Vertex Conference Call Summary Company Overview - **Company**: Vertex (NasdaqGM:VERX) - **Industry**: Technology, specifically focusing on tax compliance and automation solutions Key Points and Arguments Leadership and Background - Chris, the new leader at Vertex, has over 30 years of experience in the technology industry, particularly in cybersecurity, having held roles at Cisco, RSA Security, VMware, Intel, and McAfee [2][3][4] Customer Insights - Customers have validated Vertex's reputation for accuracy and reliability, allowing them to operate leaner tax departments [13] - There is a recognized need for Vertex to innovate and bring new capabilities to market more quickly [15] - AI tools are seen as a significant growth opportunity to enhance customer experience and operational efficiency [16] Business Performance - Vertex reported a strong new business quarter at the end of 2025, with overall business growth and increasing Annual Recurring Revenue (ARR) [19] - However, there was a 5% drop in Net Revenue Retention (NRR), attributed to customer churn and external factors like bankruptcies and mergers [24][25] - Approximately 70% of new revenue opportunities are expected to come from existing customers, emphasizing the importance of customer retention [25] AI Integration - Vertex is focusing on AI capabilities to enhance product experiences and automate manual tasks, such as tax determination processes [29][30] - The introduction of tools like Smart Categorization aims to reduce manual effort in categorizing products for tax purposes, which is currently a labor-intensive task for customers [32] E-Invoicing and Compliance - E-invoicing mandates are becoming increasingly common globally, with governments requiring real-time transmission of invoices to enhance tax compliance [50][54] - Countries like Italy, Belgium, France, and Germany are implementing e-invoicing, which is expected to drive demand for Vertex's solutions [54][55] - E-invoicing is seen as foundational for continuous audit compliance, helping companies manage their compliance posture across jurisdictions [55][56] Market Position and Strategy - Vertex operates on a consumption-based model rather than a seat-based model, which aligns well with market trends [35] - The company is well-integrated into customers' ERP systems, making accuracy critical for their operations [35][36] - Vertex aims to leverage AI to enhance its offerings and maintain a competitive edge in the market [36][61] Competitive Landscape - The company acknowledges the presence of AI-native startups but believes its complex tax solutions serve a different market segment [62] - Vertex's comprehensive platform combining e-invoicing and compliance is viewed as a differentiator in the market [64] Additional Important Insights - The leadership is focused on balancing growth and investment, particularly in e-invoicing and AI capabilities [38][46] - There is a recognition of the need for ongoing adaptation to changing compliance mandates and customer needs [56][57] This summary encapsulates the key discussions and insights from the Vertex conference call, highlighting the company's strategic direction, market challenges, and growth opportunities.

Financial Data and Key Metrics Changes - Revenue for the fourth quarter was $194.7 million, up 9.1% year-over-year, and in line with guidance [21] - Full-year revenue reached $748.4 million, an increase of 12.2% from 2024 [21] - Adjusted EBITDA for the fourth quarter was $42.5 million, an increase of 11.6% year-over-year [28] - Annual recurring revenue (ARR) was $671 million at quarter end, up 11.3% year-over-year [24] - Gross profit for the fourth quarter was $147.4 million, with a gross margin of 75.7% [25] Business Line Data and Key Metrics Changes - Subscription revenue in the fourth quarter increased 8.9% year-over-year to $166.2 million [21] - Services revenue grew 10.2% year-over-year to $28.5 million in the fourth quarter [23] - Cloud revenue for the fourth quarter was $94.6 million, up 23% year-over-year [23] Market Data and Key Metrics Changes - New logos increased by 20% in 2025, indicating healthy revenue from new customers [9] - E-invoicing mandates are expected to drive growth, particularly in the second half of 2026 [39] Company Strategy and Development Direction - The company aims to accelerate revenue growth through AI transformation and innovation [7][10] - Focus on expanding customer success coverage and leveraging AI tools to enhance customer service [9][60] - Plans to broaden the functionality of Smart Categorization and expand into additional industries [11] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges in 2025, including higher customer attrition primarily due to M&A and bankruptcies [8] - Confidence in achieving 2026 revenue guidance of $823.5 million to $831.5 million, with expected cloud revenue growth of 25% [30] - Emphasis on restoring growth and capitalizing on AI and e-invoicing opportunities [20] Other Important Information - The company repurchased approximately $10 million of its shares in the open market [29] - Ended the fourth quarter with over $314 million in unrestricted cash and cash equivalents [29] Q&A Session Summary Question: Can you elaborate on the losses to competitors at the lower end of the market? - Management noted that attrition was higher in 2025, primarily due to M&A and bankruptcies, with the highest churn in smaller customers [35] Question: How confident are you in achieving the guidance for next year? - Management expressed confidence in the guidance, considering various factors and aiming to return to a beat-and-raise cadence [39] Question: What parallels can you draw from your previous experiences that will help at Vertex? - Management highlighted the importance of AI transformation and the need for accuracy in tax compliance, drawing parallels from experiences at Microsoft [44][48] Question: What are your expectations around net retention rates? - Management is focused on improving net retention rates through new product offerings and proactive customer engagement [50] Question: How is the pipeline for 2026 shaping up, particularly with SAP customers? - Management reported steady growth in the SAP pipeline, with ongoing partnerships and win rates remaining strong [55] Question: Have you seen any AI tech budget crowding out affecting entitlement slowdown? - Management has not observed explicit budget crowding out in their business, indicating continued strength in their solutions [88]

Financial Data and Key Metrics Changes - Revenue for the fourth quarter was $194.7 million, up 9.1% year-over-year, and in line with guidance [21] - Full-year revenue reached $748.4 million, an increase of 12.2% from 2024 [21] - Adjusted EBITDA for the fourth quarter was $42.5 million, reflecting an increase of 11.6% year-over-year [28] - Annual recurring revenue (ARR) was $671 million at quarter end, up 11.3% year-over-year [24] - Gross profit for the fourth quarter was $147.4 million, with a gross margin of 75.7% [25] Business Line Data and Key Metrics Changes - Subscription revenue in the fourth quarter increased 8.9% year-over-year to $166.2 million [21] - Services revenue grew 10.2% year-over-year to $28.5 million in the fourth quarter [23] - Cloud revenue for the fourth quarter was $94.6 million, up 23% year-over-year [23] Market Data and Key Metrics Changes - New logo revenue was up 20% in 2025, indicating healthy demand for Vertex's solutions [9] - E-invoicing mandates are expected to drive growth, particularly in the second half of 2026 [39] Company Strategy and Development Direction - The company aims to accelerate revenue growth through AI transformation and innovation [7][10] - Vertex is focusing on expanding its customer success coverage and leveraging AI tools to enhance customer engagement [9] - The company plans to broaden its Smart Categorization offering and expand into additional industries [11] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges in 2025, including lower entitlement growth and higher customer attrition, primarily among smaller accounts [8] - The company is optimistic about restoring growth through new product offerings and proactive customer engagement [20] - Management emphasized the importance of AI in improving workflows and driving future growth [10][12] Other Important Information - The company repurchased approximately $10 million of its shares in the open market [29] - Vertex ended the fourth quarter with over $314 million in unrestricted cash and cash equivalents [29] Q&A Session Summary Question: Can you elaborate on the losses to competitors at the lower end of the market? - Management indicated that attrition was higher in 2025, driven by M&A and bankruptcies, particularly among smaller customers [35] Question: How confident are you in achieving the guidance for next year? - Management expressed confidence in the guidance, citing e-invoicing and AI products as potential growth drivers [39] Question: What parallels can you draw from your previous experiences that will help at Vertex? - Management highlighted the importance of AI and the need for accurate tax compliance as key areas where previous experiences will be beneficial [44][48] Question: What are the expectations around net retention rates? - Management is focused on improving net retention rates through new product offerings and proactive customer engagement [50] Question: How is the pipeline for 2026 shaping up, particularly with SAP customers? - Management noted steady growth in the SAP pipeline, with ongoing partnerships and win rates remaining strong [55] Question: Have you seen any AI tech budget crowding out that might have driven the entitlement slowdown? - Management has not observed explicit budget crowding out affecting their business [88]

Financial Data and Key Metrics Changes - Revenue for Q4 2025 was $194.7 million, up 9.1% year-over-year, and in line with guidance [20] - Full-year revenue reached $748.4 million, an increase of 12.2% from 2024 [20] - Adjusted EBITDA for Q4 was $42.5 million, reflecting an 11.6% year-over-year increase [27] - Annual recurring revenue (ARR) at year-end was $671 million, up 11.3% year-over-year [23] Business Line Data and Key Metrics Changes - Subscription revenue in Q4 increased 8.9% year-over-year to $166.2 million [20] - Services revenue grew 10.2% year-over-year to $28.5 million in Q4 [22] - Cloud revenue for Q4 was $94.6 million, up 23% year-over-year, with full-year cloud revenue at $352.9 million, up 27.9% [22] Market Data and Key Metrics Changes - New logo revenue was up 20% in 2025, indicating healthy demand from competitive takeaways and customers switching from homegrown solutions [8] - Customer attrition was concentrated in smaller accounts, with the average annual revenue per lost account under $50,000 compared to an overall average of $138,000 [6] Company Strategy and Development Direction - The company aims to accelerate revenue growth through AI transformation and innovation in compliance and e-invoicing [5][19] - Vertex is focusing on expanding customer success coverage and leveraging AI tools to enhance customer engagement and retention [7][9] - The company plans to broaden its Smart Categorization offering and expand into additional industries [10] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges in 2025, including lower entitlement growth and higher customer attrition, primarily driven by M&A and bankruptcies [6] - The company is optimistic about restoring growth, particularly through AI and e-invoicing opportunities [19] - Management emphasized the importance of customer trust and the need for continuous innovation to maintain market leadership [47][48] Other Important Information - The company repurchased approximately $10 million of its shares in Q4 under its stock buyback authorization [28] - Vertex ended Q4 with over $314 million in unrestricted cash and cash equivalents [28] Q&A Session Summary Question: Can you elaborate on the losses to competitors at the lower end of the market? - Management noted that attrition was higher in 2025, primarily due to M&A and bankruptcies, with the highest churn in smaller customers [35] Question: How confident are you in achieving the guidance for next year? - Management expressed confidence in the guidance, citing e-invoicing and AI products as potential growth drivers [37][39] Question: What parallels can you draw from your previous experiences that will help at Vertex? - Management highlighted the importance of AI transformation and the need for accurate tax compliance as key areas of focus [44][47] Question: What is the outlook for net retention rates? - Management is focused on improving net retention rates through new product offerings and proactive customer engagement [49][51] Question: How is the pipeline for 2026 shaping up, particularly with SAP customers? - Management indicated steady growth in the SAP pipeline, with ongoing partnerships and win rates remaining strong [55][57] Question: Have you seen any AI tech budget crowding out affecting entitlement slowdown? - Management has not observed explicit budget crowding out in their business, indicating continued demand for their solutions [90]

Financial Data and Key Metrics Changes - Revenue for Q3 2025 was $192.1 million, representing a year-over-year increase of 12.7% [4][21] - Adjusted EBITDA reached a record $43.5 million, exceeding guidance by $2.5 million, with an EBITDA margin of 22.6% [4][24] - Free cash flow was strong at $30.2 million for the quarter [4][24] - Annual recurring revenue (ARR) grew 12.4% to $648.2 million, with average annual revenue per customer increasing to $133,000 [4][22] Business Line Data and Key Metrics Changes - Subscription revenue increased by 12.7% to $164.8 million, while services revenue grew by 12.8% to $27.3 million [21] - Cloud revenue was $92 million, up 29.6% year-over-year [22] - Gross revenue retention (GRR) remained stable at 95%, while net revenue retention (NRR) decreased to 107% [4][22] Market Data and Key Metrics Changes - The company experienced customer turnover at the low end of its customer base and discontinuation of legacy product usage due to migrations to new cloud solutions [5] - The bankruptcy of three large enterprise customers impacted retention metrics by approximately $2 million [5] Company Strategy and Development Direction - The company is focused on expanding its cloud solutions and e-invoicing capabilities, with significant investments in automation and AI initiatives [8][9] - A share repurchase program of up to $150 million was authorized by the board, reflecting confidence in long-term growth opportunities [8][24] - The company aims to penetrate existing customer bases further and capitalize on upcoming e-invoicing mandates in major countries [8][9] Management's Comments on Operating Environment and Future Outlook - Management acknowledged specific market headwinds but expressed confidence in the long-term growth drivers [26] - The company anticipates improved performance as it moves into 2026, supported by ongoing growth initiatives and customer demand [26][62] - Management highlighted the importance of maintaining strong relationships with partners and adapting to regulatory changes [26][38] Other Important Information - The company announced a leadership transition, with Chris Young set to join as the new CEO [19][20] - The company is investing in AI and e-invoicing solutions to enhance its product offerings and market competitiveness [9][45] Q&A Session Summary Question: Thoughts on SAP ERP cycle and migration capacity - Management noted that the industry has been preparing for SAP migrations, with partners ramping up staff to manage upcoming transitions [30] Question: Guidance philosophy and recent cuts - Management confirmed that the guidance philosophy remains unchanged despite recent cuts, attributing them to specific customer activities [33] Question: Customer retention and entitlement growth - Management acknowledged challenges in customer growth rates and emphasized the need for better visibility into customer forecasts [34] Question: Leadership change in Europe - The leadership change was driven by the need for experienced management to handle the increasing complexity of operations in Europe [38] Question: Competitive landscape and win rates - Management reported no significant changes in competitive dynamics, maintaining strong win rates and focusing on strategic partnerships [50]

Financial Data and Key Metrics Changes - Vertex reported Q4 revenue of $178.5 million, a 15.2% increase year-over-year, and adjusted EBITDA of $38.1 million, up 21.3% compared to the previous year [6][34] - For the full year, total revenue reached $668.8 million, reflecting a 16.5% increase from 2023 [34] - Annual recurring revenue (ARR) grew nearly 18% to $603.1 million [6][37] - Net revenue retention (NRR) was 109%, down from 113% in the previous year, attributed to a strong Q4 last year [7][38] - Gross profit for Q4 was $133.9 million with a gross margin of 75%, compared to 70.7% in the same period last year [41] Business Line Data and Key Metrics Changes - Subscription revenue in Q4 increased 16.8% year-over-year to $152.6 million, while services revenue grew 6.8% to $25.9 million [36] - Cloud revenue for Q4 was $76.9 million, up 27% year-over-year, with full-year cloud revenue at $276 million, a 28.6% increase [36][37] - Average annual revenue per customer (AARPC) for Vertex standalone increased 14.8% year-over-year to $136,000 [8][40] Market Data and Key Metrics Changes - The company noted a significant increase in new logo additions, with a record number of new logos in Q4 [9] - The growth in the enterprise market is driven by the ongoing ERP migrations, particularly with Oracle and SAP [5][21] - The indirect tax regulatory environment is becoming increasingly complex, creating demand for Vertex's solutions [14][15] Company Strategy and Development Direction - Vertex is focusing on expanding its e-invoicing solution, which integrates VAT compliance and is well-received in the market [16][18] - The company plans to accelerate investments in e-invoicing and AI-related tools to enhance its product offerings [49][50] - Vertex aims to leverage its strong relationships with ERP vendors to capture more market share and drive growth [11][20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the pipeline for 2025, noting no slowdown in SAP activity and an increase in pipeline visibility [57][58] - The company anticipates NRR to rebound above 110% in 2025, supported by increased cross-sell opportunities [8][39] - Management highlighted the importance of addressing the evolving indirect tax compliance landscape as a key growth driver [30][31] Other Important Information - Vertex ended Q4 with over $296 million in unrestricted cash and cash equivalents, with an additional $300 million available under its line of credit [45] - The company expects total revenue for 2025 to be in the range of $760 million to $768 million, representing a year-over-year growth of 14.6% [46] Q&A Session Summary Question: Can you provide more detail on the ERP migrations around Oracle and SAP? - Management confirmed strong relationships with both Oracle and SAP, with no observed slowdown in activity and an increase in pipeline as they entered 2025 [57][58] Question: Why is the company increasing investments despite expected margin declines? - Management indicated that the acquisition of ecosio and the need to grow that business justified the increased spending, which is seen as a strategic move for long-term growth [62][64] Question: What is driving the improvement in gross margins? - Management noted that revenue true-ups contributed to higher margins in Q4, but advised caution in extrapolating these margins into the future [68][72] Question: How should we think about services revenue growth in 2025? - Management expects services revenue to remain flat, focusing on enhancing customer experience rather than being a primary revenue driver [74] Question: What are the expectations for AI-related investments and their impact on revenue? - Management anticipates that smart categorization will be available this year, potentially leading to ARR lift, although revenue recognition may lag [83][85] Question: Can you elaborate on the early adopters of ecosio? - Management reported a mix of larger and mid-sized customers adopting ecosio, with positive feedback on the integration of VAT compliance and invoicing solutions [95][98] Question: What is the strategy for go-to-market investments in Europe? - The majority of investments will focus on product development for ecosio, with some resources allocated for market coverage to support growth in Europe [121][123]