Wix.com Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 17, 2023

There are 12 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Wick Q1 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising that your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rona Davis, Head of PR and Communications. Please go ahead.

Speaker 1

Thanks, and good morning, everyone. Welcome to Wix's Q1 2023 earnings call. Joining me today to discuss the results are Avishai Abrahami, CEO and Co Founder Nir Zohr, our President and COO and Lior Shemesh, our CFO. During this call, we may make forward looking statements, and these statements are based on current expectations and assumptions. Please consider the risk factors included in our press release and most recent Form 20 F that could cause our Actual results to differ materially from these forward looking statements.

Speaker 1

We do not undertake any obligation to update these forward looking statements. In addition, we will comment on non GAAP financial results and key operating metrics. You can find all reconciliations between our GAAP and non GAAP results In the earnings materials and in the Interactive Analyst Center on the Investor Relations section of our website, investors. Wix.com. With that, I'll turn the call over to Abhisheis.

Speaker 2

Thanks, Rona, and good morning, everyone. We have had a fantastic start to 2020 And I'm pleased to say that we exceeded our expectation across many areas of our business. The drivers of our results this quarter were broad based across our business, both on the top line and on the profitability. Revenues in Q1 grew to $374,000,000 above our guidance. We generated $44,000,000 of free cash flow, excluding one time charges and Also ahead of our expectation.

Speaker 2

These great results are a testament to the strong execution of our strategy to provide the best platform of innovative product for our users while increasing operational efficiency and discipline. Much of the growth this quarter Was also driven by our partners business. This year, scaling our business with partners, including designers, freelancers and enterprise partnerships Remaining a key strategic focus. Partner's revenue growth accelerated this quarter, Up 27% year over year. We recently announced some exciting product for partners, including Wix Headless and have many more incredible product announcements and marketing plans for later this year.

Speaker 2

The outperformance of this 1st quarter is very encouraging. So we are raising our revenues and free cash flow outlook for the full year as well as pulling forward Many of our profitable targets for 2023. Our profitability at the firm bolster our confidence in achieving the rule of 40 in 2025. I will let Neil and Lior share more detail about this quarter, and then I will close with my thoughts on AI. Neil?

Speaker 3

Thank you, Avishai, and thank you everyone for joining us today. I'll share a bit more details about our performance this quarter As it relates to our user cohorts, some color on our marketing investment in the quarter following the recently announced strategy shift and an update on our focus on operational efficiency. Let's start with user cohort performance. Our Q1 'twenty three new user cohorts performed exceptionally well with 5,400,000 new users collectively Generating more than $30,000,000 in bookings in this Q1, easily the highest same quarter booking In a non COVID cohort and on a base of a significantly smaller sized cohort. This clearly indicates the inherent improvements in the fundamentals of our business, including subscription conversion and average collections per subscription as well as stable retention.

Speaker 3

Diving deeper into these fundamentals Shows the returns from our focus on bringing higher intense sales creator users and partners, which convert at higher rates. It is also the result of higher monetization driven by users choosing higher priced subscription, Strong adoption of business solutions applications, more transaction revenue as a result of higher GPV and increased take rates, And continued contribution from our B2B partnerships. We expect these trends to continue in the coming quarters this year. Lastly, this performance is a testament to the strength and scale of our global brand as reflected in the success of our marketing strategy shift implemented last year. As a reminder, Based on tests we started last summer, we determined that we could keep new cohort bookings stable even If we reduce acquisition marketing spend by half, we continue this marketing strategy this quarter and decreased acquisition marketing spend by approximately 47% year over year, while still increasing new course bookings.

Speaker 3

After more than 8 months of expanding and perfecting this new strategy, we are confident in the results and therefore expect investment in acquisition marketing to remain at reduced levels throughout the rest of the year and beyond. In addition to the strong fundamentals and the significant increase in marketing effectiveness, We also intensified our focus on driving operating efficiency across our business. We successfully implemented the Cost savings outlined last quarter as well as realized additional hosting optimization opportunities and continued to decrease headcount. We ended Q1 with 5,006 employees, down 18% year over year from nearly 6,100 employees in Q1 2022. With that, I will now hand it over to Lior to walk through more details on our financials.

Speaker 3

Jorg?

Speaker 4

Thanks, Nir. This quarter was marked by fantastic profitability improvements That's allowed us to achieve our 2023 profitability targets much earlier than anticipated. Even more importantly, These steps firmly put us on a path to achieving Ruro40 in 2025 with significant expansion of our margins. In Q1, we grew gross margins by nearly 500 basis points, driven by hosting optimization and headcount efficiencies, among other cost savings. We further drove operating leverage by executing on our new marketing strategy, reducing headcount and implementing savings across our entire operating cost structure.

Speaker 4

Non GAAP operating expenses In Q1 2023, resulting in the highest non GAAP operating income in our history. These efforts drove free cash flow generation to finish higher than anticipated. Looking past this year, we expect to continue this quarter's momentum by advancing our commitment To operational efficiencies across all aspects of our organization, continued cost management, mostly across operating expenses, Will enable us to drive further leverage and expand our cash flow margin significantly. In addition to our continued profitability improvements, I'm also very excited about the execution of our strategic initiatives. Particularly, our focus on the Partner's business that will enable us to continue to deliver growth in the coming years.

Speaker 4

Now on to the details of the quarter. The fundamentals of our business remained strong this quarter, which led us to exceed the top end of our guidance range for revenue. Total revenue was $374,000,000 this quarter, up 10% year over year. Total bookings were $415,000,000 in Q1, up 6% year over year. Remember that we signed our partnership with LegalZoom in Q1 2022, Creating a difficult comparison this quarter, removing this amount from bookings in Q1 of last year, Our FX neutral year over year bookings growth was 13%, a better indication of our growth compared to the prior year quarter.

Speaker 4

We saw an acceleration in transaction revenue growth this quarter, up 16% Year over year to $42,300,000 This growth was driven by higher GPV of $2,700,000,000 up 6% year over year as well as high overall take rate as merchant adoption of Wix Payments continue to increase. As Avishai mentioned, partners is a major area of Focus and growth for us this year. Partners revenue grew to $103,900,000 up 27% year over year. This is an acceleration in growth compared to the prior couple of quarters as more agencies and developers build projects on Wix And we increased our monetization of professionals, particularly as they increasingly generate more GPV. This quarter, we also began to see some early but still very minimal revenue contribution from the B2B partnerships we signed over the past couple of years.

Speaker 4

More impressively, this quarter, we intensified our focus on driving operational efficiencies across the business. These actions allow us to achieve the profitability milestones planned for later in the year much earlier in Q1. By implementing the cost saving strategy introduced last quarter as well as additional hosting optimization and headcount efficiencies, Non GAAP gross margin increased to 67% in Q1, making it the highest quarterly gross margin since 2020. Growth in the creative subscription revenue along with cost discipline drove non GAAP gross margin for creative subscriptions To above 80% in Q1, an increase of 4.50 basis points year over year, both of these gross margin targets were originally Our continued implementation of our new marketing strategy that Nir spoke about earlier, Along with additional savings across our operating cost structure this quarter resulted in the highest quarterly non GAAP operating income in our history of $48,500,000 or 13 percent of revenue. As we mentioned last quarter, we did take a one time charge of $25,300,000 related to the headcount reduction we announced in February and impairment charges related to operating leases as We align our footprint with our current needs.

Speaker 4

As a result of higher growth and a focus on operational efficiency, we generated $44,000,000 of free cash flow or 12% of revenue. This excludes CapEx related to the build out of our headquarters as well as The cash portion of the one time severance charges I just discussed, which was about $2,100,000 in Q1. Free cash flow performed better than expected and give us more confidence in our ability to achieve the rule of 4Q in 2025. Now let me finish with our outlook for Q2 and 2023. We expect total revenue in Q2 to be $380,000,000 to $385,000,000 representing approximately 10% to 12% year over year growth.

Speaker 4

For the full year, we're increasing our outlook. We now expect total revenue to be approximately 1.5 $2,000,000,000 to $1,540,000,000 representing approximately 10% to 11% year over year growth. This is an increase from our prior expectation of $1,510,000,000 to $1,530,000,000 or 9% to 11% growth. We are also updating our profitability expectations for the full year as we continue to drive efficiencies across Our operating cost structure, we now expect non GAAP gross margin to increase to 67% for the year, Up from the 66 previously expected, creative subscription non GAAP gross margin is now expected to be 81%, up from 80 previously expected. Non GAAP operating expenses in 2023 are now expected to be down Year over year to 58% to 59% of revenue compared to 59% to 60% of revenue as previously expected, driven by lower sales and marketing expenses and general incremental operational efficiencies.

Speaker 4

As a result, we are increasing our outlook for free cash flow for 2023 to $172,000,000 to 180,000,000 11% to 12% of revenue, exiting the year with a free cash flow of more than 13%. This compares to our previous expectation of $152,000,000 to $162,000,000 or 10% to 11% of revenue and an exit margin of 12% to 13%. Note that our free cash flow outlook exclude our headquarters build out costs as well as approximately 4 $5,000,000 of cash restructuring costs. Finally, stock based compensation is expected to decrease to 14% To 14% to 15% of revenue in 2023, down from our previous expectation of 15% and down from 17 I'm very happy with our results this quarter and our revised outlook for the remainder of the year. I'll now turn it back to Avishai.

Speaker 2

Thanks, Lior. I have been getting a lot of questions about AI lately, so I want to share my thoughts to close out Our time today. My own background prior to Wix was in the development of advanced computing algorithms, including AI, which is why I find The recent AI breakthrough is so exciting. In fact, the data and AI groups here at Wix report directly to me. Over the past decade, we've been unlocking more and more opportunities based on AI, breakthrough, while also collaborating With the best teams on the planet at OpenAI, Google X, IBM and others, my Fortune AI can be summarized in 3 key points.

Speaker 2

First, our goal with Wix is to remove friction. The easier it is for a user to build website, the better Wix is. We have proven this many times before. For the development of software and products, including AI, as we make it easier for our users to achieve their goals, Their satisfaction goes up, conversion goes up, user retention goes up, monetization goes up and the value of Wix grows. In 2016, we launched Wix ADI, an AI based site creation platform.

Speaker 2

In fact, it's equivalent to using a prompt to build a site. The user enters some basic information about their business and they are recommended pages, images and text that makes sense and then generate the site personalized to the business. Obviously, the tech generation ability in 2006 were a bit naive compared to the recent gen AI tools of today. That said, due to our long established team and institutional knowledge of AI, it was easy for us to replace that initial text generation tool With OpenAI Chargepti for our AI text creation, which we introduced earlier this year. Today, New emerging AI technologies create an even bigger opportunity to reduce friction in some areas that were almost impossible to solve a few years ago.

Speaker 2

When we embed these technologies into our platform, it increases value for our customers. We believe This opportunity will result in an increased addressable market and many more satisfied users. We have over 200 AI and GenAI model deployed on our platform, both to simplify complex technology for our users and to improve internal workflows and development efficiencies. This model Power of many processes and innovation of ours, including full site creation, text creation, image manipulation and enhancement, Site design, user support, user sentiment analysis, site classification, recommendation engines, semantic search, forecasting and many more. In the coming months, we will introduce even more AI tools to fully powered by LLM to And proprietary algorithms, which will of course include full site creation that not only generate content, but also the design and the layout.

Speaker 2

It will also integrate with everything you need to run a business such as e commerce, scheduling, SEO and more. The second important point is that there is a huge amount of complexity in software even with websites and it's growing. The question today is not when AI will be able to create the content for our website. That already has been possible for many years. Wix ADI fully demonstrated.

Speaker 2

The big question today is what happens when AI can generate all the content And the code of the software needed to run a fully functional website. For example, even if AI could code a fully functional e commerce website, which I believe we are still very far from, There is still a need for the site to be deployed to a server, to run the code, to make sure the code continues to work, to manage and maintain the database for when someone wants To buy something, to manage security, to ship products, to partner with payment gateways and many more things. So even if you have something that can build pages and content and code, you still need much more. That gets to my 3rd and final point. And that is Even in the far future, if AI is able to automate all of those layers, it will have to disrupt a lot of software industry.

Speaker 2

You will no longer need And database management, server management and cloud computing, I believe we are very far from that and that before then There will be many more opportunities for Wix to leverage AI and create value for our users. To add to that, the value of what We do today is align the user to capture their story and bring it to the web. It is not a text that Chargept generates. It's helping the user use JMPT to create their version of TapText, to tell their story. It's not about MidJourney, Using MidJourney to create images for your business.

Speaker 2

For example, like a yoga studio or an amusement park, you need an image of your yoga studio and your amusement park. For your e commerce site, you need images of your products that are being sold. The images have to be real and the story needs to be real. And the value of telling that story online and how to do it well is a big part of what we do here at Wix. As you can tell, I'm tremendously excited about the power of AI and the power that AI is bringing and the amazing opportunities It will create for our users and our business.

Speaker 2

Thank you again for joining, and we will now take your questions.

Operator

Please stand by while we compile the Q and A roster. One moment for our first question. And our first question will come from Yigal Yurania of Citigroup. Your line is open.

Speaker 5

Hey, good morning guys and good afternoon. Aditya, I want to a lot of good color on AI, and I would just want to focus on that maybe a little bit more. Specifically on that last point, when you talk about more opportunities to leverage AI and add value for users, even kind of further into the future as All this evolves. I guess, I want to maybe expand on that point a little bit. And as we talk to investors over the past couple of weeks, This question has come up more.

Speaker 5

I think the biggest fear is that all this stuff happens and that Folks start to go to some of the larger players in AI where you can build websites and do some of these things. And As they develop their AI capabilities, they start to develop some of this stuff more.

Operator

So can you just talk about

Speaker 5

how you envision that and why As the AI capabilities improve, you expect users to continue to come to Wix?

Speaker 2

Of course. Well, first thing I want to say is that the first part of your question, Maher, is about What kind of opportunities to leverage AI do we get, right? And I think it's about a few things. I'll start with the first one. It's About how many of the people that try to build the website on Wix actually finish with the website that they are very happy with, right?

Speaker 2

And the more we increase that ratio, the better is the customer experience, the longer those customers will stay with us and of course, the better monetization. And we've proven, right, with ADI in 2016, but by just generating a lot of the things automatically for the users, so the text, What we did and the images and the layouts, we increased conversion. I think the current technology will allow us to do it even further. So I look at it as a way for and website is a combination of many things, not just the text. So Chargepti help us with some of it, but you still have to have the right Structure, the right visuals, the right layout, right design, the right to use the user images.

Speaker 2

So there's a lot of work there. And so I think this is the first part, right, creation of the website. The next part is how do you edit and modify and use the website. There, It's a bit harder to use any of the human standard models because you want to replace an image. You don't want to write, I'm going to I want to replace the 3rd image in the 5th column.

Speaker 2

Can you please change it to something? Actually, it's easier to go and click and point on it. And you don't want to generate all the ticks from the beginning. You just want to do the specific part. So this requires a lot of complex UI.

Speaker 2

But I think ADI proved that you can do it and when you do it well, it works very well. So I think this is the first part, right? We're going to see better, happier users and faster site creation and more sites being finished to the user satisfaction. The second part is when you start to have things like Copilot and a way for the AI to help you understand what you need to do next and how to add things, You can actually use more of our software capabilities, right? Because today, you kind of have to know yourself 1, you want to do it and then find how to do it.

Speaker 2

But if we can guide you with AI and Microsoft is demonstrating a lot of really cool thing with Copilot On Excel, for example, then we can actually take it to another level. So we actually have the ability to take users that use Wiki in a certain way and make the news Better and more ways. And I think that also creates the next part, which is the more that you have stronger AI tools, The more important is the power of the platform itself and not just how quickly you can type content because if we now have a way for you to Finish everything and now utilize more of the platform than the fact that you have a deeper software layer actually become a lot more valuable. And so I think we are very optimistic that this would actually enable us to give more power And for our users, make their sites more successful and as a result, make us put us in a better place as a company. I think your second part was about why what is the chance of People moving to the AI companies to build the website, if I understood correctly or I misunderstood it?

Speaker 5

Yes, that's essentially it. They leverage their ad capabilities and build create website builders and replicate what you're doing and You just need to go over there. So why people stay on Lex?

Speaker 2

Yes. So okay. So but If you look at what you can do today with AI, there are actually 2 things that have changed dramatically. The first one is the creation of text, right, which has moved, changed dramatically. And images, which you can invent images and do that.

Speaker 2

But as I said, we've been doing it for a very long time. And of course, not in the same text generation, not nearly as good as ChatuPT. But this is a very small part of what we do, right? Because how do you use that to create e commerce, right? How do you use that to make a scheduling engine?

Speaker 2

Just think about all the way that you need to sign contracts with payment To add that, how do you edit things, okay, on top of it? So pretty much 8% of what we work on and develop, right, is not covered by that. You need your site to be running well, you need To be managed well, you need to have SEO, you need to have security and then you need the ability to update content, you need to have the ability to do slideshow And scheduling, e commerce, transaction, collect leads, all of those are not covered. So what you can do Essentially, it's great and with all those tools on the basic level, it's great simple landing pages, right, which is kind of like a very static page. But you could always do that Already with Microsoft support, you can just go and type the text and publish it as HTML and put it in some hosting company.

Speaker 2

So And those guys have never been our competitors, the ones that do that, okay, that do those very basic simple line of page. In fact, you can do those in weeks And it's a very small portion of our business. So if you look at the majority of our business, I think there is a very still very quite a few years Probably more than just quite a few years until we see that the ICE starting to cover that kind of software.

Speaker 5

Great. Thank you. That's really helpful.

Operator

If I could just ask a quick follow-up on some a little bit

Speaker 5

more near term. A number of interesting ties announced since this quarter.

Operator

Maybe if you could just expand on the Google Ads one because you Talked about that

Speaker 5

being a meaningful contributor to growth in Business Solutions. And then I thought the news around the headless products was really interesting and You can potentially open up the opportunity with the partners a little bit more. So maybe if you could just hit on that as well. Thank you. Welcome.

Speaker 2

This is actually a good demo where we are utilizing the power of advanced hardware and we're bringing an AI to bring more value for our users, right? It's a way for you to Not understand anything about what you need to do in Google in order to create great advertisement and for us to fully create that and generate it for you. And by doing that, we'll reduce the friction for our user have and running successful Google Compound is a very Well, it's a real skill that you need to learn. It takes time and we use advanced algorithms to do it for the users. And the result of that is that we have more the happier users that their business is more successful And of course, for us, it means more monetization opportunities.

Speaker 2

It is as funny as it is, it's also being used a lot by What we call partners, web agencies, because even for them, it provides so much value and reduction of friction and labor We see a lot of the professionals are using that product.

Operator

Thank you. And one moment for our next question. And our next question We'll come from Aaron Kessler of Raymond James.

Speaker 6

Great. Thank you. Maybe just a couple of questions. Maybe just you commented a little bit on the Just maybe your updated thoughts there and kind of the environment we're seeing, especially with SMBs right now. And second, just the non GAAP OpEx guide, I think You lowered that a little bit, but still it's given the strong Q1 performance there, it looks relatively conservative to guide.

Speaker 6

If any updates on the non GAAP OpEx

Speaker 2

Thanks for the year as well. Thank you.

Speaker 3

Hey, Arren, it's Nir. I'll take the first part and Lior can follow-up on the second part In regards to the OpEx, so in terms of the macro environment, we've seen some modest improvement Kind of across the board, in terms of on the demand side, top of funnel, Some I would say some recovering growth in GPB, a little bit in the transaction revenue as well as The subscription behavior of the both the existing cohorts and the new cohorts. That being said, It's still relatively early. The increase is modest. So we're being cautious not to call it a recovery, but We do point out that we're seeing a little bit of

Speaker 4

it. Aaron, this is Lior. With regard to the OpEx, I think that this is one of, in my mind, one of the most amazing things that we will manage to achieve. OpEx this year, the non GAAP OpEx is going to be around 58% to 59%. And I believe that this trend of taking down OpEx as a percentage of revenue will continue into 2024 2025, Which brings me the confidence in our ability to meet the target that we set for the Rule of 40.

Speaker 4

So you should expect it to continue decline as a percentage of revenue even in the next couple of years and will be significant.

Speaker 6

And just in terms of 23, though, I think you did 54% in Q1 in terms of the non GAAP OpEx. I guess any reason it wouldn't be lower than that 58%, 59% for the full year?

Speaker 4

Yes, because as we mentioned last time, the second half of the year, we do plan to invest more in branding For the weeks, especially with regard to the partners vertical. And we said that we are going to do that in the second half of the year. So it reflects that.

Speaker 6

Great. Thank you.

Operator

And one moment for our next question. And our next question will come from Mark Mahaney of Evercore ISI. Your line is open, Mark.

Speaker 6

Great. Thanks. Two questions. Could you talk about the revenue growth outlook in order to get to that rule of 40? I think For the full year, your guidance implies maybe the potential for very modest acceleration.

Speaker 6

Are there factors that could cause that revenue growth rate over the next 2 or 3 years To get back to the kind of the mid teens levels and if it does, what would be the 2 or 3 biggest drivers of that? And then secondly, just on Google Ads, Just talk through the mechanics of that or the materiality of that? Thank you very much.

Speaker 4

Okay. So for the first question, Mark, we obviously see a tremendous growth in terms of our partners business, Approximately 30%, very much in line of what we said during the Analyst Day. But I must tell you that I didn't plan into my model growth or acceleration growth in revenue in order to achieve the rule of 40, Meaning that the Rule of 40 will be mostly achieved by more efficiency and leverage coming from both of gross margin, but mostly operating margins. With regard to the Google Ads, Look, this is something that we started and it's a great as Avish, I mentioned, it's a great monetization of our funnel, of our Customers, it is 1,000,000 of dollars. I don't want to provide the exact amount, but this is one of The very exciting growth driver for our business solution.

Speaker 6

Okay. Thank you, Lior.

Operator

One moment for our next question. And our next question will come from Elizabeth Porter of Morgan Stanley. Your line is open.

Speaker 7

Great. Thank you very much. Really helpful color on why kind of the current AI platforms aren't a replacement for Wix. But you also referenced emerging AI technologies providing the opportunity to actually increase Luxe's addressable market. So could you provide more color on who that incremental user type is Did you expect to be able to address it and how that's different than your core TAM today?

Speaker 2

Of course. I think that one of the things that we always see In Wix, we have a lot of users that come to Wix. And sometimes, They can finish the website that they want. And there are many reasons for that, right? Some of the reason is that it just takes too much time.

Speaker 2

At the end of the day, you have to personalize the template. You have to even if you use ADI, you're still going to have to go around And fix a lot of things. Understand how to do that, you need to understand how the user interface works for that. So reduction of that Complexity and making Wix more available to users that are less advanced or don't have the time It's something that we think is one direction of increasing that addressable market. The other side of it is exactly the opposite, is that users that actually Understand I've used the platform pretty well, but cannot use the more advanced functionality.

Speaker 2

I don't know whether it exists, right? So you come to Wix And you think about, oh, I need to have an application that does something specific and it's not obvious to you or you cannot find how to do it on Wix. And these are actually the opposite, right? Because on one side, those are the we have users that don't have the time and sophistication, and here we have users That have a lot of time and sophistication. For example, they'll be using Velo to actually code things into the website.

Speaker 2

Here, I think we have the advantage that with AI, we can expose them, give them the ability to ask way more complex questions and get More detailed answers and actually guide them into where they should be going. So in other words, I think that the Expansion of addressable market will go both ways, towards more advanced user and more advanced functionality and then for the people that just want to finish your website quickly And do it and get results. I think those are both directions that it will allow us to expand into.

Speaker 7

Great. And then on the B2B partnership side, you mentioned that it's starting to impact revenue in the model. And while it's small today, How should we think about the magnitude of the impact kind of building through this year into 2024?

Speaker 4

So I believe that, Elizabeth, if you take the overall bookings that we already had and some of the deal we already In the past, it is growing very fast, meaning that 2023, we are going to see 1,000,000 of dollars. And I guess that 2024, It will be more like tens of 1,000,000 of dollars, but it's growing and we are able to Sign more and more deals and this segment is actually growing very nicely. I do want to mention that we see less people that are willing to sign for Multi years agreement, nevertheless, we see many of them actually moving to Wix and start to use Wix for their customers.

Speaker 7

Great. Thank you.

Operator

And one moment for our next question. Our next question will come from Clark Jefferies of Piper Sandler. Your line is open Clark.

Speaker 8

Hello. Thank you for taking the question. First question is for Lior. I mean, one metric that seems to jump off the page is Improvement in net new ARR and creative subscriptions ARR. I wanted to ask what specifically drove the improvement.

Speaker 8

I mean, the color around the Q1 cohort is helpful, but Doesn't seem to really fully reflect inflection there. Wondering if you could maybe break apart maybe changes in churn or what might drive That improvement in the ARR from Q4 to Q1.

Speaker 4

Well, so there are a few reasons for that. The first one, I might say that it's Coming from the growth that we see in our partners business, we see more and more agencies using Wix And building an existing agencies, building more websites for their customers. And we saw Also, a better conversion of existing users creating more subscriptions. The third point is, as we mentioned before, is we see more revenue coming from the B2B partnerships also has a positive effect on that. So those are like the three main reasons.

Speaker 4

And the full reason why was obviously the ARPU increase that was happening this quarter, Meaning that we see a more ship towed like more expensive packages that has a positive impact on the growth of our creative subscriptions.

Speaker 8

Perfect. And then just one follow-up. You characterizing half of the increase The free cash flow being driven by cost of revenue efficiencies and other half from OpEx. Wondering if you could parse out maybe where you are in terms of your expectations Splitting that between partners and self creator, is there a disproportionate amount of the cost savings both on cost of revenue and OpEx coming from either Stealth Creator or the partner business. Thank you.

Speaker 4

So, yes, so obviously it's coming from both of them, but mostly from partners. I mentioned many times in the past that we are going to see more leverage in partners while partners is growing. And this is exactly what we are seeing. We see more leverage coming from the partners, and it's mostly because of the fact that we invested a lot of building this vertical in the last 2 years. And we started to see the fruits of it and getting more and more leverage from this business.

Speaker 8

Perfect. Thank you very much.

Operator

One moment for our next question. Our next question will come from Trevor Young of Barclays. Your line is open.

Speaker 9

Great, thanks. First one, just dovetailing on that prior question. On free cash flow margin, ex all the items at 12%, can you kind of break that down into core self creator versus partner? Is Self Creator kind of still high teens, which would put partners still modest but improving free cash flow declines? For self creator, now north of 20% in light of all your cost actions, which would maybe result in partners still being quite a bit more negative.

Speaker 9

And then on the geo mix, Europe slowed just 5% year on year ex FX despite easier compares and maybe lapping Some of the headwinds that started with after the Ukraine conflict, any color on why Europe is slowing?

Speaker 4

So with regard to the first question, we do not provide at this point of time the breakdown of the free cash flow between partners to Sales, Crietos, I promise that I'm going to do it in the next couple of months or in a quarter or 2. I will provide all the information. With regard to Europe, you're right. I think that it's mainly due to a tough comp in Q1 2022, But we obviously see the effect of also the war in Europe that affecting the overall business.

Operator

And one moment for our next question. Our next question will come from Brent Thill of Jefferies. Your line is open, Brent.

Speaker 10

Thanks. Just a question on sustainability of demand in the back half. I know Nir mentioned it's still too early. You don't want to call it But you did raise the guidance more than the actual beat in the quarter. Can you just talk to the visibility?

Speaker 10

And maybe For Lior, can you give us a sense of just what the linearity of the quarter look like and ultimately what happened into April into May?

Speaker 4

Sure. So the way that we provide guidance is we take The KPIs, the fundamentals as we see right now, we don't improve it. And I didn't count as any improvement or further improvement To what we see right now, based on that, we provided our guidance. But I believe that you see Increase or acceleration in growth in the second half of the year due to a different comp because Q1 of last year was a very strong quarter for us. So obviously, if you are looking at it on a year over year basis, the second half of the year is going to be stronger Due to that, but again, it's not coming from a place that we took any kind of assumption about More recovery than what we see right now.

Speaker 4

April, May also has been good and continue. I cannot say more than that.

Speaker 5

Thank you.

Operator

One moment for our next question. And our next question will come from Andrew Boone of JMP Securities. Your line is open.

Speaker 11

Good morning and thanks for taking my questions. Avishai, you talked about the importance of integration in the back end in terms of AI. I think in the context of also launching a headless solution, what else do you guys need to build in terms of the back end to make the business more defensible and compete against maybe other competitors that are that have already built out kind of had the solutions. And then secondly, thinking about the self creator business as well as marketing, as we think about the rest of 2023, Can you talk about the puts and takes in terms of marketing spend and how we should be thinking about self create a revenue growth? Thanks so much.

Speaker 2

I just want to ask a quick question to clarify. In the first question, do you mean in regards to AI or just you mean to others Headless vendor, software vendors.

Speaker 11

I think more broadly. So if I think about the back end and you've talked about the defensibility that creates When you think about AI coming online, if I think about your headless solution, I think those it's somewhat connected in terms of what else you guys can build to make Platform more defensible as well as to attract more headless dollars. I mean, maybe that's wrong, but talk about then why that thesis is wrong or what else you guys need to build there?

Speaker 2

Well, yes, okay. First of all, thank you. And I think I understand the question better now. So there's, okay, quite a few parts with that. But the first thing is that Headless is just one of the things that current model AI cannot do, right?

Speaker 2

They can do very basic things come to court. But And if you think about the old stack, right, the things that you need to have running, booking, scheduling, website, right, So you need databases to be able to index the databases, a lot of APIs. And then you need to have also to sign contracts, right, with processing and merchants and banks. And there's a lot of things that you need to do, right? So I think this is something that is going to take quite a while.

Speaker 2

I want to say quite a while, we don't even have a clue about the algorithms that we'll need to do something like that yet. That's quite a line in the future. But every element we're going to get from our eyes that simplify that, of course, provides value for Wix just because it Allow us to do it better, faster and reduce the cost. Now there's going to be a lot of opportunities underway for that. As for the headless itself, So we have quite a few software stacks that we build that are being used by tens of millions of users And are quite fantastic, but we never offer them outside of Wix.

Speaker 2

Now yes, in some cases, you have competitors that have like e commerce, right, where you have really great competitors out there. But in some case, like scheduling, booking and the ability to manage a variety of events and other things, there's not really anything similar in quality to what we have. So we think the opportunity there is the ability to allow people to use that and offer that on their In websites that are not built on Wix, and I think that is something that We'll create for us another marketing channel, which is very different than a standard one. It's mostly based on partners and professionals. And long term, I think the value there is quite big.

Speaker 2

There is something that because we actually provide All of the different elements and not just one like shopping cart, e commerce space. Then the thing is that there's also the integration, So you can actually have all of them offered together and not in separate pieces. And I think that provides quite a lot of value.

Speaker 3

Hey, Andrew, it's Nir. In terms of the marketing plan, so as Lior mentioned and as we also Illustrated in the previous quarter, we do expect on the partner side to see an increase in the marketing as We have some initiatives around that segment in the second half of the year. In terms of the Stealth Creators, we will continue the Current focus, which is a combination between brand activity as well as the direct acquisition, it's similar cadence As we've done this past quarter and before, as we see that marketing strategy really paying off.

Speaker 11

Thank you.

Operator

I would now like to turn the call back to Rona Davis for closing remarks.

Speaker 1

Thank you for joining, and have a good day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Wix.com Q1 2023
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