Vertex, Inc.

Good morning and welcome to the Vertex Inc. Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one of your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Joe Crivelli, Please go ahead.

Hello, and thanks for joining us to discuss Vertex's second quarter financial results. I'm Joe Crivelli, Vice President, Investor Relations. David DiStefano, our President and CEO, and John Schwab, our CFO, are also with us today. During this call, we may make forward-looking statements about expected future results. 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. In our remarks today, we will also refer to non-GAAP financial metrics, A reconciliation of these metrics to GAAP is provided in today's press release. The call is being recorded and will be available for replay on our investor relations website. I'll now turn the call over to David.

Welcome, everyone, and thank you for joining us. In the second quarter, we delivered on several important strategic and financial priorities. The financial results once again had numerous highlights, but I want to cover the strategic developments that we have announced recently as they position us for sustaining the profit-driven growth that has been the hallmark of our company for more than 45 years. Earlier today, we announced the acquisition of Ecosio, a fast-growing Austrian company specializing in e-invoicing and EDI, for $69 million in cash, along with a multi-year revenue-based earnout. The non-uniform proliferation of e-invoicing mandates, with several large economies soon to adopt new requirements, is making global reporting compliance more challenging for our enterprise customers. With this acquisition, we unlock additional value for our customers while opening new market opportunities for Vertex. This acquisition will enable us to address the burgeoning opportunity of e-invoicing head-on. We were attracted to Ecosio for a number of reasons. First, its scalable, fully cloud-based platform. Second, its ability to handle e-invoicing across many countries that have mandates today. Third, its ability to quickly expand coverage as new mandates are introduced. And fourth, the ease with which we can integrate the Ecosio offering with the Vertex platform of VAT compliance and O-Series tax determination. In fact, we have been working on integrating their technology on our platform since February as a potential partner. So we intend to launch our combined offering shortly. By bringing together Vertex and Ecosia, we can deliver a comprehensive global solution with reliable end-to-end indirect tax reporting along with continuous transaction control or CTC capabilities to mitigate the risk of noncompliance. This in turn will streamline the entire compliance lifecycle from tax determination through reporting. So I'm pleased to welcome the entire Ecosio team to the Vertex family and look forward to bringing the two organizations together in the third quarter. Also in late June, we announced the acquisition of tax-specific artificial intelligence capabilities. This technology will apply AI to simplify and expedite the manual and time-consuming processes of tax categorization. This involves matching a customer's SKUs with applicable tax rates wherever it does business globally. Tax categorization is required not only when implementing a new Vertex solution, but is also essential ongoing tasks as SKUs, rates, and jurisdictional rules are constantly changing. Getting this right is critical for achieving tax accuracy, especially for high-volume businesses that must manage indirect tax compliance globally at scale. Consistent with a hallmark of our 45 years of success, numerous customers have signed up to be design partners to ensure we deliver with excellence. Additionally, beyond product categorization, we will be deploying the acquired AI capabilities to support furthering our industry-leading tax content database and have application with our data management capabilities. We are excited about the commercial and financial potential of this technology and this acquisition. Now, turning to the financials. When we talk with investors about our financial goals, We typically mention long-term Rule of 40 targets, including mid- to high-teens revenue growth, mid-20s adjusted EBITDA margins, and a 65% to 70% free cash flow to adjusted EBITDA conversion rate. With the second quarter results, we are making good progress towards these goals. Revenue was $161.1 million in the second quarter, up 15.3% year-over-year. Software subscription growth was 15.8%. and cloud revenue growth was higher than our full-year guidance at nearly 30%. Adjusted EBITDA was $38.5 million, and adjusted EBITDA margin was 23.9%. Notably, since completing our multi-year investment program one year ago, we've grown adjusted EBITDA in the mid to high double digits for four quarters in a row and seen our adjusted EBITDA margin expand by over 800 basis points. Accelerating our cash flow conversion following our three-year investment cycle was an essential financial priority of our organization as it demonstrates earnings quality and the power of our financial model. So I'm very pleased that the second quarter free cash flow was a record $36.9 million, up from $4 million in Q1. While the increase in free cash flow is in part due to the AR Collections catch-up that we have discussed previously, the performance still far exceeded our internal expectations. In addition, this quarter, NRR was 110%, down one point from 111% in last year's second quarter. Scaled customer count, which represents customers delivering annual revenue of over $100,000, grew 14% year-over-year, and GRR was 95% in the second quarter, which achieves our targeted best-in-class range of 94% to 96%. Two of our customer metrics were impacted by the completion of our SysTax acquisition in the second quarter. John will provide more color in a moment. Including SysTax, ARR was $548.4 million, up 17.3%, and average annual revenue per customer was $123,560, up 13% year over year. While the overall revenue growth rate and customer metrics were strong and in line with our expectations, They were a bit lower than the last two quarters. This is in part due to the planned strategic slowdown in implementation services and the publicly reported slower than expected migration acceleration of SAP ECC customers to HANA S4. Beyond that, we did see somewhat lower cross-sell and up-sell activity in the first half of the year. On the flip side, a more positive trend was the second quarter was our second best of the last two years for new logo revenue. and June was the best month of the year for cross-sell and up-sell. Given our visibility into second-half opportunities, we remain confident in our outlook and have narrowed our full-year revenue guidance to the upper part of the range. We have also substantially increased our adjusted EBITDA guidance. John will discuss this in a moment. Finally, I'll note that in the second quarter, we were gap earnings positive for the third quarter in a row. And while this may change temporarily in the back half due to integration expenses related to Ecosio, we believe the ability to deliver positive gap earnings and positive free cash flow makes Vertex an uncommon SaaS company. Now, turning to notable wins in the quarter. One of the biggest wins in the second quarter was with an existing customer in the food delivery industry. This customer renewed his contract with Vertex in May. In addition to a significant increase in entitlements, the customer also upgraded its mobile transaction processing systems to Vertex O-Series Edge. The result was more than seven figures of new revenue for Vertex. Also in the second quarter, organic growth for a global specialty food and beverage retailer led to additional tax determination entitlements. As transaction volumes rise with increased adoption of their mobile app, we are expanding our partnership to meet their growing requirements. We've seen increased investment over the life of the partnership with revenue from this top 10 customer now in the mid seven figures. An SAP driven ECC to S4 HANA cloud transformation resulted in a mid six figure competitive upsell for a transportation equipment manufacturer. As part of their move to the cloud, this customer took the opportunity to address increased demand and complexity with their leasing services. Our differentiated industry-specific tax content turned this opportunity in our favor. In total, this ended up being a four-fold increase in ARR for this long-standing customer. As part of their analysis, the customer did solicit competitive bids, and our competition tried very hard to buy the business with significantly discounted pricing. However, Vertex prevailed as we were able to leverage our long-term relationship with the customer and track record of top-notch customer support as well as our close relationship with SAP. A cloud transformation resulted in a mid-six-figure win from a national clothing retailer. This long-standing customer had relied on Vertec to support their business in North America, EMEA, and Asia-Pac. The burden of maintaining a tax engine within their infrastructure was great enough to initiate their move to the cloud with Vertec in advance of a larger ERP migration. This 24-year customer did not see competitive bids during the process, which is evident of their confidence in Vertex and our solutions. Investors are sometimes surprised at the number of major companies that still calculate indirect tax with homegrown solutions. As an example, we had a win in the second quarter with a subsidiary of one of the largest financial services companies in the world that wanted to sunset their internally developed VAT calculation solutions. This mid-six-figure deal was catalyzed by the company's continued M&A activity and their inability of the legacy code to seamlessly integrate with a new ERP system. Another along these lines, Vertex won a low six-figure new customer when a multi-billion dollar data analytics company re-evaluated its approach to indirect tax in conjunction with the consolidation of multiple ERPs to a single instance of Oracle. Due to the nature of their business, they needed a flexible solution that could manage a high volume of transactions when subscription billing activities peaks at month end. Interestingly, the incumbent solution was a combination of two competitors' data overlaid by the company's own manual processes. On the new logo front, we had a number of competitive displacements. An international professional services provider selected Vertex over an incumbent competitor to support its SAP S4 HANA cloud transformation journey. This led to high six figures of new revenue for Vertex. Likewise, a national facilities management provider selected Vertex to support its implementation of Workday financials. Organic growth changed their tax scenarios requiring greater agility to support business expansion. Their existing solution was not able to scale and meet their complex needs. Additionally, they were extremely unhappy with the level of customer service from an incumbent competitor who had been largely unresponsive. The result was a new scaled customer for Vertex. And on the international front, we had a six-figure new logo win with a Brazilian fashion company that was implementing Oracle Cloud. We referred into the deal through our partnership with Shopify. The customer was using one of our competitors previously, but they had outgrown their capabilities which were focused on the small business segment of the market, and were looking for a partner that could support their aggressive worldwide growth plans. Finally, we just went live with a major Japanese conglomerate that selected Vertex to support a 58-country global tax automation project spanning North and South America, EMEA, and APAC. This 18-month implementation project was one of the most complex ever completed by Vertex. and one that we believe our technology is singularly qualified to handle in the indirect tax automation industry. John will now take you through the financials. John?