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

All right. Good afternoon, everybody. Let's get it started. We're very, very excited to have the Wix team. We have Lior Shemesh, Wix CFO; and Emily Liu, Head of IR with us today. And we also have my partner in covering the web builders, Chris [indiscernible] here with us. So let's start -- let's get it started.

So maybe just starting from the self-creators topic, a key takeaway to us from third quarter earnings was that the self-creators was, in your words, firmly in the front seat of your growth strategy. It's still very -- it's still nearly 2/3 of your revenue and growth accelerated in the third quarter, and now you're seeing your AI products bear fruit. So I guess going from here, what areas are you focusing on to accelerate the growth in the self-creators business? And what are some of the investment needs in R&D and marketing spend there?

So first of all, hello, everyone, and thank you for coming, and thank you for having us. I said many times in the past that I believe that the self-creators segment will probably, at some point of time, we'll get again to a double-digit growth. Looking at the history of Wix, we always drove growth through innovation, through product. So basically, there are a few ways in order to accelerate the growth, and this is exactly what we intend to do. The first thing is about, as I mentioned before, about increasing conversion through more product innovation. And let me go back a few years when we started to invest in the Partner business. And we've launched Studio a year ago, and it has a tremendous effect on our numbers, but also a tremendous effect in terms of the market opportunity. But for the first time, we actually have two set of products, the one for growth and another one for self-creators. So what we intend to do is to allocate some of the resources that we had with Studio and to invest in self-creator and to launch, I believe, a significant product next year. Based on our experience for many, many years, usually, when we do that, it means that our conversion will continue to increase. So that, with the combination of more AI tools and the combination of also increasing the ARPU by introducing more services part of the business solution. So I think that the combination between increasing conversion, increasing ARPU, increasing top of the funnel for weeks will end up with accelerate the growth for self-creator in the future.

All right. That's great. That's very helpful. And maybe I guess quick dive a little into the growth algorithm. If you think about how you grow from here. And definitely, the growth is picking up and for it to potentially grow to, say, high single digit, low double digit and then eventually to probably like the mid-teens target. If you think about the components to get there, there can be the subscriptions growth and pricing increases, maybe some mix shift and product attach. Maybe can you just break it out to us by these areas? And maybe is there something more?

For the overall business or just for the self-creators?

Just the self-creators.

Sure. So first of all, all the plans that we have for the self-creator will not require additional investment in R&D. I think that it's important to mention. I mentioned many times in the past, we don't intend to increase the head count at least in the next 12 to 24 months. In order to achieve that, again, as I mentioned before, I think that the first opportunity that we have is to increase conversion by introducing a new product. Second, with the different AI tools. I think that this quarter, we've experienced increase in conversion of 13%. When we increase conversion, it has a double effect because in -- on one hand, we increased conversion from free to paid. Wix is a premium model. We bring approximately 1.5 million users every month. So the fact that we have managed to increase conversion, it end up with, obviously, with better numbers. But it actually take down the TROI, meaning that the TROI for self-creator is about 3 to 5 months in terms of the returns. When we increase conversion, it go down. So it allows us to increase marketing investment again. So it has this double effect. And as I mentioned before, continue with increasing the ARPU by introducing more products. And on a regular basis, I believe that every couple of years, we also will be able to increase prices. So those are kind of, I believe, the growth drivers for self-creators in the near future.

All right. And I guess maybe just in those components all back together, what are you trying to solve for the self-creators. So what's kind of your North Star? Is it Rule of 40? Is it maybe just investing as much as we can within your TROI guardrails. And as you mentioned, the free cash flow margin should be already above 30% right now. And what you're thinking on the spending going from here?

Definitely, passing the Rule of 40. I think that we've already experienced increase in the free cash flow margin. I believe that for self-creator, it would be around 35%, perhaps a bit more than that and a double-digit growth in terms of the top line. So I think that people can make their own calculation, but this is where I see the North Star of self-creators, and we are pretty much close to that, at least from the profitability perspective. In terms of the growth, we are working really hard on it.

All right. That sounds great. And I'll probably squeeze in one last question about the self-creators before passing it to Chris on the Partner side. So -- and I guess it's a natural transition. So maybe what can you -- can you share with us what you can maybe leverage for effort over the past several years on the Partner business in this push on the self-creator side?

We've learned a lot when we've made a decision a few years ago to penetrate into the Partners business. We invested a lot. We improved the infrastructure. We invested a lot in terms of the technology. I think that the fact that we have a much better performance, all other to track a different mix of customers or self-creators. It can be large stores. It can be enterprises. And it can be generally business that are more mature in their nature. But it also means that the ARPU increases because they are using more business solution, more business applications. And they also have much better KPIs, different retention, for example. The fact that we really right now understand the two segments also make us use some of the technology, for example, that we develop in Studio to implement it on self-creator. So for example, the fact that we are able to do responsive designs automatically using all kinds of AI tools that we develop for Studio, doing it again for self-creator. So the fact that we understand both sides of the business, both side of those pros but also for the fact that we understand the self-creator because this is how we started, make it very interesting for us to deliver an accelerated growth for both segments in the future.

All right. Sounds great. Cool. Well, let's jump into the partner business and Wix Studio here for a second. I think you said 75% of bookings from new Partners came from Studio accounts in 3Q, and that was a step-up. I guess just are you able to share what that percentage of new premium accounts in your Partner business are on Studio? And how should we be thinking about that ramping further?

So first of all, I think that when you're talking about Studio, there is a Studio Editor, but also the Studio Workspace. Meaning that many people that not necessarily using Wix the Studio, they can use Wix Editor, but they are using the Wix the Studio dashboard. So it means that they can actually control and manage their customers, doing collection, looking at payments and so on and so forth. It's increasing. Studio is a new product, only launched a year ago, but we see a tremendous increase in effect. We didn't share the numbers in terms of number of premiums. But what I can tell you that is like growing tremendously well on a quarter-over-quarter basis. It mostly has a huge potential the way that they see it for the future.

Got it. And considering the strong growth here, is there any possibility that you would consider discontinuing the core Editor and really just going forward with Wix Studio for the Partner channel.

No. I think that we let our Partners decide what they want to use. For some of the projects, the Wix Editor can be a perfect fit. For some of the other projects, Studio is a better fit. So we don't want to limit them in terms of what they can use. They have the entire portfolio of products they can use whatever they want. We do see them right now. Some of them really like to use the Wix and Wix templates or the traditional editor for some of the project and feel very good about it. And for some more complex projects, they use Studio.

Got it. I guess as you think about drivers here that could be pushing further Partners and when could this become the overwhelming majority of Partner business is going towards Studio. How do you think about drivers here and some of the caps that you're facing here for adoption? Where is that -- where are those friction points?

Well, we already started to see that in terms of the new cohorts. So it's become more and more significant. The fact that we said that 75% of the booking of new bookings coming from Studio users. It tells a lot about the engagement about the fact that people really like Studio. In the past, Partners used to use Wix, but not entirely. Today with Studio, they can use Wix for more than 90% of the projects, and we can see the adoption of it. Actually, we can see like the early comers, the one that's already started to use Studio a few quarters ago, they're building the second, the third and the fourth website on Studio. We're getting -- we hear in the feedback, we see the type of sites that they managed to build. So it's really encouraging. I do believe, again, and I said that many times in the last few quarters, Studio is the first and a growth driver for Wix in the future. I believe that Studio, it's a product with the best launch ever in terms of the product that we ever had. We already have more than 1 million users on Studio since we launched this product. So from my point of view, by far, it's an amazing opportunity for us, which will hopefully will drive hundreds of millions of dollars of revenue.

And I'll add to -- you asked about caps and hurdles and something that I think is really something we're really proud of is one of the biggest hurdles that we've had entering this new professional market on as an easy-to-use DIY platform has been perception with small agents, especially like the larger professionals. And over the past 18 months, perception has improved a lot, like very, very meaningfully in a way where agencies of all sizes today are very open to meeting with us and learning about Studio even if they may not deploy it right away. So the work that we've done to educate, to meet them at where they are at conferences in their community, that's been -- we're seeing very meaningful fruits of that. And now we're very focused on new transitioning over to initiatives that are helping them actually change the way that they work, if they're onward press and they have huge developer teams and big design teams because you need all of that to build a WordPress site or a more sophisticated site on another kind of CMS platform. On Wix, and on Studio, it really simplifies a lot. So getting them to change the way they work -- we're doing that fully, but surely, but that's something that we're focused on and it's going to happen with time.

Got it. And maybe just on last on Studio. Just you're going to be getting to the anniversary of some of those earlier subscribers here. Just how are those renewal rates? You talked about the velocity of new projects getting spun up there? How do those kind of renewal rates for those early subscribers looked versus as you kind of think about Wix Editor trends? And what other kind of trends you're seeing within the business?

Yes. The Studio -- the first cohort of Studios in the back half last year. they're renewing at better rates than our classic Editor cohorts have in that same cohort and especially like the Business Studio packages are renewing at an even higher rate. So these kind of really strong robust renewal rates that we do expect to continue in addition to what -- Leah mentioned before, more and more agencies building second, third, fourth, multiple sites, all of these things kind of drive the wheel of compounding growth that will really power our partners' growth in the next few years.

By when you think about it, it also makes a lot of sense because usually people that go to partners to build the website for them, they are more mature in terms of their business. Talking about small businesses. The first couple of years are the most critical if they survive the first 2 years, so it's much easier for the future. We see much more mature businesses onboarding 2 weeks through partners. -- with more GPV, much more healthy business. And as a fact, so the retention is totally different.

Helpful. Great. A big focus of Wix, I guess, or from the investor sisters, the bookings numbers and you kind of resumed the guidance on the bookings. And for the third quarter, bookings and revenue accelerated by 1 point and the revenue for self-creators and the partners each accelerated by about 1 point. I guess, maybe directionally, are you seeing even stronger bookings acceleration for self-rate than the revenue acceleration if we're the share?

We definitely see acceleration in bookings for self-heals since the beginning of the year. I think that it's definitely a result mostly from innovation, but also from the AI. I mean, we mentioned that the AI side builder improved the conversion. We started to see the fruits of it. We have better demand for products modest improvement also in terms of them grow better GPV, increasing GPV and business solutions. So yes, definitely, we see acceleration of booking more than revenue since the beginning of the year.

All right. That's great. And then for the fourth quarter, at the high of your guidance ranges, total bookings and the total revenue are both expected to accelerate by about a few points, I believe. I guess, how should we think about the trends for of creators versus partners' revenue growth in the fourth quarter?

Well, I think that, again, I mean, we guided for an acceleration in bookings -- so it's going to come both from health care to and partners. We are going to see a continued improvement of conversion Usually, when you see improvement in conversion, it's not a onetime effect. It continues and as more of that progress into the year, the effects of those new cores are higher, like any other SaaS model. So we see the improvement of that. And we definitely see also the improvement and the increase of Studio, which contribute asked about the effect of Studio, definitely the acceleration of partners between the third to the fourth quarter, it's all coming from Studio.

Yes. Maybe jump over back to the product side of things. Wix has really been there for AI has been an AI story since 2016. You've had Wix ADI in March, you launched the AI website builder. Can you just maybe for folks us familiar here, just talk to us about your capabilities here, just how are you stacking up against competitors? And as we think about the product road map here, where are areas and opportunities to kind of fill in?

Yes. kind of like you mentioned, in 2016, we launched Artificial Design Intelligence, which is kind of version 1.0 of an AI-powered website generator. And even over the past decade, we've continued to invest really, really heavily focusing a lot of our innovation efforts on AI. And now we have a really broad suite of AI products, the cornerstone being the new AI website builder that we launched earlier this year that through a quick prompt conversational AI chat, it will create -- our platform will create a and also AI tools to help you grow and market your business, helping write Google ads, launch e-mail marketing campaigns connected with social and running campaigns there. So it really is everything we also have analytics tool. So I think we definitely have a much more comprehensive suite than what we see out there, and it's really in our DNA of being product first, innovation first and being a leader in AI for so long. And recently, this year, we -- earlier this year, we launched almost 30 AI business assistant. So these are more targeted use case assistance that will help kind of move or change our users through the web creation journey, help them kind of troubleshoot any issues and actually perform simple functions for them with very, very little customer or user support from our end. And we have already dozens of them, and we still have many, many more to come. So that's been something that we're really proud of this year. And then looking forward, this past quarter, we did mention that we will be rolling out our first set of AI -- monetized AI products in the coming months and early next year. And these are going to be kind of much more valuable value-adding assistance targeting merchants, helping them streamline their businesses, making them kind of go-to-market easier for them and other creation products that are coming as well. So a lot to be excited about.

And that will be the first real kind of direct AI monetized product. Can you just maybe talk about what you saw that allowed you to kind of to go that route here? And how should we kind of think about the pricing of these? I think a lot of people think about Office 360 and copilot where the copilot was earning more than the pilot. So how should we be thinking about the value add of these products and kind of what that monetization kind of structure could look like?

Yes. So we haven't announced anything about pricing, but definitely before we put anything out, we do our own pricing tests and for a couple of the products that are coming out sooner, we're already doing those tests and seeing the results that we want to see. But with these products, a lot of these are going to be more true like assisting copilot like experiences that can either supplement or almost replace a lot of functions and back-end responsibilities of very typical of SMBs. So that's what like the real value is. And again, it could be a subscription model. It could be usage-based, but we're testing all those things. And as they come out, we'll be coming out of the pricing for those.

Right. That's also very exciting to see the progress there. Maybe switching to the reporting segment on the Business Solutions. Just wanted to have a little deep into the underlying products and the trends there. We've seen your transaction revenue continued to accelerate in the third quarter. And then for the rest of the business solutions, let's call it the non-transaction portion which is mainly the applications. Revenue also accelerated in the third quarter. Maybe can you talk about the drivers for the acceleration of the nontransaction portion and by product? Where did you particular strength there?

So let's start with the transactional revenue. I think that we've seen increase in GPV and continuous strength of the tech rate which obviously resulting in acceleration of the revenue. But I believe that it's worth mentioning that the business solution acceleration, it's also kind of attached to its partners. I mentioned before the fact that we are talking about more mature businesses, using more consumption of more business application using more Google Ads and Google Workspace and email marketing capabilities and so on, but also much higher -- we mentioned before that partners is about 1/3 of the revenue, but they are more than 50% of GPV. And I think that as long as we are going to see acceleration of partners, it will follow with acceleration of business solution as well. So with regard to the non-transaction revenue, exactly the same story. I think that we see a much better usage, different mix of customers that consume more application, for example, email marketing because that's a more mature business and they need to use it in order to boost their business.

Understood. So basically very similar drivers for that Business Solutions revenue. All right. That's very helpful. And maybe let's look at the gross margin there. and the margin continued to expand to 31%, up 1 point in the third quarter, and you continue to expect it to exceed 30% for the full year of '24. Maybe can you give us an update by unpacking the transaction -- the gross margin on the transaction revenue versus the gross margin on the non-transaction revenue -- where are you right now?

So for the transaction revenue, I mentioned before that it's very clear. You cannot get more than 30% to 35% in the gross margin because of the nature of the business when 2/3 of it go to the credit card companies. So there is no change. I think that the fact that we see acceleration in gross margin over there is because you are getting better margins when you get higher GPV. In some of the geographies, we're already at 35%. So I think that the scale is actually improving the growth margin as well for payment. With regard to the nonpayments, it really depends on the nature of the product. Some of the products, it's product that we develop, like, for example, email marketing. Some of the products we are using like Google Workspace when we recognize on a gross basis because we are adding a lot of value. I think that from my point of view, what is important about the business solution application is to add much more value to our customers. So let me give you an example. If we are providing them with the ability to do much better campaign on Google, and lets assume that I have an X profit on it, I also have an indirect effect of the fact that I have a much better happy customer, increasing GPV, again, I'm getting true payments back. And because it's managed to boost this business much better retention. So there is this direct and indirect effect. So I'm not trying necessarily to optimize the gross margin for the non-transactional revenue actually, we are going to see in the near future, we are going to see more products that we are going to offer. Obviously, I intend to make money on it. But what is important, it's also much better experience the customer which also contributing to the indirect effect.

All right. That helpful.

You shouldn't expect any change in terms of the gross profit also in 2025 according to my estimation.

All right. Sounds good. That's very helpful. So maybe pass on to Chris.

Yes. Maybe just looking at some of the other areas, just overall head count has been down last year, reduction in support roles. I guess head count has increased in sales and marketing, G&A related type of functions. I guess as you strive to maintain the discipline on overall head count, is it fair to kind of think about that same direction as same direction is what you started in '23 as you get more from AI and support?

We shouldn't expect any change in terms of the head count for 2025. I think that perhaps you see some changes between the quarters, like plus 3%, minus 3%, but it's basically a part depends on the fact that how fast we're able to recruit people that instead of people that are leaving. But the overall headcount, we do believe that we have the right structure of head count to support our growth initiatives. So we don't intend to change the overall head count for next year.

And just as far as going after some of these larger agency partners here, can you just talk to us about what has been -- what have you learned over the last year as far as winning these relationships here and going deeper with certain partners? And how should we be thinking about that as we look forward to '25?

Sure. I think that Emily spoke about it before, but I believe that the first challenge that we have after obviously completing with Studio, which we believe is the best product out there is how to change perception of partners about Wix to increase the brand awareness for Studio. Well, I think that we see it's progressing. I think that people are talking about Studio mentioning Studio. Agency started to use Studio. It started to happen. We are engaging with agencies. We go to conferences. We are talking with them, we are teaching them. We are training them. And once they are using Studio, they are so happy. Remember that it's also a different model with them because until now to use WordPress. We're definitely taking a big market share from WordPress. It started to happen. I mean you can see that in the numbers. But to their point of view, using WordPress, it's a onetime fee. You build a website, you charge your customer onetime fee, and that's it. With Wix, I'm sharing revenue with them. So for the first time, those are agencies become a SaaS model agencies. And it's great because they have a great product but also a great business model.

Very helpful. All right. We're at the mark. Thank you so much. It's been helpful, informative. Thank you, Lior, and Emily for joining us.

Thank you.

Thanks for having us.