Q3 2020 Vertex Inc Earnings Call
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Good morning, and welcome to birth, Texas third quarter 2020 conference call.
Reminder, today's call is being recorded and your participation implies consent to such recording at this time all parts.
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Question answer session will follow the formal presentation.
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Thank you good morning, everyone and thank you regarding the Vertexs financial results conference call for the third quarter ending September Thirtyth 2020 on the call today, we at vertex CEO gave to Stefano and CFO John <unk>.
Before we begin to lobby to provide disclaimer regarding forward looking statements on this call, including the Q1 a portion of the call may include forward looking statements relate to the expected future results for our company and are therefore forward looking statements. Our actual results may differ materially from objections due to a number of risks and uncertainties risks and uncertainties that forward looking statements.
Our subjects, who are described in our earnings release and other RCC.
Today's remarks will also include references to non-GAAP financial measures additional information, including reconciliations between non-GAAP financial information to the GAAP financial information is provided in the press release.
This conference call will be available for replay via webcast through Vertexs Investor Relations website at IR Dot vertex Inc. dot com.
We will begin with an overview of Bridgetex.
Buyers are quarter John.
John will then take you through a review of the financials before we proceed to Q1.
I'll now turn the call over to David.
Thanks on Kate and welcome everyone. Thank you for joining us today.
I'm pleased to share that we delivered strong third quarter performance across all of our key metrics, which I think is a testament to the resilience of our business and our ability to drive sustainable growth and profitability.
I'm so proud of how our teams have maintained their focus on delivering results and supporting our customers in these challenging times.
We saw double digit year over year top line growth with accelerated cloud adoption, among both new and existing customers.
Which reflects the strength of our hybrid approach to meet complex customers, where they are in their rights you roadmap and when they're ready. They know vertex has to cloud solution that will serve their complexity.
Our operational discipline led to year over year improvements in several bottom line metrics, which John will speak to in a moment.
From a macro perspective, it's clear that digital transformation is accelerating for many companies as they are adapting their business models and operations to a new normal and our momentum reflects the increased scale and complexity of our customers tax operations in supporting these initiatives.
Our strong financial results underscore the value that protect springs to our customers every day and their confidence in our solutions to help them meet the challenges ahead.
Throughout this unique and challenging year, we have maintained our investments in key areas, such as sales and marketing customer success and our partner ecosystem.
We believe our strong results validate these investments and fueled our growth.
We also believe the macroeconomic drivers continue to create systemic opportunity here in the U.S. and abroad, which aligns to our strategy.
I also want to add that despite economic uncertainties, we continue to accelerate R&D investment into Q4 and beyond while still delivering strong financial performance.
Positioning us to capitalize on growth opportunities now and what we foresee in the future as the economy improves and indirect tax plays a central role in the recovery for jurisdictions globally.
Now I'd like to share some notable highlights from the quarter.
First we continue to expand existing customer revenues, we had a number of our existing customers accelerating omni channel strategies and expanding their investments with US Tonight is tax complexities as they extend their business models across multiple regions and business applications.
This quarter, we expanded our relationship with one of the world's largest home improvement companies, who have been leveraging our solutions for E Commerce.
And now have expanded the use of our solutions for their retail stores and to manage consumers you stuck in their purchasing operations.
We believe is omni channel accelerates and some of the world's biggest brick and mortar companies. We will continue to be the leader in supporting their offline and online operations.
We're also helping a global retailer expand its mobile applications for customer order and payment across thousands of stores in dozens of countries.
Next I'd like to highlight how digital transformation is also bringing a whole new set of customers to us.
Many of the fastest growing new economy companies, who delivery logistics leasing education and entertainment services are realizing as their businesses grow exponentially that they need enterprise grade tax automation.
Another example is where we leverage our long standing partnership with Oracle to.
To bring first to market cloud to cloud integration with Oracle ERP cloud and deliver our solutions on Oracle cloud infrastructure.
This is helping a large grocery chain to enable door to door delivery as part of its digital transformation.
They are also implementing our solutions to enhance their procurement processes and specifically the taco the complexities of consumers use tax.
Third we continue to expand our partner ecosystem.
We're seeing many of the platform and infrastructure providers, who are supporting digital transformation in payments cloud services and communication infrastructure, adopting our solutions to support and enable their growing customer base.
This quarter, we introduced new integration supporting oral commerce, one of the leading b to B E commerce platforms, and new integrations with Sep concur for expense and invoice management.
In the Midmarket, we announced certified integration with acute medical.
A leading cloud ERP provider in that segment further expanding the opportunity to acquire new customers through our channel partnerships and direct sales efforts.
And we expanded our relationship with the accounting from video to provide services to members of their video Alliance USA program, a nationwide association of independently own local and regional accounting.
Consulting and service firms.
This builds upon the approach we started with our exclusive C.P. dot com relationship, enabling their member firms to leverage our solutions.
In addition, we continue to expand our global footprint.
As expected.
The H. in Europe continues to get more complex and the pace of change increasing.
We're seeing new opportunities emerge there for example, a luxury auto company, who is building connected car experience is through mobile applications is leveraging our solutions to automate compliance for those digital services.
Also.
The regulatory environment continues to grow and complexity and we have responded delivering new and expanded tax concept to increase coverage in Brazil, which is one of the most complex tax environments.
Our work there is enabling one of the largest companies in the world to expand into additional states in Brazil.
In addition, we continue to support tax changes related to VHP COVID-19 around the world.
And in North America, we significantly enhanced content for the leasing retail and food and beverage industries.
Finally, I'm thrilled we are sustaining our investments in new product innovation.
But the pace of change in Commerce and compliance. We believe it is important to continue innovating and extending the functionality and breath of our software and solutions.
We completed a very interesting proof of concept with one of the world's largest marketplace. This quarter involving machine learning attacks categorization to enable them to quickly onboard new merchants.
Now the teams are working to bring that to commercial availability, both for our enterprise and marketplace customers.
We believe our leadership in global enterprise tax automation positions us well to continue to capitalize on the demand, resulting from business regulatory and technology transformations, especially as the global economy continues to rely on indirect taxation as a major source of revenue.
We realize there are economic geopolitical and social uncertainties ahead, but I believe that we are well positioned to serve our customers and partners in the months to come.
I'm also incredibly proud of how all 1100 vertex employees have showed up over these past months demonstrating great resilience in adapting to a whole new work environment without missing a beat in supporting our customers partners and communities.
In fact this week, we hosted our first ever virtual customer conference, which is our annual event, where we bring customers partners and prospects together to connect on regulatory trends technology innovation and best practices.
That maximize the value of their vertex investments.
One of the benefits of being virtual this year is being able to reach two to three times bigger audience. Then we would in a physical destination.
We saw tremendous interest with nearly 2000 customers and partners in attendance and well over half of them were first time attendees and new customers.
The conversations we're having with them continues to affirm our strategy and the value we are delivering to them every day.
Exchange also enables us to expand those customer relationships and provide enterprise grade end to end capabilities to address the growing tax complexities in their business.
I'll now turn it over to John to discuss our financial results for the quarter and guidance for the year.
Thank you David and good morning, everyone.
Today, I'm going to <unk> to discuss our third quarter 2020 results and then provide Q4 and full year guidance.
Total third quarter revenue grew at 14.8% year over year to reach $94.6 million.
Subscription revenues grew 12.3% year over year to $79.8 million.
Our annual recurring revenue were at four A., our grew to $306.5 million. This represents a 15.4% growth year over year.
Our services revenue grew to 14.8 million or 30.1% driven by implementation related services associated with the growth in our subscription revenues from new and existing customers.
We continued to see strong growth in our cloud based solutions among both our existing customers as well as new customers cloud sales grew by 39% in the third quarter of 2020 over the third quarter of 2019.
We continue to believe that the shift to cloud presents a unique opportunity for the company to drive additional revenues and they are our growth.
Our sales to existing customers made up 73% of software sales in the third quarter of 2020.
While new logos made up 27% of the new sales and it continues to be an area of continued focus for the company.
Our net revenue retention rate is 108%, which demonstrates our customers continued commitment to our software and solutions.
Our gross revenue retention remained at 91%, which is consistent with prior periods.
In discussing the remainder of the income statement. Please note that unless otherwise stated all references to our expenses operating results and per share results are on a non-GAAP basis and are reconciled in our GAAP results in the earnings press release that was issued last evening.
On an overall basis gross profit was $67.5 million in the third quarter, representing a 71.4% gross margin.
This compares with gross profit of $59 million and a 71.6% gross margin in the same period last year.
The 20 basis point change reflects our investment in our tax research as well as customer service areas.
From a subscription software standpoint, our gross margins were 78.1% as compared with 79.1% in the prior year. This difference was driven by continued investment in our cloud infrastructure as well as our customer support functions.
Our margin in our services business increased to 35.4% from 24.6% in the prior year, we continued to see strong demand and productivity levels for these are services from implementation of new software solutions as well as existing customer projects.
Research and development expense was $10.1 million or 10.7% of revenues an increase of 200 basis points year over year, that's affecting the increased spend on new solutions to address our customers' end to end data analysis and compliance needs.
Sales and marketing expense was $16.5 million in the third quarter were 17.4% of total revenue.
Decrease of 150 basis points year over year, which was primarily driven by reduction in travel and marketing expenses due to the COVID-19 restrictions.
Our third quarter general and administrative expense was $18.4 million or 19.5% of revenue versus 20.2% of revenue in the third quarter 2019.
The increases were driven by higher levels of information technology infrastructure process reengineering and other initiatives to drive future operating leverage.
GAAP net loss was $21 million compared to GAAP net income of 11.9 million for the same period last year.
GAAP net loss per basic and diluted class, a and class B share was 15 cents compared to GAAP net income per basic and diluted class, a and class b share of 10 cents for the same period last year.
Non-GAAP net income was $21.6 million compared to non-GAAP net income of 16.9 million for the same period last year.
Non-GAAP net income per diluted class, a and class B share was 15 cents, respectively compared to non-GAAP net income per diluted class, a and class b share of 14 cents, respectively for the same period last year.
Adjusted EBITDA of $22.5 million was up 14.7% year over year, while adjusted EBITDA margin of 23.8% was consistent with the same period last year.
The most significant non-GAAP charges continued to relate to our stock based compensation.
Turning to our balance sheet and cash flow statement.
We finished the quarter with approximately $270 million of cash and cash equivalents, reflecting the completion of our initial public offering where we sold 24.3 million shares at an IPO price of $19 per share raising proceeds net of underwriting fees of $423 million, which was primarily used to repay.
To retire 175 million dollar term loan and offering expenses.
We generated $15.8 million in free cash flow for the quarter up.
From an increase from 3.7 million in 2019.
Turning now to guidance for the fourth quarter of 2020, we expect total revenue in the range of 93 to 95 million representing annual growth of 8% to 10.4% and adjusted EBITDA in the range of 18.5 million to 19.5 million, representing an increase of 8%.
13.8%.
Turning now to guidance for the full year of 2020.
We expect total revenue in the range of 368 million to 370 million.
Representing annual growth of 14.5% to 15.1%.
And adjusted EBITDA in the range of 78 million to 79 million, representing annual growth of 14.9% to 16.3%.
Additional modeling details underlying our outlook are as follows.
At September 32020, we had 120.417 million shares of our class B stock outstanding and 25.688 million shares of class a outstanding.
We had 12.312 million common stock equivalents outstanding with a weighted average exercise price of $2.45 per share.
Our effective tax rate is expected to be 25%.
Overall, we're pleased with the progress that we made on our strategic initiatives and the performance of the business and with that we're now happy to open it up for questions.
Operator will you. Please open up the line for Tonight.
Thank you at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is when a question queue.
You might start to do like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset for parts or just lucky one moment, while people first question.
Our first question comes from Brad Sills with Bank of America. Please proceed.
Oh, Great Hey, guys. Thanks for taking my question I wanted to ask about the cloud it sounds like you saw some real nice results. There this quarter, what our conversations with customers regarding the cloud worked where are they in the tax department and can kinda migrating.
You know more of their operations, and you know returns and and filings to the cloud.
Thanks, Brian Yes. Thank you yeah, great to connect with you. So you know the conversation typically starts in the tax department because it will see the the tax leaders looking to get control of their infrastructure. So they can continue to progress with our updates and continue enhancements, we made to the product but.
Currently resides in the eye team, because ultimately I tee, it up and be aligned to their road map and where they are in their own corporate strategy about moving to the cloud. So certainly cobot has accelerated those conversations and we're seeing more and more people want to have that dialogue with both a preponderance of our new new logos that we were.
And as well as existing customers as they continue to look through that journey with additional AD they make it offerings or with their existing solutions. They already have that they're ready to migrate from.
That's great. Thanks, so much and then on International you mentioned you know some some strength in Brazil with with content.
Could you remind us where you are with regard to international content and sales and marketing investment and in other regions. Please yeah sure. So we made the acquisition investment down into CICE tax earlier, this year, which has allowed us to expand our content based in Brazil dramatically. Additionally, we'll be bringing.
Forward some of the products that the CICE tax team had to ER for the Brazilian market, we're gonna be able to expand that to our multinational. So we're looking to now start working with their sales teams to coordinate how to bring our U.S. multinationals down into the Brazil market, where we can offer like the 80 validation voice product. It's a stack says we're we're very excited.
It's about we continue to expand all of our content globally, though between the covert changes as well as our customers ongoing need a in Europe and elsewhere, we continue to add content or all the time.
Great. Thanks, so much David.
Yeah, good talking about it.
Our next question comes from some odd familiar with Jefferies. Please proceed with your question.
Hi, Good morning, Thanks for taking my question so that is.
It's good to see the strong results or maybe David first for you as we think about air are the growth is tracking better than we expected and now that we're in the middle of November I know that you guys are guiding for 2021, but can you maybe at least anecdotally or high level discuss that the level of confidence do you have kind of halfway.
Through the fourth quarter and as we as we look out to 2021 I missed that.
Actually with what the how strong they are brought to stayed.
Thanks, Subodh and I appreciate the comments the the truth is we started to gain a little more visibility into our pipeline I think when we came out in July we were mindful of where we were in the pandemic as we built our forecast and thus far in the rest of Q2 Q3 and now as we look forward into Q4, we continue to see.
The positive signs in the pipelines that are encouraging. We also are though mindful obviously with the recent a block downs that are occurring in Europe and some of the you know certainly some of the commentary that's happening here in the U.S., we still need to be thoughtful about where that is in terms of where it's going to lead in 2021, what I will say is regard with the.
Sales of indirect tax and how it will lead many jurisdictions out of this current crisis suggests we need to continue to accelerate our investment and we're doing that across all of our product line as well as in our opportunities abroad, expanding both sales and marketing capacity and increasing our R&D investment because we believe as we come out of this.
2021 at some point or the opportunity around indirect tax will only increase.
Great and then a question we got a lot this quarter and frankly, we got it pretty frequently in general is around the competitive environment, especially in light of some M&A and the indirect tax space and I'm. Just curious if you could maybe give us your view on on you know how vertex is still differentiated even with.
What's in that changes in the competitive environment, and and maybe how youre content differentiates you from from some of your competitors sure somewhat so it starts with the fact that our number one competitor is the in house solution that we're replacing that's really what we focus on all the time is and everything.
Those opportunities where somebody is good enough in house solution is no longer sufficient and our sales team and partner team can go in and add value and that's the fundamental when we look at those opportunities then moving forward. We typically see a couple of things, we're able to differentiate on our brand our.
Our brand being the large reference base that we enjoy that is so important to the tox fire. The skilled experience our team brings both in the partner and sales area in terms of working through a complex sales, which you know requires working with the team as well as the tax team.
And then you move forward on the partner integrations, we enjoy for complex organizations. We've worked for years to have really deep integrations and the IP. We've embedded there and then underlying all that is that content database as you say and you over 40 years, we have accumulated that large content database. It really gives us the deepest jurisdictional penetration and product suite.
To win going forward and so that's really how we win it's a combination of all that and then lastly, I would just add you know the hybrid approach still matters greatly while we lead cloud first in everything we do.
We still for large enterprises will sell elements of the solution on premise and having that capability to meet the I.T. team, where they are at still remains an important differentiator at the at the enterprise market.
Great and John just a quick housekeeping one for you what what was cloud as a percentage of new book deals in the quarter.
Yeah and in terms of new deals in terms of new deals cloud was about just the just over 60% it's consistent with how it was the last in the last quarter.
Great. Thank you again and congrats on a solid quarter.
You bet, thanks, very much Mike.
Our next question comes from Brad Reback with Stifel. Please proceed with your question.
Great. Thanks, very much David as you look at the sales and marketing line and the efficiencies that you'll definitely be left with as we come out of Cove. It in 21 and beyond how do.
Do you think about the percent of that get that gets reinvested into the business to accelerate growth versus what gets gets left behind to fall to the bottom line. Thanks.
Yeah sure. So I think to start with there's there's more opportunity to expand and we intend to around our sales capacity both into the channel to support our mid market strategy as well as overseas in both Europe and you know overtime in Latin America. So we definitely want to continue to put some of those dollars. As you said there was a fish.
She says you're noting into new capacity to expand our footprint.
But then additionally, the excess that you know we're looking to expand really in R&D I think there's great opportunity to enhance product for the for Europe, which is where our focus is we've got a number of products that we'll be bringing out the end of this year and into 2021 that I'm very encouraged by and then lastly innovation. We continue to look at a co design and cope.
Partner innovation with our customers we've done some interesting things recently with a P. O C. A proof of concept around some machine learning and tax categorization that I think could lead to some exciting developments in the future. So we continue to R&D continues to be a big element of where that those dollars will go.
Excellent thanks, very much after talking to Brett.
Our next question comes from Pat Walravens with JMP Group. Please proceed with your question.
Oh, great. Thank you and let me add my congratulations guys.
Can you remind us at what rate investors should think about this business transitioning to the cloud and I definitely hear you about how these big enterprises still sometimes need on premise solutions, but just you know over over how many years, that's going to play out and then and then maybe also a reminder for investors about how the economics work.
In a club deal versus non premise gale.
So I'll take the first part of that and let John take the second part about the economic Pat and good to connect with you.
So I think if we think about it in three distinct tranches. The first tranche as new logos, because we lead cloud first our new logos typically come in around 85% to 90% cloud.
And I think that's reflective of you know where were bringing what were bringing to market there and the receptivity of our cloud offering I think our.
They are in our in our base, you're looking at existing customers, who are expanding their footprint with us and we will see existing customers again, because we leave cloud first we're trying to pull them along into the cloud with our new <unk> New unit. So lets say they they bought consumers use tax from US a few years ago and now they want to expand in the V.A.T., where they want to add sales tax.
We'll leave cloud first and sometimes we'll be able to move that new unit into the cloud with them, even though they may retain their existing unit it on premise or it could be an omni channel strategy, where we've got in the stores the brick and mortar operation were on premise, but then as they go into the you know with their E commerce.
Strategy, we're supporting that with our cloud or mobile offering so it really and then the last piece is how are you moving those existing customers that are just 100% on premise moving them to the cloud and that's probably the slowest so it sort of breaks out as that 85% to 90% in the new logos its probably in the 50% for the.
Existing companies expanding their footprint and then a much lower percentage still that are just starting that journey of moving their existing services from us on premise into the cloud.
Yeah, I think Pat just a follow up on that to your point around sort of the economics around that shift and what that looks like the example that we've given I think as you think about on Prem in year, one year, one billings for them. If it in an example lets assume that a year one on prem billing for a sales tax applications $100000 when that comes around for renewal at the beginning in year two.
So we're going to build them roughly 50% of that first year first year billing. So that's what your renewal revenue is going to be and it's going to be that every year thereafter subject to our price increases as we think about cloud we think about cloud a little bit differently. We think typically that comes in and roughly at about $70000 per year, but it starts at 70000 in year, one and a 70.
Sales in every year thereafter straight across the page also subject to those sales pricing.
So as those come but to your point as those existing companies that are currently now claims have been on Prem for a period of time decide to move over we see the opportunity for a shift and an increase in air are from that existing that existing product that they are buying from us, but also we do see opportunity that there could be opportunities to sell more product.
Into that Sweet does there so we view it as kind of a twofold opportunity there as that ship type.
Okay. Thank you that's helpful. You bet, thanks very much.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from Chris Merwin with Goldman Sachs. Please proceed.
Okay. Thanks, very much for taking my questions. Yeah, I think you all called out 73% of new sales from existing customers, 27% from new logos and on the one hand, you are very much focused on driving expansion within your large enterprise customers get her hand, I think we're also investing to drive new logo growth, particularly down market. So is that the right.
<unk> mix of new business going forward either in terms of the split between new logos and expansion or do you see that changing in the future. Thanks.
Yeah, Good question, Chris and good to connect with you.
Yeah, I think as we continue to expand channel relationships, whether it be like the one we expanded with video this past quarter are adding axiomatic a in as a as a new certified integration those all increase the addressable space that we can get into in new logos and so that's why for that exclusive.
Chip, we enjoy with CBS dot com continues to expand and that relationship gets us access to more new logos.
And I would expect that to continue overtime certainly as the complexity environment. That's out there now between business regulatory and technology continues to accelerate the demand opportunities are increasing and so I think that will continue to make our value prop at the upper end of that middle market, where we can distinguish our value prop I'm great.
Sure and therefore continue to increase the you know the opportunity to increase new logos in that in that space.
Okay, great. Thank you and then just a follow up I was wondering if you talk a bit about the pipeline seems like oxy coal accelerating digital transformation efforts broadly across lots of large enterprises and for your customers you find that you're looking to bundle capex automation solutions within bigger projects and the opposite.
I felt like an ERP transformation or are they really looking at this category or more on a standalone basis and prioritizing it as they go through their spending priorities or system migration to the cloud. Thanks.
Yeah, you know what really happens in both ways I mean, we see certainly new ERP adoption.
You know like a cloud procurement system like Cooper, which we enjoy a great relationship with or Sep arriva, they're adding in just the procurement system in the cloud and therefore their in house solution will no longer work with what they've been doing and so we'll see growth. There and then obviously there are larger transformations that are going on from the office of the CFO, where there is you know moving to haunt us four or the Oracle.
Cloud infrastructure or whatever and those will create new opportunities. Additionally, our new really our relationships with people like workday and vacuum Attica continue to create transition opportunities for us as well. So we see it really across the board in either a niche unit, where a business might be a business leader might be driving a new E commerce or omni.
Channel strategy and that will just create a point opportunity for us with our cloud or as a broad wholesale change within the CFO The office CFO.
Great. Thank you.
Good talking to you Chris.
Our next question comes from stands Lasky with Morgan Stanley. Please proceed with your question.
Perfect. Thank you so much and good morning, guys great to hear from me that from I'm from my end I wanted to just stop just clarify something.
John I believe you mentioned that your cloud growth I was 39% is is the right apples to apples comparison to 60% plus that we saw in Q2.
No no I think I think what you want to look at it that was the growth over the prior year. So you saw that 60 plus percent growth in Q2, it's very it's very similar in Q3 in terms of the amount of cloud that's out there that 39% was our increased from the same quarter last year to where we are today. That's how that's the growth that we've seen from cloud stand.
If I could just build on that what I would tell you is if you. If you think about it in total new sales in 2018 cloud probably represented about 40% or so in 2000. The end of 2019, we saw a cloud become the leader in our new sales. It just crossed over 50% and now this year, we're seeing cloud in the new sales be about little over 60.
<unk> percent. So we're seeing a natural progression of our new sales moving into the cloud I think what John said he was just referring to the euro the quarter over quarter comparison from a year ago.
So I should say.
Sorry, Jim maybe just 111 more so the 39% growth. This year that you just mentioned in Q3, that's a year on year number or is that a quarter on quarter number but.
That's year on that year over year same quarter last year.
And then 60% in Q2 was a year on year a quarter on quarter to 60% is just how much of the new sales that came in in the third quarter were cloud based.
Got it understood okay, sorry for that confusion than that but thank you for it. Thank you for asking.
Got it that makes a lot more sense and then maybe just a a slightly more high level question could you remind us of your relationship with Oracle and how you guys are working with their ERP infrastructure to support our joint customers. Yeah. So we've we were proud to say we've been an oracle partner for like 35.
Five years, we are the OEM provider of their payroll and we.
EBITDA cloud sales tax a partner with them since the mid early nineties and they selected us for the first cloud to cloud integration with their own running on the Roche I platform and we're now in the market jointly marketing that and their sales teams are actually leading the way in that process and we're seeing a nice revenue progression there.
Okay perfect. Thank you so much.
Thanks, Dan.
Our next question comes from Bob certainly with William Blair. Please proceed.
Hey, Gents and let me Echo my congrats to solid solid start there.
I just wanted to touch really quickly maybe David for you on the overall back office accounting Finance software logistic is being sort of these guys all expand and there's a ton of work and sort of it they often the CFO of the control the treasury tax et cetera, as you think about the convergence thats starting to happen there. How do you guys think about sort of the exposure.
And because there's obviously lots of room to grow, but you've got sort of half of the fortune five.
500 customers et cetera, how do you think about potentially broadening into maybe other areas of treasury compliance governance horizontally. They love to have options on how you guys think about sort of next five year plan around that space yeah.
Yeah, I appreciate it and you're right there is opportunity to grow first of all within our existing customer base. We continue to expand our footprint because a lot of times, where we've sold a fortune 500 company. It just one element of their business, they're often made up of many divisions. Many diverse operations and we may have a third of their business or half of their business, but we continue to expand.
Our footprint that would just in our core indirect tax area and then as you know there are there are obvious indirect there are obvious adjacency to what we look at when we think about the indirect tax end to end process and what goes beyond that and certainly our rules engine gives us a natural progression for where we might want to expand our footwear.
It over time and those are things we actively look at.
[laughter], Oh wait for product announcements over time.
And I guess, [laughter] and I guess, let's touch a little more tactically. So you talked about partnerships and the partnerships with guys like the accounting firms and systems integrators. Those are sort of symbiotic partnerships. They might bring deals you might bring deals, but other partnerships with guys like Sep an awful are there any compensation metrics our sales people they're compensated.
We're beginning vertex how should we think about the ones, where there's actually monetization capabilities for sales people to bring in projects that are not vertex direct sales people hopefully I was clear I'm not sure like me that I, just think I, if I I think I understand your question the new opportunity. We were excited about with Oracle and their OCI platform is a that their sales teams are being.
Connect directly to the the vertex sales that they generate so there's a direct economic benefit for them I don't obviously have the particulars on what it is but I do know they are rewarded for bringing in creating that this partnership a success and we don't have the same direct relationship with the S&P sales team currently but we.
Enjoy obviously, a long standing relationship with them. We've done we actively road map with their with their teams in Waldorf and here in the U.S. around their product development, and where we're bringing our product to make sure. We're aligned is one of the reasons why we were the first cloud provider. If you went to when they looked at the heart of platform for the same reason.
Don I was Super helpful. Thanks, taking my question John you were talking about.
Our next question comes from Daniel Jester with Citi. Please proceed.
Great. Good morning, everyone. Thanks for taking my question on the on the services revenue line you called out in the prepared remarks are the strong growth there we've seen strong growth there for several quarters now.
So as I think about sort of how I guess first of all what's driving that growth and then secondly, if that's being driven by implementation how should be thinking about sort of the outsized growth in implementation revenue translating over time to improving sort of software subscription revenue.
But dan good to connect and thanks for the question I think start with our services has two important components. One component is our outsourcing practice, where we have a lot of customers who send their returns to us and we actually manage and processor returns and remit, although the the dollars out to the different jurisdictions and that's a growing business.
And certainly Cove it has accelerated that growth because I think tax departments are looking for and companies look for what can they they move outside their organization. So we continue to see good services growth. There and then in addition, as you know we have our implementation services and I think even in the current environment. What we've seen is customers are benefiting from the fact that our teams.
We're able to do their servicing remote and in some cases, because they are now working remote our customers are working remote they are actually leveraging our services team to help fill in some of the gaps for them. So I think it continues to be a strong growth driver, but if you really have to think about it as two distinct practices within our services revenue bundle. The one is almost <unk> almost you can almost say a recurring revenue which.
As our managed services, which is under contract and we enjoy.
Nice ongoing growth from and then as you note and more implementation side.
Got you and then just a high level. One you know in terms of just new business obviously.
Obviously, the third quarter you highlighted.
Certainly improvement there I guess compared to where you thought you'd be like a year ago pre cobot, where are you on that new business trajectory are we back to kind of pre coded levels or are we not quite there yet. Thank you.
Yeah, it's a it's a hard thing to predict because obviously cobot has been a a wildcard in the equation you know I think overall I'm pleased with the the revenue traction we continue to get across the channel and the mid market as well as as what we're doing in our enterprise space I think I'd like to have been a little further in Europe, but they obviously had a little.
I think a little more of an extreme locked down, but it really hasn't slowed us down from accelerating investments. So I think that's the other piece of it I think we're getting to where we want to be with our R&D spend with the acceleration here that we're planning here in the third and fourth quarter and what will be in 2021 to really position us for what I think is just these.
Fundamental drivers of business complexity technology complexity in regulatory complexity, which are all compounding to make indirect tax you know growth opportunity for us for the future.
Great. Thanks very much.
Good talking to you Dan.
Thank you ladies and gentlemen, we have reached the end of the question answer session I would like to turn the call back over to David just the final for closing comments.
Thank you you know in summary, I'm really proud of the vertex team for their solid execution across the company, which is reflected in our strong third quarter financial performance.
We continue to see significant growth ahead as the rapid changes taking place in today's global business technology and regulatory environments are having that compounding effect I, just spoke about and really creating opportunities indirect tax management.
We remain focused on helping our customers continue to transact comply and grow with confidence even in this uncertain macroeconomic environment. Thank you again for your interest in vertex and for joining us on the call today, We hope you and your families stay safe and healthy during this time and we look forward to connecting again soon.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.
Okay.