Welcome back. Lior Shemesh is with us from Wix. Really appreciate you making the trip and sharing your thoughts on what's happening in the industry. We were just talking about what was going on in kind of the overall sentiment in the markets and what's been happening. Maybe we'll talk about that, but the whole industry is kind of being punished right now with this terminal fear of what AI is going to do.
When you think about what you're doing as a management team to kind of get in front of this, and it seems like you're doing the right things, with Base44 and what you're doing inside the core platform. Maybe just talk to us about your thoughts.
Yeah, I think first of all, thank you for having us here. I think that it's a fair question because I can understand the fear. Because people might assume that in the future, we don't know that, all the SaaS companies will be replaced with AI. Salesforce, Wix, monday.com, ServiceNow, and so on. It's a true concern. We see right now with Base44 what people are capable to build. Okay. I'm using Base44 to build all kind of workflow management, like with my SOX compliance and so on, that replace other SaaS companies. We can elaborate about it a bit, it's a true concern. I think that in the end of the day, what is important, your question is super important, what we as a company do in order to manage it.
I think that there's no point to say there's no impact on our business, okay. It's not true. There is impact on our business. There is impact of AI of every other SaaS company business. I think that the most important thing is to embrace this change and actually to deliver more growth. Let's think about, I don't know, there is like three scenarios I can think about. One, everyone going to use all kind of AI or Velo coding tools, LLM models, in order to build any kind of application. It include all the integration and everything that you can think about. If this going to happen, this is why we bought Base44. Base44 already have about 40% of the U.S. market for non-professionals looking to build applications, much more than Bubble, than Replit, and so on. We talk about it's exploding.
Second option, LLM cost will continue to be so high that this model is not going to fly, so we are back to where we were before. Option three, which I assume that it's more realistic, that it will be a combination. Some of the people would like to use Base44 to build websites. Some of the people will still want to use Wix. Why? Because it has much rich platform, much more capabilities, and also the drag and drop experience. Think about it. If you use today LLM, or any kind of AI model to build your website, how much money you're going to save compared to Wix? Second, every time that you want to change something, you need to prompt again. You don't have the drag and drop experience, which is really easy to do.
I think that in the end of the day, for us, for Wix, we are preparing for every given scenario, and I think that we need to make sure that the combined company is growing. You can create website using Base44. You can create website with a drag and drop with Wix Harmony. This is why we call it Wix Harmony. It's a combination between Velo coding and drag and drop, it's okay. What is interesting, by embracing the technology, we actually increase our TAM significantly for people that coming with an intent not just to build a website, but to build all kind of applications.
Thanks for the refreshing view that there is an impact. It seems like, to your point, there's an impact, but you're backfilling. You had $150 million of Base44 ARR. You had a 46% jump in new cohort bookings. You had mid-teens top line, yet we kind of have a stock reaction that signals like, hey, it feels like you're going out of business, is what the market's implying. It seems overly harsh from my perspective, but what is
Again, I think that people need to look at the opportunity. Every time that I'm talking about the cost, yes, we increase the cost significantly. It's the first year. Think about a SaaS model, okay? Let's think about a software model, not just a SaaS model. The first year, let's assume that you have a company with $100 million of collections, of bookings. You have 50% of gross margin, and you have 12 months of TOY. It's mean that by definition, in the first year, your marketing equal to top line. You're losing about $50 million. What's happening in the second year? The second year, you're going to have all the renewal from the first year, and then you spend the marketing to bring the new traffic, meaning that the second year, already margin improve significantly.
What we need to make sure that we are talking about a healthy business. From my point of view, what is a healthy business? If I'm investing money in marketing, in advertisement, remember that we are doing it for the last 20 years with an ROI of up to 12 months, taking everything into consideration, including the churn and so on. It means that I'm already profitable in the second year. This is one, I think that every time that we are looking at this TRY model that we are implementing also for Wix, it's working for us great. We know how to do that. The only KPI is that we need to make sure that we comply with is this up to 12 months of ROI.
By the way, in the future, it will be like Wix, 5 to 7 months while you increase conversion, you improve the brand. The second thing is about the growth margin, and we can talk about it, but I do believe that we see the improvement growth margin. We did mention last quarter that we're already at around 30% when you compare it on bookings, and it keep on improving. I do believe that it's something that is going to improve significantly, and I can explain the reason why, but let's see what we did with Harmony. We develop our own proprietary LLM model. We took down the cost to about 5% of the cost that would have been paid if we use a third-party LLM model. We are super innovative.
We understand how to do that, and we are already started to optimize the profit with the margin with Base. I definitely believe, I don't know what is going to happen in a year from now or two years from now, but I do understand and do believe that we are doing the right things, and I do believe that this business is going to be profitable. Yes, this year is not profitable, and we said that we are going to invest money mostly in sales and marketing in order to make sure that we can answer the demand.
We want to make sure that in a few years from now, we can provide the full experience to our customers, including AI capabilities, including product, but more importantly, we have increased the TAM significantly, and I do believe that it's going to generate much more growth for us in the future.
The big question we get is, Base44 is really exciting, but there's so many of these tools that are merging, and how do you know the investments you're putting in are going to be the right ones, and help really differentiate Base44?
We see the growth. We see the usage. I think that we see what people are building today, and we already mentioned that Base44 is about 40% of the U.S. market based on the Similarweb reports. Why is that? I think that Base44 provide you with an amazing experience with a lot of capabilities of mostly about backend. It mean that even you compare it to other platform like Bubble, you're able to build a really sophisticated, complex applications. Everything around CRM, management tool, productivity tool, dashboard that you can do, you use it for your own use or use it for your corporate. You see also big corporates that already started to use Base44. What is interesting is that you really can do many things that you couldn't do before.
I can tell you from my own experience, for example, for Wix, I use Base44 right now, and we develop a full SOX compliance workflow management. Okay? It's mean that I'm going to save about $60,000 or $70,000 from what I'm paying right now to the other SaaS software that we are using for SOX compliance. What is interesting, Base44 is truly an amazing platform that enable many people to use for so many use cases. We just launched the Superagent. I created a virtual PA that helping me managing my calendar, answering email, sending a task to do, and I communicate with her through WhatsApp or Telegram.
There's a lot of productivity tool that you can do with Base. Base truly provide with so many options for you as a corporate, but also as an individual. This is why we see this kind of growth coming from all places, not just for individuals, but also for big enterprises that using right now, Base for their needs.
On the capital allocation, you repurchase 30% of your shares for $1.6 billion, and it put you into a net debt position. Can you just talk through, going forward, how you're thinking about the capital allocation?
Yeah. Let's start why we did it. It is unusual to buy one third of the company. I think that, I was in the other conferences, already in December, talking about the fact that we need to invest in our business, in our growth. We said that we are going to invest more in sales and marketing, and obviously, there's also the cost of the AI. Yes, this year, we are not going to make $650 million in free cash flow. We're going to make just around $400 million. But not all of the shareholders feel really good about it. Many shareholders actually invested in Wix as a free cash flow story. This year, we are going to make less cash. Why? Because we need to invest in our growth, in our future, in order to deliver more cash in the future.
This is exactly what we are planning to do. We said, okay, if we are willing to provide those shareholders the ability to sell the stock, if they are not happy with the direction that we are going. It was a strategic decision to do it, and I think that it's the right decision. Having known that the stock will go down after the first earnings the way it was down, yes, perhaps I would do it gradually. The decision to buy one side of the company coming from a place that we know that we need to invest, we are thinking about the long term, and it's fine. Not all of the shareholders feel very good about it. This is a decision that we took. I believe that we will continue to generate a lot of cash.
This year, we are going to generate $400 million. Next year, we are going to generate much more than that. The plan is to generate the same amount of cash that we use for the buyback within the next two and a half years. Most of the debt is going to be returned in four years from now. It's for the converts. I don't feel that we are under any pressure. We don't plan right now, like big M&A. When we think about it, most of the companies that would like to buy today, they are very small, like Base44. We are not talking about big companies. In term of capital allocation, I think that we are in a good place. I think that the decision to do the buyback was the right one, and we will continue to generate a lot of free cash flow.
The durability keeps coming up, but your signals of the durability, maybe just explain why you're so confident that cash flow rebounds. What?
I see the core business. The core business is super healthy. We built it for many, many years. We always drove growth through innovation. We did it right now with Harmony. We are going to do it with new capabilities for our partners. I think that more than anything, when you think about our agencies today, most of them still using WordPress. What kind of AI capabilities they get? What's happened to WordPress? What are the opportunities that it's open for us using all of our AI tools? Wix today is truly a full AI company. I believe that we have a lot of opportunity, especially with Base. This is one. Second, AI represent us a lot of efficiency that we can generate. It's coming from a place that we need less employees.
Today, for example, at finance, I have AI agents, they're doing bank reconciliation for me. I think today when you think about engineers, it's totally different. We call it X engineer, you have one person that can do both front-end, back-end, UI, UX. How many people you had to have before? By the way, it's not just about taking down the cost, it's about being much more efficient and launching product much faster. I think if you do the right thing about how you size a company, how you structure the company, you have to do some kind of reorganization in order to meet the new capabilities and the new needs of AI. By the way, we did it also with core organization.
I think that the combination between the opportunities that we see ahead of us, plus being much more efficient in terms of the cost structure, I truly believe that we can generate this amount in cash, and this is why I feel very, very comfortable about it.
The synergies with Base44 and the core, can you speak to what you're seeing?
Wow, the synergy, this is like, I've been in this business so many years. I think that the synergy just make it so excited. There's so many synergies. It's not just about the product, I will get to that, but think about Base44, what it does. It simplify the way for people which are not sophisticated or not professional people, they are sophisticated, but they are not professional, to build application. Exactly the same thing that we did with Wix, with website. There is a lot of synergy about the vision. Second, think about the knowhow. After two months after buying them, we already got to a point where we see about $100 million of run rate for marketing, and it's keep on increasing because we know how to do that. For 20 years, this is what I was doing. We know how to build a brand.
We know how to use the marketing with the TRY methodology. We have the headcount to support it. I don't right now need to recruit people, I have them. Everything that we did with Harmony, developing their own proprietary LLM model, we are implementing it right now with Base. It's going to take more time. It's much more complicated, yes. We have the talented people in order to execute on what we need to do. They use our infrastructure, security, GDPR, payments. They're using some of the technology that we use. Think about the synergy between both companies, like Base working with headless and other product of Wix. Think about the entire vertical that we have. The amount of synergy between two companies. I think that this is where the place of, every time that I'm saying, look at the combined company, it is really amazing.
There's been comments about a pretty big reduction in force of employees. Can you comment about the supposed 20% reduction?
Look, I'm not going to comment. Unfortunately, it's leaked to the newspaper in Israel before we actually completed. I can say one thing, that it's something that we've been working and still we didn't execute. We are going to do it really, really soon. I'm not going to talk about the numbers. I mentioned before, I think that this reorg is something that it's really important, not just in terms of cost reduction, but also about the efficiency. Yes, it's going to be significant. I think that it will make Wix It's funny, we're a big company, we assume to know everything, but we've learned a lot from Base how to operate with small teams, how to develop things faster. Today, we have the technology that enable us to do that.
Yes, we're obviously going to do this reorg, and we are working on it. I am definitely going to update once it is done about the result of it, about the contribution. Probably there will be some impact also for cost, but also for top line, because this reorganization will require from us to make a lot of changes. I believe that overall, it's going to be healthy and more profitable for the company. Again, we mentioned about the things about the AI. I think that what is important for management to do the right thing in order to make sure that we make the company even better and stronger.
How are things in Tel Aviv now?
Well, more relaxed. It was really tough. It's funny because most of Wix is Tel Aviv and Kiev in Ukraine. We have about 1,000 employees over there. They're also having a very tough period right now, especially the last week. It is tough. It's not easy. I think that, it's sad to say, but we learn how to work in this kind of environment. Yes, we had some delays because of the war. Hopefully, we are soon going to be done, to be after this kind of a weird period, that actually started from COVID. We are strong. We are a strong company. We know how to handle it. We are supporting our people. Even within the war, we launch Harmony. I think just tell you about the company DNA and how people strong and how we do things different.
Jefferies is a huge supporter of Israel, and we have a huge business there. Everyone's been asking us, we're bringing our tech trek back in May of 2027. We've already planned it. We've taken out the Kempinski Hotel.
Which is amazing.
Yeah. We're fully committed, so hopefully we can make this, because I've been bummed personally, haven't been able to come over in a couple of years. That invite's out, so if you guys want to sign up, I can get you the link. I know it's a ways out, but we already made the commitment to take the hotel out, so we're financially in. Any open questions from the audience for Lior? What do you think-
I was just going to ask, I think earlier you mentioned that nobody knows the trajectory of drag and drop versus obviously the Velo coding stuff, right? If you had to see a world 5 years from now, are you thinking that there'll be separate class of maybe segmented users, use cases, which will gravitate more to the other? It'll truly be hybrid where an agency is using both these two together, as mom-and-pop shops are using both these two together. I think that the question that everybody's trying to answer is how cannibalistic is your Base44 offering to the tradition?
This is why I'm looking specifically at Wix. I'm not talking about other companies, okay? We are fully hedged for any given scenario. From my point of view, this is the most important thing because as a management, you need to try to understand not what is going right now, how the world is going to be in five years from now. Then it's difficult to say, but you need to hedge yourself to any given scenario. Probably it will be kind of a hybrid model. There's some people that feel very comfortable using just AI Velo coding within two prompt to create the website. Some people will have to have some kind of a drag-and-drop capabilities because they need constantly to change the content, need to change images, need to change how the websites looks like.
They don't want to go back and prompt again, and then discover that they're wasting a lot of time and money because they need to pay for the tokens. Yes, it will be a combination. Remember that Harmony, the reason why we call it Harmony, because it exactly represent this hybrid kind of capabilities of both drag and drop and AI capabilities.
We appreciate you making the trip and thanks for sharing the story, Lior.
Thank you for having us here.
See you.
Thank you.