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 being 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 would now like to turn the call over to Julia Vatter-Fernandez, Investor Relations Director. You may begin.

Hello, everyone, and welcome to the VTEX earnings conference call for the quarter and the June 30, 2024. 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, 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 continual 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 a new reliance on these forward-looking statements. Certain risks and uncertainties are described on the risk factors and forward-looking statements section 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 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.

Thank you, Julia. Welcome, everyone, and thank you for joining our second quarter 2024 earnings conference call. VTEX 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 give 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 significant 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 26 percentage points gained 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, although 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 and leaving Ricardo to cover the financials later. In the second quarter…

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 a robust contract signature momentum. We are encouraged by our prospects and aim to build more reference cases demonstrating VTEX’s value proposition. As Geraldo briefly mentioned, 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 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…

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

Hi. Good evening to all the VTAX 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 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 on the gross margins, they're evolving very quickly. What's next? What's beyond the target model? Thank you very much.

Hi, Marcelo. Thanks for this. As highlighted in our prepared remarks, we saw a strong performance from our existing customers and a robust momentum in new contract signatures from new customers, which exceeded our expectations in Q2 and prompted us to increase our FX neutral four-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. Further on Q3 and 2024 guidance and on your question on the assumptions and how we're about it, we are assuming similar operational KPIs for Q3 and onwards versus what we saw in Q2. The slightly lower year-over-year growth implied for the second half of the year can be explained by tougher comps. 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 guidance for the remainder of the year. Weighted…

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

Yeah, happy to start and others to chime in. So Marcelo, as you can note, 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 was a mid-term target, like three to five years. We lapped the investor day already, so it's been a year since that, so now two to four years. And we have been positively surprised by our progress on the margin side, and we continue to go after this target model target. Once we are closer to it, or 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.

Thank you. Thank you very much.

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

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 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 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 movement in the U.S. as 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, and especially opportunities or threats that you can find in developed markets like the U.S. with all of that. So thank you.

Yes. Hi, Thiago. Great. Thanks for the opportunity to share additional details on this topic. So on Argentina, as I mentioned on the guidance, right, Argentina has been a couple of percentage points headwind to our consolidated growth. And 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 the Black Friday for Argentina. Once hot sales in Argentina passed, we felt our guidance 4Q2 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. And we were also glad to see that during the event, our customers over performed the overall market by a decent margin. And 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 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.

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

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, right? In the SaaS business because of AI, companies moving more into paths, 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?

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. Macroeconomic demands the companies to go for it, and the AI should be the instrument of this kind of delivery. The LLM part of the AIs will do a kind of significant impact on the customer service. You can imagine that the customer service varies from 0.5% to 2.5% of the GMV of the retails and brands, and that can reduce, maybe, it's an assumption here, by 50%. So, AI will deliver some value on the customer service. On the sales itself, all the tools that have predictions will be reinvented. So, the search, the front end, everything will be affected by AI. Our bet, VTEX's bet, is that we're going to leverage the models that are there as infrastructure. So, VTEX is happy to explore the models that will be provided by infrastructure companies, like, for example, Cinerise, like, for example, OpenAI, NVIDIA, Meta, and we will leverage those models to deliver the best applications to our customers. We address the situation of developing AI pretty close to the goals of providing better revenue and better profitability for our customers. We are not deploying, like, a huge amount of capital in AI, although we are moving R&D to delivery AI products at domes to the customer base of VTEX.

And here, I'm Geraldo here, if I can also add, Tiago. I think I can link also this, you said about the expansion in the U.S., all the changes here that is happening, and when the market moves, there's always opportunities to disruption. This is an opportunity that we will get if we leverage our software to 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 change and broaden the interfaces where people buy. You see that we always advertise VTEX as the e-commerce platform that also has OMS that is very close to the e-commerce platform. So, having this omni-channel approach, being able to welcome a new channel for the consumers of our customers can be a huge opportunity for us in the new market that we're entering as they are changing. Let's remember also that AI is done with a lot of training. VTEX is the e-commerce platform, the source of truth for attribution for all the orders that are generated in every channel, traditional channel or AI channel, let's say, in the future. We believe that having the source of truth for the attribution is very important for our customers and partners to develop their own models, to develop their capabilities on top of the rich data that we have custody of. That's why we are investing so much in security compliancy capabilities to the data. We're investing in making the data available to partners and customers by upselling the data pipeline products that we are offering to them. And we, as Mariano said, I will just reinforce it, I do believe that the latest technology on AI, which is the large language model, are very convenient for the retailers to enable them to not only automate a lot of processes that today are very complicated and demand a lot of investment, but also to allow them to go to other channels and produce content that is quality, that is high quality for all kinds of audience. I would say that AI is the materialization of retailers now can, every retailer, not only the VTEX can provide a very powerful and convenient experience to their customers. And we're there to support them and enable them to do that.

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, let's say, closer to the business outcome in terms of monetization, or not really, we're not there yet?

Yeah, when there is a disruption in the market, the value chain changes. People move, people make RFPs, people prospect other systems, and people prospect because they need to evolve. Like if by next year, everybody's buying using a share bought assistance, there's maybe thousands of retailers in the U.S. that will need to adjust and will need to catch up with the technology. And then we will see an opportunity for us in the market that we are less mature to show our value. And yes, the low TCO for sure, especially if the interest rates are still in a challenging level, this can make an extra difference for the choice of our customers, of our future customers.

Excellent. Thank you so much for the detail.

Our next question comes from the line of Maddie Schrage with KeyBanc. Please go ahead.

Hey, guys, and thank you for taking the question. I was just wondering if you could provide an update for maybe sales cycle length, if there's 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.

Yeah. Hi, Maddie. Thanks for the question. So on the sales cycle and corporate budgets, we've seen a stabilization of our sales cycle. I think if we rewrite the tape a little bit, going back to 2022, when inflation was high and interest rates were increasing, we did see sales cycle lengthening and corporate budgets being more maybe short term, low hanging fruit focused. Throughout 2023, we saw a stabilization of our sales cycle and towards the second half of 2023, actually some improvement. Now in 2024, I would say that the sales cycle has been kind of stable versus how we closed it last year. So it has not been either relevant tailwind or headwind to our growth. And on corporate budgets, obviously with high interest rates and money being more expensive, all corporations are more mindful of their budgets and they are focused on delivering a bottom line that's attractive. With our value proposition of having a lower TCO solution to our customers and flexible and easy to test solutions so they can test different go to markets, I think this has been a positive pitch for us with our customer base and prospects. So I mean, it's challenging, but it's something that we are navigating well, I would say, as you can see by the growth of our existing customer base, as well as new customers that we are adding. And then the second question, Maddie if you could repeat please, that would be great.

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?

Yeah, I can start here. So as I mentioned on the question about the guidance, we are assuming for Q3 and over singular KPIs and what we saw in Q2, on a same source sales basis, we continue to see our existing customers growing their GMV in the teens level. So that's something that's above what we are seeing for the overall e-commerce market. So it's great to see our customer base over performing the market. Now, interest rates are still high. And when you look at consumer confidence across different countries, you see some volatility. And so it is still an uncertain macro out there. So we are not embedding in our guidance and forecast any recovery on consumer spending. We are also not really expecting a recession or embedding a recession in our numbers or decreasing consumer spending at this point.

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

Yeah, I mentioned it was getting worse month over month until April, Maddie. Since then, we saw some recovery in May with the hot sales event. That's kind of like their Black Friday. But the country is still volatile. So we don't see a clear trend in Argentina at this moment.

Thank you so much.

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.

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 a strong momentum in contract signatures, and our global ecosystem continues to mature, generating positive externality. 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.

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