VTEX - VTEX Lowers Revenue Growth Bar While Aiming For Operating Breakeven

2023-04-27 18:08:52 ET

Summary

• VTEX provides a range of e-commerce capabilities to companies operating in Latin America.
• Management has guided to reduced topline revenue growth in 2023, but is targeting positive non-GAAP operating income by the end of the year.
• With slowing revenue growth, higher marketing costs in the U.S. and Europe and macroeconomic risks ahead, I'm on Hold for VTEX in the near term.

A Quick Take On VTEX

VTEX ( VTEX ) has developed a digital commerce platform for enterprise brands and retailers who want to do business in Latin America.

Management has guided to slower topline revenue growth but positive non-GAAP operating income by the end of 2023.

But with slowing topline revenue growth ahead, increasing marketing costs as part of its international expansion and a deteriorating macroeconomic picture, I’m not optimistic about VTEX in the short term.

VTEX Overview

London, UK-based VTEX was founded to develop an online retail platform that enables enterprises and large retailers to more easily do business in Latin America.

Management is headed by Co-CEO and Co-Chairman Geraldo Thomaz, who previously graduated with a degree in mechanical engineering from the UFRJ.

The company’s primary offerings include:

• API

• Multi-tenant platform

• Low code development

The firm pursues large enterprise customers who seek to sell their products online in Latin American countries through its ecosystem.

VTEX’s Market & Competition

According to a 2023 market research report by ResearchAndMarkets, the B2C gross merchandise value market in Latin America was an estimated $165.8 billion in 2022 and is forecast to reach $254.3 billion by 2027.

This growth, if achieved, would represent a CAGR of 8.90% from 2023 to 2027.

Important drivers for expected growth include broader usage of smartphones, improved broadband infrastructure and increasing consumers' comfort in purchasing more goods online.

Major competitive or other industry participants include:

• SAP

• Oracle

• Magento

• Salesforce

• Shopify

VTEX’s Recent Financial Trends

• Total revenue by quarter has risen per the following chart:

• Gross profit margin by quarter has trended higher, as the chart shows below:

• Selling, G&A expenses as a percentage of total revenue by quarter have dropped materially in recent quarters:

• Operating income by quarter has remained negative but has made substantial progress towards breakeven:

• Earnings per share (Diluted) have achieved breakeven in the most recent reporting period:

(All data in the above charts is GAAP)

In the past 12 months, VTEX’s stock price has fallen 37% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) drop of 3.34%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $238.6 million in cash, equivalents and short-term investments and $1.2 million in current total debt.

Over the trailing twelve months, free cash used was $29.5 million, of which capital expenditures accounted for only $0.3 million. The company paid $11.1 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For VTEX

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

VTEX’s most recent Rule of 40 calculation was negative (4.6%) as of Q4 2022’s results, so the firm is in need of substantial improvement, per the table below:

(Source - Seeking Alpha)

Commentary On VTEX

In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the differential between single-digit e-commerce growth in Latin America and the firm’s GMV growth of 31%.

This indicates the company is taking market share from others.

Leadership also said it was continuing to make ‘solid steps’ in its international expansion to the U.S. and Europe.

The company’s net retention rate from existing stores was 105% on a foreign exchange-neutral basis, indicating negative net churn.

Total revenue for Q4 2022 rose 22.6% year-over-year and gross profit margin increased five percentage points, a remarkable growth rate.

SG&A as a percentage of revenue dropped 23 percentage points and operating losses continued to be reduced, to a $3 million loss for the quarter.

One area of concern is the firm’s foreign exchange headwinds in the context of a strong US dollar, which has been reducing its dollar-based growth rates by about 3% in recent periods.

Also, the company has lower sales efficiencies in its expansion into the U.S. and Europe, as those regions are more expensive in terms of sales and marketing costs.

Looking ahead, management expects positive non-GAAP operating income by Q4 2023 ‘sustainably.’

Leadership guided full-year 2023 topline revenue growth of 17% at the midpoint of the range but didn’t provide any other full-year guidance expectations.

The company's financial position is strong, with ample cash and almost no debt. However, the company used nearly $30 million in cash in the trailing twelve-month period.

Regarding valuation, the market is valuing VTEX at an EV/Revenue multiple of 2.6x on trailing revenue growth in the low to mid-twenties.

However, management is now guiding revenue growth to be around 17%, so it appears the company's previous growth rates won’t be achieved any time soon.

The primary risk to the company’s outlook is the prospect for slowing macroeconomic activity, which appears to already be underway in some regions.

In the past twelve months, the firm's EV/Sales valuation multiple has dropped 51%, as the chart from Seeking Alpha shows below:

A potential upside catalyst for the stock would be if and when it consistently generates positive operating income and begins to produce positive operating cash flow.

However, with reduced topline revenue growth ahead, increasing marketing costs as part of its international expansion and a slowing macroeconomic picture, I’m not optimistic on VTEX in the short term.

Count me on Hold for VTEX.

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