VTEX Price & Performance (VTEX)

A reconciliation of those measures to the nearest comparable GAAP measures can be found in our fourth quarter twenty twenty four earnings press release available on our Investor Relations website. Now let me turn the call over to Gerardo. Gerardo, the floor is yours. Thank you, Julia.

Welcome, everyone, and thanks for joining our fourth quarter twenty twenty four earnings conference call. We closed the year with our underlying business remaining stronger than ever. Looking at the medium to long term, twenty twenty four was a transformative year for Vitex VTEX. We delivered significant milestones in our evolution as a global leader in digital commerce. First, we continue to see a robust sales momentum demonstrated by the number of customers that pay us more than $250,000 per year. Increasing [indiscernible] 126 to one hundred and fifty five. Second, our annual revenue churn remained stable in the mid single digit percentage range and evidence of our customer satisfaction and our strong position in the competitive landscape. Third, we introduced new products such as Vitek's ad data pipeline and shield designed to empower our customers with AI support that add ons that enhance business outcomes and revenue generation. Delivering efficiency and tangible business results for our customers and potentially contributing to vitex monetization capability. The three operational pillars highlighted above adding new enterprise customers, maintaining low churn, and launching innovative products. Are key to Vitek's medium and long term success. While our revenue model with two thirds coming from a take rate on customer GMV closely align our success with that of our customers and benefit us from the growth of digital commerce.

It also introduces short term volatility. This was evident this quarter and year with revenue coming below expectations due to weaker same store sales. Particularly in Brazil, amidst softer consumer spending in significant effects of devaluation. Ricardo will elaborate further on this in the financial section. Now going back to the three key operational growth drivers. On adding new enterprise customers, in 2024, we saw strong contract signature momentum with Brazil standing out as a highlight throughout the year and with notable contributions from U. S. In Europe, the second half, As a result, our deferred revenue increased 29% year over year, which is a testament to the attractiveness of our value proposition for net new customers and existing one that renew to renew [indiscernible] These achievements reaffirm VTechs global ambitions of becoming the backbone for connected commerce. Being more than just a software provider but the preferred comprehensive commerce suite by the both CIOs and CEOs worldwide. On keeping a low and stable churn, we further solidified our partnership with top tier brands and retailers demonstrating our ongoing upmarket trajectory with a 23% increase in number of customers generating over $250,000 in annual recurring revenue. In 2024, we celebrated the go live of several key customers including H Mart, MyEyeDoctor, Jeffers Pet, and Hirsch's ongoing expansion in The U. S. OBI and an enterprise multinational fashion retailer in Europe.

Motorola in Sweden and Wirtel in Poland. Pashmina in India, Nike, Adidas and Elektra across Latin America. And FreshShop, Although our total number of customers had slightly decreased year over year, That's driven by a lower intake of small customers that are not strategic nor financially relevant for Vintechs VTEX. Our annual revenue churn remains stable in the mid single digits, as our base of customers paying us more than $2,000 in ARR growth and compounds over time. It further strengthens VTech's long term growth and resilience. On Logic, product innovations, Vitek is successfully transitioning from a single product platform into an integrated suite of solutions. Our offering now spans B2C, B2B sales app, Pick n Pay, data pipeline, retail media, security shield and many more, empowering business through a well connected ecosystem. Our strategic investments, including a stake in Sunrise and the acquisition of WENIT expanded our AI and conversational commerce capabilities while enabling us to enter two new segments, retail media and post sales markets. This diversification strengthens our position as the most comprehensive suite of commerce solutions going beyond software to serve as a trusted ally in executing our customers' growth As we look ahead, we remain steadfast in building trust with our customers and delivering on our promises along side our ecosystem partners.

Trust is that the quarter detects DNA and will continue to guide us as we solidify our leadership With this segue, let me go to the newly added customers during the fourth quarter of twenty twenty four. [indiscernible] an enterprise multinational fashion retailer in Ireland. [indiscernible] hangs in Mexico. Sammeka in Portugal, Heart Corporation and Lion Bakery in The U. S. With also focus on strengthening our relationship with existing customers actively supporting the grow initiatives During the fourth quarter, several premier brands and retailers chose VTech's to expand their operation with us, including Almo Belliesa has launched a new brand, MascaFO, and now operate two B2C stores in Brazil. Cartamundi has introduced the Grimald brand in France extending its operation to Europe in addition to to its two B2C stores in The U. S. Kieran continues to expand its B2B presence across Europe, adding Germany to its Belgium, France, Netherlands and UK operations. Mazda is further strengthening its European presence with the addition of France which is now operating in four countries. Solar has expanded to be to be in Colombia with two new accounts Solar B2B and this Travis B2B, adding two their two existing B2C store in the country.

And Voigt has expanded its B2C presence into The U. S. Complementing its operation in Mexico. Additionally, in our continued pursuit of fostering our trusted ecosystem, we're thrilled to announce that we've launched the strategic partnership with Accenture through Logic the retail technology systems integrated, This collaboration empowers U. S. Enterprises to modernize this digital commerce infrastructure addressing shifting buyer trends and rising market challenges. With record retail closures highlighting the urgency for transformation, VTech and Accenture are united. To help brands stay competitive by leveraging VTech's VTEX platform and Accenture expertise in business transformation. This partnership positions Vtech at the forefront of driving growth and resilience for U. S. Companies in today's dynamic retail landscape. Now before leaving the stage to Ricardo, I would like to share some customer success cases demonstrating our Partafone's tangible impact and potential. An enterprise multinational fashion retailer [indiscernible] partnered with Vitex to overcome significant technical [indiscernible] Before ZTACs, the company relied on a dedicated commerce textile platform that lacked capability, functionality and the flexibility needed to support its growing digital commerce ambitions. The primary objectives were integrating inventory from over 100 stores centralizing digital sales and driving revenue and efficiency improvements. VTech implemented its core platform with a white label B2C operation to address this need and enhance the user experience with out of the box features like color and sizing options.

The architecture was further strengthened by redesigned and integrations facilitated by middleware from our partner, logic. Early indications suggest improved sales efficiency and platform usability by integrating SmartCheckout. Carajaje, the leader retailer in Home Improvement segment in Brazil, transformed its customer experience and boosted sales with Veni by ZTechs VTEX. With 11 physical stores, two distribution centers and over 20,000 SKUs ranging from decoration to construction [indiscernible] Karajayas needed an efficient post sales channel to enhance customer service and drive incremental revenue. By integrating conversational commerce with many by the VTEX, Carajaj's automated key processes including card recovery with optional human assistance, order updates and financial solutions like invoice retrieval and PIX payments. This automation led to remarkable results such as a 15 times higher conversion rate on WhatsApp and email, an expansion on the return over investment in abundant card recovery which reached double digits. And a 68% message read rate well above the 40% to 45% average for emails. We are proud to help Karajah embark in their conversational commerce journey where WhatsApp has already become a comprehensive and efficient channel delivering trust, convenience and competitive differentiation throughout the customer journey. Heineken Brazil, home of some of the most beloved alcohol chose VTech's ads to run their digital campaigns.

It achieved exceptional results with above average return on that spend in the fourth quarter of twenty twenty four. This success was powered by identifying Zona Su highly qualified audience through first party data including transactional insights and search behavior on the platform. By analyzing shopper intent Heineken campaigns were strategically optimized targeting consumers with high purchase intent and ensuring maximum impact across many SKUs. Through this data driven approach, Detect adds provides Heineken Brazil with actionable insights into key performance indicators like sell out, and market share helping them define the strategy for even better results. Pachimina.com, the leading B2C e commerce [indiscernible] in luxury handcrafted [indiscernible] has started with VTEX to transform its digital operations and accelerate global growth.

With 85% of its business coming from international [indiscernible] Pachimina.com migrated from its legacy platform to VTEX platform to enhance scalability flexibility and operational efficiency. This transition empowered the brand to offer personalized shopper experiences. Experiences multilingual support and local currency option for its customers across The U. S, Europe, Australia and India. These partnerships allow pachimina.com to expand its global presence. While celebrating the rich heritage of Kashimir craftsmanship all without the burden of managing its web infrastructure. Together, we aim to redefine Integer's digital length retail landscape and set new benchmarks in global e commerce [indiscernible] Sony, the Hill Nolan global electronic company, has selected Salesat as the primary platform platform to manage sales operations across LatAm stores.

These partnerships represent the first Multi country implementation of the sales act. Which with seven stores across Ecuador and Chile, already becoming their main in store sales platform. To meet its specific operational needs, Sony has extended sales app within the Vitex ecosystem using Jitterbit integrating it with their existing systems, Sony plans to expand sales app usage for four additional countries in LATAM, Peru, Panama, Colombia and Mexico. Bringing the total number of stores to 18. With sales at as its exclusive platform for all operations, this rollout underscores its potential to drive significant results across Sony's regional network. Walmart, the multinational discount store operator, and one of the largest corporation in the global retail industry. Is transforming the mobile shopping experience across Central America by launching new apps in Costa Rica and Guatemala.

The apps offer a flexible customized shopping solution for each country and store format from Walmart Supercenters to Supermarket and Discount stores.

Leveraging VTech's IO infrastructure and our API first approach, the apps advanced architecture enhances load time and performance, while intuitive navigation improves user experience driving higher customer satisfaction. This is just the beginning with the additional brands that crossed the region set to go live. Fruit's digital expansion Walmart is setting new standards for retail innovation in Central America. A development we proudly support. The smart storage solutions business unit of Black and Decker successfully launched its Smart Stores digital commerce store migrating from content to only site core websites to the VTech's Fresh Store platform. This new platform delivers a seamless catalog browsing and purchasing experience for premium from prominent brands like VITMAR Lista and Creepmaster. Built on the proven global architecture using used for scaling engineering fastening websites also powered by VTEX smart storage expense in Stanley assortment availability and commerce capabilities. Positioning to meet the rising demand of digitally native B2B customers. The migration represents a pivotal step in enhancing operational efficiency and customer engagement in B2B digital commerce. To conclude this session, I want to to our thirteen sixty eight VITEX employees dedicated to making VITEX the backbone for connected commerce. And to our customers, partners and investors.

With that, I will now hand over the call to Ricardo to discuss our financial performance for the quarter and the full year of 2024. Thank you, Gerardo. Hi, everyone. It's a pleasure to update you on our financial performance. In the fourth quarter of twenty twenty four, our GMV reached $5,400,000,000 representing a flat year over year growth in U. S. Dollars and 11% increase in FX neutral.

With this, concluded the full year 2024, reaching $8,200,000,000 in GMV, representing 1016% growth in U. S. Dollars and FX neutral respectively. Our revenue totaled $61,500,000 growing year over year 1% in U. S. Dollars and 12% in FX neutral in the fourth quarter of twenty twenty four. And reached $226,700,000 for the full year 2024. Representing a thirteen percent and eighteen respectively. These results came below our guidance range of 14% to 17% FX neutral for the fourth quarter and 18.5% to 19.5% FX neutral for the full year. The primary driver for the GAAP versus our expectations came from a softer than expected GMV from existing customers in Brazil. Where our consumer spending softened. On top of this, the U. S. Dollar meaningful appreciation against most currencies especially the Brazilian held, further pressure our U. S. Dollar reported results. Despite Brazil's challenging consumption scenario, as mentioned by Gerardo, we remain confident in our ability to sustain a profitable growth trajectory based on the robust momentum in adding new enterprise customers our stable and low churn and our recent product innovation launches. Double clicking on our revenues, our subscription revenue reached $59,500,000 in the fourth quarter of twenty twenty four, representing a year over year increase of 2% in U. S. Dollars and 13% in FX neutral.

On top of last year's 36% in U. S. Dollars and 27% in FX neutral growth. For the full year, subscription revenue reached $217,700,000 up from $190,300,000 in 2023. Representing a 1420% growth in U. S. Dollars and FX neutral. In 2024, our existing stores revenue increased to $169,000,000 Our net revenue retention reached 104% in FX neutral. A key driver to net revenue retention our same store sales growth reached 10% in FX neutral. Looking at same store sales throughout 2024, For the first three quarters, same store sales growth was in the teens level while in Q4, it dropped to single digit range. Given tougher comps in Argentina and softer consumer spending in Brazil. It's important to mention that the upselling of new features contract renewals at better terms and inflation adjustments have partially offset the impact in our net revenue retention from the weaker same store sales from our customers. On top of our existing stores growth, we continue attracting new stores [indiscernible] $27,900,000 in revenue to our base. Representing approximately 16% of our 2023 VITEX platform revenue, The solid contract signature momentum is coupled with our LTV over CAC ratio that remains at strong fold exceeding the 6x cash on cash mark.

This year, a significant highlight is the continued progress of our existing stores P and L. Reinforcing the strength of our inherent attractive business model Existing stores gross margin increased from 77% in 2023 to 81% in 2024. While operating margin reached 43% marking eight percentage points increase year over year. Additionally, given our net revenue retention of 104% in FX neutral, our existing stores P and L is significantly above the rule of 40 giving us confidence in the rule of what I goal at maturity. Meanwhile, for new stores margins, we delivered a 10 percentage point improvement in gross margin year over year and a five percentage point operational leverage improvement in R and D and G and A which were all basically reinvested into sales and marketing. Strategically positioned to seize the significant growth opportunity ahead. Now analyzing the geographical breakdown of our revenue. In 2024, revenue generated outside of Brazil accounted for 43.4% of our total Looking at the year over year FX neutral growth by region, Brazil subscription revenue grew 28% in FX neutral. A slight acceleration versus last year mostly given the solid sales momentum mentioned throughout the year and despite the year end softness in same store sales.

Latin America excluding Brazil subscription revenue increased 6% in FX neutral. And remove the Argentina headwind the region grew at a pace just slightly below Brazil's. And the rest of the world subscription revenue grew 34% in FX neutral, demonstrating a relevant compounding rate even as we increase the baseline. Moving down our P and L, we have maintained strong discipline on costs and expenses, important to note that all figures I will now present are non GAAP. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our fourth quarter twenty twenty four earnings press release on our Investor Relations website, Our subscription gross profit reached $46,900,000 resulting in 78.9% subscription gross margin. Up from 78.6% in the same period last year. Our total gross margin [indiscernible] rose to 75.1% compared to 74.1% in Q4 twenty twenty three, Our total gross margin improvement was mostly driven by the lower mix of services revenue in our total revenue. As we are relying more on our ecosystem to provide implementation services.

And to a smaller extent by operational efficiencies [indiscernible] despite the currency headwind experienced in the fourth quarter, Operating expenses were $33,800,000 slightly below the $34,200,000 recorded in the prior quarter. Resulting in an operating income of $12,400,000 representing a 20.1% margin. Up from 19.1% in the same quarter of the prior year. Aligned with these our free cash flow performance was equally strong reaching the same $12,400,000 and 20.1% margin. Consistent with the target model we communicated to the market. The resiliency of our operating income and free cash flow margin clearly demonstrates our natural operational hedge against FX fluctuations. As even though the weighted average of our BASC of currencies depreciated approximately 10% year over year against the U. S. Dollars, we still improved our operating income margin by one percentage point and our free cash flow margin by 4.5 percentage points.

Looking at the full year, the improvements have been even more significant.

Our subscription gross margin improved 196 basis points reaching 78.2% while our overall gross margin expanded by four zero two basis points reaching 74.1%. Operating margin improved nine percentage points reaching 13% going from $7,700,000,000 in 2023 to $29,500,000 in 2024. Free cash flow also significantly increased from $3,800,000 in 2023 to $25,200,000 in 2024. We also did strategic capital allocations. Like Wenny, and a minority investment in Synarize, and launched a new share repurchase program. Approved by our Board of Directors on 12/03/2024, the program authorizes the repurchase of up to $30,000,000 in Class A common will remain in effect until 12/02/2025. In the fourth quarter of twenty twenty four, we repurchased 1,800,000 Class A common shares an average price of $6.08 per share.

Totaling $11,200,000 We will continue to allocate capital rig diligence aligned with our strategic vision and aiming to maximize long term returns and value generation for VTEX. Our customers, partners, employees and investors. [indiscernible] As we move forward with our business outlook, we remain confident in our business resilience. Despite Brazil's FX volatility and existing we see an attractive opportunity to help our customers outperform the market attract new customers, cross sell our suite of products to our base and efficiently manage our costs and expenses to deliver operational leverage. Considering these, for the first quarter of twenty twenty five. Implying a $51 to $52,000,000 range. For the full year 2025, as we continue we are targeting FX neutral EO for year subscription revenue growth of 14% to 17%. Implying a range of $235,000,000 to $241,000,000 based on the quarter to date average FX rate.

We are targeting non GAAP operating income and free cash flow margins of mid teens. Given the evolution of our partners' Echo system, we plan to increasingly rely on VTech's ecosystem of system integrators new customers' implementations. We view our lower short term growth rate as temporary influenced by the abrupt FX devaluation and a softening of consumption in Brazil. Looking ahead, our operational and long term indicators are showing strong performance. We have seen a significant 23% increase in number of customers generating over $250,000 in ARR. And our deferred revenue has also meaningfully increased by 29%. Year over year, Our annual revenue term remains in the mid single digits with larger customers experiencing low single digit churn, Finally, and not less important, we are excited to be expanding with compelling new products that are enhancing our offerings.

Overall, we remain optimistic about the future and look forward the opportunities that lie ahead in the coming years.

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

Thank you. We will now begin the question and answer session. We'll take our first question from Marcelo Santos at JPMorgan.

Hi, good evening. Thanks for taking my questions. The first question is regarding the guidance, the subscription revenue guidance growth and FX neutral terms for 2025.

Could you discuss this a bit more into the the regions that you operate maybe comparing how they grew last year like what are you kind of forecasting the main moving parts that you have on that guidance?

That's the first question.

Second question, I think on the opening remarks, you commented that you're transitioning from a single product company to more of I forgot the exact words, but more of a platform of solutions. What would be the P and L impacts over the long term of such transition? What should we expect in different lines? Thank you very much. Hi, Marcelo. Thanks for the question. Happy to take the first one. Regarding the guidance for 2025, So our Q1 and full year 2025 guidance assumptions reflect a balanced view of consumption headwinds and the continued strength of our operational execution. So on the same store sales growth front, remember that this was in the teens level. During the first three quarters of twenty twenty four, but it decelerated to single digits in Q4. And as mentioned in the prepared remarks, And for 2025, we are assuming a same store sales growth rate in FX neutral roughly aligned with what we saw in Q4. Factoring in ongoing consumption pressures particularly in Brazil. We are going to your question on geographical, right, aside, we are embedding a recovery in Argentina where we are starting to see some signs of year over year consumption improvement.

And then with that, we are assuming Argentina should return to positive growth in 2025. Although we still expect it to grow less than the average of the company given the uncertainty of the speed of recovery of the country.

And as we like to talk as well, right, we separate existing customers and new customers. On the new customer front, we are assuming some increase in average implementation plus ramp up time given the mix of larger customers we currently have in the backlog across the world. And with that, and given the meaningful new customers already signed in 2024, You can note that there is an implied acceleration from the midpoint of our Q1 guidance, to the midpoint of our full year guidance And this acceleration is mostly driven by operational drivers. Not by macro recovery assumption. And these operational drivers basically the expected go lives of already signed new enterprise customers. And on the second question, Marcel, if you could repeat it, please.

You mentioned in the beginning of your prepared remarks that VTech is transitioning from being a single product company to use a word that I forgot, but I think it was something like a platform of solutions, an ecosystem of solutions. I just wanted to understand better what would be the mid term P and L impact of such transition like as you add more solutions and products to your shelf How does this impact the different parts of your P and L? Yes, perfect. So happy to start and then others feel free to to chime in. So we are undergoing this transition already, right? I mean, when we're talking about this Commerce Suite, we are talking not just the all you can eat B2C platform, but also the B2B retail media, the sales app, the VitexShield data pipeline and so on. This is something that we have been executing for the past, let's say, few quarters. And we have been already investing behind it on the the R and D side, so we can actually launch these products because not ideas, right? I mean, these are products that have been launched and we have customers using them. So we will the next [indiscernible] relevant impacts on the investment side.

Of the P and L. And then on the other parts of the P and L, I'm thinking long term, the way that we think about it is that some of these products, they have a different buyer inside the organization. And then you by having these different products being used. On not just on the commerce side, but also on the marketing side the security side, the data side and so on. So it's more about stickiness and lifetime value of customers than short term impact on the P and L. I can add something here, Soudre.

Thank you.

I can add something. The financial distress that retailers and brands are suffering creates the opportunity for companies like us to give them a out of the box full integrated solution. So they can write off providers and unify in a very simple way what we are calling the simplification of the operation. That gives them more margins and unlock some revenues. So When we call ourselves, that's what we disclaim in the VTechs 2020 VTEX charter in our Vitex 2024 VTEX report. Quote, VTechs is the commerce street of choice for both CIOs and CEOs globally.

That means that we will not provide only B2C anymore. So as we are testing those markets in the last two years, now we became a commerce suite. So you can have the B2C with us, you can have the B2B with us, also you can have the add ons, such as, for example, the Pick n Pay, the VTech VTEX, the Shield, data pipeline, all of these, it is to simplify the operation of our customers and allowing them to serve these efficiency necessary wave they will be forced to serve. So what we can expect in terms of P and L impact, as Soudre said, not really much What we can see is that the capacity that we do have inside our clients to guide them to use a simple solution is pretty strong. And we are using it. So we already have clients that are using three or four products of Vitex VTEX this is creating more stickiness and preparing the clients for the future.

Perfect. Very clear. Thank you very much.

We'll move to our next question from Thiago Kapschis with Itau BBA. Hi, everyone. Thanks for the opportunity to ask questions. I also have VTEX from my side. So the first one, just to get a little bit more color on the on the softness that you saw in Brazil this quarter. Is there anything specific in terms of sectors verticals, regions that you would call out And also how are you thinking about that on your guidance looking into Q1? And also into the full year? How are you incorporating those [indiscernible] And my second question is more related to the environment in The U. S. Given the new administration coming in, I know that by the end of last year, there was a lot of bushiness on everything. Just want to hear a little bit from you guys. More on the pipeline of new deals and conversations if the mood continues to be positive, if it changes, any color there would be great. Thank you.

Great. Thanks, Thiago. Ricardo here. Happy to take the first one. And I believe Mariano can address the second one. So on the GMV softness and macro impact, and before answering the question, let me take a step back and do a quick recap of our revenue model as I think you help on aligning the foundations. So as you know, Thiago, approximately one third of our revenue comes from a fixed fee while the remaining two thirds are tied to our customers' GMV. We like these revenue model structures. As it align our success with our customer success provides us with long term exposure to the continued penetration of e commerce. And automatically protects us against inflation. Having said that, this revenue model may also introduce some short term volatility in the positive consumption cycles. It's a tailwind to our [indiscernible] And in the negative cycles, it's a short term headwind. From an operational and medium to long term perspective, our focus remain on signing new enterprise customers, keeping a high gross retention and helping our existing customers grow their GMV above the market. And from this perspective, we are seeing a strong performance. New customer contract signatures continue at a solid pace, which is reflected in our deferred revenue growing 29% and the number of customers paying us more than $250,000 per year growing 23%.

And also our annual revenue churn remains in line with historical levels in the mid single digit range. Where our fastest growing clusters of customers ones above $250,000 our revenue churn is even lower. In the low single digits. [indiscernible] GMV softness let me just try to share some context in Brazil. The same store sales that we saw in Brazil which is the GMV growth of our existing customer base, For instance, the year over year same store sales growth effect neutral in Brazil unexpectedly decelerated by roughly six percentage points from Q3 to Q4. The abrupt FX devaluation and the rising interest rates weighted on consumer spending. And the significant appreciation of the U. S. Dollars against most currencies, particularly the Brazilian, how do also further pressure this type of consumption behavior.

Specific segments, we saw more relevant deceleration in home appliance and electronics. But as you know, this is volatile. Every quarter changes a bit, but those are the key segments that we saw some of this deceleration.

Great. That's great color.

Thank you very much. Our next question comes from Leonardo Olmos at UBS. Sorry, I think those was a second question. Yes, there was a second one. Second question.

It's about the new administration in U. S. Is that correct? Yes, if I'm still in. Yes, about the the environment, the new administration, remember that by the end of last year, the environment was very positive overall. In The U. S. And I guess that would be good for deals and everything. Just want to understand how you see all the new administration came in and how's the mood from like from the perspective of eventually signing new deals or negotiating deals and that kind of thing. Okay. So I will answer in two aspects. The first one is in what matters for Vitex. So we keep seeing the same sales momentum increasing the pipeline in The U. S. In B2C B2B grocery. So we continue to see the same trend and a good momentum to be creating in The United States. And what can the new administration affect this momentum? I am not sure if it will affect VTechs VTEX specifically, but let me say that if macro that we cannot predict, if the new administration creates volatility that will affect inflation, that will affect interest rates, of course, the retail and the brands will be affected. And on this scenario, you do have more kind of momentum for the companies to change and to simplify their operations.

So we always see a crisis on the retailer as a good momentum for VTech because the companies that used to have their own custom platform that's pretty expensive to maintain uses the crisis to make the decisions to simplify their process. So we cannot anticipate that the volatility will be good or bad for V VTEX in The U. S. And even that's a very small country for us. But we like a lot when crisis creates the momentum for companies to change. And we are seeing this in our pipeline.

And now we'll go to Leonardo Olmos at UBS.

Hi, everyone. Good evening. Can you discuss a little bit the Ascent for the guidance? I'm sorry to go back to Marcelo and Guilla's question.

But just to understand, so we saw Latin America ex Brazil growing 6% in 2024. You said that Argentina may go to zero. So if you could discuss a little bit the other tariff in Latin X Brazil and ex Argentina. And Brazil has been doing great. So I assume you're putting some new traction in the guidance which of course makes a lot of sense However, the rest of the world just mentioned in U. S. Is not as relevant So there's there was a 37% growth in 2023 going down to 34% almost [indiscernible] of the world. So I know you don't give guidance, but just understanding the assumptions in Marcelo's question, if you adjust Argentina a little bit, I just hoping you could discuss other countries as well online. Thank you. [indiscernible] Sure. Thanks, Lohicardo here. So if we look at our growth, the subscription revenue growth in FX neutral in the fourth quarter we grew roughly 13% year over year, right? So this is how we are exiting this year, right? And as we have been mentioning, there is relevant headwind from the Argentina on this growth rate. That was expected when we issued the guidance for for the fourth quarter.

The unexpected part was the deceleration of our existing customers, right, this roughly six percentage point deceleration that we saw in Brazil in Q4. So we started from this base of roughly 13% growth that we saw in Q4. And then for Q1, if you look at the guidance the midpoint of the guidance is 14%. Right? And that accelerates to a midpoint of 50.5 for the year.

So part of these acceleration versus Q4 it's decrease of the headwind of Argentina As I said, we are assuming some recovery and starting to see some recovery in Argentina. They are going to positive territory, but they're still the assumption is that they will still grow less than the overall of the company. So there is still some headwind there, although we do see. But then there is this now headwind of Brazil with these lower same store sales and this consumption at a lower level. So this is the key moving pieces of the of the guidance. And as I mentioned to to Marcelo on the first question, on the new customer side, we are assuming some increase in average implementation plus ramp up time. Given the mix of larger customers that we have in the backlog. So there is also some impact there.

And that's kind of across the world, including U. S. And Europe as we have customers under implementation that are more in these larger side.

Understood. Thank you very much and have a good night everyone. [indiscernible] Next, we'll move to Luca Brendum at Bank of America. Good afternoon, everyone. Thank you for taking my question. I have two here. The first one is on Brazil. Regarding the payroll tax exemption, if you guys will be passing that through to clients? In some way and what can we expect in terms of the impact for that? And also second, you guys showed the breakdown for the margins for existing stores and also the margins for new stores for 2024. And the margin for new stores actually went down and the one for existing stores went up So I just want to check if this has to do with the profile with larger clients And how can we think about that going forward? Is Most of the expansion should continue to come from the existing stores or if we should see an expansion for new stores as well?

Great. Thanks, Luca. Happy to to take the questions here. So on the payroll tax change in Brazil, as you know, after some back and forth for potential payroll tax regulation in Brazil. The situation seems to accommodate it with the progressive re inclusion of taxes over the next few years.

Given that we have also progressively improved our margins, the potential impact of the current proposed change in payroll taxes should not have any material impact to V VTEX. At the most, under the current legislation approved, VTEX could face annual impact of approximately low single digit million dollars on our operating income and roughly half of that on our net income. As you have the tax shield on these additional expenses. Over time, we expect that these impacts to diminish and potentially disappear altogether. As we continue to enhance our operating margin. And it's important to reinforce that regardless of the potential impact, our target for the operating margin for the year, the mid teens remains intact. And the first question, Luca, was about sorry, could you please repeat?

The other question is for the breakdown for the existing stores and new store margins that the margin for the new stores actually went down and the for existing stores went up. And how can we think about that going forward?

And why the new stores went down if it was because of the larger clients coming in?

Yes. Perfect, Lucas. So on the new stores, We achieved a 10 percentage point improvement in gross margin over year, right? So that's important to note. And this improvement is largely attributed to our increased reliance on the ecosystem for implementations. Which reduces the pressure on the service side And we also realize five percentage point operational leverage improvement in R and D and G and A And then the drag on the margin on your question is that we chose to strategically reinvest these 10 percentage points from gross margin the five percentage points operating leverage in R and D and G and A, in sales and marketing to capitalize on the growth opportunity. So with that, if you look at the operating level, it didn't change that much. It slightly reduced versus the prior year.

And this is as we invest in sales and marketing to go after larger customers and expand geographically the company as well. I would say that's also important to highlight that our LTV over CAC, right, which we think about the new stores P and L, we lose money in the short term, but you get customers for us for the long term. So it's a about the return on invested capital.

And the way that we think about return on invested capital is the LTV or CAC.

And that remains above six times cash on cash. With a payback year at around two point five years So this is a strong performance that underscores the attractiveness of our investment in acquiring new customers and making it a compelling proposition the long term growth of the company as well.

Perfect. Very clear. Thank you for the answer.

And that concludes our Q and A session. I will now turn the conference back over to Geraldo for closing remarks. 2024 was a transformative year for Zitex. Defined by innovation, Operation X7C and robust momentum in both new and renewed contracts. [indiscernible] The fourth quarter growth fell short of expectations due to short term FX volatility and existing customers GMV softness in Brazil we have laid an exceptional strong foundation to propel VITEX into its next phase for the company. We expanded our platform into a connected ecosystem with AI powered solutions like VTEX and Shield. Enhancing customer outcomes and positioning VTech's VTEX as the most comprehensive commerce suite. Our strategic investments and evolving product portfolio have strengthened our leadership and opened new revenue streams reinforcing confidence in our long term growth potential. We've made significant progress towards sustainable profitable growth. As we step into 2025, we're committed to building on this solid foundation delivering value and driving innovation for our customers and shareholders. We look forward to updating you at our next earnings call.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.