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Bear of the Day: Wix.com (WIX)

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Wix.com (WIX - Free Report) is a $6.7 billion provider of website hosting and development tools. In its Q1 earnings report on May 16, the company delivered non-GAAP EPS of 3 cents, missing the Zacks Consensus Estimate of 9 cents.
 
Despite revenues surging 27% year over year, the big EPS miss and subsequent guidance caused the majority of Wall Street analysts to lower future estimates and pushed the stock to the cellar of the Zacks Rank.
 
Quarter in Detail
 
Collections during the reported quarter came in at $200.4 million, up 26% year over year, attributable to expansion of new products and enhancement of existing products. Management had projected collections in the range of $196 million to $197 million.
 
The company witnessed better-than-expected conversion and retention in its user cohorts. The company added a total of 180,000 net premium subscriptions in the reported quarter, which came in at 4.2 million as of Mar 31, 2019 (up 21% year over year).
 
Wix added 6.6 million registered users during the reported quarter. Registered users as of Mar 31, 2019 came in at 148 million, up 19% year over year.
 
During the reported quarter, average revenue per subscription (ARPS) increased 9% year over year. The surge can primarily be attributed to favorable mix of higher priced subscription packages.
 
Operating Results
 
Non-GAAP gross profit advanced 23.7% from the year-ago quarter to $136 million. Nonetheless, non-GAAP gross margin contracted 200 bps to 78%.
 
Total operating expenses surged 27.7% to $162.4 million in the first quarter.
 
The company reported non-GAAP operating loss of $2.2 million wider than year-ago loss reported at $0.8 million.
 
Company Guidance
 
For the second quarter, the company expects revenues in the range of $182-$184 million, representing year-over-year growth of 25-26%. The Zacks Consensus Estimate for revenues is currently pegged at $184.06 million. Collections are projected to be in the range of $197-$199 million, suggesting growth in the range of 23-24% in the year-ago quarter.
 
The company updated fiscal 2019 guidance. Management now anticipates revenues in the range of $758-$763 million, up from prior guided range of $755-$761million. This indicates an improvement of 26% from the year-ago reported figure. The Zacks Consensus Estimate for revenues is currently pegged at $759.8 million.
 
Collections are projected to be in the range of $822-$830 million, suggesting growth of 25-26% from the prior-year quarter, compared with previous predicted range of $817-$827 million.
 
However, the company expects free cash in the range of $122-$126 million, indicating an improvement of 20-24% from the year-ago quarter, down from prior guided range of $135-$140 million.
 
Since the company report on May 16, the Zacks analyst consensus for 2019 full-year EPS dropped 26.5% from $1.13 to $0.83, representing -22.4% growth. But revenue growth remains robust at 26.2% to a projected $762 million. 
 
Customer Service
 
I was an investor in Wix.com shares in 2017 as I admired their platform tools, growth, and broad popularity. 
 
But I recently had a negative experience with Wix over their annual recurring billing policy and wondered if others have also. I was recovering from an accident and illness and missed the automatic annual subscription renewal of my website. I decided to cancel the $200+ in annual services for that site hosting but since I missed the 15-day window for annual cancellations, my refund/pro-rating request was denied with only reference to the policy.
 
I also lost my domain renewal in the process and so the services were further unusable and useless to me. I made 4 separate requests and all responses were the same. It wasn't about the money for me, but about the principle of having someone acknowledge my situation with some flexibility -- especially since they got all the money upfront for 12 months of services I wasn't using, and would not being using.
 
So to see what experiences others might have had, I entered "wix customer service reviews" in a Google search engine on May 27 and found the top 3 results were from trustpilot.com, whoishostingthis.com, and sitejabber.com.
 
Trustpilot had 990 reviews of which 44% were a "Bad" rating, with the same overall rating. The second most recent comment related to my experience...
 
They renewed our subs without our consent and when we try to ask for a refund they denied us right away without even investigating it first like they supposed to. and also their CS is the worst, never have we ever encounter such lazy, nonexistent CS , all is auto-generated computer responses.
 
Sitejabber.com had 292 reviews from their community with 165 (56.5%) offering only 1 star of 5. 
 
WhoIsHostingThis.com has a much more extensive review by web hosting expert Dale Cudmore, published April 26 and titled "Wix.com Hosting: Powerful & Popular But Small Businesses Can Do Better. Here's Why."
 
In addition to Cudmore's evaluation of the features, tools, quality and value of Wix.com, the piece also offered 47 reviews by Wix customers with an overall 2.5 stars out of 5 for Support. 
 
Here's part of the intro to Cudmore's article...
 
Wix is one of the most popular website builders on the market. But how many people really use the website builder?
 
Here’s an overview:
 
More than 3.3 million sites have been built using Wix. (Source: BuiltWith)
17,556 live sites in the US were built using Wix. (Source: BuiltWith)
287 of the top 100K sites in the US were built with Wix. (Source: BuiltWith)
As of 2017, Wix had 110 million users. (Source: Wix)
Each day nearly 45,000 people sign up to use Wix. (Source: Wix)
The numbers don’t lie. But, what do real users have to say about Wix?
 
(end of Cudmore article intro)
 
That last line sums it up. Numbers-wise, Wix is a strong growth business providing services to millions of users. And the recurring subscription model obviously works to boost revenues and profits.
 
But a valid question about customer service might concern whether strict, automatic enforcement of refund policies leads to short-term financial gains that will be harder to repeat if fewer satisfied customers return with new projects and business ideas that require webhosting.
 
In the company's favor is a big push into the professional market where web designers and marketing agencies take care of the website needs of multiple clients and businesses. And the company will spend $5 million per quarter the rest of this year on plans for expanded customer solutions/support staff. Management expects a 3X return on that investment, or $45 million into 2020. 
 
These will be exciting developments to watch. As far as buying WIX shares, I'd wait until the earnings estimates stop going down and start going back up. The Zacks Rank will let you know.
 
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