Vertex, Inc.

Greetings. Welcome to Vertex's second quarter 2023 earnings conference call. Please note this conference is being recorded. At this time, all participants are in a listen-only mode. At this time, I'll now turn the conference over to Joe Crivelli, Vice President of Investor Relations. Mr. Crivelli, you may now begin.

Hello, and thanks for joining us to discuss Vertex's second quarter financial results. I'm Joe Crivelli, Vice President, Investor Relations and David DiStefano, our President and CEO, and John Schwab, our CFO, are joining me on the call today. As a reminder during this call, we may make forward-looking statements about expected future results. Our actual financial results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Please note that our remarks today will also include references to non-GAAP financial measures, a reconciliation of these non-GAAP metrics. 2GAAP is also provided in today's press release. This conference call is being recorded and will be available for replay via webcast on our investor relations website. I'll now turn the call over to David. Thanks, Joe.

Welcome, everyone, and thank you for joining us. Our team continues to execute our strategy with excellence, resulting in strong second quarter financial results and furthering our competitive differentiation. I'm very excited about where we are as a company. We've made growth investments over the past three years to accelerate go-to-market success, deliver new products, and advance our capabilities through acquisitions and organizational modernization. We're seeing the return from these investments starting to take hold. The second quarter demonstrated our anticipated steady progression of increased revenue growth and margin improvement. We added $21 million of recurring revenue in the second quarter alone, the highest we've reported as a public company, driving a 17.5% increase year over year in ARR. GRR remained consistent at 96%, while NRR climbed to 111%, which represents another record high for Vertex. Average annual revenue per customer continues to grow quarter by quarter, and ended over $109,000 in Q2, up 16% year-over-year. Total revenue was $139.7 million, exceeding the high end of our financial guidance for the second quarter, and adjusted EBITDA was $22 million at the high end of our guidance. John will provide an update on our full-year guidance in a moment. Also this quarter, Growth of our scaled customer count, those customers with annual revenues greater than $100,000, accelerated to 15% year-over-year. This reflects our ongoing success in the vastly untenantrated enterprise market. These are the most dynamic companies in the world, spanning every industry. They are the heart of global commerce growth, and the durability of their performance is evident even in challenging economic conditions. These scaled customer wins position us for future NR growth and enhance profitability with the proven land and expand efforts of our market-leading customer success teams. A combination of new logo wins along with major existing customer expansion deals contributed to our strong second quarter performance and reflects the sustained growth of the lifetime value of our customer base. We have a vision to accelerate global commerce. To achieve this, we are building our solutions into all the major platforms powering global commerce backed by trusted partner relationships that help differentiate us in deals and deliver extended value to our customers. Again this quarter, we saw how our partnerships are paying significant dividends. We continue to build on the 25 plus year partnership with SAP to extend the value we provide to our joint customers. Vertex has the most complete indirect tax solution in the SAP ecosystem, especially when combined with the unique capabilities of our SAP-certified chain flow accelerator and the uniquely strong customer referenceability we enjoy as the leader in the enterprise market. I've also previously shared how we are driving an entirely new sales motion with SAP designed for growth. to better support our joint customers and our go-to-market efforts. I'm incredibly proud to announce that Vertex O-Series is now an SAP-endorsed app for the North America region. This enables even greater collaboration between our respective sales and marketing teams to accomplish our collective revenue goals. Accordingly, we are seeing accelerating momentum in the SAP ecosystem. We had several high-profile wins in the second quarter, including a leading global semiconductor manufacturer and a major manufacturer of private label food products. Both customers engaged Vertex to support tax transformation as part of their S4 HANA migration initiative. We also helped one of the world's largest manufacturers of branded food products automate their manual processes around use tax to ensure they were not overpaying suppliers and creating audit risk. In each case, An SAP platform transition drove mid-six figures of annual recurring revenue for Vertex, demonstrating the magnitude of this opportunity. We expect this will continue to be a new business driver for Vertex in the coming years, as thousands of customers still on ECC, a platform that SAP has announced they will stop supporting in 2027, migrate to S4 HANA. In the second quarter, we also won a high six-figure deal from a leading medical diagnostics company. Following a company merger, they engaged in a global S4 migration initiative to consolidate systems and selected Vertex Cloud for tax automation as part of this process. This was a highly collaborative process with the SAP team to provide the best joint solution for the customer. Our chain flow accelerator and data visualization tools, which enhance the company's VAT tax compliance in Europe, were key to their decision, as well as our ability to link multiple systems to a single tax system on a global scale. We're seeing the value of our focused and collaborative approach extend across our entire partner ecosystem as companies leverage our connected solutions as part of their tax transformation efforts. As an example, in the second quarter, one of our longtime Oracle customers implemented a cloud-first strategy to support their business growth. Because of the trusted relationship we have earned over the years, they chose to continue their journey with us and transition to our cloud solution. This deal reflects not only how we can seamlessly transition with our customers when they are ready to move to the cloud, but also the importance of our differentiated customer experience. We also significantly expanded our relationship with a major marketplace for tickets to live events. The company's global growth drove their need to move to the cloud and modernize their indirect tax solution. In conjunction with our partners at Oracle, this OCI cloud deployment resulted in seven figures of new revenue for Vertex. We're also driving customer value with Workday, where we are enabling seamless indirect tax management for our joint customers in the cloud. Their sales team brought us into the conversation with a West Coast healthcare provider to modernize their manual tax processes. Thanks to the strong connections we have built with Workday, we won this six-figure new local deal to automate consumer use tax. We also won a new local deal with one of the largest waste management companies in the U.S. This customer was looking to improve their business processes by consolidating their homegrown and disparate billing system on one platform that could work harmoniously with Workday. Their trusted advisor and implementer is a key partner for Vertex and brought us into this competitive evaluation process. In addition, our ability to effectively manage exemption certificates and support real-time jurisdiction classification with our lat-long locator ultimately set us apart from the competition. Tax complexity increases as businesses diversify their offerings, expand in new regions, or grow their customer base. For us, this can mean new opportunities within our existing customer base, either through our new offerings or by increasing use of their existing solution as transaction volumes grow. In the second quarter, one of our largest customers, a global food and beverage retailer, signed a contract expansion that included a seven-figure increase due to the high sales volume and user growth. Adoption of their mobile app is rapidly growing, along with a number of items in each order. With this, they needed to support the variety of locations where mobile orders are taking place. The high performance and reliability they've experienced with Vertex Cloud Solutions is are the hallmarks of why they trust us with their thriving business. While I enjoy highlighting how we are selling new offerings through upsells, cross-sells, and new logos, the increased use of our solutions by existing customers represents another pervasive benefit of being the leading provider of indirect tax solutions to the largest companies in the world. Last quarter, we discussed our leadership in the food delivery industry. We expanded our relationship with one of the major players in this space in the second quarter. This new three-year deal augments usage for marketplace support and drove six figures of additional annual revenue for Vertex. Our edge offering was a significant differentiator as the customer's business model is mobile, requiring pinpoint accurate tax calculation from any location. We believe we're still in the early days of advancing various and diverse business solutions for our edge offering across multiple industries. Edge deployment enables greater flexibility and scalability regardless of where transactions occur. We also continually invest in our database to drive expansion into key growth markets. As of the end of Q2, our robust tax content database covers over 840 million effective rates and rules. With the rise in mobile commerce, more of our customers are subject to telecommunications taxes. As a result, we are seeing the investment we've made in telecommunications content drive significant new business opportunities. As an example, in the second quarter, we won an eight-figure multi-year contract from one of the big three U.S.-based telecom leaders. This major contract was driven by key Vertex differentiators, including our communication tax content, as well as our edge product to support the company's nationwide retail presence. I'm also thrilled to highlight in the second quarter, one of the world's leading providers of cloud software and infrastructure selected Vertex to support their growing telecommunications business. This upsell to an existing customer relationship will drive mid six figures of additional annual revenue for Vertex. Turning to the international market, we won a six-figure deal with a mid-market gaming company based in Singapore who was looking for a long-term partner to support their growth in the U.S. The company owns one of the fastest-growing free-to-play RPG video games with numerous avenues for in-game purchases. Getting the tax right was incredibly important to them to create the best user experience for their gamers. Initially, they contracted with us to manage their returns filing in the States. This quarter, we expanded our footprint with a five-year deal that includes our cloud solution for tax determination to create a smooth process end-to-end. As you can imagine, reducing latency and ensuring uptime are top of mind in their business. We're also able to earn the business of a European manufacturers of aviation products when they acquired a U.S. company that runs Vertex. As a result of this acquisition, we're able to win the parent company's EU business, driving six figures of additional revenue. Before I close, I'd like to take a moment to share my perspective on artificial intelligence and why we are excited to leverage it even further as we incorporate AI technologies into our offerings. At Vertex, we see the adoption of advancements in AI as unambiguously strategic, building on our long history of technology innovations. Over the past few years, we have seen that AI has the power and potential to augment our most valuable resource, our tax technology experts, and revolutionize how we approach indirect tax software by combining human expertise with AI capabilities, we can optimize workflows and elevate the user experience. We've accelerated our investments in AI to realize and advance our commercial strategy. Our R&D investment is focused initially on streamlining content management, delivering actionable insights, and enhancing the customer experience using AI-powered copilots. Our products interact with many types of data. As a result, we can use AI to correlate data, identify patterns, and offer deeper insights for our customers. We can also leverage AI to automate parts of the tax content curation process while maintaining a control framework to ensure the accuracy, precision, speed, and performance our customers need for taxable transactions. In its current state, AI is a probabilistic technology, which gives an answer that is close or good enough, which is often acceptable for recommendation engines. But in the enterprise market we serve, where an incorrect tax answer can lead to massive penalties, a deterministic answer is required. Our solutions combine multiple technologies to take advantage of both probabilistic and deterministic technologies. These pair with the appropriate use cases to work with our tax technologists and customers to increase productivity, improve user experience, and empower decision intelligence. By applying emerging AI technologies in thoughtful ways, we can drive enhanced productivity, usability, and value for our customers. We'll have more to share as these investments evolve. John will now take you through the financials.