Starboard takes a position in Wix and creating free cash flow could become a focal point
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Company: Wix.com (WIX)
Company: Wix.com is an Israeli information technology company that develops and markets a cloud-based platform that allows users to create a website or web application. Their platform consists of three web building products, each with a different primary purpose or audience: (i) Wix ADI, intended for rapid website building; (ii) the Wix Editor, intended for the complete creation of websites aimed at users with basic, average or above average technological skills; and (iii) Editor X, intended for advanced users such as design professionals. As of December 31, 2021, Wix has approximately 222 million registered users and 6 million premium subscriptions.
Market value: $4.2 billion ($72.21 per share)
investment related news
Activist: Starboard Value
Percentage of ownership: 9.00%
Average cost: $66.79
Activist Comment: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiency and improving margins. Starboard also has a successful track record in the information technology industry. In 45 prior engagements, it has returned 32.36% versus 13.90% for the S&P 500 over the same period. Starboard has a proven track record with web application companies since 2004 with their 13D investment in Register.com. Register.com was sold to Web.com in 2005 for $135 million, giving Starboard a 30.82% return versus 11.37% for the S&P 500 over the same period. On June 8, 2018, Starboard filed a 13D on Web.com Group Inc. In October 2018, Web.com was acquired by Siris Capital Group and three years later combined with hosting business competitor Endurance International from GoDaddy. Starboard returned 47.27% on its Web.com 13D against a 1.82% decline for the S&P 500 over the same period. Finally, on December 27, 2021, Starboard filed a 13D on GoDaddy Inc. which is a live 13D where Starboard is currently yielding 6.12% versus a decline of 19.16% for the S&P 500 over the same period.
What is happening?
In the wings
Wix is a market leader in web development tools that operates in an attractive space with favorable winds for long-term growth. They have a sticky business that’s usually unaffected in bad economies: People don’t shut down their websites in down markets.
Before Covid, the business was growing through the teens, but growth has slowed to around 30% per year during the pandemic. During this time, Wix increased its cost structure and hired new employees. However, this high rate was not so much a new level of perpetual growth as it was an accelerator, and since Covid the company’s growth rate has fallen to around 10%. As a result, Wix’s free cash flow margins dropped from 15% to 0%. These margins should not only return to 15% but could exceed 20%.
Wix initially targeted FCF margins of 20%, but this assumed a growth rate of 20%. They have since committed to achieving 20% FCF margins by 2025, which are not dependent on 20% growth, by implementing a $150 million savings program. If the company commits to 20%, it is very likely that more can be done and we have already seen companies significantly exceed their estimates with Starboard involved. As they have done many times in the past, Starboard will work with Wix to help generate a better balance between growth and profitability. Although the rule of 40 (growth rate plus profit margin) for software publishers does not fully apply here, it is certainly analogous and Starboard could work with the company to help it achieve growth rates at double digits and double digit free cash flow margins.
In addition to the savings plan, Wix had announced a $500 million share buyback plan. It’s like what companies do when they know there’s an activist at the door. Whatever the motivation, it’s good for shareholders that it looks like the company and Starboard are on the same page, and it looks like they can work together to increase shareholder value. Starboard has extensive experience helping companies optimize growth and margins, typically at the board level. Based on their history and background, we think it would be best if Starboard got a seat or two on the board.
While Starboard’s primary focus here is operational, when an activist engages with a company, it often puts that company in a pseudo game by attracting the attention of strategic investors and private equity. Although Starboard does not advocate strategic transactions, they are economic animals with fiduciary duties. If an offer came in at the right price, they would compare it to shareholder value as a standalone entity and do what they believe is best for shareholders. There has also been speculation that Starboard is trying to have Wix acquired by GoDaddy, as Starboard is one of GoDaddy’s major shareholders. GoDaddy probably isn’t the best potential acquirer for this company, and that’s not even something Starboard would suggest. If GoDaddy or anyone else expresses an interest in acquiring the company and the company decides to sell, Starboard will recommend that the company sell at the best offer after an arm’s length sale process.
There is another similarity between Wix and many other Starboard activist posts. It’s run by the founder, who often isn’t the best person to run a public company. Additionally, in this case, company co-founder, CEO, and director Avishai Abrahami; co-founder and vice president of client development Nadav Abrahami; and chief research and development architect Yoav Abrahami, are all brothers. Additionally, President and COO Nir Zohar is married to Vice President Design & Brand, Hagit Zohar. While that might sound like a classic case of nepotism and a founder-led company being run like a private company, that’s not necessarily the case here and it’s probably not a goal of Starboard. This management team has developed great products, making a market leader the best in class. Moreover, they are already taking steps to focus on operations. It’s not about selling Wix or replacing management, just working with the company to focus on free cash flow and shareholder value instead of just focusing on growth.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments 13D. Squire is also the creator of the AESG™ investment category, an activist style of investing focused on improving the ESG practices of portfolio companies.