VTEX (VTEX) 2024 Q1 法說會逐字稿

Thank you for standing by, and welcome to the VTEX first-quarter 2024 financial results conference call.

(Operator Instructions)

Thank you.

I'd now like to turn the call over to Julia Vater Fernández, Investor Relations Director.

You may begin.

Hello, everyone, and welcome to the VTEX earnings conference call for the quarter ended March 31, 2024.

And I'm Julia Vater Fernández, Investor Relations Director for VTEX.

Our senior executives presenting today are Geraldo Thomaz Jr., Founder and Co-CEO; and Ricardo Camatta Sodré, Chief Financial Officer.

Additionally, Mariano Gomide de Faria, Founder and Co-CEO, and André Spolidoro, Chief Strategy Officer, will be available during today's Q&A session.

I would like to remind you that management may make forward-looking statements related to such matters as continued growth prospects for the company, industry trends, and product and technology initiatives.

These statements are based on currently available information and our current assumptions, expectations and projections about future events.

While we believe that our assumptions, expectations and projections are reasonable in view of the 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, 2023, and other VTEX filings within the US Securities and Exchange Commission, which are available in our Investor Relation 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 2024 earnings press release available on our Investor Relations website.

Now let me turn the call over to Geraldo.

Geraldo, the floor is yours.

Thank you, Julia, and welcome, everyone, and thanks for joining our first-quarter 2024 earnings conference call.

As we step into 2024, despite macroeconomic uncertainties, our GMV continued to outperform the market growing 22% year-over-year, slightly above that, our revenue grew 25% year over year in the first quarter of 2024.

We remain encouraged by new contract signatures and the operational leverage of our business model, resulting in significant operating margin expansion.

In today's retail landscape, seamless integration of software solutions, content creators and suppliers within an efficient architecture is imperative for low maintenance costs and rapid revenue generation.

Commerce has evolved into a ecosystem-driven play, and VTEX is at the forefront of connectivity.

With an extensive network comprising over 1,000 system integrators and independent software vendors and over 6,000 VTEX IO extensions by third parties, we delivered comprehensive solutions with remarkable speed and efficiency.

Our ecosystem extends beyond that.

Our customers can easily become marketplaces and connect to external marketplaces.

Sales rep also play a crucial role in the consumer journey, and we're investing in connecting them across all channels.

Additionally, this year with strengthen connections through data, leveraging AI to extract valuable insights, we envision VTEX as the source of truth for sales attribution data, which is vital for developing AI models in commerce.

At VTEX, we are delivering significant year-over-year operating margin increases while also launching products that reshape commerce for IT and business teams, driving sustainable growth with compelling ROI.

Introducing new revenue streams paves the way for our long-term expansion, while enhancing operational efficiency and margins.

We're excited about the tech's future, focusing on growth, margin optimization, and customer success.

Positive feedback from customers and industry experts reaffirms our position as the global leader in connected commerce.

We're leveraging these strengths to drive significant sales momentum.

Our recent expansion into Germany underscore our commitment to global growth while sustaining sales momentum in Brazil highlights our long-term growth potential.

In the first quarter of 2024, we celebrated successful go-lives of new customers, including Keune Haircosmetics Manufacturing, Belgium, the Netherlands and France; Arado, Cruzeiro do Sul, PetYard in Brazil; Tres Montes in Chile; OBI in Germany; PagineGialle Shop in Italy; KFC in Romania; and H Mart in the US.

Furthermore, we have strengthened our relationship with existing customers, such as Grupo Soma, who added a new store in Chile, expanding its presence to more than 10 stores across Latin America and the US; Hinode Group, who added a B2B store in Brazil, now operating both B2B and B2C models across two countries in LATAM; Hugo Boss, who added a new store in Colombia and Peru increasing its footprint to four stores across Latin America; and Nike, who added a new store in Colombia, extending its reach to three countries in Latin America.

This year, VTEX achieved a significant milestone in its journey of growth and innovation by successfully launching the OBI operation in Germany.

This move marks a pivotal moment in our commitment to the European market.

Talking about milestones, I would like to draw attention to a significant event in the first quarter of 2024 that happened right after NIF.

VTEX Connect Live New York City made a resounding debut at the first US-based event of its kind, drawing over a thousand influential in-person attendees eager to immerse themselves in the latest trends and strategy shaping digital commerce.

The event was a hub of inspiration and network of opportunities for commerce leaders seeking to navigate the evolving retail landscape.

In addition to featuring the renowned entrepreneur and basketball Hall of Fame, Magic Johnson, our event included a panel discussion with Hearst.

They shared insights into their decision to partner with VTEX, highlighting how this choice enabled them to significantly decrease the total cost of ownership transitioning from a TCO of high single digits after GMV to low single digit with VTEX.

The event highlighted the significance of equipping the retailers and brands with the essential tools in today's high-interest-rate environment.

As global interest rates remain high, business must optimize organic sales channels and enhance margins.

The event have demonstrated that VTEX strikes the balance between flexibility and low-maintenance commerce technology, enabling its customers to stay ahead in the dynamic world of retail.

Additionally, as mentioned, we started 2024 with strong momentum with industry analysts and firms recognizing VTEX as top performer.

In January, we were recognized as the customer's choice and got the voice of the customers for digital commerce.

By February, we also earned the top spot in the IDC marketplace, worldwide B2C digital commerce platform for mid-market growth vendor assessment study.

With the strong start, 2024 is shaping to be an even more remarkable year for VTEX.

Now let's focus on what matters most, our customers.

Here are just a few customer success stories that exemplify our platform capabilities and the remarkable outcomes they achieve.

OBI, one of our new live customers this quarter is tightening Europe's home improvement sector with more than 640 stores scattered across 10 European countries with headquarters in Germany.

By migrating away from the previous legacy platforms and choose VTEX over the others, OBI can now leverage the VTEX composable and complete commerce platform, marketplace capabilities and unparalleled automation processes.

OBI seamlessly integrated to its e-commerce operation 349 Germany-located physical stores and third-party sellers into a unified transaction platform, expanding product offerings and providing customers with a seamless shopping experience across various delivery and pickup options.

With integrated physical stores nationwide, customers can now pick up online orders within just two hours, showcasing the platform efficiency and effectiveness in meeting consumer needs.

Since migrating to VTEX, OBI has experienced significant enhancements, including unified franchise management, smooth ramp up of platform traffic, improved front-end metrics, and increased agility in development processes.

This collaboration not only enhances OBI's current operation, but also opens the door to a world of future possibilities.

It's a testament to VTEX's unwavering commitment to driving profitable growth and fostering innovation for enterprise brands globally.

Cloe, the most relevant leather goods brand in Mexico partnered with VTEX to lead through omnichannel strategies and its international expansion.

VTEX's composable platform helped them reduce implementation costs and streamline processes among its stand-out feature, Personal Shopper that emerges as a game changer, often customized shopping experiences.

With VTEX's innovative solutions, Chloe achieved remarkable results, a 14% increase in digital sales by the end of 2023.

Standout features like Personal Shopper, reduced returns, and improved decision-making while enhancing share comp performance and diverse payment methods boosted offline sales.

Cloe become a success evidenced by a 60.5% conversion rate increase and a 12.5% growth in the average order value underscored the impactful so collaboration between VTEX and Cloe.

Future plans include adding the cross-border solutionality for expansion into new markets and personalized experiences to live shopping, demonstrating Cloe's commitment to continue growth and innovation.

Colgate partnership with VTEX is the embodiment of innovation in digital commerce, recognizing a gap in the customer experience between dental professionals and the customers.

Colgate got to work by building a unique B2B2C marketplace e-commerce mod.

With a network of consultants covering diverse regions, Scalability of this digital transformation was vital.

Colgate saw a platform accommodating complex B2B requirements, including a specialized log in system for certified dentists and seamless integration with partners.

Leveraging VTEX's native capability, Colgate developed a pioneering marketplace for dentists, offering integrated distributor products and fostering sales growth without logistical expenses, streamlining implementation and reducing costs.

The strategic enhancements like cashback promotions and the loyalty program further augmented its sales.

Colgate started its operation with detecting the view and in the first quarter of 2023, it added two B2B sites in the US, PCA Skin and Colgate Professional, further leveraging our fully composable and marketplace-enabled architecture.

Dimak, our grocery distributor in Chile catering to over 24,000 customers across eight regions, partnered with VTEX to revolutionize their B2B operations.

Embracing VTEX's innovative solutions, Dimak embarked on a digital journey to tap into strategic growth opportunities by expanding its sales channels.

With the launch of the B2B website, Dimak establish a 24/7 online stores, ensuring seamless access to the products for customers around the clock.

Utilizing B2B suite as the cornerstone for -- of the architecture, Dimak implemented a closed website model offering product prices exclusively upon customers' login while leveraging essential tools such as checkout, catalog, and OMS.

With VTEX's guidance, Dimak is streamlined its pricing strategy called dancing its price list from 600 to 6 tiers based on location and customer segments.

Since the platforms launch with the suite for the month implementation period, Dimak with this remarkable growth experiences a 10x increase in GMV and orders, doubling their conversion rates and achieving a 4-percentage-point boost in profitability compared to traditional channels alone.

Hearst, the leading global diversified media information and service company chose VTEX for its extensive native capabilities, adaptable multi-site architecting, and VTEX IO development platform, enabling the integration of custom features.

Leveraging VTEX, Hearst established a marketplace supporting multi-vendor business models, thereby seamlessly enhancing the customer experience across its publication and shoppable interfaces facilitating the easy purchase of featured products.

With VTEX's out-of-the-box features and flexible API's, Hearst swiftly launched its platform and iteratively leveraged new business models in the digital economy.

Furthermore, Hearst serves as the flagship customers piloting the VTEX Data Pipeline and VTEX Fast Checkout, currently undergoing A/B testing for the men's health website as the primary checkout experience.

Interfood, a leading Brazilian beverage importing company with a global presence of over 100 locations has been a satisfied VTEX B2C customer since 2020.

Recently, they chose VTEX also to power their B2B operations, unlocking a new realm of opportunities.

Leveraging VTEX B2B Suite tool, Interfood seamlessly integrated APIs to create micro services, streamline customers, registrations, and credit control processes for enhancing organizational management.

Additionally, with VTEX IO apps, the VTEX team tailored tax requirements to match eating Interfood needs precisely exemplify VTEX's dedication to meeting and exceeding customer expectations.

KFC, a quick service restaurant giant, selected VTEX in Romania to power their B2C operations.

Seamlessly aligning with the VTEX's out-of-the-box functionalities, KFC swiftly launched the website and mobile app for both iOS and Android, all from a single code base.

I am proud to say that VTEX team was able to adeptly tailor ordering and payment methods to meet KFC's specific requirements and be ready to launch the products in only four months.

Mezzo, a leading Brazilian dermo-cosmetics chain expanding nine states, partnered with VTEX to develop their B2C and B2B platforms.

They swift launched two stores, Mezzo Cosmetics and Mezzo Professionals, leveraging seamless connectivity with physical stores and a unified data source for streamlined operations.

Each franchisee account serves as a white-label seller, representing individual physical stores and ensuring optimal inventory management across territories.

Remarkably, the project was completed within a mere three months.

New Balance, the global brand catering the sneakers enthusiasts, migrated to VTEX and doubled the website conversion rates in Brazil.

With their previous e-commerce platform, New Balance is struggling to deliver innovative experiences limited to basic sales journey due to the high development costs and resource allocation constraints.

VTEX composable platform, plug-and-play functionalities, an extensive partners ecosystem caught New Balance's attention.

Once manual and labor intensive, integration of pricing catalog and XML automation became seamless with VTEX API integrations, empowering their teams to manage promotion and discounts autonomously.

The migration to VTEX facilitated rapid results for New Balance's e-commerce, which led to a significant increase in product base visits, turbo conversions, and revenue growth within a month post migration.

Before handing over to Ricardo, I want to revisit some exciting announcements from VTEX Day.

This year's event boasted over 20,000 attendees, highlighting the impressive reach of VTEX ecosystem.

Some of the announcements included fresh store, empowering brands with agile front-end solutions for tailored store experiences now available for both B2B and B2C use cases.

VTEX Ad Network, revolutionizing digital advertising through AI-driven targeting and auctions.

VTEX Data Pipeline, offering specialized APIs for seamless data retrieval and sharing.

VTEX Shield, safeguarding against security threats and preserving revenue and trust, along with AI-powered features across search engine like shopping and pick-and-pack operations, optimizing user experiences and boosting conversion rates and marketplace enhancements for streamlined operations and accelerated time to revenue.

This represents just a handful of the previous investments we revealed on our innovation and growth journey here at VTEX.

We're reshaping the coverage landscape with pioneering products, specifically designed for enterprise customers and IT and business teams.

Our solutions empowers IT teams with cutting-edge functionalities while our intuitive interface empowered businesses, teams to implement a strategy seamlessly.

Ultimately, our products are geared towards optimizing end user retention and attraction, boosting conversion rates, helping our customers optimize their e-commerce platform to amplify the ROI.

Moreover, these products will open up new revenue streams for VTEX.

While the short-term impact may not be significant, they could play a role in our long-term growth trajectory.

I'd like to take a moment to express my gratitude to our 1,334 dedicated VTEX employees, whose unwavering dedication and commitment propel us forward as the backbone for connected commerce.

I'd like also to thank our valued customers, partners, and investors.

I will now hand the call over to Ricardo.

Thank you, Geraldo.

Hi, everyone.

I'm pleased to share VTEX Q1 2024 financial results.

As emphasized by Geraldo, our Q1 GMV hit $4.0 billion, marking a year-over-year growth of 22% in US dollars and 20% in FX-neutral.

This led to a year-over-year revenue growth of 25% in USD and 21% on an FX-neutral basis, reaching $52.6 million.

Although macroeconomic conditions impacted the same-store sales of existing customers, the first quarter of 2020 for witness relevant momentum in signatures of new annual contract value.

That, coupled with significant gross margin improvements and a disciplined operational expenses approach, results in significant operational leverage and an encouraging sign for VTEX's profitable growth trajectory.

Double-clicking on our top line, our subscription revenue reached $50.4 million this quarter, up from $39.8 million in the first quarter of 2023, representing a year-over-year increase of 27% in US dollars and 23% in FX-neutral, while our services revenue totaled $2.3 million.

Now moving down the P&L, we have exciting updates.

We are pleased to announce the positive operational leverage achieved even with the inherently weaker seasonality observed in our first quarters.

This performance instills confidence in our sustainable profitability prospects.

Our non-GAAP subscription gross margin reached 77.2%, a 328-basis-points year-over-year improvement compared to the 73.9% margin in the same quarter last year.

These margin expansion underscores our team's dedication to enhancing profitability and highlights our ongoing efforts to migrate non-core services to more efficient hosting providers and optimized support costs for operational leverage.

While we've made substantial progress, there is still further opportunities for marginal improvements moving forward.

Consequently, our non-GAAP gross margin reached [72.4%], representing a 641-basis-point improvement year-over-year compared to 65.9% in the first quarter of 2023.

Notably, our gross profit increased 37% year-over-year in the first quarter of 2024, reaching $38.1 million.

Our non-GAAP total operating expenses reached $35.1 million in the first quarter of 2024 from $33.4 million in the prior quarter and $31.9 million in the same period last year.

We remain steadfast in our commitment to controlling expenses and optimizing investment returns.

Our expenses have remained notably stable throughout 2023 and the first quarter of 2024, reflecting our ongoing efficiency enhancements.

R&D and G&A expenses remained relatively stable quarter over quarter, while the increase in sales and marketing is mostly explained by special events such as an NRF and the previously mentioned VTEX Connect, New York City.

As a result our non-GAAP operating income improved from a negative 9.7% margin in the same quarter last year to a positive 5.7% margin in the first quarter 2024.

Given that expenses increased only slightly year over year, these significant 15 percentage points improvement is driven by our revenue growth with operational leverage and by gross margin improvements.

This reinforces our dedication to managing our business efficiently, fostering growth responsibly and sustainably and aiming towards reaching the Rule of 40.

For the third consecutive quarter and in a seasonally weak quarter, VTEX generated cash.

As of the three months ended March 31, 2024, we had a positive $1.9 million free cash flow compared to a negative $5.0 million free cash flow in the same quarter of the prior year.

Looking ahead, despite the uncertain macroeconomic conditions, we remain encouraged by our sales momentum and operational leverage.

From a revenue perspective, we are currently targeting $54.5 million to $56.0 million range for the second quarter 2024, implying a year-over-year growth of 18% on an FX-neutral basis in the middle of the range.

For the full-year 2024, we continue executing our strategy for profitable growth.

Recognizing heightened volatility in Argentina's macro situation, we are targeting FX-neutral year-over-year revenue growth of 16% to 20%, implying a range of $234 million to $243 million based on April's average FX rates.

Further demonstrating our operational leverage, we are targeting free cash flow and non-GAAP operating income margins of high single digits.

We are excited about the future of VTEX.

Our business model has proven its robustness, and now our journey revolves around achieving business growth, expanding margins, and generating cash.

We anticipate in supporting our customers while extending our value proposition to more brands and retailers to help them reach their financial and operational objectives in a high-interest-rate environment worldwide.

Our journey so far has been filled with rewarding moments, and we are encouraged about all that lies ahead to solidify our position as a global backbone for connected commerce.

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

Thank you.

Thank you.

We'll now begin the question-and-answer session.

(Operator Instructions)

Thiago Kapulskis, Banco Itaú BBA.

Thanks a lot for the question.

So I have two -- so I think the first one regarding the full-year guidance, I mean, the nominal numbers are the same, right?

But the FX neutral growth is lower than the previous guide, right?

So you guys mentioned Argentina.

Is there anything else in terms of the business that is going different or doing different than your previous expectations?

And if you could guide -- if you guys could give us some color also on Argentina, if it's just FX related or how the business is there in terms of overall strength.

I know that this was a concern back in came back in Q4.

And the other question is about the AI products that you were providing.

I mean, there's a lot in the pipeline.

I think there was the shareholder letter too last quarter.

So if you guys could comment a little bit more on the road map that you have and how you think this could actually enhanced your strategy or future opportunities that could come from your strategy there.

Thank you.

Great.

Hi, Thiago.

Ricardo Sodré here.

Happy to take the first two questions on the full-year guidance in Argentina, and then I'll pass it over to Geraldo to talk about AI.

So on the guidance, for the full year, we are maintaining our annual guidance in dollar terms as you mentioned.

This is supported by a steady and robust performance observed in key markets such as Brazil, Colombia, Mexico, the US, and Europe.

And although consumption in real terms is being severely impacted in Argentina, which impacted our FX-neutral guidance, given there hasn't been any significant change in the FX rates in Argentina over the past couple of months, that also led us to maintain our revenue guidance in US dollars for the full year.

And it's important to recognize a certain level of risk in our guidance, considering the volatility associated with the situation in Argentina.

Especially in Q2, given one, their current macro situation and consumption level and two, their most relevant e-commerce event of the year called Hot Sales that will happen next week in the midst of these uncertain environment that they're going through.

Now going back to things that are under our control.

Looking forward, we are encouraged by our meaningful new contracts sales momentum.

And on the operational operating margin front and encouraged by our Q1 achievements, we have also adjusted our full-year operating income and free cash flow margins guidance raising our forecast from mid to high single digits that we mentioned last quarter to high single digits that we gave this quarter.

So these adjustment reflects our unwavering confidence in our ability to navigate and improve our financial performance throughout the year.

And then just double-clicking on Argentina -- the macroeconomic situation in Argentina is challenging.

While FX rates have remained stable over the past two months, this stability has come at a cost of significant economic slowdown.

Even though the slowdown was by design to control inflation, the extent of the decline in consumption has been severe.

And predicting the trajectory of this environment is difficult, as you can imagine, and it remains beyond our control.

So with that said, our performance in Argentina, although weak, stands out a significantly better than the overall e-commerce market and other e-commerce reporting companies largely due to the resiliency of our customers.

For instance, if we look at our Q1 performance on a year-over-year basis, our GMV increased above inflation in local currency and was down only single digits in USD.

Now, nonetheless, it's important to acknowledge the high level of volatility in the situation and that the situation may get worse before it gets better.

And then finally, it's important to point out that Argentina's performance was the most relevant driver responsible for our Q1 revenue being closer to the bottom of the guidance and also of the most relevant driver responsible for us reviewing down our FX-neutral annual revenue growth guidance.

With that, let me pass it over to Geraldo on AI.

Well, thank you, Ricardo.

Thiago, very good question.

You know like this -- there's been this revolution about using AI as a new building block, right?

We're getting so many new capabilities being created by our LLMs and models and stuff like that.

And we believe that VTEX is uniquely positioned to leverage these building blocks give business meaning to the retailers, the manufacturers, and brands in the world.

So that's why we're investing so much and leveraging the building blocks that people are creating all over the world.

And you can see that I invite you to explore our latest VTEX Vision Spring 2024 edition.

We talk a lot about the things that we did and the roadmap that we are heading to.

And we have product launches that are around four key directive, more or less -- like creating fast and high-converting composable experiences, empowering sales reps across all channels and ensuring faster and efficient fulfillment.

All this boosting productivity through AI would launch it faster test of framework.

We are revolutionizing the way we are letting our customers building fast experiences in the website.

This not completely related to AI, but we think it's very important to our customers right now that the Ad Network, as you can imagine, is leveraging AI a lot, and I think customers will leverage this a lot.

Data Pipeline, with Data Pipeline, we will enable our customers and partners to build AI models, should leverage AI -- would create possibilities of their own and actually turn data into gold.

We also launched a product called VTEX Shield -- security shield.

I think with this, data have more value -- people will capture more value.

Be sure that the data is self-guarded is fundamental to a software like ourselves.

So we launched this product as well. so we are investing a lot, and as I said, we are -- with the right company to give business meaning should be say high resolution.

Okay.

Thank you so much for the answers, guys.

And I'll definitely explore the video -- the content.

Maddie Schrage, KeyBanc.

Hey, guys, and thank you for taking my question.

Besides Argentina, just kind of wanted to talk through maybe some of your other geographies.

Wondering if there may be any tailwinds in rest of world or anything like that that could partially offset it.

Thanks.

Happy to start and then others feel free to chime in.

Thanks, Maddie.

So as I mentioned on my first answer, we saw these headwinds in Argentina, but we saw the other countries performing well: Brazil, Colombia, Mexico, the US, Europe.

Also would highlight that Brazil continues to show strong momentum in signing new contracts and new sales.

Even with the relevant market share that we have in the country, our strong position and the strong ecosystem that we have is helping on that.

And also the way we see our retailers, our customers, in Brazil, integrating the physical stores and accelerating their same-store sales has been a positive.

So overall, we see a good performance on our geographies, which is encouraging for our year as well.

And I'm not sure if that answers the question or others wants to chime in.

Yeah, I think I just have a quick follow-up for you as well.

Wondering if you could maybe talk about the sales motion right now, maybe the mix of revenue between existing and new customers, maybe if you could kind of size the backlog for us, I think that would be helpful too.

Hey, Mariano here.

Just to mention about little bit on sales momentum, if I understand correctly your question.

We are seeing a consistent improvement in the pipeline, not one specific country, but globally.

This is a consequence of the tax position in most of analyst companies such as Forrester, IDC, and Gartner.

So we are receiving good reports.

We are enhancing our positioning, and we are invited to more and more RFPs globally.

We are recognizing the good momentum.

We are on track with the sales goals we planned for the year.

However, we need to highlight the relative period for retailers and manufacturers all over the world in this environment of high interest rates.

So this it will bring some volatility, and we might end up being a good solution for the world that we'll pursue more efficiency.

And it's going to be really tough years ahead for all retailers.

It's not one year; it is going to be like three, four, five years in a shift.

So we are being very diligent in opening new organic channels and increasing profitability for our active customers, and we are really focused on helping them to simplify their operations and deliver efficiency in the bottom line.

In these high interest rate and high-inflation environment, seamless integration, ecosystem-ready software and efficient architecture are essential to minimize maintenance costs and accelerating revenue.

So with all of the more than 1,000 system integrators and more than 6,000 VTEX IO extensions by third parties, VTEX provides a very comprehensive solution we call the complete and composable solution that can help retailers all over.

Mentioning Brazil, we still have a lot of room to grow on the B2C, and we have a enormous B2B market to be discovered.

Latin America, we have significant groundwork to cover.

This quarter, having the go-live of Nike in Colombia is a significant milestone.

In Europe, our expansion in Germany with OBI sets a solid foundations for us to build up on them.

So that's the summary.

Mainly the recognition of the industry experts, Gartner Customer Choice -- we were the only company to achieve the Customer Choice Award and the IDC acknowledgment of VTEX as the main leader on B2C and a major leader for B2B also completes the good momentum on branding and positioning for VTEX.

And maybe just to build quickly, Mariano, I think there was a question from Maddie as well on the existing versus new customers.

So we continue to see in our same store sales on the mid-teens level if we look on a GMV basis.

And on the overall revenue growth for the company, we continue to see that roughly one-third of our revenues coming from our existing customer base and roughly two-thirds of the revenue growth coming from adding new customers to the customer base.

[Luca Brendon], Bank of America.

Hi, good afternoon, everyone.

Thank you for taking my questions.

I have two here on my side.

First of all, on gross margin, it was really strong this quarter, and it's getting close to what you guys said is the target model for the coming years, even in a tough quarter.

So we probably should expect gross margins to be higher for the full year.

So I just wanted to see when do you guys think you could be reaching this target model and looking forward, what do you think could be the gross margin for the company maturity?

Or how can we think about that going forward?

And then second ties a little bit to the first question.

But on service revenues, it was down year over year.

And I just wanted to understand how we could think about this line going forward.

Should it continue at similar levels in the nominal rates, or should it also expand from current levels?

Thank you.

Thanks, Luca.

Thanks for bringing that up.

I'll start with gross margin and then I'll pass it over to Mariano regarding services revenue.

So in Q1, we achieved a non-GAAP gross margin of 72%, marking a year-over-year expansion of over 600 basis points.

And despite the seasonal effects, typical to Q1, as you mentioned, this brings us closer to our Investor Day target of 75% for our overall gross margin, and it's 80% for the subscription gross margin, right?

And we also achieved 77% on the subscription gross margin.

So also getting closer there as well.

And approximately, two-thirds of our subscription costs are related to hosting, and we have significantly enhanced our cloud efficiency.

These efforts include migrating systems to Linux, optimizing CPU usage, and reducing costs through caching and outscaling and all while maintaining or improving performance.

So that has been helping a lot, our subscription gross margin.

Regarding the services gross margin side, although some volatility has been observed, the improvement is primarily attributed to our strategic adjustment away from the hyper-care modes for key new customers in the US and Europe as they go live.

So we remain focused on the opportunities to enhance our subscription gross margin and overall gross margin.

While some services gross margin volatility is inherent in our business, we anticipate further improvement in this area in the future, and we are moving towards our goal that was disclosed in the last Investor Day of 80% subscription gross margin and 75% overall gross margin.

And that's a medium-term goal for the next like three to five years.

It's not a terminal model growth.

We don't have the visibility yet for the terminal model.

But for these next three to five years, that's what we are going after.

With that, let me pass it over to Mariano to talk about services revenue.

Yeah, clarify a little bit more on service margin -- our service revenue, which includes our solution architect offering during major customer implementations naturally experienced some volatility as accounts goes live and the stage of development of new geos are expanding.

So it's expected by design to have some volatility.

This time last year, we had a few accounts in implementation phase, like, for example, OBI that we just announced in a hypercare model.

That said, we would expand a little bit more on hypercare.

So that volatility is expected.

But while there are no significant changes in the model and design of the services to report aside from what I already mentioned that's expected volatility, we will continue to execute.

We remain optimistic on service as we are increasing our system integrator reach, and the system integrators are becoming more and more mature.

So broader and more mature ecosystem will bring the volatility on the service revenue and service expenses of VTEX a little bit down.

So we will be able to scale the deliveries with less direct service of VTEX.

And that's by design the ultimate goal for a platform like us.

That's very clear.

Thank you for the answers.

That concludes our question-and-answer session.

I will now turn the call back over to Geraldo for some final closing remarks.

In conclusion, it's evident that in today's high-interest-rate environment, retailers and brands urgently need effective tools to enhance margins and optimize organic sales channels.

VTEX is fully committed to providing actionable strategies for B2B and B2C enterprise to maximize ROI and elevated e-commerce platforms.

By integrating cutting-edge innovations, we're ready to view fresh audiences and insights, empowering our customers to achieve even more impactful consumer engagement.

Our unwavering dedication to customer centricity and innovation-driven solutions is not merely shaping the future of commerce; it is redefining it.

We are excited about the results of the first quarter.

Our gross margin and operating margin expansion was remarkable and sets a strong foundation for our sustainable profitable growth.

As VTEX, we stand stronger and more robust position than ever before.

We focus on growth and margins, underpinned by a remarkably strong, strong business model.

This is our time, and we are ready to seize it.

Thank you, everyone, for being part of this exciting journey.

We look forward to keeping you updated at our next earnings call.

Have a wonderful week.

This concludes today's teleconference.

Thank you for your participation.

You may now disconnect.