Earnings Call Transcript - VTEX Q2 2024

Operator, Operator

Thank you for standing by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the VTEX Report Second Quarter 2024 Financial Results. All lines are being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Julia Vatter-Fernandez, Investor Relations Director. You may begin.

Julia Vatter-Fernandez, Investor Relations Director

Hello, everyone, and welcome to the VTEX earnings conference call for the quarter ending June 30, 2024. I am Julia Vatter-Fernandez, Investor Relations Director for VTEX. Our senior executives presenting today are Geraldo Thomaz, Jr., 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 training session. I would like to remind you that management may make forward-looking statements relating 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 currently 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 section of VTEX Form 20-F for the year ended December 31, 2023, and other VTEX filings with 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 second 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 Thomaz, Founder and co-CEO

Thank you, Julia. Welcome, everyone, and thank you for joining our second quarter 2024 earnings conference call. VTEX's positioning is stronger than ever, with a clear alignment between our value proposition and the needs of global enterprises. This is evidenced by our existing customers consistently outperforming the market and our sustained sales momentum. This allowed us to deliver another robust quarter and gives us confidence in our future growth prospects. As a result, our GMV grew by 19% and revenues increased by 22%, both in FX neutral, boosted by new contract signatures, cross-selling add-ons, and solid net revenue retention performance. Additionally, our ongoing subscription and service cost optimization has resulted in FX neutral year-over-year gross profit growth of 34%. We've made significant strides in developing a more efficient and resilient structure aimed at maximizing growth and capturing demand. Our team continues to enhance cloud efficiency while maintaining performance. As our ecosystem matures globally, our need to invest in services for new customers decreases, leading to a substantial increase in gross margin quarter-over-quarter, even after the strong results in Q1. A steadfast commitment to profitable growth has yielded significant year-over-year non-GAAP operating margin expansion in the last eight quarters, starting with a 26 percentage point gain in the third quarter of 2022, peaking at 42 percentage points in the second quarter of 2023 and reaching approximately 15 percentage points over the last three quarters. Following our remarkable journey, we still see room for operational leverage gain, albeit at a more moderate pace. Our cost optimization initiatives and disciplined approach to expenses are reflected in our numbers, positioning us well to reach the target model shared at our investor day. That said, let me now provide more insights into our operation, leaving Ricardo to cover the financials later. In the second quarter of 2024, we celebrated the successful go-live of new customers, such as Shoes in Australia, Armani, Colormark, Drogal, and PneuBarato in Brazil, the Lime Group in Chile, Addi Marketplace in Colombia, Grupo Nazan, and Librerias Gandhi in Mexico, Ageia Seguro in Portugal, and MyEyeDoctor in the U.S. Additionally, we continue our expansion with existing customers, adding more brands or new regions, such as Exiti, who added four brands in Colombia, now operating with 11 brands across five countries in Latin America. Hearst, who added Cosmopolitan, is now operating with three stores in the U.S. Multilaser in Brazil, who added a new brand, BGI, is now operating with three stores in the country. Motorola, who added a store in Sweden, is now operating across APAC, Canada, EMEA, LatAm, and the U.S. Nike, who added a store in Uruguay, is now operating in four countries across LatAm. And Victoria's Secret, who added a store in El Salvador, is now operating in 12 countries across LatAm. The second quarter is always special for us because of VTEX Day, an event that holds a unique place in our hearts. It allows participants to grasp the size of our ecosystem and gain deeper insights into our value proposition and new products. It also enables us to cross-sell features and attract new customers. While this time I will not delve into VTEX Day, I'm excited to share a new milestone. Following the success of our inaugural U.S. event in the first quarter, we have now celebrated our first European event. VTEX Connect Europe, held in Barcelona, attracted over 3,000 registrants from more than 50 countries, featured over 60 sponsors, and delivered more than 10 hours of content led by over 30 of Europe's most renowned e-commerce leaders. Panels included representatives from OBI, Mars, Red Cloud, Starbucks, Racket, among others. We are encouraged by the results of this event and our growth potential in the region. Another encouraging factor enhancing our global positioning is the recognition from industry analyst firms. 2024 has already been a remarkable year, with VTEX being consistently recognized for its product strategy and vision. This quarter, I am proud to announce that VTEX has been named the leader for the first time in the IDC MarketScape for Worldwide Headless Digital Commerce Applications for Mid-Market Growth, 2024 Vendor Assessment. We were acknowledged for providing comprehensive unified commerce solutions, including B2B, B2C, B2X, omni-channel, experiential e-commerce, marketplaces, native marketplace and OMS capabilities, developer-friendly tools and support, and a robust serverless development platform for rapid, scalable, and flexible e-commerce solutions. Combined with the recognitions received in the first quarter, we can now say VTEX is a leader in B2B, B2C, and headless digital commerce, according to IDC. We are encouraged by this recognition, which boosts our confidence in our global expansion journey and affirms that we are on the right path. In a world where the value of building connections is exponential, we are committed to evolving and strengthening our network of partners and channels, ensuring we stay ahead of our customers' dynamic needs and unlock new go-to-market strategies for them. With this in mind, in the first half of the year, we have expanded our partnership with TikTok, which has grown from Brazil to the rest of LatAm, and this quarter, we are thrilled to launch a partnership with Pinterest, further expanding our customer social commerce opportunities. Through this collaboration, our global customers can seamlessly integrate their product catalogs, create pins, and execute high-performance shopping campaigns on Pinterest, reaching over 500 million monthly active users. This partnership advances our mission to empower global enterprise brands to deliver seamless shopping experiences and engage with consumers seeking inspiration in a positive online shopping environment. We are thrilled to see customers such as Whirlpool and Yeezy already leveraging Pinterest's catalog to enhance their customer journey from inspiration to action. Security remains a priority as we grow our network and widen our geographical footprint. In a world where data is as valuable as gold, security will only grow in importance, especially as governments enforce regulations and set mandatory security standards for providers. That said, we proudly announce that VTEX has achieved the ISO 27001 certification, which provides an international standard framework and guidelines for establishing, implementing, and managing an information security management system. This certification represents another step in our security journey and strongly reaffirms our commitment to supporting and providing peace of mind to our customers. Before moving to the financial section, I would like to share some customer stories with you to illustrate more tangibly why enterprises worldwide are choosing VTEX and how we are partnering with them to streamline their operations. Adyen, a buy-now-pay-later payment method provided in Colombia, decided to expand its business, becoming a marketplace with the VTEX platform. This strategic move aimed to connect its existing merchants, most of whom were VTEX customers, enabling them to use Adyen payment methods via a mobile app. The new platform has over a million customers and is built using our robust marketplace architecture, with both VTEX and non-VTEX sellers integrated through the seller portal. The project was also developed using our authentication protocol integrated with a third-party identity provider, VTEX IOStore framework, and analytics integration with Applitools. The implementation, completed in less than four months, delivered impressive results in the first three months of operation, enhancing Adyen’s market presence and driving significant growth. Choose is an Australian NDIS-approved disability equipment and supplies distributor dedicated to supporting individuals with disabilities and aging Australians who has launched its marketplace partner with VTEX. Choose is leveraging VTEX's out-of-the-box features such as marketplaces, seller portals, OMS, and VTEX-IOs to facilitate its digital business expansion. With a growing network of 134 sellers and a catalog of over 18,000 products, the marketplace architecture empowers customers with seamless product comparison and the ability to purchase from multiple local sellers simultaneously. By leveraging the VTEX I-PASS solution, Choose successfully implemented customized NDIS-friendly invoicing for purchases from multiple shops, including all necessary data for claiming, simplifying the claiming process, and reducing the likelihood of delays and rejection. Additionally, a feature to include membership and subscription services for key products is under implementation. Choose aims to set a new benchmark in disability and aged care shopping, focusing on expanding its product range and diversity on the platform to attract more customers and boost revenue. We are excited to partner with Choose on their journey to becoming leaders in the sector, helping them leverage their expertise by providing a seamless, transparent, and accessible shopping experience to their customers. Cosmo Music, a leader in musical instruments rental in Canada, recently completed the migration of its rental business from a highly customized legacy platform to VTEX. This strategic move was driven by the need to enhance operational efficiency, streamline the checkout process, and provide greater control over rental contracts. The migration to VTEX has ensured a seamless and uninterrupted customer journey, maintaining service consistency. Following the migration, Cosmo Rentals has achieved a stable number of rental orders year-over-year, an outstanding outcome during the transition period. The migration included implementing advanced features such as a seamless one-page checkout, enhanced rental management capabilities, and intuitive interfaces for managing business roles and customer journeys. These improvements have enabled Cosmo Music to better serve its diverse customer base, including students, parents, educators, and organizations while laying a solid foundation for future growth and adaptability. Additionally, in line with our firm commitment to our customers, Cosmo Rentals highlighted that the VTEX professional services team has been unparalleled partners throughout the process, early understanding their business, meticulously mapping out complex business rules and various customer journeys, and ensuring the project was managed to guarantee its success. Dior, the renowned French luxury fashion and beauty brand, has an exceptional success story and serves as a compelling testament to the transformative power of VTEX's omni-channel capability. By partnering with VTEX, Dior experienced more than a 100% year-over-year order spike in the first half of 2024, directly attributed to the seamless integration of their physical and online channels. Leveraging VTEX’s expertise and adaptable solutions, Dior effectively navigated the complexity of digital transformation and successfully expanded to Argentina, with plans to broaden the reach to new markets across Latin America. The collaboration with VTEX empowered Dior to deliver a unified commerce experience, ensuring consistency and excellence across all touchpoints, whether online or offline. Doto, a marketplace for electronic devices, has expanded its reach through its integration with the VTEX platform and ecosystem in Mexico, enhancing usability and user experience. Doto can now effectively measure and improve its conversion rates by leveraging key VTEX components, such as A/B testing and workspaces. Its innovative double-buy box, offering save time and save money delivery options, has increased user interaction and loyalty, resulting in a 19% boost in product conversions. With VTEX IO, Doto can manage its infrastructure natively, focusing on user experience, leading to a 27% increase in site visibility and a 26% rise in visits from returning users. Additionally, Doto benefits from VTEX’s omni-channel strategy, adopting the VTEX Sales App and more recently VTEX's Intelligent Search. These advancements have established Doto as a leader in e-commerce, ensuring a balance between logistical efficiency and customer satisfaction. Ageas Seguros, the largest insurance provider in Belgium and a leader in 14 other countries, has launched a new health and wellness marketplace in Portugal under their Medis brand, partnering with VTEX. They chose us for our unique native marketplace capability and robust front-end features, including the store framework and the optimized checkout flow. These were crucial for integrating multiple payment protocols, including its own payment methods and various gift card options. Additionally, by using the VTEX seller portal, Ageas Seguros Portugal can now efficiently onboard sellers, ensuring a quick and straightforward process. We are excited about this partnership and eager to help them create an innovative healthcare ecosystem. H Mart, the largest Asian supermarket chain in the U.S., migrated to VTEX, launching two new online stores after a seven-month transition from the legacy platform. By migrating, H Mart sought to consolidate the previously separate system for purchasable and non-purchasable items with its fresh goods system, creating a unified commerce experience. Now, consumers can order from all product categories in the same cart, while also leveraging store inventory to provide real-time availability information and facilitate efficient delivery strategies. In the second quarter, H Mart initiated the integration process for its physical grocery stores, beginning with the California locations. H Mart's commerce capabilities have already witnessed a significant enhancement, incorporating features such as the VTEX Pick and Pack app for seamless in-store order picking and precise product visibility control based on customer location for franchise accounts and trade policies functionality. On top of that, the architecture also integrates with H Mart's ERP for category inventory and pricing, tax automation, and payment processing. With over 90 locations across the U.S., this strategic move positions H Mart to deliver a superior omni-channel shopping experience, both online and offline. We're excited to accompany H Mart on their digital transformation and their path to strengthening its market share in the U.S. Librerias Grande, a leading bookstore chain in Mexico with 49 physical stores and a central distribution center, partnered with VTEX to enhance their omni-channel capabilities. They aim to integrate their extensive inventory of 4.5 million SKUs, including physical and digital products, across all sales channels. This integration enabled sales and inventory management from each store and incorporated in-store pickup. Leveraging VTEX architecture, Grande can offer same-day delivery in Mexico City, prioritizing distribution and delivery from the central distribution center and extending their sales reach through marketplace integrations with Walmart Mexico and MercadoLibre. Additionally, we're developing the sales integrations with El Palacio de Hierro, Mexico's premier luxury department store, and building the capabilities to manage international deliveries from their central distribution center. Last but not least, Pague Menos, a leading pharmacy retail chain in Brazil, recognizes the pivotal role of retail media as the next frontier in advertising. By using the VTEX ads network, Pague Menos efficiently manages its advertising space, seamlessly aligning advertiser promotions with consumer behavior to drive sales, all without the burden of managing numerous separate advertiser relationships. This integration expanded the reach, opened new sales channels, and delivered an immediate increase in sales and revenue, while concurrently boosting advertiser performance metrics and ROAs. With VTEX ads network, a scalable and performance-driven approach, Pague Menos is poised to capitalize on emerging trends and drive further growth in the future. To finalize this session, I'd like to express my gratitude to our 1,339 dedicated VTEX employees whose commitment, passion, and execution do not go unnoticed. I also want to thank our customers, partners, and investors who support us on this journey and help shape our story. We have a clear vision and a challenging yet rewarding purpose to become the backbone of connected commerce. Let's make it happen. Now, I will hand the call over to Ricardo.

Ricardo Sodre, Chief Financial Officer

Thank you, Geraldo. Hi, everyone. I'm pleased to share VTEX Q2 2024 financial results. As Geraldo highlighted, our Q2 GMV reached $4.4 billion, marking a year-over-year growth of 15.6% in U.S. dollars and 19.4% in FX neutral. Revenue stood at $56.5 million, representing a year-over-year increase of 18.1% in U.S. dollars and 21.9% on an FX neutral basis. The over-performance versus our guidance was primarily driven by stronger revenue performance from existing customers, positive outcomes from retailers' promotional events, cross-sellings from add-ons, and robust new contract signature momentum. We are encouraged by our prospects and aim to build more reference cases demonstrating VTEX’s value proposition. Our profitable growth strategy is making strides. Two years ago, in Q2 2022, informed by the macro scenario and the opportunities ahead, we started optimizing our organizational structure. The very next quarter, Q3 2022, we were already delivering a year-over-year improvement of 26 percentage points in our non-GAAP operating income margin. Just a year later, by Q2 2023, we further accelerated our operating margin expansion, reaching a peak of 42 percentage points. As we lapped these initial adjustments, the year-over-year margin gain has been more moderated, still remaining at around 15 percentage points over the last three quarters. Most importantly, throughout this period of eight quarters, our FX neutral year-over-year revenue growth has remained between 20% and 25%, demonstrating sustainable and profitable growth. We reiterate our commitment to profitable growth. We are making steady progress towards reaching back to the Rule of 40, our guiding financial principle. We will continue to evaluate our revenue growth and investment levels, adjusting to the level of demand, sales conversion rates, and return on investment to build the highest possible long-term value. Going back to our Q2 P&L, our subscription revenue reached $54 million this quarter, up from $44.8 million in the second quarter of 2023, representing a year-over-year increase of 20.6% in U.S. dollars and 24.7% in FX neutral, while our services revenue totaled $2.6 million. Over the past two years, our commitment to driving efficiency has led to notable improvements in our subscription gross margin. Initially, we focused on foundational steps, such as monitoring cloud investments and establishing a culture of efficiency to reduce costs and enhance resilience. These efforts, which include migrating micro-services to more efficient solutions, set the stage for advanced measures that could generate further improvements. For example, we are enhancing API consumption data's precision, allowing for better allocation of infrastructure costs and identifying efficiency gains. Additionally, we are refining our approach to measure API consumption by latency. Enabling a more accurate assessment of resource intensity and actionable cost sharing. These initiatives empower us and our customers to make informed, efficiency-driven decisions that support our financial goals and enhance our competitive advantage. As a result, our non-GAAP subscription gross margin has reached 78.1%, a 285 basis points year-over-year improvement compared to the 75.3% margin in the same quarter last year. On top of that, our overall non-GAAP gross margin this quarter also improved significantly, reaching 74%, a 597 basis points improvement from the 68% margin in the second quarter of 2023. Our efforts to build an ecosystem of system integrators and partners globally are enabling us to scale more efficiently. Our ecosystem has allowed our new customers in the U.S. and Europe to rely less on direct services from VTEX, which in many cases were sold at a loss to onboard our initial larger customers in these regions. Consequently, our non-GAAP gross profit had a year-over-year increase of 28.4% in U.S. dollars and 33.6% in FX neutral in the second quarter of 2024. Our non-GAAP total operating expenses reached $35.4 million in the second quarter of 2024, up from $35.1 million in the prior quarter and $34.1 million in the same period last year. Although a net positive one-off of almost $1 million reduced our expense this quarter, total expenses have remained relatively stable throughout 2023 and the first half of 2024, reflecting our ongoing operational leverage. As a result, our non-GAAP operating income improved from a negative 3.2% margin in the same quarter last year to a positive 11.3% margin this quarter. With expenses increasing only slightly year-over-year, the significant 15 percentage point margin improvement is primarily driven by revenue growth with operational leverage and sustainable gross margin improvements. Before going to our guidance for the next quarter and the full year 2024, let me highlight that in the fourth consecutive quarter, VTEX generated cash. As of the three months ended June 30, 2024, we had a positive $3.2 million free cash flow on top of a positive $1.9 billion in Q1 2024, and up from a negative $3.3 million free cash flow in the second quarter of last year. Looking ahead, despite the uncertain macroeconomic conditions, we remain encouraged by our sales momentum and operational leverage. From a revenue perspective, for the quarter of 2024, we are targeting FX neutral year-over-year revenue growth of 18% to 20%, implying a $56 million to $57 million dollar range. For the full year 2024, we will continue to execute our profitable growth strategy. We are increasing our FX neutral year-over-year revenue growth target to 18% to 20%, implying a range of $231 million to $235 million based on July's average FX rate. We are also raising our free cash flow and non-GAAP operating income margins target to a range of high single digits to low teens. VTEX continues to operate from a position of strength, propelled by robust sales momentum. Our solid business model, coupled with recognition from industry analysts, customers, and partners, underpins a prosperous growth opportunity. As we move forward, our focus remains on execution and delivering long-term value to our customers, partners, and investors. We look forward to continuing this journey together, maintaining a relentless commitment to operational excellence. With that, let's open it up for questions now. Thank you.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Marcelo Santos with JP Morgan. Please go ahead.

Marcelo Santos, Analyst

Hi. Good evening to all the VTEX team. Thanks for letting me ask questions. I have two. The first question is, if you could please discuss the main elements that led to the revision of the growth and profitability guidance, maybe we can break it into parts and explain what's coming better. The second question is, you're getting pretty close to your target model. When you look especially at the gross margins, they're evolving very quickly. What's next? What's beyond the target model? Thank you very much.

Ricardo Sodre, Chief Financial Officer

Hi, Marcelo. Thanks for this. As highlighted in our prepared remarks, we saw a strong performance from our existing customers and robust momentum in new contract signatures from new customers, which exceeded our expectations in Q2 and prompted us to increase our FX neutral full-year revenue guidance. Additionally, our profitable growth strategy has enabled us to also raise our non-GAAP operating income and free cash flow margin targets from high single-digits last quarter to a range of high single-digits to low teens now. As a quick side note to explain our financial mindset, at the beginning of the year, our implied Rule of 40 guidance was in the mid-20s, with an 18% to 22% FX neutral growth and mid-single-digit margin guidance. Now, with 18% to 20% growth and high single-digits to low-teens margin guidance, our implied Rule of 40 is in the high 20s to low 30s. This is a significant improvement and a demonstration of the Rule of 40 as our financial guiding principle. Furthermore, regarding Q3 and 2024 guidance and in response to your question about the assumptions, we are assuming similar operational KPIs for Q3 and onward compared to what we observed in Q2. The slightly lower year-over-year growth implied for the second half of the year can be explained by tougher comparatives. As a quick reminder, last year we grew 22% and 23% in Q1 and Q2 and about 25% in Q3 and Q4. Therefore, when we analyze in a two-year CAGR, the FX neutral growth rates of the first and second halves of 2024 are quite similar. Quickly on FX, for the second half of the year, by basing our guidance on July's average FX rates, we have included a greater FX impact in our outlook for the remainder of the year. Weighted average by our basket of currencies, the implied FX devaluation for the second half since our previous earnings report is roughly 6%. But as you probably noted, we have only adjusted the implied midpoint of our revenue guidance for the year by 2%. So this softening of the FX impact is possible given the strong operational momentum we are witnessing. We expect to offset some of the FX impact by delivering higher operational/FX neutral growth. As per our guidance, our FX neutral growth outlook has increased to 18% to 20%, an increase of one percentage point in the middle of the range.

Marcelo Santos, Analyst

Perfect. Thank you for the first answer. The second question is that you're getting pretty close to the target model, especially on gross margin, but in general. So my question is, what's next?

Ricardo Sodre, Chief Financial Officer

Yeah, happy to start, and others can chime in. So Marcelo, as you noted, we have made relevant improvements in our overall gross margin, reaching 74% overall gross margin versus the target model of 75%, and on the subscription gross margin, we reached 78% versus the 80% of the target model. We issued the target model in our Investor Day last year, and we mentioned it as a mid-term target, around three to five years. We have already lapped the investor day, so it's been a year since that, which places us now at two to four years. We have been positively surprised by our progress on the margin side, and we continue to pursue this target model. Once we are closer to it, or if we have more visibility on potential next steps, we will inform the market. But we are still working our way towards this target model of 80% subscription gross margin and 75% overall gross margin.

Operator, Operator

Our next question comes from the line of Thiago Kapulskis with Banco Itau BBA. Please go ahead.

Thiago Kapulskis, Analyst

Hi, everyone. Thanks for the opportunity to make a question. Actually, I have two on my side as well. First one, you guys did a little bit on the services part in Argentina, but if you could give us an update about the macro, about what you saw there. We know that the hot sales event was strong, but I just want to hear a little bit better what you see, like the latest data that you have, and how you're thinking about the environment there? And then the second question, a little bit more broad-based about the whole SaaS discussion. As you guys know, we've seen a lot of movements in the U.S. stocks because of AI and how actually that can change the SaaS business versus the past business. So just wondering how you think about that for the VTEX context, especially opportunities or threats that you can find in developed markets like the U.S. with all of that. So thank you.

Ricardo Sodre, Chief Financial Officer

Yes. Hi, Thiago. Great. Thanks for the opportunity to share additional details on this topic. So on Argentina, as I mentioned in the guidance, right, Argentina has been a couple of percentage points headwind to our consolidated growth. As discussed in our previous earnings call, predicting the situation in Argentina is always challenging, with no clear view of when its macroeconomic situation and its impact on consumption would improve. Consumption until April was more challenging than anticipated and was getting worse month over month. The second quarter imposed an additional challenge, given the hot sales and special event seasonality of the country, which is similar to Black Friday for Argentina. Once hot sales in Argentina passed, we felt our guidance for Q2 was de-risked. The event was better than expected across the board, and the Argentine Chamber of E-commerce shared the market's good results. We were also glad to see that during the event, our customers outperformed the overall market by a decent margin. As mentioned before, we are still navigating an uncertain and volatile scenario in the country. Consumption appears to have slightly improved since hot sales in May, partly due to the extended pre-installment programs. But there are no clear trends to indicate that the country has entered its stabilization or recovery phase. With that said, although we are expecting some recovery of the country in the second half versus Q2, Argentina should continue to be a couple of percentage points headwind in the VTEX consolidated FX neutral year-over-year revenue growth performance. With that, let me pass it over to Geraldo to answer the second question.

Geraldo Thomaz, Founder and co-CEO

Sorry. Okay, Thiago, could you repeat the second question?

Thiago Kapulskis, Analyst

Yeah, absolutely. So, just wondering how, because we've been seeing a lot of pressure on SaaS companies in the U.S., especially like Salesforce and others, because of AI, right? So, there's been a lot of conversations in the market about changes in the SaaS business because of AI, companies moving more into paths, and internalizing functions. So, just wondering how you guys at VTEX are thinking about that, positioning the business or any thoughts, especially regarding developed markets that you have there?

Mariano Gomide de Faria, Founder and co-CEO

Yeah. So, happy to take this one, Mariano here. So, AI will change a lot of the foundations for commerce in the world. But if you break down how it's going to impact, I believe, and VTEX believes, that the profitability of the company should be the first target. The macroeconomic environment demands companies to focus on this, and AI should be the instrument for this type of delivery. The LLM part of the AI will significantly impact customer service. You can imagine that the customer service costs vary from 0.5% to 2.5% of the GMV of the retailers and brands, and that can potentially reduce by 50%. So, AI will deliver some value on the customer service front. Sales tools that leverage predictions will also see a reinvention. Everything from search to the front end will be affected by AI. Our bet, VTEX's bet, is that we're going to leverage the models that are available as infrastructure. So, VTEX is eager to explore the models provided by infrastructure companies, like Cinerise, OpenAI, NVIDIA, and Meta, and we will leverage those models to deliver the best applications to our customers. We address the development of AI with a focus on providing better revenue and profitability for our customers. We are not deploying a massive amount of capital into AI, although we are shifting our R&D to develop AI products for our customer base.

Geraldo Thomaz, Founder and co-CEO

And here, I'm Geraldo, if I can also add, Thiago. I think I can link also this to your mention about expansion in the U.S. and all the changes happening here. When the market moves, there are always opportunities for disruption. This presents an opportunity for us if we leverage our software across all the scenarios that AI will bring to the consumers. You can imagine people changing the interfaces where they buy, and we can be a very good partner for our customers when they want to adapt and broaden the interfaces where consumers are shopping. We always promote VTEX as the e-commerce platform that also encompasses OMS, closely integrated with the e-commerce platform. So, having this omni-channel approach, and being able to accommodate new channels for our customers' consumers can be a significant opportunity for us in the new markets we are entering as they evolve. It's also important to remember that AI development requires a lot of training. VTEX serves as the e-commerce platform, the source of truth for attribution for all orders generated across various channels, traditional or AI channels in the future. We believe having this source of truth for the attribution is very important for our customers and partners as they develop their own models and capabilities using the rich data that we hold. That’s why we are investing significantly in security compliance around data management. We are making data accessible to partners and customers by upselling the data pipeline products we offer. As Mariano indicated, I personally believe that the latest technology in AI, particularly large language models, allows every retailer— not just VTEX— to deliver a powerful, convenient experience to their customers. And we're here to support them and enable them to achieve that.

Thiago Kapulskis, Analyst

Now that's excellent. Maybe, one follow-up. Given that you have a lower TCO versus other competitors like these large ones, do you see that as an opportunity as well, given that there's been a lot of discussions to be closer to the business outcome in terms of monetization, or not really, we're not there yet?

Geraldo Thomaz, Founder and co-CEO

Yeah, when there is a disruption in the market, the value chain changes. People move; they issue RFPs and seek other systems because they need to evolve. If by next year everyone is buying using a share-bought assistant, there are likely thousands of retailers in the U.S. that will need to catch up with the technology. We will see an opportunity in the market where we are less mature to demonstrate our value. Indeed, the low TCO is a significant factor, especially if interest rates remain at challenging levels, which can weigh heavily on our customers' choices.

Maddie Schrage, Analyst

Hey, guys, and thank you for taking the question. I was just wondering if you could provide an update on maybe sales cycle length, if there have been any changes to re-platforming budgets that you've seen. And then I'm also wondering if you could give an update on what’s kind of baked into guidance in terms of consumer spend expectations. Thanks.

Ricardo Sodre, Chief Financial Officer

Yeah. Hi, Maddie. Thanks for the question. So on the sales cycle and corporate budgets, we've seen a stabilization of our sales cycle. If we rewind a bit to 2022, when inflation was high and interest rates were increasing, we saw sales cycle lengthening and corporate budgets focusing primarily on short-term, low-hanging fruit. Throughout 2023, we saw a stabilization of our sales cycle, and towards the second half of 2023, we observed some improvement. Now in 2024, I would say that the sales cycle has remained fairly stable compared to how we closed last year. So it has not posed a relevant tailwind or headwind to our growth. Regarding corporate budgets, given the high interest rates and increased costs of capital, all corporations are more cautious with their budgets and are focused on delivering an appealing bottom line. With our value proposition offering a lower TCO solution to our customers along with flexible, easy-to-test solutions, this has been a beneficial pitch for us with both our current customer base and prospective clients. Although it's challenging, we are navigating well, as evidenced by the growth of our existing customer base and the new customers we're acquiring. Regarding your second question, Maddie, if you could repeat that, please.

Maddie Schrage, Analyst

Yeah, perfect. The second question was just can you talk about what you're expecting in terms of what's baked in the guidance from a consumer perspective for the rest of the year?

Ricardo Sodre, Chief Financial Officer

Yeah, I can start here. So as I mentioned regarding the guidance, we are assuming for Q3 and onward similar KPIs to what we observed in Q2. Based on same-source sales, we continue to see our existing customers growing their GMV in the teens level, which is above the overall e-commerce market. This is encouraging to see, with our customer base outpacing the market. However, interest rates remain high. When assessing consumer confidence across different countries, we observe some volatility. Thus, we are not embedding any recovery in consumer spending into our guidance. We are also not anticipating a recession in our forecasts at this stage.

Maddie Schrage, Analyst

Okay, perfect. And just a point of clarification, because you mentioned Argentina was kind of worsening month over month. So are you kind of expecting the low point in terms of consumer spend level from Argentina specifically?

Ricardo Sodre, Chief Financial Officer

Yeah, I mentioned it was worsening month over month until April, Maddie. Since then, we observed some recovery in May with the hot sales event, akin to their version of Black Friday. However, the country remains volatile, so we currently do not see a clear trend in Argentina. Thank you. This concludes our Q&A session. I will now turn the call back over to Geraldo Thomaz, Founder and Co-CEO of VTEX for closing remarks.

Geraldo Thomaz, Founder and co-CEO

The second quarter has proven to be a standout period for VTEX, which has been marked by robust performance and strategic milestones. Our existing customers have demonstrated resiliency and success across diverse markets and seasonal peaks. This success underscores our platform capability to handle high transaction volumes, effectively target diverse consumer segments, and help our customers consistently outperform the market. We continue to experience strong momentum in contract signatures, and our global ecosystem continues to mature, generating positive externalities. As we continue to execute our profitable growth strategy and deliver long-term value, we're more confident than ever that we are well-positioned to achieve our vision of becoming the backbone for connected commerce. We appreciate the support of our investors and partners on this journey and remain focused on executing with excellence to capitalize on the significant opportunities ahead.

Operator, Operator

This concludes today's call. You may now disconnect.