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spk05: 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.
spk09: 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.
spk03: 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.
spk08: Thanks, David, and good morning, everyone. I'll now review our second quarter financial results and provide third quarter and full year guidance. In the second quarter, revenue was $119.3 million, up 13.7% compared to last year's second quarter, and exceeding the high end of our quarterly guidance by $1.8 million. Subscription revenues increased 12.8% period over period to $101.1 million, and services revenues grew at 18.6% period over period to $18.2 million. Annual recurring revenue, or ARR, was $398.1 million in the quarter, representing approximately 18.4% growth over the comparable 2021 period. We've now lapped the tax amount acquisition in last year's second quarter. Accordingly, on an organic basis, ARR grew at 18% as compared to 17.2% in Q1 2022. Net revenue retention, or NRR, remained strong at 110%, This was up from 106% in the comparable 2021 period and consistent with the first quarter of 2022. This metric continues to demonstrate our customers' ongoing commitment to our software and our solutions. Gross Revenue Retention, or GRR, was 95.9% at quarter end. This is consistent with prior performance, which is averaged 94 to 96%. Our returns processing managed services business generated recurring services revenues of over $10.3 million year-to-date through the second quarter of 2022, as compared to $8.4 million for the comparable period in the prior year. This service is a competitive differentiator and generates consistent recurring revenue but is not included in our ARR. At June 30th, we had 4,242 direct customers, consistent with last quarter. The inclusion of Vertex users that are sold and serviced by our one-to-many channel strategy would add 266 indirect customers to our customer count. So that investors have a full picture of our customer counts, including indirect small business customers sold and serviced by our channel partners, we have provided the most recent five quarters of data in today's earnings release. AARPC is based on the direct customer count. Accordingly, our average revenue per direct customer has steadily increased and was $93,850 in the second quarter, up from $89,700 in the first quarter. We continue to see strong growth in our cloud-based solutions among both existing and new customers. Revenues from cloud-based solutions grew to $40.2 million, an increase of 25% over the prior year comparable quarter. As a reminder, in the second quarter of 2021, we recorded cloud-based revenues of $2.1 million from a tier-based subscription amendment to a cloud customer that we highlighted at the time. Adjusting for this amendment in the last year's second quarter, cloud revenue quarter-over-quarter growth would have been 34%. As I discuss the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and per share results are on a non-GAAP basis. All non-GAAP financial measures are detailed and reconciled to our GAAP results in the earnings press release that was issued this morning. Gross profit for the second quarter was $84.3 million, and gross margin was 70.7%. This compares to gross profit of $74.7 million and 71.2% gross margin in the same period last year. Gross margin on subscription software revenues was 76.9% compared to 77.3% in last year's second quarter and 76.6% in the first quarter of 2022. Gross margin on services revenues was 36% compared to 35.3% in last year's second quarter and the first quarter of 2022. As we've discussed with investors previously in 2022, operating expenses are being impacted by investments we are making for continued growth. These investments include, first, R&D spending to enhance our cloud solutions, integrate acquired technologies, and expand connectors and APIs into new platforms. This also includes additions to our R&D team. Second, expansion of our sales team, as well as additional marketing programs. And third, IT infrastructure, business process reengineering, integration costs, and other initiatives to drive our operating leverage. Note that the ongoing impact of our investments is included in our guidance for the third quarter and full year, which I will discuss in a moment. Accordingly, in the second quarter, research and development expense was $9.8 million, or 8.2% of revenues, compared to $11.3 million, or 10.8% of revenues in last year's second quarter. While R&D spending on the income statement is down year over year on both a dollar basis and as a percent of revenue, much of our spending is capitalized. With capitalized spend included, R&D spend is up $2.4 million year over year in the second quarter and $7 million for the six-month period. Selling and marketing expense was $28.6 million, or 23.9% of total revenues, an increase of $6.2 million and approximately 22.3% from the prior year period. And general and administrative expenses was $28.3 million, or 23.7% of total revenues, an increase of $7.5 million from the prior year period. Our growth investments, in turn, impacted the year-over-year comps for our earnings metrics. Adjusted EBITDA was $17.8 million for the second quarter of 2022, a decrease of $1.4 million over the prior year comparable period. and adjusted EBITDA margin for the second quarter of 2022 was 14.9%, down 340 basis points from last year. Turning to the balance sheet, we ended the second quarter with over $85.6 million in unrestricted cash and equivalents. Total bank debt was $49.5 million, and investments in securities totaled $6.9 million. For additional liquidity, we also have a $200 million of unused availability on our line of credit. And now turning to guidance. For the third quarter of 2022, we expect total revenues in the range of 121.5 to $124 million, representing growth of 10 to 12% from the third quarter of 2021. And adjusted EBITDA on the range of 16.5 to $18.5 million, representing a decrease of 3.4 to $5.4 million from the third quarter of 2021. For the full year 2022, we expect total revenues in the range of $480 to $484 million, representing annual growth of 13% to 14% from the full year of 2021, and adjusted EBITDA in the range of $72 to $75 million, reflecting the impact of the investments I discussed earlier. We also continue to expect that cloud revenue will grow by over 33% in 2022. All told, the company's financial performance was strong in the second quarter, We delivered healthy revenue growth and solid profitability while continuing to make growth investments that we believe will deliver significant shareholder value in the years to come. In addition, we continue to demonstrate that our customers depend on Vertex Solutions to power their commerce with strong growth in ARR, NRR, GRR, and AARPC.
spk11: David will now make some closing comments. David? Thanks, John.
spk03: When I look back at Q2 in the first half of the year, the common thread driving our strong financial results is people, which is why we continue to invest in our ecosystem and our team. I want to take a moment to thank our Vertex team around the world. It is your ongoing commitment to developing innovative solutions and an unmatched experience that allows us to deliver value for our customers and shareholders. I'd also like to thank our customers for putting your trust in Vertex and allowing us to be part of your business success and growth. As you've heard time and again in my comments today, our partner ecosystem and the strength of the relationships we have built are a true differentiator for Vertex. Our end-to-end platform, our robust global tax content, our trusted partner ecosystem, and our talented Vertex team create a winning combination that continues to drive our growth. Now let's pause for your questions.
spk05: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Josh Riley with Needham.
spk00: Hey, guys. Thanks for taking my questions and nice job on another quarter of accelerating ARR growth. If you look at your exposure by vertical, you know, within retail, obviously, we know you have some very large customers. I'm curious, what are you seeing in their trend in terms of in-store versus e-commerce transactions? And how are these customers renewing their revenue bands year over year? Are you seeing any downsells? because of lower e-commerce transaction volumes, or is it just kind of stable?
spk03: Josh, thanks. Thank you for calling in and appreciate the question. To be honest, we don't have direct visibility on a quarter-by-quarter basis of what our clients are billing through e-commerce or in-store to answer that question directly. The good news is in almost all of our retailers, we have both sides of that relationship. And then when you add in now the edge computing solution, we're actually seeing still expanded opportunities in the retail space because of the need for retailers to be more creative in serving the point of need, and that's what containerization and and edge solutions allow them to do. So I don't have that specific data. I will say, again, because of our license bans, the way we price our product, we don't see any material downward pressure. We've been through several, obviously, economic downturns in our 40-year history and have not experienced sort of any significant repricing of contracts.
spk00: Got it. Okay, and then maybe one other way of kind of asking about business trends. If you look at your B2C customers versus some of your B2B customers, are you seeing any difference in terms of the underlying trends with those customers in terms of what their eagerness to upsell or cross-sell new additional products? And can you just remind us, you know, maybe roughly how much of your business is B2B versus B2C?
spk03: The great news is, you know, we're not seeing any elongation or slowdown in our pipeline across all our verticals. One of the beauties of our content database is we actually have the opportunity to sell across so many verticals. So if one vertical is slow, you know, we're seeing that oil and gas do some really, you know, interesting things that we've added that content. So I haven't seen any real material issues there in the shift. I would say I don't have great data to answer your B2B versus B2C, but they are fairly balanced. I would approximate.
spk11: Got it. Thank you, guys. Thanks, Josh. Thanks, Josh.
spk05: Next question, Matt Stotler with William Blair.
spk02: Hey there. Thanks for taking the questions. Maybe just start off with one on cloud, obviously, you know, cloud deployments continue to be the majority of your new customer wins here. But I'd be interested if you're seeing any update in kind of the shift in the installed base, right? I mean, you know, whether there's been any move or acceleration of transition in that installed on-premise space towards cloud or what that path looks like and expectations there going forward.
spk03: Yeah. Matt, I appreciate, you know, we really look at cloud in three dimensions. It's the new logos, which we continue to see exceptional success by our sales teams in delivering cloud as the primary. We see it in the cross-cells, and I'd say it's still holding at about 50% of all of our cross-cells are that. The migration base continues at the fairly annualized 3% to 4% we experience every year. Haven't seen material shift in that. Obviously, as we monitor the ongoing evolution of OCI adoption and SAP S4 adoption, we may see acceleration there, and it certainly we're positioned well for that because of our content database and how well customers have relied on our content accuracy on-prem. When they're ready to make that migration to the cloud, it's a pretty seamless transition from their perspective because they want to get the same answer in the cloud that they were getting on-prem, and that's why we enjoy such high success rate on those migrations. But I would not say there's any unique acceleration.
spk02: Right. Got you. That's helpful. And a great segue into the next question, which is, I think Josh asked a couple of questions on the macro. We'd be interested when you look specifically at the, I guess, adoption triggers, right, the trigger events that typically drive adoption of your solutions or moving to cloud or what have you, specifically momentum in the ERP implementation pipeline and the progress you're seeing in that pipeline, and then any other observations around significant adoption triggers that you're seeing here.
spk03: Yeah, so our adoption triggers are threefold. They are business model transitions as companies seek to create new revenue models, which obviously in challenging economic times is going to be an area of focus. And as they're doing that, that will create pressure on the in-house tax solution, which will create pain and therefore opportunities. You'll also see it in the regulatory environment in one of two ways. You'll see it either in increased regulations or you'll see it in audit pressure. And we've seen through tough economic times both things showing up. So that's another trigger. And then lastly, as you note, it's the system change. It could be a best of breed, like I'm adopting a Coupa or an e-commerce platform like Adobe Magento, or it could be ERP. And I would say right now we're seeing demand across all three of those segments. We haven't seen any material slowdown in demand. the work that we're doing across those platforms, across those drivers at this point.
spk02: Very helpful. Thanks again.
spk05: Next question, Brad Reback with Stiefel.
spk10: Great. Thanks very much. High level, guys, without getting specific on guidance for next year, but do you see margins bottoming this year?
spk08: Yeah, this is John, Brad. Thanks for the question. I think we do. I think we've talked about that we really see this year as a big investment year for us. I mean, we are making significant investment both in external facing through sales and marketing as well as through some of the R&D activity that we're doing to develop some of those new products. And I've always expected this was going to be our heaviest year of investing and that we would start to see ourselves move out of it into the back part of next year for sure.
spk10: And just sort of following on there, free cash flow this year, will it be positive?
spk08: We anticipate that it will. We don't guide to that, Brad, but from a free cash flow standpoint, we had a couple of big drivers in the current quarter when we think about some of the changes that took place. The biggest areas in AR, we had a couple of real big AR collections back in Q2 of 2022 that really drove in, and it was a lot of kind of pent-up stuff from the pandemic. And that was in 2021. In 2022, what we did see is the timing of certain of the renewals and certain of the new sales that we had in the quarter were a little bit differently timed than last year. And so I think the cash flow from those things just flops, period. So I think we'll see that come back. We believe that's going to be positive. Yeah, that's certainly going to be positive. But we feel good about our opportunity to continue to generate cash flow and move it forward. Our aging continues to be in great shape. And again, because of the investment year from a cash flow standpoint, The PP&E and some of those spends are continuing to be very strong as we drive those product development activities. That's great. Thanks very much. You bet.
spk05: Next question, Samad Samana with Jefferies.
spk07: Hey, good morning, gentlemen. Maybe first just going back to the organic ARR. That was a pretty strong sequential increase and good, particularly in dollars added for a 2Q. So, John or David, either one of you could answer this question, but I'm curious, how would you think about that better than normal seasonal strength? Is that more of a function of sales execution, the timing of go-lives, maybe switching from 1Q to 2Q, or just better than expected demand? Just how should we think about that given how seasonally strong that was?
spk03: I think I would say a couple of things there. I would say one is, you know, we've been investing continually in our, in our sales and marketing and it takes, there's a lead time before you actually are going to get return on that. And so we're seeing, I think some of the growth because of the investments we've made there in both customer success and sales and marketing that is driving continued improvement. I do think traditionally in our business, Q1 is a little slower than Q2 in general, so that's not unusual for us. And then the last thing, I think the investments we've been making with our ecosystem partners and the relationships that I've called out about SAP and Oracle are really critical to our success, and they continue to be important levers that we're digging into.
spk07: Understood. And then just as I think about, David, your comments on several large European wins, that just kind of stands a little bit in contrast to some maybe other software companies that are calling out Europe being a little bit of a tougher market right now. What do you think is driving your customers or your wins there beyond your distribution efforts? Is it just that the problems around tax rules have gotten too complex and they have no choice, or... Is it just your vertical exposure that's still on you to have success in Europe? Just maybe help us understand why that's a little bit different than maybe what some other software companies are seeing in the market.
spk03: Sure. So I'd start with our product suite. I'm really proud of what our team's built with that chain flow accelerator. Now our global compliance solution is those are maturing in the market. I think gaining referenceability around those is growing. The European market, as I've mentioned in the past, is very much a community where referenceability, anything in the enterprise marketplace, Europe in particular, where referenceability matters. And so I think a combination of the great work our team has done in the product suite, the referenceability we're gaining. We enjoy strong relationships with the alliance partners and consulting partners in the U.S. That is translating more and more into Europe because of the their global organizations as well, and then obviously the strength of our SAP offerings, the whole suite of SAP capabilities we bring to bear with the LCR Dixon acquisition we made last year, the relationships we enjoy with SAP. When you put those together, I think that's what's generating the type of results that we're excited about.
spk07: Great. Appreciate you taking my questions, and good to see the solid results. Thank you.
spk05: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Next question comes from Daniel Jester with BMO.
spk04: Thanks for taking my question. Good morning, everyone. Appreciate the additional color on the indirect client growth. Maybe if you could just spend a minute and help us think about sort of how additive that could be in the future, what's driving that, et cetera. Thank you.
spk03: Yeah, you know, I think it's part of our strategy to be efficient in accessing a market that otherwise we don't think is very efficient to access on a direct sale basis. And so I think as we continue to advance, and again, I think referenceability will matter as we continue to add new partners into that equation. It will be, it builds over time, though. It will be an additive, but I don't, you know, I don't want to confuse anyone that Our focus is the enterprise market and the upper end of the mid-market. These are unique opportunities where we see growth, but it's clearly not the primary focus of this business. Primary focus is complex mid-market and enterprise customers where we lead. Great.
spk04: And then maybe two quick ones for John. First, I don't know if you mentioned it, but did you say what organic cloud revenue growth was in the quarter? And was there any FX impact on the second quarter or in the guide? Thank you.
spk08: Yep. Thanks, Dan. Appreciate it. There was virtually minimal impact from an FX standpoint. Generally speaking, the majority of our revenue comes in U.S. denominated and even our European contracts, some of those are denominated in U.S. So we do not have a big impact in exposure to FX from that standpoint. And from a cloud revenue standpoint, I think we talked a little bit about the growth there in terms of kind of what that's come through cloud revenue was the 25% growth that we reported out. And then on a pro forma basis, excluding the $2.1 million item from last year, that gets back up to 34%.
spk11: All right. Thank you very much. You bet. Thank you.
spk05: Next question, Pat Walraven with JMP Securities.
spk06: Oh, great. Thank you. And let me add my congratulations. So, it's just kind of interesting. There's a change in the competitive landscape with Vista and Avalara. So, David, could you just maybe remind us how often and when you compete against them and what impact you think this might have on your business going forward?
spk03: Yeah. So, you know, I think we see them primarily in the mid-market. That's been sort of the middle ground between them coming up market and us moving down market as more demand has showed up in the mid-market, and that's really where we see them. We don't really see them, and I've not seen any material change in our competitive win rates or our competitive dynamics, quite frankly, at the enterprise market. That's really Vertex and Thomson Reuters. I don't want to speculate on what Vista's going to do. I certainly think it validates the space in the industry that we play in, and the reality is we've seen a lot of M&A deals in our industry over time. Thomson bought Sabrix, ADP, and Vista. have both owned what is now HG's taxware business, and now that became Sovo's, and he had Stripe buy TaxJar. So we've seen a lot of industry transitions. It really hasn't affected our brand, our market leadership, or our strategy in any material way.
spk12: Thank you.
spk05: Next question comes from Keith Weiss with Morgan Stanley.
spk01: Hi, this is Theo Toon on for Keith. Thanks again for taking my question. So I just want to touch on kind of the growth that you're seeing in Europe. And maybe can you provide any additional colors sort of on your investments in Europe and how they're paying off and what differences you're seeing between the U.S. and European market in this environment? And then maybe also you spoke a little bit to the catalyst for customers to move to the cloud. So if you can maybe zoom into particularly the in Europe, which one of these catalysts is really driving the strong cross-sell deals that you noted, and how do you expect that sort of going forward?
spk03: Yeah, so the European – thanks for the question – the European – The European growth, you know, I think you have to focus on the products. We have built products that are uniquely aligned to the SAP ecosystem. They are certified within SAP, which is really important to the end user to experience it the way they experience the rest of the SAP capability and the SAP offerings. And so I think in doing that, that has created differentiation for us in the market. When you add in some of the acquisitions we've made, like LCR Dixon, which has a wonderful tool set of capabilities for SAP, it really gives us a broader approach to market than what we've seen in the competitive environment. And so I think that's why we've enjoyed the success we have. As far as looking forward, I think we're going to continue to invest in areas of Europe that are where demand is being driven. So that would be around things like we're seeing e-invoicing becoming a growing demand point. We're seeing regulatory change that is making it more complex for the native functionality of VAT. And that continues to be an opportunity area for us. And then, again, I can't emphasize enough, referenceability matters in the enterprise market. And so part of the reason I think we're gaining some traction there is we have been fortunate to secure some of the largest companies in Europe. And in doing so, that will attract other tax buyers who are struggling with some of the issues on regulations to look for who else is doing this well. And because Vertex is now developing brand over there, I think that that is why we're gaining the traction we are. Excellent.
spk12: Thank you.
spk05: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. There are no further questions. I would like to turn the floor over to David DiStefano for closing remarks.
spk03: Great. Thank you for joining us today. We look forward to speaking with you next quarter. If you have any questions, please don't hesitate to reach out. Have a great rest of your day.
spk05: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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