Vertex, Inc.

Good day and welcome to the Vertex Inc. third quarter 2025 earnings conference call. All participants will be in the listen only mode. Should you need assistance during the conference call, please signal the conference specialist by pressing star key followed by zero. After today's presentation, there'll be an opportunity for you to ask questions. To ask a question, you press star and then one on your touchtone phone. To withdraw your question, please press star and then two. Please note that this conference is being recorded. I would now like to turn the conference over to Joe Crivelli, Vice President, Investor Relations. Thank you and over to you.

Hello, and thanks for joining us to discuss Vertex's third quarter results. 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 results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Our remarks today will also include references to non-GAAP metrics. A reconciliation of these metrics to GAAP is also 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. Our third quarter performance demonstrated continued momentum in core strategic areas while managing specific market and customer headwinds. The strength of our strategy was evident in our strong cloud revenue growth, the increased margin leverage driven by automation initiatives, and strong cash flow performance. We also saw accelerating traction in e-invoicing and improved SAP activity. However, Offsetting this was the persistence of lower than typical growth from existing customer entitlements, as previously discussed in our second quarter earnings call. In addition, the bankruptcy of three large enterprise customers, as well as several accelerated migrations to our new cloud platform, impacted customer retention metrics. I will highlight the specifics of all of this and their impact on certain metrics in a moment. Our revenue results for the third quarter were in line with our guidance, while adjusted EBITDA exceeded expectations. Revenue was $192.1 million, up 12.7% year over year. Subscription revenue grew 12.7%, and cloud revenue growth was 29.6%. Adjusted EBITDA was a record $43.5 million exceeding the high end of our guidance by $2.5 million and representing an EBITDA margin of 22.6%. And free cash flow was very strong at $30.2 million in the third quarter. In addition, annual recurring revenue or ARR grew 12.4% to $648.2 million Average annual revenue per customer increased 12.4% year-over-year to $133,000. Scaled customer count grew 14%. Gross revenue retention, or GRR, remained at 95% in the third quarter within our targeted best-in-class range of 94% to 96%. And net revenue retention, or NRR, decreased to 107% down one point from the second quarter. But first and foremost, I want to provide more specific details into the items that impacted customer retention metrics. As we have discussed each quarter, we experienced moderate customer turnover at the very low end of our customer base and discontinuation of legacy product usage by customers who have migrated to our new cloud solutions. In Q3, we experienced an unusual impact in these areas. Certain enterprise customers, including Big Lots, Party City, and Joann Fabrics, canceled licenses due to bankruptcy. This impacted retention metrics by approximately $2 million. Additionally, we had three large customers who had previously migrated to our new cloud platform complete their own internal legacy ERP migrations faster than previously anticipated, which enabled them to downsize that portion of their subscription fees with us. This impacted NRR by another $2-plus million. Beyond these anomalies, management was encouraged by the progress achieved across several of our ongoing growth initiatives. On e-invoicing, Ecosio had a strong quarter and contributed revenue of $4.1 million. This is an increase of approximately 30% from their run rate in last year's third quarter when we acquired the company. We have landed over 100 customers since declaring general availability in late March. all fit nicely into our expected land and expand experience. Additionally, we are seeing success with our integrated product strategy, which includes both e-invoicing and value added tax compliance in one platform with full end-to-end documentation and audit support. In the third quarter, we continue to see an influx of new customers driven by upcoming e-invoice mandates, including Belgium, France, and Germany, which we expect to accelerate as those actual deadlines approach. Ongoing cloud migrations with ERP vendors, including our partners SAP and Oracle, remain solid with pipeline build improvements appearing. And the expense control initiatives we discussed last quarter are driving improving earnings leverage as demonstrated by our strong adjusted EBITDA and free cash flow results this quarter. This quarter's progress on our long-term growth initiatives validates We still have significant greenfield opportunity with enterprise customers that are currently using legacy homegrown or manual solutions for indirect tax compliance and are migrating to the cloud. We continue to believe we have approximately 3x opportunity with our existing install base, which we will penetrate by expanding usage throughout their organizations or by cross-selling additional products. And we have major tailwinds in front of us from the upcoming e-invoicing mandates in major countries like Belgium, France, and Germany. Demonstrating our confidence in Vertex's long-term growth opportunity today, we announced that the board of directors has authorized the repurchase of up to $150 million of Vertex shares in the open market. Coupled with our progress on several growth areas, I'm excited with the number of AI initiatives the team advanced in the quarter. We are executing on three fronts to commercialize AI, which are focused on enabling new logo wins and wallet expansion with existing customers, driving enhanced customer retention through targeted ecosystem interoperability, and participating in new segments ripe for disruption. We are seeing ongoing traction with our smart categorization offering, and last week at our annual customer conference, we highlighted several new agented capabilities on our cloud platform. These are focused on workflow capabilities and data management. The customer conference was our largest yet, with strong attendance from Alliance and tech partners highlighting the energy around our customer segment and market opportunity. And the AI sessions were clearly the most oversubscribed sessions by attendees. Additionally, at Exchange, we shared some of the transformational work we are doing, including our pioneering of the first-ever agent-to-agent tax configuration capability for Microsoft Dynamics 365 Finance and Supply Chain. This is another step forward in creating a differentiated experience for Microsoft customers, bringing enterprise innovation to the mid-market. In October, we also launched Kintsugi Powered by Vertex, which enables SMBs to automate key compliance functions while providing real-time dashboards for jurisdictional liability and exposure tracking. Powered by the Vertex tax engine, it delivers the same trusted accuracy and global content that enterprises rely on. in an AI native experience built for agility and scale. This is just the first of many such new products and new initiatives that we expect to launch in partnership with Kintsugi. Exchange was also a clear reminder of the stark difference in tax compliance precision requirements between the enterprise customer and the SMB segment where good enough is sufficient. These complex global multinational enterprises remain very cautious about how AI is being considered in their departments due to inherent limitations. Several points were clear from our discussions there. Enterprise customers know that our solutions operate in speed and on a scale they must have to support their business embedded in the workflow of the critical order-to-cash process. Our implementations are complex. It's not uncommon for Vertex to be connected to multiple instances of SAP, an instance of Oracle in another division, a legacy ERP solution in still another, as well as multiple billing and CRM solutions. And we are providing tax answers across that architecture with no latency and enterprise-level accuracy. These enterprise customers cannot afford for a single customer to experience transaction delays as an AI engine spins through scenarios to deliver a tax answer. They rely on the accuracy Vertex provides in every transaction. Enterprise customers are audited constantly by taxing authorities that cannot afford any risk that a probabilistic AI-driven outcome subject to hallucinations delivers an inaccurate tax answer. And they need accountable traceability for tax positions they take in their compliance. In addition, we estimate that as many as 70% of the tax rules in our content database are not easily mined by AI-driven web scraping. In the United States, below the level of state and county, tax rules for municipalities and tax overlay districts are hard to curate, sometimes embedded in meetings minutes that are not easily sourced on the internet. And in some districts, finding the latest tax rules requires a person-to-person phone call. And all of this requires human judgment and professional curation to codify into the tax content database. In addition, These tax rules are constantly changing at a historic pace, and this is likely to get worse with reduction in federal funding to states as a result of the recently approved tax legislation. I'll now highlight a few business wins. We saw improved momentum in the SAP ecosystem this quarter, driven by ECC to S4 HANA conversions. These transitions created meaningful opportunities for Vertex to expand our footprint with existing customers and win new logos. In the third quarter, we partner with an existing specialty retail customer on a major ECC to S4 HANA transformation. As part of this initiative, the customer advanced their plan to standardize on Vertex, transitioning additional tax functions from a competitor to our cloud platform. This expansion resulted in mid-six figure of new revenue and reinforces our role as a strategic partner in their modernization journey. Another longstanding customer in the manufacturing industry launched a company-wide transformation project this year, including a migration from ECC to S4 HANA. As part of their transformation, the customer added VAT calculation across its operating regions and added several SAP tools, resulting in mid-six figures of new revenue for Vertex. This is an example of how our business grows during migration. In addition to receiving a significant like-for-like increase, many customers use this as an opportunity to license additional capabilities. An existing customer that is a leading North American energy services company expanded with Vertex to cover two companies it recently acquired. This customer, which is currently operating on a legacy Oracle ERP solution, selected our private cloud solution and will eventually migrate its entire infrastructure to the cloud as part of an Oracle Cloud transformation. This customer expansion drove low six figures of new revenue. While our AI-based smart categorization product is still in limited availability, we added a major grocery store chain to our customer base for this new product. The customer staff was struggling with the labor-intensive nature of tax categorization in its delivery business and is excited about the ability to automate this process. This cross-sell resulted in six figures of new revenue for Vertex. This gives you an idea of the magnitude of sales opportunities with this AI-driven application. At present, we are focusing on the retail industry, hence the new business wind, but over time we will expand our capabilities to cover other industries. A leading aerospace and defense contractor recently selected Vertex as its preferred indirect tax solution for one of its consumer-facing subsidiaries, fully displacing a competitor across its global operations, including Brazil and India. This competitive win underscores the strength of Vertex's tax content coverage in complex jurisdictions and is expected to generate mid-six-figure annual revenue. In addition, a global pharmaceutical company selected Vertex as its first external indirect tax provider to support its S4 HANA transformation. This new logo win was driven by Vertex's proven global tax coverage, deep expertise in the pharmaceutical industry, and ability to manage complex requirements. This new business win, which was brought to us by our partner, EY, will also drive mid-six figures of new revenue for Vertex. During a cloud transformation initiative, a global marketing services company replaced an incumbent competitor with Vertex, citing concerns about scalability and infrastructure flexibility. The customer valued Vertex's agnostic deployment model, which aligned with the CIO's preference for private cloud, an option the competitor did not support. This strategic win, sourced through our partner Grant Thornton, represents a six-figure new business opportunity. Finally, during the quarter, we won an e-invoicing opportunity with a global real estate investment trust. which is preparing for upcoming mandates in Belgium, France, and Germany. We will also cover Italy and Spain for this customer. Of note, this customer was driving mid six figures of revenue for Vertex prior to this new business win. E-invoicing will drive high five figures of new revenue. Before I turn the call to John, let me address my succession that we announced in October. I approached the board of directors in early 22 and five and told them of my plan to retire after 26 years at Vertex. However, I did not set a specific timeline as we wanted to make sure we had the right candidate in place. We launched a comprehensive search process led by renowned management recruiting firm Spencer Stewart and considered both internal and external candidates, ultimately found an exceptional new CEO in Chris Young, who will officially join the company next week. Our search surfaced outstanding candidates from top companies around the world, but Chris stood out as the clear choice. His strategic vision, experiencing our ecosystem through his prior role as Executive Vice President of Business Development at Microsoft, and deep familiarity with global enterprises all point to his ability to drive growth and value creation. What truly sets Chris apart, however, is his commitment to fostering a positive, performance-driven culture grounded in respect for people, a quality that aligns closely with our values and leadership philosophy. In addition, Chris was at the vanguard of Microsoft's push into AI and helped shape Microsoft's investment agenda in artificial intelligence and other frontier technologies. His forward-thinking perspective in that regard will be extremely valuable to Vertex and our shareholders. As for me, I'm not going anywhere. I'm merely transitioning. I will stay on as non-executive chairperson of the board, where I will bring all my energy in the months ahead to support Chris and his transition. John will now take you through the financials.