Hello everyone, and welcome to the VTEX Earnings Conference Call for the quarter ended September 30, 2021. I'm Julia Vater Fernández, Investor Relations Director for VTEX. Our senior executives presenting today are Geraldo Thomaz Jr., Co-CEO and Co-founder, and Ricardo Camatta Sodré, Finance Executive Officer. Additionally, Andre Spolidoro, Chief Financial Officer, will be available during today's Q&A session. I would like to remind you that management may make forward-looking statements relating to such matters as continuing growth prospects for the company, industry trends, and relevant 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 undue reliance on these forward-looking statements.
Certain risks and uncertainties are described under Risk Factors and Cautionary Statements Regarding Forward-Looking Statements sections of VTEX registration statements on Form F-1/A and other VTEX filings with the U.S. Securities and Exchange Commission, which are available on 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 the third quarter 2021 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 us today in our 2021 quarter three earnings results. I'm excited to announce our progress in making VTEX the platform designed to be the operating system for the commerce ecosystem. Strong execution enable us to move closer towards our desired future. This quarter, we had outstanding new contract signatures. We increased our backlog of new online stores under implementation, and we extended our relationship with existing customers. We also continued launching product development and signing important partnerships that position ourselves towards creating the future-proof platform of choice for enterprise brands and retailers. Finally, we also over-delivered the guidance we provided to the market. We will cover all these points and more throughout today's call. I invite you to stay with us for the next hours to hear more about our progress and the principles guiding our strategy actions.
Exciting times are here to come. Last year, we witnessed the surge in e-commerce as the consumer behavior shifts towards the more convenient online shopping, and that trend is here to stay. As a consequence, our business is showing strong momentum, both in the top line growth as well with new contract signatures. This is just the tip of the iceberg. E-commerce in Latin America is still an untapped opportunity. According to eMarketer 2021 report, Latin America is the fastest growing region in the world, with almost 10 percentage points higher growth than the worldwide average. We are living in a new era, a revolution, and we are here to accelerate it. We continued attracting premier brands to our platform from across the globe.
Some new customers that went live this quarter that didn't have online presence in the region before were Instituto Ronald McDonald in Brazil, Ripley in Guatemala and Mexico, and Elo in Brazil. We also added customers that migrated from other competitive platforms, including Reserva in Brazil, Dior in Argentina, and Miniconf in Italy. Given our focus on zero-friction onboarding and our customers' need for digital commerce transformation to remain ahead of the curve, it's important to point out that speed to market continued to be a key differentiator and priority for VTEX. For example, Reserva implementation, the leading fashion retailer in Brazil with more than 110 stores and presence in more than 1,500 retailers across Brazil went live in only four months. We continue to see strong sales momentum in new stores contract signatures.
As a result, year-over-year, we have double our backlog of new online stores in implementation, which give us confidence in the future growth of the company. One highlight win this quarter was Mazda Motors. They chose VTEX to power its commerce digital transformation across 22 countries in Europe. Winning Mazda Motor Europe's vote of confidence is a tremendous honor for all of us at VTEX, and another proof that our commerce and marketplace capabilities are a match for the greatest enterprises in the market. As we strive to increase our presence across markets, this global brand enable us to further validate our platform strategy with success cases and strengthen our position in new countries. The strong momentum with new customers is also validated by external market experts.
This quarter, VTEX was recognized as a visionary in the Gartner Magic Quadrant for Digital Commerce 2021 report and in the B2C digital commerce use case, as well as for B2C and B2B digital commerce on same platform and composable commerce use cases in the 2021 Gartner Critical Capabilities for Digital Commerce. Additionally, VTEX was awarded seven medals overall with gold medals for ability to execute and sales and channel enablement by Andy Hoar, a former Forrester analyst and B2B commerce luminary. Not only do we see this strong momentum in new customers and external validation, but we are also obsessed with getting an entrenched sticky relationship with these premier brands and retailers.
Some current customers that extended their operations with us by opening new online stores in new countries during the third quarter were Tommy Hilfiger in Peru, Levi's in Argentina, BMW in Chile, Xiaomi in Mexico and Victoria's Secret in Costa Rica. Additionally, our marketplace solution continues to gain traction. In Q3, it has been adopted by AB InBev, Cobasi, Elefant, Decathlon and many others. We know that we cannot do all this alone. We believe in the multiplying force of collaboration. One of our key competitive advantages is our ecosystem, and that's why we will continue to nurture and expand our partners. Since our last earnings release, we have launched strategic partnerships with AWS, Facebook, Stripe, Mercado Libre and McFadyen. We expect that the AWS partnership will enable us in the long term to expand our global digital commerce presence.
Our customers, especially the CPG ones, will now be able to leverage machine learning services and other management capabilities with logistics and distribution operators to create their end-to-end B2C solution. The new global integration with Facebook aims to ensure better conversion rates in e-commerce by leveraging online campaigns with data intelligence and improving sales conversion natively on the platform. Furthermore, we hope this is the beginning of a long-term partnership with Facebook. We launched a partnership with Stripe to help our customers to offer all their consumer preferred payment methods. The integration will work in all countries where both companies operate in North America, Europe, Latin America and Asia, supporting payment processing in more than 135 different currencies.
The certified integration with Mercado Libre in Brazil is a significant milestone in our journey to become the center of a vast network that natively connects every part of the global digital commerce ecosystem. We aim to roll out the certification across the rest of Latin America soon. Our strategic partnership with McFadyen, a leading marketplace strategy and implementation agency in Brazil and in the U.S. excites us not only by the technical and architectural expertise that McFadyen Digital brings to our customers, but also by the depth and the breadth of business planning, the strategy practice they can offer. Before wrapping up, I'd like now to revisit our four product strategic priorities. Zero friction onboarding, zero friction collaboration, single control panel for every order, and the development platform of choice for digital commerce. We don't innovate in a vacuum. Those are the principles that guide our development.
On zero friction onboarding, we launched self-service onboarding. Our goal is to reduce our customers' time to revenue by giving them the tools to connect to the Seller Portal faster and with a user-friendly experience. On zero friction collaborations, we built a new Seller Portal that enables partners of our customers, franchisees or SMBs to more easily sell into their marketplaces, making collaborations between the online store, the franchisee or physical store seamless. We want to become the one-stop-shop solution. This approach will treat the physical store as an independent seller with the Seller Panel to create and manage inventory and capacity of delivery. We're building tools for the physical stores to streamline the fulfillment process.
We are very excited with these initiatives as we have success stories that showcases the benefit, as is the case of C&A, which tripled their sales because of this, adding incremental inventory and lower SLA, which resulted in a major boost in their conversion rate. We also enhanced our OMS order progress flow system, reducing refresh time to seconds without external event dependencies such as manual authorizations, cancellation windows, and anti-fraud. This fits grocery, food and beverage, and tech shop companies needs, among others, as it enabled them to have faster communications between channels, avoiding out-of-stocks and errors, and deliver faster to the consumer's doorstep. Of course, we will keep integrating with more channels and enhancing the existing connections we have as the one I already highlighted with the Mercado Libre certification integration.
On the single console panel for every storefront, we enhanced our in-store solution with a headless IO approach that enables physical stores to sell products from other stores, as well as from the e-commerce store. We've improved messaging between different channels, tuned search filters, and added social selling. We've also launched a new dashboard that tracks additional key performance indicators for our customers, such as the cart to checkout and payment conversion rate. On the development platform of choice for digital commerce, I already covered all the strategic partnerships which are fundamental enablers for attracting more developers to our platform as the preferred distribution channel. To complement that, let me just share a couple internal KPIs we follow on this topic. The monthly active developers accessing the VTEX development portal increased from more than 9,500 in Q2 to more than 14,000 in Q3.
Additionally, we are excited to announce that this quarter, U.S. developers were the second-largest country accessing our platform, having grown more than four times versus the last quarter. We are also focusing on building security, privacy, and compliance framework as features of our platform for our customers and developers to leverage on. Our ambition is to convert security, privacy, and compliance into differentiating factors for VTEX. This topic is a major requirement, especially in the European market, but it will soon be a worldwide requirement, and we plan to be in the forefront of it. Last but not least, I would like to thank all the 1,624 VTEXans that had worked and continue working insatiably to fulfill our mission as well as our customers, partners, and investors. Now I'll turn the call to Ricardo, who can cover our financial progress report for the quarter.
Ricardo, please.
Thank you, Geraldo. Hi, everyone. It's a pleasure to be here updating you on our financial performance for the third quarter of 2021. This quarter, our revenue increased to $31.9 million, a year-over-year increase of 15.2% in U.S. dollars and 12.3% on an FX neutral basis, and above our guidance of $31 million-$31.5 million. This increase was on top of our record same quarter last year revenue growth of 140% on a FX neutral basis, as COVID impact led to a further acceleration of e-commerce and reinforced the importance of having a holistic omnichannel strategy.
Although some verticals were impacted by supply chain challenges or lower consumer confidence, which tend to be short-term impacts, revenues associated with new stores, which tend to bring long-term results, more than compensated that impact and allow us to over-deliver our guidance. Total revenue two-year CAGR for the third quarter of 2021 was 64.0% on a FX neutral basis, a 330 basis point sequential acceleration compared to the prior quarter. This demonstrates the sustainability and robustness of our revenue growth. It also demonstrates how diversified across verticals we are, given that VTEX software works well for many different industries, allowing us to perform well even while some verticals are impacted by macroeconomic events. July was our toughest comp, and as anticipated, the comps gradually eased throughout the quarter.
We exited the quarter with September year-over-year FX neutral growth in the 20% range, demonstrating that the gradual normalization trend we were expecting entering towards the end of the year already started. Subscription revenues represented 93.0% of total revenues. We continue to see a strong sales momentum by our sales and marketing team and go live of new online stores, which drove an increase in our services revenue. As Geraldo mentioned, year-over-year, we doubled our backlog in dollar amount of new online stores implementation. Subscription revenue increased to $29.6 million in the third quarter of 2021 from $26.3 million in the third quarter of 2020. A year-over-year increase of 12.6% in U.S. dollars and 9.7% on a FX neutral basis. Now, moving down our P&L.
Non-GAAP subscription gross profit was $20.2 million compared to $20.4 million in the second quarter of 2021. Subscription gross margin was 68.2% in the third quarter of 2021 compared to 68.8% in the second quarter of 2021. The quarter-over-quarter compression reflects incremental investments in cybersecurity, privacy, and compliance, mostly related to our global expansion and becoming a public company. We believe we can improve our subscription gross margin over the coming quarters and in the long term. We are encouraged by the digital commerce opportunity, especially in Latin America. We see an attractive opportunity for further penetration even after the strong acceleration we all witnessed last year. Therefore, we have decided to accelerate our investments to capture this market opportunity and leverage our leadership position in the region.
As a result, our non-GAAP loss from operations was $13.3 million during the third quarter of 2021 compared to a non-GAAP loss from operations of $10.4 million in the second quarter of 2021. We continue to see attractive unit economics from our investments to bring new online stores to our platform. Our LTV to CAC is still above 6x cash on cash, even after we tripled our sales and marketing investments compared to the same quarter last year. We plan to remain focused on new online store additions, and we believe it is the right long-term decision for VTEX, even if that has some short-term impacts to our margins.
As of the three months ended September 30, 2021, VTEX had a -$10.4 million free cash flow, primarily driven by our non-GAAP loss from operations, which is mostly attributable to sales and marketing and research and development efforts related to our growth stage. In this regard, it's important to highlight that this company has grown historically, mostly self-funded, with limited primary capital injection. As I already mentioned, we have a powerful business model. We are currently focused on increasing our leadership in Latin America and discovering other regions. Given our attractive unit economics, we are more than happy to reinvest back in our business every incremental dollar and even burn cash in a disciplined fashion. Now moving to our outlook. We expect to continue seeing strong new stores growth as our encouraging backlog on the growth implementation.
In Q4, our existing stores will face easier comps than Q3 comps. During Q4, we expect our revenue growth to continue accelerating. While supply chain challenges may impact commerce during Q4, we are excited to support our customers on a successful Black Friday, Cyber Monday, and the holiday shopping season. We are working closely with our customers to understand how they are preparing stock inventory, and so on. With that said, we are targeting revenue in the $35.3 million-$37.3 million range for the fourth quarter of 2021, implying a 27% year-over-year FX neutral growth rate in the middle of the range. For 2021, although LatAm currencies devalued 6.7% during Q3, we are confirming our guidance of a $124 million-$126 million range.
These outlooks assume the current FX rates remain constant for the remainder of the year. Wrapping up today's call, we want to reinforce that it is clear to us that e-commerce momentum is here to stay, and that the current state is just the beginning of a promising long road ahead for the region. We are seeing good indicators from the investments we are doing in the region and across other geographies, which is reflected in the strong momentum we are seeing in the new contract signatures, as well as in the increase in our new store backlog under implementation. We have a strong leadership position in Brazil. We continue to quickly strengthen our position in Latin America, and we are starting our global expansion. We feel encouraged by the opportunities we have in front of us. Thanks, everyone, for joining this conference call.
We look forward to keeping you updated on our progress next quarter. Let's open it up for questions now.
If you would like to ask a question, please press star followed by one on your telephone keypad. Now, if you change your mind, press star followed by two. Our first question comes from Sterling Auty of JPMorgan. Your line is open. Please go ahead.
Yeah, thanks. Hi, guys. One question, one follow-up. Just curious, in terms of the GMV, would you expect that the third quarter would be the bottom in terms of GMV growth? You mentioned the revenue acceleration expected in December. Would you expect the GMV growth to accelerate as well?
Yeah. Hi, Sterling. Great to speak with you. Thanks for the question. Yeah, certainly, GMV growth also should be the bottom in Q3. We are already seeing an acceleration of GMV as well as we mentioned for revenue. As you probably remember, to set the foundation, roughly 2/3 of our revenue comes from a take rate on our customers' GMV. So these two are tightly connected, right? We are seeing a pickup in GMV, and that's driving recovery on the revenue growth as well. As we mentioned, there are, you know, supply chain impacts that can have some of the impact on this GMV growth.
We are seeing strong pickup in October, and we feel confident for November and going forward.
All right. That's a perfect segue. My follow-up question was actually about that take rate. You know, if I look at the, you know, subscription revenue in the quarter, you know, coming in where it did despite GMV maybe being a little bit below what we would have expected, was there a difference in mix in terms of take rate versus kind of the straight subscription fee that you saw in the quarter? Or what else kind of drove that strength in subscription revenue?
Yeah. Great question, Sterling. As you probably remember, our revenue is driven by the existing customers and the new customers. New customers are coming online, they have a slightly higher take rate because they are paying already the fixed fee, but they are not yet bringing a lot of GMV to the platform, right? The implied take rate of new customers is higher than for existing customers. As they ramp up their GMV, which takes, you know, roughly six months, sometimes a year, they trend towards the average take rate of the company or the long-term take rate that they will have, right?
These slightly higher implied take rate that you're mentioning is mostly driven by, you know, more new customers joining the platform, which we see as an encouraging trend. I think we mentioned during the prepared remarks that we are seeing, you know, strong sales momentum and that our backlog doubled on a dollar amount on a year-over-year basis. This is an encouraging trend that we are seeing.
Understood. Thank you.
Our next question comes from Josh Beck of KeyBanc. Your line is open. Please go ahead.
Many thanks for taking the question. I wanted to follow up on your last point there, which I think you both had mentioned around the backlog doubling. Maybe just help us double-click there. If you were to look at maybe the verticals where you're seeing the momentum or the geographies, any other really standouts underneath that backlog strength.
Yeah. I'm happy to take this one, and then others on the call, if they wanna chime in, please feel free. Josh, it is across the board. It's not specific to one segment. The VTEX platform works well across different industries, and we are expanding globally. We are seeing strong momentum and continue to see very strong momentum in Brazil, where we have a strong market share. The backlog in Brazil has increased, and we see further opportunity to continue growing in Brazil. As you know, we are investing a lot in Latin America outside of Brazil. We pretty much triple our sales and marketing investment in Latin America outside of Brazil, if you look at over the past 12 months.
As expected, these additional sales and marketing team is bringing pipeline and new opportunities, and these are getting signed, and this goes into the backlog. Just to take a step back on the sales cycle, right? It takes on average six months between the RFP launch and the contract signature. That customer stays in the backlog for an average of six months 'cause the contract is signed, and it takes about six months for the contract, the store to go live, right? Because we increased a lot our investments in Latin America outside of Brazil, a lot of the backlog increase was driven by Latin America outside of Brazil.
We are also seeing increase in backlog in Brazil and outside of the region outside of Latin America as well. On segments and industries, not specific to one industry. It's across the board. On geographies, we see a good trend in the geographies, but we see, you know, a bigger increase in Latin America outside of Brazil, given that's the region that we made most of our sales and marketing investments.
Fantastic. Very, very good to hear about that momentum. I wanted to follow up on the supply chain impact. As we've gone through this earnings season, it has been really varied, I feel like. Some of the really large enterprise companies, even Walmart and Target this week, have said their inventory levels are well-positioned for the holiday season. I think in the true enterprise, those are the dynamics. I think once you get into SMB, right, there's probably less preparation. I'm just curious, as you look into next year, do you feel like for maybe the customers that had supply chain issues, that there could be some type of overhang?
The metric that I'm really trying to think through is net revenue retention, if we should maybe factor in some type of impact to some of those non-enterprise customers as we start to think about next year.
Yeah. Josh, thanks for the question. It's very hard to answer this precisely, right? I mean, what I can share is what we saw during Q3 and how we are, you know, starting to see the performance of Q4. The supply chain issues impacted mostly the electronics and home appliances. Although these are, you know, enterprise customers and they can prepare, they can, you know, they have more better processes around supply chain planning and they can foresee some of these trends before some of the SMBs, if chips are out of stock or if they can just get the raw materials to make their products, that does impact a little bit these companies, right?
We have seen these two key segments be impacted, we are also seeing now in Q4 a stronger growth in their GMV than we were expecting. It's hard to say if they are recovering. I think it's early for that, but maybe they were stocking for this holiday season to be ready for this important moment for the industry, right? Now, looking forward to 2022 and the net revenue retention, I mean, we would love to have more insight on that, but I think it's very early to know how these trends will evolve.
We do like the perspective that the enterprise customers bring because of their processes and their preparation, and being able to be more prepared and control their inventory so they have less ruptures than some other smaller players may feel, right? We like our customer base and we like how, you know, they try to position themselves. We try to stay very close to them on how they are preparing and stocking for the holiday season, understanding also their planning for this season, right? I mean, there is some uncertainty on that. There is always uncertainty on these topics. We try to stay close with them so we can help them get the best GMV possible during this season.
Very helpful context. Thank you, team.
Our next question comes from Diego Aragão of Goldman Sachs. Your line is open. Please go ahead.
Yes. Good morning, everybody. Thanks for taking my question. Actually, the first question is on the current economic environment in Brazil. We are now seeing inflation picking up in the country, partially driven by, you know, the BRL devaluation. I was just wondering if you can comment on how these potential factors could end up impacting your business in the short term. Thank you.
Thanks, Diego. First on the FX devaluation, right? I think as we mentioned on the earnings release, there was a meaningful devaluation of the LatAm currencies during Q3, right? Roughly 6.7% devaluation already as a weighted average by the VTEX revenue by currency, right? For example, if you take Brazil, as you mentioned, FX in Brazil was BRL 5 to the dollar in June 30, and then I think like BRL 5.44 by September 30. It's almost like 9% devaluation during the quarter.
Even though there was the 6.7% devaluation, which would impact our Q4 revenue in dollar amounts, so it reduce our expected revenue for Q4 just because of currency, a variable that we don't control, we are keeping the guidance, right, for the year, right? Yes, in the short term, there are currency impacts on our business. If you think about long term and VTEX being a high growth company and the inflation differential being a couple percentage points that it has been historically, FX is not a important driver for us. There is volatility in the quarter, in the short term, you may see some impact.
In the long term, high growth company with FX being a couple percentage points impacts per year, we don't see as some meaningful long term impact. Again, in the short term it could impact us. Quickly on inflation, I mean, we are seeing inflation. It's not just in Brazil, right? I mean, it's a global phenomenon. You know, can also see inflation in the U.S. picking up. In Brazil it's maybe slightly higher on 10% LTM, but the U.S. is at 6% or so, right? It's important to mention that the way our business model is designed, we are very well protected against inflation because 2/3 of our revenue comes from take rate on our customers' GMV.
As inflation impacts the economy, the GMV of our customers increases naturally because they are selling the goods that are driving this inflation, right? We capture these automatically because of our business model. It's not a renegotiation of a contract of trying to increase prices, or anything like that. It just flows through because of the take rate. Although we are, you know, seeing this inflation impacting the global economy, we feel well positioned because of the business model that we have. Let me pause here. I don't know, Geraldo, if you wanna add a few more thoughts on the topic.
Well, yeah, Ricardo. Your point is exactly what I was going to talk about. There's several reasons why we like the take rate component in our subscription revenue. One of them, the biggest one is alignment of interest. The other one is that we truly believe that in the long term, GMV of e-commerce will grow much more than any other metric. Also when we started building a business model based on GMV, you know, Mariano and I, we are here for 20 years. We saw the hyperinflation in Brazil, the inflation. Usually inflation in countries like ours, it's stagflation. So it's very difficult to renegotiate contracts in this period where you have inflation and recession at the same time.
This business model that we have also protects us from charging less in real terms in the long term, because we naturally adjust the contract to the agreement with our customers because of this company. I do believe that in this sense, especially in the long term, this company is kind of protected against the bad effects of pressuring the suppliers in our case because of inflation.
That's very helpful. Thank you, Geraldo and Ricardo. Maybe just a follow-up question around the GMV. I think since, you know, I guess it accelerated sequentially in the third quarter, so I'm not sure. I think this was partially driven by your FX movements and the BRL devaluation as well. Maybe if you can just help us to understand the trends in there and comment on the performance of the GMV related by client vertical and different industries, I think that would be great. Thank you.
Yeah, perfect. No, thanks for the question. As you can imagine, it's very hard to precisely calculate the impact of some of these supply chain challenges or lower consumer confidence that we are seeing in some countries, as they are, you know, intertwined with other variables and doing these sector variables analysis is almost impossible. But having said that, historically, seasonality is such that Q3 GMV is usually is slightly higher than Q2 GMV. This year it was actually, you know, roughly $150 million lower. Doing some round number calculations, you know, if you divide our revenue by our GMV, you get to an average take rate of roughly 1.3%.
You have to remember that, you know, only 2/3 of our revenue is based on GMV. Thus, you know, if you do this 1.3% on these $150 million lower GMV that we don't control, it's, you know, it's driven by the macro in some way. You multiply by these 2/3 that I mentioned, it's almost, you know, $1.5 million as a directional impact of these events in the quarter. Even this was mostly in, as we said, you know, home appliances and electronics, a little bit on furniture.
I mean, there is these potential short-term impacts, being exposed to GMV, but we love that for the long term, because as Latin America is very under-penetrated, and as this penetration increase over time, and the GMV increases, we naturally capture that growth in our revenue growth. We like having this, GMV exposure, but it's a variable that we don't control. During these macro events, it could have some impact. Even considering these, you know, directional impact that I mentioned, we over-deliver the guidance with $31.9 million in a range that was from $31 million - $31.5 million.
Ricardo's point is very good. We don't control in the short term, naturally, we don't control in the long term, but we have a good bet that in the long term, tying our revenue to GMV is a big deal. Eventually, you know, we have this big disruption because of the supply chain just after COVID, and we had this very small impact in our revenue. This is just the short term. Still we are beating the guidance and everything. It's not that it's the end of the world, but in the long term, we're very optimistic to be attached to the GMV of our customers.
That's very helpful. Thank you both for the answer. Very clear. Thank you.
As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. We have a question from Fred Mendes of Bank of America. Your line is open. Please go ahead.
Hello, good morning, everyone, and thanks for the call. I have two questions as well. The first one on sales and marketing expense, I mean, increased almost 20% quarter-over-quarter. I'm just wondering, are you guys expanding this marketing campaign or that's just the price of the digital channels that are, let's say, more expensive and let's say you are doing kind of the same but spending a little bit more on this front? This will be my first question. Then on the second question, I think the more strategic one, you look at the headcounts of 9,600 employees. You almost doubled over the last 12 months.
Just wondering, do you believe you are close to an optimal level or should continue to see this headcount to increase over the next quarters? This will be my second question. Thank you.
Hi, Mariano here. I am a Co-founder and Co-CEO with Geraldo. Just introducing myself. The S&M, the most part of the S&M investment, it is in people. We are seeing an increase in the opportunities arriving on VTEX, and we need to prepare the people for this. The most part of the investment is directly to people.
It's important to highlight, Fred. Oh, sorry, Ricardo. You go. It's important to highlight, Fred, that this company is very not sensitive to digital marketing. Most of our investment in S&M is people. We don't buy AdWords. We don't buy digital channels to sell. Like, this is like almost irrelevant to our expenses in terms of marketing. Because we are mostly-
Yeah.
Sales company and an ecosystem sales company.
To be more precise, it is account executive solution engineering, CSMs, people that are engaging on the opportunities that's arriving.
Perfect. I think Mariano put this out very clear. On the second one, in terms of the headcount, you already believe you are at an optimal level or as you continue to develop products. I mean, obviously as you grow, you'll be hiring more people. The volume that we have seen recently, should it continue or believe you're already at an optimal level for the size that you are? Thank you.
Yeah. Happy to take the question, Fred, and thanks for the question. As we explained during the IPO process in the last quarter, we are seeing a very strong opportunity for us to capture in the market, right? As the pandemic completely shifted the mindset of the C-level and board members of these enterprises, and they are accelerating their digital transformation. We are in a market where, you know, penetration is very low. Our unit economics is very attractive, and the customer is very sticky, right? Our churn continues to be mid-single digits, right? With this all said, it makes a lot of sense for us to invest now and capture this opportunity, and bring the customers to VTEX.
You know, as we mentioned, you know, roughly half of our new customers are greenfield, so we wanna capture them first than trying to steal these customers from another platform. The switching cost plays both ways, right? Once the customer joins our platform, they tend to stay with us, but it's also hard to take customers from other platforms. I mean, we have been successful in doing it, but you have to be at the right time, at the right place, and the customer needs to be feeling some type of pain, like trying to do omnichannel solution or scaling a Black Friday and not being able to, and they'll switch to us.
Anyway, it makes a lot of sense for us to invest now to capture this customer, and that's what we have been doing over the past year now, as we started to accelerate our expense in Q3 last year. We see that we did a lot of the heavy lifting already. As you said, we almost doubled the headcounts year-over-year. Going forward, we don't see the same pace of increase in headcounts, but we feel there is an opportunity to continue investing. As we're seeing a strong sales momentum and we're seeing our backlog increasing, we feel it's important to invest to continue capturing this opportunity and driving the growth of the company going forward.
Okay. Perfect. Thanks, Ricardo. Thank you.
There are no further questions on the lines at this time, so I'll turn the call back over to Geraldo.
Thank you very much. I think I want to make sure that I use this opportunity that I have to finalize the call to thank you all again to join our earnings call conference. This is our first step as a public company. We're very happy and humbled to share the steps with you. VTEX ambitions were always sizable, and you are enabling us to dream even bigger. Thank you for that and for accompanying us in such an important moment. We will continue executing the highest standards to continue to be the best partner for enterprises to do business in this new digital era. Thank you very much. See you next quarter.
This concludes today's call. Thank you for joining. You may now disconnect your lines.