VTEX (VTEX) Q1 2023 Earnings Call Transcript
[Operator Instructions] Our first question comes from the line of Marcelo Santos with JPMorgan.
The first question, I wanted to understand a bit better if you could give some more color on the GMV growth. It was a good growth in the first quarter, but there was a sequential deceleration. So if you could explain the moving parts here, and I think that would be very interesting.
And the second question is about the competitive environment. When Brazilian software company launched a new brand called Wake targeting midsized companies. Is that something that somehow crosses your path or that you have seen somehow impacting maybe the low end of your clients? Or — or is this totally a different business?
Geraldo Thomaz Jr.
Marcelo, this is Geraldo speaking. Good to talk to you. So about the GMV growth, we think that we are outperforming the general market although the pace of the GMV growth is lower than last year, mainly because of the same-store sales, VTEX same-store is decelerating a little bit. We’re still growing more than the average market.
And we attribute that to the fact that we have a more robust customers and also that the platform allows these customers to succeed. I think the greatest and latest example of that is the fact that we have this capability that allow our customers to deliver from physical stores, deliver from physical store is very good for most of our customers, especially fashion customers. They have less rupture, they have more inventory available at the website.
It allows also the salesperson at the physical store to sell products that are not available at the — currently at the physical store. So this allow collaboration between the online and offline world in a very seamless way. And this is growing a lot as VTEX’s capabilities is ramping up very fast. In the last 2 years, we almost more than doubled the volume of what we call collaborative orders on omnichannel, the — it was less than half of 2 years ago. So this is — this is our explanation for our growth on GMV more than the market recently.
The — about the competition with Wake like e-commerce platforms, we have several competitors, all the time, there’s always a new set of competitors. I do believe Wake is positioned to compete with our Tier 3 and Tier 2 customers, we’re going to do our work as we should do, and we’re going to serve our customers the best way possible. So we plan to continue to serve them well.
And our next question comes from the line of Clarke Jeffries with Piper Sandler.
I wanted to follow up on the sort of question around GMV growth. And specifically, was it in line with your expectations? And what it seems most curious to me is the deceleration in GMV growth, but the actual acceleration in subscription growth. Was there a reason or a dynamic in which a typical economic model was changing such that GMV growth coming down didn’t result in an equal drawdown in subscription?
Ricardo Camatta Sodre
Yes. Clarke, Ricardo here. Thank you for the question. Very good question. So on the GMV growth, what we saw was, as Geraldo mentioned, for the existing stores, existing customers, same-store sales was slightly below but we did see new customers coming on board especially through some upselling initiatives that was above what we expected.
So this helps to explain also your second part of the question, that because of this slightly better mix or higher mix of new customers that have a slightly higher implied take rate because they paid the fixed fee. But in the beginning, they don’t bring a lot of GMV has improved this performance on the revenue side. So that has matched a little bit more the GMV growth with the revenue growth. Hopefully, that answers the question.
Yes, absolutely. And then I think a follow-up to that is really around some of the commentary around maybe subsidizing or maybe being flexible on price for the services and implementation. So fair to say that there was some economic sensitivity around the implementation, but that the customers were more than willing to pay the fixed fee on the subscription fee once implemented, and this is really around trying to accelerate or reduce the friction to adoption.
And then I guess, the last follow-up to that is, how long do you expect to maybe have those concessions? Is it still a good ROI to maybe be flexible on services to promote adoption?
Mariano Gomide de Faria
Yes. So Mariano here, thank you for the question. So I think you are mentioning about the service gross margin. So the overall gross margin in Q1, it was an improvement year-over-year from 63.6% to 65.6%. But the quarter-over-quarter was a compression, right? So seasonality can explain part of the quarter-over-quarter if you see last year’s, but we also made a deliberate commercial decision to closely support the implementation of relevant new customers in the U.S. and in Europe.
And these are kind of over care it is to ensure the success of their go-lives. So as a result of this strategy move, we are creating strong relationships with recent signed customers, ensuring a high-quality integration and onboarding experience and advancing our expansion into these new geos with reputational cases. This is quite important for our declared future to pursue reputational cases, it is what makes us strong.
But while this decision may impact our service in the gross margin in the short term, it will position us better in newer regions as U.S. and Europe in the mid and long term. Additionally, it is important to clarify that this commercial decision should not compromise our ability to reach a sustainable breakeven by the fourth quarter of this year.
And we have mentioned in previous earnings calls. So we are on track, instead of it will enable us to pursue a much greater market opportunity. So we are optimistic by taking this decision, and we are looking forward for the results of it.
And our next question comes from the line of Franco Granda from D.A. Davidson.
I was hoping to follow up on the gross margin question on the other side of the business and the subscription side. You obviously had some nice uptick from your infrastructure improvements. But I was wondering, is there more room for upside there? Or how should we think about that as we go through the year?
Geraldo Thomaz Jr.
Thank you. Thank you very much for the question. This is Geraldo here. Thank you. So at the time of the IPO, we were — our gross margin was getting smaller than historically was. And we were growing a lot like — we’re bringing customers and we were investing in new capabilities very fast because of the pandemic, we needed to be much faster than efficient.
I would say that, in a sense, you see consistent improvements in our gross margins since, I guess, 1 year or a little bit more than 1 year ago. And this is a deliberate effort of R&D and, of course, optimizations in our support processes. This is related mostly to how we architecture our hosting capabilities, how we make them more efficient, how we move from Windows instances to Linux instances, we move to more modern processors.
This is an area where there’s a lot of improvements should be done. And while the growth is a little bit lower in our end, there is more bandwidth on the R&D side for us to focus on these improvements. So to answer your question, yes, we’ll continue to invest in the improvement of our gross margin. And we thought, you cannot expect that like we almost improved the subscription gross margin by 400 basis points, right, in the year-over-year, you won’t expect that rhythm, but you expect marginal improvements, yes.
All right. That’s some good color. I appreciate it. And then for my second question, I was hoping to get some color on the costs associated with Loja Integrada, your SMB business. On the 6-K, it was filed, they noticed that the cost nearly doubled year-over-year. Can you speak about those increases that?
Ricardo Camatta Sodre
Ricardo here. Happy to take that one. So on the 6-K, we don’t disclose the breakout of the expenses for Loja Integrada versus the overall VTEX. We do have some disclosure on the stock-based compensation for the management team there, but that’s not the full picture of the expenses for Loja Integrada. But what I could say is that Loja Integrada has been performing in a similar pace to VTEX, I would say, both on a revenue growth perspective, as well as on operating margin perspective.
So it’s not exactly the same, but it is similar. So they are going through the same trends that we are seeing that VTEX on the overall numbers, right? The underneath the numbers, the details are pretty different because they are in the SMB business. And VTEX is more enterprise, but the overall numbers are similar. So it’s not a boost to our results, but it’s not also a detriment to our results.
Thanks for the clarification. I appreciate it.
And our next question comes from the line of Cesar Medina with Morgan Stanley.
On the commentary in the release, you mentioned that you haven’t seen additional reservation on sales cycles. And on that front, can you comment on how this is impacting sales time, ramp time, your backlog and more importantly, your expansion outside of Brazil, in LatAm and developed markets?
Mariano Gomide de Faria
So yes, proud to answer here, Mariano. So the sales cycle is not changing. It is — the maturity of each region can influenciate the sales cycle. But the sales cycles in each region, we are seeing kind of a — kind of, let’s say, a commoditization of, let’s say, of the sales cycle. So we are not expecting not a good surprise or even a worse surprise based on the sales cycle.
And the international expansion, how are your clients outside of Brazil reacting amid the macro uncertainty?
Mariano Gomide de Faria
Perfect. So I can say some words about our international expansion. Like, for example, we shifted our approach towards a more technical sales strategy early last year, and we have been focused on building a kind of POCs and engaging the clients on a more technical way. This is only possible because of the VTEX platform features and capabilities, the out-of-the-box capabilities allow us to prove to our clients by doing it instead of selling it.
And this approach of not [speech] the selling, but speech the product is making the difference. We are seeing the conversion rate answering to this kind of approach. So it’s — of course, it’s making it harder for our competitors to replicate our proof-of-concept approach. Additionally, we have been dedicating more and more to tech teams solution engineering to engage on the first calls with our prospects.
And I believe VTEX is pioneering on this sense. And it is a big bet for the U.S. and Europe, putting more engineering in front of the clients as early in the process as possible. So — and we anticipate being able to disclose some of the customers we have signed contracts with over the coming quarters as they are having their go lives. And we can say that B2B demand, it isn’t high. So VTEX has a unique offer for B2B.
The digital commerce platform plus the distributor order management plus the marketplace ready platform makes VTEX a unique offering for the B2B industry. So we do feel optimistic that we are moving into the right direction and the consistency of our reputational cases going live, we will create more and more the brands that we want in U.S., in Europe. And you can call, for example, Gartner and IDC analysis — and analysis, and they will share with you their perspective about VTEX.
So I believe the increase of those analyst companies on the coverage of VTEX, it is a good sign of our reputation increasing as well. So we are optimistic for the quarters and the years to come in the U.S. and Europe.
[Operator Instructions] Our next question comes from the line of Luca Brendan [ph] with Bank of America.
Two questions here. The first one, if you could just clarify a little bit on those higher expenses to support the implementation costs, is this related just to clients that are yet to go live? Or — has this already been implemented before — started to be implemented before with the previous clients?
And then the second question, if you could give us some color on how you’re seeing the e-commerce market mainly in Brazil, but if you could also give a color from how things are going in the other regions compared to what we saw in the first quarter, if you’re seeing some sort of recovery or if the market remains difficult?
Ricardo Camatta Sodre
Luca, Ricardo here. Happy to answer the first one. So on the investment that we are making on the services side, this is connected with the implementation. So new customers coming on board, it’s not with the existing customers of VTEX. It’s very specific on helping cases that we have signed customers in U.S. and Europe to undergo a successful implementation and go live. And the second question, if you could repeat, please?
If you could just tell us how you’re seeing the e-commerce market so far in the second quarter and the outlook going forward comparing it to the first quarter?
Mariano Gomide de Faria
So the e-commerce market, we are seeing a lot of retailers in the world suffering. These are kind of, let’s call the god effect, right? COVID plus war plus inflation plus high interest rate. It is 1 of the kind of worst kind of [pivot] of macro conditions we have in the market in the last 30 years. So all the retailers that needs to finance themselves in a new environment, they will suffer.
So you can see the Body Bath & Beyond and other retailers in the U.S., in Europe, they will suffer, they will go Chapter 11. They will go bankrupt. So that’s not different in Latin America. Maybe Latin America is a little bit more resilient because the companies there are more used to crisis. But at the end of the day, that’s something that is pretty obvious in effect.
The money is much more expensive than it used to be before. That brings the client — the customers to make more pragmatic decisions. So in terms of the positioning where VTEX is we’re a kind of a backbone for connected commerce, where you can have your time to market faster than other platforms. We might see a demand coming that we need to be very cautioned on being optimistic on this because a crisis is never good, but might have an effect that allows us to serve a wave that clients that want to not use any more custom softer and use VTEX or any other platform to serve a more lean approach.
So — we can say like for good and for bad, we can expect the same pace. So we are keeping — seen our 2 quarters on a $45 million to $45.8 million year-over-year with a 19% FX neutral, and we keep seeing the 2023 in between $185 million to $190 million, that’s a 16% to 19% FX neutral. So we didn’t change roughly the guidance that we have been doing in the last quarter.
And there are no further questions at this time. Geraldo Thomaz, I’ll turn the call back over to you.
Geraldo Thomaz Jr.
To conclude the earnings call, I would like to thank everyone who joined us today for our first quarter 2023 earnings conference call. We’re treated to share our successes from past quarter which includes robust growth and successful implementation of strategy in all regions, further reinforcing our leading position in the digital landscape of Latin America and enhancing our presence globally.
We have experienced an increase in GMV by 22% year-over-year, which reflects our customers’ resilient performance even in challenging times. We have also expanded our customer base, adding several new customers and strengthening our relationship with the existing ones. I’m looking forward to keep you updated on new customer adds across the years. Great things are about to come. We continue to be excited about our path of being the backbone for connected commerce.
Thank you again for your continued support, and we look forward to your participation on our future updates. You may now disconnect.
And this concludes today’s conference call. You may now disconnect.