Wix.com Ltd. (WIX) Earnings Call Transcript & Summary

All right. Let's get started. My name is Chris Zhang, and I'm part of the UBS Payments and Fintech Research team. We're super excited to have Wix here with us, again. We have Lior Shemesh, Chief Financial Officer; and Emily Liu, Head of Investor Relations with us. Welcome back and very excited to have you.

Thank you for having us.

All right. Let's kick it off. So BASE44, maybe to start off, how do you define the opportunity set you're pursuing with the BASE44 acquisition? And why do you believe BASE44 is the right path to unlocking the opportunity?

Well, it's a great first question. I think that if I may, just to start with the introduction of what -- exactly what we did, BASE44, it's amazing Vibe-coding platform. I believe that we are obviously going to see that in terms of the numbers, and we are going to talk about it a lot, but it's opened a completely incremental time for us. Think about all those people that's looking to build all kinds of applications. It can be like application for your family. It can be a big enterprise that using a BASE to build a dashboard in order to help these employees in terms of the production activity. People that use it to build CRM. We see so many use cases that already started to happen. I'll also talk about the profitability of it and why it's so exciting. But it's opened a completely new time for us. When you think about -- when we started Wix, I remember when I joined Wix like 13 years ago, that when Wix started, we actually established Wix in order to help people to create and build the website, although they don't have any understanding and know-how about code. Okay? Because in the old days, you need to know how to use code. For example, if you use WordPress, right? With Wix, you can build the website, drag and drop very easy. Usually, we tell you exactly what you need, and based on that, you build the website and we created like the most strongest brand in the world right now for website creation. When we think about it, BASE44 is actually the same. It's helping people to create all kinds of applications without the ability to know how to code. So as I mentioned before, it's opened a completely new time for us, huge opportunity. And I believe that -- and we believe that it will be also super successful and profitable in the future. The right way to look at it, think about business, you need one website, but how many applications, all kinds of applications, sometimes hundreds of applications. So definitely, I think that we are truly excited about it. And we've already started to see that with the results.

All right. That's awesome. And just to help us understand more about the product and maybe the unit economics. I know it's still early days and there must be a lot of interest in testing the product you're improving, I guess, maybe either longer term or maybe just for the paying versus free subscriptions. How do you see the unit economics with BASE44?

I will let Emily answer if you think about the products and who exactly are the audience and who are the people that are actually using BASE. In general vibe coding, what are the type of people that use vibe coding. And then I will get to the business model about BASE.

Yes, sure. So when we talk about vibe coding, there's still some misconception that vibe coding is just this one homogenous user base. But really, we see it in two spheres. One is really geared for developers and an engineering team. So you're talking about QuadCode and Cursor and WindSurf. Those are IDEs, specifically for engineering teams. Our teams internally use -- our R&D teams do use and leverage these vibe coding tools that moves developers away from coding manually line by line to more describing things logically and then having vibe coding take the rest. So you're able to just ship code a lot faster. That's not where we are playing in this field. We're on the other side where it's really like Lior said, opening the world of software and application building to end consumers with no or very low coding experience. So it's the freelance developer or someone that has a software idea, they're now able to execute on it. It's for smaller design and product teams, not within the R&D organization but within these enterprises that are looking at prototype tools or build internal tools for their own consumption. And then, of course, the biggest population is everyone like me and you, who have something, have an idea, they need a widget, they need something. And that's where BASE has really been shining. Our market share of this particular AI-powered application building. So that second sphere was very minimal, low single-digit audience traffic share in June when we acquired it, and now it's double digits around 10%. So that's a factor of the product mean that much better. We launched a new builder a few weeks ago, and that's really shown in user adoption and feedback. So that's been really great. And then we've also invested a lot in marketing, and that's what it takes to build a great brand for a new product in a new space.

All right. Awesome. Thanks for the background. And I think you also talked about BASE44, having not had any marketing motion until right after the acquisition, right, after it became part of Wix. Maybe can you talk about the marketing efforts, which, for example, which channels are you targeting? And how is that similar to your work different from your efforts around Wix Editor?

Yes. I think that first of all, we are talking about different intent of customers. People that come to Wix, people that's looking to build the website. People usually that come to Wix, people are actually looking to build applications, not necessarily a website. Actually, we don't see many people use BASE44 to build website. So I think that it's a different use case. Now, as I mentioned before, I think that we've done an amazing job, and I'm not too modest about it, but we managed to build a super strong brand meaning that most of the people right now that are looking to build the website end up with Wix. I think that we can do the same thing with BASE44 to create a really, really strong brand and we already started to do that. I think that -- Emily mentioned the fact that we are right now more than 10% of this entire space growing in almost no time. So I think that we have the capabilities, the know-how how to do that, how to do marketing campaigns, how to use, for example, YouTube and create content online and to do it like an acquisition type of marketing. So I believe that we have the ability to do that. And definitely, we are going to invest, we are going to talk about it very soon about the business and about the margins. But I believe that we are talking about a different type of customers, again, people are looking to build applications. And we're definitely going to take the opportunity and to create the brand associated with that.

All right. That's amazing. And you talked about more recently the updated ARR target by year-end, that's over $50 million. And in the past, you've talked about it beyond this are going to head rapidly towards $100 million. Maybe just can you help us understand some of the milestones you've set for BASE44 at the time of the acquisition? Are those the ARR targets? Or are there some other things as well?

If you remember, when we bought BASE and people ask me about, okay, what's going to happen to your margins. I said, okay, I'm not going to assume there will be no difference compared to what we've already said to the market. And then again, we mentioned in the last earnings that we are going to invest more because the demand is huge. I think that what we've seen in the past few months since the time that we acquired BASE44, that the demand is right, really booming. I think that, first of all, the product is much, much better than when we started. At the very beginning, people use it to build application with database, with integration for all kinds of use cases. And then we saw that it was much more than what we expected, which is kind of a good problem to have. The demand is so big and so huge that we said that, okay, when we bought BASE, it was about $3 million of ARR. We are going to finish the year with more than $50 million of ARR in a very short period of time. And when I'm talking about ARR, it's very important to mention, we are a public company. And when we report ARR, it's a real ARR that is recurring and you do taking into consideration the future churn and so on. So yes, I mean, I think that it's much more than what we expected. We continue to see this kind of level of increase on a week-over-week basis, and we are truly excited about it. We didn't like say that we want to reach $100 million or $200 million in this specific amount of time. I think that it was much more than what we expected. But I truly believe that we are on the right path to get to what we mentioned about the $100 million very, very soon. So I think that from what we see until now, we are super excited and even much more excited about this opportunity than when we started with.

All right. That's awesome. And we definitely look forward to following the progress there. Maybe just as you mentioned, touched on margins a little bit, maybe just dive into it. At the third quarter earnings, you lowered the full year '25 gross margin outlook and raised the OpEx -- non-GAAP OpEx as a percentage of revenue. And then with one quarter left, of course, that means even a bigger swing or impact in Q4. Maybe just can you first recap some of the investments you're making that cost of margins to be lower? And then how should we think about the trajectory in 2026?

Sure. So I'm afraid that it will be kind of a little bit a long answer. Emily told me to do it as short as I can, but I will try. Let's start with the core Wix because I think that it's really important to explain this margin thing though like most of the questions today that I got was about the margin and what is the impact of -- based on our margin. Let's start with the core Wix. I expect for 2026 at the core Wix margin will actually improve and expand. I think that we are going to have better gross margin for Wix. It's come from a fact that we see a lot of savings coming from the care organization. We can do much more and to serve much more users with less resources. So this is with regard to the gross margin of Wix. With regard to the operating expenses, again, we are going to be more efficient. And I think that the fact that AI can help us generate and produce and develop more products in a much more efficient way, meaning that the free cash flow for Wix definitely is going to be higher than 30%. Now let's go to the impact of BASE44 and what it means. One of the most amazing things about this acquisition is the synergy with Wix. Think about a company that's growing so fast. And now you want to create everything to support it in order to scale it up. You need the infrastructure, you need to build security, you need to build care organization. You need to know how to do marketing, you need to recruit talented people, engineers. We have it, it already exists. It already exists. It's just -- we connected to the Wix CRM. We already have the security built in place, we already have the infrastructure to support it. We already have the care organization. We already have G&A and everything to scale it up. So in the end of the day, we are not going to increase even on headcount in order to support this growth because it's all coming from the own resources of Wix. And this is why the synergy makes it so impressive. Now again, so what are the costs that I'm going to have. We are talking about 2 types of costs. The first 1 is about marketing. The second is about the cost of AI. Both of them are variable cost, I can stop it in 1 day. And it all comes with the fact that it starts with marketing. We see the demand, and we invest in marketing. We do it through acquisition. We are establishing the brand. But the most interesting stuff is that we do it based on our own methodology, which called the TRY, meaning how much time it takes me to get $1 of investment in marketing. For sure, it won't be more than 12 months, but it means that I'm taking into consideration the churn, the retention, the conversion, the usage that I see and it's all blended to this TRY and according to that, I'm making my investment. This is one. Second is the cost of AI, and we definitely see the gross margin. I can tell you right now that the gross margin for paying user is positive. It's around 30%, 40% and I believe that it will improve, and it will improve from 3 reasons. The first one, think about new customers, new cohorts when they start to use BASE44, this is where all the prompts happening. This is where they build the application. This is where most of the cost is happening, right? But when you look at cohorts and customers that already build their application, they need to prompt a little bit in order to make changes, right? But it's not that high, meaning that people that already build application, they are more profitable than people that just started to build the application. So it really depends on the mix between existing to new customers. Definitely next year, we are going to see more cohorts for people that already finished, completed application. So definitely, by definition, the margin is going to get better. Second thing it's about the cost of AI. I truly believe when we started when we bought this business, we already took down the cost of AI by approximately 30% on a relative basis. Why? Because there are more players, it's not just Anthropic, it's also Gemini 3, which is an incredible product. And I believe that in the end of the day, the cost of LLM will continue to go down. There's no other way. There are more players over there. And I think that it just makes sense, in a way it already started to happen. The third thing is about our ability to make a lot of optimization to the cost meaning that you can use less LLM in order to do the same application. I think that there's a lot of optimization that we already started to do, and I believe that it will continue. So next year, definitely gross margin is going to be positive as it is now, even perhaps better. So the only cost that I'm going to have on top of it is for the marketing, as I mentioned before. I don't believe that it will bring us to a place where we are going to be worse than mid-20 for the blended free cash flow. I will be surprised if it will be even mid-20, I believe that it can be even higher than that. But it's a good investment, meaning that we are going to invest in growth. We are going to invest in a business that I believe will be super profitable and super interesting, and it's an amazing growth engine for us. So this is why when I'm talking about the cost, it's cost that we know for sure that we see the returns of it. But again, when you think about it, it's like one-off cost. Why? Because there is misalignment between top line to cost. I'm recognizing the entire cost of marketing and AI right now where I see the top line coming over time. In 2027, I already see the fruits of it. So this is why I call it kind of a onetime investment where you actually -- because of the super high growth that we see right now, but this is why we are truly a believer in this business. So I'm sorry for the long answer, but I think that it was super important for me to explain the kind of the economics behind it.

This is amazing. We really appreciate all the details. So just to recap, the core business margin is still improving, expected to be definitely better this year, north of 30%. And for BASE44 overall gross margin positive and then for the overall total consolidated business for the free cash flow from where you're looking right now, it's mid-20s or better free cash flow margin.

Yes, exactly. It's a good summary.

Right. Awesome. And then just one follow-up on the free cash flow margin. I think just for this year, it looks like the numbers -- the free cash flow margin has benefited from some of the outsized positive impact from working capital changes. How should we think about a normalized level of contribution from the working capital changes to your free cash flow margin going forward?

So again, it's a good example of what we're seeing right this year, like a one-off benefit. Why? Think about the super growth business where we need to invest most of the cost at the very beginning where we see the fruits of it later on. But it's simply issue of payment terms, okay? Well, I have vendors that I'm already recording the expenses, but I'm going to pay them based on payment terms only next quarter. So you see the benefit of working capital. But obviously, over time, it's kind of one-off because then there is no more alignment between the cash to the P&L expenses. But again, this is what's happened usually when you have like a super growth -- incremental growth in every company and you have payment terms. So you have like one-off benefit coming from working capital. And this is exactly the case also this quarter and also the fourth quarter.

All right. That's awesome. And then aside from fourth quarter, looking back at the core business, you touched on the margins. That's super helpful. And then how should we think about the growth of the core website business. Maybe if you can just provide some color in terms of top of funnel, the conversion, the pricing or any comp dynamics.

So I'm happy for the question because I think that in the last couple of months, most of the question was around BASE44. But we have $2 billion of income coming from the core business, which I remember that at the beginning of the year, I said that we view acceleration and we forecast acceleration in the second half of the year, and it happened. It's not because we know how to predict the future because we started to see the performance of the new cohorts. And it's coming from 3 different reasons. The first one, we see better top of funnel, more intent of those customers. We see better conversion and increased ARPU. Increased ARPU coming from the fact that we see also a different mix of customers, more mature businesses that are using more business solution, payments, e-mail marketing solutions, Google Workspace and so on. The strength of top of funnel that we've seen lately coming from we believe, 3 different reasons. The first one is because the strength of the brand. The brand of Wix become better and better, more people looking for Wix. Actually, the search for Wix is all-time high. People are looking for Wix in order to build the website. Second, we see some kind of improvement in terms of the macro, especially in North America, meaning that most of the growth actually coming from the U.S. We see some improvement in terms of business formation. Third, I believe that people recognize the fact that in order to be discoverable with AI, they need to use a platform like Wix. Think about the old days of SEO, okay? Today, the SEO using Wix, the SEO is much better than, for example, building website on WordPress. But it took a lot of time to do that. There's widgets that we have that explain to you exactly how you need to do your SEO, what you are missing in order to have the best SEO. But think about ChatGPT, think about Gemini. If you build an online store and you are selling furniture, how you will be recognized? How will you be discoverable with ChatGPT? You need to build those capabilities. There's no way that you can do it yourself as there's no way that you can build the best security. And therefore, using the Wix platform or for that regard, you can also use Squarespace or Shopify. But at the end of the day, it's connected, for example, to the galleries that we have. And then you know, okay, if I'm looking for a specific furniture, I know how to do it through the Wix because it's part of the LLM integration. And I can actually do also a deal using PayPal and to do like to complete the interaction and actually someone that's looking for this specific furniture also to buy within the ChatGPT, but it's all done in the back end of Wix. So at the end of the day, people really, really understand that if they want to have a good business with the best website, the best design website that it's on the website that can actually be discoverable on the different LLM. They need to use Wix, and we see the strength of the brand. So definitely the last quarters actually proved that. We've got to a place where we see all-time high in terms of the performance of the cohorts and we say that it's improved. It actually happened in the second half of the year. So we are truly excited about it. And again, we look forward for the product that we are going to launch for self-creators that I believe will just improve it.

All right. That's amazing. And you actually also answered a lot of the questions that I'm going to have for the upgraders because that's...

Because I knew what you're going to ask.

Those are very important points. And I think one follow-up or feedback or questions we received from the investors is also just on the new product side, the new self-creator products next year. Will there be any accompanying significant marketing investments associated with the product launch or why or why not, just from your experience?

We are going to continue with the TRY methodology as we did for so many years. So there has been no difference. You know that for every dollar that we invest in marketing for the core Wix most of it return in day 1 because most of the customers are non-monthly. Actually, we see a phenomenon that many people starting to do like 2 years and 3-year subscription. There will be some branding investment. But again, it's not going to be significant or huge even to have like a significant impact on the financials.

All right. That's great. It's great to follow. I guess the follow-up or clarification on this point. I'm sure that's -- investors will appreciate it. I guess just moving -- looking at the corporate level, over the last 2 years through -- or exactly 8 months over Q3 of '25, you spent, I think, exactly $1.0 billion rounded $1.0 billion on share repurchases, which was 100% of our cash flow during that period and double your 2023 Investor Day target. And of course, you're still going to generate a ton of cash flow -- free cash flow in Q3, you've effectively doubled the size of your cohort. So the shares at the current level, how would you -- how much would you like to spend on the buybacks in relation to the free cash flow going forward?

How much we did, $1.5 billion?

Yes, since 2021.

Since 2021, $1.5 billion. Look, I think that definitely, we will continue with buyback. I mean I think that, first of all, we intend to eliminate the dilution that we have for granting equity to our employees even reducing share count by doing so, and we are very successful, by the way, in the last couple of years. Definitely, we also need to take advantage of the current share price, and we are in discussion with our board. But there is an opportunity. I think that right now, it's a good investment.

All right. Awesome. Yes, we agree. Maybe just a couple of kind of rapid fire your high-level thoughts. What do you think of pricing next year?

You want to take it?

Yes. I think, look, like we have a new product coming next year, the new self-creator product. And I think launching that driving adoption, fixing the bugs on it and making sure that users are really enjoying that product is probably our primary focus. We don't have any plans right now to increase pricing. But of course, like we test it very, very regularly. So we could do it on our classic editor, the new editor, we could do it on studio, but there's just nothing planned right now.

All right. I appreciate that. And I guess the next one. It's going to be a little bit of a change because I think you're starting to pay taxes. And how should we think about that for 2026.

About what?

The tax rate, corporate tax rate.

Yes. I think next year, OECDs like Pillar 2 is likely going to come into effect. So I think we expect like a corporate tax rate of around 15%.

All right. Awesome. That's super helpful. Maybe just in the last minute or so I'd just like to open it up for any audience questions.

It's Tim from [indiscernible]. But do you see any structural advantages of Squarespace partnering with Perplexity versus you partnering with Gemini?

No, we haven't seen any change in terms of the competition, especially not from Squarespace. I think that since they went private, we haven't seen really real changes about competition. I believe that we're actually taking more market share. But let's wait and see. I think that they have a good product, not as good as our product. But I believe that the technology gap between us to them just keep on increasing.

And I'll say too, I think like our end goal, and I'm sure it's similar for them too, is to make sure our merchants and our Wix user sites appear and are very well visible in all of these AI search engine. So I think eventually, the end goal would be for us to integrate directly with these LLMs, and I think that's probably what the next era of web would likely be anyway.

All right. Awesome. With that, please join me in thanking Lior, Emily and also the people that joined us here today. Thank you so much, and I look forward to some more of the progress.

All right. Thanks.

Thank you. Thank you.