Starboard snaps up a position in Wix, and building free cash flow may become a focal point
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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 enables users to create a website or web application. Their platform consists of three web creation products, each with a different purpose or primary audience: (i) Wix ADI, intended for fast website creation; (ii) the Wix Editor, intended for full website creation targeted at users with basic, average or above average technological skills; and (iii) Editor X, intended for advanced users such as design professionals. As of Dec. 31, 2021, Wix had approximately 222 million registered users and 6 million premium subscriptions.
Stock Market Value: $4.2B ($72.21 per share)
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Activist: Starboard Value
Percentage Ownership: 9.00%
Average Cost: $66.79
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard also has a successful track record in the information technology sector. In 45 prior engagements, it has a return of 32.36% versus 13.90% for the S&P 500 over the same period. Starboard has had a notable track record with web applications companies going back to 2004 with their 13D investment in Register.com. Register.com was sold to Web.com in 2005 for $135 million, yielding 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 combined three years later with Endurance International, a comp to GoDaddy’s hosting business. Starboard made a 47.27% return on its Web.com 13D versus a decline of 1.82% for the S&P 500 over the same period. Finally, on Dec. 27, 2021, Starboard filed a 13D on GoDaddy Inc. which is a live 13D where Starboard currently has a 6.12% return versus 19.16% decline for the S&P 500 over the same period.
Behind the Scenes
Wix is a market leader in web development tools that operates in an attractive space with long-term growth tailwinds. They have a sticky business that is not typically affected in bad economies: People do not shut down their websites in down markets.
Prior to Covid, the company was growing in the high teens but growth increased to approximately 30% per year during the pandemic. During this time, Wix increased its cost structure and hired new employees. However, this high rate was not a new, perpetual level of growth as much as it was an accelerant, and since Covid the company’s growth rate has declined to approximately 10%. As a result, Wix’s free cash flow margins declined from 15% to 0%. These margins should not only return to 15% but could exceed 20%.
Wix initially targeted 20% FCF margins but that assumed a 20% growth rate. They have since committed to 20% FCF margins by 2025 that is not dependent on 20% growth by implementing a $150 million cost savings program. If the company is committing to 20%, it is very likely that more than that can be done and we have seen companies significantly exceed their estimates before with Starboard involved. As they have done many times in the past, Starboard will work with Wix to help generate a better balance of growth and profitability. While the Rule of 40 (growth rate plus profit margin) for software companies does not squarely apply here, it is certainly 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 plan to buy back $500 million of stock. Sounds like things companies do when they know there is an activist at the door. Whatever the motivation, it is good for shareholders that it appears that 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 in helping companies optimize growth and margins, typically from a board level. Based on their history and track record, we think this would be best done with Starboard getting one or two seats on the board.
While Starboard’s primary objective here is operational, when an activist engages with a company, it often puts that company in pseudo-play getting the attention of strategic investors and private equity. While Starboard is not advocating for any strategic transaction, they are economic animals with fiduciary duties. If an offer came in at the right price, they would weigh it against shareholder value as a standalone entity and do what they believe to be best for shareholders. There has also been speculation that Starboard is trying to get Wix acquired by GoDaddy, as Starboard is one of the largest shareholders of GoDaddy. GoDaddy is not likely the best potential acquirer for this Company and this is not something Starboard would even suggest. If GoDaddy or anyone else showed an interest in acquiring the Company and the Company decided to sell, Starboard would recommend that the Company sell to the best offer after an arms-length sales process.
There is one other similarity between Wix and many other Starboard activist positions. It is run by the founder, who often is not the best person to operate a public company. Moreover, in this case, the company’s co-founder, CEO and director Avishai Abrahami; co-founder and VP of client development Nadav Abrahami; and chief architect of research and development Yoav Abrahami, are all brothers. Also, the president and COO, Nir Zohar, is married to the VP Design & Brand, Hagit Zohar. While this could look like a classic case of nepotism and a founder-led company being run like a private firm, this is not necessarily the case here and not likely a focus of Starboard. This management team developed great products resulting in a best-of-breed market leader. Moreover, they are already taking steps to focus on operations. This is not about selling Wix or replacing management, but purely working with the company to focus on free cash flow and shareholder value as opposed to 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 activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.