Earnings Call
Vtex (VTEX)
Earnings Call Transcript - VTEX Q3 2025
Julia Fernandez, VP of Investor Relations
Hello, everyone, and welcome to VTEX's Earnings Conference Call for the Third Quarter of 2025. I'm Julia Vater Fernandez, VP of Investor Relations. Joining me are Geraldo Thomaz Jr., Founder and Co-CEO; Ricardo Camatta Sodre, CFO; and for the Q&A, our Founder and Co-CEO, Mariano Gomide de Faria; and Chief Strategy Officer, Andre Spolidoro, will also join us. Before we begin, please note that today's remarks may include forward-looking statements. Actual results may differ due to risks and uncertainties described in our Form 20-F for the year ended December 31, 2024, and other SEC filings available on our IR website. We will also reference certain non-GAAP measures. Reconciliations to GAAP are included in our Q3 2025 earnings press release on our IR website. With that, I will turn the call over to Geraldo. Geraldo, the floor is all yours.
Geraldo do Carmo Thomaz, Founder and Co-CEO
Thank you, Julia. Good afternoon, and thanks for joining our third quarter 2025 earnings conference call. This quarter played out in line with the expectations we shared after Q2. Our business continues to show the hallmarks of a durable profit growth model, consistent execution, expanding margin and the gradual ramp-up of high potential revenue streams. Focusing on our consistent execution and expanding margins, profitability improved meaningfully this quarter. AI-powered support automations continue to deliver sustainable efficiency gains, driving our non-GAAP subscription gross margins above 80% for the first time. We also achieved a 16% non-GAAP operating margin. And in a seasonally neutral quarter, our non-GAAP net income reached $10.6 million, a 41% growth year-over-year. Our margin expansion reflects a deeper AI-driven transformation in how we operate. The most tangible outcome so far is in customer support, where automation has structurally reduced costs while enhancing service quality. The vast majority of the recent rep count optimization stems from these AI productivity gains in support, while the remainder reflects normal commercial adjustments to market demand levels. At the same time, we're partially reinvesting these savings into R&D, fueling innovation and future growth. Now expanding on our gradual ramp-up of high potential revenue streams, we're doubling down our 4 growth pillars: global expansion, B2B use case customers, retail media and Agentic commerce. Our global expansion continues to make solid progress. We are seeing rising demand for enterprise-grade composable commerce solutions, especially in B2B as global brands modernize complex operations and migrate from legacy systems. A highlight this quarter is continued progress with a multibillion-dollar U.S. enterprise implementation, a strong validation of our ability to serve large sophisticated customers globally. In Brazil, we expanded our enterprise footprint with wins such as H&M, Itau and Picpay, reinforcing our competitive strength even in more penetrated markets. Across Latin America, the environment remains cautious with longer decision cycles and slower top-of-funnel activities but our win rates remain stable, demonstrating the resiliency of our value proposition and our readiness to reaccelerate as macro conditions improve. On the product front, B2B commerce is emerging as a major growth driver, developed with an AI-driven design focused on automation, scalability and deep integration into enterprise workflows, we're leveraging our existing customer base to expand into B2B. For instance, Electrolux, a long-time B2C customer, now uses VTEX to sell spare parts directly to its service network. We're also pursuing flagship projects globally, including the migration of a large U.S. enterprise from legacy mainframes to VTEX. Success here would further validate our enterprise capabilities and open doors to new opportunities in the U.S. and Europe. While B2B today represents a mid-single-digit percentage of our revenue, the new U.S. deals are already roughly split between B2C and B2B, signaling a clear long-term opportunity. Retail media continues to stand out as a key growth driver, unlocking monetization layers for our customers. Following our strategic partnership with Globo, Brazil's largest media network, this quarter, we achieved another milestone with Electrolux, launching the first integrated campaign connecting Globo's digital reach with retail media placements across VTEX-powered stores. The campaign exceeded expectations, validating both the scale of the opportunity and the VTEX roles as the orchestrator of Brazil's first retail media ecosystem at scale. Finally, our AI transformation is redefining how we build and deliver software. VTEX sits at the center of first-party brand other commerce as a platform orchestrating price, promotions, payments, fulfillment, service and loyalty. As AI accelerates fragmentation across customer touchpoints, this orchestration becomes increasingly critical. The new theme aggregators such as the Agentic Commerce Protocol are routing demand to brand owner channels, reinforcing the need for a unifying platform like VTEX. And our outcome-based pricing already aligns incentives so that we win as we help our customers win in these new AI channels. Additionally, through our multi-tenant cloud-native architecture, VTEX represents the collective intelligence of billions of click streams and transaction signals across hundreds of enterprises. This unified aggregated data set, combined with our enterprise customer base enables models that can predict behavior, increase conversion and personalize experiences at scale. Unlike on-premise or single-tenant systems, VTEX is structurally advantaged to harness these network effects. And to make it tangible, AI is already delivering real business outcomes today. First, through data monetization with retail media. AI now enables our clients to turn their commerce data into a profit center, building their own retail media networks and generating high-margin revenue that can potentially double their margins over time. Our AI-driven recommendation and intelligence search features are already in beta with leading customers and results have been excellent. Second, through automation that cuts costs at scale, Weni by VTEX, our AI-powered customer support platform, helps retailers reduce after-sales services costs by up to 10x and in some cases, saving millions by automating over 80% of call center interactions. AI is also transforming how we operate, making us faster, leaner and more efficient across support, implementation and product development. We are investing decisively behind it, not as a feature, but as a full company transformation, an early demonstration in our subscription gross margin gains over the last year, resulting from our AI-empowered support. At the heart of our road map, we're seeking to power new AI agents to connect commerce, advancing conversational experiences and simplifying complex workflows through automation and semantic understanding. We're reshaping our R&D and our mindset to be fully AI-native because companies that don't embrace this shift risk being left behind, just like those that missed the cloud revolution. That's the foundation of the next chapter for VTEX, one built on innovation, execution and profitable growth. Shifting gears, our focus on driving solid and consistent commercial progress remains unchanged. This quarter, we celebrated several important go-lives from new customers, including H&M, Itau Shop and Picpay in Brazil, Cromantic in Colombia, Kep Italia in Italy, STIHL in Mexico and Etihad Arena in the United Arab Emirates. We also deepened our relationships with existing customers, showcasing the scalability of our platform across models and markets. Belliz company launched a B2B store in Brazil, expanding beyond the VTEX-powered B2C operations. It already runs for its Ricca, Kess, and Vertix brands. Casa Pinheiro has launched a new operation, Prosam, and now runs two B2C stores in Portugal. Johnson & Johnson launched the Johnson & Johnson MedTech store in Brazil, expanding its B2B operations in the region. A leading German home improvement retailer expanded into Austria, now operating in both Germany and Austria. And U.S. Electrical Services launched 2 new stores in the U.S., Walters Wholesale Electric and Lade Electric Supply, now running three VTEX-powered stores. Expanding our customer base through new wins and deeper relationships is central to our growth strategy. Each successful customer success case serves as a proof point that attracts future customers. Consistent delivery builds trust, which we amplified through visibility initiatives like VTEX Connect, our global flagship event series inspired by VTEX Day. This quarter, VTEX Connect LATAM in Mexico City solidified its position as the leading digital commerce event for Spanish-speaking Latin America with record scale over 20,000 registrations, 60 sponsors and more than 40 speakers, including Netflix Co-Founder, Marc Randolph. The event reinforced our brand leadership in the region and created new opportunities to deepen relationships and drive customer acquisition. Now to illustrate the process we are making on multiple fronts, let's highlight a few customer success stories from this quarter, featuring innovative brands that chose VTEX to accelerate their digital transformation, expanding into new business models and deliver superior experiences to their consumers. Etihad Arena, the Middle East's largest state-of-the-art indoor entertainment venue in Abu Dhabi's Yas Bay's Waterfront, partnered with VTEX to launch a fully headless mobile commerce solution that powers food and beverage ordering during high-profile events such as NBA games, UFC fights and world-class concerts. Designed to eliminate the long queue typical of larger venues, the app delivers real-time ordering and payment capabilities with zero tolerance for downtime. The app supports bilingual Arabic and English experiences and dynamically handles event-specific menus tied to each guest seating area, so orders are routed directly to the appropriate kitchen. By orchestrating every transaction end-to-end, VTEX enables Etihad Arena to offer a seamless high-performance digital experience for thousands of simultaneous users, setting a new standard for venue-based commerce and marking a strategic milestone in VTEX's expansions into the Middle East. Itau Shop, the marketplace integrated into the super app of Itau, Latin America's largest private bank, migrated to VTEX in order to power the next stage of its digital commerce growth. The initiative rebuilt the platform end-to-end to support faster expansion, greater reliability and an even better shopping experience for millions of customers. With a stronger and more flexible foundation, Itau Shop can now onboard new sellers more quickly, expand its product assortment with ease and handle seasonal peaks and launch campaigns with confidence and efficiency. Early results already show significant growth in the number of sellers, along with higher click-through and conversion rates and noticeable gains in overall performance. More than a technology refresh, this new chapter gives Itau the agility to introduce new services, loyalty programs and shopping benefits at speed, all while keeping the customer experience at the center and strengthening engagement and long-term loyalty. A leading German home improvement retailer selected VTEX as the backbone for its global commerce strategy to unify channels and accelerate international rollout, operating in Germany and now adding Austria. After consolidating its home market on VTEX's composable platform, the customer activated marketplace capabilities integrated with 350 store accounts under a single control plane and delivered a truly omnichannel journey with rapid options like 2-hour pickup. The result is faster time to market, greater developer autonomy and the agility to tailor features by country without disrupting core operations. This streamlined infrastructure and automated business logic equip them to scale efficiently across Europe, enhance customer convenience and innovate continuously, as highlighted by the leadership turning Austria into a blueprint for resilient high-velocity expansion. Picpay, one of the largest digital banks, has entered a new phase in its commerce strategy by integrating Picpay Shop, its marketplace into the app to VTEX platform, marking a major milestone in the company's evolution from an affiliate model to a fully integrated commerce ecosystem, previously limited to product showcases that redirected users to external sites. Picpay now allows customers to browse, purchase and complete the transaction entirely within the app, seamlessly positioning the platform as the unique hub where commerce and digital banking converge. In parallel, Picpay Ads powered by VTEX Ads enables brands and retailers to promote products directly within Picpay Shop, reaching a highly engaged audience at the moment of purchase. Acting as both technology and commercial partner, VTEX Ads integrates product catalog, ad inventory and performance data while leveraging its network to onboard new advertisers and expand Picpay's monetization ecosystem. This partnership combines Picpay's scale, financial intelligence and consumer reach with VTEX's Commerce and retail media leadership, creating a powerful new benchmark for convergence between media, payments and commerce in Brazil. Sephora, a global beauty retailer with a strong and loyal customer base, expanded its retail media strategy by becoming a publisher in the VTEX ads network, creating new opportunities for brands to reach a highly qualified audience. Building on its previous retail media experience, Sephora has transitioned seamlessly from its former setup to VTEX Ads, enabling makeup, skincare, fragrance and dermocosmetic brands to advertise directly within its digital experience, ensuring visibility across high-impact touchpoints. With this move, Sephora offers its partners a premium media environment powered by VTEX technology, turning its digital storefront into a performance-driven channel for brand growth and measurable results. U.S. Electrical Services, one of the largest electrical distributors in the U.S., is transforming its digital experience with VTEX to better serve customers and meet evolving expectations. With an extensive branch network and a highly diverse product catalog, the company needed a scalable platform capable of delivering seamless, consistent and personalized interactions across online, mobile and in-branch channels. By adopting VTEX, U.S. Electrical Services unifies its customer experience into a single connected environment, enabling real-time access to accurate product data, faster support and flexible fulfillment options from in-store pickup to delivery. This integrated approach creates a smoother, more intuitive buying journey that builds trust, strengthens loyalty and drives repeat business, while VTEX's flexibility allows the company to continuously introduce new services and stay agile in a rapidly changing marketplace. As the business continues to grow, VTEX will support them in delivering higher quality engagements and value-added solutions, ensuring the company remains customer-centric, competitive and future-ready. Before handing it over to Ricardo, I want to extend my appreciation to the 1,234 VTEXers across our global offices whose work is essential in shaping the future of commerce. I also want to thank customers, partners and investors whose trust and partnership continue to inspire us and propel our journey forward. With that, I'll hand the call over to Ricardo.
Ricardo Sodre, CFO
Thank you, Geraldo. Hi, everyone. I'm pleased to share with you VTEX's financial results. In Q3 2025, GMV reached $5.0 billion, up 13% in U.S. dollars and 12% FX neutral. Subscription revenue was $58.4 million versus $53.9 million in Q3 2024, an increase of 8% in U.S. dollars and 7% FX neutral. Given our Q2 performance, we had already adjusted expectations for Argentina. The country faced additional challenges in Q3, so performance was worse than expected with no signs of short-term recovery amid weak consumer sentiment. Moving north, Brazil performed in line with expectations, showing a modest deceleration of a couple of percentage points quarter-over-quarter. Within this context, in Q3, our non-GAAP subscription gross margin reached 80%, underscoring the success of the efficiency initiatives we've been highlighting over the past several quarters, particularly the continued deployment of AI-powered automation and customer support. These initiatives are consistently delivering structural gains in customer support productivity and cost reduction, reinforcing the durability of our margin improvement and the scalability of our business model. Our total gross margin, including services, reached 77.5%, an expansion of 270 basis points year-over-year. This continued improvement reflects not only the steady gains in subscription gross margin, but also the ongoing shift of services in our revenue mix as our global ecosystem of partners increasingly takes the lead in complex implementation projects. Our expense management continues to reflect our discipline and alignment with long-term growth priorities. Total non-GAAP operating expenses in the third quarter were $36.7 million, up 7% year-over-year and down 1% quarter-over-quarter, even though LatAm currency depreciation drove most of our expenses up in U.S. dollar terms. We delivered savings in S&M and G&A, and we chose to reinvest through R&D in innovation, product development and AI capabilities that strengthen our competitive position. In other words, while optimizing margins, we are building a more efficient engine for sustainable profitable growth. As a result, our non-GAAP income from operations reached $9.5 million, up from $7.6 million in Q3 2024, a 25% growth in U.S. dollars. This also represented a non-GAAP operating margin of 16%, an improvement of 230 basis points year-over-year. In short, our operational discipline continues to translate into stronger margins and a more profitable growth trajectory. Non-GAAP net income was $10.6 million in Q3 2025, up 41% year-over-year. This earnings step-up reflects structural profitability driven by operating leverage and efficiency gains and reinforces the sustainability of our model. These continued profitability gains keep showing up in our cash generation, which remained strong once again this quarter. Free cash flow for the quarter was $7.5 million, reaching a free cash flow margin of 13%. Our capital allocation strategy remains grounded in disciplined long-term value creation and efficient use of our strong financial position. We ended the quarter with approximately $200 million in cash, representing about 25% of our market capitalization. With a business that consistently generates positive free cash flow, we have the flexibility to fund innovation, pursue strategic growth opportunities and return capital to shareholders. Our priority remains organic growth, particularly through continued investment in becoming a multiproduct AI-driven platform, as Geraldo highlighted earlier. This may be complemented by selective M&A focused on accelerating capabilities that can scale across our customer base, such as the Newtail acquisition in Retail Media and Weni in AI-powered aftersales support. We continue to allocate capital with the same rigor that defines our operating model, investing where returns are measurable, risk-adjusted and accretive to shareholder value. We also maintain a disciplined and opportunistic approach to share repurchases. As of September 30, we repurchased almost $100 million of shares across 4 programs. Under the $40 million authorization approved in July 2025, we repurchased 4.5 million shares in Q3 at an average price of $4.14 per share, a total of $18.8 million. As we look ahead to the fourth quarter, our focus remains on disciplined execution amid a persistently complex macro environment. In Latin America, we expect the headwinds seen in prior quarters to continue. In Argentina, consumption may remain weak and highly volatile, while in Brazil, elevated interest rates are likely to keep pressuring demand and extending enterprise decision cycles. While top-of-funnel activity is softer than last year, our win rates remain stable and the quality of late-stage opportunities continues to reinforce our confidence in the long-term relevance of our platform. In this environment, we are using the current cycle to deepen our focus on 4 core strategic priorities: scaling in the U.S. and Europe, expanding B2B in our retail media products and accelerating the AI transformation of our products and processes. Supported by strong cash generation and expanding margins, these priorities position us to create sustainable long-term value even amid short-term volatility. With that in mind, for the fourth quarter 2025, we are targeting FX-neutral year-over-year subscription revenue growth of 5% to 10%, implying $65.8 million to $68.8 million. Additionally, we are targeting for the fourth quarter a non-GAAP income from operations margin in the mid-20s and a free cash flow margin in the high teens range. For the full year 2025, we are targeting FX-neutral year-over-year subscription revenue growth of 9.3% to 10.7%, implying a range of $234 million to $237 million based on October's average FX rates. We remain confident in our ability to reaccelerate our growth over the coming quarters and years through our commercial expansion into the U.S. and Europe and our product innovation in B2B, retail media and AI-powered solutions. With that, let's open it up for questions now. Thank you.
Operator, Operator
Our first question today comes from Marcelo Santos with JPMorgan.
Marcelo Santos, Analyst
I have two questions. First, I wanted to discuss the recent increase in R&D expenditures. At the same time, it seems the number of employees decreased by about 49. I would like to understand what your plans are regarding hiring and the reasons behind the employee decline. I want to connect these two aspects. My second question is about your churn trends. Has the market weakness in Latin America contributed to a higher rate of client disconnections, or is it more related to GMV and potentially longer cycles for closing new deals?
Geraldo do Carmo Thomaz, Founder and Co-CEO
Marcelo, this is Geraldo. I want to discuss our investment in research and development. We are continuing to invest significantly in R&D because we believe this is a pivotal time for the company and for the world, where technology and AI are transforming the commerce landscape. By 2026, we anticipate our R&D investment will keep growing, as we are committed to building the future VTEX platform. Our priorities are clear and focused on four main areas: AI transformation, B2B commerce expansion both within and outside of Latin America, retail media that enhances our customers' profitability and generates substantial revenue for us, and strengthening our core commerce foundation through AI. First, AI transformation is central to our initiatives. We are rethinking how we develop software and the types of software we create, moving from basic admin tools to a fully AI-driven environment supported by autonomous agents that streamline commerce processes from product onboarding to promotions and optimizing search and pricing. This approach will position us as the AI-driven backbone for connected commerce. Second, we are accelerating our investment in B2B, which we see as a significant global opportunity. We are creating a robust B2B platform that includes AI-assisted sales tools for a seamless digital experience between buyers and sales representatives. Third, retail media is becoming increasingly important on our strategic roadmap. We are assisting retailers in monetizing their traffic and data by establishing one of the largest retail media networks in Latin America, integrating various media types with AI to enhance personalization, recommendations, and tracking. Finally, we are reinforcing our core commerce and omnichannel platform, making advancements in areas such as semantic search, product recommendations, delivery timelines, and physical store integration to create a more intelligent and connected customer experience. Throughout all these efforts, AI is not just a buzzword; it is a crucial enabler for efficiency, growth, and differentiation. We are investing to lead this transition, similar to how we evolved into a cloud-native company a decade ago. In summary, our R&D focus aims to develop the next generation of VTEX, which will be AI-driven, outcome-focused, and equipped to shape the future of global commerce. Therefore, you can expect us to keep investing in R&D, Marcelo. Regarding churn, it is stable. The issue we’re observing is a slowdown in sales momentum, and I can provide further details if anyone is interested.
Mariano Gomide de Faria, Founder and Co-CEO
Marcelo, I can elaborate a little bit more on the sales. And on churn, as Geraldo said, it's Mariano here. So on churn, as Geraldo said, is stable. We are seeing more in the Tier 3, but the overall number of the company stays the same, not a point of attention here. In demand, we can elaborate a little bit more. The demand environment remained mixed, soft in Latin America, but resilient in U.S. and EMEA. In Brazil and across Latin America, high interest rates are lowering the consumer spending and continue to weight on activity. So we are seeing sales cycles are longer and overall bookings remain below last year record levels. That said, we are not losing deals to competitors. Decisions are simply taking more time and sometimes being postponed. Importantly, our customers remain engaged and retention is strong, and we're helping them to navigate this very, very challenged macro backdrop. At the same time, we are gaining share through new growth levers. B2B solution adoption in the region is picking up. And also our retail media platform and our AI support platform offering is helping retailers to monetize and make more margin. Their initiatives reinforce customer economics and deepen longer-term relationship between VTEX and our customers. Outside Latin America, demand remains resilient. The U.S. and EMEA continue to grow roughly twice as fast as the company overall, driven by our focused go-to-market strategy and the migration of large enterprises from outdated and high-cost legacy platforms. Roughly half of our new deals in the U.S. and EMEA are now B2B, validating both our position and product strategy. Competitively, our position remains strong. Our comprehensive product offers a unique advantage, B2C and B2B in a single platform. Against legacy providers, we win on modernization and cost efficiency. Against the market-moving competitors, we win on depth, composability and high-touch enterprise service. Our public company's credibility and consistent execution are helping us to secure large strategic deals with global brands. So while the macro environment in Latin America is still a headwind, pretty uncertain, our sales momentum and competitiveness remain solid. We see attractive opportunities in our global expansion, the B2B solutions use case customers, the retail media and the Agentic commerce. The foundations are intact. Our pipeline is healthy, and we are confident that we're building the right base for reacceleration as conditions continue to improve.
Operator, Operator
And our next question comes from the line of Maria Clara Infantozzi with Itau.
Maria Clara Infantozzi, Analyst
The first one is related to Argentina. Now that the elections are behind us and you're seeing more signs of macro stabilization, does this change anything on your outlook for the region? Can you comment briefly on how you perceive things evolving there, please? And the second question, more structural and qualitative one. If you could please develop on how you see AI investments leveraging the way you monetize your clients going forward?
Mariano Gomide de Faria, Founder and Co-CEO
Argentina continues to be a very challenging market for us, with high interest rates nearing 50% and inflation around 25%. The credit system is mostly frozen, and retailers are acting like banks, which is hindering the ability to fund inventory and consumer financing. This situation is primarily affecting our gross merchandise volume and revenue. After experiencing a significant downturn earlier in the year, our performance in Q3 fell short of expectations. Although the recent elections were positively received, there hasn't been a noticeable improvement in consumer spending, and we have limited visibility moving forward. We are taking a cautious approach to our operations in Argentina for the remainder of the year and are actively engaging with our customers on a weekly basis. The core issue is not the desire to spend, but rather the availability of credit. The reliance on financing is critical, and without access to affordable credit, consumer spending stagnates. We do not provide financing ourselves, so we depend on external factors for support. Concurrently, we are assisting our customers in protecting their margins and enhancing their competitiveness by demonstrating how AI can reduce operational costs. For instance, our AI customer support platform can streamline call centers, potentially saving over 1% of their revenue through improved efficiency and better monetization of their traffic. Additionally, we are witnessing a rise in new players, such as Chinese brands entering the Latin American market. We've already established relationships with brands like Midea in Brazil and aim to extend this success to Argentina as well. While Argentina poses challenges, we have a deep understanding of the market, maintain close relationships with our customers, and are gearing up to seize opportunities when conditions improve.
Geraldo do Carmo Thomaz, Founder and Co-CEO
Thank you, Mariano. Maria, I'll address the question about AI monetization. Monetization involves product positioning, and we also need to compare ourselves with competitors. It's a separate topic that we don't directly link to AI. For us, AI represents more than just a monetization source; it signifies a major transformation, much like the transition to the cloud over a decade ago. By rebuilding our platform for the cloud at that time, we surpassed our competitors and became the e-commerce leader in Latin America. We are approaching AI with the same urgency, ambition, and clarity. AI is transforming enterprise software, particularly in the commerce value chain. We believe this will enhance decentralized brand-owned channels, where VTEX has a structural advantage. Unlike marketplace aggregators, we enable first-party channels, empowering brands to manage transactions, data, and customer relationships. As new agentic models develop, directing demand to these proprietary channels, VTEX will be vital as the orchestration layer linking price, promotions, fulfillment, loyalty, and services across all digital touchpoints. Our product roadmap reflects this belief, as we are developing autonomous agents and AI assistants that automate crucial commerce workflows, from onboarding products and launching promotions to data analysis and logistics management. These agents will seamlessly integrate into our ecosystem, improving efficiency, results, and allowing users to concentrate on strategy. To illustrate, we are creating data insight agents for performance diagnostics and actions, a visual editor agent for storefront updates, book import agents, and developer-assisted agents. We're also creating an AI workspace, our next-generation admin experience aimed at making commerce operations outcome-driven, proactive, and personalized. Over time, this will change how merchants operate, reducing costs while improving conversion rates and time to market. Our multi-tenant architecture facilitates access to extensive research and development for commerce-specific data, enabling us to train and refine models at a scale that few others achieve. Additionally, we are embedding AI into our own operations to boost productivity, accelerate implementation, and cut service costs. This relates to Marcelo's question about the decreasing headcount; this reduction is due to our processes evolving to integrate AI. Therefore, this is not just product evolution related to monetization; we are undergoing a complete organizational transformation. Just as we became a cloud-native commerce leader a decade ago, we are now developing VTEX to serve as the AI-native backbone for connected commerce, which is outcome-driven, intelligent, and designed to assist brands in selling more, spending less, and operating more efficiently.
Operator, Operator
And our next question comes from the line of Vitor Tomita with Goldman Sachs.
Vitor Tomita, Analyst
Since the topic is already addressed, I would like to ask a few questions more about the free cash flow side specifically. Looking at what 9 months results and your Q4 guidance implied for the full year, am I correct in understanding that you remain confident on the prior expectation of high teens margin in income from operations, but have become a bit more conservative on the free cash flow side where you were anticipating high teens margin as well? And my second question also related to this, how are your initiatives related to working capital optimization or other cash flow drivers progressing, if there were any surprises on that area this quarter? And if we should especially, for example, expect CapEx to remain a bit higher than usual in Q4.
Ricardo Sodre, CFO
Ricardo here. Regarding free cash flow, I want to take a moment to discuss the Q4 and 2025 guidance in more detail, as well as profitability metrics. For Q4, our guidance presents a balanced and realistic outlook. While subscription revenue in October has increased more rapidly than in Q3, we are still experiencing ongoing GMV volatility. For instance, the Cyber Monday event in Argentina, which began this week, was weaker than anticipated. Due to this volatility and the uncertainty surrounding the holiday season GMV performance, we are providing a broader range for our Q4 guidance. Looking ahead, we are confident in our ability to accelerate growth over the next quarters and years. Our key drivers for this, as noted in the prepared remarks, include our commercial expansion into the U.S. and Europe as well as our product innovation in B2B, retail media, and AI-powered solutions. Each of these four areas is currently achieving over double-digit growth rates and has significant potential for further growth. Now, regarding profitability and free cash flow, we expect a solid quarter with a non-GAAP operating margin in the mid-20s and a free cash flow margin in the high teens. This reflects both the natural seasonality of Q4 and the structural efficiencies we have implemented through AI-powered support automation, alongside careful management of G&A and S&M expenses. On the matter of free cash flow, as discussed in previous earnings calls, our model is inherently front-loaded, meaning we typically bill customers upfront for the fixed fee portion of our contracts when new contracts are signed. Consequently, cash flow may vary depending on the timing and pace of new bookings, particularly as decision-making cycles in Latin America have lengthened, even though our competitive positioning and win rates remain steady. Looking at the whole year for free cash flow, we are trending toward the high end of mid-teens rather than the high teens, but for the quarter, we are in the high teens. For non-GAAP EBIT, we project mid-20s for the quarter and high teens for the year. Overall, despite a challenging environment, we are committed to reaccelerating our growth while also improving profitability metrics. We see promising opportunities in the U.S. and Europe, particularly in B2B, advertising, and AI, and we are actively pursuing these opportunities. Regarding working capital, this quarter's performance reflected the market environment. While we have effectively managed collections and reduced receivables, the prolonged decision-making cycles in Latin America have affected our deferred revenue. This is a timing issue and does not signify any structural changes due to our upfront annual billing model. Working capital can vary based on timing and booking pace. We continue to manage this with discipline, ensuring a balance between customer support and cash efficiency, and we expect conversion to improve as market conditions and new bookings stabilize.
Operator, Operator
And our next question comes from the line of Cesar Davanco from Santander.
Cesar Davanco, Analyst
I have a question regarding Brazil. It was mentioned that the total GMV FX-neutral growth in Brazil was in the low 20s, but there was a shift towards new and large enterprises, which lowered the implied take rate. Can you comment on these numbers for the third quarter and what you anticipate for the fourth quarter and beyond?
Ricardo Sodre, CFO
Yes. Happy to take the question, specifically on Brazil. So as I mentioned on the prepared remarks of the call, Brazil performed largely in line with expectations. Q3 unfolded largely in line with expectations, right? If you look at the number, we came slightly below the midpoint of the guidance in FX neutral and slightly above the midpoint in U.S. dollar terms. Argentina's performance was weaker than expected with no tangible signs of short-term recovery and Brazil was largely aligned with expectations and with a modest deceleration of a couple of percentage points quarter-over-quarter. So we were in the low 20s last quarter. This quarter, we were in the high teens. And all other countries were mostly aligned with expectations. So I think that covers it. If we look at Q4 for Brazil, we continue to see a high interest rate environment. So we would expect Brazil to be stable to slightly decelerating Q4 versus Q3.
Operator, Operator
And our next question comes from the line of Lucca Brendim with Bank of America.
Lucca Brendim, Analyst
I disconnected for a little bit. So I'm sorry if any of those have already been answered. So first, if you could give us an update on the U.S. operations, if everything is still on track or if there have been any delays with the larger customers that you're expecting at the start of the year? And then second, for the past few months, we have seen Nelly and Shopee announcing the launch of several official stores for some enterprise customers. Have you seen this having any impact on your operations? Have you seen GMV migrating for some of those official stores or something that has not impacted your operations?
Mariano Gomide de Faria, Founder and Co-CEO
We continue to see strong traction in the U.S. and EMEA. In the U.S., our focused go-to-market strategy is paying off. We are executing a defined playbook targeting large enterprises, especially those transitioning from legacy B2B platforms. This segment represents our biggest growth opportunity in the U.S. and EMEA, and it proves to be a wise investment. Our competitive edge is resonating. We combine the sophistication needed to replace complex legacy systems with the agility and composability required for modern enterprises. Currently, about half of our deals in the U.S. and EMEA are B2B, highlighting our strategy's effectiveness in leading enterprise commerce. We are making encouraging strides in both commercial and execution areas. The multibillion-dollar enterprise migration in the U.S. is progressing, serving as a significant validation of our capabilities. Global CIOs and CTOs are selecting VTEX for its comprehensive features. Notable recent wins include the KitchenAid e-commerce launch and the expansion of a U.S. electrical service with two new stores, showcasing both new client acquisitions and deeper engagement with existing customers. In EMEA, we are maintaining steady progress. This quarter, a significant DIY operation expanded cross-country, launching operations in Austria. Another example is the newly launched Etihad Arena in the United Arab Emirates, which reinforces our scalability across various regions and business models. Overall, our global pipeline remains strong, and we are experiencing continued contract momentum. Although we've achieved significant progress, we are still in the early stages of what we believe will be a lengthy trajectory ahead. Our offering as a complete and composable enterprise solution, combining B2B and B2C solutions on a single commerce platform, is gaining traction in the U.S. and EMEA. We are increasingly competing effectively and winning markets that were once dominated by legacy players. Regarding the marketplace context in LatAm, we view marketplaces as influential components of digital commerce, but not as existential threats. Brands and retailers will continue to prioritize maintaining their customer relationships. Marketplaces operate under a vertical model; they are the merchant of record, controlling data, logistics, and consumer relationships, while demanding significant fees of 10% to 20% of GMV. While this may provide convenience to customers, it can weaken brand equity over time. For brands using VTEX, marketplaces are one of the supported channels. The marketplace is thriving and helps drive volume for VTEX. As more companies enter the marketplace space, diluting the power of one or two marketplaces, this actually benefits platforms that facilitate operations as the underlying backbone. Our motto is to be the backbone for connected commerce. As more marketplace operators enter Latin America, VTEX strengthens its position as the backbone for brands operating in the region. Most of our electronics and home appliance brands in Brazil rely on VTEX as their core platform for marketplace channels. Additionally, VTEX powers proprietary brand owner channels, organic channels, first-party apps, and direct-to-consumer experiences where brands maintain control over transactions, margins, and relationships. The organic D2C go-to-market approach is not going away. D2C and marketplaces will coexist, and we believe that new technologies, such as AI and agentic commerce, will favor proprietary channels. We are also observing the emergence of new aggregators that create direct traffic and leads back to brands rather than taking full control of transactions, as marketplaces do. I am referring to the new AI tools that foster a more open ecosystem and enhance the value of platforms like VTEX as the backbone orchestrating transactions across these channels. This summarizes our perspective on marketplaces.
Operator, Operator
And our next question comes from the line of Madison Schrage with KeyBanc Capital Markets.
Madison Schrage, Analyst
I was just wondering, where does B2B sit in terms of your new logo pipeline today? And maybe what unique features is getting you guys to win those deals?
Mariano Gomide de Faria, Founder and Co-CEO
I can take. Could you repeat the question, please?
Madison Schrage, Analyst
Yes. I was saying in your new logo pipeline, how much of those would be B2B customers versus B2C customers? And then what's helping you guys build those deals?
Mariano Gomide de Faria, Founder and Co-CEO
Yes. Most of all, I believe the B2B is the B2B offering and the solution that we offer in the same platform. So it's the same product commerce platform that we offer B2C and B2B. And that's resonating as a comprehensive solution when companies want to migrate from their legacy systems to the new platform; they are now choosing a platform that provides the most comprehensive solution where they can explore multiple channels. So this is our main differentiator. We don't disclose on overall pipeline, how much is the B2B. What we are disclosing is that in the United States and EMEA, B2B roughly represents 50% of the deals that we are landing, including a multibillion operation that we are migrating from legacy systems. So as we established, we only disclose new clients when they go live, and I invite you to wait for the quarters to come where we can disclose more on the customers that we are putting live on B2B in those regions.
Madison Schrage, Analyst
Perfect. And then my second question for you is you guys obviously called out the customer support line utilizing AI to cut costs. I'm wondering how much costs are left to be taken out of that line item or if there are other areas that you guys think you'll implement AI to replace hats?
Mariano Gomide de Faria, Founder and Co-CEO
Thanks, Maddie. Happy to start on this one, and I want Ricardo feel free to chime in as well. So on the customer support, we started this in Q4 of last year, and we rolled it out over time, and we continue to do so. Most of the savings have been captured. We still could capture additional savings. But for very large Tier 1 customers, they still expect some level of personal engagement, not just through AI. And there are also complex support problems that usually a person needs to get involved and not fully AI. So there could be additional savings, but they need to go through these true challenges, let's say. But most of the savings have been captured at this moment from what we see.
Ricardo Sodre, CFO
Yes. I want to emphasize that our current focus is on enhancing quality and coordinating multiple agents to maintain our high level of customer support, which is recognized in the market. This recognition comes from Gartner, and we aim to uphold this standard while ensuring our operations remain efficient. Now that we have achieved efficiency, our priority is to concentrate on quality.
Geraldo do Carmo Thomaz, Founder and Co-CEO
Perfect. On R&D, I should add that, yes, as I said before, like we are working very hard on not only on what to build, what software should look like after the AI revolution, but on how we should build software after the AI revolution. And we, like everybody else, think that this should be much more efficient building software informed by the AI revolution. But our choice, at least right now, is to leverage this gain of efficiency to have more throughput, not less expenses. So that's where we're going with our R&D. Our customers, they need and they claim for a very comprehensive platform. There's always a lot of things that they ask us and we cannot do because of the lack of throughput, and now we hope that we expect that this revolution will help us a lot to serve them even better.
Operator, Operator
And our final question today comes from the line of Gustavo Farias at UBS.
Gustavo Farias, Analyst
I've got 2. So the first one on B2B, and of course, if you can disclose that, how does the LatAm B2B momentum compare to U.S. and Europe if those new B2B contracts are usually from existing or new clients? And the second one, maybe a follow-up on Mariano's answer to an AI question that was the previous question. I was wondering about the role of VTEX in this new agentic commerce. And I'm specifically talking about the new OpenAI commerce protocol. So if you could provide any color on the challenges as well as the opportunities you see coming from this new way of commerce, it would be very helpful.
Ricardo Sodre, CFO
Let's take a look at the progress in B2B. Our B2B solution is built on the same commerce platform that we already have, which is a significant strength for our operations. It allows customers to manage multiple channels very efficiently. Currently, our B2B solution is the most promising and strategic growth driver for VTEX. It enables brands already utilizing VTEX for their B2C channels to expand into B2B or B2B2C operations, reaching distributors and service networks all through the same platform. This represents a natural extension of our value proposition and presents a market opportunity roughly equal to that of the B2C market. We are starting to penetrate the B2B market in Latin America, which is somewhat lagging behind what we observe in the U.S. and EMEA regions. In those areas, approximately 50% of our pipeline is attributed to B2B solutions. On a global scale, B2B is emerging as a significant differentiator for VTEX. Large-scale transitions, such as those from multibillion-dollar U.S. enterprises moving from legacy systems to VTEX, underscore the clarity of our value proposition. Many enterprises still rely on systems that are over 20 years old, which are costly and inflexible, and not designed for the AI era. VTEX enables them to reduce operating costs by 3% to 5% of GMV while enhancing their speed and capacity for innovation. Our B2B solution is AI-driven, featuring agents that streamline catalog management, automate onboarding, speed up implementation, and coordinate orders across multiple channels. While it's still early in this journey, we are witnessing significant momentum. We view B2B as an opportunity for transformation that could greatly accelerate our growth, expand our global presence, and effectively double our addressable market over time.
Geraldo do Carmo Thomaz, Founder and Co-CEO
Yes. Yes, yes. So about the agentic commerce and the rise of the potential new aggregator, right, OpenAI or ChatGPT. So we see the rise of agentic commerce and OpenAI in general as a major opportunity to our customers and hence to us because in our view, it represents the next evolution of digital commerce, and it actually seems to strengthen the model VTEX was built for. OpenAI's approach looks more like Google and Meta acting as aggregation layers that direct leads and traffic back to brands and retailers rather than like Amazon, Mercado Libre, which own the full transaction and the opt-in of the consumer. That's critical because it reinforces the importance of proprietary brand-owned channels where VTEX is structurally advantaged. Our goal is clear. We're the backbone for connected commerce, the one that powers those channels. So we provide everything that happens after that. AI agents send the customers to the brand from pricing and catalog management, checkout, fulfillment services, loyalty, and services across all digital touchpoints. So even if AI becomes the new front door, the new aggregator that will expand in the next phase of e-commerce, VTEX will remain the operating system that runs everything behind it. So we are already preparing for this future. We're building AI agents and integrations that connect directly to new protocols like that one that you mentioned, just as we did in the past with marketplaces, social commerce, and other sales channels. And because our platform is multi-tenant and data-rich, we have this unique advantage in training commerce-specific models that can predict, personalize and optimize at scale. So we see agent commerce as a catalyst, one that makes VTEX even more relevant. It plays to our strength, aligned perfectly with our vision of being the AI native backbone for connected commerce and expands the ecosystem where our customers can win and where we can win with them. So we're very excited about this new channel.
Operator, Operator
And that does conclude our Q&A session today. So I will now turn the call back over to Geraldo Thomaz for closing remarks. Geraldo?
Geraldo do Carmo Thomaz, Founder and Co-CEO
Thank you for the great questions. As we look ahead, our conviction remains strong. VTEX is operating from a position of strength, a differentiated, scalable product architecture, a focused and experienced team and a strong balance sheet. We're confident in our ability to navigate short-term uncertainty while delivering long-term value through innovation, execution and disciplined growth. We remain focused on what we can control united by a clear vision. VTEX has proven its resilience not only by delivering consistent margin expansion and strong cash generation, but also by staying deeply committed to the long-term levers that will shape the next era of enterprise commerce. We're making tangible progress on those levers from our expanding international footprint where the U.S. and Europe represent an enormous opportunity to the ramp-up of new revenue streams like retail media and B2B and ongoing transformation shift as our transition to an AI-driven company. We believe that AI and agentic commerce are rewriting the rules of enterprise software. And at VTEX, we're not watching it happen. We're actively designing our platform, our organization and our future in the light of this paradigm. With a multi-tenant architecture, outcome-based model and a massive aggregated data set, we are uniquely positioned to lead in this next chapter. We're building a platform that not only powers commerce but increasingly executes. And we're doing it in a way that drives measurable outcomes for our customers and enduring value for our shareholders. We have the strategy, we have the technology, and we have the team. The opportunity ahead of us is exciting, and we are here to seize it. Thank you for your continued trust and partnership. We look forward to sharing the next milestones of our journey in the quarter to come. Have a great rest of the day. You may now disconnect.