Starboard snags a position at Wix, and building free cash flow could become a focus
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Company: Wix.com (WIX)
Business: 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 purpose or primary audience: (i) Wix ADI, intended for rapid website building; (ii) the Wix Editor, intended for complete website creation and aimed at users with elementary, intermediate or above average technological skills; and (iii) Editor X, intended for advanced users such as design professionals. As of December 31, 2021, Wix had approximately 222 million registered users and 6 million premium subscriptions.
market value: $4.2 billion ($72.21 per share)
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Activist: Starboard value
Percentage 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 efficiencies and margin improvement. Starboard can also look back on a successful track record in the field of information technology. In 45 previous engagements, it has returned 32.36% versus 13.90% for the S&P 500 over the same period. Starboard has an impressive track record of success in web application companies, dating back to 2004 with their 13D investment in Register.com. Register.com was sold to Web.com in 2005 for $135 million, giving Starboard a return of 30.82% versus 11.37% for the S&P 500 over the same period. On June 8, 2018, Starboard submitted a 13D to Web.com Group Inc. In October 2018, Web.com was acquired by Siris Capital Group and three years later merged with Endurance International, part of GoDaddy’s hosting business. Starboard’s Web.com 13D returned 47.27% versus a 1.82% decline for the S&P 500 over the same period. Finally, on December 27, 2021, Starboard filed a 13D with GoDaddy Inc., which is a live 13D where Starboard currently has a 6.12% return versus the S&P 500’s 19.16% decline in the has the same period.
Wix is a market leader in web development tools operating in an attractive environment with long-term tailwinds for growth. They have a tricky business that doesn’t usually get affected in a down economy: people don’t shut down their websites in down markets.
Before Covid, the company was growing in the high teens, but during the pandemic, growth has surged to about 30% a year. During this time, Wix increased its cost structure and hired new employees. However, that high rate was less a new, sustained level of growth and more an accelerator, and since Covid, the company’s growth rate has slowed to around 10%. As a result, Wix’s free cash flow margins fell from 15% to 0%. Those margins shouldn’t just return to 15%, but could top 20%.
Wix initially targeted 20% FCF margins, but that assumed a 20% growth rate. They have since committed to 20% FCF margins not contingent on 20% growth by 2025 by implementing a $150 million cost savings program. If the company commits 20%, it’s very likely that more than that can be done, and we’ve seen companies significantly beat their estimates when Starboard was involved. As has been the case many times in the past, Starboard will work with Wix to achieve a better balance between growth and profitability. While the rule of 40 (growth rate plus profit margin) for software companies doesn’t directly apply here, it certainly is analogous, and Starboard could work with the company to help it achieve double-digit growth rates and double-digit free cash flow margins.
In addition to the cost savings plan, Wix had announced a $500 million share repurchase plan. Sounds like things companies do when they know an activist is at the door. Whatever the motivation, it’s good for shareholders that the company and Starboard appear to be on the same page and that 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 track record, we believe this can best be achieved with Starboard if it gets a seat or two on the board.
While Starboard’s primary goal here is operational, when an activist engages with a company, it often gets that company into a pseudo-gimmick in order to attract the attention of strategic investors and private equity. Although Starboard does not advocate strategic transactions, they are economic beasts with fiduciary duties. If an offer came in at the right price, they would weigh it against shareholder value as a separate entity and do what they felt was 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 largest shareholders. GoDaddy probably isn’t the best potential acquirer for this company, and Starboard wouldn’t even suspect it. If GoDaddy or someone else shows interest in acquiring the Company and the Company decides to sell, Starboard would recommend that the Company sell at the best offer after an independent sales process.
There is another similarity between Wix and many other Starboard activist positions. It is run by the founder, who is often not the best person to run a public company. Also, in this case, the company’s co-founder, CEO and director Avishai Abrahami; Co-Founder and Vice President of Customer Development Nadav Abrahami; and chief architect for research and development, Yoav Abrahami, are all brothers. Also, President and COO, Nir Zohar, is married to VP Design & Brand, Hagit Zohar. While this might seem 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 probably not a focus of Starboard. This management team has developed great products that have resulted in a world-class market leader. In addition, they are already taking steps to focus on operations. This isn’t about selling Wix or replacing management, it’s just about working with the company to focus on free cash flow and shareholder value, rather than solely 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 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.