Wix.com Ltd. (WIX) Q2 2026 Earnings Call Transcript

Good morning, and thank you for standing by. Welcome to the WIC's second quarter 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, please press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Emily Liu, Investor Relations. Please go ahead.

Thanks, and good morning, everyone. Welcome to Wix's second quarter 2026 earnings call. Joining me today to discuss our results are Abishai Abrahami, CEO and co-founder, Mir Zohar, president and co-founder, 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, except as required by law. 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.

Thanks, Emily. Finally, as I mentioned in our shareholder letter, our strategy is centered on deepening our ownership of the technology stack behind our AI products while expanding Wix's role across the AI ecosystem and throughout the entire user journey, from ideation online to fully operational businesses and deployed software. We're pursuing this through two distinct purpose-built paths rather than betting on a single outcome for how AI reshapes online creation. Wix Harmony continues to serve self-creators through visual drag-and-drop creation paired with AI. Base 44 serves a different and fast-growing motion, natural language, vibe-coded app, and software creation. Running both in parallel means we capture demand wherever the market evolves. We achieved a significant product milestone this quarter in support of this strategic priority with the introduction of Base 1, the first platform in its category to launch a proprietary LLM. Building this model in-house was a deliberate choice. It gives us tighter control over quality, faster iteration cycles, and a better long-term cost structure. It also means every interaction on the platform continues to compound into a proprietary data asset, one that keeps improving Base 1 rather than benefiting an external vendor's model. On the economics, Base 1 is also driving tangible margin improvement for Base 44. As we shift more inference to our own model and continue cost optimization work, we see AI-related costs fall across free and paid users, improving the base 44 gross margin from roughly 0% when we started the year to approximately 60% in the second half of the year. This trajectory reflects the business moving past early-stage hyper-growth economics toward a more sustainable, margin-healthy model with further room to improve. Base 1 also demonstrates what is possible when bringing together Wix's 20 years of expertise building and making complex technology accessible to everyone with Base 44's nimble and ambitious AI-powered workflow. The same data science organization that led the development of the Wix Harmony LLM, our first purpose-built AI model introduced earlier this year, was able to support the Base44 team directly with existing research, infrastructure, and experimentation capabilities achieved over years of AI development. This team, which I work closely with, played an invaluable role in the creation of Base One and was a major reason we were able to bring our model into production so quickly. With continued demand strength and now more control over the technology stack, powering the platform, we are doubling down on a strategy that has already proven successful. The vision behind Wix Harmony is focused on building AI and human collaboration into the core editing experience helping users generate refine and iterate on content while staying fully in control of the final result this reflects a broader principle behind everything we build as the market the technology and user expectations keep shifting our focus is to continuously evolve our platform to the needs of our users we've continued to make significant advancements in Wix Harmony as part of this ongoing commitment our focus now is execution leaning into opposition of strength to create products that generate real value for users and durable growth for Wix. With that, I'll turn it over to Nir.

Thanks, Avishai. I want to start with a quick overview of the growth trends we're seeing across the business, then explain how those insights inform our investment strategy. We continue to execute on our plan in the second quarter with steady top-line performance. Bookings grew 12% year-over-year, and revenue grew 15% year-over-year, driven by strong base 44 performance and continued growth in our core Wix business in line with our expectations with encouraging performance from Wix Harmony. As a result, year-over-year self-creators' revenue growth accelerated sequentially to 14% this quarter, underpinned by healthy business fundamentals including improving conversion from free to paid users, stable retention behavior, and a robust top of funnel. Partners revenue grew 17% year over year in line with the expectations we provided in early June. Encouragingly, we saw a step up in base 44 contribution to the partner segment in the second quarter as professionals increasingly leveraged AI and AI agents in their workflows and expanded their pipelines to include software creation. GPV in Q2 grew 3% year-over-year, driven primarily by the wind-down of our subsidiary InkFrog as part of our organizational realignment in June to refocus efforts on high-return products. InkFrog had moderate contribution to GPV, but low monetization. Its wind-down improves our mix towards better monetized GPV dollars, resulting in better take rate. After our June Outlook adjustments related to our partners' business, I want to make it clear that our partners' business remains a key area of investment and focus. We are already actively testing new solutions with our agency partners and believe that these solutions will align our platform with how the partners' and agency's ecosystem is evolving. turning to Base44, which continued on its strong growth trajectory in Q2. Top of funnel demand remained elevated with the newest cohort outperforming the previous one, while renewal activity led overall Base44 growth. Encouragingly, we continue to see more new and existing users choose annual plans as they increasingly trust Base44 for their software needs. Given the continued strong demand, meaningful product improvements, and the significantly improved margin profile of the Base 44 business, driven by Base 1, which Lior will speak to in more detail shortly, we plan to invest further into Base 44. As a result, we are raising our TROI target moderately, underscoring our confidence that the opportunity in front of us remains competitive but massive. Our priority is to aggressively capture base 44 market share as the AI-powered app creation space continues to be dynamic and growing, with strong belief that the strategic investments we're making today will drive sustained growth and market leadership over the long term. With that, I'll hand it over to Lior, who will discuss how we expect these priorities to flow through the financials.

Lior? Thanks, Nir. In the second quarter, we delivered continued solid top-line growth and continued to position the business for long-term success and free cash flow generation by innovating our platform and managing the business with discipline. You just heard from Nir about our strategic priorities and top-line trends, so I'll focus my remarks on the cost side of the business, where we drove strong execution on initiatives that I believe will create meaningful leverage over time. I am proud to say that we have delivered on a key initiative planned for this year. A company-wide priority for 2026 was to lower inference costs with our own LLMs. We started with our Harmony model earlier this year. Then in June, we launched our Base 1 model, which we believe structurally improves the margin profile of the business. And we are seeing immediate results. We now expect non-GAAP gross margin for base 44 to be approximately 60% in the second half of this year. This is a very significant improvement from the near-zero gross margin entering 2026. These cost savings are expected to translate into approximately two points of total non-GAAP gross margin improvement in the second half of the year versus the first half of the consolidated business. Turning quickly to the second quarter, let's start with gross margin. Our second quarter total non-gap gross margin was 67%, a slight increase sequentially, and down three points year over year. Our lower year over year total non-gap gross margin was driven by continued elevated investments in base 44 to support its rapid growth and elevated AI compute costs as we scale and maximize gross profit dollars. Our second quarter margin reflects stable growth margins in our core weeks business compared to the prior year period. Total non-GAAP operating income came in at 12% of revenue, primarily driven by continued higher levels of sales and marketing expenses in the quarter. Non-GAAP S&M expenses remained elevated in the second quarter as expected as we continued to accelerate marketing investments into base 44 in order to capture strong top-of-funnel demand trends throughout the quarter, while also seeing AI inference and compute costs associated with free base 44 users continue to increase sequentially. As Nir discussed, with the margin profile of base 44 fundamentally improved, we are going to lean into S&M expenses to capture increased demand. As a result, we plan to reinvest the entirety of the gross margin savings I just discussed back into sales and marketing activities. As a result, we anticipate third and fourth quarter sales and marketing activities to remain elevated as we now aim towards a moderately longer TROI, finally turning to our balance sheet. We ended Q226 with approximately $960 million in cash and cash equivalents and $1.63 billion in short and long-term debt. Let's turn now to the outlook for the third quarter and second half of 2026. We are maintaining our current guidance and continue to expect bookings to grow at a low teens percentage, lagging revenue growth by a few points, and revenue to grow at a low to mid-teens percentage on a year-over-year basis for the full year. We expect third quarter revenue to grow at a low double-digit percentage on a year-over-year For the full year 2026, we are maintaining our expectation for free cash flow margin, excluding acquisition and restructuring costs to be in the high teens. Our full year outlook assumes that the approximately two points of non-GAAP gross margin improvement in the second half in the consolidated business will be reinvested into Base44 sales and marketing through the rest of the year. This reflects our expectation that demand for Base44 will remain elevated, enabling us to capture additional market share as the business continues to outperform. We expect to offset this increased sales and marketing investment in Base 44 with lower AI costs and decreased marketing costs for core weeks in the second half of the year in line with seasonality and lapping the Super Bowl investments earlier this year. We expect R&D expenses to remain stable in the second half of the year compared to the first half as the FX headwind from a strengthening Israeli shekel offset savings from our organizational realignment. As a result, we continue to expect non-GAAP operating margin for the consolidated company to step up in the second half of the year, putting us on track to achieve our free cash flow outlook. In conclusion, our conviction in our near-term strategy and ambitious AI-focused product roadmap remains unchanged. The team is incredibly focused on executing our shared vision, and I am confident that key initiatives like Harmony and Base44 are the right areas of investment. We are utilizing this year to lean into our future growth and leverage AI across every function to drive higher output.

The decisions we are making today will pay off in the long term as we continue to build, refine and deliver products that capture additional market share and drive compounding financial performance for our shareholders operator we are now ready for questions thank you very much at this time we will conduct the question and answer session as a reminder to ask a question you will need to 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 wait while we compile the q a roster our first question comes from the line of ugal aronian of wetbush ugal your line is open hey good

morning, guys. I want to first dig in on Base One and the proprietary LLM, and maybe if you could expand on the product in general, you know, how it's built, but maybe if there's any quality trade-offs and potential for further AI cost improvements, compute cost improvements over time. Just to love to get a little bit more detail on that and then have a follow-up.

Well, of course. So base one is a model that we train in-house. It is a big part of the concept, is that we always keep training it based on what we see that works better for our users. And this is a lot where the secret sauce is. How do you know what is good? How do you know what is bad? Because essentially, every time you write a prompt in base 44, Or the model usually generates thousands or hundreds of thousands of source code lines. And we have to somehow know how to pick the good results as the bad results. So once you do that, we're able to push that back into the model and keep training it to continuously be better. Today, because of this approach, we're in a place that we can already see that the result of base one are better than any of the models that we have from a front frontier providers okay it's not better for everything I want to be very clear about it it's better for base 44 right but we do see a significant improvement and of course the cherry on the top is the fact that it also costs dramatically less and we think that this in a is part of a very long term strategy where we'll be able to continue and improve phase one as a result of

that a continuously improve one of the critical parts of base 44 making best 44 a better product okay great thanks and and can you maybe just give an update also on what you're seeing uh in in the partner ecosystem you know as more builds are going you know towards vibe coding and ai builds and how's the competitive environment changing around that as well maybe with base 44 in particular but just more more broadly and how um you know those that cohort is is building and starting uh sites and online experiences thank you

There you go. It's near. So I think I'm not going to go back to what we already shared, but I do want to talk like a more broadly on kind of the dynamics we're seeing. There's definitely you know more and more appetites also for the part on the partners ecosystem for AI solutions and AI products. We're seeing this across the board. We're seeing this obviously with the ones who are using Harmony on the Wix side, we're seeing that with more and more of them using Base44, some of which to create websites, some of which to create and build applications for their clients. And we're also definitely seeing it in those kind of conversations we're doing with all of our advanced beta testers on new products that we intend to release to the hands of the partners.

So I think from that standpoint, we're probably going to keep on seeing that. and our goal is to be able to deliver value you know across the the full portfolio of our of our products and offerings thank you guys thank you very much our next call comes from the line of Elizabeth Porter Elizabeth your line is open great thank you so much for the question I wanted to follow up again on the base 44 gross margin improvement which is really impressive so how much the expected improvement to the approximately 60% non-gap gross margin in the back half of the year has already begun to be reserved versus remaining kind of in the forecast period? And what percentage of inference traffic is currently running through baseline? Are there any constraints we should consider before broader deployment? Thank you.

Elizabeth, it's Lior. What I can tell you that the range that we provided for the gross margin, we already see it. I think that this is why we feel a lot of confidence about what we've managed to do. And it was not happening like in day one. It happened gradually over the last few weeks. But we've already started to see the increase in gross margin within the range that I already provided within my guidance.

Great. And then just as a follow-up, I believe BASE 44's earliest annual cohorts are approaching or starting to pass their first renewal period. So, just curious what you could say about the renewal behavior relative to some of the monthly cohorts or core WICs. And what are some of the cohort indicators that give you confidence that the BASE 44 ARR is durable? Thank you.

Yeah, Elizabeth, so yeah, you're correct. We are nearing kind of the first round of the annual renewals for Base 44, and naturally we're not there yet, so we're not ready to comment or speak about it. In terms of what we're seeing in terms of the monthly behavior on Base 44, you know, we commented on this in the past. Naturally, it is not at the same rate as Wix, which makes a lot of sense. Wix is a brand and a product that has been in existence for many years. We have a much higher annual rate there. People know the brand very well. That being said, we are seeing an improvement almost every month in terms of the behavior there. And we take all of that into consideration when we're when we are assuming our growth trajectory both for the ARR as well as how we spend our TROI so we have I would say we feel we feel comfortable great thank you thank you very much our next question comes from the line of Alexey Koglev of JP Morgan Alexey your line is open thank you hello Hello, everyone.

Can you hear me? Yes. Great. Thank you. I wanted to follow up on Elizabeth's question about traffic running through Base 1. Any update there? And generally, what are the biggest drivers of Base 44 demand right now? Maybe you can talk about user types or channels, and what indicators tell you that demand remains elevated? it?

Well, we already are running significant traffic on models that are not the classic frontier models. But saying that, we continuously now test what is the right balance and how to effectively use each model that we have. It's very complicated because we were always are trying to estimate what is the best model to solve that specific application that the user is trying to build. And that varies a lot. But I think that the interesting part is that ability to predict better which model to use is also improving. The biggest drivers for base 44 demand is actually the satisfaction of users from the application that they built. Because what we see is that when somebody is successfully building an application and is happy with what he built, he'll share it with his friends, he'll share it with co-workers, and that is the biggest driver of new users, in addition, of course, to marketing. Because of that, we are such big believers in the product quality that the better the product quality is, the better demand will become. And we've seen that in the early days of weeks, of course. So we are very familiar with this pattern of behavior. In terms of user times, Well, I would say about 40% of our users are trying to build personal projects and things that are related to their life or their personal goals in life. And 60% are business-oriented applications, people taking that to what they do at work. In addition, when you look at a business segment, you see a big variety. However, I want to maybe one thing to worth emphasizing is that we have more enterprises than we have at Wix. So we ended up having more large businesses on base 44 than we have at Wix. Beyond that, it's a big mix. And I think the fact that it's a big mix is a huge part of the strength of the product, just showing that it's versatile enough that it can be used by many kinds of people in many different scenarios. And that is a big way for us to appreciate the potential strength of Base44.

Thank you very much, Avishai. And just a quick follow-up, to what extent is partner activity migrating towards base 44, and how do you ensure that this increases total lifetime value rather than shifting revenue between those buckets?

Well, what we see now is a beginning, and it might be a big trend, but we don't know yet, right? It's very early. It's kind of hard to estimate how the world will evolve with different technologies, AI technologies, because it never happened before. What we can say is that we do see some partners that reduce their activity on Wix, and then a lot of them have increased their activity on Base 44. I want to be clear. It's not that people are just moving between Base 44 to Wix and Wix to Base 44. We see that also. people that use some of our competitors and agencies there are moving to base 44 and I'm sure some of our partners right have left and using different products in the in the vibe coding company in the vibe coding game and a offering so but but we do see this migration I think it will be very irresponsible for me now to try and predict our way to vote how it evolve in the next year but we update and when we have more information thank you very much of the same.

Thank you very much. Our next question comes from the line of Stefano Careers of a company. Stefano, your line is open.

Hi, I just wanted to follow up on that last question. As you see some partners shifting to base 44, can you talk about the difference in economics for someone that switches, maybe just on revenue or margin contribution? Thank you.

So it's very, I think this is the answer. There's no clear answer. It depends what they're doing. A lot of those partners actually ended up doing more heavy applications for their customers. In fact, in my conversation with partners, one of the things they were very happy about is that from building a website and charging $1,000, now they can build an application and charge $15,000 or $30,000, OK? And so I think, again, even for them, a lot of it is new, and it's being reshaped. But in terms of the general value in the economy side for weeks, there is that I would say at this stage, I would be pretty enderical, because you might build less projects, but more expensive projects, then you utilize more base 44 and then the result that is that our tech from that is a bit bigger however this is yet to be proven and we need to wait a few more at least months to be able to come back with a clear uh with a clear number yeah with regard to the uh to the margins i think that right now when we started to use base one um you know i think that uh right now base 44

is more or less, you know, the same profitability as many other software companies. I think that also there is a lot of, there is some, I believe that there is more room for improvement. So definitely, you know, the growth margin is, and profitability is much better than, you know, what it was like even just a few months ago.

Got it. Thank you. And just to follow up on the base one cost savings, Is that expected to only help base 44 margins, or can that help the rest of the company?

Well, go ahead. Base 1 used for base 44. We did the same thing, if you guys remember, with Harmony. And with Harmony, we also used our own LL model that we managed to reduce cost significantly. So you can say that we're using the same strategy across the board. And this is why we saw increase in profitability in the second half of the year compared to the first half.

Great. Thank you.

Thank you very much. Our next call comes from Josh Beck of Raymond James. Josh, your line is open.

Yes. Thank you for taking the question. I wanted to ask about the TROI framework. I believe historically it's been less than 12 months. and with the opportunity you see ahead you're kind of willing to to lean in so any um you know kind of metrics you can share on on how much you're willing to extend it is it at somewhat of a maximum point you know as we exit the year or is that something that could maybe flex up higher based on based on market conditions hey josh it's near so uh first of all you know this is a framework that allows us to, you know, to run investment into marketing what we deem is the right cadence and the right risk profile, so to speak, on the

investment. Sorry? With high discipline. Yes, with very high discipline. Now, to your question, is there a ceiling or a max? The answer is, right now, we think we deem this is to be in a very good framework, and we don't expect to to increase it necessarily anytime soon. Obviously many things can change over time that can benefit it, okay? Either whether it's gonna be more improvement on the gross margin, that can be something that's interesting for us. Adaptation of more into annual subscriptions on the Base 44 subscription, which will just drive more of the TROI forward, meaning that we collect faster. So there are so many different parts and moving parts throughout this, how we calculate this, that we definitely can make adaptations through it, but it's always through a very clear formula. So it's about us understanding how quickly we can get the investment back.

Okay, and then maybe a follow-up for Lior just on how to think about bookings, you know, if you look to last year, it kind of been within a point of revenue growth and obviously dipped about three points below. Is that a good baseline to kind of use as we model going forward until we maybe start to lap some of these changes? Any pointers on bookings or kind of any, you know, color on how we should think about modeling partners as well?

Well, at this point of time, you know, definitely you see in a 2026 situation where you see that revenue growth is higher than bookings from obvious reasons, but it doesn't mean that it will continue into 2027. It really depends on how fast we are going to generate more growth, for example, from base or from other new product that we are going to launch, meaning that if we see that we can get a new product, like a new funnel, more customers, generate more growth, base 44 continue under the same rate and even accelerate, for example. So, you know, it might be a situation where we see acceleration in bookings. So it's really, really hard for me to tell you that the same cadence actually will continue into 2027, it might change. I actually hope that it will change.

Okay. Very helpful.

Thank you very much. Our next question comes from the line of Ken Wong of Oppenheimer. Ken, your line is open.

Fantastic. Thanks for taking my question. I just wanted to kind of dig in on Josh's booking question just now. Any assistance in terms of thinking about that low teens booking trajectory in the second half? Is it kind of a dip and then re-acceleration, fairly consistent, both quarters, and then that spread between revenue and bookings of a few points, is that pretty consistent in both 3Q, 4Q?

Hey, Ken, this is Leo. So let's try to understand what is the reason first, and then I can answer you. The reason is we spoke about it before about partners. and we do see a situation where when we are going to deliver more kind of AI tools you know to our partners to try you know obviously to accelerate the growth in partners we are going to see more partners coming to base so it's hard for me to tell you about 2027 if it will continue the same way as I mentioned before I hope that that won't be the case but what's happening the second half of the year it's mostly because of partners and and obviously we are dealing with it right now the entire company is concentrated only on one thing to generate more profitable growth and we

are doing it through base but also through our new product at weeks you know we spoke about it before more tools to our partners definitely with harmony so i i certainly hope that you know that that it will change in 2027 but but it's too early for me to say okay understood uh and then just on the the revenue guide the the implied q4 number does seem to suggest a bit of acceleration there and the comp is still pretty tough and the bookings have been a little soft um in the first half so just the confidence in that 4q revenue number what's what's underpinning that leor

So, I think that the Q4 revenue, first of all, I don't see it much different than the Q3, meaning that I don't see acceleration in Q4 compared to Q3. But definitely, we see a lot of benefit coming mostly from base 44 into the numbers. so Q3 and Q4 revenue growth on a year-over-year basis more or less the same but I don't see acceleration Q4 compared to Q3 okay perfect thank you thank you very much our next call comes from the line of Robert Kulberth of Evercore Robert your line is open hi two questions please As partners use Base44 in place of Wix Studio,

just wanted if you could talk about a tad trade of Wix business solutions on a headless basis, maybe also just some early learnings from some of the headless initiatives you have with the LLM partners as well. And then just wanted to double-click on the GM profile in H2. I think you said one to two points of benefit, H2 over H1 from Base44 or the Base1 model specifically. But then you also talked about some AI savings in the rest of the business. So just wondering if you were to put that all together. Yeah, maybe you could give us a consolidated view of the GM improvement in H2, thank you.

Yeah, I will start with the growth margin and about the two points that you just mentioned. And then Avishai will continue with the first one, O'Neill. So with regard to the growth margin improvement in the second half, I said that it's going to improve by two points, and this is mostly coming from the savings that we see compared to the guidance we provided previously about base 44, meaning that the improvement in growth margin and the usage of the model of base one and the fact that it's, as Avishai mentioned, that it's even performed better. So we see that the usage of base 1 is even much higher and better than what we expected and faster. Therefore, we updated the gross margin as a result of that, meaning that we see a dramatic change in gross margin of base 44, and it's translated to a two-point improvement in the consolidated revenue, in the consolidated gross margin.

Hey, Rob, for the first part of your question, so, you know, as Avishai mentioned before, you know, partners, you asked about partners using Base44 instead of Studio. You know, the dynamics here, as Avishai said about, you know, partners and Base44 are very, very early. And it's very, you know, I think it's too early to comment about whether it's supplementing or it's actually additional. By the way, we are seeing some that are using both for different use cases, and I think that as time progresses, we'll probably have segmentation more and more of some partners and agencies that are sticking to one product, the other that are using different products for different kind of projects that they're doing. So I think it's early in this cycle. It's definitely an evolution of this segment, and it should be very interesting. Our goal is to try to be there and deliver the right value on whether they're trying to go one way or the other. By the way, to some extent, and the second part of your question was about headless, it also applies to headless. Obviously, in a world where there are more and more agentic solutions out there, we want people to be able to benefit. from the value of the business stack that's on Wix in a very easy manner. And this is what Headless is all about. It's something we're starting to see pick up, but, again, it's an early cycle. Obviously, it's aimed towards people who are more professional in their youth and what they're trying to build. And we're seeing traffic coming to this from various places over the Internet where the professionals are dealing and working with a genetic solution. It can be things that are coming from a topic, open AI, our own stack. And our goal is to definitely be there and add that to the portfolio of solutions that we offer the professional crowds.

I do think that in the coming few quarters it's going to become more and more clear exactly what is the preferred path for each and what each and with every one of them great thank you thank you very much our next question comes from the line of Navid Khan of B rally securities Navid your line is open thank you very much so I understand you guys are not updating the ARR for base 44 but just uh curious if the trajectory is uh is similar to what we saw uh you know between your last few updates and uh are you still taking share uh from level in the us are you still ahead there because i think that's something you pointed to before so that's my first question and then uh in terms of just the base 44 mix of monthly versus annuals can you just maybe talk about how that next looks like uh seems like you're getting more annuals versus monthly but any color they would be helpful thank you hey levin uh so for the the all uh as we said before this is not a kpi where we intend to report uh it's you know it's trending in similar manners as as before um in terms of what you asked about the mix of monthly and annual then uh yes i would say there's more adoption of

annual, but we're not in the place where we want to break it out to the exact numbers right now. For the Lavable market share in the U.S., you want to comment on that, Fischer?

Yeah, I think that it's important to say we are not taking shares from Lavable. We are inventing a new market together with Lavable. And we are competing on the percentage of that going forward. but I think it's mostly us supporting each other more than competing with each other by educating the market and educating people that the fact that they can now build applications themselves and invent products and actually make that manifest that in reality which was shocking for most people so I would say we more support each other than competing with each other yeah thank thank you guys yeah I must talk I think you had said that you were ahead of never but in terms of taking the share but not necessarily about what I think you're hard if you're trying to find the precise market split between us to lovable it's extremely hard they are a private company they report a number is based on metrics says that are not clear okay so it's very hard for us to distinguish marketing on their numbers from real numbers and I can say that our estimation is that in the more important market the United States we are ahead of them but to say by how much is again tricky we can only look at secondary metric says that we can measure on the internet I would say we're in a very good place. Great. Thank you, guys.

Thank you very much. Our next question comes from the line of Andrew Boone of Citizens. Andrew, your line is open.

Thanks so much for taking the questions. I wanted to go back to base one. Can you just talk about the improvements of the model? If we think about the trajectory of base one, should we really think about a parallel path with open source more broadly. So as we think about Kimmy K3, if we think about other open source models that have come to market, is that the right trajectory of what we see for improvements for base one, or how do we think about that? And then just connect that more broadly to what we're seeing in terms of conversion or retention. How do we think about the improvements of models with base 44, improving the overall business? And then secondly, just more of a bigger picture question. A lot of people think about frontier models and their progress and especially just the competitive threat from Cloud Code or other frontier-type models. How do we think about just the competitive mode, broadly speaking, for base one and open source more broadly versus what is the frontier as we think specifically about coding assistance? Thanks so much. All right.

So those are pretty different questions. The fourth one is base one, will it improve in parallel with open source models? So I want to be saying, first of all, the answer is yes, of course. However, I don't think that that is the most significant part of the improvement. For most of the applications that you want to build today, Kimi Free, GLM 5.2, 5.4, I think, and Cloud 5, Opus 5, or the latest codecs, they are all good enough for most applications, right? Because most of us don't do those complicated things that require that extra few percent in model intelligence, right? So for most of the application, the improvement that we need to make on base one are to build those applications better, okay? and it's a different thing. It's not about how we make it more intelligent in Hungarian poetry, right? Which is one of the things that, or on any other of those things, molecular biology, right? All those things that those frontier models are trying to push the envelope. A lot of what we need to do is how we make applications that people prompt. And a lot of the time, those people are non-professional developers, so they don't prompt them in a professional way, right? They're lacking or out of the definitions, they don't put all the information that you need. How do you make those base? I'll make base one better at solving those specific problems. And so, yes, we will benefit from continuation of development in the open source environment, absolutely. But the vast majority of the value will come from what we do and not from implementing the open source models. How does base one improve impact, conversion, and retention? I believe that was your second question. Well, obviously, if you come to base 44, and you prompt something, and you get a bad application, you're going to convert a lot less than if you went to base 44, type the same prompt, and get a better application. Even if you don't get a perfect application, in a place that you can now feel confident that if you start working and continuously to prompt, you'll get to what you want, that's already a dramatic improvement in your chances to convert. And we see that, we measure that, we have now a year of consistent measurements on that. We know that that's the case. So by improving base one, I'm confident we will continuously improve base 44 conversion which is why I'm so excited about it the other side of it of course is exactly the same for retention what is the competitive mode for best one and open source broadly based on team models that's a very long question I think that is beyond the scope of this conversation I'll just say my two cents and currently everybody is using exactly the same algorithm okay yes we do some engineering modification on top of it and and but but that's pretty much it so the mark is not huge okay for frontier models however they've proven in the past that they have the ability to innovate even within the same algorithm which is attention and base transformers right that's the algorithm that and and create new things so if they continue to do that they'll have some kind of a model. There is another side to that, is that there is a level where it doesn't matter, or legal action or government action will start preventing the evolution and release of new models. We see that we meet this, right, on security, cybersecurity issues. So I think that between, and the fact that for a lot of the times, the current model are already intelligent enough. So if you're a commercial model, a frontier commercial model, but for the task that your customers need, that extra intelligence that you've added are not significant, okay? It's very hard to justify prices. In other words, it's a very interesting conversation, I think, beyond the conversation of our discussion, but I think it's extremely important for the Western world to have really strong frontier models in the Western world and I really hope that those guys at OpenAI and Anthropic and Google will continue to innovate and drive fantastic products. Thank you.

Thank you very much. This concludes our question and answer session. Thank you for your participation in today's conference. You may now disconnect.