Earnings Call Transcript - VTEX Q4 2023

Operator, Operator

Good afternoon. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the VTEX Fourth Quarter 2023 Financial Results Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Julia Vater Fernandez, Investor Relations Director

Hello, everyone, and welcome to the VTEX Earnings conference call for the quarter ended December 31st, 2023. I am Julia Vater Fernandez, Investor Relations Director for VTEX. Our senior executives presenting today are Geraldo Thomaz Jr., Founder and Co-CEO; and Ricardo Camatta Sodré, Chief Financial Officer. Additionally, Mariano Gomide de Faria, Founder and Co-CEO; and Andre Spolidoro, Chief Statutory 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 of 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 assumed expectations and projections are reasonable in view of the corporate 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's filings within the U.S. Securities and Exchange Commission, which are available on 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 fourth quarter 2023 earnings press release available on our Investor Relations website. Now, let me turn the call over to Geraldo. Geraldo, the floor is yours.

Geraldo Thomaz Jr., Founder and Co-CEO

Thank you, Julia. Welcome, everyone, and thanks for joining our fourth quarter 2023 earnings conference call. In reflecting on our performance throughout the year, it's evident that despite navigating a persistently uncertain macroeconomic landscape, we have consistently surpassed expectations quarter after quarter. The fourth quarter of 2023 was no exception with GMV and revenues growing 28% and 34% year-over-year in U.S. dollars, respectively. Our performance is a testament to the resilience of a sticky enterprise customer base, which affects net same-store sales and net revenue retention reached 15% and 107%, respectively, in 2023 and the successful onboarding of new customers onto our platform. Beyond our robust top line performance, our business model also came to the forefront as demonstrated by our operational leverage that Ricardo will cover later on. In our history, we've built strong long-lasting enterprise customer relationships. As evidence, we increased the number of customers with annual recurring revenue above $250,000 to 126, up from 94 last year, and these customers increased their online store count to 692 from 557. Additionally, we increased our global presence to 43 countries from 38 last year. Our continuous progress in the top-tier customer base not only highlights our commitment to enterprise customers, but also our product market fit around the globe. This year, we have achieved significant commercial milestones. Some of the net new customers that went live on our platform were BeautyCounter, CornerUp, Hearst, Kayser-Roth and crafted items made in the US. Rainblue in Canada and offshore 100 Beauty in Europe. We also have expanded with existing customers such as Colgate, Motorola, Unilever and Whirlpool to many countries around the globe. Additionally, we've added customers during Q4 of 2023, including Biscoite, John, Obabox, Osklen, and Tiffany in Brazil; Mega in Colombia; Macondo in Italy; 7-Eleven, Chapur and Voit in Mexico; Hunter Douglas in Netherlands; Yape Market in Peru; and Hearst and ShopHero in the US. During the fourth quarter, several premier brands and retailers chose to expand their operations with us, opening new stores and further integrating with us. This includes Carrefour, who added a new store in Brazil, Atacadão, now operating seven stores in Latin America; Colgate, who added a new store in the US; PCA Skin, now operating in Brazil and the US, both with B2C and B2B models; Motorola, who added a new store in Ecuador, now operating in 20 countries across North America, Latin America, and EMEA; Oshkosh Corporation, who added a new store in the US; and Probeauty, who added a new store in Romania, now operating both B2C and B2B stores in Romania. In 2023, we achieved remarkable milestones in the digital commerce realm. We started the year being recognized as established in Gartner Peer Insight Voice of the Customer, digital commerce. In the second quarter, IDC acknowledged us as a major player, and we achieved medals in all 24 categories after 2023 paradigm B2B combined being the exclusive vendor to secure a gold medal for marketplace product capabilities. In the third quarter, we were named a Visionary in Gartner Magic Quadrant for digital commerce and became the only vendor ranked in the top 5 for all use cases into 2023 Gartner critical capabilities for digital commerce reports. In the fourth quarter, we were recognized as a leader in IDC's market scale, worldwide mid-market growth B2B digital commerce applications 2023-2024 vendor assessment. VTEX was also recognized by the ecosystem. We were honored as the Global Industry Partner of the Year in Retail and Consumer Packaged Goods at the 2023 AWS Partner Awards and received the best interface developer portal at the Devs Portal Awards 2023. This underscores our commitment to reshape e-commerce through innovation and collaboration. We're thrilled to share that 2024 started strong. In January, VTEX was recognized as the customer choice in 2024 Gartner Voice of the Customers for Digital Commerce. According to the report, 98% of our customers expressed willingness to recommend our e-commerce platform. This month, we were recognized as the top leader in IDC MarketScape: Worldwide B2C Digital Commerce Platforms for Midmarket Growth Vendor Assessment Study, rated the highest out of 25 vendors, we stood out for our comprehensive solutions and strategic focus on B2C excellence. We are proud of all the recognitions we received throughout 2023, and it fuels our dedication to pioneering solutions that empower businesses for lasting success. Continuing our commitment to fostering our ecosystem and offering our customers the most comprehensive solutions, we're thrilled to announce that in the fourth quarter, we've launched a strategic partnership with Dynamic Yield, a Mastercard company and a leading pioneer in personalizing customer experiences. We're jointly developing a VTEX native innovative app that aims to integrate with Dynamic Yield's cutting-edge customer experience optimization platform. In an ever-evolving landscape, we seek to empower our customers to leverage Dynamic Yield’s AI-driven tools to optimize engagement, lifetime value, and revenue generation. Together, we aim to empower brands to easily build tailored experiences that resonate with each individual consumer, leading to enhanced standards of customer engagement and commerce success. Before leaving this stage to Ricardo, I would like to share some customer success cases, demonstrating our platform's tangible impact and potential. Our customers are at the core of our organization, and their success will always remain our focus. For instance, leading brands in innovative room appliances faced the challenge of lacking physical stores and developed adaptive stores with a digital experience at the 2023 Home Fair, a crucial event in the Colombian consumer calendar. These stores set up at specific events featured kiosks and a sales team equipped with the VTEX subaccount, offering customized catalogs and inventory. The innovative approach resulted in a 73% sales increase compared to 2022, with the pickup point contributing 30% of total sales and a remarkable 84% growth in units. This success demonstrates the effectiveness of the digital strategy and the integration of sales apps for an enhanced customer experience. Motorola faced significant challenges managing its multiple commerce platforms, leading to high maintenance costs. By migrating to VTEX, Motorola streamlined operations and accelerated the establishment of new stores globally, leading to a remarkable 20% annual growth in their e-commerce business. Jeffers Pet, the leading US animal health and supply company, expanded its operation through VTEX, now managing one physical store and two websites after launching their second site with over 4,000 SKUs, benefiting from custom site adaptations for detailed pet registration and subscription strategies. Flamingo, a retailer with over 40 stores across Colombia, partnered with VTEX to expand online payment options by integrating their widely used private label credit card, which now represents over 60% of their digital sales, significantly improving their user experience. The largest tool company recognized the immense potential of implementing a self-service platform through VTEX, which expedited user ordering experiences across three business units. By migrating to VTEX, they merged their traditional e-commerce site with B2B operations, providing a user-friendly journey across both segments. To conclude this section, I would like to express my gratitude to our 1,277 VTEX employees dedicated to making VTEX the backbone for connected commerce, as well as to our customers, partners, and investors. I will now hand the call over to Ricardo to discuss our financial performance for the quarter.

Ricardo Camatta Sodré, Chief Financial Officer

Thank you, Geraldo. Hi, everyone. It's a pleasure to be here to update you on our financial performance for the fourth quarter of 2023. In the last quarter of the year, our GMV reached $5.4 billion, representing a year-over-year increase of 38% in US dollars and 30% in FX neutral. With this, we concluded the full year 2023 with $16.5 billion in GMV, representing a growth of 30% and 25% in US dollars and FX neutral, respectively. Our same-store sales in 2023 reached 15% in FX neutral on top of 17% from 2022. Despite the slight decrease in same-store sales compared to 2022, the upsell of new features to existing stores and inflation adjustments contributed to a net revenue retention increase to 107% in FX neutral in 2023 compared to 105% last year. New stores added throughout the year, especially for customers paying us more than $250,000 per year, helped us achieve a solid GMV performance. Our revenue reached $60.7 million in the fourth quarter of 2023, a year-over-year increase of 34% in US dollars and 25% in FX neutral. This contributed to our full year 2023 revenue of $201.5 million, showing a 28% growth in US dollars and 24% on a FX-neutral basis. The performance against guidance was driven by better than expected FX fuel performance during October and November, as well as the appreciation of Latin American currencies against the US dollar. Subscription revenue reached $58.3 million in Q4 2023, an increase of 36% in US dollars and 27% in FX-neutral from $42.7 million in the same quarter last year. For the full year, subscription revenue reached $190.3 million, up from $148.5 million in 2022. Existing stores' revenue increased to $146.0 million, with our net revenue retention reaching 107% in FX-neutral. Despite challenges in the retail market and slightly lower same-store sales, our upsell efforts resulted in increased revenue retention. We also attracted new stores, adding $27.7 million in revenue to our base, representing approximately 20% of our 2022 VTEX platform revenue. Our sales efficiency improved slightly compared to the previous year, demonstrating the effectiveness of strategic measures implemented in 2022. Consequently, our LTV over CAC ratio remains strong, exceeding the 6x mark. We continue expanding our geographical reach, with revenues outside of Brazil accounting for 46% of total revenues. In 2023, Brazil, Latin America (excluding Brazil), and the rest of the world grew 23%, 21%, and 37% year-over-year on a FX neutral basis, respectively. It's important to note that all figures presented are on a non-GAAP basis. You can find the reconciliation of those measures to the nearest comparable GAAP measures in our fourth quarter 2023 earnings press release available on our Investor Relations website. In Q4 2023, our subscription gross margins saw a significant increase, reaching $45.8 million, representing a margin of 78.6% compared to 73.5% in the same quarter last year. We expect to see less significant year-over-year subscription gross margin improvements going forward. As a result, we have achieved a 74% gross margin, representing a year-over-year expansion of 562 basis points. In Q4 2023, total operating expenses decreased to $33.4 million from $34.1 million, demonstrating our disciplined approach to expenses over the past two quarters. We committed to achieving our sustainable breakeven point on operating income and free cash flow by Q4 2023 and surpassed our initial projections, accomplishing these milestones a quarter earlier than anticipated. In Q3 2023, we reached a positive 3.4% operating margin and a positive free cash flow of $2.7 million. Now, in Q4 2023, we achieved a positive 19% operating margin and a positive free cash flow of $9.5 million. For the full year, our operating margin reached 3.8% and free cash flow of $3.8 million. This demonstrates our dedication to sustainable growth, positioning us ahead of our target financial milestones. Our Q4 2023 performance showcases the operational leverage inherent in our business model, laying a solid foundation for future growth. For example, our subscription gross margin reached 79%, slightly below the 80% target model, while our overall gross margin stood at 74%, closely in line with our 75% target model. Expenses in selling and marketing, research and development, and general and administrative were 23%, 20%, and 11%, respectively, aligned with our target model. Consequently, our EBITDA margin reached 19%, also close to our 20% target model. Given our 25% FX-neutral revenue growth, this translated into a rule of 44%, exceeding the 40% target model. However, our Q4 results are strongly supported by seasonality. Although this performance demonstrates our operational leverage and a clear path to sustainable growth, we are still a few years away from reaching our target model on a yearly basis. Before moving to our Q1 and full year 2024 outlook, I would like to remind the audience that from a business perspective, our P&L reflects a combination of two P&Ls: existing stores and new stores. VTEX's existing stores revenue, excluding our SMB platform, represented approximately 80% of our revenue, while new stores, also excluding our SMB platform, accounted for around 20%. The operating margin from existing stores increased from the low 20s in 2022 to the mid-30s in 2023, while operating margin losses from new stores improved by 74 percentage points. 2023 served as the initial clean year following our organization restructuring and efficient growth plan initiated in May 2022. While we anticipate ongoing margin expansion due to operational leverage, we believe we have attained a normalized operational level for the demand from the market. Regarding the share repurchase program approved in August 2023, as of December 31, 2023, no balance is available for share repurchase under this authorization. We purchased 1.9 million shares at an average price of $5.41 per share. Considering repurchase since August 2022, total shares repurchased reached $10.7 million at an average price of $4.48 per share, totaling $48 million. As we move forward with our business outlook, it is essential to note that macroeconomic conditions remain uncertain. While we've seen stabilization and slight improvement in our sales cycle, they have not yet returned to normal duration. Despite these challenges, we remain confident in our ability to help our customers outperform the market while controlling our costs and generating operational leverage. Given the current macro conditions, we target revenue in the $52.5 million to $53.5 million range for Q1 2024, implying year-over-year growth of 22% on an FX-neutral basis at the middle of the range. For the full year 2024, we are targeting FX-neutral year-over-year revenue growth of 18% to 22%, implying a range of $234 million to $243 million based on January's average FX rate. We expect free cash flow and non-GAAP operating income margins to reach mid-to-high single digits. With that, let's open it up for questions now. Thank you.

Leonardo Olmos, Analyst

Hi, good evening, everyone. Congrats on the results once again. So my question is around the employee requirements the company may have versus growth. I wanted to know if the guidance of mid to high single digits of operating margin is correlated to your lower growth expectations or deceleration expectations on an FX-neutral basis for 2024. What happens if you accelerate—if you deliver additional growth as you grow in 2023? Do you think your operating margin would be lower? Thank you.

Ricardo Camatta Sodré, Chief Financial Officer

Hi, Leonardo. Ricardo here. Thanks for the question. It's great to address this important topic with you. Looking at overall expenses, we have been disciplined in our cost control, as reflected in our Q4 results. We foresee incremental expenses due to inflation and a possible small headcount increase, yet it will be below our growth rate. With our company’s flexibility, we can adapt accordingly to different growth scenarios. If there's a potential for higher growth, we may also adjust our investments; conversely, a lower growth would compel us to adjust expenses to enhance profitability. Our mental model, therefore, remains fluid to adapt as per market demand. Hopefully, that answers your question, Leonardo.

Leonardo Olmos, Analyst

Crystal clear. So not guiding, but just an interpretation of what is said. If you have growth slightly above what you have, we're probably going to see operating leverage. But if you have super growth, we may see some additional investments. That would be a proper interpretation. This is helpful. A quick follow-up with the share repurchase program that you did. How do you see—what opportunities do you see for capital allocation this year? More share repurchases or are there other things? Thank you.

Ricardo Camatta Sodré, Chief Financial Officer

Hi Leo, happy to take this one as well. We have completed the 2023 buyback program, so there’s no active plan now. As a high-growth company, we continuously seek opportunities to invest, balancing organic growth plans, M&A opportunities, and buybacks in the best interests of long-term shareholders. So there's a clear order of priority in our approach.

Fred, Analyst

Hello, can you hear me? Thanks for the call. I have two questions here. The first is if you can just give us an idea about what type of environment is included in the guidance? Given the strong 4Q results, the guide looks a little conservative at first glance. My second question, for the year 2023, assuming essentially no growth in the e-commerce segment. If you grew significantly, it looks like you gained a lot of market share, especially in Brazil. Any comments on this would be great. Thank you very much.

Leonardo Olmos, Analyst

Hi, Fred. Thanks for the question and the opportunity to explain how we're thinking about the guidance for 2024. Starting the year, we are in a more favorable position than we were in 2023. We started 2023 with guidance for 15% to 19% FX-neutral revenue growth. For this year, we have 18% to 22%. There’s still a relevant level of uncertainty in the market expressed by the 30% to 40% recession probability and our customers' GMV volatility. For existing customers, we assume that same-store sales and net revenue retention remain around the current levels, and for new customers, we expect stable sales cycles and implementation times similar to the second half of 2023. On margins, we will continue to control costs, leading our non-GAAP operating income and free cash flow margins to reach mid-to-high single digits. We always express our guidance in FX neutral and the implied US dollar revenue based on certain FX assumptions. For 2024, we consider January average FX for the whole year, which aligns with year-end FX consensus. In the case of Argentina, the 50%-plus devaluation last December will result in a low-to-mid single-digit percentage point headwind for VTEX in 2024. Overall, we are happy with how we are starting the year and consider our guidance well-balanced given macro uncertainties.

Geraldo Thomaz Jr., Founder and Co-CEO

Thank you, Ricardo. You’re right about the global e-commerce growth statistics. The company’s GMV growth was 25% FX-neutral, 30% in US dollars and even higher at 38% for Q4 2023. This growth was driven by new customers, and we consistently outpaced the market in terms of same-store sales. Our customers have demonstrated resilience, achieving same-store sales growth of 19% in USD and 15% FX-neutral. Our value proposition resonates with customers, enabling them to achieve sustainable and profitable growth.

Marcelo Santos, Analyst

Hi, good evening. Thanks for taking my questions. My first question is if the existing customers have same-store sales and net revenue retention around current levels, should you have similar growth as in 2023? I'm missing something here because it seems you maintain stable assumptions, why isn't growth the same? My second question is more conceptual. New stores increased by 100 from last year. In the past, you used to add significantly more. Are you now adding larger stores? How should this move forward? Thank you.

Ricardo Camatta Sodré, Chief Financial Officer

Hi Marcelo, thanks for your questions. On guidance, we're assuming same-store sales and new stores won't drastically change based on market factors we can't predict. Compared to previous years, we don't have the same pull-forward effect from 2022's sales cycle innovation. Our focus is on adaptability given market demand. We are gaining market share while effectively managing costs and expenses. Regarding customer growth, while the total customer count remained around 2,600, store counts increased by 4% to 3,500. The notable increase in customers paying more than $250,000 annually reflects our focus on larger clients, who are essential to our revenue.

Clarke Jeffries, Analyst

Hello. Thank you for taking the question. It's great to see the operating margin from the existing storefront showing impressive year-over-year expansion. With the ambition to be a Rule of 40 company, how do you envision further improvement? Would it be steady moving forward? And also regarding growth composition, would you expect 20% plus FX-neutral growth in the coming year excluding currency impacts? Thank you.

Ricardo Camatta Sodré, Chief Financial Officer

Latin America holds significant potential for VTEX. While there are notable differences among the markets, countries like Mexico, which we entered later, offer substantial growth opportunities. We are excited about our progress and intend to strengthen our regional leadership while expanding into new markets like the US and Europe. Customer experiences indicate that we can continue enhancing our ecosystem. With a good foundation in Brazil, we can leverage e-commerce penetration to achieve future growth.

Maddie Schrage, Analyst

Hey, guys, thanks for taking my question. My first inquiry is regarding the healthy step-up in NRR this year. Do you have a long-term sustainable NRR target in mind? My second question pertains to pricing; have you noticed any changes in the pricing environment in LATAM? As you begin operations in the US market, Shopify has raised its pricing. Do you see that creating opportunities for you?

Ricardo Camatta Sodré, Chief Financial Officer

The mental model for NRR is connected to our revenue model, which indicates that one-third comes from fixed fees and two-thirds from same-store sales growth. This can lead to fluctuations based on churn and upselling measures that increase NRR. Historical data shows we have been in the 105-110 range for NRR, and as e-commerce continues to grow, we anticipate that as uncertainty stabilizes, so too will our NRR. Regarding pricing, I'll turn it to Geraldo.

Geraldo Thomaz Jr., Founder and Co-CEO

Thanks for the question. Our pricing strategy centers around long-term relationships with our customers. We offer predictable pricing as a foundational aspect of our model. While our prices have generally remained stable, any increased pricing by competitors like Shopify could offer us the chance to reassess ours while staying aligned with our core value proposition. While we would ensure any pricing adjustments reflect the value we provide, our main focus will continue to be helping our customers grow their GMV. Looking ahead to 2024, our dedication to drive innovation remains stronger than ever. VTEX remains steadfast in supporting our customers' strategic commerce investments, fostering growth and boosting profitability. Latin America's Internet penetration offers promising growth opportunities. We will focus on strengthening our regional leadership and expanding our presence in the US and Europe. The progress made in global expansion this year is exciting, but it is just the beginning of our transformative journey. Thank you for being a part of this ongoing journey with us. We look forward to keeping you updated at our next earnings call. Have a wonderful week.

Operator, Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.