Okay. Well, apologies for the delay, folks. Good morning. I think it's still morning. My name is Hamza Fodderwala. I'm a US software analyst here at Morgan Stanley, and filling in for my colleague, Elizabeth Porter here, who's currently on parental leave. So hopefully I can do her justice. Perhaps being a few minutes late so far, not great, but we'll finish strong, guys. So I have the pleasure of having the team from Wix here. We have Lior Shemesh, CFO of Wix. Before I begin, just a brief programming note. For important disclosures, please see the Morgan Stanley Resource Disclosure website at www.morganstanley.com/resourcesdisclosure. With that, gentlemen, thank you so much for joining.
Thank you for having us.
Thanks.
Yeah. I should say, Lior, thank you, very much for traveling over to London, from Tel Aviv, just given everything that's going on. So, our hearts are with you and with all your team, over there. Maybe just as a on a high level, for investors who may be newer to the Wix story, I think, you know, some of the products are somewhat intuitive, but can you provide a quick overview of the company, the core value proposition, and sort of the mission statement for Wix?
Yeah. Sure. So I will let-
I'll start.
Joe start.
Yeah. I'm Joe Pollaro. I'm the Head of Corporate Finance at Wix. So, many people may know Wix as a website builder, which is certainly how we got our start. You know, we have today over 250 million users on Wix. We're adding about 1.5 million a month, and you know, we have over 6 million subscribers. And our business is today, about 70% of our users are what we call self-creators, which are small businesses, individuals, organizations that come to Wix to build a site for themselves. And we obviously have software that makes building a website very easy. And this is a market that we are now, you know, the global leader in, as far as DIY website building for self-creators.
We've evolved that website building into far more over the last several years into being really an operating system for businesses online. So far beyond just building a website, but being able to run your business, whether you're a store, and having commerce capabilities, whether you're a fitness center or a hair salon, having the ability to book appointments and scheduling to events for event planners and restaurants, et cetera. So lots of different ways that we've expanded our platform through commerce and operating a business. And in most recent years, we've further expanded our market beyond self-creators. We are now addressing the needs of what we call partners, which are agency-design agencies, freelance designers, professionals that build websites for other people.
And this is a much larger market, and we'll touch on in a little bit more detail. It makes up now about 30% of our revenue. It's growing very fast, 38% year-over-year in the last quarter. And here we've led with products that are very focused on professionals, around coding, around very sophisticated design capabilities. And throughout all of this, we've also incorporated AI into many of our products, and we're really the leader now in incorporating AI into the website building, you know, process for both self-creators and partners.
Great. So let's dive a little bit deeper into that. You know, you have the self-creator business, which makes up the majority of the revenue base and the partner business. Can you talk a little bit about the health of that self-creator business? What do you see as a durable growth there, and how do you... Like, what do you think about growth and profitability in that particular business alone?
Yeah.
Yeah.
Yes, I will start to go into kind of the details of those different markets. Just to provide a further explanation, when we talk about self-creators, we have the self-creators, we have partners, both of them using subscription, creative subscription and business solution, right? And you know, Joe described you know the overall type of businesses that we serve at Wix. And so let's start with the self-creator. Self-creator is most of our revenue. About 70% of our revenue coming from self-creators. And we are more or less dominating this market. We have a very stable cohort. We have a very stable business, super profitable, by the way, and generate right now most of our free cash flow, obviously.
We see a very solid, durable business in terms of the cohort behavior, meaning that it's mostly serving small businesses that start to create their online presence by themselves using Wix. When you think about self-creators and about, you know, the growth drivers for the future, so we're actually looking at three different things, okay? The first one is about how we can increase conversion. Remember that Wix is a Freemium model. You start, you come to Wix, you build your website, and then you become a premium subscriber, right? Because you want to connect your domain, you want to have an online business, you want to have an online store, you have a restaurant, you have a hotel, and you're providing all kinds of services using online commerce.
So the way to increase conversion is first to help those type of businesses to complete their website, right? I want them to complete their website to their satisfaction, and this is something that we do through innovation of product. First of all, Wix is a product technology company. The way that we drive growth is through innovation. And you know, we mentioned like, for example, like, all type of AI capabilities. Like the, the last one that we launched is AI that helping or through chat to complete your website, to start conversation, what type of business, what you need, and, and then you start to inject content and, and all kind of things that you actually need in order to complete your website. Sometimes you don't know exactly what you need, and the AI is a great tool in helping you do that.
And after all, when you finish your website, it's very easy from there to move to become a premium subscription. So one way to do that is to increase conversion. To increase conversion, we mentioned through innovation, through products, new products, new features, and so on. The second thing is, another strong growth driver of self-creators is around ARPU, meaning that those people need to buy more new products. For example, the business solution provider, they're using more payments. They're using, for example, new products like the Google Ads automation that helping them to do a marketing campaign using this product. They're using Google Workspace, which we resell. They're using email marketing capabilities. So obviously, the reason we see that the ARPU is keep on increasing over time, and this is another growth driver for self-creators.
The other thing around ARPU is obviously we are keep on testing price optimization. Every couple of years, you see Wix increasing pricing as a result of a lot of A/B testing that we are doing, because in the end of the day, we provide much more content, and they are more satisfied, and therefore, like, you know, you are able to test the price optimization, and therefore, overall, ARPU is going up also as a result of that. The third thing, which is not under our control, but obviously it's the macro environment, we see that, you know, when you have a very high interest level, it has a major impact on small businesses.
I believe that once, you know, we see the interest level go down, obviously it's going to have a significant positive effect on self-creator, mostly because it's small businesses.
Maybe digging into the factors in your control around price optimization and what you talked about, what are some of the things you can do to, you know, paint the path to sort of re-acceleration in that self-creator business? Because there has been some macro headwinds there.
Mm-hmm.
Do you see those stabilizing now, and do you think execution can get you back to a more durable growth trajectory?
Look, absolutely. I mean, yes, we are dominating this marketing. You know, it's safe to say that. I mean, I think that the way that we did it, we, you know, I think that it's also important to elaborate about the marketing, but it is the strongest brand. So most of the growth, most of the customer are actually coming from organic traffic. So when you think about a very... When you have a very strong brand, the only way in order to deliver growth is through this product innovation, not just by increasing pricing. If you are counting only on increasing pricing, I don't believe that it's something that it's, it's not necessarily something good. It's not bad, but it's not something good.
I think that, you know, for a product technology company, first of all, we need to make sure that by innovation, we can increase the overall growth, and to do that is by increasing conversion. I believe that, you know, we are truly believe that we can get back to a double-digit growth for self-creators as macro improved, but as we also launching new product, and I think that, you know, we can talk about it later on, about a new product that we are going to launch around, you know, site generator that mostly build on AI capabilities. So for example, this is something that increased conversion, and we already see the result of the new AI tools that we launch. Increasing conversion, keep on using more the business solution product. Macro environment can definitely take it to a double-digit growth.
Maybe we can jump right into the AI capabilities. I mean, Wix has layered in AI capabilities across both self-creators and the partners business. Talk a little bit about the AI opportunities that you see and how that can drive further growth in the product suite.
Joe, want to take it?
I'll, I'll take that. Yeah. So I'll, I'll start by saying we had a capital markets day in August, and I encourage anyone to take a look at that. We had an entire section around AI. Our head of AI presented, really gave a big overview of what we're doing with AI. AI has been a part of Wix and what we're doing at Wix for many, many years. We launched our first AI product actually in 2016. It was called Wix Artificial Design Intelligence, or ADI. Much of that is still used today, but it's obviously a very different AI than we're seeing today with a lot of the generative AI capabilities.
We have AI incorporated throughout our products, both for self-creators and partners. As I said earlier, we launched our first generative AI product with OpenAI about a year ago. It's the text generator that allows a business owner to essentially, you know, generate text for its site about their business or about maybe their industry. If you think about, you know, if you're a business owner and you're building your own website, there is content you need to write, and having the text creator with OpenAI can just help businesses write all this content. And at the end of the day, AI in our products is used to remove friction for users.
As Lior kind of mentioned earlier around product development and innovation, you know, AI is another great tool to just make the website-building process and operating your business just easier. So, other examples of this, in the new Wix Studio, which is designed for partners, we have an AI tool that enables the website to be responsive to whatever type of device the website will be viewed on, the AI will adjust the content and the layout to fit that device automatically. So you, as the designer, don't have to worry about relaying out content based on a mobile device or a tablet or a desktop. Excuse me. The AI will do it automatically.
We have SEO tools that are driven now by AI, and the AI recommends meta tags that professionals can put into their website to improve SEO. And then Lior mentioned the site generator, which essentially just creates an entire website based on some prompts that the user can provide, and that's gonna be a product that we're gonna be launching here in, hopefully in the coming weeks. The other area where we're putting AI into place is internally, and this is, again, something we've done for many years at Wix. But in our support team, AI has become a very big part of how we provide customer support to our users.
It also is used by our support agents to help them, write up call summaries faster, you know, generate suggestions that they can provide to a customer that they're speaking to or chatting with. We use AI to analyze the websites and the content within the websites, so that we can better target products. We use AI for financial forecasting and modeling. So a lot of different ways we're using AI throughout, throughout Wix.
Is this something that you're looking to explicitly monetize? Is there a sort of a SKU out there, or is it kind of more to generate top-of-the-funnel interest?
Yeah. As of today, we don't monetize it separately. The way that it monetizes within Wix is through increased conversion, a better user experience. You know, but obviously, as Lior mentioned earlier, you know, price and monetization is something we're always, you know, evaluating and optimizing. But today, it is not separately-
Yeah.
-monetized.
But it might be in the future.
Yeah.
Okay. Okay. Maybe just a question on the partner business, and then I'll take a break to open up to the audience for any questions. You talked about the partner business. This is the faster-growing portion of your business now, I think, close to a third of revenue. Can you talk about the evolution of the segment? What are some of the key growth drivers there? And in particular, you know, Wix Studio, which was launched in August, what has been the feedback on that product?
So as you mentioned, partners is like the number one growth driver for us in the next few years. Let's first understand this business. I mean, we started this business or the build-out of this business at the beginning of or early 2019. We completed the build-out of this business and within just a bit more than two years, it already has been about 30% of our revenue, growing more than 30% on a year-over-year basis. The last quarter, it was about 37%-
Yeah
... 38% on a year-over-year basis. So it's a hyper-growth business, and essentially, when you think about our partners business, about eight out of 10 people, when they're looking to build their online presence, they go to a professional, to an agency, to someone to do it for them. And then we thought, "Okay, back in 2019, how we can take Wix from a $2 billion company to a $10 billion company of revenue?" And there isn't really a good solution. I mean, most of those agencies using WordPress, which is a kind of an open code community, but it's not really a good solution for them. It's not like a holistic solution for agencies. And we thought about, okay, how we can use the power of Wix in term of easy maintenance, security, GDPR, for example.
How we can use the power of Wix in order to engage with those agencies to allow them to start to use Wix for their customers? And part, and partners is actually the overall strategy is around that. So we see that in the last few years, we took a lot of market share from WordPress, you know, community. We see more and more agencies using Wix. It's a hyper-growth business, as we mentioned before, and I believe that this is something that obviously will continue. The latest addition to this business is Studio. We are truly excited about this product. I think that, it's a unique one. We believe that, Studio can actually not just increase, the overall growth, but allow us to take a very big market share, from the WordPress users. Studio, it's an holistic...
In a way, it's an holistic platform for agencies. It's not just about the product, but it's also about workspace. It's allow agencies to manage their customers, their business on this product using analytics, you know, collecting the fees from them, understanding what they have. And through a lot of capabilities also around the product, which is again, very, very one, well, very unique, it's allowed them to use Studio as, like, the perfect solution for agencies, and there's nothing like that right now in the market. So I believe that it will allow us to continue with the growth, taking a very kind of a large market share from those that using WordPress.
Any questions from the audience? We have one over here.
... You've invested a lot in the growth of the business, and I'd love to just talk about ... hear your thoughts on the margin expansion on a GAAP basis going forward, and what your target margins are over the next three to five years.
Thank you for the, for the question. I, you know, I believe that, we increased investment during, COVID, obviously, because we saw a large demand, but we also wanted to build the partners business. I think that post-COVID, we see demand going down, you know, for the overall internet, but we finish with the build-out of the business. We managed to cut about $200 million in terms of expenses, mostly coming from, care organization. We become much more efficient. For example, you know, Joel mentioned that. We implemented AI tools that making the overall conversation with the, with the agents much more efficient. So we managed to, take down the, the cost, mostly around headcount.
We became much more efficient in term of the hosting capabilities, which allow us to take down the cost by $10 million, but still having a very strong infrastructure, you know, to serve both partners and self-creators. We managed to be much more efficient in cost in general, also in term of the operating expenses, because we finish with the build-out of the partners business, and we're thinking that right now, at this stage, we need to focus on profitability, not just about growth, also growth, but also about profitability, and we set some KPIs that we intend to meet. So for example, you know, last year, the free cash flow was about 3% out of revenue.
This year is going higher than 15% and exiting the year with about 20%-21% of free cash flow, just within one year. I think that what we are going to see in the next few years a situation where we see increasing growth. Growth is going actually growing better, mostly for partners, but costs are very stable, meaning that we are see that the overall increase in revenue, most of it, except of the variable cost, going down to the bottom line, which allow us to expand the profitability. So for example, 2020, it was the first year of become a GAAP profitable.
Profitability, where we see that the overall stock-based compensation expenses are actually lower than the free cash flow. I believe that it's achievable also in 2024, and we set some KPIs that are super important for us to meet. For example, getting to at least 25% of free cash flow by 2025, targeting Rule of 40 by 2025, taking down the overall cost as a percentage of revenue, which allow us to be in this position. I believe that also beyond 2025, we see the same thing that continue and expanding the profitability.
Yeah. Any other questions from the audience?
Sorry, I'll take two. In terms of market share, you talked about how you're the leader now. It's very hard as a layperson to understand, you know, why somebody chooses GoDaddy or why somebody uses WordPress. Can you talk about maybe what really distinguishes you and, and why you've been able to expand share, and, and how much share do you expect to continue to take?
Yeah. So I, I believe that the right way to answer this question is to divide our business into two. The first one is self-creators. Obviously, we see Squarespace as competition over there. We do see GoDaddy, but it's, like, really small, because GoDaddy, it's mostly a service company. I mean, many people that starting to engage with GoDaddy end up with Wix. So we mostly see, you know, over there, companies like Squarespace, but that's it. I think that, you know, in most of the cases, you know, obviously, Wix is, like, dominating this market for self-creators. Many people that... You know, I can give you an example.
The search for Wix is much, much higher than the search for website builder, meaning that most of the people that looking to build their own website end up with Wix. I think that also, you know, when we think about the B2B, the B2B partnerships, is actually also a great tool allowing us to consolidate this market. We see many online service companies moving to use Wix. For example, Vistaprint, LegalZoom. The latest one is, you know, Intuit with Mailchimp and QuickBooks, understanding that Wix is the best platform for those people that looking to build their own website. For partners, I think that it's different because partners put us in a situation where we don't see competition like we do not compete with Squarespace, obviously, over there.
We mostly compete with an open code platform, like WordPress. It's not really a company that we are competing with, right? It's mostly trying to change the understanding about Wix, mostly for those kind of professionals, that Wix has a very powerful product for them to use. So it's changing the perception about who we were, not just serving self-creators, but also a very professional tool solution for partners. Changing the perception of those people, taking them from using just WordPress to use Wix or Wix plus WordPress, in some cases. So this is like most of the customers that are coming right now that we see, or the growth of partners coming actually from the WordPress community.
Maybe one last question. You know, you're generating a significant amount of cash now. Just what are your views on capital allocation, M&A, buyback? What's sort of the split there?
Yeah, I can take that. I mean, M&A is something that we have not done a lot of in our history. The M&A that we've done is typically product, technology, plugin-type acquisitions, very small. You know, we always want to be opportunistic about it and evaluate things, but it's not expected to be a big, you know, priority. You know, we want to make sure we have enough cash on our balance sheet to obviously fund operations, to be able to take advantage of M&A opportunities. But, you know, beyond that, we've announced at our Capital Markets Day that our board authorized a $500 million buyback program that will take us through 2025. It's roughly 50% of the free cash flow we expect to generate over that time.
You know, we are going through right now an approval process with the courts in Israel to be able to begin those repurchases. Obviously, the $500 million, it's not something that we wanna do linearly. We want to front-load it. So try to repurchase as much of it here upfront as we can. So that's, you know, how we plan to return capital.
Is that, Excuse me. Is that $500 million, you know, something you're committing to that number exactly, or is it gonna be more opportunistic in nature, depending on the share price?
It's $500 million. That's what we've committed to. But, you know, obviously, if we are able to generate much more cash over that period of time, I think we would consider, you know, more repurchases beyond that. But that's what we've committed to at this point.
Okay. Gentlemen, thank you so much for your time.
Thank you.
Thank you for the audience for joining.