VTEX
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

And welcome to the VTEX Reports First Quarter 2022 Financial Results. My name is Brika and I’ll be today’s event specialist. There will be a question-and-answer session. [Operator Instructions] Your host for today’s call will be Julia Vater Fernández. So Julia, please begin when you’re ready.

[Julia Vater Fernández:]

Hello everyone, and welcome to the VTEX earnings conference call for the quarter ended March 31st, 2022. I am Julia Vater Fernández, 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 our 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 31, 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 first 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.

[Geraldo Thomaz Jr.:]

Thank you, Julia. Welcome everyone, and thanks for joining our first quarter 2022 earnings conference call. We’ve started the year with a strong first quarter. Our business delivered solid growth, with good execution across all regions, solidifying our position as the leader in the digital landscape in Latin America and strengthening our global footprint. I’m excited to update you on our progress in making VTEX the backbone of global commerce. In the first quarter, GMV has a robust performance, as a consequence of healthier consumer sentiment in Latin America, as well as initial recovery of some verticals, such as electronics, that were affected by inventory shortages in the second half of last year. Meanwhile, verticals such as apparel and accessories, beauty and health and groceries continued its high growth performance, all above 50% year-over-year growth in USD. As a consequence, GMV growth accelerated to 33.3% in U.S. dollars, resulting in 18.6 percentage points increases versus our fourth quarter GMV growth. Another highlight here is that Mexico’s performance outpaced the region this quarter, showing strong indications of traction. We continue attracting premier brands and retailers. This quarter we more than doubled, in dollar amount, the go-lives of new stores in the VTEX platform, demonstrating that we are bringing into production the attractive backlog we mentioned during the second half of last year. Some new customers that went live this quarter that didn’t have online store presence in the respective countries before were

[Ricardo Camatta Sodre:]

Thank you, Geraldo. Hi everyone, it’s a pleasure to be here update you on our financial performance for the first quarter of 2022. This quarter our revenue increased to $34.7 million, a year-over-year increase of 33.7% in U.S. dollars and 29.7% on an FX neutral basis. Furthermore, this increase was on top of our same quarter last year revenue growth of 77.0% on an FX neutral basis. This growth rate acceleration was driven by a significant increase in the same-store sales of our existing customers and by new stores coming online. Subscription revenue represented 94.0% of total revenue versus 95.1% in the same quarter last year. This is explained by the strong sales momentum we are having, and the implementation of our backlog leads to increases in our services revenue. Subscription revenue increased to $32.6 million in the first quarter of 2022, from $24.7 million in the first quarter of 2021, a year-over-year increase of 32.1% in U.S. dollars and 27.7% on an FX neutral basis. Now, moving down our P&L. Non-GAAP subscription gross profit was $22.7 million, compared to $16.1 million in the first quarter of 2021. Non-GAAP subscription gross margin was 69.6% in the first quarter of 2022, compared to 65.1% in the same quarter of 2021. The 466 basis points year-over-year improvement reflects operational hosting cost efficiencies, as we migrate non-core hosting services and improve our code’s efficiency. On top of the subscription gross margin expansion, we also increased our services gross margin, which led to overall gross profit reaching $22.1 million, representing a year-over-year increase of 46.1% and a margin improvement of 563 basis points. Our non-GAAP loss from operations was $13.7 million during the first quarter of 2022, compared to $8.0 million in the first quarter of 2021, primarily due to incremental personnel-related investments in sales and marketing, and research and development, as we have been investing to capture market share and benefit from the further penetration of ecommerce. We continue to see attractive unit economics from our investments to bring new online stores to our platform. We also have some key areas of investment related to our product side, such as live shopping, conversational and social commerce, FastStore, VTEX ^shipping network, B2B, among others. We are going to continue to pursue these opportunities as we believe they are fundamental for our long-term growth, while being committed to be disciplined on our allocation of resources. As of the three months ended March 31, 2022, VTEX had a negative $16.1 million free cash flow, compared to $21.3 million negative free cash flow in the fourth quarter of 2021. This improvement of almost 25% quarter-over-quarter, on top of the sequential acceleration on a top-line perspective, is the reflection of our capability to deliver sustainable growth, while moving towards a cash generative scenario, as we historically have. In addition, it is important to mention that we ended the quarter with more than $270 million in net cash in our balance sheet. On top of this strong cash position, we are committed to efficiency. We increased our headcount from 1,727 employees at the end of the fourth quarter 2021 to 1,765 employees by the end of the first quarter 2022, a moderate increase of 2.2% quarter-over-quarter. Our non-GAAP total operating expenses increased from $34.4 million to $35.9 million, a slightly higher increase of 4.4% quarter-over-quarter given some senior hires we onboarded in our team over the last couple of months. While VTEX Day will have some one-off impact on our expenses in Q2, we expect our Q3 and Q4 expenses to reflect an even lower quarter-over-quarter increase than we delivered in Q1. Therefore, looking forward to the remainder of 2022, we continue to expect delivering significant operating margin expansion. Regarding our future outlook, while we had a solid year-over-year performance in Q1, we continue to see significant macroeconomic uncertainty and volatility in our customers’ GMV performance. Additionally, it is important to note that the second quarter of 2022 has a harder year-over-year comp due to the second wave of COVID in Latin America, with cases increasing significantly from March to June of the last year. Therefore, we are currently targeting revenue in the $37.5 million to $38.5 million range for the second quarter of 2022, implying a year-over-year growth of 23% in U.S. dollars and 20% on an FX neutral basis in the middle of the range. For the full year 2022, given the macro conditions and recent volatility as previously mentioned, we expect a FX neutral year-over-year revenue growth of 24% to 27%, implying a range of $160 million to $164 million based on the first quarter average FX rates. Wrapping up today’s call, VTEX had a solid start of the year, with robust top line performance, margins expansion, strong backlog undergoing implementation, and of course many new exciting products and partnerships now available in our platform. All of this together gives us confidence in our business today and in the long-term opportunity we have ahead of us. We’ll continue focusing on our differentiation, the quality of our platform’s technology, product and features, as well as continuing developing the ecosystem around it, which will push us even further. With that, let’s open it up for questions now. Thank you.

[Operator:]

[Operator Instructions] We have our first question on the phone lines from Cesar Medina from Morgan Stanley. Your line is open.

[Cesar Medina:]

Hi. Thanks for taking my call. I have two questions. The first one is related to the guidance. Can you – because it has changed and I believe it’s different relative to the one that you presented with the fourth quarter results. Can you break down the drivers behind the change? Is it more difficult in acquiring new customers? Is it lower outlook for net revenue retention? Things like that. That’s the first question. Second question, any comments on your store backlog? In the past, it was growing. I don’t if I recall correctly, triple digits, where are you seeing right now? Thank you.

[Ricardo Camatta Sodre:]

Thanks for your question, Cesar. That’s a very good question and happy to elaborate further. Before talking about the guidance and forward looking aspects, it’s important to know that we had a strong performance in Q1, right? Our GMV growth of 33% and revenue growth of 34% in U.S. dollars were quite robust considering the current market scenario in the organic growth of the digital commerce software market. Now on the top line guidance specifically, I would highlight two key factors we took into consideration. The first one is macroeconomic conditions. We are all seeing inflation rising globally, and interest rates being increased to reduce inflation. These increasing rates can obviously impact the retail sector, although it is still uncertain to what extent. So this is what we mean by macro uncertainty. The second one is consumer behavior post-COVID. We are seeing the reopening of stores for a few months now. However, consumer behavior continues to change. We believe omnichannel strategies will be of the utmost importance and we can help our customers with that. However, the path together may not be linear. So this is what we mean by the volatility in our customer’s GMV. Having said that we adjusted our FX neutral growth guidance to 24% from 20 – guidance through 24% to 27% in 2022, but given the appreciation of the currencies in Latin America, that now implies a range of $160 million to $164 million. In addition, we are also committed to efficiency. In Q1, we deliver more than 500 basis points increase in gross margin year-over-year. And we only increase our head count by 2%. And finally we continue to, to be committed to deliver significant operating margin expansion in 2022. So I think that answers the guidance question. And I can talk a little bit about the backlog that you asked as well. So we continue to have a strong backlog. Our backlog was doubling year-over-year, as you mentioned in your question for a couple quarters. And now we see the backlog growth more aligned with our revenue growth, which is expected, and it’s at a healthy level to sustain our revenue growth projection. We also continue to see contract signatures at a healthy pace. We are monitoring closely, how this strong backlog translates into online stores go live and new revenue for VTEX. And given the current macro conditions, we are being more conservative in our assumption of go lives/ramp up time of new customers. Having said that, we continue to win new customers at a healthy pace with some new wins mentioned in our press release and we continue to implement our backlog. For instance, as mentioned by Geraldo in the prepared remarks, the dollar amount of go lives we had in Q1 was more than double what we had in Q1 2021. And it’s also interesting to know that we have been able to attract more large enterprise customers across the globe with these large enterprise customers increasing their dollar share of the backlog over the past year. So I hope that answers both your questions.

[Cesar Medina:]

Thank you.

[Operator:]

Thank you. The next question we have comes from Vitor Tomita from Goldman Sachs. Your line is now open.

[Vitor Tomita:]

Good evening, all. Thanks for taking our questions. Two questions from our side. The first one on active developers, the overall number of active developers accessing the VTEX dev portal increased quite a bit this far as you said. Could you give us some more color on the drivers for that? And also on how the number of developers particularly outside LatAm is evolving. Second question from our side, thinking about your partnerships with payment providers, which you emphasized this in call could become a driver for a relevance improvement in your overall take rate in the longer-term, perhaps. Thank you.

[Ricardo Camatta Sodre:]

I think you’re on mute, Geraldo.

[Geraldo Thomaz Jr.:]

I’m so sorry. Sorry, Vitor, I was on mute. So thank you for the question. About the developers, we have this idea of being the developer platform for commerce developers. And this, we think the word is of commerce will be more complex, not less complex will be more fragmented, not less fragmented. And we need in the long-term the support of the ecosystem around us. So this is a very important indicator for us. It’s growing, it’s coming from lot of regions and not only the U.S., not only at all. And it’s driven by – there’s this push that we are doing, that we call VTEX IO, which is us providing a development environment for the developers, so that they can use the talent to get revenue out of the ecosystem that we created on the motion side. So this is – we are – that’s a big push. As we grow to other territories as well. We need to be more formal. When we were in Brazil, there was this ad hoc knowledge about our platform. Now that we are in a lot of other countries, we need the support of the documentation and we can check if we’ve been successful, educating our ecosystem with this KPI. About the – what’s the second question again? I’m sorry. The payment, Ricardo, could you talk – could you talk a little bit about the payment impact on the take risks?

[Ricardo Camatta Sodre:]

Yes. I’m happy to take this one, Geraldo. Perfect. Before talking about our partnerships with PayPal, EBANX and payments in general, let’s just take a step back and talk about payments more broadly and how we see it. So VTEX focuses on enterprise customers. And as you probably know, Vitor, payments volume is an inadvertent pyramid where enterprise customers tend to bring a large amount of TPV, but the payments profit pool is a regular payment where enterprise customers tend to bring only a limited amount of the profit pool. Additionally, payments for enterprises is premature in competitive markets. So knowing this context, VTEX has decided to build a payment gateway and through this gateway build partnerships with payment providers/acquires, instead of building our own payment, acquiring or processing solution for enterprise customers. By building partnerships in payments, we create value in two ways. First, we ensure VTEX customers are happy as they can implement payment solutions in a frictionless way, as well as switch providers as needed. This potentially helps us reduce our churn and increase the lifetime value of our customers. Second, we give a distribution network to payment providers where they can offer their solution to VTEX customers in a scalable way. So considering this strategy, we are starting to monetize our payments partnerships based on the GMV of our customers that flow through as TPV to our payment partners. In the end, we charge a low double basis point fee on our payment partners, TPV that flows through the VTEX platform. So hopefully that answers your question.

[Vitor Tomita:]

Very clear global double digit. Thank you.

[Operator:]

Thank you. Your next question comes from Clarke Jeffries of Piper Sandler. Your line is open Clarke.

[Clarke Jeffries:]

Hello, and thank you for taking the question, certainly encouraging to hear about the doubling of new store starts, but I kind of wanted to refine a previous question around the inputs to guidance. I recognize the macro considerations to GMV, but maybe talking specifically about the sentiment of the brands and the merchants that you’re talking to, has anything fundamentally changed in the last year? Anything that would change your confidence in new contract signings or new brands being onboarded onto the platform, recognize that GMV is hard to control and a little bit external to the platform, but wanted to get a temperature gauge on the brand conversations at this point in time.

[Geraldo Thomaz Jr.:]

Yes. Hi, Clarke. Thanks for the question. I’m happy to further elaborate. So as I mentioned, right, on the guidance in future looking aspects, we have the macroeconomic conditions and our customers GMV, right. Regarding the microeconomic conditions, there is uncertainty of how much the increase in interest rate will impact retail sector globally and going one level deeper. Given the low level of penetration of e-commerce, especially in Latin America, some increasing penetration could help softly the impact of e-commerce. So there are a couple moving pieces here, and we will have more clarity on these as we move through the year. Now, more specifically to your question, right, moving on to our customers, GMV, consumer behavior post-COVID could impact our existing customers GMV and the ramp up of the new customers, right. So for example, as we mentioned in the prepare remarks, the same time last year, most countries in Latin America were going through a second wave of COVID. And in Q2 2020, we were undergoing the first wave of COVID with many countries in lockdown. Therefore in Q2 this year, we are facing the toughest two year CAGR comp in GMV with a FX neutral two year CAGR of 87%. Considering this is natural to see a lower Q2 growth and expect some recovery in the second half of the year. For instance, these 87% two year CAGR comp in Q2 will reduce to 74% in Q3 and then 63% in Q4. Now on new contracts and implementation, we continue to sign new contracts at the healthy pace. And as I said, the implementation of new customers could be impacted on the ramp up time given the macroeconomic conditions. So we are being mindful of that as well.

[Clarke Jeffries:]

Got it. Yes. Maybe clarify my question as the second part of that is just the willingness to purchase and implement is at the same pace that it has been before. There’s been no change to sort of the interest level or the pipeline for new contract signing. And maybe just a second question, I think I heard Briggs & Stratton as a U.S. customer, and maybe if I heard correctly a live streaming, kind of functionality used by Motorola in North America. How do you feel about the U.S. market at this point is still in kind of an exploratory phase with existing customers, any new learnings that you can share in terms of how you’re hiring in North America to address that locale?

[Mariano Gomide de Faria:]

Hi, Mariano here. So the first question is no fundamental changes on the willingness of retailers and brand manufacturers to replatform and engaging for the test, we are seeing like a strong trend on that. But so as I said, on the implementation phase, maybe we are recognizing some delaying, let’s say in how they ramp up the operation. So the urgency that we saw in 2020, 2021, because of COVID, it is not in that 100% as was before, but didn’t change anything on the willingness of investing for new platforms in digital. The live shopping, as you mentioned, it is 52% market in Asia. And, in markets like United States is almost zero. So we see that as a big trend. We have been investing these in the last two years. We launch a product on these and in the life shopping, we do have more than 100 clients in more than 15 countries already using the life shopping. So we see that as a new channel open and it is for sure an opportunity for us and for our clients.

[Clarke Jeffries:]

Really appreciate it. Thank you.

[Operator:]

Thank you. [Operator Instructions] We now have a question from Will Carlson of KeyBanc Capital Markets. Your line is open.

[Will Carlson:]

Hey guys, it’s Will on for Josh Beck. I think it’d be really helpful if you could just give a little bit more color on the trends that you’re seeing in sub-verticals specifically looking at mobile, social and physical. And then also just kind of going off that if you could talk a little bit to how you’re seeing customers react to this in certain ways, maybe kind of how they’re modernizing certain aspects of their online stores. I heard you mention something about a delay as compared to COVID, but yes, just a little bit of color on that would be awesome. Thanks.

[Mariano Gomide de Faria:]

Yes. Mariano here again. So social, it is let’s divide social in two. There are the social, but the paid social channels. That was a boom in the last five years, but actually the social channels now becomes very expensive for the expansion and cause acquisition of new customers that said marketplaces and paid channels are in the limit of the price. Retailers and brand manufacturers will not pay much more than what they are paying now. So we are seen an emerge of a more organic channels like shopping, like channels, like conversational channels, like personal shopper. Those are the channels I believe in retailers and brands will invest. And that is also social, right. So we are seeing a much bigger kind of a trend by merging the physical stores and online operation by having the sales people as the central piece of the social engagement. So these engagement, digital economy will emerge in the markets that we are, we believe Latin America will be in the forefront because of the penetration of WhatsApp, but we also believe that United States will follow with the Apple Business Chat. So social, it is in the center of what we are doing. Mobile, it is still really high, right, didn’t change. What we are seeing is now companies investing more in a very simple way to approach mobile. They try to replicate what was the desktop experience, but now they’re investing to simplify this and the results of it. It is an increase on conversion rates. So what we see as a disruptor, it is this new social selling that’s for sure will change the percentage in between the channels that the retail can see right now. About the speed of implementation, right, so what we are seeing is that the speed and the urgency of the projects, it is not as a survival mode as it was in 2021 and 2020, because of COVID. It is more likely to recover the pace of was to 2019 and 2018. So we are expecting and being conservative on the implementation pace of the accounts that we have in our business.

[Geraldo Thomaz Jr.:]

And Josh, let me add to Mariano, this might be a little bit accentuated by the fact that everybody may be expecting a recession in the future. And maybe they’re thinking stop to think a little bit. So because of that, we’re seeing a slightly bigger aging in our backlog. And so people are in last hurry, building products, deploying products, it is because of the phase of COVID. And eventually this is also because they’re expecting some downturn in the economy.

[Will Carlson:]

Super helpful. Thanks guys.

[Operator:]

Thank you. There are no further questions. I’d like to hand it back to the team.

[Geraldo Thomaz Jr.:]

Thank you for joining us once again. We are honored to be here with you sharing our progress. We’re witnessing an increasing momentum in VTEX attractiveness for enterprise brands worldwide. We’re committed to continuing maximizing growth while being disciplined on how we deploy capital. We’ve set the foundations for sustainable growths over the year to come, while progressively improving margins over time. We’re now a stronger company than ever and we’re confident in the long-term opportunity for VTEX. Looking forward to keeping you updated on our progress. Good afternoon for everyone. You may now disconnect. Thank you.