Wix.com - Q2 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Wix Q2 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you need to press star one one on your telephone. You will then hear an automated message advising, "Your hand is raised." To withdraw your question, please press star one one again. Please, please be advised that today's conference is being recorded. I would now like to hand the conference over to Emily Liu, Investor Relations. Please go ahead.

Emily Liu (Director of Investor Relations)

Thanks, good morning, everyone. Welcome to Wix's second quarter 2023 earnings call. Joining me today to discuss our 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. 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 materials and in our 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, Emily. Good morning, everyone. We continued the momentum built up over the past few quarters into a strong Q2, exceeding expectation as we accelerated both profitability and growth for a third for for a third consecutive quarter. This is a testament to our focused commitment to our growth strategy while balancing operational efficiency. Revenue in Q2 grew to $390 million above our guidelines. We generated more than $49 million of free cash flow or 13% of revenues, also outperforming expectations. A meaningful driver of the strong performance this quarter was our partners business, which grew revenue 36% year-over-year in Q2. For the last several years that our partner business has grown, we have been listening to our partners' needs and innovating on a set of solutions tailored especially for professionals.

This all has led to the launch of one of our most significant product releases in the last few years, Wix Studio, the new cornerstone platform of our partners' product experience. Wix Studio is the first of its kind web creation and development platform made specifically for agencies and freelancers. It is an all-in-one platform for professionals to create websites, easily collaborate and delegate among team, manage workflows and clients at scale, and grow their business more efficiently. I want to share a bit more about how Wix Studio came to life. Three years ago, we launched Editor X. Since then, we have gained significant traction with agencies and designers and have learned a great deal about the types of projects they build, about their needs in design and control, and about how they run their business.

We learned that agencies and freelancers need more than just a high-end design environment. They need tools to manage and grow their business. The knowledge we have gained has enabled us to make significant leap forward in our offering for partners, which we now deliver with Wix Studio. Wix Studio brings so much more agencies and freelancers in one platform than we, or we believe anyone else has ever offered. The Wix Studio Editor provides a simple way to do complex things online with layers of control over all aspects of design, while still allowing in-depth sophistication of Editor X for the most advanced users. One of the hardest issues that agencies have is keeping consistent design across multiple sites. We are greatly simplifying this challenge with Responsive AI technology.

Wix Studio also includes a full set of native business solutions all supported on Wix infrastructure, like Wix Stores and Wix Bookings, as well as the ability to add third-party apps. For specific business logic that is sometimes needed for clients, Wix Studio offers developers new capabilities and tools to create custom applications better and faster. For that, we've introduced Wix IDE, a completely new professional development environment based on VS Code. Using Wix IDE, developers can extend the functionality of our business solution using hundreds of API and integrations. With integrated AI here as well, developers can use an AI-powered code assistant to write cleaner code and detect errors. With Wix Blocks, partners can create custom component widgets and apps that can be reused on multiple sites. Partners can even sell the apps they create using Wix Blocks to millions of Wix users in the app market.

Finally, Wix Studio is made specifically for professionals who build sites for a living. The Wix Studio Workspace includes powerful dashboard to manage clients, projects, and teams, which is also accessible on a dedicated Wix Studio mobile app. For when an agency hands over a site, Wix Studio includes a client-facing dashboard and editor with features such as a Quick Edit, which allow clients to make easy changes to the site on their own, and the ability for the agency to add relevant resources for the client, such as video guides and tutorials. These are just some of the many ways to address all of our partner needs, from building complex projects to managing client relationships, all in one place. These capabilities are built with all types of agencies across all specialties and skill set in mind, not just design experts.

We are incredibly proud and excited for the release of Wix Studio. We believe it will be a meaningful driver of continued growth with partners. In addition to Wix Studio, we also made a meaningful stride in all our AI innovation this quarter, with the announcement of AI Site Generator and AI Assistant for businesses. Just two of among many other exciting products in our pipeline we'll be rolling out to our user later this year. This add to our already robust suite of AI and GenAI products developed over the past decade. AI remains a key part of our growth strategy for both self-creators and partners alike. There are so many more exciting features and highlights of Wix Studio, as well as our AI pipeline and vision, and we'll be sharing more details and some demo next week at our Analyst Day.

I hope you will join us there. With an excellent first half of the year behind us, I'm confident in our ability to continue this momentum and even accelerate profitable growth for the rest of 2023. We're again raising our revenues and free cash flow outlook for the full year. The outperformance of the last few quarters put us on the path to achieving the Rule of 40 in 2025. There are many exciting things still to come this year, and only made possible by incredible team here at Wix. Thank you all for your hard work and dedication to our users. With that, I'll turn it over to Nir to speak more about the partner business. Nir?

Nir Zohar (President and COO)

Thank you, Avishai, and thank you everyone for joining us today. I want to start by sharing a bit more about the significance of Wix Studio for our business, and then I'll share more about this quarter's performance. While professionals have always used the Wix platform, over the last several years, we've invested significantly into infrastructure, product development, and marketing to expand our TAM by building the go-to platform for professionals. Last year, we presented how the partner cohorts generate compounding growth. This compounding growth is inherent to the difference between partners and self-creators. Partners take on more and more projects over time, and therefore, each partner generates more subscription revenues over the lifetime of the cohort. Partners' websites also deliver higher GPV, and they have a deeper grasp of advanced capabilities, adopting more business solutions and generating higher ARPS across the board.

We continue to see this behavior, and we still and we will share more at our Analyst Day next week. The financial results from all of this have been outstanding, as partners now make up 30% of our total revenue and continue to grow. This growth is a testament to the success of our investments. Wix Studio represents an important milestone in this journey. With Wix Studio, we are not only delivering to partners an updated, powerful design and development experience with AI technology, we are also bringing something completely new that meets their specific needs. With the Wix Studio Workspace and its set of new workflow tools that will help agencies manage their business, scale and grow, we believe Wix Studio is a unique offering that no one else provide. There will be much more to come.

We will continue to add products and tools to Wix Studio as our partners grow with us. We believe that this product will enable us to enhance the partner cohort behavior I described before, as well as grab even more market share and accelerate our penetration into this massive TAM. Moving on to the quarter, starting with the cohort performance. Our Q1 2023 user cohort generated $42.5 million in cumulative bookings in its two quarters, ending in Q2. This was approximately 6% higher than that of the Q1 2022 cohort in its two quarters. Despite the Q1 2023 cohort containing about 13% fewer users compared to the Q1 2022 cohort and lower acquisition marketing investment. We benefited from solid conversion of new and existing users, and continued growth in bookings per subscription, and stable retention.

These fundamentals show the positive returns from our focus on bringing higher intent self-creators and partners, which convert at higher rates, as well as higher monetization, driven by favorable pricing mix, 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. Finally, this quarter's performance again demonstrates the strength and scale of our global brand, as reflected in the success of our marketing strategy shift implemented last year. With that, I will now hand it over to Lior to walk through our financials and outlook. Lior?

Lior Shemesh (CFO)

Thanks, Nir. As Avishai mentioned, we continue to make progress in the disciplined execution of our profitable growth strategy in Q2, with growth and profitability accelerating for another consecutive quarter. Continuing to meaningfully expand margin will ultimately drive us to reach the Rule of 40 in 2025 under a variety of scenarios. At our Analyst Day next week, I will show you how we plan to reach this goal from where we are today. This quarter, we accelerated gross profit margin further, up nearly 580 basis points year-over-year, as we continued hosting optimization and benefited from the cost efficiencies completed over the past year. Non-GAAP operating expenses as a percentage of revenue declined meaningfully from 66% in Q2 2022 to 51% in Q2 2023.

This decline was a result of continued execution of our streamlined marketing strategy and the cost savings actions executed over the past year and completed last quarter. This drove us to log a new record high for quarterly non-GAAP operating income. We achieved the first quarter of positive GAAP operating income in Wix history. This milestone demonstrate strides we've taken towards sustained GAAP profitability, which we believe we are very close to achieving. Non-GAAP operating expenses also declined more than 300 basis points sequentially from increased operating leverage, as revenue grew 13% year-over-year, while operating expenses remained stable. This outperformance in Q2 caps off an incredibly strong first half to 2023, with free cash flow generation of $93 million or 12% of revenue, which was better than expected.

Excitingly, we expect to accelerate margin expansion in the back half of the year as we drive further leverage. Now on to the details of the quarter. Total revenue of $390 million exceeded top end of our guidance range by $5 million as we continue to execute on our strategic initiatives. With our partners business performing exceptionally well, total booking were $398 million in Q2, up 12% year-over-year, and also above our expectations. As you just heard Nir speak about in detail, our partners business continued to outperform as it remained a key strategic focus for us. Due to better fundamentals and increased output through increased Business Solutions attachment and more GPV generation, partners revenue growth accelerated to 36% year-over-year.

We expect meaningful growth to continue as we improve the Wix experience for professionals through new products tailored for their needs, such as our new Studio platform. Partners GPV growth, strength across geographies and commerce vertical, as well as higher average GPV per site, drove overall GPV to increase 10% year-over-year to $2.8 billion in Q2. Higher GPV and a continued increase in take rate as more merchants choose Wix Payments, resulted in accelerating transaction revenue growth of 21% year-over-year to more than $44 million. Strong growth in Creative Subscriptions ARR continued this quarter, accelerating to 10% year-over-year, as we continue to benefit from strong core behavior, price increases, and growing revenue contribution for partners. Net new ARR growth in Q2, 2023 was approximately 66% year-over-year.

We expect net new ARR to continue its meaningful year-over-year growth through the rest of 2023, as incremental subscriptions from our ramping partners business layer into our core self-creator base. On top of accelerating revenue and bookings growth, we also saw an acceleration in margin expansions as well in Q2. Through continued hosting optimization and benefits from previously completed headcount efficiencies throughout the past year, non-GAAP gross margin increased to 68%, adding another 160 basis points on top of Q1 record high and up approximately 580 basis points year-over-year. Non-GAAP Creative Subscriptions growth margin increased to 83%, marking a 230 basis points expansion sequentially, and more than 700 basis points year-over-year. This improvement was driven by strong revenue growth in this segment, as well as continued hosting efficiencies.

Non-GAAP operating margin improved nearly 470 basis points quarter-over-quarter to 18% of revenue in Q2. This was mainly driven by continued execution of our streamlined marketing strategy focused on higher intent users. Q2 surpassed last quarter record high for non-GAAP operating income. As a result of continued growth and profitability acceleration, we generated over $49 million of free cash flow, or 13% of revenue. This excludes CapEx related to the build-out of headquarters, as well as the remaining cash portion of the one-time severance charges related to the headcount reduction we announced in February. Free cash flow performed better than expected again this quarter, giving us full confidence in our ability to achieve the Rule of 40 in 2025.

Accelerating free, free cash flow growth and expanding margin over the past three quarters demonstrate the strength of our business and the success of cost efficiency action executed over the past year, which have been completed. Let me finish with our outlook for Q2 in 2023. We expect total revenue in Q3 to be $386 million-$391 million, representing approximately 12%-13% year-over-year growth. For the full year, we are increasing our outlook again. We now expect total revenue to be approximately $1.543 billion-$1.558 billion, representing approximately 11%-12% year-over-year growth. This is an increase from our prior expectation of $1.522 billion-$1.543 billion, or 10%-11% growth.

With this new guidance, we expect revenue growth in the second half of the year to accelerate compared to the first half of the year. Additionally, we are also updating our profitability expectations for the full year as we see operating leverage from the cost actions completed over the past year as we scale. We now anticipate non-GAAP growth margin to be approximately 68% for the full year, up from our previous expectation of 67%, driven by increased profitability across both Creative Subscriptions and Business Solutions. We now anticipate Creative Subscriptions growth margin to be approximately 82%, up from our previous expectation of 81%. For Business Solutions, we expect growth margin of approximately 28%, up from our previous expectation of 27%.

Full-year non-GAAP operating expenses are now expected to be down year-over-year to 56%-57% of revenue, compared to 57%-58% of revenue, as previously expected, driven by lower marketing expenses and operational leverage from previously completed cost actions. As a result of higher revenue growth and additional profitability improvements, we are increasing our outlook for free cash flow for 2023 to $200 million-$210 million, or 13% of revenue, exiting the year with a free cash flow of margin of approximately 15%. This compares to our previous expectation of $172 million-$180 million, or 11%-12% of revenue, and an exit margin of approximately 13%.

With this updated guidance, we expect free cash flow margin to accelerate in the second half of the year, compared to an already very strong and profitable first half. With our cost efficiency plan now complete and behind us, the operating cost in the second half of the year will reflect the necessary run rate to drive meaningful operating leverage going forward and carry us to achieve the Rule of 40 in 2025. Additionally, stock-based compensation is expected to decrease to 14% of revenue in 2023, versus our previous expectation of 14%-15%. Finally, we are committed to increasing free cash flow per share going forward.

Our updated guidance, combined with our share repurchase activity year to date, positions us well to generate over $3 of free cash flow per share in 2023, a significant increase over 2022 free cash flow per share of $0.51. We will share more about our plans to increase free cash flow per share through 2025 at our upcoming Analyst and Investor Day. I'm extremely pleased with the results and accomplishments we've made on all fronts over the first half of the year, and I'm looking forward to continued growth and profitability acceleration in the back half. Operator, we're now ready for questions.

Operator (participant)

Thank you. We will now conduct a question and answer session. 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 I compile the Q&A roster. Our first question comes from Matthew Pfau from William Blair. Please go ahead.

Matthew Pfau (Research Analyst)

Hey, great. Hey, great. Thanks for taking my question, guys, and great results. Wanted to ask first on Wix Studio. What are the monetization plans here? Is it something that you're gonna charge for some of these features separately, or is it more of a plan to help your partners bring more subscriptions onto your platform? Thanks.

Nir Zohar (President and COO)

Hey, Matthew, it's, it's Nir. In terms of how we think about the pricing and monetization, so the pricing for Studio at this point is gonna be the same as it was for Editor X. The way we think about the monetization, and I think it also tightly relates to what I spoke about before in terms of the cohort behavior of the partners, is by introducing Studio, we believe that we can, we can be much more attractive for these partners, for the designers and agencies that want to cater and build projects for their clients. It means that we'll have, we'll increase the adoption of partners into the platform, and by increasing that adoption, we will just get more completed projects, which mean more websites and more, and more subscription revenue coming out of it.

We also know that these kind of websites are, are, are much, have a much more higher, higher likelihood to be commerce websites that also drive GPV and higher GPV, which is another great contribution to our monetization. Again, these partners are also much more sophisticated in, in their general approach to, to more, more complex business applications on the internet, which means that they adopt more of our business solution, and therefore end up with a, with a higher ARP- ARPS. All of that together is a driver for monetization that we believe is gonna not only continue the compounding effect of those cohorts, but hopefully even acceleration. We'll see an acceleration of that effect.

Matthew Pfau (Research Analyst)

Great. Thanks for taking my question.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Ken Wong from Oppenheimer & Co. Please go ahead.

Ken Wong (Managing Director and Senior Equity Analyst)

Great, thanks for taking my question. I wanted to dig into the partner side of your business. That, that saw a notable step up in terms of the acceleration. Can you help us walk through some of the moving pieces there? How much was, maybe the B2B flow-through, or, or was there a lot of net new ARR that might have come through from, you know, kind of the traditional partner channel as well?

Lior Shemesh (CFO)

Hi, this is Lior. I think that in order to understand it, I think that if you look at the net growth of the ARR, which was about 66% this quarter, and Q1 was more than 90%, I think that it provide you with the right understanding that we managed to generate an incremental revenue to our business, mostly coming from partners, as you suggested. It's a combination of both B2B, obviously, but most of it is actually coming from agencies that moving to Wix and using Wix to build the website. We need to understand that this business has a compounding effect, because once you get an agency, they continue to build websites for their customers, and on top of it, you're getting a new one.

This is why we see that the actual growth of partners is accelerating. This is why we so believe in this business and the fact that it can be even more profitable than the self-creators, because it's compounding effect. In addition to that, we know that partners growth is also due to the fact that it's a different mix of customers. It's more businesses using more businesses applications, generating more GPV and transaction revenue, which obviously also contribute to the growth of this business. You know, it's also worth mentioning that we expect this business to deliver also higher growth in the future due to the fact that we just launched Studio. It will be interesting to see the result of it.

Ken Wong (Managing Director and Senior Equity Analyst)

Great. Thank you for those thoughtful insights.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Bernie McTernan from Needham & Company. Please go ahead.

Stefanos Crist (Internet Equity Research Associate)

Hi, this is Stefanos Crist, calling in for Bernie. Can you just talk on the, on the revenue acceleration, you know, what you're seeing in the macro environment and how much impact that's had?

Lior Shemesh (CFO)

We see some, a modest improvement in the overall, you know, economy, but it's only modest, obviously. Most of the acceleration that we see right now in the revenue is actually coming from the fact that we are getting and taking more market share in our partners business. I think that it's worth mentioning the growth on a year-over-year basis, it was 36%. Yes, we see some modest, improvement in the overall economy as people buying more online, but it's really, really modest. I think that most of the growth is attributed to the fact that partners business is going very well for us.

Stefanos Crist (Internet Equity Research Associate)

That's great color. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Elizabeth Porter from Morgan Stanley. Please go ahead.

Elizabeth Porter (Equity Research Analyst)

Great. Thank you so much. You know, really impressive growth on the partner side of the business. I wanted to switch and ask on, on the self-creators and more specifically about, you know, top-of-funnel trends. You know, are we getting back to kind of normal cadence after digesting the impacts from COVID? Can you also speak to any change in conversion rates from paid customers, to the user base that you've been seeing as you've been attracting kind of more high-quality customers? Thank you.

Nir Zohar (President and COO)

Hey, Elizabeth, it's Nir. From the standpoint of the self-creators, you asked whether we are getting to normal pre-COVID cadence from the top of the funnel. The answer is not yet. As Lior mentioned before, on his comments on the macroeconomy, we have seen some improve- improvement to top of funnel, but it's still not where it was pre-COVID, and our belief is that there is still room for more recovery there, you know, over time and as the general economy gets better and better. In terms of conversion rates, yes, we have seen conversion rates going up, first of all, because of the significant, significant change we've done to our marketing strategy, and we're bringing much higher intent users now, so obviously that is paying off.

We've also seen improvement, simply for, you know, due to the cadence of our product release and, and innovation that is aimed at helping users become more successful. You know, the introduction, the February release of ChatGPT within the editor is a good example for something that drove that. Obviously, we have many, many of those coming. That's also another positive effect on conversion.

Elizabeth Porter (Equity Research Analyst)

Great. Thank you so much.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Christopher Zhang from Credit Suisse. Please go ahead.

Christopher Zhang (Executive Director and Equity Research Analyst)

Hi, thanks for taking our question. The question is around the marketing expense guide, which you took down from 27% to net to now 25%-26%. Remember previously you mentioned the second half increase of the brand marketing expense, which would represent probably a 400 basis point step up. Are you still expecting that, or is there any change in the strategy there? Thank you.

Lior Shemesh (CFO)

Hi, Christopher. This is Lior. Yes, we do expect to see increase in marketing due to the fact that we just launched Studio. Obviously we are going to invest in order to accommodate that. The amount of spending that we have in our plan, yeah, we plan to increase the investment in marketing, going forward, obviously, it will be a reflection of how successful we are with this product. Meaning that it's a strict variable cost, very linked and attached to the success that we are going to see in Studio. It's hard for me to tell you, you know, what will be the runway, obviously, yes, we are going to see some increase of our marketing investment in the second half of the year.

Christopher Zhang (Executive Director and Equity Research Analyst)

All right. Thank you very much. It's very helpful.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Ygal Arounian from Citigroup. Please go ahead.

Ygal Arounian (Managing Director and Senior Equity Research Analyst)

Hey, good morning, guys. Good afternoon. First on Studio, can you maybe just talk a little bit more about when you expect it to kind of hit general availability? Is there anything additional to share on, on the marketing efforts you just talked about around it? You know, the agencies that are currently partners, do you just switch them over? You know, how are you on that kind of expectation that partner growth accelerates or, you know, has more strength from here because, because of this product, you know, what, what is that kind of sell through process? Then just wanna talk about GenAI for a little bit. You guys have done a great job of late, highlighting how it benefits and the things you're doing. Site Generator looks really interesting.

Are you seeing any tangible evidence that AI is helping, you know, drive more website creation and web building, helping your customers create better websites, so far, or is it still too early for that? Thank you.

Nir Zohar (President and COO)

Hey, Yigal, it's Nir. I'll start with the first question about the Studio. The current launch path that we already started this Tuesday aims to first open and invite our existing very large base of partners to adopt it. Obviously, to get feedback, to introduce more improvements, to iron out whatever needs to be ironed out, as well as understand and help them educate them on this new platform. With the goal of, first of all, treat these people that have been with us for many, many years and already use our platform in order to cater to the needs of their own customers.

That being said, the next step, will indeed be to go to general availability, sometime in probably Q4. We will determine what is the best path to do that, as we, we gain more more insights from the first phase of the launch, which is, which is already happening. I'm happy to say that already yesterday, we started opening and, and, and adding partners into it, in, in thousands, in many thousands. The initial feedback we are getting is very, very encouraging. We are getting very positive feedback on many, many different fronts. So we're very happy about that.

... We will continue to monitor that and make sure that we have a, have a very smooth transition into it, and then continue in the launch a plan towards the general public. On in regards to your question, if we see any tangible evidence that GenAI is actually improving, business performance, then yes, we do. I'm not going to disclose all the details, but I'm just going to say that the thing we released in the first part of the year and late last year, already are showing improvement in business KPIs. It makes us very optimistic. Of course, the more we put those kind of technology in front of more users, we expect that factor to grow.

If you think about, right, the core value of that Wix brings is reducing the friction when you try to build a website. When you use those technology, that can do tremendously well in order to improve that core value. Then, of course, we expect the results to be significant.

Ygal Arounian (Managing Director and Senior Equity Research Analyst)

Okay, thanks. Anything you can share on when Site Generator will be ready or can't do that yet?

Nir Zohar (President and COO)

Well, like every research project, it always looks more, easier than, than, than, it actually is in reality. I can say we already managed to generate real websites with it, so it seems to. We are past the critical and hard parts. Now it's a lot about publishing it and making sure that it is a clean product and, you know, reliable. We are at that phase now.

Ygal Arounian (Managing Director and Senior Equity Research Analyst)

Okay. Thank you so much.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Clarke Jeffries, from Piper Sandler. Please go ahead.

Clarke Jeffries (VP and Senior Research Analyst)

Hello, thank you for taking the question. You know, I wanted to ask about profitability, certainly a brisk pace in terms of getting to 18% operating margins. You know, even going back to the last Analyst Day, you know, I think it was contextualized that much of the profitability improvements were going to come from the partner business. Is that still tracking to be the case? Has the recent revenue outperformance in that segment lended at all to a faster-paced cash flow break even? As sort of a follow-on to that, I think it was interesting to see sequential dollar decrease in Creative Subscriptions COGS.

You know, Lior, how much optimism do you have that the actual dollar value in COGS could go down in the future, you know, recognizing we have, you know, guidance here for a gross margin on the Creative Subscriptions side?

Lior Shemesh (CFO)

First of all, let me start with saying that I will show in our Analyst Day, a very detailed plan, you know, both for, in terms of the profitability, both for self-creators and partners, and we'll show exactly how we are getting this leverage. I want to start and say that, yes, improvement is coming from partners, but not just from partners, but also from self-creators, just from the fact that we become more efficient company. For example, when you are taking down a hosting, it impacts both partners, but also self-creators. So we managed to optimize the growth margin by keeping the cost fixed while revenue is increasing, so there, they get more and more leverage.

We are doing it by, you know, developing all kinds of tools in order to help us to optimize the hosting. To your question with the growth margin, yes, I think that I believe that we are going to see more leverage also next year. You know, obviously, it's not going to be huge, but there will be some more leverage to our growth margin just from, you know, from the fact that revenue will be growing more than the cost or more than the variable cost part of the cost.

Now, with regard to the profitability, you know, the overall profitability, I will show in the Analyst Day, during the Analyst Day, that we've already reached to, to, in the second half of the year, to a run rate in terms of our cost structure that will lead us to the Rule of 40. This is something that is really important to mention. We don't need to do anything else. We're simply going to see, every quarter, every year, some more leverage coming from the fact that revenue is growing, but only the variable part of our cost is growing, which deliver a huge leverage to our model.

Clarke Jeffries (VP and Senior Research Analyst)

Thank you very much.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Andrew Boone, from JMP Securities. Please go ahead.

Andrew Boone (Managing Director and Senior Equity Research Analyst)

Good morning, and thanks for taking my question. I wanted to go back to generative AI. As you guys bring this to market, can you talk about how you feel like your product will be differentiated versus the competition as we think about AI-generated site builders? Thanks so much.

Avishai Abrahami (CEO and Co-founder)

You're mentioning the AI. How is what we do in terms of generating websites, right? Is different than others. The one that we've seen until now are essentially doing the following, right? They take a template and generate the text for the template. Then they save that as a website. Essentially, they're using ChatGPT to write text and then just put it inside of a template. When we started, we did that, we're now doing with ChatGPT, we're doing it since last, I think November. With the ADI, we did it, of course, with algorithms that are less sophisticated, but even then, we didn't just inject text to template, we actually created layouts around the text, which is the other way around, right?

That creates a huge difference in what you generate, because when you fill text into a template, you are creating essentially artificial text that will fit the design. While in most cases, if you think about building a business, you do the other way around. You create your marketing messages, and then you create a design, right, to fit that. Visually, it creates a massive difference. Efficiency of those websites are very different. That is the first difference. The other difference is that if you think about it, since probably 1998, you could write text in a Word document and then save it as HTML, okay? Now you just build the website, and you wrote the text, and you have a very, very basic website.

Of course, you cannot run your business on top of that because it doesn't have everything you need to run a business. It doesn't have analytics, it doesn't have a contact form, it doesn't have e-commerce, it doesn't have transactions. You know, all of those are the platform that makes it into a real business. This is something that most of the tools, or all the tools I've seen so far, are lacking, right? They just build the page, which you could do in AI, with Word and just save it as HTML. That's another huge difference, right? The last part is the question of how do you edit? This is a very important thing. A website is not something that you create once, and you just publish it, and you never go back to it. You constantly have things to do.

You change products, you change services, you change addresses, you add things, you remove things. You need to add content, so Google will like you, and this is very, very important for finding your business on Google. And there's a lot of other things, right? So you need to be able to edit the content. Now, when it comes to edit content, you don't want to regenerate the website, okay? Which is the current flow you see in all of those things that fill a template, because it's no longer about filling a template, it's now about editing the content. And this is the thing that we spend so much money on doing, right? The back-end, the technology, the e-commerce, and then the ability to go in and point at something and edit it or move it and drag it.

Those are the things that created Wix, and those are, I think, still our differentiator. Even if you generated a template with ChatGPT, and it looks great, and for some magical reason, it actually fit your value, the marketing values that you want to put in your website, editing it is not going to be possible with the current technology they use. Then even more than that, the ability to have all of the applications on top of it, that you really need for a business, don't exist.

Andrew Boone (Managing Director and Senior Equity Research Analyst)

Thanks. The letter talked about a growing number of partners. Can you talk about the driver of that? I understood Studios to come, and so was that more product driven, or did you guys do anything different on the marketing side? Thanks so much.

Lior Shemesh (CFO)

In term of the growing number of partners, yes, it's both product driven, more than marketing. We need to remember that, we haven't really started with marketing campaign for partners. I think that we build a business that is close to a $500 million in a few years, without significant investment in marketing. Obviously, you know, now, when we have the complete solution, Studio, Wix Studio, we are going to invest more in marketing. You know, a, a different way to look at it is just, you know, open for us, much more opportunities in term of the growth. Most of the growth for partners is actually was driven by product.

Andrew Boone (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Brad Erickson from RBC Capital Markets. Please go ahead.

Brad Erickson (Senior Equity Analyst)

Yeah, thanks, guys. Just a couple follow-ups. I guess first, as you speak to the acceleration and the second half growth and kind of looking into next year, maybe just talk to the growth algorithm for bookings between subs and price, particularly as you lap those price increases. Second, just some housekeeping. Can you just, Lior, can you just speak to any FX changes that are assumptions that are contemplated in the guidance versus last quarter? Thanks.

Lior Shemesh (CFO)

Yeah. Look, everything with regard to the FX was, was not meaningful. I mean, there is, you know, a kind of a few hundred thousand or a $1 million effect of FX, so it's not really worth, you know, spending time over it. When we look at the second half of the year in term of the acceleration, obviously, the comp are different. Remember that Q1 of this year, the growth was about 10% over a very strong quarter of last year. We are benefiting from a different comp. On top of it, we are very encouraged to see the growth in our partners business and the growth of our Business Solution.

As, as usual, you know what we do when we provide the guidance, we see, you know, the cadence, we see the fundamentals that we have in front of us now, and based on that, we provide the guidance. It's simply just taking, you know, what we see right now and without taking into effect any, any upside, for example, from the launch of Studio. This is with regard to the acceleration.

Brad Erickson (Senior Equity Analyst)

Got it. Thanks.

Operator (participant)

Thank you. I'm showing no further questions at this time. I will now turn the conference back to the company for closing remarks.

Emily Liu (Director of Investor Relations)

Thanks, everyone. Thanks, Anton, for that. Thanks, everyone, for joining us today. Have a great day. Bye.

Operator (participant)

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