VTEX

Thank you for standing by and welcome to the VTAC's first quarter 2024 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I'd now like to turn the call over to Julia Vatter-Fernandez, Investor Relations Director. You may begin.

Hello, everyone, and welcome to the VTEX Earnings Conference Call for the quarter ended March 31st, 2024. I'm Julia Vatter-Fernandez, Investor Relations Director for VTEX. Our senior executives presenting today are Geraldo Thomas, Jr., founder and co-CEO, and Ricardo Camatas-Odre, Chief Financial Officer. Additionally, Mariano Gomila de Faria, founder and co-CEO, and Andres Polidoro, 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 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 statement sections of BTEX Form 20F for the year end of December 31, 2023, and other BTEX filings within the U.S. Securities and Exchange Commission, which are available in our investor relations website. Finally, I would like to remind you that during the course of this conference call, we might 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. Welcome, everyone, and thanks for joining our first quarter 2024 earnings conference call. As we step into 2024, despite macroeconomics 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 an ecosystem-driven play, and VTech is at the forefront of connectivity. With an extensive network comprising over 1,000 system integrators and independent software vendors and over 6,000 ZTEX IO extensions by third parties, we deliver 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, we're strengthening connections through data, leveraging AI to extract valuable insights. We envision VTech as the source of truth for sales attribution data, which is vital for developing AI models in commerce. At Vitax, 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 Vitek'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 underscores our commitment to global growth, while sustained 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 CUNY Hair Cosmetics, manufacturing in Belgium, the Netherlands, and France, Arado, Cruzeiro do Sul, Pet Yard in Brazil, Tres Montes in Chile, OVI in Germany, Pagina d'Ale shop in Italy, KFC in Romania, and H-Mart in the U.S. 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 U.S. Himno De Group, who added a B2B store in Brazil, now operating both B2B and B2C models across two countries in Latin. 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, Vitex achieved a significant milestone in its journey of growth and innovation by successfully launching the OBI operation in Germany. These moves marked 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. Vitex Connect Live New York City made a resounding debut at the first U.S.-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 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 VTech. 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 digits with Vitex. The event highlighted the significance of equipping 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 demonstrated that ZTEX 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, firms recognizing VTech 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 this strong start, 2024 is shaping to be an even more remarkable year for BTEX. 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 achieved. OBI, one of our new live customers this quarter, is a titan in 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 platform and choose VTEX over the others, ODI 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 and 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 doors to a world of future possibilities. It's a testament to VTech's enabling commitment to driving profitable growth and fostering innovation for enterprise brands globally. Chloe, the most relevant leather goods brand in Mexico, partnered with Vitex to lead through omni-channel strategies and its international expansion. Vitex's composable platform helped them reduce implementation costs and streamline processes. Among its standout features, personal shoppers emerged as a game changer, offering customized shopping experiences. With exact innovative solutions, Chloé 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 checkout performance and diverse permanent methods boosted offline sales. Chloé's e-commerce success evidenced by a 60.5% conversion rate increase and a 12.5% growth in average order value underscored the impactful collaboration between VTech and Chloé. Future plans include adding the cross-border functionality for expansion into new markets and personalize our experiences through live shopping. demonstrating Chloe's commitment to continual growth and innovation. Colgate's partnership with E-Tech is the embodiment of innovation in digital commerce. Recognizing a gap in the customer experience between dental professionals and their customers, Colgate got to work by building a unique B2B2C marketplace e-commerce model 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 login system for certified dentists and seamless integration with partners. Leveraging VTAC's native scalability, 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 Vitex in Brazil, and in the fourth quarter of 2023, it added two B2B sites in the U.S. PCA's keen and co-gated profession, further leveraging our fully composable and marketplace-enabled architecture. Dimach, a grocery distributor in Chile catering to over 24,000 customers across eight regions, partnered with Vitex to revolutionize their B2B operations. Embracing VTech's innovative solutions, DMACC embarked on a digital journey to tap into strategic growth opportunities by expanding its sales channels. With the launch of the B2B website, DMACC established 24-7 online stores, ensuring seamless access to their products for customers around the clock. Utilizing B2B Suite as the cornerstone of their architecture, DMACC implemented a closed website model, offering product prices exclusively upon customer's login, while leveraging essential tools such as checkout, catalog, and OMS. With VTEX guidance, DeMarc is streamlining its pricing strategy, condensing its price list from 600 to 60 years based on location and customer segment. Since the platform launched within a swift four-month implementation period, DeMarc witnesses remarkable growth, experiences a 10x increase in GMV and orders, doubling their commercial rate, and achieving a 4% point boost in profitability compared to traditional channels alone. First, the leading global diversified media information and service company chose Vitex for its extensive native capabilities, adaptable multi-site architecture and Vitex IO development platform, enabling the integration of custom features. Leveraging Vitex, Hertz 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 feature products. With VTech's out-of-the-box features and acceptable APIs, Hearst swiftly launched its platform and iteratively leveraged new business models in the digital economy. Furthermore, Hearst serves as the flagship customers piloting VTech's data pipeline and VTech's 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 V-TECH's B2B switch tool, InterFood seamlessly integrated APIs to create microservices, streamline customer registrations, and credit control processes for enhancing organizational management. Additionally, with V-TECH's IO App, The VTEX team tailored tax requirements to match internal food needs precisely, exemplifying VTEX dedication to meeting and exceeding customer expectations. KFC, a quick service restaurant giant, selected VTEX in Romania to power the B2C operations. Seamlessly aligning with VTech's out-of-the-box functionalities, KFC switched and launched the website and mobile app for both iOS and Android, all from a single code base. I am proud to say that VTech's team was able to adapt and tailor ordering and payment methods to meet KFC's specific requirements and be ready to launch the products in only four months. Meso, a leading Brazilian dermal cosmetics chain expanding nine states, partnered with Vitex to develop the B2C and B2B platforms. The Swift launched two stores, Meso Cosmetics and Meso 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 to sneakers, is two guests and migrated to Vitex and doubled their website conversion rates in Brazil. With the previous e-commerce platform, New Balance has struggled to deliver innovative experiences limited to basic sales journey due to the high development costs and resource allocation constraints. The text-composable platform, plug-and-play functionalities, and extensive partners ecosystem caught New Balance's attention. Once manual and labor-intensive, integration of pricing catalogs and XML automation became seamless with Vitex API integrations, empowering their teams to manage promotion and discounts autonomously. The migration to Vitex facilitated rapid results for new balances e-commerce, which led to a significant increase in product page visits double conversions and revenue growth within a month was post-migration. Before handing over to Ricardo, I want to revisit some exciting announcements from VTech today. This year's event boasted over 20,000 attendees, highlighting the impressive reach of the VTech ecosystem. Some of the announcements include the Fresh Store, empowering brands with agile front-end solutions for tailored store experiences, now available for both B2B and B2C use cases. The TechEd Network, revolutionizing digital advertising through AI-driven targeting and auctions. The Tech Data Pipeline, offering specialized APIs for seamless data retrieval and sharing. detect shoot, safeguarding against security threats, and preserving revenue and trust, along with AI-powered features across the 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 training advancements we've reviewed on our innovation and growth journey here at Vitex. We're reshaping the commerce landscape with pioneering products specifically designed for enterprise customers and their IT and business teams. Our solutions empower our IT teams with patchy net functionality, while our intuitive interface empowers businesses' teams to implement strategies 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 their ROI. Moreover, these products will open up new revenue streams for VTechs. 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 VTechs 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 VTAC's Q1 2024 financial results. As emphasized by Geraldo, our Q1 GMV hit $4.0 billion, marking a year-over-year growth of 22% in U.S. dollars and 20% in FX neutral. This led to a year-over-year revenue growth of 25% in U.S. dollars and 21% on an FX neutral basis, reaching $52.6 million. Although macroeconomic conditions impacted the same source sales of existing customers, the first quarter of 2024 witnessed 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 VTAC'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 U.S. 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. This 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 optimize support costs for operational leverage. While we've made substantial progress, there are still further opportunities for marginal improvements going forward. Consequently, our non-GAAP gross margin reached 72.4%, representing a 641 basis points 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 gap total operating expenses reached 35.1M dollars in the 1st quarter of 2024 from 33.4M dollars in the prior quarter and 31.9M dollars in the same period last year. We remain steady fast 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 and enhancements. R&D and G&A expenses remain relatively stable quarter over quarter, while the increase in sales and marketing is mostly explained by special events such as 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 of 2024. Given that expenses increased only slightly year over year, this 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 31st, 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 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 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 Vitax. 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. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Thiago Kapolskis from Banco Itao BBA. Your line is open.

Hi, everyone.

Can you guys hear me here?

Yep, we can hear you, Trevor.

Great, great.

So thanks a lot for the question. So I think the first one regarding the full year guidance, I mean, the nominal numbers are the same, right? But the effects neutral growth, is lower than the previous guide. 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 guys could leave some color also on Argentina, if it's just effects related or how the business is there in terms of overall strength. I know that this was a concern earlier. back in Q4. And the other question is about the AI products that you are 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 roadmap that you have and how you think this could actually enhance your strategy or future opportunities that could come from your strategy there.

Thank you.

Great. Hi, Thiago. Ricardo Sodré here. I'm 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 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 that there hasn't been any significant change in the FX rates in Argentina over the past couple months, that also led us to maintain our revenue guidance in U.S. 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 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 this 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 few months, this stability has come at a cost of significant economic slowdown. Even though this 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 as 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 Q1 performance on a year-over-year basis, Our GMV increased above inflation in local currency and was down only single digits in US dollars. Now, nonetheless, it's important to acknowledge the high level of volatility in this situation and that the situation may get worse before it gets better. and then finally uh 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 of the guidance and also uh the most relevant driver responsible for us you know reviewing down our fx neutral uh annual uh revenue growth guidance with that let me pass it over to geraldo on ai Oh, thank you.

Thank you, Ricardo. Tiago, very good question. You know, like, there's been this revolution about using AI as a new building block, right? We're getting so many new capabilities being created by LLMs and models and stuff like that. And we believe that VTech is uniquely positioned to leverage Is building blocks and gives me business meaning to the retailers and manufacturers and brands in the world. So, that's why we invest in so much and leveraging the building blocks that people are creating all over the world and and you can see that. I invite you to explore our latest VTech 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 directives, 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 boosts productivity through AI. We launched a fast store framework. We're revolutionizing the way we are letting our customers building fast experiences in the website. This is not completely related to AI, but we think it's very important to our customers right now But the ad network, as you can imagine, is leveraging AI a lot, and I think customers will leverage this a lot. Data pipelines. With data pipelines, we will enable our customers and partners to build AI models, to leverage AI, to create possibilities of their own, actually turn data into gold, We also launched a product called Detect Shields, Security Shields. I think with the data with more value, people will capture more value. Being sure that the data is self-guarded is fundamental to a software like ours, so we launched this product as well. And so we are investing a lot. And as I said, we are the right company to give business meaning to this AI revolution.

Great. Thank you so much for the answers, guys. And I'll definitely explore the video, the content. Thank you.

Thank you. Our next question comes from the line. of Maddie Schrag from KeyBank. Your line is open.

Hey, guys, and thank you for taking my question. You know, besides Argentina, just kind of wanted to talk through maybe some of your other geographies, wondering if there may be any tailwinds in the rest of the world or anything like that that could partially offset it.

Thanks.

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

Thanks, Maddy. So, as I mentioned in my first answer, we saw this headwind in Argentina, but we saw the other countries performing well, Brazil, Colombia, Mexico, the U.S., Europe. uh also i would highlight that brazil continues to to show a strong momentum uh in in signing new contracts and new sales uh 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 you know same store sales it has been a positive So, overall, we see good performance on our other geographies, which is encouraging for our year as well.

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

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

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

Hey, Mariano here.

Just mention about a little bit on a 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 plan for the year. However, we need to highlight the volatile period for retailers and manufacturers all over the world in this environment of high interest rates. will bring some volatility and we might end up being a a good solution for this world that will pursue more efficiency and it's going to be really tough years ahead for all retailers it's not one year it's going to be like three four five years uh in a shift so we are being very diligent in open new organic channels and increasing profitability for our active customers we are really focused on helping them to simplify their operations and delivery efficiency in the bottom line. In this 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 the more than 1,000 system integrators and more than 6,000 VTEX I.O. 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 an 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 into Germany with OBI sets solid foundations for us to build up. That's the summary, mainly the recognition of the industry experts, Gartner, Customer Choice. the only company to achieve the Customer Choice Award. And the IDC acknowledgement, Vitex as the main leader on B2C and a major leader for B2B also completes the good momentum on branding and positioning for Vitex.

And maybe just to build quickly, Mariano, I think there was a question from Maddy as well on the existing versus new customers. So we continue to see, you know, our same store sales on the meetings level, if you look at a GMB basis. And on the overall revenue growth for the company, we continue to see that roughly one-third of our revenue is coming from our existing customer base and roughly two-thirds of the revenue growth coming from adding new customers to the customer base.

Appreciate it, guys. Thank you.

Again, if you'd like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Luca Brendam from Bank of America. Your line is open.

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 as the target model. for the coming years, even in a soft quarter. So we probably should expect gross margin 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. 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-gap 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 always 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, all while maintaining or improving performance, right? So that has been helping a lot our subscription cost 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 the 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're 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, clarifying a little bit more on the service margin, our service revenue, which includes our solution architect offering during major customer implementations, naturally experience some volatility as accounts go 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 hyper-care molecule that said we would expand a little bit more on a hyper-care molecule. 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.

Perfect. 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. Vitex is fully committed to providing actionable strategies for B2B and B2C enterprise to maximize ROI and elevate e-commerce platforms. By integrating cutting-edge innovations, we're ready to unveil 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. At Vitax, we stand stronger and more robustly positioned than ever before. We focus on growth and margins, underpinned by a remarkably strong business model. This is our time, and we're 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.