VTEX Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 8 speakers on the call.

Operator

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 VTech's report's 2nd quarter 2024 Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Julia Vater Fernandez, Investor Relations Director. You may begin.

Speaker 1

Hello, everyone, and welcome to the Beadex earnings conference call for the quarter ended June 30, 2024. I am Giulia Barro Fernandez, Investor Relations Director for Vitex. Our senior executives presenting today are Gerardo Tomas, Jr, Founder and Co CEO and Ricardo Camata Sodre, Chief Financial Officer. Additionally, Mariano Ramirez Parilla, 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 relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives.

Speaker 1

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

Speaker 1

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 Q2 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 2

Thank you, Julian. Welcome, everyone, and thank you for joining our Q2 2020 4 earnings conference call. The tech's 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.

Speaker 2

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.

Speaker 2

A steady fast commitment to profitable growth has yielded significant year over year non GAAP operating margin expansion in the last 8 quarters, starting with 26 percentage points gain in the Q3 of 2022, peaking at 42 percentage points in the Q2 of 2023 and reaching approximately 15 percentage points over the last three quarters. Following our remarkable journey, we still see room for operational leverage gains, 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 Q2 of 2024, we celebrated the successful go live of new customers such as CHOOZ in Australia, Armani, Colormark, Drogau and Pinel Barat in Brazil, the Lime Group in Chile, Adi Marketplace in Colombia, Grupo Naza and Libreria's Ganzi in Mexico, Ajea Seguro in Portugal and MyEyeDoctor in the U.

Speaker 2

S. Additionally, we continue our expansion with existing customers, adding more brands or new regions such as Exiti, who added 4 brands in Colombia, now operating with 11 brands across 5 countries in Latin. Hurst, who added Cosmopolitan, now operating with 3 stores in the U. S. Multilaser in Brazil, who added a new brand, TGI, now operating with 3 stores in the country.

Speaker 2

Motorola, who added the store in Sweden, now operating across APAC, Canada, EMEA, LATAM and the U. S. Nike, who added the store in Uruguay, now operating in 4 countries across LATAM and Victoria's Secret, who added the store in El Salvador, now operating in 12 countries across LATAM. The Q2 is always special for us because of VTech's Day, an event that holds a unique place in our hearts. It allows participants to grasp the size of our ecosystem and gain deeper insight into our value proposition and new products.

Speaker 2

It also enable us to cross sell features and attract new customers. While this time I will not delve into VTech Day, I'm excited to share a new milestone. Following the success of our inaugural U. S. Event in the Q1, we have now celebrated our 1st European event.

Speaker 2

DetectConnect Europe held in Barcelona attracted over 3,000 registrants from more than 50 countries, featured over 60 sponsors and delivered more than 10 hours of content led by over 30 of European's most renowned e commerce leaders. Pennials included representatives from OBI, Mars, Red Cloud, Starbucks, Records among others. We are encouraged by the results of these events and our growth potential in the region. Another encouraging factor enhancing our global positioning is the recognition from industry analyst firms. 2024 has already been remarkable year with VITEX being consistently recognized for its product strategy and vision.

Speaker 2

This quarter, I am proud to announce that Vitex has been named the leader for the first time in the IDC market space, worldwide headless digital commerce applications for mid market growth 2024 vendor assessment. We were acknowledged for providing comprehensive unified commerce solution including B2B, B2C, B2X, omnichannel, experiential, the commerce and marketplaces, our native marketplace and OMS capabilities, developer friendly tools and support and a robust serverless development platform for rapid, scalable and flexible e commerce solutions. Combined with the recognitions received in the Q1, we can now say VITEX is a leader in B2B, B2C and headless digital commerce according to ITC. We are encouraged by this recognitions, which boost our confidence in our global expansion journey and affirm that we are on the right path. In a world where the value of building connections is exponential, we are committed to evolving and strengthening our network of partners and channels, ensuring we stay ahead of our customers' dynamic needs and unlock new go to market strategy for them.

Speaker 2

With this in mind, in the first half of the year, we've expanded our partnership with TikTok, which has grown from Brazil to the rest of LATAM. And this quarter, we're thrilled to launch a partnership with Pinterest, further expanding our customers social commerce opportunity. Through this collaboration, our global customers can seamlessly integrate their product catalog, create teams, execute high performance shopping campaigns on Pinterest, reaching over 500,000,000 monthly active users. This partnership advances our missions to empower global enterprise brands to deliver seamless shopping experiences and engage with consumer, seeking inspiration and a positive online shopping environment. We're thrilled to see customers such as Whirlpool, Blindstand and Easy already leveraging Pinterest catalog to enhance their customer journey from inspiration to action.

Speaker 2

Security remains a priority as we grow our network and widen our geographical footprint. In a world where data is as valuable as gold, security will only grow in importance, especially as government enforced regulations and set mandatory security standards for providers. That said, we proudly announced that Vitex has achieved the ISO 27,001 certification, which provides an international standard framework and guidelines for establishing, implementing and managing an information security management system. This certification represents another step in our security journey and highly reaffirms our commitment to supporting and providing peace of mind to our customers. Before moving to the financial section, I would like to share some customer's case with you to illustrate more tangibly why enterprises worldwide that are choosing Vitex and how we are partnering with them to streamline their operation.

Speaker 2

Addi, a buy now pay later payment method provider in Colombia decided to expand its business becoming a marketplace with the Vitex platform. This strategic move aimed to connect its existing merchants, most of whom were Vitex customers and enable them to use Adis payment methods via a mobile app. The new platform has over a 1000000 customers and it's built using our robust marketplace architecture with both VTech and non VTech sellers integrated through the seller portal. The project was also developed using our authentication protocol integrated with a 3rd party identity provider, the text. Io store framework and analytics integration with Amplitude.

Speaker 2

Additionally, the Adi Payment Connector is certified through the payment protocol. The implementation completed in less than 4 months delivered impressive results in the 1st 3 months of operations, enhancing ADAS market presence and driving significant growth. Choose an Australian NDIS approved disability equipment and supplies distributor dedicated to supporting individuals with disabilities and agents Australians has launched its marketplace partnered with Vitex. Choose is leveraging Vitex out of the box features such as marketplaces, teleportal, OMS and Vitek. Io to facilitate its digital business expansion.

Speaker 2

With a growing network of 134 sellers and a catalog of over 18,000 products, The marketplace architecture empowers customers with seamless product comparison and the ability to purchase from multiple local sellers simultaneously. By leveraging the Vitex. Io iPaaS solution, choose successfully implemented customized and NDIS friendly invoicing for purchases from multiple shops, including all necessary data for claiming, simplifying the claiming process and reducing the likelihood of delays and rejections. Additionally, a feature to include membership and subscription services for key products is under implementation. Choose aims to set a new benchmark in disability and aged care shopping, focusing on expanding its product range and diversity on the platform to attract more customers and boost revenue.

Speaker 2

We are excited to partner with Choose on their journey to becoming leaders in the sector, helping them to leverage their expertise by providing seamless, transparent and accessible shopping experience to their customers. Cosmo Music, a leader in musical instruments rental in Canada recently completed the migration of the rental business from a highly customized legacy platform to VTech. This strategic move was driven by the need to enhance operational efficiency, streamline the checkout process and provide greater control over rental contracts. The migration to Vitex has ensured a seamless and uninterrupted customer journey, maintaining service consistency. Following the migration, Cosmo Rentals has achieved a stable number of rental orders year over year and outstanding outcome during the transition period.

Speaker 2

The migration included implementing advanced features such as a seamless one page checkout, enhanced rental management capabilities and intuitive interfaces for managing business rules and customers' journeys. These improvements have enabled Cosmo Music to better serve its diverse customer base, including students, parents, educators and organizations, while laying a solid foundation for future growth and adaptability. Additionally, and aligned with our firm commitment to customers, Cosmos Rentals was highlighted that Vitek's professional services team has been unparalleled partners throughout the process, early understanding their business, meticulously mapping out complex business rules and various customer journeys and ensuring the project was managed to guarantee its success. Dior, the renowned and beauty brand has an exceptional success story in Chile and served as a compelling testament to the transformative power of Vitek's omnichannel capabilities. By partnering with Vitek, Dior experienced more than 100% year over year orders spike in the first half of twenty twenty four, directly attributed to the seamless integration of the physical and online channels.

Speaker 2

Leveraging VTech's expertise and adaptable solutions, PR effectively navigated the complexity of digital transformation and successfully expanded to Argentina with plans to broaden the reach to new markets across Latin America. The collaboration with D'Axt empowered Dior to deliver a unified commerce experience ensuring consistency and excellence across all touch points whether online or offline. Doto, a marketplace for electronic devices has expanded its reach through its integration with the Vitex platform and ecosystem in Mexico, enhancing usability and user experience. Doto can now effectively measure and improve its conversion rates by leveraging TV text components such as AB testing and workspaces. It's innovative double by box offering save time and save money delivery options has increased user interaction and loyalty resulting in a 19% boost in product conversions.

Speaker 2

With DTX. Io, Doto can manage its infrastructure natively focusing on user experience leading to a 27% increase in site visibility and a 26% rise in visits from returning users. Additionally, Doto benefits from VTech's omni channel strategy adopting the VTech sales app and more recently VTech Intelligent Search. These advancements have established Doto as a leader in e commerce, ensuring a balance between logistical efficiency and customer satisfaction. Agios Seguro, the largest insurance provider in Belgium and the leader in 14 other countries has launched a new health and wellness market based in Portugal under their Magis brand partnering with Zitex.

Speaker 2

They chose us for our unique native marketplace capability and robust front end features, including the store framework and the optimized checkout flow. These were crucial for integrating multiple payment protocols, including its own payment methods and various gift cards options. Additionally, by using the Vitex seller portal, Ageles Seguro Portugal can now efficiently onboard sellers ensuring a quick and straightforward process. We are excited about this partnership and eager to help them create an innovative healthcare ecosystem. H Mart, the largest Asian supermarket chain in the U.

Speaker 2

S. Migrated to Vitex, launching 2 new online stores after 7 months transition from the legacy platform. By migrating, H Mart start to consolidate the previously separate system for perishable and non perishable items with its fresh good systems, creating a unified commerce experience. Now consumers are able to order from all product categories at this in the same cart and while also leveraging store inventory to provide real time availability information and facilitate efficient delivery strategies. In the Q2, H Mart initiated the integration process for its physical grocery stores beginning with the California locations.

Speaker 2

Hmart's commerce e commerce capabilities have already witnessed a significant enhancement incorporating features such as Vitek's Pick N Pack app for seamless in store order picking and precise product visibility control based on customer location through franchise accounts and trade policies functionality. On top of that, the architecture also integrates with H Mart's year pure category inventory and pricing, tax automation and payment processing. With over 90 locations across the U. S, this strategic move positions H Mart to deliver a superior omnichannel shopping experience both online and offline. We're excited to accompany H Mart in on their digital transformation and their path to strengthening its market share in the U.

Speaker 2

S. Liberas Grande, a leading bookstore chain in Mexico with 49 physical stores and a central distribution center partner with VITAC to enhance their omnichannel capabilities. They aim to integrate their extensive inventory of 4,500,000 SKUs including physical and digital products across all sales channels. This integration enabled sales and inventory management from each store and incorporated in store pickup. Leveraging VTech's architecture, Gundy could offer same day delivery in Mexico City, prioritizing distribution and deliveries delivery from the central distribution center and extended their sales reach through marketplace integrations with Walmart Mexico and Mercado Libre.

Speaker 2

Additionally, we're developing the sales integrations with Palacio de L'Eijo, Mexico's premier luxury department stores and building the capabilities to manage international deliveries from their central distribution center. Last but not least, Pagimenos, a leading pharmacy retail chain in Brazil recognized that the pivotal role of retail media as the next frontier in advertising. By using VTech's ad network, Pagmenos efficiently manages its advertising space seamlessly aligning advertiser promotions with consumer burden of managing numerous separate advertisers' relationships. This integration expanded the reach, opened new sales channel and delivered immediate increase in sales and revenue, While on the other hand, it boosted advertising performance metrics and rollers With the text ads network scalable and performance driven approach, Pagimena is poised to capitalize on emerging trends and drive further growth in the future. To finalize this session, I'd like to express my gratitude to our 1339 dedicated VITACS employees whose commitment, passion and execution do not go unnoticed.

Speaker 2

I also want to thank you customers, partners and investors who support us on this journey and help shape our story. We have a clear vision and a challenging yet rewarding purpose to become the backbone of connected commerce. Let's make it happen. Now, I will hand the call over to Ricardo.

Speaker 3

Thank you, Geraldo. Hi, everyone. I'm pleased to share VTech's Q2 twenty twenty four financial results. As Gerardo highlighted, our Q2 GMV reached $4,400,000,000 marking a year over year growth of 15.6% in U. S.

Speaker 3

Dollars and 19.4% in effect neutral. Revenue stood at $56,500,000 representing a year over year increase of 18.1 percent 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.

Speaker 3

We are encouraged by our prospects and aim to build more reference cases demonstrating Vitak's value proposition. As Gerardo briefly mentioned, our profitable growth strategy is making strides. 2 years ago, in Q222, 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.

Speaker 3

As we lap these initial adjustments, the year over year margin gain has been more moderated, still remaining at around 15 percentage points over the last 3 quarters. Most importantly, throughout this period of 8 quarters, our FX neutral year over year revenue growth has remained between 20% 25%, demonstrating sustainable and now 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 investments to build the highest possible long term value.

Speaker 3

Going back to our Q2 P and L, our subscription revenue reached $54,000,000 this quarter, up from $44,800,000 in the Q2 of 2023, representing a year over year increase of 20.6% in U. S. Dollars and 24.7 percent in FX neutral, while our services revenue totaled $2,600,000 Over the past 2 years, our commitment to driving efficiency has led to notable improvements in our subscription gross margin. Initially, we focused on foundational steps such as monitoring cloud investments and establishing a culture of efficiency to reduce cost and enhance resilience. These efforts, which include migrating microservices to more efficient solutions, set the stage for advanced measures that could generate further improvements.

Speaker 3

For example, we are enhancing API consumption data's precision, allowing for better allocation of infrastructure cost and identifying efficiency gains. Additionally, we are refining our approach to measure API consumption by latency, enabling a more accurate assessment of resource intensity and actable cost sharing. These initiatives empower us and our customers to make informed efficiency driven decisions that support our financial goals and enhance our competitive advantage. As a result, our non GAAP subscription gross margin has reached 78.1%, a 285 basis points year over year improvement compared to the 75.3% margin in the same quarter last year. On top of that, our overall non GAAP gross margin this quarter also improved significantly, reaching 74.0 percent, 597 basis points improvement from the 68.0 margin in the Q2 of 2023.

Speaker 3

Our efforts to build an ecosystem of system integrators and partners globally are enabling us to scale more efficiently. Our ecosystem has allowed our new customers in the U. S. 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. Consequently, our non GAAP gross profit had a year over year increase of 28.4 percent in U.

Speaker 3

S. Dollars and 33.6 percent in FX neutral in the Q2 of 2024. Our non GAAP total operating expenses reached $35,400,000 in the Q2 of 2024, up from $35,100,000 in the prior quarter and $34,100,000 in the same period last year. Although a net positive one off of almost $1,000,000 reduced our expense this quarter, total expenses have remained relatively stable throughout 2023 and the first half of twenty twenty four, reflecting our ongoing operational leverage. As a result, our non GAAP operating income improved from a negative 3.2% margin in the same quarter last year to a positive 11.3% margin this quarter.

Speaker 3

With expenses increasing only slightly year over year, the significant 15 percentage points margin improvement is primarily driven by revenue growth with operational leverage and sustainable gross margin improvements. Before going to our guidance for the next quarter and the full year 2024, let me highlight that in the 4th consecutive quarter, VITAAC generated cash. As of the 3 months ended June 30, 2024, we had a positive $3,200,000 free cash flow on top of a positive $1,900,000 on Q1 2024 and up from a negative $3,300,000 free cash flow in the Q2 of last year. Looking ahead, despite the uncertain macroeconomic conditions, we remain encouraged by our sales momentum and operational leverage. From a revenue perspective, for the Q3 of 2024, we are targeting FX neutral year over year revenue growth of 18% to 20%, implying a $56,000,000 to $57,000,000 range.

Speaker 3

For the full year 2024, we will continue to execute our profitable growth strategy. We are increasing our FX neutral year over year revenue growth target to 18% to 20%, implying a range of $231,000,000 to $235,000,000 based on July's average FX rate. We are also raising our free cash flow and non GAAP operating income margins, target to a range of high single digits to low teens. Vitex continues to operate from a position of strength propelled by robust sales momentum. Our solid business model coupled with recognition from industry analysts, customers and partners underpins a prosperous growth opportunity.

Speaker 3

As we move forward, our focus remains on execution and delivering long term value to our customers, partners and investors. We look forward to continue this journey together, maintaining a rent to less commitment to operational excellence. With that, let's open it up for questions now. Thank you.

Operator

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

Speaker 4

I have 2. The first question is, if you could please discuss the main elements that led to the revision of the growth and profitability guidance? Maybe you can break into parts and explain what's coming better. And the second question is, you're getting pretty close to your target model like when you look especially on the gross margins, they're evolving very quickly. What's next?

Speaker 4

What's beyond the target model? Thank you very much.

Speaker 3

Hi, Marcelo. Thanks for this. So 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 full year revenue guidance. Additionally, on 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% attract neutral growth and mid single digit margin guidance.

Speaker 3

Now with 18% to 20% growth and high single digit 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 thinking 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 both Q3 and Q4.

Speaker 3

Therefore, when we analyze in the 2 year CAGR, the FX neutral growth rates of the first and second half of twenty twenty four 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 average by our basket of currencies, They imply FX devaluation for the second half since our previous earnings report is roughly 6%. But as you probably noted, we have only adjusted the implied midpoint of our revenue guidance for the year by 2%. So this softening of the FX impact is possible given the strong operational momentum we are witnessing.

Speaker 3

We expect to offset some of the FX impacts by delivering higher operationalFX neutral growth. As per our guidance, our FX neutral growth outlook has increased to 18% to 20%, an increase of 1 percentage point in the middle of the range. And also important to mention that services in Argentina have each been a couple of percentage points headwind on our year over year total revenue growth. On the services side, we see it as a positive that our global ecosystem matures and we need to invest less on services, which is accretive to our borrow line. And regarding Argentina, we understand that this is a temporary and necessary macro adjustment for the country.

Speaker 3

And finally, we remain encouraged by the strong operational momentum, competitive position and long term growth potential of our business. And we will continue to monitor the uncertain macro scenario and keep you informed of any relevant changes in our business. So this was the answer on the guidance in your first question. Could you repeat please the second question, Marcelo? Perfect.

Speaker 3

Thank you for the first answer. The second question is that you're getting pretty close to the target model, especially

Speaker 4

on the gross margin, but in general. So my question was kind of what's next?

Speaker 3

Yes. Happy to start and not as if you 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 percent of the target model. We issued a target model in our Investor Day last year, and we mentioned it was a mid term target like 3 to 5 years.

Speaker 3

We lapped at the Investor Day already, so it's been a year since that, so now 2 to 4 years. And we have been positively surprised by our progress of 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.

Speaker 4

Thank you. Thank you very much.

Operator

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

Speaker 5

Hi, hi, everyone. Thanks for the opportunity to make a question. Actually, I have 2 on my side as well. First one, you guys detailed a little bit the services part in Argentina, but if you could give us an update about the macro, about what you saw there. And we know that the hot sales event was strong, but just want to hear a little bit better what you see like in like the latest data that you have and how you're thinking about the environment there?

Speaker 5

And then the second question a little bit more broad based about the full SaaS discussion. As you guys know, we've seen a lot of movements in the U. S. SaaS stocks because of AI and how actually that can change the SaaS business versus the PaaS business. So just wondering how you think about that for the VTechs context and especially opportunities or threats that you can find in developed markets like the U.

Speaker 5

S. With all of that? So thank you.

Speaker 3

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.

Speaker 3

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 Q2 imposed an additional challenge given the hot sales 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 for Q2 was derisket. The event was better than expected across the board and the Argentine Chamber of E Commerce shared the market's good results.

Speaker 3

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 free 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 of percentage points headwind in the VITEX consolidated FX neutral year over year revenue growth performance. With that, let me pass it over to Gerardo to answer the second question.

Speaker 3

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

Speaker 5

Yes, 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 and companies moving more into PaaS, internalizing functions. So just wondering how you guys at Vtechs are thinking about that positioning the business or any thoughts, especially regarding developed markets that you have there?

Speaker 6

Yes. 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 Vitex believes that the profitability of the company should be the first target.

Speaker 6

Macroeconomic demands the companies to go for it and the AI should be the instruments 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 point 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.

Speaker 6

So the search, the front end, everything will be affected by AI. Our bet, Vitek's bet is that we're going to leverage the models that are there as infrastructure. So Vitex is happy to explore the models that will be provided by infrastructure companies like for example, Cineraise, like for example OpenAI, NVIDIA, Meta, and we will leverage those models to deliver the best applications to our customers. We addressed 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 and D to delivery AI products add ons to the customer base of eText.

Speaker 2

I'm Geraldo here if I can also add Thiago. I think I can link also this you said about the expansion in the U. S. And all the changes here that is happening. And when the market moves, there's always opportunities to disruption.

Speaker 2

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 the and broaden the interfaces where people buy. You can you see that we always advertise as Z Tags as the e commerce platform that also have OMS that is very close to the commerce platform. So having this omnichannel approach, being able to welcome a new channel for the consumers of our customers can be a huge opportunity for us at the in the new market that we are entering as they are changing. Let's remember also that AI is done with a lot of training.

Speaker 2

Vtech is the e commerce partner from the source of tool 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 compliance capabilities to the data. We're investing in making the data available to partners and customers by upselling the data pipeline product that we are offering to them. And we, as Mariano said, I will just reinforce it.

Speaker 2

I do believe that the latest technology on AI, which is the large language model are very convenient for the so to the retailers to enable them to not only automate a lot of processes that today is just a very complicated and demand a lot of investments, 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 big techs can provide a very powerful and convenient experience to their customers. And we're there to support them and enable them to do that.

Speaker 5

That's excellent. Maybe one quick follow-up, given that you have a lower TCO versus other competitors like these large ones, do you see that monetization or not really, we're not there yet?

Speaker 2

Yes. When there is a disruption in the market, the value chain changes. People move, people make RFPs, people prospect to other systems and people prospect because they need to evolve. Like if by next year, everybody's buying using a chatbot assistant. There's maybe thousands of retailers in the U.

Speaker 2

S. That will need to adjust and we 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 will make this can make an extra difference for the choice of our future customers.

Speaker 5

Excellent. Thank you so much for the detail.

Operator

Our next question comes from the line of Mavi Shreyj with KeyBanc. Please go ahead.

Speaker 7

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 replatforming 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.

Speaker 3

Yes. Hi, Mehdi. Thanks for the question. So on the sales cycle and corporate budgets, we have been we've seen a stabilization of our sales cycle. I think if we rewind 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.

Speaker 3

Throughout 2023, we saw any stabilization of our sales cycle and towards the second half of twenty twenty three, actually some improvement. Now in 2024, I would say that the sales neither a neither 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 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.

Speaker 3

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, Marie, if you could please, that would be great.

Speaker 7

Yes, perfect. The second question was just can you talk about what you're expecting in terms of what's baked into guidance from a consumer perspective for the rest of the year?

Speaker 3

Yes, I can start here, Mary. So as I mentioned on the question about the guidance, we are assuming for Q3 and onwards similar KPIs than what we saw in Q2. On a same store sales basis, we continue to see our existing customers growing their GMP in the teens level. So that's now 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.

Speaker 3

Now interest rates are still high. And when you look at consumer confidence across different countries, you see some volatility. And so it's still an uncertain macro out there. So we are not embedding in our guidance and forecast any recovery on consumer spending. We are now we are also not really expecting a recession or embedding a recession in our numbers or decreasing consumer spending at this point.

Speaker 7

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 like Argentina specifically?

Speaker 3

Yes. I mentioned it was getting worse month upon month until April, Mehdi. Since then, we saw some recovery in May with the hot sales event. That's kind of like the Black Friday. But the country is still volatile.

Speaker 3

So we don't see a clear trend in Argentina at this moment.

Speaker 1

Thank you so much.

Speaker 4

Thank you.

Operator

This concludes our Q and A session. I will now turn the call back over to Geraldo Thomas, Founder and Co CEO of Vitex for closing remarks.

Speaker 2

The Q2 has proven to be a standout period for VITACS, which has been marked by robusted performance and strategic milestones. Our existing customers have demonstrated resiliency and success across diverse markets and seasonal peaks. This success underscore our platform capability to handle high transaction volumes, effectively target diverse consumer segments and help our customer 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.

Speaker 2

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.

Operator

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

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Earnings Conference Call
VTEX Q2 2024
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