VTEX Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 5, 2024

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to the Vitex Earnings Conference Call for the Quarter Ended September 30, 2024. I'm Julia Baterzamandez, VP of Investor Relations for Vitex. Our series executives presented today are Gerardo Tomas, Jr, Founder and Co CEO and Ricardo Camata Sogre, Chief Financial Officer. Additionally, Mariano Gomez de Faria, Founder and Co CEO and Andres Polidoro, Chief Strategy Officer, will be available during today's Q and A session. I would like to remind you that management may make forward looking statements related to such matters as containing growth prospects for the company, industry trends and product and technology initiatives.

Operator

These statements are based on currently available information and our current assumptions, expectations and projections for 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 under Risk Factors and Forward Looking Statements section of BTEC Form 20F for the year ended December 31, 2023 and other BTEC's filings within the U. S. Securities and Exchange Commission, which are available on our Investor Relations website.

Operator

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 Q3 2024 earnings press release available on our Investor Relations website. Now, let me turn the call over to Gerardo. Gerardo, the floor is yours.

Speaker 1

Thank you, Julian. Welcome everyone and thank you for joining our Q3 2024 earnings conference call. We are proud to report that our product innovation and expanded platform capabilities continue to be key drivers of growth, further strengthening our competitive moats. For our complete and composable approach, we are deepening relationships with existing customers while also attracting high profile brands and retailers, driving both top line growth and profitability. Vitex made strong strides towards profitable growth.

Speaker 1

During a period of macro uncertainty, we continued delivering strong subscription revenue growth, while also optimizing our cost basis, resulting in a gross profit growth of 28% in FX neutral this quarter. Significant progress is also noticeable in on a rule of 40 basis, with VITEX achieving 32% this quarter, up from 28% in the same period last year. We may be slightly more than a handful of quarter away from reaching the 40% target presenting on our Investor Day last year. Finally, as macro uncertainty may begin to clear, we have streamlined Zetech to fully capitalize on the attractive market opportunities ahead. We're proud to serve some of the most influential brands and retailers, fostering trusted relationships and supporting the success, which ultimately pushes us toward our vision to become the backbone for Connected Commerce.

Speaker 1

On top of our existing customers' robust performance, adding new customers further strengthens our growth engine. New contract signatures have remained robust. This quarter, we are excited to highlight the successful go live of FastShop in Brazil, one of the big accounts we were implementing throughout the year. The solid sales momentum in our most mature market compounded by the progress in the U. S.

Speaker 1

And Europe and the near products such as our B2B offering and ZTech ad network give us confidence in our long term profitable growth potential. On Q3 2024, beyond SaaS shops go live in Brazil, we've expanded our customer base with new wins, including Deco in Austria, DeMall, Champion Reloges, Perameltas Negron, FTM Consumu, Gramomania and George Biscott in Brazil, Conferma and Himax in Colombia, Caridad and Fajamaso Universel in Peru and U. S. Electrical Services in the U. S.

Speaker 1

Our existing customers are also deepening their partnership with Zidex. Colgate launched a new store in Switzerland, expanding its footprint across Switzerland, Brazil and the U. S. First, added 2 new stores, Harper Bazaar and Prevention, bringing their store count to 5 across the U. S.

Speaker 1

Knew Hercrosmetics launched the new store in the UK, now serving the UK, Belgium, France and the Netherlands. Mazda expanded into Belgium, now operating 3 countries across Europe. And Samsung added 2 new stores in Uruguay, now operating in 3 countries in Latin America. We're grateful for the trust of our customers, whom we look forward to serving with excellence. The decision to interest Vitex reflects the value of our product and the deep relationship with Forge as we collaboratively shape the future of commerce.

Speaker 1

And talking about collaboratively shaping the future of commerce, this year we hosted several key events to strengthen our brand presence across various geographies, including the U. S, Brazil and Barcelona. This quarter was the turn of a high potential market for us, Mexico. The TextConnect LATAM, which has become a flagship event for digital commerce in the region with over 10,000 registered participants in Mexico City. The event featured proeminent players such as Amazon, Decathlon, Grupo Copel, HEB, L'Oreal, Mondelez, TikTok and many others, with Apple Co Founder Steve Bonsniak redlining as the keynote speaker.

Speaker 1

Like our other events this year, Vitex Connect LatAm was instrumental in boosting brand awareness and recognition, driving lead generation and potential future conversion in our sales funnel. This quarter, we also launched Vitex Vision 4 Edition, an initiative designed to align our product roadmap with customer needs and showcase the robustness of our platform to prospects, reinforcing our position as the leading composable and complete commerce platform, let's highlight some of the key announcements. On the retail media side, in this addition, we expanded the Vitex Ad Network Media Kit portfolio with new ad formats. Sponsored products now appear in search, auto complete suggestions and product galleries, boosting visibility and customer engagement with a seamless experience. We'd also simplify the process of advertisers to measure and visualize campaign performance, offering deeper insights and facilitating data driven decisions.

Speaker 1

Advertisers can now easily export campaign data, search terms and product insights, providing comprehensive reports with just a few clicks. Additionally, we announced upcoming features such as ads with product recommendation powered by Similarize and Sponsored Banners targeting shoppers at the discovery phase. The Vitex ad network already counts with leading publishers such as FreshShop, Drogaria Pacheco Sao Paulo and Zona Su among others. We've also introduced new data models for catalog, promotion and external marketplace data to the Vitex data pipeline. The product is now compatible with any preferred data warehouse, PI tools and CRM systems, making it easier than ever to deliver VTech's commerce data where it needed most.

Speaker 1

These new models offer a unified view of commerce operations, allowing businesses to optimize their strategy seamlessly. These are just a few of the exciting updates in the VITEX Vision4 Edition. I encourage everyone to visit our website at vision. Vtax.com for the complete list of the releases, enhancements and product innovations. In the Q3 of 2024, we also expanded our platform post purchase capabilities with the acquisition of WEMI, a leader in AI powered customer service solutions.

Speaker 1

Although a small financial investment, this strategic acquisition significantly enhances Vitek's ability to offer a comprehensive end to end customer experience platform tailored to the personalized needs of today's consumers. Vitek's customers will now benefit from AI driven intuitive customer support options that boost efficiency and drive sustainable business success through a more connected and seamless commerce journey. WENI's AI capabilities allow us to deliver modern software. Through AI, we will deliver measurable business outcomes of increased customer engagement and satisfaction, while optimizing outdated and inefficient call center operations. Finally, this acquisition aligns perfectly with our vision to be the backbone for connected commerce, shaping the future of digital commerce by empowering brands and retailers to deliver personalized omni channel experience at every touch point.

Speaker 1

Now turning to the heart of our company, our customers. I'd like to share some success stories. Bemaul, one of the Brazil's largest retailers with 39 stores, 48 pharmacies and 5 distribution centers successfully migrated its entire operation to Vitex, including its B2C franchise model and Headless app, picking a scalable, efficient platform to unified operations, streamline sales and introduce innovative financial solutions like Bemore Store Credit, Bemore Valid Borders, Credit 2 Bemore and Bemore PIX. During the phased rollout, the website already experienced a 12% boost in conversion rates and a 33% increase in average revenue per session. After fully migrating all traffic to Vitex, organic traffic rose by 8%, supported by a 56% faster loading performance in mobile device with limited processing power and Internet connectivity.

Speaker 1

These advancements not only improved the user experience, but also reinforced Pemal's expansions across Brazil. With Big Tex, Pemal is now positioned to further growth, capitalizing on a scalable architecture and strong financial integrations to provide a superior omni channel experience. Colgate Palmolive, the global leader in oral skin and pet care, continued its expansion with Zetex. Following the successful B2B implementations of PCA Skin Professional and Colgate Oral Professional in the U. S, Colgate has now expanded its T2 strategy to international markets, recently launching Oral Professional in Switzerland and its European B2B site on VTech.

Speaker 1

Colgate's headless global architecture powered by VTechs enable a seamless rollout demonstrating the platform adaptability and scalability across diverse markets and business models. We're thrilled to support Colgate's continued expansion in the U. S. And Europe underscoring their commitment to digital commerce innovation. Decatur, a global leader in sporting goods retailers with over 1700 stores across 64 countries, leverage VTech's sales app in Brazil to enhance omni channel strategy and create a seamless shopping experience across both physical and digital stores.

Speaker 1

By integrating their sales channels, Decathlon allow customers to purchase items not in local stocks by accessing a unified inventory across all stores. The Vitex sales app enabled personalized customer interactions, real time stock visibility and flexible checkout, ensuring a faster, more agile shopping experience. This innovation has helped Decathlon maintain its commitment to delivering high quality customer centric service, driving operational efficiency and increasing conversion rates to a fully unified commerce platform. FastShop, the leading Brazilian retailer with 36 year of history, 85 stores and 15 distribution centers selected Vitex to migrate from its legacy platform due to high cost and lack of flexibility. FastShop has now significantly lowered its total cost of ownership and gained access to our robust and deep ecosystem of third party solutions, enhancing its customer experience and happily expanding into new channels like B2B.

Speaker 1

All operations, including physical stores, online storefronts, marketplace and B2B will now be integrated into a single unified platform. They've also developed a custom app for in store sales team, delivering personalized shopping experience. This strategic shift strengthens FastShop Premium's customer journey, offering a seamless omnichannel experience with exclusive service and a strong loyalty program, Fast Prime. We are thrilled to see immediate improvements in site performance and sales conversions and look forward to supporting them with agility and flexibility in all future developments. Hearst, one of the largest global diversified information and media companies has leveraged VTech's extensive native capabilities, multi site architecture and VTech's IO developer Cloud to successfully integrate with the prestige beauty retailer Sephora becoming part of her expanding digital marketplace.

Speaker 1

Now available across leading lifestyle publications like Women's Health, Cosmopolitan, Harper's Bazaar, Men's Health and Prevention, Hearst integration with Sephora marks a new era transforming the buying experience for consumer media business. Readers can now seamlessly purchase products that are mentioned or featured in punctured content from the favorite national magazine and websites, making every touch point a sales opportunity. Women's Health, a trusted publication contributing to the well-being of women everywhere has expanded its reach by instantly enabling readers to become customers. Now with just a click over 8,500 products with Sephora diverse assortment are available, offering customization and rewards through its Popular Beauty Insider loyalty program. We're excited to accompany hearts in this journey that marks a major advancement for the media industry, delivering a seamless experience with shoppable interfaces for effortless product discovery and purchase.

Speaker 1

Closing this session, I would like to extend my sincere gratitude to the 1409 Vitexers. It takes a collective effort and together we're reshaping the future, establishing VTechs as the backbone for Connected Commerce. We have ambitious goal and united we will seize every opportunity. I will now hand the call over to Ricardo.

Speaker 2

Thank you, Geraldo. Hi, everyone. I'm pleased to share VTech's Q3 2024 financial results. This quarter our GMV reached CAD4.4 billion marking a year over year growth of 10% in U. S.

Speaker 2

Dollars and 17% in FX neutral. We have same store sales remaining in the teens range. Our revenues stood at CAD56.0 million representing a year over year increase of 11% in U. S. Dollars and 19% on an FX neutral basis.

Speaker 2

Subscription revenue reached $53,900,000 representing an increase of 13% in U. S. Dollars and 22% in FX neutral, primarily driven by good momentum in new contract signatures, solid performance from existing customers and cross selling of add on services. Services revenue totaled $2,100,000 a by design reduction given that the evolution of our ecosystem has allowed our new customers in the U. S.

Speaker 2

And Europe to rely less on direct services from Vitex, which in many cases were sold at a loss to onboard our initial larger customers in these regions. Now going to our cost and expenses. Our non GAAP gross margin reached 75%, up from 71% in the same quarter last year. The approximately 4 10 basis points year over year improvement was mainly driven by costing cost efficiencies, resulting in our non GAAP subscription gross margin increasing 2 30 basis points, reaching 79% in Q3, 2024 from 76% in the same quarter last year. While work remains to fully reach our Investor Day subscription gross margin target model goal, future improvements may be more marginal.

Speaker 2

Moving down the P and L, this quarter we achieved a positive 14% non GAAP operating income margin, marking a 10 percentage point improvement year over year. Our non GAAP total operating expenses were $34,200,000 slightly up from $34,100,000 in the same quarter last year. As mentioned earlier, most of this margin expansion is driven by revenue growth supported by a well invested and efficient organizational structure, which will allow us to invest in R and D and sales and marketing to fully capitalize on market opportunities that may emerge. Combining our operating income result with disciplined working capital management resulted in our free cash flow in Q3 2024 reaching $7,700,000 representing a 14% margin and up from 5% margin in the same quarter last year. We are well positioned to continue delivering strong cash conversion and we'll remain focused on pursuing the most suitable high return opportunities for the long term.

Speaker 2

Notably, given our strong free cash flow, we managed to increase our cash and short term investment position to $217,000,000 even after allocating capital in some inorganic opportunities. Looking ahead, we remain encouraged by our sales momentum and operational leverage. As macro uncertainty may begin to clear, we have streamlined VITEX to fully capitalize on current market opportunities. We reaffirm our commitment to delivering profitable growth by continuously focusing on maximizing revenue and long term value. We will continue to evaluate our investment levels in alignment with demand, sales conversion rates and return on investments with the rule of 40 as our North Star.

Speaker 2

Moving on to guidance. From a revenue perspective, given the tougher comps in Q4 that will ease up in Q1, we are targeting FX neutral year over year revenue growth of 14% to 17% for the Q4 of 2024, implying a CAD64,800,000 to CAD66,800,000 range. For the full year 2024, as we continue executing our profitable growth strategy, we are targeting FX neutral year over year revenue growth of 18.5 percent to 19.5 percent implying a range of $230,000,000 to $232,000,000 based on Q3's average FX rate. We are raising our non GAAP operating income and free cash flow margin target to low teens. In conclusion, Dietetics holds significant growth potential supported by our progress toward profitable growth.

Speaker 2

We are seeing strong sales momentum with new customers, geographical and brand expansion from existing customers and improved operational efficiency, positioning us to seize future opportunities. We remain optimistic about Brazil's potential, the vast opportunities in Latin America and the large and attractive markets in the U. S. And Europe. We will continue pursuing disciplined growth, making firm steps toward our ambition to become the global backbone for Connected Commerce.

Speaker 2

With that, let's open it up for questions now. Thank you.

Speaker 3

Thank you. We will now begin the question and answer session.

Speaker 4

Your first question comes from

Speaker 3

the line of Marcelo Santos from JPMorgan. Your line is open.

Speaker 5

Hi, good evening. Thanks for taking my questions. The first question is if you could provide some additional color on the growth

Speaker 2

of subscription revenues. How is that going per region?

Speaker 5

You had some revenues. How is that going per region? You had some tougher situation in Argentina. So I just wanted to if you could focus a bit there, but also talk about the other regions. And the second question is, you see this margin level as sustainable?

Speaker 5

And are you happy with the growth margin combo? How would you consider that? Thank you.

Speaker 2

Hi, Marcelo. Ricardo here. Thanks for your question. So in Q3, we achieved a total revenue growth of 18.7% in FX neutral. That's close to the midpoint of the guidance range of 18% to 20% that we provided last quarter.

Speaker 2

And that's also a 2 year CAGR in FX neutral of 22% for total revenue. And on your question, 23% for subscription revenue. It's important to note this 2 year CAGR given that last year we were positively impacted by an acceleration of consumption in Argentina from August until November and as mentioned in last year's earnings call. And I would also add that from organic revenue growth, it was very similar to the total revenue growth as the WENI acquisition contributed only a negligible amount to our revenue and did it solely in the last month of the quarter. So continuing on your question on the subscription revenue, right?

Speaker 2

We delivered robust year over year growth of 22% in FX neutral, even against these challenging comps in Argentina, where last year's pre devaluation consumption behavior affected the baseline. And as mentioned last quarter, Argentina remained a couple percentage points headwind to our growth this quarter. And as noted in the Q4 outlook, we expect this headwind to reduce by December when Argentina FX devaluation happened last year and consumption started adjusting. And our ex Argentina performance underscores the strong underlying performance of the company on a more recurring basis. And I would also add that as we rely more on the VITAC's ecosystem of partners, we experienced a by design reduction in our services offering.

Speaker 2

These decision negatively impacts our services revenue and positively impacts our gross margin and bottom line as in many instances these services were sold at a loss. So the strategic by design decision to increase our services offering last year was a consequence of the first couple of bigger implementations we were doing in the U. S. And Europe. And now as the ecosystem matures and already did larger implementations, we are confident to lower the services offering, minimizing the impact on our margins.

Speaker 2

So looking ahead, as we lap the tough comps, the strong performance of existing stores and our robust sales momentum are fundamental factors that instill confidence in our ability to deliver solid profitable growth. So I believe that answers the first question. Marcelo, could you please repeat the second question?

Speaker 5

The second question is about the sustainability of margins and if you're happy with the growth margin combo?

Speaker 2

Yes, perfect. I'm happy to start on this one and others to complement. So the margin is sustainable. Yes, we have a target model of 80% for the subscription gross margin. We are making progress toward that.

Speaker 2

We are at 78.5 percent in this quarter. So we still have 1.5 percentage points to get there. From the overall gross margin, we are at 74% and change and the target is 75%. So we are moving towards that level. And then when we look at the operating margin, we reached 14% this quarter, while our goal is 20%.

Speaker 2

So these incremental margins will come as we scale and drive revenue leverage over time. So we are a high growth company and we continue to prioritize this revenue growth. And we are committed to profitable growth with additional well aligned hires in R and D and sales marketing as we see fit. So as this momentum continues, we will certainly update you all on the progress. But we feel like we have a well invested structure at the moment and we'll continue to improve on margins going forward.

Speaker 5

Perfect. Thank you very much.

Speaker 3

Your next question comes from the line of Cesar Medina from Morgan Stanley. Your line is open.

Speaker 4

Hi. Thanks for taking my call. Quick question. Can you provide more context on what you highlighted as a strong new contract signature momentum? And I'm asking this because it seems as if bookings that you reported during the quarter accelerated.

Speaker 4

So it would be great to have some color in terms of what's going on, where is this coming from, what type of sectors and more importantly, the mix of regions where you are getting this acceleration? Thank you.

Speaker 6

So I can take this one and Cedrat, if you please join adding anything. So thanks for the question. Mariano here. As mentioned in our prepared remarks, our global pipeline shows steady improvement, followed by our unique composable and complete commerce platform. We deliver very low TCO compared to our competitors, pretty fast time to market and very flexible solution for testing multiple go to market strategies.

Speaker 6

Our technical sales model successfully customer case studies and recognition from IDC, from Forrester and from Gartner all contribute to this momentum that you might see. So in today's challenging retail landscape with high interest rate, Vitex Pop as the partner for the sustainable growth and profitable growth. So in Brazil, to be more narrow on the analysis, we see strong B2C growth potential as more players are now open to migrate to VTechs moving away from the legacy platforms or homegrown. In that sense, this quarter, we had go lives that is an evidence of these movements like Sashop and Bemol, big retailers based on homegrown and custom legacy migrating for VTechs. And there are only a couple these are only an example of a couple of the clients under implementation.

Speaker 6

But as you know, we just comment the clients that goes live. On the B2B side, also grows as a company modernized their front end and channels approach, which give us a huge opportunity to keep growing in redefining the commerce landscape in Brazil and Latin America. In the United States and Europe, our portfolio is expanding across categories, omnichannel marketplace customers including Hearst in the U. S. And OBI in Europe.

Speaker 6

We also have HMR H Mart in the U. S, Ocean in Europe. And this quarter, we can celebrate go lives from Colgate Palmolive and Kyun, both in B2B models across U. S. And Europe.

Speaker 6

Colgate now operates both B2C and B2B in the U. S, while Qune is live in 4 European countries, so further expanding their retail footprint with eText. So these milestones, coupled with industry recognition, have significantly strengthened our brand presence and our pipeline. We are confident in our path forward, building on execution, reputation and customer success histories to capture the market opportunity that's ahead of us.

Speaker 2

And just to further complement from a financial perspective, Cesar, the increase in deferred revenue is consistent with the strong contract signature momentum mentioned in the prepared remarks and by Mariano just now. And now having said that, it's important to note that there was also some increase in the deferred revenue duration. Therefore, adjusting by average duration, the increase in deferred duration adjustment, but still a pretty solid improvement.

Speaker 4

Got it. Thank you so much.

Speaker 3

Your next question comes from the line of Leonardo Olmos from UBS. Your line is open.

Speaker 7

Hi, everyone. Just one question from my side. Can you talk a little bit about system integrators? Can you talk about your current relationship with them? How has it been evolving?

Speaker 7

What types of strategy are you thinking about for 2025? And if you have 1 or more competitors, they are growing relevance in terms of this distribution in system integrators. Thank you.

Speaker 6

Yes. So VTech's ecosystem matures. We are seeing, as you can see on our numbers, the service revenue of Vitex, it's not increasing as the revenue. That's a sign that our ecosystem of SIs are maturing in all regions. So Vitex needs to provide direct service has the Vitex needs to provide direct service has declined.

Speaker 6

So system integrators in new geos now bring stronger experience in executing implementation projects on our platform. And the AFFO since the Q1, you can notice that we gradually reduce our direct roles in our implementations, resulting in a lower contribution from service revenue and higher margins. And you can expect that as our target company. We believe DSI, it is pretty complete and can be a strength or leverage for us to deploy projects all over the world. Our focus remains on subscription revenue, the core of our product driven business model and a key driver of profitability.

Speaker 6

Leveraging a mature ecosystem of system integrated enables us to have this global reach, global support and a profitable growth. Notably, 96% of our revenue are subscription based, while service contribute 4% only. So subscription revenue is the true indicator of the business health. And in Q3, it grew 22%, FX neutral. Paired with our increasing gross profit, we've rose 28% in FX neutral this quarter.

Speaker 6

Did I answer your question?

Speaker 7

Yes, yes. And great news. Just a small part of my question, if you could maybe double click on it, the competitors part that I asked, is there any competitor that is advancing with SIs or any other form? Thank you.

Speaker 6

So competition, the competitive environment has remained stable. While we always receive questions about peers potentially expanding from long day or SMB segments or some enterprise competitors displaying increased and we continue to gain market share globally. Nevertheless, we are monitoring the competitive environment, ensuring our value prop and technology stack to remain highly competitive. But just summarizing, we didn't see any kind of major shift in the competitive landscape.

Speaker 7

Great. All right. Another great news. Thank you very much. Have a good night.

Speaker 4

And there are no further questions. So this does conclude our question and answer session.

Speaker 3

I will now turn the call over to Geraldo Thomas, Founder and Co CEO of Vitex for closing remarks.

Speaker 1

In conclusion, I would like to reaffirm our commitment to delivering profitable growth and our objective of returning to the rule of 40. This quarter's progress reflects the dedication of our team at Vitex. Once we set our goals, we work relentlessly to achieve them, no matter the scale of our ambitions. With over 20 years of history, we can confidently say that Vitex grows stronger each year and this year is no exception. We're honored to support some of the world's leading brands and retailers as we redefine commerce together, bridging the gap between physical and digital channels and strengthening an industry with immense potential ahead.

Speaker 1

Our purpose is to keep our customers ahead of the curve, adaptable and resilient in the phase of constant change. With strong sales momentum and continued platform innovation, Vitex is well positioned for sustained growth and to solidify its role as an e commerce leader on a global basis. We have a long invigorating journey ahead of us and we are here to seize it as we remain fully committed to delivering value to our customers, investors and stakeholders and as we continue our journey to becoming the backbone for Connected Commerce. Thank you everyone for being part of this journey. We look forward to keeping you updated at our next earnings call.

Speaker 1

You may disconnect now. Have a wonderful week.

Speaker 3

This concludes today's conference call.

Speaker 4

Thank you for your participation. You may now disconnect.

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