VTEX (NYSE:VTEX) Q1 2024 Earnings Call Transcript

VTEX (NYSE:VTEX) Q1 2024 Earnings Call Transcript May 11, 2024

VTEX  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by and welcome to the VTEX First Quarter 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’d now like to turn the call over to Julia Vater Fernandez, Investor Relations Director. You may begin.

Julia Vater Fernandez: Hello, everyone, and welcome to the VTEX earnings conference call for the quarter ended March 31st, 2024. I’m Julia Vater Fernandez, Investor Relations Director for VTEX. Our senior executives presenting today are Geraldo Thomaz Junior, Founder and Co-CEO; and Ricardo Camatta Sodre, Chief Financial Officer. Additionally, Mariano Gomide de Faria, Founder and Co-CEO and Andre Spolidoro, Chief Strategy Officer, will be available during today’s Q&A session. I would like to remind you that management may make forward-looking statements related to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events.

While we believe that our assumptions, expectations and projections are reasonable in view of the current available information, you are cautioned not to place undue reliance on these forward-looking statements. Certain risks and uncertainties are described in the Risk Factors and forward-looking statements sections of VTEX Form 20-F for the year ended December 31st, 2023, and other VTEX filings within the US Securities and Exchange Commission, which are available in our Investor Relations website. Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found in our first quarter 2024 earnings press release available on our Investor Relations website.

Now let me turn the call over to Geraldo. Geraldo, the floor is yours.

Geraldo do Carmo Thomaz Junior: Thank you, Julia. Welcome everyone and thanks for joining our first quarter 2024 earnings conference call. As we step into 2024, despite macroeconomics uncertainties, our GMV continue to outperform the market, growing 22% year-over-year. Slightly above that our revenue grew 25% year-over-year in the first quarter of 2024. We remain encouraged by new contract signatures and the operational leverage of our business model, resulting in significant operating margin expansion. In today’s retail landscape, seamless integration of software solutions, content creators and suppliers within an efficient architecture is imperative for low maintenance costs and rapid revenue generation. Commerce has evolved into an ecosystem-driven play and VTEX is at the forefront of connectivity.

With an extensive network comprising over 1000 system integrators and independent software vendors and over 6000 VTEX IO extensions by third parties, we deliver comprehensive solutions with remarkable speed and efficiency. Our ecosystem extends beyond that. Our customers can easily become marketplaces and connect to external marketplaces. Sales rep also play a crucial role in the consumer journey and we’re investing in connecting them across all channels. Additionally, this year we’re strengthening connections through data, leveraging AI to extract valuable insights. We envision VTEX as the source of true for sales attribution data, which is vital for developing AI models in commerce. At VTEX, we are delivering significant year-over-year operating margin increases while also launching products that reshape commerce for IT and business teams, driving sustainable growth with compelling ROI.

Introducing new revenue streams paves the way for our long-term expansion while enhancing operational efficiency and margins. We’re excited about VTEX’s future, focusing on growth, margin optimization and customer success. Positive feedback from customers and industry experts reaffirms our position as the global leader in connected commerce. We’re leveraging these strengths to drive significant sales momentum. Our recent expansion into Germany underscore our commitment to global growth, while sustaining sales momentum in Brazil highlights our long-term growth potential. In the first quarter of 2024, we celebrated successful go-lives of new customers, including Keune Haircosmetics Manufacturing in Belgium, the Netherlands and France, Arado, Cruzeiro do Sul, PetYard in Brazil, Tres Montes in Chile, OBI in Germany, PagineGialle Shop in Italy, KFC in Romania and HMart in the US.

Furthermore, we have strengthened our relationship with existing customers such as Grupo Soma, who added a new store in Chile, expanding its presence to more than ten stores across Latin America and the US. Hinode Group, who added a B2B store in Brazil, now operating both B2B and B2C models across two countries in LATAM. Hugo Boss, who added a new store in Colombia and Peru, increasing its footprint to four stores across Latin America and Nike, who added a new store in Colombia, extending its reach to three countries in Latin America. This year, VTEX achieved a significant milestone in its journey of growth and innovation by successfully launching the OBI operation in Germany. This move marks a pivotal moment in our commitment to the European market.

Talking about milestones, I would like to draw attention to a significant event in the first quarter of 2024 that happened right after NRF. VTEX Connect Live New York City made a resounding debut as the first US based event of its kind, drawing over 1000 influential in-person attendees eager to immerse themselves in the latest trends and strategy shaping digital commerce. The event was a hub of inspiration and network opportunities for commerce leaders seeking to navigate the evolving retail landscape. In addition to featuring the renowned entrepreneur and basketball Hall of Fame, Magic Johnson, our event included a panel discussion with Hearst. They shared insights into their decision to partner with VTEX, highlighting how this choice enabled them to significantly decrease their total cost of ownership transitioning from a TCO of high single-digits of their GMV to low single-digit with VTEX.

The event highlighted the significance of equipping retailers and brands with the essential tools in today’s high interest rate environment. As global interest rates remain high, business must optimize organic sales channels and enhance margins. The event demonstrated that VTEX strikes the balance between flexibility and low maintenance commerce technology, enabling its customers to stay ahead in the dynamic world of retail. Additionally, as mentioned, we started 2024 with strong momentum, with industry analysts firms recognizing VTEX as top performer. In January, we were recognized as the Customers’ Choice in Gartner Voice of the Customer for Digital Commerce. By February, we also earned the top spot in the IDC marketplace Worldwide B2C Digital Commerce Platform for Midmarket Growth Vendor Assessment study.

With this strong start, 2024 is shaping to be an even more remarkable year for VTEX. Now, let’s focus on what matters most, our customers. Here are just a few customer success stories that exemplify our platform capabilities and the remarkable outcomes they achieved. OBI, one of our new live customers this quarter is a titan in Europe’s home improvement sector, with more than 640 stores scattered across ten European countries with headquarters in January. By migrating away from their previous legacy platform and choose VTEX over the others, OBI can now leverage the VTEX composable and complete commerce platform, marketplace capabilities and unparalleled automation processes. OBI seamlessly integrated to its e-commerce operation 349 Germany located physical stores and third-party sellers into a unified transaction platform, expanding product offerings and providing customers with a seamless shopping experience across various delivery and pickup options.

With integrated physical stores nationwide, customers can now pick up online orders within just two hours, showcasing the platform efficiency and effectiveness in meeting consumer needs. Since migrating to VTEX, OBI has experienced significant enhancements, including unified franchise management, smooth ramp-up of platform traffic, improved front-end metrics and increased agility in development processes. This collaboration not only enhances OBI’s current operation, but also opens door to a world of future possibilities. It’s a testament to VTEX unwavering commitment to driving profitable growth and fostering innovation for enterprise brands globally. Cloe, the most relevant leather goods brand in Mexico, partnered with VTEX to lead through omnichannel strategies and its international expansion.

VTEX composable platform helped them reduce implementation costs and streamline processes. Among its standout feature, Personal Shopper emerged as a game-changer, offering customized shopping experiences. With VTEX’s innovative solutions, Cloe achieved remarkable results, a 14% increase in digital sales by the end of 2023. Standout features like Personal Shopper reduced returns and improved decision making while enhancing checkout performance and diverse payment methods boosted offline sales. Cloe’s e-commerce success, evidenced by a 60.5% conversion rate increase and a 12.5% growth in average order value, underscores the impactful collaboration between VTEX and Cloe. Future plans include adding the cross-border functionality for expansion into new markets and personalized experiences through Live Shopping, demonstrating Cloe’s commitment to continued growth and innovation.

Colgate partnership with VTEX is the embodiment of innovation in digital commerce. Recognizing a gap in the customer experience between dental professionals and their customers, Colgate got to work by building a unique B2B2C marketplace e-commerce model. With a network of consultants covering diverse regions, scalability of this digital transformation was vital. Colgate saw a platform accommodating complex B2B requirements, including a specialized login system for certified dentists and seamless integration with partners. Leveraging VTEX’s natives capability, Colgate developed a pioneering marketplace for dentists, offering integrated distributor products and fostering sales growth without logistical expenses, streamlining implementation and reducing costs.

Strategic enhancements like cashback promotions and a loyalty program further augmented its sales. Colgate started its operation with VTEX in Brazil and in the fourth quarter of 2023 it added two B2B sites in the US, PCA Skin and Colgate Professional, further leveraging our fully composable and marketplace enabled architecture. Dimak, a grocery distributor in Chile catering to over 24,000 customers across eight regions, partnered with VTEX to revolutionize their B2B operations. Embracing VTEX’s innovative solutions, Dimak embarked on a digital journey to tap into strategic growth opportunities by expanding its sales channels. With the launch of the B2B website, Dimak established a 24/7 online stores ensuring seamless access to their products for customers around the clock.

Utilizing B2B suite as the cornerstone of their architecture, Dimak implemented a closed website model offering product prices exclusively upon customers login, while leveraging essential tools such as checkout, catalog and OMS. With VTEX’s guidance, Dimak is streamlined its pricing strategy, condensing its price list from 600 to six tiers based on location and customer segment. Since the platform launched within swift four month implementation period, Dimak witnessed remarkable growth, experiences, a 10x increase in GMV and orders, doubling their conversion rates, and achieving a four percentage point boost in profitability compared to traditional channels alone. Hearst, the leading global diversified media, information and service company, chose VTEX for its extensive native capabilities, adaptable multi-site architecture and VTEX IO development platform, enabling the integration of custom features.

Leveraging VTEX, Hearst established a marketplace supporting multi-vendor business models, thereby seamlessly enhancing the customer experience across its publication and shoppable interfaces, facilitating the easy purchase of featured products. With VTEX’s out of the box features and flexible APIs, Hearst swiftly launched its platform and iteratively leveraged new business models in the digital economy. Furthermore, Hearst serves as the flagship customers piloting VTEX Data Pipeline and VTEX Fast Checkout currently undergoing AB testing for their Men’s Health website as the primary checkout experience. Interfood, a leading Brazilian beverage importing company with a global presence of over 100 locations, has been a satisfied VTEX B2C customer since 2020.

Recently, they chose VTEX also to power the B2B operations, unlocking a new realm of opportunities. Leveraging VTEX’s B2B Suite Tool, Interfood seamlessly integrated APIs to create microservices, streamline customers registrations and credit control processes for enhancing organizational management. Additionally, with VTEX IO apps, the VTEX team tailored tax requirements to match Interfood’s needs precisely exemplifying VTEX’s dedication to meeting and exceeding customer expectations. KFC, a quick service restaurant giant, selected VTEX in Romania to power their B2C operations. Seamlessly aligning with VTEX’s out of the box functionalities, KFC swiftly launched their website and mobile app for both iOS and Android, all from a single code base.

I am proud to say that VTEX team was able to adeptly tailor ordering and payment methods to meet KFC’s specific requirements and be ready to launch the products in only four months. Mezzo, a leading Brazilian dermo-cosmetics chain expanding nine states, partnering with VTEX to develop their B2C and B2B platforms. They swiftly launched two stores, Mezzo Cosmetics and Mezzo Professionals, leveraging seamless connectivity with physical stores and a unified data source for streamlining operations. Each franchisee account serves as a white label seller, representing individual physical stores and ensuring optimal inventory management across territories. Remarkably, the project was completed within a mere three months. New Balance, the global brand catering the sneaker enthusiasts, migrated to VTEX and doubled their website conversion rates in Brazil.

With their previous e-commerce platform, New Balance has struggled to deliver innovative experiences limited to basic sales journey due to high development costs and resource allocation constraints. VTEX composable platform, plug and play functionalities and extensive partners ecosystem caught New Balance’s attention. Once manual and labor-intensive, integration of pricing catalogs and XML automation became seamless with VTEX API integrations, empowering their teams to manage promotion and discounts autonomously. The migration to VTEX facilitated rapid results for New Balance’s e-commerce, which led to a significant increase in product page visits, doubled conversions and revenue growth within a month was post-migration. Before handing over to Ricardo, I want to revisit some exciting announcements from VTEX Day.

This year’s event boasted over 20,000 attendees, highlighting the impressive reach of the VTEX ecosystem. Some of the announcements included FastStore, empowering brands with agile front-end solutions for tailored store experiences, now available for both B2B and B2C use cases. VTEX Ad Network revolutionizing digital advertising through AI-driven targeting and auctions. VTEX Data Pipeline offering specialized APIs for seamless data retrieval and sharing. VTEX Shield, safeguarding against security threats and preserving revenue and trust. Along with AI-powered features across the Search Engine, Live Shopping and Pick and Pack operations, optimizing user experiences and boosting conversion rates and marketplace enhancements for streamlined operations and accelerated time to revenue.

This represents just a handful of the thrilling advancements we’ve revealed on our innovation and growth journey here at VTEX. We’re reshaping the commerce landscape with pioneering products specifically designed for enterprise customers and their IT and business teams. Our solutions empower IT teams with cutting-edge functionalities, while our intuitive interface empower businesses teams to implement strategies seamlessly. Ultimately, our products are geared towards optimizing end-user retention and attraction, boosting conversion rates, helping our customers optimize their e-commerce platform to amplify their ROI. Moreover, these products will open up new revenue streams for VTEX. While the short-term impact may not be significant, they could play a role in our long-term growth trajectory.

I’d like to take a moment to express my gratitude to our 1,334 dedicated VTEX employees whose unwavering dedication and commitment propel us forward as the backbone for connected commerce. I’d like also to thank our valued customers, partners and investors. I will now hand the call over to Ricardo.

Ricardo Camatta Sodre: Thank you, Geraldo. Hi, everyone. I’m pleased to share VTEX’s Q1 2024 financial results. As emphasized by Geraldo, our Q1 GMV hit $4.0 billion, marking a year-over-year growth of 22% in US dollars and 20% in FX neutral. This led to a year-over-year revenue growth of 25% in US dollars and 21% on an FX neutral basis reaching $52.6 million. Although macroeconomic conditions impacted the same-store sales of existing customers, the first quarter of 2024 witnessed relevant momentum in signatures of new annual contract value. That, coupled with significant gross margin improvements and a disciplined operational expenses approach, results in significant operational leverage and an encouraging sign for VTEX’s profitable growth trajectory.

Double clicking on our topline, our subscription revenue reached $50.4 million this quarter, up from $39.8 million in the first quarter of 2023, representing a year-over-year increase of 27% in US dollars and 23% in FX neutral, while our services revenue totaled $2.3 million. Now, moving down the P&L, we have exciting updates. We are pleased to announce the positive operational leverage achieved even with the inherently weaker seasonality observed in all first quarters. This performance instills confidence in our sustainable profitability prospects. Our non GAAP subscription gross margin reached 77.2% a 328 basis point year-over-year improvement compared to the 73.9% margin in the same quarter last year. This margin expansion underscores our team’s dedication to enhancing profitability and highlights our ongoing efforts to migrate non-core services to more efficient hosting providers and optimize support costs for operational leverage.

While we’ve made substantial progress, there are still further opportunities for marginal improvements going forward. Consequently, our non-GAAP gross margin reached 72.4%, representing a 641 basis points improvement year-over-year compared to 65.9% in the first quarter of 2023. Notably, our gross profit increased 37% year-over-year in the first quarter of 2024, reaching $38.1 million. Our non-GAAP total operating expenses reached $35.1 million in the first quarter of 2024 from $33.4 million in the prior quarter and $31.9 million in the same period last year. We remain steadfast in our commitment to controlling expenses and optimizing investment returns. Our expenses have remained notably stable throughout 2023 and the first quarter of 2024, reflecting our ongoing efficiency enhancements.

R&D and G&A expenses remained relatively stable quarter-over-quarter, while the increase in sales and marketing is mostly explained by special events such as NRF, and the previously mentioned VTEX Connect New York City. As a result, our non-GAAP operating income improved from a negative 9.7% margin in the same quarter last year to a positive 5.7% margin in the first quarter 2024. Given that expenses increased only slightly year-over-year, this significant 15 percentage points improvement is driven by our revenue growth with operational leverage and by gross margin improvements. This reinforces our dedication to managing our business efficiently, fostering growth responsibly and sustainably, and aiming towards reaching the Rule of 40. For the third consecutive quarter, and in a seasonally weak quarter, VTEX generated cash.

As of the three months ended March 31st, 2024, we had a positive $1.9 million free cash flow, compared to a negative $5.0 million free cash flow in the same quarter of the prior year. Looking ahead, despite the uncertain macroeconomic conditions, we remain encouraged by our sales momentum and operational leverage. From a revenue perspective, we are currently targeting $54.5 million to $56.0 million range for the second quarter 2024, implying a year-over-year growth of 18% on an FX neutral basis in the middle of the range. For the full year 2024, we continue executing our strategy for profitable growth, recognizing heightened productivity in Argentina’s macro situation, we are targeting FX neutral year-over-year revenue growth of 16% to 20%, implying a range of $234 million to $243 million based on April’s average FX rate.

Further demonstrating our operational leverage, we are targeting free cash flow and non-GAAP operating income margins of high-single-digits. We are excited about the future of VTEX. Our business model has proven its robustness and now our journey revolves around achieving business growth, expanding margins and generating cash. We anticipate in supporting our customers while extending our value proposition to more brands and retailers to help them reach their financial and operational objectives in a high interest rate environment worldwide. Our journey so far has been filled with rewarding moments and we are encouraged about all that lies ahead to solidify our position as a global backbone for connected commerce. With that let’s open it up for questions now.

Thank you.

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Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Thiago Kapulskis from Banco Itau BBA. Your line is open.

Thiago Kapulskis: Hi, everyone. Can you guys hear me here?

Geraldo do Carmo Thomaz Junior: Yep, we can hear you Thiago.

Thiago Kapulskis: Great. So, thanks, thanks a lot for the question. So I have two. So I think the first one regarding the full year guidance right, I mean, the nominal numbers are the same, right. But the FX neutral growth is lower than the previous guide, right. So, you guys mentioned Argentina. Is there anything else in terms of the business that is going different or doing different than your previous expectations? And if you could guide — if you guys could give us some color also in Argentina, if it’s just FX related or how the business is there in terms of overall strength? I know that this was a concern back in Q4 and the other question is about the AI products that you are providing. I mean, there’s a lot in the pipeline I think there was the shareholder letter too last quarter.

So if you guys could comment a little bit more on the roadmap that you have and how you think this could actually enhance your strategy or future opportunities that could come from your strategy there? Thank you.

Ricardo Camatta Sodre: Great. Hi, Thiago. Ricardo Sodre here. Happy to take the first two questions on the full year guidance in Argentina, and I’ll pass it over to Geraldo to talk about AI. So, on the guidance for the full year, we are maintaining our annual guidance in dollar terms as you mentioned. This is supported by steady and robust performance observed in key markets such as Brazil, Colombia, Mexico, the US and Europe. And although consumption in real terms is being severely impacted in Argentina, which impacted our FX neutral guidance, given that there hasn’t been any significant change in the FX rates in Argentina over the past couple of months that also led us to maintain our revenue guidance in US dollars for the full year.

And it’s important to recognize a certain level of risk in our guidance considering the volatility associated with the situation in Argentina, especially in Q2, given one, their current macro situation and consumption level, and two, their most relevant e-commerce event of the year called Hot Sales that will happen next week in the midst of these uncertain environment that they’re going through. Now going back to things that are under our control. Looking forward, we are encouraged by our meaningful new contracts sales momentum and on the operating margin front encouraged by our Q1 achievements we have also adjusted our full year operating income and free cash flow margins guidance, raising our forecast from mid to high single-digits that we mentioned last quarter to high-single-digits that we gave this quarter.

So, these adjustment reflects our unwavering confidence in our ability to navigate and improve our financial performance throughout the year and then just double clicking on Argentina. The macroeconomic situation in Argentina is challenging while FX rates have remained stable over the past few months. This stability has come at a cost of significant economic slowdown. Even though this slowdown was by design to control inflation, the extent of the decline in consumption has been severe and predicting the trajectory of this environment is difficult, as you can imagine, and it remains beyond our control. So with that said, our performance in Argentina, although weak, stands out as significantly better than the overall e-commerce market and other e-commerce reporting companies, largely due to the resiliency of our customers.

For instance, if we look at Q1 performance on a year-over-year basis, our GMV increased above inflation in local currency and was down only single-digits in US dollars. Now, nonetheless, it’s important to acknowledge the high level of volatility in this situation and that the situation may get worse before it gets better. And then finally, it’s important to point out that Argentina’s performance was the most relevant driver responsible for our Q1 revenue being closer to the bottom of the guidance and also the most relevant driver responsible for us reviewing down our FX neutral annual revenue growth guidance. With that, let me pass it over to Geraldo on AI.

Geraldo do Carmo Thomaz Junior: Thank you. Thank you, Ricardo. Thiago very good question. You know, like there’s been this revolution about using AI as a new building block, right. We’re getting so many new capabilities being created by LLMs and models and stuff like that. And we believe that VTEX is uniquely positioned to leverage these building blocks and give business meaning to the retailers and manufacturers and brands in the world. So that’s why we’re investing so much and leveraging the building blocks that people are creating all over the world. And you can see that I invite you to explore our latest VTEX Vision, Spring 2024 edition. We talk a lot about the things that we did and the roadmap that we are heading to and we have product launches that are around four key directives, more than that, creating fast and high, converting composable experiences, empowering sales reps across all channels and ensuring faster and efficient fulfillment.