Vertex, Inc.

Good day and welcome to the Vertex Inc. Third 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 on 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, Vice President, Investor Relations. Please go ahead.

Hello, and thanks for joining us to discuss for Texas third quarter financial results. I'm Joe Crivelli, Vice President, Investor Relations. David DiStefano, our President and CEO, and John Schwab, our CFO, are with us also 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. This 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 third quarter of 2024, Vertex delivered very strong financial results while advancing our long-term strategic and financial priorities. From a financial standpoint, we delivered strong revenue growth, adjusted EBITDA, and free cash flow, and we were gap earnings positive for the fourth quarter in a row. In addition, we achieved a significant strategic goal in late August when we completed our announced acquisition of Ecosio, a fast-growing EDI and e-invoicing company based in Austria. We are very excited to have Ecosio as part of the Vertex family. We believe our combined solution will be a springboard for sustained growth in international markets where value-added tax is the main source of indirect tax revenue for governments. Our combined Vertex e-invoicing solution is powered by our global tax content and built on our data platform. This allows our customers to effectively manage the entire indirect tax workflow from tax determination and compliance to planning and audit defense through a single platform. This creates tremendous value for our Vertex community. At a customer event in Germany in September, we previewed our offering with 40 key customers and prospects, as well as representatives from our partner ecosystem. The excitement was clear with one of our largest customers telling us we have changed the competitive landscape. This was then topped by the experience I had at our annual customer conference last week. At this event, we enjoyed record customer and partner attendance. We previewed several exciting new AI capabilities, including our recently released co-pilot and our soon to be released smart categorization offering. We also highlighted ways we are enhancing our support offerings based on customer input and unveiled significant enhancements to our global partner enablement program. The strong relationships we maintained drives our ongoing success. And we never forget that our customer's total experience matters. That shows up at customer events throughout the year. I left both events extremely energized and convinced that we have the right strategy to help our enterprise customers and prospects tackle the compliance challenges of today and tomorrow. Now, turning to the financials. Revenue was $170.4 million in the second quarter, up 17.5% year over year. Software subscription growth was 20.6%, and cloud revenue growth was 29.9%. This includes a $1 million revenue contribution from Ecosio. John will discuss the organic financial results in a moment. The earnings power of our financial model is demonstrated by adjusted EBITDA of $38.6 million in the third quarter, which represents an adjusted EBITDA margin of 22.7%. Adjusted EBITDA margin has expanded in every single quarter since we completed our multi-year growth investment program in mid-2023. Demonstrating the quality of our earnings, free cash flow was $18.4 million in the third quarter. In addition, gap net income was $7.2 million, or four cents per diluted share. I'll now share some additional key performance indicators. Note that these figures are vertex only and do not include the impact of Systax or Ecosio, which John will cover in a moment. NRR was 111%, which is up from 110% in the second quarter and equal to 111% in last year's third quarter. GRR was 95% in the third quarter, which maintains our targeted best-in-class range of 94% to 96%. Annual recurring revenue was $563 million, up 16.1% from last year's third quarter. Cloud revenue growth was 28.5%, in line with our stated target for the year. Scaled customer count, which represents customers delivering annual revenue over $100,000, grew 13% year-over-year. And average revenue per customer was $131,400, up 16.6%, from $112,690 in last year's third quarter. My leadership team and I are laser-focused on executing our strategy as we believe we have room to continue to grow revenue, further improve profitability and free cash flow, and build on our market-leading customer metrics. This is because we are in a unique segment of the software market. Indirect taxes are incredibly complex. For example, we now maintain over 1 billion effective rates and rules in our differentiated tax content database. This content fuels all our solutions. Indirect taxes impact every single transaction and every single company in every jurisdiction around the world. And yet so many enterprises are still calculating and reporting indirect taxes based on legacy internally developed software and systems that were built decades ago. For these companies, things like ERP conversions, mergers and acquisitions, and audit pressure from taxing authorities cause their legacy systems to be inadequate to support their increasingly complex and sophisticated business. This in turn makes switching to an expert provider like Vertex an absolute necessity. In addition, we have two multi-year tailwinds coming our way that will accelerate the migration from homegrown to our cloud solutions. The first of these has received a lot of attention from Wall Street lately, the coming super cycle of ERP conversions that is partly driven by legacy ERP systems that will be end of life by leaders in the space. And the second is the reason we bought Ecosio last quarter, the coming wave of e-invoicing regulations that will make countries with VAT regimes for indirect tax fertile hunting ground for Vertex's global indirect tax platform. Net-net, we believe the opportunities that are in front of us are sizable and will fuel revenue growth and profitability for years to come. I'll now highlight some notable wins in the quarter. It was an exciting quarter on the new business front with new logos, so I'll start there. We landed a very high-profile new logo deal with a major electric vehicle manufacturer. This new scaled customer moved to Vertex from a competitive solution that didn't support their business effectively. This customer's operating environment is unique in that they use a custom, homegrown ERP system. In turn, this introduces a level of complexity and customization that gives Vertex a major edge over competitors. The result was nearly seven figures of new recurring revenue for Vertex across a comprehensive solution set, including sales, use, and VAT tax calculation, sales tax returns, address cleansing, and exemption certificate management. As an example of a company that switched from a homegrown solution, in the third quarter we won a mid-six-figure new contract with one of the largest fast food restaurant chains in the world. This company decided to move to a vended solution due to an Oracle Cloud transformation. We had several exciting wins in Europe during the quarter as well. Our integrated Vertex Ecosia solution won the day for an e-invoicing opportunity with a SaaS software company based in Germany. This customer wanted to get ahead of the upcoming e-invoicing mandate in Germany and conducted an RFP and evaluated several competitors in the space. While this was a modest five-figure new business win, it evidenced the strength of our e-invoicing solution as we prevailed over several of the most formidable competitors in the space. We won a six-figure new logo deal for VAT calculation and compliance with a leading Swiss agricultural company. This customer previously used a homegrown tax calculation solution, but the level of complexity of their business, as well as an upgrade to their commodities trading platform, moved them to look at vended solutions. Vertex prevailed with a global solution including capabilities for Brazil. And we won a six-figure deal with an international materials manufacturer based in Austria. This company is planning for an SAP S4 HANA migration in 2025. This company selected Vertex in part due to Systax, as they have extensive operations in Brazil. In addition, we had a strong referral from one of our top accounting partners. Now, turning to wins with existing customers. One of the largest technology companies in the world expanded its entitlements with Vertex in the third quarter. This led to an annual entitlement increase across a comprehensive solution including sales, use, and value-added tax, communications tax content, retail tools, and SAP accelerators. This was the largest entitlement ever done in our 46-year history, an increase well into the seven figures that was necessitated by the growth of our customers' business. A cloud transformation project led a global pharmaceutical company to expand its relationship with Vertex. The company purchased additional entitlements for the areas of the business that we did not previously serve. It cost a very comprehensive solution that included calculation for sales, use, and VAT tax, as well as Vertex Plus tools, SAP Accelerator, Exemption Certificate Manager, address cleansing, and other add-ons. The net result was a high six figures of new revenue for Vertex, nearly doubling our cloud business with this longstanding customer. An international industrial manufacturer expanded with Vertex to consolidate systems and become more efficient. The company, which had grown through acquisition, was using Vertex for sales tax calculation and compliance in certain segments of his business, as well as competitors and manual processes in others. By standardizing on Vertex, the company can improve accuracy and efficiency. As a result, we now provide the customer with a comprehensive solution set, including tax mapping tools, address cleansing, and exemption certificate management alongside the original sales tax calc and compliance solutions. The last two customer expansions are very notable because they demonstrate the reality that when we land a new logo, it's very unlikely that the company is implementing our solutions across all the operating units of its business. Whether they only have challenges in one part of the business initially or they subsequently make acquisitions, there are always opportunities to expand our software footprint as we prove out our capabilities and earn their confidence. This is an essential element of our long-term success. I really appreciate how excited investors are about the upcoming transition in the SAP ecosystem from ECC to S4 HANA could mean for Vertex. In the third quarter, an existing customer that is a global manufacturers of semiconductor equipment executed an enterprise-wide transformation. As part of this process, they expanded their use of Vertex O-Series globally to support VAT compliance obligations that previously have been managed natively within their ERPs. And while I don't think this example is necessarily typical of what we will see across our customer base, for this customer, the transition led mid-six figures of new revenue, a more than tenfold year-over-year increase across increased entitlements for sales tax, the addition of consumer use tax, and the licensing of a cross-section of SAP tools. And finally, I will highlight that one of the world's largest equipment rental companies expanded with Vertex in conjunction with with a company-wide cloud transformation project. The customer moved from a legacy on-prem offering to our O-Series cloud offering and selected us for best-of-breed leasing, sales tax, and consumer's use tax capabilities. This resulted in mid-six figures of new revenue for Vertex, a four-fold year-over-year increase with this customer. In closing, it was a great quarter for Vertex with strong financial results and positive momentum on the new business front with both new and existing customers. Our business is executing as we expected. And best of all, we have plenty of runway to continue to drive revenue growth and earnings leverage. John will now take you through the financials.