Vertex, Inc.

Greetings and welcome to the Vertex second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Crivelli, Vice President of of Investor Relations at Vertex. Please go ahead.

Good morning, everyone, and thanks for joining us for Vertex's conference call for the second quarter ended June 30, 2022. I'm Joe Crivelli, Vice President, Investor Relations. David DiStefano, our CEO, and John Schwab, our CFO, joined me on the call today. As a reminder, this call, including the Q&A portion of the call, may include forward-looking statements related to our expected future results. Our actual results may differ materially from our projections due to risks and uncertainties. These risks and uncertainties are described in our earnings release and filings with the Securities and Exchange Commission. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release. This conference call will be available for replay via webcast on our Investor Relations website. And with that, I'll now turn the call over to David.

Thank you, Joe. Welcome, everyone, and thank you for joining us. I'm proud to share our Q2 results with you today. We delivered another strong quarter of profitable growth. Total revenue was $119 million, up 14% year-over-year, and exceeding the high end of our guidance. We saw solid growth across the key measures by which we monitor customer success. ARR grew in the quarter to $398 million, up over 18% year-over-year. NRR was 110%, up from 106% for the same period in 2021. And GR was 96%, up from 94% from the second quarter of last year. We continue to grow our top line and sustain strong EBITDA margins while investing for the future. Throughout the quarter, we saw strong adoption from both new and existing customers, reflecting the strength of our brand, momentum with investments we are making, and sustained demand and market opportunity despite challenging economic conditions. Historically, over the past 60 years, it has been shown that indirect taxes provide a more consistent method of government funding during adverse economic cycles relative to income and property tax. which are the other primary sources of funding. As a result, indirect tax revenues play a key part in the global economy and serve as a primary source of revenue for governments around the world. In fact, government revenue from indirect taxes is more than double that of income tax. And this will only continue to increase with expanding requirements for digital commerce and real-time reporting in a growing number of countries. All of this puts added pressure on companies of all sizes and market segments to automate indirect tax compliance to keep pace with changing requirements. Are companies still processing indirect taxes with homegrown systems? It's a matter of when, not if, they will need to automate their end-to-end tax process. We remain confident that our total addressable market opportunity is at $22 billion and that we are still very early in the adoption cycle. Vertex is ideally positioned at the intersection of commerce and compliance with the companies that drive the global economy. We are extending our global capabilities and the power of our unified platform while strengthening our partner relationships and consistently delivering exceptional customer value and service. This focus strategy is showing up in this quarter's results. We continue to see momentum across all areas of our business, but I would like to highlight our outstanding performance in Europe. We had several significant cross-sale deals this quarter in Europe. Some of the largest companies in the world expanded their footprints with us as they moved to the cloud. In many cases, these were non-competitive opportunities given our unique capability to support the complex needs of enterprise customers and the proven track record they have with our tax content accuracy. These deals create substantial lift in our ARR and reflects why we benefit from having multiple deployment options for customers to meet them where they are in their own digital journey. This was the case for a customer who selected our end-to-end solution as part of their global SAP implementation in 2020. This quarter, they decided to transition their global tax function to our cloud solution, ensuring they will always be on the latest solution without the burden of maintenance. As one of the world's largest industrial manufacturing companies, they are harnessing cloud across all areas of their global business, wherever and whenever possible. Our ability to grow with their business and help them seamlessly make this transition and others that may occur in the future is a cornerstone of the partnership we build with our customers. Our fit-for-purpose solutions, which are powered by our ever-growing global tax content database and backed by strong ecosystem partnerships, make Vertex the clear choice when our customers look to upgrade their tax technology. It has been our formula for enterprise market success in the U.S., and we are replicating it in Europe as we expand our global footprint. It showed up in another notable Q2 win in Europe. Our customer, a multinational engineering and technology company, chose to move our cloud solution as part of their global SAP S4 HANA initiative. This customer is one of the world's biggest users of SAP with over 150 production systems worldwide. Their current initiative will consolidate their system significantly. They needed a proven solution that could handle a platform of this magnitude across multiple systems, making our cloud offering the only choice. Our end-to-end tax automation solutions for SAP are unmatched by anyone. Our family of SAP solutions, including our accelerator and recently acquired solutions from LCR Dixon, fit on the SAP platform and are designed to enrich and enhance data as it seamlessly flows across our systems. In particular, our chain flow accelerator solution is proving to be a strong differentiator in European opportunities. In Q2, our chain flow accelerator was recertified by SAP for integration with SAP S4 HANA. This annual validation process is a key requirement for many of our customers. All our solutions for SAP resonate with customers as they put the power to control tax automation more strongly in the hands of the tax department. Unlike other segments of the market, enterprise deals are complex sales. Our customers rely on a team of trusted advisors working closely with our experienced subject matter experts to support their business, which is why for over 40 years we put so much focus on having the best talent and deep relationships with the world's leading technology and consulting partners. We continue to reinforce our success in the cloud. We recorded another quarter in which 95% of all new logos closed were on our cloud offerings. And year to date, our cloud growth is 33%, and we remain confident in our ability to maintain this through year end. In addition to strong cloud growth, we had several large on-premise customer expansions supporting our NRR growth, which again demonstrates that our hybrid deployment capabilities are what complex businesses require to support their diverse infrastructures. Let's look at some of the new logos now that we onboard at this quarter. One that I love to talk about was a six-figure competitive takeaway tied to our new healthcare customer's compelling growth story. This business was scaling quickly through acquisition, while the customer was also considering three different ERP systems on Oracle Cloud. At the same time, The pandemic had wrapped up growth both domestically and internationally with a critical need for telemedicine services worldwide. Our cloud solution was selected to replace a competitor's cloud solution. We were able to meet their long-term growth plans thanks to the depth of our global content, the strength of our partnerships, and our validated and certified integration with the Oracle Cloud infrastructure. As our customer continues to bring needed healthcare to communities around the world, particularly underserved and underdeveloped populations, we are proud that our solutions can give them the flexibility and peace of mind to grow into new markets. Another great example of how investment in our partner ecosystem is creating sustained opportunity for us to grow within their ecosystems. We've expanded our global footprint with Oracle Cloud Infrastructure. I'm proud to announce we received the Oracle Change Agents Partner Award as Visionary ISV Partner of the Year in Q2. This award honors our technological innovation and leadership in the Oracle ecosystem. We also continue to see increased traction with NetSuite. Our unified platform and global capabilities are differentiating us in the mid-market as businesses who are looking to scale take on greater tax complexities. To tackle their growing business requirements, these customers are able to leverage applications designed to optimize performance on the OCI platform. This was the case with a mid-sized technology company running on NetSuite with 65% year-over-year growth. Our customer was at a tipping point. This rapid expansion drove the need for our cloud solution to address their intensifying global requirements and tax exposure. Our integration with Coupa provided another key selling point with the ability to connect sales and purchasing through one central tax engine. They needed a single source solution provider to meet their aggressive global growth projections. In this deal, like so many others, the difference shows up in the relationships we build with our customers, technology ecosystem, and the alliance partners. The Vertex brand and our proven track record sets us apart from the competition. It is the commitment of our teams and a desire to really get to know a customer and their business needs that makes us a long-term partner of choice, not just a vendor. Now I'd like to highlight the momentum we are gaining with our new products. The integration of Taximo's capabilities with the Vertex Tax Engine is enabling a holistic solution for one of the world's largest retail e-commerce platforms. Our customer needs to overcome the tax hurdles inherent in global online marketplaces, and accurately manage indirect tax compliance across multiple territories. Tax collection was fundamental, but they also needed to deal with daily transaction volumes in the millions and the rapid pace at which their sellers are uploading new products. Our winning solution combines the very best of Taximo and Vertex, incorporating the strength of our tax engine and global tax content with advanced invoicing, threshold management, and line item liability assessment capabilities. This gives our customer a scalable, full-service solution to seamlessly navigate the complex tax regulations, like the ones passed last July in the EU and which continue to evolve for global marketplaces. In turn, they can create a tax service for the people, creating sites on their e-commerce platform. As their business continues to grow, our solutions will help them improve market access, and accelerate commerce. In the U.S., we are helping a leading convenience store chain expand their existing cloud license to connect our sales tax capabilities into their SAP Hybris e-commerce solution to manage tax liability of their prepared foods regardless of whether they are purchased in-store at the register or ordered online. With the accelerating forces of digital transformation, and e-commerce, businesses are looking for ways to optimize their operations to support omnichannel environments and seamless customer experiences. In the second quarter, we conducted a research study with Forrester Consulting to explore interest in a containerized edge solution with 400 IT decision makers at organizations in the United States, the United Kingdom, and Germany. We found that 87% of IT decision makers are rethinking their organization's current approach to tax software deployments. And 83% of those who participated are interested in containerized edge tax solutions to align to their broader infrastructure moves to edge computing and containerization. These results substantiate the strong interest we are receiving for our new edge solution for tax. looking to the edge for greater flexibility and scalability regardless of where their customers engage with them. One of our existing e-commerce customers made the decision to move to the cloud with Vertex and Q2. As their growth continues to accelerate, they are bringing in edge computing to support improved performance. Taking TAC to the edge is a natural extension of the transformation journey our customers are already on and allows them to further optimize their technology investments. While I've highlighted several deals within the retail industry, performance in the quarter was balanced across all our key verticals, including manufacturing, financial services, and wholesale. We also saw continued strength in industries in addition to retail, where we have developed vertical solutions to meet their unique tax needs. We saw significant expansion deals this quarter in the telecom industry, This is a notable segment of our install base where customers have indicated they are not yet ready to migrate to the cloud. We are able to continue supporting their needs today without disruption to their business. And we'll be there to continue to support them when they are ready to move to the cloud. In these industries, it is the breadth and depth of our tax content that drives deals. I cannot emphasize this enough. The accuracy of our tax content creates a stickiness for solutions and leads to sole sourced cross-sell, and up-sell opportunities. Our content also helps us to win new logo opportunities. We are continuously investing in expanded content as it opens a broader serviceable market for our technology. Earlier this year, we introduced robust content for the oil and gas industry. In Q2, we won another six-figure deal in this space, demonstrating great ROI from our content investments. This deal was another great example of the power of trusted partnerships. Together with PwC and SAP, we were able to support this customer's cloud transformation. Now I'd like to hand it off to John for a deeper look at this quarter's numbers, and then I will make a few closing comments before we transition to Q&A.