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Wix.com (NASDAQ:WIX)
Q2 2018 Earnings Conference Call
Jul. 25, 2018 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Kris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wix.com 2018 second-quarter financial results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. [Operator instructions] I will now hand it over to Maggie O'Donnell, director of investor relations.

Maggie O'Donnell -- Director of Investor Relations

Thank you. Good morning, everyone, and welcome to Wix's second-quarter 2018 earnings call. Joining me today to discuss our results are Avishai Abrahami, CEO and co-founder; Nir Zohar, president and COO; and Lior Shemesh, CFO. During this call, we may make forward-looking statements, and these statements are based on current expectations and assumptions.

Please consider the risk factors included in our press release and most recent Form 20-F that could cause our results to differ materially from these forward-looking statements. We do not undertake any obligation to update these forward-looking statements. In addition, we will comment on non-GAAP financial results. You can find all reconciliations between our GAAP and non-GAAP results in our press release, presentation slides, shareholder update, and our interactive analyst center on the Investor Relations section of our website.

Now I will hand it over to Avishai Abrahami, who is going to say a couple of words about the quarter.

Avishai Abrahami -- CEO and Co-Founder

Thank you, Maggie, and good morning, everyone. Thank you for joining us today. We had another great quarter at Wix. The momentum and excitement we shared at the Analyst and Investor Day in June are reflected in these strong results.

Both collection and revenues beat our expectations again. Revenues increased 41% year over year and collection grew 37% year over year. Free cash flow also grew in the quarter to nearly $24 million, our highest ever. These results prove that what we talked about at the Analyst Day that Wix continues to be a real combination of strong top-line growth and growing cash flow.

We believe this trend will continue and we are again increasing our full-year outlook for all metrics. We continue to drive increasing cohort value driven by conversion and retention improvements. We've added 205,000 net subscription this quarter and we are maintaining our TROI of seven to nine months. As a reminder, for every 100,000 new subscription we add, we estimate future collection of more than $165 million over the next eight years.

We now expect our existing cohort to generate $4.6 billion in collection over the next eight years based on a current cohort behavior. Finally, consistent with what we shared at our Analyst and Investor Day, the momentum of our product development is expanding our market opportunity. We continue to provide Wix user of all skill levels and backgrounds with a complete product platform so they can create their dreams online. Development of Wix Code continues.

Users of all skill levels, including experts and professionals are creating many different kinds of websites and web applications. Activity in the Wix Code Forum, our community for Wix Code users is also increasing. Users have contributed over 35,000 posts and comments, which have generated over 1 million views. We remain excited about the opportunity Wix Code presents for the coming years.

We also recently launched a mobile site builder for Wix , enabling users to create professional-looking websites entirely from a mobile device. And Wix ADI continues to be a positive contributor to the overall conversion improvements. We are experiencing early success in additional languages other than English and plan to release more before the end of the year.I am very happy by our progress so far this year and remain very excited about the remainder of the year. With that, I am going to hand it back to Maggie.

Maggie O'Donnell -- Director of Investor Relations

Thank you. [Operator instructions] Shall we have the first question, please?

Questions and Answers:

Operator

We will now go ahead and take your questions. [Operator instructions] Your first question is from Brent Thill with Jefferies. Please go ahead.

Brent Thill -- Jefferies -- Analyst

Thank you. You had mentioned that code users are starting to buy more premium subscriptions although in the quarter the premium growth actually decelerated from past periods. I'm curious if you could just walk through what you're seeing, and perhaps there's some anomalies that are creating a deceleration in that growth as it relates to some of the metrics that you released.

Lior Shemesh -- Chief Financial Officer

Sure. This is Lior. So, obviously, let see, remember that in terms of seasonality, Q2 is weaker than the first quarter. Usually the first quarter is very strong, especially about premiums added.

Many reasons for that. Second, I think that we have some impact and we kind of focused on it when we provided the guidance for the quarter specifically for the World Cup. So, we need also to take it into account, but overall the conversion is up even when we look at the new cohorts in the second quarter compared to the first quarter. And the main reason for that is for the adoption of the Wix Code and also the contribution of the idea in other places of the world.

So, it's actually even above our expectations.

Brent Thill -- Jefferies -- Analyst

Thank you.

Maggie O'Donnell -- Director of Investor Relations

Great. Thanks, Brent. Can we have the next question, please?

Operator

Your next question is from Ron Josey from JMP Securities. Please go ahead.

Ron Josey -- JMP Securities --Analyst

Great. Thanks for taking the question. So, I'll just dive. In the press release you mentioned two goals for '18.

I think it was increased penetration in existing markets and then continue to see progress in the benefits of larger market opportunities. I just wanted to understand it a little bit more. As we head in the back half of the year and talking about increasing penetration in existing markets, is that just more marketing, more products? And then as it relates to the larger market opportunity, just any plans around code and broadening the appeal as we head in the back half would be helpful. And then, Lior, just a follow up to Brent's question.

You talked about code above expectations. Any insights on users there would be helpful. Thanks again.

Avishai Abrahami -- CEO and Co-Founder

This Avishai answering the first part of the first question, which is what we're looking at is actually to continue to expand to new markets in terms of geography and in terms of things that people can do with Wix. Wix Code is, of course, a dramatic and a big step toward that direction. But on the other hand, we're also looking at increasing marketing of the product in different markets. So, it's a combination but I think a big part of it is the additional product to sell launching and having them being accessible to more users.

Lior Shemesh -- Chief Financial Officer

Yes, for the other question with regard to the users and so on. So, in general we see that the increase of conversion although sometimes its' really hard to tell, as you know, but we know that there is a contribution for the new codes, specifically for people that's using the Wix Code. We do see more professionals and agencies and experts actually using the Wix Code creating an amazing website, and it's pretty much consistent with what we saw. So, although the performance was a bit better but I think that overall, it's even more increased our excitement about the contribution of the Wix Code for the next coming years.

Ron Josey -- JMP Securities --Analyst

Great. Thank you.

Maggie O'Donnell -- Director of Investor Relations

Thanks, Ron. Can we have the next question please?

Operator

Mark Grant with Goldman Sachs. Please go ahead.

Mark Grant -- Goldman Sachs -- Analyst

Thanks for taking the question. I just wanted to get a better handle on some customer trends here. On the gross new subscriptions, it seems like the mix of the annual sub stayed pretty consistent around that two-thirds range. Can you give us a sense of how retention has trended among those annual subscribers? And I'm not asking for specific retention numbers.

Just hoping you can help us understand how that behavior has trended over the last couple years and if you've noticed anything changing.

Nir Zohar -- President and Chief Operating Officer

Hey, it's Nir, Mark. So in terms of the goals, the trending of the split between the annuals and the monthlies, as you said it's pretty stable. In terms of the retention of those over the past few years, we've actually seen a slight improvement. If you remember the presentation and the discussion we had around the business model and the negative churn basically just the positive retention, when we look at newer cohorts.

We clearly saw that the newer cohorts have better retention than the older one. Naturally that has not changed in the Analyst Day. Basically, the year-over-year trend as we've seen.

Mark Grant -- Goldman Sachs -- Analyst

OK. Thank you.

Maggie O'Donnell -- Director of Investor Relations

Thanks, Mark. Can we have the next question please?

Operator

Deepak Mathivanan from Barclays. Please go ahead.

Deepak Mathivanan -- Barclays -- Analyst

Thanks for taking the questions. So, first one, sort of related to the questions from a couple ones ago. Have you have factored in, I don't know, direct monetization from cohorts in the back-half guidance at this time, but how should we think about the benefits to conversion that's factored in? Obviously, you raised back half's guidance a little bit more than 2Q's performance. So do you expect or have you factored in continued improvements on cohorts of related conversion in the guidance of back half? And then second question related to GDPR, GDPR is now in effect.

Are you seeing any constraints in converting a previously registered user through campaigns like email marketing or something, whose efficiencies might be a little less now? More broadly on that topic, how should we view the registered user base at this time? I mean, what percent do you think long term you can target and convert, because some of them probably are now registered under the old privacy laws.

Avishai Abrahami -- CEO and Co-Founder

Hey, Deepak, so with regard to the code and the improvement of conversion, so as always the guidance that we provide is based on what we see right now. So, we have seen some improvement in conversion and it's already embedded in the guidance that we provided for the second half of the year. Actually the fact that we increased the guidance for the full year is mainly because of that. And look, I think that you know we are very, as I mentioned before, we are very excited about it and we think that we can-- the Wix Code is a major contribution in the future for the new cohorts.

And for the improvement of conversion in the following year, then it will take some more time, but it doesn't embed any-- there is no impact in continuous improvement of conversion on the guidance that I provided. Just what we see right now.

Nir Zohar -- President and Chief Operating Officer

Hey, Deepak, it's Nir. In regards to the GDPR, so, it's been a few months now that we are in full compliance to the new regulation. I have to say that we actually saw no impact neither on registration of new users or behavior of the existing user or users of conversion in any manner.

Deepak Mathivanan -- Barclays -- Analyst

Got it. Thanks, guys.

Maggie O'Donnell -- Director of Investor Relations

Thanks, Deepak. Can we have the next question please?

Operator

Alyssa Johnson with KeyBanc Capital. Please go ahead.

Alyssa Johnson -- KeyBanc Capital -- Analyst

Thank you. I was hoping to ask about international. I was wondering if you could kind of parse out any kind of one-time impacts that you saw in World Cup versus how we should think about that as a driver in the back half of the year. You have new products kind of with ADI rolling out more and more internationally as well as your new mobile site builder, how that kind of plays into your existing markets as well as new potential international markets?

Avishai Abrahami -- CEO and Co-Founder

OK. So, with regard to the World Cup, we know as a fact that its impact in the quarter. It's hard to tell by how much. We do see-- for example, a drop in the overall number of user in specific days, especially the last days and during the finals of the game.

But, so, basically there is an impact. It's hard to estimate exactly what was the impact. With regard to the ADI and other new products, we do expect that conversion will be improving over time from those products. And as I mentioned before, this stage, it includes only what we see.

I don't assume right now continuous improvement, although we hope, certainly we hope, that there will be continuous improvement with regard to that.

Maggie O'Donnell -- Director of Investor Relations

Thanks, Alyssa. Can we have the next question please?

Operator

Naved Khan with SunTrust. Please go ahead.

Naved Khan -- SunTrust -- Analyst

Hi, thanks a lot. I had two questions. One on the premium to user cohort, and even at the end of the day, there is a good possibility of introducing that. How should we think about it in terms of timing? Do you think that you might see it sometime this year or do you think it's more likely that we see it next year? And then, I had a follow-up on ARPS after that.

Avishai Abrahami -- CEO and Co-Founder

OK. So, with regard to the cohort that we just mentioned that we do expect that the improvement, specifically about conversion will continue into 2019 and as I mentioned, will be a positive impact on the new cohorts in 2019 and I think that this is something that has started, but we need to remember that when we started the year, most of the top line is actually coming from existing cohorts. So we need to take it into consideration. But when we talk about the new cohorts, so, yes, we do anticipate continued improvement as a result of that.

And in terms of future additional modeling of monetizations at different tiers for codes, we have quite a few ideas of things that we intend to test in the next several months in order to understand what works best. And once we kind of understand and stabilize them, then those things will have to be modeled into the future and into '19.

Naved Khan -- SunTrust -- Analyst

OK. Perfect. And then the ARPS, I think you called out two factors. One is the vertical apps and the second was improved mix of higher priced subscription package.

What is contributing to the mix of higher priced subscription packages?

Avishai Abrahami -- CEO and Co-Founder

I think that as you indicated it's mostly the continued uptick of vertical application adoption. If we try to compare it on a year-over-year basis, right now the adoption of vertical by new cohorts is approximately-is a bit more than 40%. So actually, it's a 30% increase on a year-over-year basis, which is quite big. And this is something that is super, super interesting, because what you see right now is the direct contribution of the adoption of the vertical which obviously increase the ARPU.

But the indirect effect is even bigger, because it's when you think about it, it's increased the satisfaction of the customer, the secrets of our customers and obviously they include conversion. So, I think that this is a nice evidence of the fact that the strategies that we took and decided to use the vertical into basically to enable more kind of a [Inaudible] those kinds of professionals to use the vertical. I think that it was the right decision, because obviously we can see the fruits of it right now and some which you see as the increase in the ARPU.

Naved Khan -- SunTrust -- Analyst

Thank you.

Maggie O'Donnell -- Director of Investor Relations

Thanks, Naved. Can we have the next question please?

Operator

Jason Helfstein with Oppenheimer. Please go ahead. Jason Helfstein, your line is open.

Jason Helfstein -- Oppenheimer -- Analyst

Do you hear me?

Avishai Abrahami -- CEO and Co-Founder

Yes, yes, we can hear you.

Jason Helfstein -- Oppenheimer -- Analyst

OK. So, how are you thinking about your product outlook relative to the guidance? Does the guidance or at least the high end of guidance assume impact of many new products in the back half and then, kind of timing third quarter versus fourth quarter? And then, secondly, anything you can share with us about the dynamics of a Wix Code subscriber, because we can't really see it within the numbers. But, are you seeing a Wix Code subscriber generally having a higher ARPU? Any kind of color around what type of customers that's bringing in and obviously, your comments suggests that there is a longer-term benefit from that and just how we should think about that? Thanks.

Avishai Abrahami -- CEO and Co-Founder

Yes. So, I will start with the first question about the new products. So, as always, we include in the guidance the products that exist today with the current performance. New products are not in the guidance or improvement in performance of existing products also are not part of the guidance.

We would like to guide it when it happens. With regard to the second question, Nir?

Nir Zohar -- President and Chief Operating Officer

Yes, so, again, these are initial trends that we've observed. So, we're starting-- we still need more time in order to actually build a model out of it, but definitely I think at least two interesting behaviors that we see is that, on one hand, as they take longer to convert, which kind of makes sense, because it's a more complex product and just building a web application or a complex website functionality on Wix Code just takes a longer time. On the other hand, we do see that these users are building more websites, which is, I think it's indicative toward the fact that it's something that is what-- it's something about professionals and people, professionals need in order to achieve-- I would say, a higher value for return on their own business of catering for customers.

Jason Helfstein -- Oppenheimer -- Analyst

Thank you.

Maggie O'Donnell -- Director of Investor Relations

Thanks, Jason. Can we have the next question please?

Operator

Sterling Auty with JPMorgan. Please go ahead.

Sterling Auty -- J.P. Morgan -- Analyst

Yes, thanks. Hi, guys. Did you guys get a full quarter worth of benefit from the new languages on Wix's ADI or maybe just a partial quarter and is there any additional languages that you anticipate rolling out in the coming quarters?

Nir Zohar -- President and Chief Operating Officer

Hey, Sterling. So, it is Nir. It's some and some. In some languages we had the full impact for the quarter in others it was partial as it was rolled out within the quarter.

And yes, we do intend to roll out further languages throughout the second half of the year absolutely.

Sterling Auty -- J.P. Morgan -- Analyst

Great. Thank you.

Maggie O'Donnell -- Director of Investor Relations

Thanks. Can we have the next question please?

Operator

Matt Pfau with William Blair. Please go ahead.

Matthew Pfau -- William Blair -- Analyst

Hey guys. Thanks for taking my question. Just wanted to get some further clarity on the guidance to revenue guidance for the back half of the year here. So, if I look at the guidance, it kind of implies that there is going to be a further deceleration in growth of net premium subs added in the back half of the year.

And so, just trying to understand perhaps some, what puts and takes or factors are for premium sub-additions in the back half of the year? Thanks.

Avishai Abrahami -- CEO and Co-Founder

So, yes, let me, I will relate to the both top line and premiums, because I guess that you are talking about both of them. So with regard to the top-line, we actually increased the guidance for the quarter, the guidance for the full year by approximately $3 million on the high range of what we provided before. Very important also to mention, that we had some negative impact of currency. It was not significant, it was small during the second quarter mainly from the decrease of the euro and the British pounds compared to the dollar.

It actually went down by approximately 4%. So we had some impact of a few millions of dollars. So it's something that is also important to mention, although it's not significant. But the other thing about the premiums, we need to remember that the fourth quarter is behaving totally differently from all the other quarters, because usually you'll see an up on increase in collection, while you see decrease in net premiums.

The reason for that is, obviously because of all the holidays, and vacations during the fourth quarter, which obviously impacts the cohorts. But on the other hand, you see the renewal of all kinds of promotions that usually you do during this period. And it's coming in with a full price. So, I think that in terms of seasonality, the second quarter is totally different, then the second half of the year is totally different from the first half of the year.

But I do anticipate that this year is not going to be different from any other year before, meaning that it's in line with what we've seen before.

Matthew Pfau -- William Blair -- Analyst

Great. Thanks.

Maggie O'Donnell -- Director of Investor Relations

Thanks, Matt. Can we have the next question please?

Operator

Mark Mahaney with RBC. Please go ahead.

Mark Mahaney -- RBC Capital Markets -- Analyst

Yes, I wanted to ask about the-- that's up in your international markets and the registered user growth continues to be up year-over-year and then that you do provide this detail on your increased geographic penetration. So, is that a decent proxy for where your new registered users are coming from? So, just any color on the geographic mix shift of new registered users? And then, in that same thing, on the international side, I assume that these markets, given your business model kind of ramped profitably the same way that others do that there is probably not dramatic start-up costs in any of these markets since you don't have a really a sales force. Just comment on, as the business become increasingly geographically dispersed or diverse, what that means to profitability, if anything? Thank you.

Lior Shemesh -- Chief Financial Officer

OK. So, I'll start with the first question. We don't see any change from previous periods in terms of the-- in terms of where the users are coming from. Again, a big part is coming from outside of North America, when we talk about users, about 2/3.

And so, there is no change from previous periods. But I do think that you are right, I mean, there is opportunity in other places of the world like Asia-Pacific and so on, but it depends on many, many, many factors. But in general, I don't think that there will be any impact on our profitability when we are penetrating into these countries. First of all, you are right, with the software business model and we don't need foot on the ground in order to be successful there.

The second thing, we always act according to the TROI, meaning that, if someone theoretically, the payments or the pricing is different, so obviously, also the investment in marketing is different. So, on a TROI basis, it's really remain the same and therefore the profitability should be the same and we actually already see that, because, the behavior and the economics of Latin America for example is totally different than North America. And so, this is the way that we manage it.

Mark Mahaney -- RBC Capital Markets -- Analyst

OK. Thank you, Lior.

Maggie O'Donnell -- Director of Investor Relations

Thank you, Mark. Can we have the next question please?

Operator

Jonathan Kees with Summit. Please go ahead.

Jonathan Kees -- Summit Insights Group -- Analyst

Great. Thanks. Thanks for taking my question. I'll keep in one question.

It's really one topic, just curious, if you've gotten any product changes from-- or directional changes from your in-processing partner, Square? Or if you are ultimately taking any different direction there in terms of-- in order to use as a partner for a POS, maybe using other vendor or just add some partner to facility there? Thanks.

Avishai Abrahami -- CEO and Co-Founder

Hey, Jonathan. So, I am assuming that you are asking about the Square due to the Weebly acquisition.

Jonathan Kees -- Summit Insights Group -- Analyst

Yes, yes.

Avishai Abrahami -- CEO and Co-Founder

In fact, yes, so, the fact is that, we haven't seen any change in the, kind of, the overall behavior in the market and the way we think about it, Square has been a good partner for us in terms of the POS and the payments for our users who need it. Our customers like it. They are users-- hey ask for it and they want that service. So we don't anticipate any changes in the near future in that aspect.

It's a good product and a very good relationship between the two companies.

Jonathan Kees -- Summit Insights Group -- Analyst

And no changes from them, in terms of what – how they want to take this?

Avishai Abrahami -- CEO and Co-Founder

No.

Jonathan Kees -- Summit Insights Group -- Analyst

OK.

Avishai Abrahami -- CEO and Co-Founder

None.

Jonathan Kees -- Summit Insights Group -- Analyst

Thanks.

Maggie O'Donnell -- Director of Investor Relations

Great. Thanks, Jonathan. Can we have the next question please?

Operator

Tim Klasell with Northland Securities. Please go ahead.

Timothy Klasell -- Northland Securities -- Analyst

A quick question also around the competitive environment. With Code, are you, maybe you can give us some color of who you think the type of customer you are tracking? What were they using and what could have they been using? And as part of that, are you seeing any more, you are competing more up against WordPress. We've noticed more of them our channel checks. Thank you.

Avishai Abrahami -- CEO and Co-Founder

So, when we look at the Wix Code, first part was what kind of-- right, customers. So we that the-- who they have historically used and what were they using before they jumped off to the Wix Code. So, we do see-- if you are asking, if we do see an increase of people that used to use WordPress and now are moving to use Wix's assets, yes, we do see that. But it's not only that.

We also see people that used really codes from scratch moving to Wix Code and we see people that use systems like Drupal moving to Wix Code. So, it's a bigger-- it's a bigger set and just saying, how it takes from WordPress. And this is by the way, what gets us so excited, why, because it means that the potential is so much bigger. And the functionality that people use from Code, well, so, the more-- we see a lot of database used, OK, and that's something very common where people only-and this is something that we also see designers and that a way capital of doing and we are really enjoying seeing how they do that and how well it works.

Beyond that, there is tons of people that actually go in and just program stuff, which I found to be fascinating, because I just saw that the level of need for the additional functionality Wix Code has provided is tremendous.

Timothy Klasell -- Northland Securities -- Analyst

Thank you. OK. Great. Thank you very much.

Maggie O'Donnell -- Director of Investor Relations

Great. Thanks, Tim. I think we have time for one more question.

Operator

Lloyd Walmsley with Deutsche Bank. Please go ahead.

Unidentified speaker

Hey, thanks for the question. It's actually Seth on for Lloyd. I was just curious if you could talk about the new mobile site builder and what you are seeing in terms of behaviors for users coming into that funnel. Are you seeing, maybe better site completion rates? Or premium upgrade rates or any other insights you can share there? Thank you.

Avishai Abrahami -- CEO and Co-Founder

So, well, we just launched a product. And then, we believe that long term, right, it's a strategic product, because we think that long term more and more people will-- that grew up using a mobile phone and a smartphone as their computer, right, will be using that product to build their website. It's a pretty awesome product. If you didn't try it, you should definitely try it.

It's a really using the full-- of the ADI to build your site, you can really manage, you can do everything from there. And so, it's a fantastic product. So, now, the result that we see are very early stage, but, of course, we believe that long term that will be an important product in a tool set.

Maggie O'Donnell -- Director of Investor Relations

Great. Thank you, Seth. Thanks, everyone, for joining today.

Operator

[Operator signoff]

Duration: 33 minutes

Call Participants:

Maggie O'Donnell -- Director of Investor Relations

Avishai Abrahami -- CEO and Co-Founder

Brent Thill -- Jefferies -- Analyst

Lior Shemesh -- Chief Financial Officer

Ron Josey -- JMP Securities --Analyst

Mark Grant -- Goldman Sachs -- Analyst

Nir Zohar -- President and Chief Operating Officer

Deepak Mathivanan -- Barclays -- Analyst

Alyssa Johnson -- KeyBanc Capital -- Analyst

Naved Khan -- SunTrust -- Analyst

Jason Helfstein -- Oppenheimer -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Matthew Pfau -- William Blair -- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Jonathan Kees -- Summit Insights Group -- Analyst

Timothy Klasell -- Northland Securities -- Analyst

Timothy Klasell -- Northland Securities -- Analyst

Unidentified speaker

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