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

Hello everyone, and welcome to the VTEX earnings conference call for the quarter ended March 31, 2024. I'm Julia Vater Fernandez, Investor Relations Director for VTEX. Our senior executives presenting today are Geraldo Thomaz Junior Founder and Co-CEO and Ricardo Camatta Sodre, Chief Financial Officer. Additionally, Mariano Gomide de Faria, Founder and Co-CEO and Andre Spolidoro, Chief Strategy Officer, will be available during today's Q&A session. I would like to remind you that management may make forward-looking statements related to such matters as continued growth prospects for the company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and projections are reasonable in view of the current available information, you are cautioned not to place undue reliance on these forward-looking statements. Certain risks and uncertainties are described in the Risk Factors and Forward-Looking Statements sections of VTEX Form 20-F for the year ended December 31, 2023, and other VTEX 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 first quarter 2024 earnings press release available on our Investor Relations website. Now, let me turn the call over to Geraldo. Geraldo, the floor is yours.

Thank you Julia. Welcome everyone and thanks for joining our first quarter 2024 earnings conference call. As we step into 2024, despite macroeconomics uncertainties, our GMV continue to outperform the market, growing 22% year-over-year. Slightly above that our revenue grew 25% year-over-year in the first quarter of 2024. We remain encouraged by new contract signatures and the operational leverage of our business model, resulting in significant operating margin expansion. In today's retail landscape, seamless integration of software solutions, content creators and suppliers within an efficient architecture is imperative for low maintenance costs and rapid revenue generation. Commerce has evolved into an ecosystem-driven play and VTEX is at the forefront of connectivity. With an extensive network comprising over 1000 system integrators and independent software vendors and over 6000 VTEX IO extensions by third parties, we deliver comprehensive solutions with remarkable speed and efficiency. Our ecosystem extends beyond that. Our customers can easily become marketplaces and connect to external marketplaces. Sales rep also play a crucial role in the consumer journey and we're investing in connecting them across all channels. Additionally, this year we're strengthening connections through data, leveraging AI to extract valuable insights. We envision VTEX as the source of true for sales attribution data, which is vital for developing AI models in commerce. At VTEX, we are delivering significant year-over-year operating margin increases while also launching products that reshape commerce for IT and business teams, driving sustainable growth with compelling ROI. Introducing new revenue streams paves the way for our long-term expansion while enhancing operational efficiency and margins. We're excited about VTEX's future, focusing on growth, margin optimization and customer success. Positive feedback from customers and industry experts reaffirms our position as the global leader in connected commerce. We're leveraging these strengths to drive significant sales momentum. Our recent expansion…

Thank you Geraldo, hi everyone. I'm pleased to share VTEX's Q1 2024 financial results as emphasized by Geraldo, our Q1 GMV hit $4.0 billion, marking a year over year growth of 22% in U.S. dollars and 20% in FX neutral. This led to a year over year revenue growth of 25% in U.S. dollars and 21% on an FX neutral basis, reaching $52.6 million. Although macroeconomic conditions impacted the same store sales of existing customers, the first quarter of 2024 witnessed relevant momentum in signatures of new annual contract value. That, coupled with significant gross margin improvements and a disciplined operational expenses approach, results in significant operational leverage and an encouraging sign for VTEX's profitable growth trajectory. Double clicking on our top line, our subscription revenue reached $50.4 million this quarter, up from $39.8 million in the first quarter of 2023, representing a year over year increase of 27% in U.S. dollars and 23% in FX neutral, while our services revenue totaled $2.3 million. Now, moving down the P&L, we have exciting updates. We are pleased to announce the positive operational leverage achieved even with the inherently weaker seasonality observed in our first quarters. This performance instills confidence in our sustainable profitability prospects. Our non-GAAP subscription gross margin reached 77.2% a 328 basis point year over year improvement compared to the 73.9% margin in the same quarter last year. This margin expansion our team's dedication to enhancing profitability and highlights our ongoing efforts to migrate non-core services to more efficient hosting providers and optimize support costs for operational leverage [Technical Difficulty] implying an year-over-year growth of 18% on a FX neutral basis in the middle of the range. For the full year 2024, we continue executing our strategy for profitable growth, recognizing heightened productivity in Argentina's macro situation. We are targeting FX neutral year-over-year revenue growth of 16% to 20%, implying a range of $234 million to $243 million based on April's average FX rate. Further demonstrating our operational leverage. We are targeting free cash flow and non-GAAP operating income margins of high single digits. We are excited about the future of VTEX. Our business model has proven its robustness and now our journey revolves around achieving business growth, expanding margins and generating cash. We anticipate in supporting our customers while extending our value proposition to more brands and retailers, to help them reach their financial and operational objectives in a high interest rate environment worldwide. Our journey so far has been filled with rewarding moments and we are encouraged about all that lies ahead to solidify our position as a global backbone for connected commerce. With that, let's open it up for questions now. Thank you.

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

Hi everyone. Can you guys hear me?

Yes, we can hear you Thiago.

Great. So thanks, So I think the first one regarding the full year guidance right, I mean, the nominal numbers are the same, right. But the FX neutral growth is lower than the previous guide, right. So, you guys mentioned Argentina. Is there anything else in terms of the business that is going different or doing different than your previous expectations? And if you could guide -- if you guys could give us some color also in Argentina, if it's just FX related or how the business is there in terms of overall strength? I know that this was a concern back in Q4 and the other question is about the AI products that you are providing. I mean, there's a lot in the pipeline I think there was the shareholder letter too last quarter. So, if you guys could comment a little bit more on the roadmap that you have and how you think this could actually enhance your strategy or future opportunities that could come from your strategy there? Thank you.

Great. Hi Thiago, Ricardo Sodre here. Happy to take the first two questions on the full year guidance in Argentina, and I'll pass it over to Geraldo to talk about AI. So, on the guidance for the full year, we are maintaining our annual guidance in dollar terms as you mentioned. This is supported by steady and robust performance observed in key markets such as Brazil, Colombia, Mexico, the U.S. and Europe. And although consumption in real terms is being severely impacted in Argentina, which impacted our FX neutral guidance, given that there hasn't been any significant change in the FX rates in Argentina over the past couple of months that also led us to maintain our revenue guidance in U.S. dollars for the full year. And it's important to recognize a certain level of risk in our guidance considering the volatility associated with the situation in Argentina, especially in Q2, given one, their current macro situation and consumption level, and two, their most relevant e-commerce event of the year called Hot Sales that will happen next week in the midst of these uncertain environment that they're going through. Now, going back to things that are under our control. Looking forward, we are encouraged by our meaningful new contracts sales momentum and on the operating margin front encouraged by our Q1 achievements we have also adjusted our full year operating income and free cash flow margins guidance, raising our forecast from mid to high single digits that we mentioned last quarter to high single digits that we gave this quarter. So, these adjustment reflects our unwavering confidence in our ability to navigate and improve our financial performance throughout the year and then just double clicking on Argentina. The macroeconomic situation in Argentina is challenging while FX rates have remained stable…

Thank you Ricardo. Thiago very good question. You know, like there's been this revolution about using AI as a new building block, right. We're getting so many new capabilities being created by LLMs and models and stuff like that. And we believe that VTEX is uniquely positioned to leverage these building blocks and give business meaning to the retailers and manufacturers and brands in the world. So that's why we're investing so much and leveraging the building blocks that people are creating all over the world. And you can see that I invite you to explore our latest VTEX Vision, spring 2024 edition. We talk a lot about the things that we did and the roadmap that we are heading to and we have product launches that are around four key directives, more than that, creating fast and high, converting composable experiences, empowering sales reps across all channels and ensuring faster and efficient fulfillment. All this boosting productivity through AI. We launched FastStore framework where we're revolutionizing the way we are letting our customers building fast experiences in the website. This is not completely related to AI, but we think it's very important to our customers right now. But the ad network, as you can imagine, is leveraging AI a lot and I think customers will leverage this a lot. Data pipelines. With data pipeline, we will enable our customers and partners to build AI models to leverage AI with to, you know create possibilities of their own, actually turn data into gold. We also launched a product called VTEX Shield security shields I think with these value -- with more value, people will capture more value being sure that the data is self-guarded is fundamental to a software like ours so we launched this product as well. And so we are investing a lot. And as I said, we're the right company to give business meaning to this AI revolution.

Great. Thank you so much for the answers guys. And I'll definitely explore the video -- the content. Thank you.

Thank you.

Your next question comes from the line of Maddie Schrage from KeyBanc. Your line is open.

Hey, guys. And thank you for taking my questions. Besides Argentina just kind of wanted to talk through maybe some of your other geographies, wondering if there are maybe any tailwinds in rest of world or anything like that, that could partially offset it? Thanks.

Yes. Happy to start and then others feel free to chime in. Thanks Maddie. So, as I mentioned on my first answer, we saw this headwind in Argentina, but we saw the other countries performing well. Brazil, Colombia and Mexico, the US, Europe also, I would highlight that Brazil continues to show strong momentum in signing new contracts and new sales, even with the relevant market share that we have in the country. Our strong position and the strong ecosystem that we have is helping on that. And also the way we see our retailers, our customers in Brazil, integrating the fiscal stores, accelerating their same store sales has been a positive. So overall, we see good performance on our other geographies, which is encouraging for our year as well. Not sure if that answers the question or if others want to chime in.

Yes, I think I just have a quick follow-up for you as well. But wondering, if you could maybe talk about the sales motion right now. Kind of what's maybe the mix of revenue between existing and new customers and maybe if you could kind of size the backlog for us, I think that'd be helpful too.

Hey, Mariano here just to mention about a little bit on sales momentum if I understand correctly your question, we are seeing a consistent improvement in the pipeline, not one specific country, but globally. This is a consequence of VTEX's position in most of analyst companies such as Forrester, IDC and Gartner so we are receiving good reports, we are enhancing our positioning and we are invited to more and more RFPs globally. We are recognizing the good momentum. We are on track with the sales goals we plan for the year. However, we need to highlight the volatile period for retailers and manufacturers all over the world in this environment of high interest rates. So, this will bring some volatility and we might end up being a good solution for this world that will pursue more efficiency and it's going to be really tough years ahead for all retailers. It's not one year, it's going to be like 3 years, 4 years, 5 years in a shift. So, we are being very diligent in opening new organic channels and increasing profitability for our active customers and we are really focused on helping them to simplify their operations and deliver efficiency in the bottom line. In this high interest rate and high inflation environment, seamless integration, ecosystem ready software and efficient architecture are essential to minimize maintenance costs and accelerating revenue. So with all the more than 1000 system integrators and more than 6000 VTEX IO extensions by third-parties, VTEX provides a very comprehensive solution we call the complete and composable solution that can help retailers all over. Mentioning Brazil, we still have a lot of room to grow on the B2C and we have an enormous B2B market to be discovered. Latin America, we have significant groundwork to cover this quarter. Having the go live of Nike in Colombia is a significant milestone in Europe. Our expansion into Germany with OBI sets solid foundations for us to build up. So that's the summary. Mainly the recognition of the industry experts Gartner Customer Choice, we were the only company to achieve the Customer Choice award and the IDC acknowledgment VTEX as the main leader on B2C and a major leader for B2B also completes the good momentum on branding and positioning for VTEX.

And maybe just to build quickly Mariano, I think there was a question from Maddie as well on the existing versus new customers. So we continue to see in our same store sales on the mid-teens level. If you look at on a GMV basis and on the overall revenue growth for the company, we continue to see that roughly one third of our revenue is coming from our existing customer base and roughly two-thirds of the revenue growth coming from adding new customers to the customer base.

Appreciate it guys. Thank you.

[Operator Instructions]. Your next question comes from the line of [indiscernible] from Bank of America. Your line is open.

Hi, good afternoon everyone. Thank you for taking my questions. I have two here on my side. First of all on gross margin, it was really strong this quarter and it's getting close to what you guys said as the target model for the coming years, even in a soft quarter. So we probably should expect gross margins to be higher for the full year. So I just wanted to see, when do you guys think you could be reaching this target model and looking forward, what do you think could be the gross margin for the company? Maturity or how can we think about that going forward? And then second, ties a little bit to the first question, but on service revenues it was down year over year and I just wanted to understand how we could think about this line going forward. Should it continue at similar levels in nominal rates, or should it also expand from current levels? Thank you.

Thanks [ Luca ], thanks for bringing that up. I'll start with gross margin and then I'll pass it over to Mariano regarding services revenue. So in Q1 we achieved a non GAAP gross margin of 72%, marking a year over year expansion of over 600 basis points and despite the seasonal effects typical to Q1 as you mentioned, this brings us closer to our Investor Day target of 75% for our overall gross margin, and it's 80% for the subscription gross margin right? And we also achieved 77% on the subscription gross margin. So always also getting there as well. And approximately two-thirds of our subscription costs are related to hosting, and we have significantly enhanced our cloud efficiency. These efforts include migrating systems to Linux, optimizing CPU usage and reducing cost through caching and out scaling and all while maintaining or improving performance right. So that has been helping a lot our subscription gross margin. Regarding the services gross margin side, although some volatility has been observed, the improvement is primarily attributed to our strategic adjustment, away from the hyper care modes for key new customers in the U.S. and Europe as they go live. So we remain focused on the opportunity to enhance our subscription gross margin and the overall gross margin while some services gross margin volatility is inherent in our business, we anticipate further improvement in this area in the future and we're moving towards our goal that was disclosed in the last Investor Day of 80% subscription gross margin and 75% overall gross margin and that's a medium term goal for the next like 3 years to 5 years. It's not a terminal model growth. We don't have the visibility yet for the terminal model, but for these next 3 years to 5 years, that's what we are going after. With that, let me pass it over to Mariano to talk about services revenue.

Yes, clarifying a little bit more on the service margin our service revenue, which includes our solution architect offering during major customer implementations, naturally experienced some volatility as accounts goes live and the stage of development of new geos are expanding. So it's expected by design to have some volatility. This time last year, we had a few accounts in implementation phase, like for example OBI, that we just announced in a hyper care model. That said, we would expand a little bit more on hyper care so that volatility is expected. But while there are no significant changes in the model and design of the services to report, aside from what I already mentioned, that's expected volatility, we will continue to execute. We remain optimistic on service as we are increasing our system integrator reach and the system integrators are becoming more and more mature. So broader and more mature ecosystem will bring the volatility on the service revenue and service expenses of VTEX a little bit down. So, we will be able to scale the deliveries with less direct service of VTEX and that's by design, the ultimate goal for a platform like us.

Perfect. Very clear. Thank you for the answers.

That concludes our question-and-answer session. I will now turn the call back over to Geraldo for some final closing remarks.

In conclusion, it's evident that in today's high interest rate environment, retailers and brands urgently need effective tools to enhance margins and optimize organic sales channels. VTEX is fully committed to providing actionable strategies for B2B and B2C enterprise to maximize ROI and elevated e-commerce platforms. By integrating cutting-edge innovations, we're ready to unveil fresh audiences and insights, empowering our customers to achieve even more impactful consumer engagement. Our unwavering dedication to customer centricity and innovation-driven solutions is not merely shaping the future of commerce, it is redefining it. We are excited about the results of the first quarter, our gross margin and operating margin expansion was remarkable and sets a strong foundation for our sustainable, profitable growth. At VTEX, we stand stronger and more robustly positioned than ever before. We focus on growth and margins underpinned by a remarkably strong business model. This is our time and we are ready to seize it. Thank you everyone for being part of this exciting journey. We look forward to keeping you updated at our next earnings call. Have a wonderful week.

This concludes today's teleconference. Thank you for your participation. You may now disconnect.