Vtex (VTEX) Q3 2022 Earnings Report, Transcript and Summary

Hello, and welcome to the VTEX's Reports Third Quarter 2022 Financial Results. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to our host, Julia Fernandez. The floor is yours. Please go ahead.

Hello, everyone, and welcome to the VTEX Earnings Conference Call for the Quarter Ended September 30, 2022. 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 Sodre, Finance Executive Officer. Additionally, Mariano Gomide de Faria, founder and co-CEO, and Andre Spolidoro, Chief Financial Officer, will be available during today’s Q&A 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 under Risk Factors and Forward-Looking Statements sections of VTEX’s Form 20-F for the year ended December 31st, 2021 and other VTEX’s 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 third quarter 2022 earnings press release available on our investor relations website. Now, let me turn the call over to Geraldo. Geraldo, the floor is yours.

Thank you Julia. Welcome everyone, and thanks for joining our third quarter 2022 earnings conference call. Last quarter we shared three key focuses for the company: continue helping our customers outperform the market; keep improving our gross margin; and optimize our expenses to gain operational efficiencies. And, most importantly, all of that while we continue to deliver our high growth plans. With that as our north, let’s deep dive on our operational performance this quarter. We are excited to announce that our business continues to deliver robust growth, solidifying our position as a regional leader while also building momentum outside of Latin America. A clear demonstration of our robust growth is that in Q3 our GMV growth accelerated to 29% year-over-over both in USD and FX neutral. Given our blue-chip enterprise customer base, VTEX customers continue to outperform the market consistently, a long term historical trend that we have been highlighting with more emphasis for the last three quarters. Not only did the GMV and topline come stronger than expected, but also both our costs and expenses came below as a result of a leaner and more agile organizational structure. Our non-GAAP subscription gross margin increased by 560 bps year-over-year. The margin expansion trend that started in the second half of last year is a reflection of gradual code optimization, migration to more efficient servers operating systems and processors, optimization of non-core cloud providers, as well as operational leverage in our personnel support costs. Although there could be some gross margin volatility as we migrate non-core cloud providers, there is still a long road ahead on gross margin improvement and we are excited about what’s to come in the medium and long term. We plan to continue optimizing our cost base, while at the same time pushing our service levels up to provide the best solution for our customers. I’m extremely proud of what our team has accomplished on the expenses side. As anticipated in our previous earnings call, we delivered significant operational leverage. Our team’s efforts enabled us to continue growing our topline at a robust pace, which is our main objective as a high growth company, while still finding incremental opportunities to operate our business with a leaner and more agile structure. Now, moving to our commercial updates. In the third quarter we continued attracting premier brands and retailers. Some new customers that went live this quarter that didn’t have online store presence in the respective countries before were: Giassi B2B in Brazil, and Asics in Peru. Additionally, new customers that migrated from other platforms that went live this quarter were: Levis in Argentina, Vivara and Farma Delivery in Brazil, Belcorp in Colombia and Chile, Chedraui in Mexico, Claro in Peru, The Foschini Group in South Africa, and WH Candy in the US. On top of that, we continued building entrenched, sticky relationships with our existing customers. Some premier brands and retailers that expanded their operations with us by opening new online stores in new countries during the third quarter were: H&M, adding a store in Uruguay, currently operating in five countries in Latin America; Motorola, adding a store in Saudi Nation, currently operating in 19 countries across the world with more than 20 stores; and Whirlpool, adding a store in Germany, currently operating in 16 countries across the world with more than 30 stores. In the third quarter, VTEX was named a Visionary in the 2022 Gartner Magic Quadrant for Digital Commerce report. This industry recognition follows the results we shared in the first quarter of this year, with customer recognition in the 2022 Gartner Peer Insights ‘Voice of the Customer’ Digital Commerce report where VTEX was named a Strong Performer. Additionally, in July of this year, Paradigm B2B released its yearly Combine reports, in which it evaluates ecommerce providers across key areas of interest in the B2B technology buyer. In 2022, VTEX was awarded medals in each one of the 12 categories that Paradigm assesses in the Midmarket Edition with gold medals for exceptional performance or capabilities in Marketplaces, Promotion Management, and Customer Service & Support. VTEX was the only vendor awarded a gold medal for Marketplace capabilities and scored silver medals, awarded to vendors with superior capabilities, in Site Search, Ability to Execute, Total Cost of Ownership, and Vision & Strategy. We are grateful and humbled about the recognition from our multinational customers expanding their relationship with us, opening new stores as well as from market experts such as Gartner and Paradigm. This gives us the confidence and strength to continue pushing further with our strategic plans. We stay committed to continue executing with excellence and precision our vision. But, as we always say, we know we cannot do all this alone. We are certain that the multiplying force of collaboration from the ecosystem we’ve built around VTEX will continue to enable us to unlock even greater outcomes, so we’ll continue to consistently nurture and expand those relationships. Aligned with our payments partnership strategy and the further monetization of our ecosystem, we are excited to announce that we launched a partnership with Checkout.com, a global Payment Service Provider and leading fintech in EMEA able to deal with the most relevant international and local payment methods, as well as digital wallets. They are a resourceful solution, especially in new markets for VTEX, like North America, Europe, Middle East, and Asia. Checkout.com's partnership agreement will enable international and local payment methods, nurturing a vast and solid ecosystem of partners and solutions and promoting better conversion for our enterprise customers. Additionally, a couple of quarters ago we launched the news of our partnership with AWS. We are now happy to share that more than supporting VTEX, AWS is actively enabling our global expansion. As we become one of their preferred global partners, we are excited to announce that Belcorp is one customer, among others, that went live with us in the third quarter, thanks to this partnership. We are extremely excited about this positive momentum and VTEX is really looking forward to continuing unlocking the potential of this partnership, as AWS is also committing themselves to invest along with us in our global expansion, especially in Europe. Great things are yet to come. Before wrapping up I'd like to share with you some customer success stories, as their success speaks volumes more than any other data point. We don’t innovate in a vacuum, and for us seeing how our four guiding pillars are helping our customers achieve their goals is more than fulfilling. So let me go straight to it. The Foschini Group, one of the biggest fashion retailers in South Africa, with more than 4,000 stores, 29 brands and operations in 26 counties, is now operating with VTEX gradually rolling out their brands, which are expected to increase over time. With our solution, they will be able to centralize their 29 brands into a main marketplace, customizing the login process for their end users providing a frictionless consumer experience, while at the same time helping them to have a single source of truth for their multi brand sales process. We are more than pleased to welcome them to the VTEX family, we are confident that we are going to do amazing things together. Erik’s Bike Shop, one of the largest bike’s shops in the US, with more than 30 physical stores across the country, chose VTEX to deliver a superior shopping experience to their online consumers. VTEX worked hand in hand with Erik's Bike Shop to do a complete revamp of their homepage, and as a result our customer benefited not only from higher stickiness on their website, which was reflected in lower bouncing rated and higher number of pages viewed per visitor, but also with a double digits improvement in their conversion rates, session duration and number of pages viewed per user. Finally, their average order value almost doubled. Hering, the leading textile and retail clothing company in Latin America, with more than 800 stores chose VTEX headless approach to provide their end users with the best purchasing experience across all channels: proprietary stores, franchisees, multibrand third-party stores, ecommerce, as well as additional sales channels such as Facebook and Google Shopping. With us, Hering benefited from consistent improvements in all their website performance metrics, such as page speed times, conversion rates, average ticket size, bounce rates, cart abandonment rate, among others. Motorola US, a pioneer in the mobile phone industry, optimized with VTEX their product detail page experience, keeping the look and feel while gaining efficiencies on their page loading time. We are happy to share that together we’ve been able to achieve an overall page loading time improvement of 45% and 54% for desktop and mobile respectively, reaching an average time of one to two seconds. Motorola now has active online stores in 19 countries operating with VTEX and continue expand into new geographies, this year they expanded to EMEA and Asia Pacific, leveraging our marketplace architecture. Blurring the lines between physical and digital commerce, we continue to see customers implementing our endless aisle product. This quarter we had companies such as Samsung and Zee.dog adopting this new wave that enables their physical stores to sell products from other stores, franchisees and their ecommerce operation to enhance conversion in their physical stores. Social commerce continues to show a strong fit for enterprises to meet and sell to consumers, both on their preferred social media channels, or at a discovery stage of the product in live shopping events. Belcorp, a multi-level marketing beauty and personal care company, present in 13 countries with three commercial brands, is already a heavy user of this feature, which was one of the many reasons they decided to come to VTEX. We believe that offering this product can become an interesting engine of growth for VTEX adoption, as we position ourselves as innovation front runners across the globe. This quarter we also had an important milestone, we hosted our first event in Mexico, VTEX Connect Latam. The event took place in Mexico City on September 7th, gathering more than 3,000 in-person attendees, and with the participation of 65 speakers from 11 countries. We are proud to have hosted the largest ecommerce event in the country, which we believe marks a watershed moment for VTEX positioning in the country and in the region Wrapping up the operational update section, I would like to thank our 1,405 VTEXers that are working to fulfill our mission, as well as our customers, partners and investors. Now I’ll turn the call to Ricardo, so he can cover our financial progress report for the quarter.

Thank you, Geraldo. Hi everyone, it’s a pleasure to be here updating you on our financial performance for the third quarter of 2022. As highlighted by Geraldo, our Q3 GMV performance accelerated to 29% growth year-over-year, both in USD and FX neutral. This is a clear demonstration of the resiliency of our blue-chip customer base and that we continue to help our customers to outperform the market. Breaking our GMV performance down in more details, in Q3 our existing customer’s same store sales went up to the high teens, demonstrating a robust performance in a market that’s currently delivering flattish to single-digit growth rate. Also, it’s important to note that some countries such as Mexico, the US and Europe grew at a stronger pace than the company’s average, while more mature regions such as Brazil are still growing at a robust pace, just slightly below the overall company average. We expect these new regions to continue to compound and contribute to VTEX’s high growth performance. This quarter our revenue increased to $38.8 million, a year-over-year increase of 22% both in US dollars and FX neutral. Subscription revenue reached $36.5 million in the third quarter of 2022, from $29.6 million in the same quarter last year, a year-over-year increase of 23% both in US dollars and FX neutral. This quarter, subscription revenue accounted for 94% of total revenue versus 93% in the same quarter last year. Non-GAAP subscription gross profit was $26.9 million, compared to $20.2 million in the third quarter of 2021. Non-GAAP subscription gross margin was 73.8% in the third quarter of 2022, compared to 72.5% last quarter and 68.2% in the same quarter of 2021. The 560 basis points year-over-year margin expansion shows the commitment of our team to keep improving our margins. This margin improvement was mostly driven by the migration of non-core services to more efficient hosting providers, and the optimization and operational leverage of our support costs. We are more than proud about what we achieved in this front, and we are excited about what’s to come. We’ve also continued improving our non-GAAP services gross margin, resulting in an even higher non-GAAP gross margin expansion, 670 basis points year-over-year to be precise. Our non-GAAP total operating expenses decreased to $32.4 million in the third quarter of 2022 from $43.3 million in the prior quarter and 32.8 million in the same period last year. This is a reflection of the organizational restructuring we made last quarter, plus additional areas of leverage our teams were able to find. As a result of the better than expected margin improvements, with the top line coming at a strong and robust pace, our non-GAAP operating income improved from a negative 41.6% margin in the same quarter last year to a negative 15.5% margin in the third quarter of 2022. This represents a 26.1 percentage point improvement year-over-year. As of the three months ended September 30, 2022, VTEX had a negative $3.3 million free cash flow, compared to negative $12.7 million in the prior quarter and negative 10.7 million free cash flow in the third quarter of 2021. Now, before I move to the outlook for the 4Q and fiscal year 2022, I would like to update you on the share repurchase program we approved in August of this year. As of September 30, 2022, the remaining balance available for share repurchases under this authorization is almost $25 million. We’ve purchased slightly less than 1.3 million shares at an average price of $4 per share. We expect to continue executing our plan based on the evaluation of market conditions and applicable legal requirements. Moving on to our business outlook, macroeconomic conditions remain uncertain. We continue to see the elongation of our sales cycle in the average time our new customers are taking to implement the VTEX Platform. More recently, we are also seeing a slower GMV ramp-up for new customers. Finally, during Q4 we will have for the first time the combination of the FIFA’s World Cup with the holiday shopping season, bringing additional uncertainty to the current macro scenario. Against this challenging backdrop, we are currently targeting revenue in the $46.0 million to $48.0 million range for the fourth quarter of 2022, implying a year-over-year growth of 27% in US dollars and 24% on an FX neutral basis in the middle of the range. For the full year 2022, considering the incremental macroeconomic volatility, we reduce our FX neutral year-over-year revenue growth target to 23% to 24%, implying a range of $158 million to $160 million based on October average FX rates. We are excited to continue contributing to our blue-chip customers' digital transformation journey, helping them to accelerate their sales with the right set of tools and products. Our customer base continues to demonstrate their resiliency, even through the uncertain times we are currently navigating. We are also honored by our customers' continued trust in the VTEX Platform, demonstrated by our stable annual revenue churn. This results in a resilient business model for VTEX that will continue to compound growth in a sustainable and ambitious way. With that, let’s open it up for questions now. Thank you.

Thank you. [Operator Instructions] Our first question comes from Marcelo Santos from JPMorgan. Your line is open.

Hi, good evening. Thanks for the opportunity to make the question. I have two. The first question would be, given your margin performance, would there be room to anticipate the target of breakeven in the end of next year? Is there room to deliver this earlier? The second question would be, your guidance implies an acceleration in FX neutral terms for the fourth quarter. I think you grew 22%, right, on this quarter and the next you're guiding for 24%, what are the drivers behind these acceleration? Thank you.

Hi, Marcelo. Thanks for your question. Happy to take this one. So we continue to be committed to reaching our positive non-GAAP operating income by the fourth quarter 2023, as we mentioned in previous earnings call. We are a high growth company operating in an underpenetrated market with attractive unit economics and high switching costs. So we will continue to prioritize growth. At the same time, we will operate in a lean and agile way, which especially during uncertain times can create a lot of value. Having said that, if there is any way for us to reach our breakeven sooner without jeopardizing growth, we would be delighted to deliver on that. So on the second question on the acceleration. As you mentioned, we have been accelerating our growth. If we look at the second quarter, we posted FX neutral revenue growth of about 20% and then 22% now in Q3. If you look at our Q4 guidance, it's in the middle of the range implied 24% FX neutral growth. So, as you probably remember in the second quarter of 2021, there was a second wave of COVID, so it was a tough comp the second quarter of this year and that started to clean up a bit more in the third quarter. So you see some of that acceleration. For this last quarter, we are seeing on the existing customer side the same store sales going to the high teens level, as I mentioned in the prepared remarks. And also we are having new customers joining the platform and helping us with these additional acceleration. So hopefully that helps you on the question.

Thank you very much. Very clear.

We now turn to Andre Salas from UBS. Your line is open.

Hi [indiscernible]. Good evening, everyone, and thanks for taking my question. We noticed there was a deceasing headcount quarter over quarter. Could you give more clarity on that and potential implications on your business model? And should headcount decrease be expected going forward. And I have an additional question. The figures that you presented were slightly above our expectations, but I believe it is worth asking here. We see a different growth dynamics between GMV and net revenue, which would -- net revenue of slightly lower growth base than GMV. For the medium and long term, should we expect these two variables to move closer? That will be it.

So I'll be very happy to answer about the first one about the layoff. Thank you for the question. So the -- yes, we are adjusting the company to the reality that we see in the market. We passed the pandemic. And as we mentioned last quarter, the layoff was an adjustment to achieve our optimal structure to deliver the growth pace the best way possible. We decided to do this in the most responsible and respectable manner possible. And we did the necessary adjustment on the second quarter of 2022. We decided to do all at once and to turn the [indiscernible] that matter. Over the last few months, we found some additional opportunities to find tune and optimize even more the old structure, one around the edges. We also had natural employee turnover and plant turnover. Some position we're not seeing the need to refill, some will overshoot over time. So we will keep our high bar on hiring. So we're feeling some positions might take some time, but we will. Finally, it is important to mention that we are -- that we're a high growth company. We'll continue to invest to deliver high growth plan. And currently, we feel like with are well invested structure that can support our growth plan for some time with just some marginal additional investment. So the headcount that we have right now won't increase that much. Ricardo, could you help me on the second question, please?

Yes, Geraldo. Happy to. So regarding the dynamics of GMV versus revenue growth, before going through the details, it's important to recap that roughly one third of our revenue is a fixed fee, and two thirds is a take rate on our customers GMV. Therefore, only two thirds of our customers GMV growth automatically flows through as revenue growth for us. In other words, as our share success model, there is an automatic imply take rate decrease for our customers, where we get more dollars out of them. It's a win-win setup. We do shares some of our success with our customers in exchange for automatically serving the increase in ecommerce penetration. If you divide our subscription revenue by our GMV, you'll see a slight increase in take rate quarter over quarter, but a slight reduction year over year. This implied year over year take rake decrease is driven by mix in our share success model that I just explained. In other words, we are not seeing any like for like pricing pressure. Finally, I would also highlight that we are passing through inflation to our fixed fee portion of our contracts in most countries. This is more challenging to do in developed economies, but we have been doing it in Brazil and we are starting to do it in some countries in LATAM ex Brazil as well.

Got it. Thank you.

Our next question comes from Diego Aragao from Goldman Sachs. Your line is open.

Yes, good evening, everybody. Thanks for taking my question. Actually, as a follow-up on maybe Marcelo's question. Looking to the subscription gross margin, it is great to see that this metric is expanding consistently during the year. So I guess my question is, how should we think about further operating efficiency? And maybe what is really the cause here? What are the key drivers for it that could continue to change the subscription gross margin level going forward? I was just wondering if this is just because you are scaling up the VITEX platform in markets where you are either at the discovery or validation phase and moving those markets to the acceleration and scale phases? Or is there any other reason behind it? And my second question is somewhat correlated to the first. It seems that most of the incremental net operating margin gain in this quarter came from lower marketing and sales. So is this where most of the headcount reduction is reflected on? And also, if you can give us some color on how to think about market and sales going forward given that, I would say that, part of the future growth of the company should come from investments in this line item. Thank you.

Hello. Thank you. I'm very happy to answer that. First of all, the gross margin is very weakly linked to the expansion in other countries. We have a single infrastructure, single system that we share across all the countries that we serve. So it may impact the efficiency of sales, it may impact the sales efficiency, but it cuts very little the gross margin performance. The most relevant improvement on gross margin performance is related to hosting cost efficient, followed by support optimization. I will explain you a little bit more. Just to recap, our hosting represents roughly two thirds of our costs. So being efficient in this front has been a major focus for the company with great results so far. When we talk about the features, I'm talking about migration to other processes from Intel to [indiscernible]. I'm also talking about transitioning some of our observability and logging -- software for logs to -- from a solution that is third party to a solution that is more -- almost created, not created, but assembled by us using more open source. So it's important to mention that as we perform the migration of our margins and continue to work towards this hosting optimization, we might face some volatility in our margin structure, especially in the beginning of each migration when we are running two * providers at the same time and adjusting the codes and processes. So -- but most of this improve in hosting, etcetera, is from hosting costs. But also on the support side, which represents hopefully one third of our cost. And this is mostly personnel. And so as we are increasing our revenue, we are not seeing the need to increase the team as much. And this might be in some ways linked to us getting a little bit bigger in this new country that we're exploring. The second question you had was the trade-off between growth and profitability, right? So I really don't see that all the -- yes, so the decrease in headcount is mostly linked to the sales and marketing area. But the answer that I'll give you is like, we -- I don't think this will jeopardize the potential future growth of VTEX for the next year, two or three years. The company is now optimized, we're optimizing our structure to continue to be high growth, but there is a change in the landscape that we're adapting to. I will give you some historical context to illustrate my point. In ‘19, we grew over 40% in FX neutral with a slightly positive free cash flow. In 2020, there was a surge, a huge demand, right, in commerce. We grew 95% in FX neutral with positive free cash flow of equivalent to 10% of our revenue on that year. And then we accelerated our investments from the end of 2020 into the middle of 2022 this year. Now we have adjusted our structure to match the ecommerce market growth, which is still very attractive and long term in nature. But given the -- because of the low penetration and the digitalization of the industry in general, but the growth that we saw in 2020 is not there and companies like ours and like a lot of other companies we were -- we didn't want to miss the growth momentum. So eventually, we increased the size of our team more than the current demand that we're seeing right now. So I don't see us losing momentum in the growth given the current demand for the market.

That's very clear and very helpful, Gerardo. Thank you very much for this. And if I may, just one more question. On your opening remarks, you mentioned a couple of new customers in the US, mentioning like Eric's bike, which are quite interesting shop by the way. But given how relevant this market could be for VTEXs, can you just comment a bit more about the demand you were seeing in that market? Maybe commenting on your pipeline and provide some colors on the customer profile, for instance, if we think about like enterprise clients versus SMB clients, I think that will be great. Thank you.

So for this, I would hand over the question to Mariano. Marianne is very on top of what is happening in the US. He will give nice sense.

So in the US we are seeing momentum in B2B. So VTEX has a great offer of B2B marketplace and we are seeing good opportunities coming organically on B2B. And we are seeing also B2C demands. So we can quote, as we mentioned, the WH Candy, that's a group of just candy ornaments shop. It is the same group. And we are migrating all of them. So we are seeing B2C and B2B, B2B mid-size. let's be more nailed down on that. And B2C, we are seeing good momentum, onmichannel B2C as well. 50:50, let's say.

Very clear, Mariano. Thank you.

We now turn to Clarke Jeffries from Piper Sandler. Your line is open.

Hi. Thank you for taking the question. First question is, could you maybe review for us how the AWS partnership is structured? How they're going to market with your solution? And what really invest alongside you? Does that mean generally trying to get a sense of how a partner fits into even their own amazon.com strategy.

Thank you for the question. So let me recap on the AWS partnership. Last year, we announced a multi-year collaboration agreement with them to deliver directly to consumer ecommerce solutions to global enterprises. AWS then include VTEX into their marketplace, communicate this partnership internally to their reps in Europe, in US, in Latin America. So their customers interest in digital commerce platform for B2C and B2B capabilities, they could choose VTEX. The sales team of AWS is matching effort with VTEX solution engineering in the three continents. And at the beginning, we were conservative in how the contribution to our operations would occur. But the good news is that, we are gaining momentum and traction on this partnership. So we are grateful for all the opportunities AWS collaborating with us in the field. For instance, as mentioned by Gerardo, in the prepared remarks, this quarter we had the go live of Bell Corp, a customer that AWS and VTEX has worked -- have worked together. Also B2B on Bridge Stratton is another case that we already announced that VTEX and AWS partners as well. So it's coming along. We are optimistic for the future of the partnership. And I believe that for Europe and US it will be relevant.

All right. Thank you very much. And then Ricardo, maybe wondering if I could ask really for more color around how the new merchant, new region or new store pipeline has trended compared to your expectations? I mean thinking through the growth algorithm, it sounds like high teens same store sales growth in larger customers is an improvement year over year. Just wondering how we should think about the other part of the equation as we get to what seems to be an implied roughly 30% GMV growth for 2022?

Yes. Hi, Clarke. Happy to elaborate on that. As we have been talking over time in previous earnings calls, we'd like to look at our P&L separate by existing customers and new customers. So we see these healthy dynamics with our existing customers and accelerating same store sales, which is very good to see with very stable annual revenue churn. So this is good news on the existing customers P&L. On new customers P&L, we continue to see a strong demand for new customers. This demand has been more stable recently than accelerating, now we continue to see strong demand for these new customers contributing to our overall growth. I would say on maybe 60:40 new customers existing customers something in that neighborhood. I think that's helpful.

Yes. Perfect. Thank you very much.

[Operator Instructions] We now turn to Thiago Kapulskis from Itau. Your line is open.

Hello, everyone. Thanks for the opportunity to make questions. So I just have two follow ups on the previous question. So the first one, just to understand a little bit what's embedded in the guidance for Q4? And I'm just asking this because you pretty much -- you posted a beat right on your Q3 guidance, but on the nominal numbers in US dollars for the full year, the guidance is lower versus the guidance you provided the last quarter, right? So I just want to understand what exactly is just like FX, is there any specifics to the World Cup or elections in Brazil, anything like in terms of deals? Just want to get a little bit of a sense of what's in here or if you just want to be conservative because of the macro. So any additional color on this would be interesting. And the other question I have is on the gross margins, right, because you're making a very good attraction here. And I know the environment for the cloud providers isn't being that good, right? We saw this in AWS and Microsoft results, right? And just want to get a sense of -- this improvement is related 100% to the operating leverage they're getting from more volumes? Or is there any sort of a renegotiation or even room actually to get lower prices due to the tougher environment that the call providers are having elsewhere. Thanks.

Yes. Happy to take the first question regarding the guidance and the dynamics there and then I'll pass it over to Geraldo to talk about the gross margin and the drivers. So on the guidance for Q4, right? As I mentioned, we continue to see an acceleration from Q2 to Q3 and then the middle of the guidance for Q4. However, having said that, as I mentioned, there was a beat for Q3 and it's not fully passing along to Q4. So there is a slightly lower acceleration than we were expecting three months ago. So let me share some context on what we are seeing here. Over the last two quarters, as we have been talking about, there is an elongation of our sales cycle expressed by an increase in the average time our customers are taking to implement the VTEX platform. The dynamic has remained stable over the past couple of quarters. It hasn't improved, but it also has not deteriorated. And we've been also talking about the strong performance of our existing stores throughout the year compared to the overall ecommerce market. So none of these factors impacted the Q4 guidance. right? But in addition to a challenging macro and you mentioned some of the factors, and the uncertainty of the Fifa's World Cup during the holiday season. I would say that there is the new piece of information that we are starting slightly longer ramp up time for some of our new customers. This means that some of our new customers are taking longer than expected to reach their estimated level of sales impacting the take rate portion of our revenue. We will continue to monitor these dynamics. At the end of the day, it's on our customer side to decide how many dollars to allocate to moving traffic to their ecommerce site once it goes live. So that's the key factor driving this Q4 guidance and this uncertainty of the Fifa's World Cup. So we'll keep you updated on this trend.

And about the gross margin, I can give some color here. The -- I would say that the natural -- there is some natural scale effect given we process more orders, we process more traffic and eventually the gross margin gets a little bit better. But this is not meaningful. This is not the reason why it got better. The other hypothesis that you brought is related to commercial conditions with the hosting providers. This is not the case for this year. We have long term contracts with AWS, our hosting providers. We don't renegotiate all the time. This is something we do once in a while and we didn't -- not this year, not specifically. Most of the increase of efficiency of our gross margin comes from R&D efforts. It's R&D that we spend to make one single service, give the same amount of throughput of responses with a little bit less money spending on AWS, a little bit less than resources spent on AWS or hosting providers. This is -- as we're not doing the pandemic, if you look to our history financial statement. You will see that in '19 we had some gross margin, then you see that during the pandemic, in the beginning of the pandemic, our gross margin was better because of the volume. Then there was a lot of features that we needed to develop for customers and capabilities linked to the physical stores, routing the order to the physical store including the physical store and the ecommerce experience and you see that our gross margin gets a little bit worse because our R&D efforts was for the past extra traffic that we were getting extra requisites that we were getting. And then for this year, as we return to a normal path of growth, we had bandwidth to put some resources on our R&D to in deficiency and we see the results. It's slowly -- very slow that we can do that. It's not there's no bullet -- silver bullet to solve the gross margin, but we can get a much better gross margin if we invest in R&D.

Great. Thanks a lot for the color. Very helpful guys. Thanks.

This concludes our Q&A. I'll now hand over to Geraldo Thomaz for final remarks.

The third quarter results have been achieved in a context of volatility and mixed macroeconomic performance globally. Under these circumstances and considering the consistent strong delivery of results from all the taxes, it's clear to us the strong resiliency of our business model and customer base. This give us the conviction to continue to reliably execute our business plan. Also, it highlights the immense opportunity we have in front of us as ecommerce continues to penetrate the economies of Latin America countries and globally. VTEX is demonstrating a clear path to become a relevant global player. We are still in the early stages of our long journey and we are more convinced than ever in the value we are creating in this omnichannel era. VTEX has great potential in the years to come. We are excited to continue executing to deliver on our vision. Thank you everyone for joining us today. I'm looking forward to update you about our progress in our next earnings call.

Today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.