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.

Thanks, David, and good morning, everyone. I'll now review our third quarter financial results and provide guidance for the fourth quarter and full year of 2025. In the third quarter, revenue was $192.1 million, up 12.7% year over year. Our subscription revenue increased 12.7% to $164.8 million. Services revenue grew at 12.8% to $27.3 million, and our cloud revenue was $92 million in the third quarter, up 29.6%. Annual recurring revenue, or ARR, was $648.2 million at quarter end, up 12.4% year over year. Our net revenue retention, or NRR, was 107% compared to 108% in the second quarter. This was impacted in the third quarter by factors David noted in his prepared remarks. Gross revenue retention, or GRR, remained at 95% at quarter end, within our targeted range of 94% to 96%. Our average annual revenue per customer, or AARPC, was $133,484, up 12.4%. For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP in this morning's earnings press release. Gross profit for the third quarter was $142 million and gross margin was 73.9%. This compares with the gross profit of $126.2 million and a 74% gross margin in the same period last year. Gross margin on subscription software revenue was 81.4% compared to 80.5% in last year's third quarter and 83.2% in the second quarter of 2025. And gross margin on services revenue was 28.8% compared to 35% in last year's third quarter and 33.1% in the second quarter of 2025. The lower margin was due to investments in automation that are expected to drive higher margins into the future. Turning to operating expenses, In the third quarter, research and development expense was $16.8 million, compared to $12.9 million last year. With capitalized software spend included, R&D spend was $40.8 million for the quarter, which represents 21.2% of revenue. Selling and marketing expense was $43.4 million, or 22.6% of total revenues, an increase of $5 million and approximately 12.9% from the prior year period. and general and administrative expense was $38.4 million, up $2.6 million from last year. Adjusted EBITDA was $43.5 million, up 12.7% compared to 38.6% for the same period last year, and exceeding our quarterly guidance. This represents an adjusted EBITDA margin of 22.6%. As a reminder, adjusted EBITDA margins are being impacted in 2025 by accelerated investments to support the two acquisitions we made in 2024 related to e-invoicing and artificial intelligence. On the former, we are investing in Ecosia, which we acquired in August 2024, to accelerate country coverage and broaden our go-to-market infrastructure. This represents an investment of approximately $16 to $20 million in 2025. On the latter, we're investing $10 to $12 million this year to productize our smart categorization product and adopt AI technologies in other areas of the business. In the third quarter, operating cash flow was $62.5 million and free cash flow was $30.2 million. We ended the third quarter with over $313.5 million in unrestricted cash and equivalents and $300 million of unused availability under our line of credit. As David mentioned, the board has authorized the share repurchase of up to $150 million. Now turning to guidance. Reflecting the factors mentioned earlier, including customer bankruptcies and faster than expected legacy platform migrations, we now expect fourth quarter revenues of $192 to $196 million. And for the fourth quarter, we expect adjusted EBITDA of $40 to $42 million. reflecting an adjusted EBITDA margin of 21.1% at the midpoint. For the full year of 2025, we now expect revenues of $745.7 million to $749.7 million, cloud revenue growth of 28%, and adjusted EBITDA of $159 million to $161 million, reflecting a margin of 21.4% at the midpoint. David will now make some closing comments before we open up for Q&A.

David? Thanks, John.

I have been in this industry for 26 years. I have seen it go through countless economic, regulatory, and technological cycles. The enterprise segment customer has remained very consistent in their approach to solving their needs for effective tax compliance due to the mission-critical nature of their role. They don't buy on hype. They seek proof. They are focused on mitigating risk and delivering accuracy. They make purchase decisions for the long term based on value. So while we have noted some very specific headwinds to short-term performance the past two quarters, we remain confident that the fundamental drivers for our long-term growth are strong and growing and that Vertex will benefit from them with improved performance as we move into 2026 and beyond. My recent experience at our customer conference reinforced my belief in the strength of our alliance partner relationships as we continue to lean into our partner-first strategy. Our leadership position in the enterprise segment certainly requires continued investment given the pace of accelerating regulatory and technological changes, and in doing so, we are positioned to reward our investors as a result. It is this confidence that is the primary driver for our board's authorization of the $150 million stock buyback program announced today. I'm thrilled to now have Chris Young join our team and work side by side with him in our respective roles to ensure the company realizes the full potential of our opportunities and delivers strong financial performance for years to come.

With that, we will take your questions. Thank you.

We will now begin the question and answer session. To ask a question, we press star and then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and two. At this time, we will pause momentarily to assemble our roster. We have the first question from the line of Joshua Reilly from Needham. Please go ahead.

My questions, I wanted to get your latest thoughts on how you expect the SAP ERP cycle to kind of play out from here. Clearly, there's a lot of companies that still need to migrate to S4 HANA to hit the 2027 deadline. Seems like that's a bit of a stretch. Curious, what's your thoughts in terms of the capacity out there to manage these migrations in the industry? And what are you hearing maybe that improved the deal flow a bit this quarter versus the last couple quarters?

Yes, Josh, thanks for the question. You know, I think industry-wise, I should say, I think the industry's been preparing for this for several years. So I know, you know, in talking to a number of our partners, they've been ramping up staff in anticipation of sort of a back-end process for the migrations that are ahead. So that's what I know. I can't speak to any more in terms of the likelihood of any deviation in the deadline. SAP keeps reinforcing itself. I don't fundamentally see there's a reason changing. I think we've talked about this. The pipeline has remained solid. It's been more the efficiency getting through the pipeline as deals occasionally at a customer level have been slow due to their own migrations slowing down. I think we saw a little bit of the break in that in the quarter, and that's why we were able to highlight the number of SAP wins in the quarter primarily.

Got it. That's helpful. And then maybe a bit more color on, was it two customers migrating to their own homegrown solutions? And is that a portion of their business with you migrating to the homegrown system or full system? And was that built into your prior guidance? Or did you find out about that after you put up your prior guidance?

Yeah, no, this came out. These are customers that didn't go to their homegrown system. They migrated to the Vertex Next Generation Cloud Platform. As you know, any companies that are going through a cloud, you know, leading a cloud migration like we are, there's always a moment where you're paying two mortgages, where you're paying mortgage on the new, you've already relicensed with Vertex, we've gotten the uplift from them, and they're shutting down their old system. And it usually lags on for a short period of time. These were two companies that were extremely large customers of ours that had already migrated to our cloud at a significant price increase that also had We're able to shut down their system faster than we had built into our guidance because they made some internal progress on their systems that they had not forecast when we had our direct engagement with them. So, yes, we do factor that into our guidance as we look at our numbers going forward. But it's just these two happen to get things done faster than they had previously guided to us.

Understood. Thank you. I'll pass it on. Yes. Thank you.

We have the next question from the line of Chris Guntero from Morgan Stanley. Please go ahead.

Hey, guys. Thanks for taking the questions. And, David, let me say, I know you're still going to be around, but it's been a pleasure working with you, and I wish you all the best in this next part of your life here. Maybe on the guidance, I think this is the second time in a row you guys have cut the guide, which I can't remember the last time Vertex has done that. And so... Just at a high level, has the guidance philosophy changed at all? And how are these kind of cuts informing your assumptions that you're putting into the Q4 guidance here?

Yeah, Chris, thanks for the call. No, we have not done this before. You're right. You know, in terms of our philosophy around guidance, this hasn't changed our guidance philosophy one bit. We continue to be thoughtful as we think through guidance. And again, as David had mentioned, there was a couple of things, obviously, this quarter that impacted us a little bit. Some of this BK and migration activity certainly had an impact. We certainly had an impact from some of the timing of deals that closed in the third and what we're expecting to see in the fourth quarter. And again, we continue to focus on that services strategy where we're trying to go partner first and sort of de-emphasize that. And so there were three kind of bigger contributors to why the change for guidance in the fourth quarter. But there hasn't been a change in philosophy from our standpoint.

Got it. Thanks for that, John.

And then it seems like the entitlement growth has been kind of one of the main headwinds on your net retention rate and growth from expanding customers. So I'm curious, like, are there any lessons in terms of, like, or anything we should keep in mind as it relates to, I don't know, renewal cohorts as some of these customers have been renewing over the past few years?

Yeah, Chris, I think it's a fundamental of trying to assess where our customers' growth rates are going to be as they grow through our revenue bands. Obviously, we don't have great visibility in each of our customers' forecast growth rate in terms of whether they're going to continue to just expand usage due to their own growth or not. And I think that's been the headwind we've tried to highlight pretty clearly in the data we've determined from, you know, we spoke to you in Q2. And so it is something we're trying to see if we can get closer to understanding our customers' actually growth guidance that they're giving to the market to see how that will flip to what we expect for revenue bands. But obviously, it's a little bit of a fine line of how much information we have there and how that actually will show up in our revenue bands based on their own revenue, their customers' revenue timing.

Unfortunately, it's sort of like two-step removed from us. Thanks, David. Thank you.

We have the next question from the line of Alex Skylar from Raymond James. Please go ahead.

Great, thank you. David, I'll echo my congratulations on a fantastic career at Vertex here. Switching gears, I wonder, you hired a new head of sales in Europe as well. Can you just talk about that process? What was behind the change in leadership in Europe? And then how are you thinking about kind of Europe as an opportunity heading into 2026 versus maybe a couple of quarters ago?

Yeah, thanks for the kind words. I'm anxious to partner with Chris Young and the future of Vertex. And certainly in my transition, I expect to be, as non-executive chair, person of the board, I will be quite active in helping continue to pursue the strategy of this company. I think Europe, you know, with timing of just a leadership change, we're continuing to expand the complexity of operations that we have over there with the acquisition of Ecosio. And as we push further into the whole e-invoicing push, marketplace. We had a very good quarter in terms of continued growth there by the Ecosia team and our team in general. And just the overall complexity of the opportunity increasing felt like we wanted somebody who had been there and done that at a high level. And so it's just an up-level opportunity there. We really appreciate the gentleman that led that operation for years. But it was a great opportunity with someone we had good relationships connection to bring in. And so we capitalized on it.

Okay, great. And then I don't know if you or John want to take this one, but just as we think about the Q4 growth outlook relative to the kind of the medium term growth outlook that you spoke to earlier this year, how much of the headwinds, like the true ups, the bankruptcies, the early kind of shutting off of on-prem feel kind of one X from your standpoint versus Anything different about the market you're operating in today in terms of just the pace of technology changes or the pace of that SAP transition or e-invoicing adoption kind of broadly? Thanks.

Yeah, maybe I'll start. You know, I think that, you know, from an overall guidance in the midterm, I think the BK migration stuff, again, is stuff that we typically, you know, it was somewhat anomalous to the quarter. I don't think that that's something that's going to be a continual thing there. We have those types of things happen every quarter. What we saw, though, is just a real confluence of a number of real big ones happening in the quarter that really drove that. So I would say from that standpoint, I think that to me is somewhat anomalous in terms of other things. When we look at how the quarter plays out and we look at what next year looks like, keep in mind as you compass out to some of our prior year numbers that we did have some very large true-ups in the fourth quarter of last year. And again, we're anticipating very little in the fourth quarter of this year. So it really drives it drives certain revenue growth next. It mutes a little bit of what the impact truly of this quarter is.

Right. I mean, the actual growth rate for the quarter would be close to 13% if you took out those entitlements. And so I think that is notable. And I do think as you look forward in the invoicing, I mean, obviously we're just getting into the whole land and expand motion we've talked about that we think is really, you know, setting us up well as those France and Germany invoices. deadlines come on in 2026. That's really what we've been pointing for. And I think the timing of those adoptions are pretty much following where we thought it'll accelerate as we move into 26 pretty significantly.

All right, great. Thank you both. Thanks, Alex.

Thank you. We have the next question from the line of Adam Hotchkiss from Goldman Sachs. Please go ahead.

Great. Thanks so much for taking the question, and David, echoing my best wishes to you. It's been great working with you. I wanted to touch on the comments you made on your customer conference and AI. What was it that customers, from your perspective, were most interested in from an AI perspective, and where are they from exploratory to actually starting to put some of these things into practice? And I thought the smartphone

cat call on the retail side was interesting how quickly can you get into other verticals and just get up and running with more customers on that side yeah yeah I think the approach we're taking with the thanks for the call of the questions in the comments certainly the the approach we're taking with AI with the human in the loop is an essential part of what the enterprise market is expecting because of the requirements for traceability and When they get into audits and they have to justify the positions they took on a tax position and understanding the logic that's actually inside of the decision-making is really essential to their processes. So the fact that we're keeping the human in the loop, number one, is critical. I think some of the agent-to-agent work we're doing, we highlighted the encouragement that we're actually directly working with the systems that they run their businesses on. So I highlighted on this quarter, and in Microsoft, the first ever agent to agent interaction between our platform and the Microsoft Dynamics 365 finance and supply chain platform is a really encouraging thing for our customers because it lets them know behind the scenes there will be certain things that will be going on to support their ongoing time to value requirements. So I think that was a really well-received component of what we're doing in the market as opposed to just pushing out AI in terms of direct, you know, like a chat GPT type, you know, a copilot, but actually taking it to a next level where it'll drive efficiency and effectiveness in the market. I think SmartCat as an offering is a really exciting one, and we started to see some of the green shoots we thought were available to us because of the challenges our customers face in categorization of products. And so, Now we're going to start to focus beyond retail. We have that product ready. We're now moving that into trying to generate more in the retail space while we also start to ingest more data. And we'll look at that basically on a quarter-to-quarter basis, to be honest, in terms of how much we can ingest and make it viable for our customer base. Certainly, there's a lot of interest across the customer base for us to do that.

Okay, great. That's really helpful, Kalar. And then on investments and e-invoicing and AI, just curious how those are tracking. I know that EBITDA did come in a little bit better this quarter. Are you still expecting that margin inflection? And I know that Chris isn't on the call, but just maybe reiterate your confidence level and when and sort of the magnitude of that margin inflection would be helpful. Thanks.

Yeah, great question. Yeah, we continue to be on track with the investments that we talked about, the Ecosio investments of $4 to $5 million per quarter. And then the AI investments largely focused around some of the SmartCat activities that David just talked through. They are tracking very well. So we feel good about that. We feel good about the progress that we've seen to date. Again, the plan is to largely have a lot of that behind us as we get into the middle of next year. And I think that we feel like everything's pointed towards that and it continues to be pointed towards that. And We expect to start to see some of that leverage and some of that realization start to show itself up. We did have a good quarter this quarter from an overall margin perspective, and I think we were pleased with the results that came through that. But a lot of that had more to do with some of the leverage we're seeing throughout the rest of our business and just being thoughtful about spend as we entered the back half based on some of the conversations we had at the end of the second quarter. So, again, I think we feel very good about the investment programs that are in place. We expect to continue them. We haven't had any significant changes in our plans in terms of timing or in terms of level of spend. And so I think everything continues to move along there nicely.

Okay, great. Thank you both. You bet. Thanks.

Thank you. We have the next question from the line of Jay Groberg from William Blair. Please go ahead.

Yeah, thanks for taking the questions. And, David, I'll echo my congrats. It's been great working with you over the past few years. Just on the invoicing solution, could you talk about how that product compares to some of your competitors out there just from a country coverage perspective? And as we start seeing some of these larger countries like Germany and France go online next year, do you feel like that product's ready for prime time?

Yeah, sure. Thank you for the kind words. Yes. Yes. Number one, France and Germany, you know, priority ones. The whole strategy from day one was always to make sure wherever there was a greenfield, meaning there was no competitor had already solved for a given country. That was our priority one in terms of where we've been investing. So we're ready for France, Belgium, and Germany to compete on those and very comfortable as those regulations are going into effect with Belgium here in two months and the other two as we move into the middle to back half of – 27 26 excuse me so yes feel very comfortable there number one number two um we continue to expand our coverage as you know we made the acquisition we didn't buy a company that had coverage everywhere we've been focused on the primary economies um and continue to expand our coverage around the primary economies where the where the invoicing is of the greatest import to our customers primary economies meaning where large economies where our customers are doing a lot of business, hence the recent go-to-market partnership we announced with Brinta to accelerate our coverage in some key Latin geographies like Mexico and Brazil, where a lot of our global multinationals have revenue, and we want to make sure we have coverage to be competitive in those regions. So, yeah, that continues to be a steady part of our build-out as we go forward, and that's the investment cycle that John was just highlighting that's going to run through the middle of next year.

Okay. That's helpful. And then there's obviously been some, some moving pieces over the past few quarters, but just thinking a bit longer term, could you double click into the competitive landscape and if you've seen any changes to win rates or competitors making more noise that that might've been showing up at the edges this year?

Uh, you know, it's funny. I literally just made sure, like I always do before these calls to check with my, uh, head of sales here in the U S in particular, where, whether we have, you know, there's a lot of competitors. And no change whatsoever in the competitive dynamics in terms of win rate. Our strategy to continue to focus on the influencers that impact the market, our tight relationships with the big four and other large accounting firms in the investment we're making to de-emphasize our services revenue, which does impact short-term revenue, we've noted that, is also paying off by securing the win rates that we've enjoyed in the past and we continue to see, and certainly some of the investments we're now making in areas like AI and Microsoft, I actually think are gonna improve our opportunities in some new segments.

Great, thanks for taking the questions.

Thank you. We have the next question from the line of Brett Huff from Stephens Incorporated. Please go ahead.

Good morning, and thanks for taking the questions. Two for me. I know you guys have been doing a lot of work given the entitlement changes on digging in and making sure you had more visibility into kind of those entitlement changes. How should we think about those as they roll forward? We've gotten some questions on, we know this entitlements have slowed a little bit. Is there a continued a couple quarter sort of period that we have to get through? Is there anything kind of bolus or timing wise that we need to pay attention to that this may last a little longer? How do you guys sort of frame that up?

Yeah, thanks for the question, Brett. Yeah, in terms of entitlements and how that plays out, I don't think there's really any, you know, any timeframe for which this is going to, this is going to change. There's nothing out there that's going to make, turn this into a, you know, a quicker, a quicker rebound or any, or even a change the rebound to too much. So I think it's going to just take a little bit of time for that to play out. And in the normal course of business through the normal renewal process, we'll see that work out. We try to we do our best to get in front of some of this visibility and do our best to try to make sure that we have that built into our forecast but i think as we talked about the last time you know some of this stuff comes up you know soon you know only just before the renewal base takes place overall generally you know this has i think a little bit more to do just with overall economic activity that's going on at customers and then again to a lesser degree some of their ability to migrate other systems they're using into the into the vertex platform so as they're doing other upgrades and other things, they're continually bringing and moving additional systems and additional entities that they have work going through onto our software. And so if that slows because of other activities that they're doing, sometimes that can take a little longer. But I don't think there's really anything out there that's really going to drive or change this dramatically. It's just a mere passage of time. And again, as we said, we saw a little bit of that happen back around COVID. And again, as

we got a little bit a couple of quarters through that we started to see that snap back as activity picked up again and i'm anticipating we'll see the same here great uh thank you and the second question around sap thanks for the comments earlier both prepared and answers to questions can you maybe just a little bit more unpack that any anecdotal kind of conversations change in tone uh around sap migrations it sounds like they were a little bit better this quarter What is kind of the anecdotal feedback that you've gotten? I'm sure you had a lot of conversations at your user conference. Can you give us any more insight into how those decisions are being made or delayed?

Yeah, I think the exchange was really good. It was just exchanges at our customer conference. It was just two weeks ago, a week and a half ago. And I would say that it was very supportive of what we would expect as we move into 26 at the conference. between our conversations with the large accounting firms that are all there, the many accounting firms that are there, as well as SAP directly, I definitely think that the activity in 26 is going to accelerate as we look forward based on what customers are telling us and what influencers are seeing in their growing backlog that they're going to be processing.

Great. That's what I needed. Thank you so much.

Thank you. We have the next question from Steve Enders from Citi. Please go ahead.

Okay, great. Thanks for taking the questions this morning. And, David, congrats as well. I got the prior sentiments on the call. I guess just to start, I want to ask or clarify, I think, a prior comment you made about seeing some, you know, there's some timing of deals that closed in the quarter that impacted things a bit. And I just want to get a little bit more clarity on that. you know, if there were deal delays, you know, maybe how that is manifesting in the pipeline or how you're kind of thinking about the future pipeline from here.

Yeah, appreciate the question and certainly the comments, Steve. The quarter closed largely at the back end of the – Q3 largely closed at the back end, meaning September was a very large month. And I think that's a behavior where we expect to see, again – good visibility. When we talk about pipeline in a quarter, it means stuff that's already through. It's not caught up in that middle where like, oh, could they get delayed because of their whole ERP process slows down. When we talk about guidance, when we're judging about guidance in the quarter, it's based on what he has visibility to that's already pretty far down the pipe of we've already been chosen. It's more about like legal getting through their process and the normal, you know, purchasing process, if you would, to close. And so I think the process is laid out pretty consistent for the quarter as we look forward to what we expect to be a normal quarter in Q4. It's our largest quarter, and we're typically headed to that way with December being the largest month, and I would expect no difference to that whatsoever.

Okay.

Sorry, but to clarify, there were deals that got pushed out or things that didn't close as you were originally expecting here?

No, I think in Q3, we closed the deals we thought we were going to close. They closed later in the quarter than we expected, for sure. That's why I said September was a very large month, which obviously cost us a little bit of revenue that would have normally been recognized in the earlier months of the quarter. And as we look forward to Q4, I think we're seeing the same setup, where December is going to be a very large month. quarter, but the pipeline of activity is where we forecast to be, and it is built into our thinking about guidance.

Gotcha. Okay. That's helpful. And just on Ecosio, I appreciate the revenue contribution this quarter, but are you feeling like that is on track for this year now? Did you kind of see the catch-up that you were expected and I think on track for the, was it a 16 million revenue number that you previously talked about? Is that still line of sight there?

Yeah, absolutely. We still have line of sight for that. I mean, I think they've made some real good progress and we've seen some nice upticks in the business activity over there as well as the momentum that's underlying their pipeline. And so we absolutely still have line of sight to that. And again, between the combination of that and then the continued investment we're making, you know, we're making in that business, we're all in, we're all in on e-invoicing. And so I think, yeah, we expect to see those results come through as anticipated.

And Steve, I think that just dubs to the, you know, the deadline of Belgium is coming. And that's, I think that, you know, these are decisions that are being made. And that's why, you know, we have that kind of visibility. I think you're going to see the exact same thing play out as we move next year into the larger economies of France and Germany, where, France goes live in September, and I would expect to see, you know, a real increase in activities we get through Q1, not so much, but certainly Q2 and into Q3, you'll see a real uptick. And then the same thing as we think about Germany going live in, you know, January of 27 with back half of Q4, which is pretty much consistent with what we've been telegraphing based on our experience.

Okay, perfect. Great to hear. And thanks for making the question. Thanks, Steve.

Thank you. We have the next question. We'll line up Andrew De Gasperi from BNP Paribas. Please go ahead.

Thanks. And, David, I'll add my own words as well. It was great working with you over the years, and good luck in the chairman role. Just wanted to, over the last, I guess, Q&A, I just getting a message that between the e-invoicing opportunity, the SAP migrations, And then if you add kind of the easier comps relative to this year, I mean, is there any reason why your business shouldn't accelerate from a top-line perspective next year? I know you don't give out guidance, just trying to get a better sense directionally where we're going.

Yeah. Andrew, I'll start with that. Again, as we think about next year, we're not giving guidance now. We'll do that when we have our call in February for next year. But we do anticipate certainly top-line revenue growth next year. I think there's a lot of fundamental factors there. that are contributing. Again, as David talked about, the invoicing activity continues to be strong. The SAP pipeline and the activity that's there are going to be big contributors to growth next year. And so absolutely, we anticipate revenue growth into next year, significant revenue growth into next year because of those factors that are out there and that are still very prevalent in the business.

Great. And then maybe just one on terms of the, I think you mentioned some comments earlier about some customers are paying two mortgages when they do these transitions. Just wondering, you know, how much of that customer base is right now doing that? Because if you look at your cloud versus on-prem revenue, obviously, I guess the question I have is, do we see a much broader dislocation between those two as we look into next year?

No, not at all. No reason to think that these, first of all, we always have good visibility and, you know, we work hard to factor that into our guidance so that it doesn't come up as a surprise. in terms of what happened in Q3. So, no, number one, I don't think. And we only see typically, we talk about 2% to 3% of our customers migrating every year. And I've talked about, you know, there's an on-prem base that's never going to go away. Subscription revenue is going to be around for quite some time. We're already up to close to 57% or so of our business is cloud. And that's where it's growing. And I think we'll see a slower, you know, we'll continue. The ones that haven't migrated are going to be the longest migrating to take the time to migrate, just given the nature of those businesses that we know haven't migrated. So no, I see absolutely no reason to think we're going to have that kind of a surprise that occurred. It's just these customers did their shutdown faster than normal, but I'm not worried about that actually at all.

Thank you. Thank you.

We have the next question from the line of Patrick Valraven from Citizens. Please go ahead.

Great. Thank you very much. David, I think you first came to our conference in 2007. So it's been a pleasure working with you over the last 18 years. It's probably for Joe, but, you know, the prepared remarks didn't address the 2028 targets. So can we just, you know, address it head on? Are you reiterating the 2028 targets? you know, 20% plus subscription growth and 30% plus cloud growth today?

Yeah, I think the buyback is a signal by our board for its confidence in the future of this company, 100%. And I certainly think we continue to be cloud first in everything we're doing. So I see no reason to fundamentally think that that's going to shift away from the growth we expect in the future. And certainly with what we're seeing in e-invoicing and what should pick up in 26 even more so from SAP as their deadline approaches. I don't see a reason to fundamentally shift anything we've said in our guidance. The numbers that you've seen in entitlements pull back. We saw this in COVID, and then it snapped back nicely. I see, once again, just the fundamental nature of who the enterprise customer is. They're going to grow through bans, and we're naturally going to get those entitlements. And so, no, I... have no data to suggest a shift in what we're, we're fundamentally what we've said.

Yeah. Terrific. Terrific. And then can I just ask about the bankruptcies? Cause I just looked two of them up quickly. Um, and, uh, party city and big lots, both of those were announced in December of 24. So how does that play out? Like, yeah. How did, you know, how does that work?

So when companies fired file chapter 11, sometimes they continue to, be in business. They stay, continue to operate for years. And, and as long as you're in business, you have to charge sales tax. So we've had customers in the past have gone bankrupt and we continue to collect licensed revenue. It may be on a reduced rate because their revenue has gone down. But we continue to collect revenue from these are ones that officially went away and you don't know when that's going to end. We have no way of knowing that just because they filed chapter 11 doesn't mean we're necessarily going to see an immediate, uh, end of that license, that license revenue.

Okay, great. Yeah, sure. Thank you. Thank you.

We have the next question on the line of Rob Oliver from BID. Please go ahead.

Great. Thank you, guys. Good morning. Thanks for taking the questions. David, first one for you is just one of the themes, I think, at the analyst day back in March was around tax not just as compliance but as business enablement. And as part of that, you talked about not just sort of the traditional enterprise channel, which has been a big focus of this call, but also some of the marketplaces like Microsoft. SAP Hybris and Salesforce Demandware. And obviously Shopify is moving up market and there hasn't been any comment on the call about this. So I really wanted to hear your view on where you guys are today relative to that opportunity where there really seems to be a burgeoning opportunity within the tech software market. And then I had a quick follow-up for John.

Yeah, sure. I had Shopify on stage with me at my customer conference and really talking about the partnership and what we're doing with them, really working in lockstep as they continue to expand and they're rapidly succeeding upmarket. There's just a natural synergy between our two organizations. And so in every quarter, I try to pick out a few wins that are notable. Coming out of Q2, there's a lot of questions about SAP pipeline. We had a really good quarter in SAP wins. So I thought I would just highlight a few of those on the call, but You know, we continue to make progress across the entire base of our key technology ecosystem partners, number one. And number two, I see no reason that's not going to change. And in fact, you may have noticed we launched our Kintsugi powered by Vertex offering, which I think is just going to increase a new opportunity for us to generate growth in the future. as we look at their ability to actually work at the lower end of the market, which is really highly suspect or highly appropriate for the type of solution that AI has, that AI can deliver through Kintsugi.

Great. That's helpful. Thanks, David. And then, John, just, you know, I know it seems like the challenge now is more about entitlements, true-ups, than it is about the ERP opportunities. So just on that topic, you know, with kind of two quarters in a row of the guidance coming down, you know, maybe talk a little bit more about how you factor those expectations into your guide for Q4 and how we might get comfortable with the thought that, you know, that's now caught you guys by surprise, I think, a couple quarters here. So how to think about that headed into 26. Thank you very much.

Yep. Thanks, Rob. You know, certainly, you know, when we revised back in Q2, entitlements was a big part of this. Entitlements and true-ups were a big part of the story. And that certainly was something we took into consideration when we set that guidance. We continue to look at those, monitor those throughout this quarter. Again, a couple of the things that we pointed to this quarter that really impacted Q4 have less to do with the entitlements and the true-ups, because I think we feel good about how we've captured that, but a little bit more had to do with around timing as well as some of this BK migration things that have moved along. Again, I feel like the BK migration, as I mentioned earlier, was somewhat anomalous, and the timing of the quarter certainly is something that we're going to use and will continue to use as we think about you know, our forecast for 2026 and then beyond as we manage through that. So that's what I would say, Rob, in terms of kind of how we're thinking about guidance. I don't think we've changed our – we've not changed our philosophy in any way. So we'll continue to put our best foot forward and try to ensure that we are giving clear and accurate information out there. Great. Much appreciated. Thanks very much.

Thank you. We have the next question from Lionel Samad Samana from Jefferies. Please go ahead.

Hi, good morning. Most of my questions have been answered, but if I just think about the bankruptcies, they were all in the retail space. So that might just be probably coincidence more than anything else. But, John, can you just remind us where your biggest vertical concentrations are in terms of the book of business? and if you're at least within the retail sector taking a more conservative view, given that that's where the bankruptcies were, and then I have one follow-up.

Yeah, good question, Samad. Thank you. In terms of kind of where our big verticals are, certainly manufacturing is our largest. Retail kind of comes in soon after, and so they're bigger focused. You know, we certainly have taken a look at some of the rest of the customers within our vertical of retail to anticipate if anything is out there, but At this point, there's really nothing in there that caused us to pause or adjust our thinking in terms of kind of any exposures there. We feel like we're very well reserved and we're in a good spot.

Understood. And maybe just on the long-term targets, I know Pat asked the question, but I'll ask it a slightly different way. I mean, with the management transition going on, with the headwinds that the businesses face, if I think about the 4Q guidance kind of pointing to what looks like about high single-digit growth, it seems like 20% is a very tough lift to get to by 2028. And so why not get rid of those targets and make it easier, especially as you go through the management transition, and just help us think about, you know, what's the path to getting to 20%?

Yeah, I guess what I might start with, Samad, is, again, I think we feel like all the overall demand drivers of the business that we've talked about, as David mentioned, are still there, and we feel good about those. you know, there is, you know, there is some transition that's going on here and we'll kind of, well, we're going to certainly manage to that as David has articulated over time. But I think at this point, we still feel like that the, all the things that got us to, you know, those expectations back in, you know, back in the March timeframe when we gave that are still in place and in play. And we expect to see, we expect to see some, you know, some additional progress towards that as we think about 26 and then 27, certainly as well. And so, In terms of kind of what we do with respect to longer-term guidance, I think we feel like it's a bit too early. And again, just given the demand that's in front of us, I don't know that it's the right time now to change anything.

Great. Thank you for your questions. Yep. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Joe Crivelli for any closing remarks.

Thanks, everybody, for joining us today. If you have any follow-up questions or if you'd like to schedule additional time with the team, please send me an email at investors at vertexinc.com. Have a great rest of your day, and we look forward to speaking with you in the coming weeks. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.