Wix.com - Q1 2023
May 17, 2023
Transcript
Operator (participant)
Good day, thank you for standing by. Welcome to the Wix Q1 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. 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 Communication. Please go ahead.
Rona Davis (Head of PR and Communication)
Thanks. Good morning, everyone. Welcome to Wix's first quarter 2023 earnings call. Joining me today to discuss the results are Avishai Abrahami, CEO and co-founder, Nir Zohar, 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. 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 material 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 Avishai.
Avishai Abrahami (CEO and Co-Founder)
Thanks, Rona, and good morning, everyone. We have had a fantastic start to 2023, and I am 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 million above our guidance. We generated $44 million of free cash flow, excluding one-time charges and also ahead of our expectation. 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 remain a key strategic focus.
Partners 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. The outperformance of this first 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 bolsters our confidence in achieving the Rule of 40 2020, 2025. I will let Nir and Lior share more detail about this quarter, and then I will close with my thoughts on AI. Nir?
Nir Zohar (President and COO)
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 2023 new user cohort performed exceptionally well with 5.4 million new users collectively generating more than $30 million in bookings in this first quarter, easily the highest same quarter booking in a non-COVID cohort and on a base of a significantly smaller size 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.
Diving deeper into these fundamentals shows the returns from our focus on bringing higher intent self-creator users and partners, which convert at higher rates. It is also the result of higher monetization driven by users choosing higher price 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. 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 reduced acquisition marketing spend by half.
We continued this marketing strategy this quarter and decreased acquisition marketing spend by approximately 47% year-over-year, while still increasing new cohort bookings. After more than eight 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 headcounts. 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. Lior?
Lior Shemesh (CFO)
Thanks, Nir. This quarter was marked by fantastic profitability improvements that 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 Rule of 40 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. Non-GAAP operating expenses as a percentage of revenue declined significantly from 77% in Q1 2022 to just under 54% 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. Our continued profitability improvements, I'm also very excited about the execution of our strategic initiatives, particularly our focus on the partners business that will enable us to continue to deliver growth in the coming years. 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 million this quarter, up 10% year-over-year. Total bookings were $415 million 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 quarter. We saw an acceleration in transaction revenue growth this quarter, up 16% year-over-year to $42.3 million. This growth was driven by higher GPV of $2.7 billion, 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 $103.9 million, 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 increase 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. 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 450 basis points year-over-year. Both of these gross margin targets were originally anticipated for later in the year. 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 $48.5 million or 13% of revenue.
As we mentioned last quarter, we did take a one-time charge of $25.3 million 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. As a result of higher growth and a focus on operational efficiency, we generated $44 million 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 $2.1 million in Q1. Free cash flow performed better than expected and give us more confidence in our ability to achieve the Rule of 40 in 2025. Now let me finish with our outlook for Q2 and 2023.
We expect total revenue in Q2 to be $380 million-$385 million, representing approximately 10%-12% year-over-year growth. For the full year, we're increasing our outlook. We now expect total revenue to be approximately $1.52 billion-$1.54 billion, representing approximately 10%-11% year-over-year growth. This is an increase from our prior expectation of $1.51 billion-$1.53 billion or 9%-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%-59% of revenue, compared to 59%-60% of revenue as previously expected, driven by lower sales and marketing expenses and general incremental operational efficiencies. As a result, we are increasing our outlook for free cash flow for 2023 to $172 million-$180 million, or 11%-12% of revenue, exiting the year with a free cash flow of more than 13%. This compares to our previous expectation of $152 million-$162 million or 10%-11% of revenue and an exit margin of 12%-13%. Note that our free cash flow outlook exclude our headquarters build-out cost, as well as approximately $4.5 million of cash restructuring costs.
Finally, stock-based compensation is expected to decrease to 14%, to 14%-15% of revenue in 2023, down from our previous expectation of 15% and down from 17% of revenue in 2022 as headcount across the organization declines more than originally anticipated. I am very happy with our results this quarter and our revised outlook for the remainder of the year. I now turn it back to Avishai.
Avishai Abrahami (CEO and Co-Founder)
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 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 thoughts on AI can be summarized in three key points. First, our goal at Wix is to remove friction. The easier it is for our 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. 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 make sense, and then generate the site personalized to the business. Obviously, the text 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 ChatGPT for our text 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. When we embed these technologies into our platform, it increased 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.
These models power 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 fully powered by LLM and proprietary algorithms, which will of course include full site creation that not only generate content but also the design and the layout. 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 content, the content for a website. That already has been possible for many years. Wix ADI fully demonstrated that.
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 product, to partner with payment gateways, and many more things. Even if you have something that can build pages and content and code, you still need much more.
That get to my third 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. You will no longer need a database management. Server management and cloud computing. I believe we are very far from 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 allowing a user to capture their story and bring it to the web. It is not the text that ChatGPT generate. It's helping the user use ChatGPT to create their version of that text, to tell their story. It's not about using Midjourney to create images for your business.
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. Thank you again for joining, and we will now take your questions.
Operator (participant)
Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from Ygal Arounian of Citigroup. Your line is open.
Ygal Arounian (Director of Internet Equity Research)
Hey, good morning, guys. And good afternoon. Avishai, a lot of good color on the AI, and I just wanna focus on that maybe a little bit more. Specifically on that last point, where you talk about more opportunities to leverage AI and add value for users, you know, even kind of further into the future as all this evolves. I guess I wanna maybe expand on that point a little bit. As we talk to investors over the past couple weeks, as, you know, this question has come up more.
You know, I think the biggest fear is that, you know, all this stuff happens, and that, you know, folks start to go to some of the larger players, in AI where, you know, you can build websites and do some of these things. As they develop their AI capabilities, they start to de-develop some of this stuff more. Maybe just talk about, you know, how you envision that and why as the AI capabilities improve, you expect users to continue to come to Wix.
Avishai Abrahami (CEO and Co-Founder)
Of course. Well, first thing I wanna say is that the first part of your question, right, is about what kind of opportunities to leverage AI do we get, right? 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 a website on Wix actually finish with a website that they are very happy with, right? 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. We've proven, right, with ADI in 2016, by just generating a lot of the things automatically for the users, so the text which we did and the images and the layouts, we increased conversion.
I think the current technology will allow us to do it even further. I look at it as a way for... website is a combination of many things, not just the text. ChatGPT help us with some of it, but you still have to have the right structure, the right visuals, the right layouts, the right design, and way to use the user images. There's a lot of work there. 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 standard models because you wanted to place an image, you don't wanna write, "I wanted to place the third image in the fifth column. Can you please change it to something?" Actually, it's easier to go and click and point on it.
You don't wanna generate all the text from the beginning. You just wanna do the specific part. This requires a lot of complex UI. I mean, ADI proved that you can do it, and when you do it well, it works very well. I think this is the first part, right? We're gonna see better, happier users and a faster site creation and more sites being finished to the user satisfaction. The second part is when you start to think like Copilot in 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?
Today, you kind of have to know yourself, what you wanna do, and then find how to do it. If we can guide it 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. We actually have the ability to take users that use Wix in a certain way and make them use better in more ways. 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.
If we now have a way for you to finish everything and now utilize more of the platform, then the fact that you have a deeper software layer actually become a lot more valuable. So I think we are very optimistic that this will 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, 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 their website, if I understood correctly, or I misunderstood it?
Ygal Arounian (Director of Internet Equity Research)
Yeah, that's essentially it. They leverage their AI capabilities and build, you know, create website builders and replicate what you're doing and, you know, users can go over there. Why people stay on Wix?
Avishai Abrahami (CEO and Co-Founder)
Okay. If you look at what you can do today with AI, there are actually two things that are changed dramatically. The first one is the creation of text, right, which is moved, changed dramatically. Images, which you can invent images and do that. As I said, you know, we've been doing it for a very long time. Of course, not in the similar and text generation, not nearly as good as ChatGPT. This is a very small part of what we do, right? How do you use that to create e-commerce, right? How do you use that to make a scheduling engine? Just think about all the way that you need to sign contracts with payment processes to run that. How, how do you edit things, okay, on top of it?
Pretty much 9....8% of what we work on and develop, right, is not covered by that. You need your site to be running well, you need it 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. What you can do, essentially, is create with all those tools on the basic level, is create 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. And those guys have never been our competitors, the one that do that, okay?
That do those very basic simple landing pages. In fact, you can do those on Wix, and it is very small portion of our business. If you look at the majority of our business, I think there is a very, still very, quite a few years, and probably more than just quite a few years until we see that the AI is starting to cover that kind of software.
Ygal Arounian (Director of Internet Equity Research)
Great. Thank you. That's really helpful. If I could just ask a quick follow-up on some a little bit more near term. A number of interesting product announcements this quarter. Maybe if you could just expand on the Google Ads one, because you talked about that being a meaningful contributor to growth in business solutions. Then saw the news around the headless products, which was really interesting and, you know, could potentially open up the opportunity with the partners a little bit more. Maybe if you could just hit on that as well. Thank you.
Avishai Abrahami (CEO and Co-Founder)
Well, this is actually a good demo of where we are utilizing the power of advanced algorithms we're bringing and 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, for us to fully create that and generate it for you. By doing that, we reduce the friction for our user to have. Running successful Google campaign is a very, well, it's a real skill that you need to learn and takes time, we use advanced algorithms to do it for the users. The result of that is that we have more. The happier users, that their business is more successful, of course, for us, it means more monetization opportunities.
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 that we see a lot of the professionals are using that product.
Operator (participant)
Thank you. One moment for our next question. Our next question will come from Aaron Kessler of Raymond James. Aaron, your line is open.
Aaron Kessler (Managing Director and Internet Analyst)
Great. Thank you. Maybe just a couple questions. Maybe just, you comment a little bit on the macro in the letter, just maybe your updated thoughts there and kind of the environment we're seeing, especially with SMBs right now? Second, just the non-GAAP OpEx guide. I think, you lowered that a little bit, but still given the strong Q1 performance there, it looks relatively conservative, the guide. Just any updates?
On, on the non-GAAP OpEx for the year as well. Thank you.
Nir Zohar (President and COO)
Hey Aaron, it's Nir. I'll take this first part and Lior can follow up on the second part in regards to the OpEx. In terms of the microenvironment, you know, we've seen some modest improvements kind of across the board in terms of on the demand side, top of funnel. Some I would say some recovering growth in GPV, 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, you know, it's still relatively early. The increase is modest. We're being cautious not to call it a recovery, but we do point out that we're seeing a little bit of it.
Lior Shemesh (CFO)
Hey everyone, this is Lior. With regard to the OpEx, I think that this is one of you know, 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%-59%. I believe that this trend of taking down OpEx as a percentage of revenue will continue into 2024 and 2025, which bring me the confidence and our ability to meet the target that we set for the Rule of 40. You should expect it to continue decline as a percentage of revenue even in the next couple of years, and it will be significant.
Aaron Kessler (Managing Director and Internet Analyst)
Yeah. Just in terms of 2023, 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?
Lior Shemesh (CFO)
Because as we mentioned last time, the second half of the year, we do plan to invest more in branding, for the Wix, especially with regard to the partners vertical.
Aaron Kessler (Managing Director and Internet Analyst)
Mm-hmm.
Lior Shemesh (CFO)
We said that we are going to do that in the second half of the year. It reflects that.
Aaron Kessler (Managing Director and Internet Analyst)
Great. Thank you.
Operator (participant)
One moment for our next question. Our next question will come from Mark Mahaney of Evercore ISI. Your line is open, Mark.
Mark Mahaney (Senior Managing Director and Head of Internet Research)
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. Are there factors that could cause that revenue growth rate, you know, over the next two or three years to get back to the kind of the mid-teens levels? If it does, what would be the two or three biggest drivers of that? Secondly, just on Google Ads, could you just talk through the mechanics of that or the materiality of that? Thank you very much.
Lior Shemesh (CFO)
Okay. The first question, you know, Mark, we obviously see a tremendous growth in term of our partners' business, approximately 30%, very much in line of what we said during the Analyst Day. 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 as Avishai mentioned, it's a great monetization of our funnel, of our, you know, customers. It is millions 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.
Mark Mahaney (Senior Managing Director and Head of Internet Research)
Okay. Thank you, Lior.
Operator (participant)
One moment for our next question. Our next question will come from Elizabeth Porter of Morgan Stanley. Your line is open.
Elizabeth Porter (SVP of Wealth Management and Financial Advisor)
Great. Thank you very much. You know, really helpful color on why kind of the current AI platforms aren't a replacement for Wix. You also referenced emerging AI technologies providing the opportunity to actually increase Wix's addressable market. Could you provide more color on who that incremental user type is that you expect to be able to address and how that's different than your core TAM today?
Avishai Abrahami (CEO and Co-Founder)
Of course. I think that one of the things that we always see in Wix is that we have a lot of users that come to Wix, and sometimes they can't finish the website that they want. There are many reasons for that, right? Some of the reason is that it's just, you know, takes too much time. At the end of the day, you have to personalize a template, you have to even if you use ADI, you're still gonna 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.
Reduction of that complexity and making Wix more available to users that are less advanced or don't have the time, is 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 how to use the platform pretty well, but cannot use the more advanced functionality or don't know that it exists, right. 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. 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. 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. Right? In other words, I think that the expansion of addressable market will go both way toward more advanced user, more advanced functionality. For the people that just wanna finish a website quickly and do it and get results. I think those are both directions that it will allow us to expand into.
Elizabeth Porter (SVP of Wealth Management and Financial Advisor)
Great. Then on the B2B partnership side, you mentioned that it's starting to impact revenue in the model. While it's small today, how should we think about the magnitude of the impact kind of building through this year into 2024?
Lior Shemesh (CFO)
I believe that Elizabeth, if you take the overall bookings that we already had and, you know, some of the deals we already mentioned, you know, in the past, it is growing very fast. Meaning that 2023, we are going to see millions of dollars, and I guess that 2024 it will be more like tens of millions of dollars. It's growing and we're 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 a multi-years agreement. Nevertheless, we see many of them actually moving to Wix and, you know, start to use Wix for their customers.
Elizabeth Porter (SVP of Wealth Management and Financial Advisor)
Great. Thank you.
Operator (participant)
One moment for our next question. Our next question will come from Clarke Jeffries of Piper Sandler. Your line is open, Clarke.
Clarke Jeffries (VP and Senior Research Analyst in Industrial Software and Defense tech)
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. 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.
Lior Shemesh (CFO)
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, and existing agencies building more websites for their customers. 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. Those are like the three main reasons. The fourth reason was obviously the ARPU increase that was happening this quarter.
Meaning that we see a more shift toward like more expensive packages that has a positive impact on the growth of creative subscriptions.
Clarke Jeffries (VP and Senior Research Analyst in Industrial Software and Defense tech)
Perfect. Just one follow-up. You know, you're characterizing, you know, half of the increase to free cash flow being driven by some of the cost of revenue efficiencies and other half from OpEx. Wondering if you could parse out maybe, you know, 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 self-creator or the partner business? Thank you.
Lior Shemesh (CFO)
Yeah. Obviously it's coming from both of them, but mostly from partners. You know, I mentioned many times in the past that we are going to see more leverage in partners while partners is growing. This is exactly what we are seeing. We see a 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 two years, and we started to see the fruits of it and getting more and more leverage from this business.
Clarke Jeffries (VP and Senior Research Analyst in Industrial Software and Defense tech)
Perfect. Thank you very much.
Operator (participant)
One moment for our next question. Our next question will come from Trevor Young of Barclays. Your line is open.
Trevor Young (Director and Senior Internet Equity Research Analyst)
Great, thanks. First one just dovetailing on that prior question. On free cash flow margin ex all the items at 12%, can you kinda break that down into core self-creator versus partner? Is self-creator kinda still high teens, which would put partners still, you know, modest but improving free cash flow declines? Or is 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? On the geo mix, Europe slowed just to just 5% year-on-year ex-FX, despite easier compares and maybe lapping some of the headwinds it started with, you know, after the Ukraine conflict. Any color on why Europe is slowing?
Lior Shemesh (CFO)
With regard to the first question, we do not provide at this point of time, you know, the breakdown of the free cash flow between partners to self-creators. I promise that I'm going to do it in the next couple of months or in a quarter or two. 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 (participant)
One moment for our next question. Our next question will come from Brent Thill of Jefferies. Your line is open, Brent.
Brent Thill (Tech Sector Leader of Software and Internet Research)
Thanks. Just a question on the sustainability of demand in the back half? I know Nir mentioned it's still too early, you don't wanna call it a recovery, but you did raise the guidance more than the actual beat in the quarter. Can you just talk to, you know, the visibility and maybe for Lior, can you give us a sense of just what's the linearity of the quarter look like, and ultimately what happened into April and into May?
Lior Shemesh (CFO)
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. I believe that you see a increase or acceleration in growth in the second half of the year, due to a different comp. Because, you know, Q1 of last year was a very strong quarter for us. Obviously, if you are looking at it on a year-over-year basis, the second half of the year is gonna be stronger due to that. Again, it's not coming from a place that we took any kind of assumption about more recovery than what we see right now.
April, May also, you know, has been good and, you know, continue. I cannot say more than that.
Brent Thill (Tech Sector Leader of Software and Internet Research)
Thank you.
Operator (participant)
One moment for our next question. Our next question will come from Andrew Boone of JMP Securities. Your line is open.
Andrew Boone (Managing Director)
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 back end to make the business more defensible and compete against maybe other competitors that have already built out kinda headless solutions? 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 creator revenue growth? Thanks so much.
Avishai Abrahami (CEO and Co-Founder)
I just wanna ask a quick to clarify. In the first question, do you mean in regards to AI or just you mean to other headless software vendors?
Andrew Boone (Managing Director)
I think more broadly. 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 the 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.
Avishai Abrahami (CEO and Co-Founder)
Well, yeah, I. Okay. First of all, thank you. I think I understand the question better now. 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? They can do very basic things when it comes to code, but and if you think about the whole stack, right, the things that you need to have a running booking scheduling website, right? You need databases, the ability to index the databases, a lot of APIs, and then you need to have also to sign contracts, right, with processing merchants and banks. There's a lot of things that you need to do, right? I think this is something that it's gonna take quite a while.
When I 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 while in the future. Every element we're gonna get from AI to simplify that, of course, provides value for Wix just because it's allow us to do it better, faster and reduce the cost. Now, there's gonna be a lot of opportunities on the way for that. As for the headless itself, so, you know, we have quite a few software stacks that we built that are being used by tens of millions of users and are quite fantastic, but we never offer them outside of Wix. Now, yes, in some cases you have competitors that have a like e-commerce, right, where you have really great competitors out there.
In some cases 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. We think the opportunity there is the ability to allow people to use that and offer that on their website that are not built on Wix. I think that is something that, if you will create for us another marketing channel, which is very different than a standard one. It's mostly based on partners and professionals. Long term, I think the value there is quite big.
There is something that because we actually provide all of the different elements and not just one like shopping cart, e-commerce base, 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. I think that provides quite a lot of value.
Nir Zohar (President and COO)
Hey, Andrew, it's Nir. In terms of the marketing plans, 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 self-creators, we will continue the current focus, which is a combination between brand activity as well as the direct acquisition. A similar cadence, as we've done this past quarter and before as we see that marketing strategy really paying off.
Andrew Boone (Managing Director)
Thank you.
Operator (participant)
I would now like to turn the call back to Rona Davis for closing remarks.
Rona Davis (Head of PR and Communication)
Thank you for joining, and have a good day.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.