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

Great. Can we talk briefly about the economics of BASE44 and some of these -- the newer models that you've implemented. So 2 new in-house models, the Wix Harmony LLM and BASE1 for BASE44, each cutting inference costs by -- to about 5% of the Frontier model alternatives. Can you talk broadly about the decision to open source the advantages in specializing on your own data and then potentially a third 1 squeezed in. How you expect to adapt your proprietary models as frontier models continue to evolve?

Yes. So I think the easy value that everyone sees immediately is the inference cost savings. I would actually argue that it's the least interesting 1 because I think it would have happened anyway. It probably would have happened took a longer time. But eventually, just on the nature of the kind of competition there is around it, it should have come down. The other thing, I think, that's driving costs on AI compute obviously is energy in data center is the lack of both. But we all know that there's so much investment into expanding that. So over time, I would expect the cost to come down anyway. Naturally, because we don't went away, the fact that we can save a ton and improve the margin profile quickly by doing it now is a huge benefit. That being said, I think that there are 2 other things that are actually even more important. They are not immediate, but they're more important. One is if the core or 1 of the core things that BASE44 does is understanding what's the best flow in order to create and code web applications for the kind of customers. Then obviously, sharing that know-how with a third party that might, at some point, either deliver the -- train their own models and then let competitors or competitor use it or become a competitor in themselves, is a huge disadvantage. So I think for us, using this is an important way to protect our IP. And I would say that once you encapsulate the problem you have and the issue you're trying to solve with your own model, you also have a better chance to improve on that specific undertaking whereas when you're only reliant on the improvements of a third party that does something much wider, you may get some benefit, but not necessarily the exact benefit that fits the problem you're trying to solve. So if fable is much better at deep research, I'm not sure that helps me with building applications, right? It doesn't mean that it's not amazing for research. So I think another thing that over time, we'll be able to create and curate a better solution by focusing on our own trade model. Now to your question, what happens when the new big innovation comes out, it's a great question. I think that, first of all, we are tracking it all the time. This is why we keep on using frontier models. It's all the time. We're never going to be completely disconnected. We're actually using a bunch of the top-notch new ones all the time and testing them. And I think at least so far, we've seen a lot of those kind of outsourced solutions managed to catch up rather quickly. You're asking what if comes a new 1 that nobody catches up with and it is so good that something so different that you have to grow and replace and go back to it. I don't know. It's a great question and if ever I have to deal with it, then maybe we'll come back and say, "Guys, we're going to increase costs right now because you're going to use it, but here's the benefit in here it right makes sense. So it can happen, but it needs to be a smart business decision that I can articulate and explain to you why it makes sense, right? If it comes to it, we'll have to engage with it.

Understood. On the cost side, and Lior, maybe you have some input here as well. But BASE44's profitability is continuing to improve. We have a few metrics that we're anchoring on now. modestly longer than 12 months, 60% gross margins in the second half. The question really is how do you think about the structural profitability today inclusive of free users versus potential bridge ahead? And then parallel to that. How do you think about TROI as you lean into marketing again in the second half?

So I think that when you talk about TROI and gross margin, at the end of the day, we manage risks, okay? So it means that if I see that I have a higher gross margin, I can take more risk in terms of the TROI. I think that let's start with the gross margin. What we see right now, and we did mention what we expect from the second half of the year. So definitely within what we provided. And let me say, even a bit better, which is a really, really good indication because it means that when we go to next year, we are definitely going to improve the overall gross margin for next year. Again, assuming there is no new model that we will implement. I can tell you even more than that. I think that technically, we can even increase the gross margin, but we want to use more of the frontier model in order to compare. So I think that we are in a very good place, and we are going to see that next year, definitely, the gross margin is going to improve, okay, based on what we know right now. Now with regard to the overall profitability, I think that then the only question that remain is how much we are going to invest in marketing. And this is something that we'll have to decide as we progress because there's a lot of opportunities that can be like new products coming from base that we would like to invest. I don't want to be in a position where we had the growth because of the free cash flow, okay? We need to deliver and we need to make sure that we will continue with the growth. So I think that definitely, when we provide the guidance, we are going to provide much more explanation about what we see, why and what we decided to do. But in terms of the margins itself, it's getting better. By the way, the same also for Wix. I'm going to see for the core Wix, I'm going to improvement in the gross margin next year. The consolidated, it's a question about the mix between B and Wix.

Makes a lot of sense. If we could switch gears quickly. Partners, just wanted to hit on that quickly. Some volatility this year, $50 million bookings headwind. Could you elaborate a little bit on the pipeline pressure, but really, the question is more on the -- have the headwinds changed? Have you seen any change in the magnitude of the headwinds or...

So the simple answer is no. We haven't. We haven't seen improvement. We haven't seen deterioration. Obviously, we also already absorbed the surprise factor the last time when we announced it in June. And I think -- again, I think the role of partners in this ecosystem is changing. Are they going to be completely gone in 2 or 3 years from now? I don't know. I don't think so, but I don't know. I think that if they do, because they lose all of their business to essentially AI machines that can do everything instead of them, then we intend to own at least one of those AI machines and be part of that change. In the meantime, I actually think that as much of the simpler stuff become very easy to do with AI, but a lot of the complex stuff as a business owner are still very complex for you. And business owners still have that tendency to try to steer away from technology, one, because it scares them and two, because it defocuses them from their business, which is what they know how to do best. And it's digital business. Then I think the role of the agency can just evolve to be someone who is much of a partner to the business owner in helping them run it more effectively in a world where there are lots of other new technological opportunities that suddenly they can unlock with better website building on Harmony or on BASE44 with adding applications around the business, maybe with running the business with that AI cluster of experts that is being built on Symphony. And I think what we want to understand, while we are improving the product and trying to kind of slow the bleeding, hopefully stop the bleeding, but at least slow the bleeding, and this is something we're going to do very, very soon. We also are talking to like many, many tens of our top agencies to try to understand what is the experience, what is changing, how their jobs are changing. And then from that to curate solutions of how can we help them evolve into the next phase of what is a partner, what is an agency in the age of AI. And I don't think anyone has all the answers yet, but we're working closely with them in order to get there.

Perfect. I wanted to open it up to the audience for any questions before we keep going.

Just out of curiosity, could you maybe just let us know the split between the queries based on frontier models versus base one, your own internal LLM? Just if you could quantify, that would be very helpful.

We don't want to provide because for a few reasons. I think that it's mostly about the fact that it keeps on changing. okay? It's not something that I want to commit to. It's not something that I can commit to. I think that the fact is that you want to test, you want to understand. In some of the cases, customers actually will prefer to use the frontier models. So it's something that we are.

But I would definitely say that if you look at the first half of the year or early in the year towards what it is right now, the portion of the frontier model usage has changed dramatically. It's a big change. It's not small. Again, we're not going to quantify it exactly, but it's very big.

On your prior subject of evolution, I think we're potentially in this transition period as well where bookings have kind of lagged revenue growth for a few quarters now. Lior, I think you mentioned specifically that you hope that, that dynamic changes next year. What would need to be true for that to occur? For the inflection to potentially happen.

Look, I think that in the end of the day, what we do right now, I think that most of the time trying to figure out about what will be the growth drivers because there's a lot of changes right now. Even within base, I mean, we spoke about base, about new product, there's so much opportunities with base. So definitely, this is one of the growth drivers that we are investing a lot. Second, with Wix, I mean there are mostly -- I mean, there are like 3 things, and Anir mentioned that. But definitely, Symphony. I believe that also within partners, we have more opportunities. And also, we talk about the headless. So we are also evolving into a place where no matter where you do the front end, you'll still be using Wix. And I think that this is super important to understand because even if you lose Entropic or use ChatGPT or whatever, I think at the end of the day, do you want to be in a position where you can present our solution and everything that we've worked so many years and establish a lot of understanding about what small business needs, what kind of vertical, what kind of connections and so on. So I think that we are working very hard in order to make sure that we can generate more growth from those growth drivers. But let's see, I think that it's too soon, but we're really, really optimistic about it.

You said it's a transition. I think it's like it's an underestimation of what's going on. First of all, like 10 years ago when we were sitting here, we had basically -- we were a few years after the IPO. We had one editor and we're talking about how we are adding all of those business solutions and verticals in order to help people unlock more value as they want to build websites. And it wasn't that we were not invested in other things so much as the world was just a much simpler world back then. I think the shift that we're seeing now is really dramatic. I think it's less dramatic sometimes because people are trying to describe it as if the sky are falling and everything is going to go away tomorrow. I don't think that's the case. But I do definitely think that we are going for a massive shift of a new Internet, which is the Internet in the age of AI. And it definitely presents a huge amount of risks, but also massive opportunities. And I think everything we're talking about, think about all the things -- the number -- the sheer number of different products and different things that we are talking about just now in 20 minutes, okay? Again, I couldn't cover so many things last time because we didn't have -- or 10 years ago because I didn't have so many things going for me. I think all of that is geared up towards making sure that we can not only survive this shift, we actually want to come as winners in this shift. And I think we have a good chance, but we'll have to work very hard.

In that shift in the platform evolution, I think the new products are interesting, right? Just obviously, headless kind of changing the access and entry point. Symphony though, usable by businesses that are not even on Wix at all. How does Symphony maybe change your TAM and how you think about creating new products that are maybe very different from the products you used to have?

So I think, obviously, there's about -- if you look at kind of the go-to-market or the kind of the profile of the user, you can say, well, there's a lot of similarities. But I think the TAM is actually a new TAM or an independent TAM because it tries to answer a completely different need than something else. At the end of the day, so much AI innovation, so many great things you can do with AI. You can really leverage AI to make your business much, much, much better. The vast majority of the people have no idea how to approach it. And if Symphony is successful, and I don't know to say it is, it's a 3 weeks old product, way too soon to determine anything. But I think that on paper in terms of the opportunity, it's a super interesting opportunity. It's interesting because if it works, then yes, then it's independent of Wix can cross with Wix definitely, but it's not determined on me bringing a customer to Wix and then selling them Symphony, but a whole new and independent opportunity. And I think the great thing about this age of AI is that this is a product we developed like in a matter of months with a very, very small team. I personally really believe in it and hope that it's going to be a big hit. But I also have the appetite to do more of these and try to go after new big opportunities. I think, again, to go back to what I said before, it's an era with a lot of opportunities. So this is -- I think this is very exciting for us.

Area of opportunities, I think, is a perfect place to end. So thank you both so much for coming. I really appreciate having here you two.