Wix.com (WIX), which provides an online platform to create websites, is trading sharply lower after reporting disappointing Q1 results early this morning. WIX reported large EPS beats in each of the past three quarters. However, it was an EPS miss this time which comes as a surprise to investors.
It was good to see WIX swing from a non-GAAP loss of $(0.06) per share in the prior year period to a $0.03 profit this quarter, but it was below expectations. Revenue was a better story as it rose 26.5% yr/yr to $174.3 mln, which was above prior guidance of $172-173 mln. Looking ahead, WIX expects Q2 revenue to come in at $182-184 mln, which is in-line with market expectations. Full year revenue guidance was increased slightly to $758-763 mln from $755-761 mln.
Whenever you have upside revenue but an EPS miss, that likely means margins were not as strong as expected. Non-GAAP gross margin in Q1 declined to 78% from 80% in the prior year period. Also, its non-GAAP operating margin declined slightly to (1.2)% from (0.6)% last year.
As we mentioned in our preview yesterday, the thing to understand with WIX is that it uses a freemium model. It offers some free products (for registered users) with the hope they will upgrade to paid subscribers at some point. However, last quarter, WIX announced it was trying to evolve its business a bit by removing its lowest price plan in Q1. WIX has also been experimenting with some base price increases for some other products. We wonder if this change in pricing strategy caused some disruption in the quarter.
We also think the EPS shortfall was from WIX spending more money on the expansion of its CS (Customer Solutions) operations, which has an expected upfront price tag of approximately $15 mln in 2019. According to WIX's Q1 press release, "The analyses showed that conversion of users who engaged with the personalized support was multiple times higher than regular conversion on Wix. As a result, we will invest in building the infrastructure to increase our Customer Solutions globally." On the call, some analysts seemed a bit surprised about the higher level of investment.
In sum, this quarter was a bit of a stumble for WIX. It seems the higher-than-expected spending on building up its CS operations is the main culprit for the EPS miss. However, it seems like a good investment because it does a much better job of converting non-paying customers to paying customers.