Q4 2020 Vertex Inc Earnings Call

[music].

Good morning, and welcome to the vertex this fourth quarter and full year 2020 conference call.

As a reminder, today's call is being recorded and your participation implies consent to such recording.

At this time all participants are in a listen only mode.

Brief question and answer session will follow the formal presentation.

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With that I would like to turn the call over to Archie here Investor Relations. Thank you Sir please begin.

Thank you good morning, everyone and thank you for joining us for <unk> financial results conference call for the fourth quarter and full year ending December 31, 2020 on the call today, we have heard Jacques CEO, David just stepping up and CFO John Schlosser.

Before we begin allow me to provide a disclaimer regarding forward looking statements.

Call, including the Q&A portion of the call.

Forward looking statements related to the expected future results for our company and are therefore forward looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward looking statements are subject to are described our earnings release and other SEC filings. Today's remarks will also include references.

The non-GAAP financial measures additional information.

The nation, including reconciliation 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 divert Jackson's investor Relations website at IR Dot vertex Inc. Dotcom.

David will begin with an overview of our tax followed by our fourth quarter and full year highlights. John will then take you through a review of the financials people in prison proceed to Q&A with that I'll now turn the call over to day.

Thanks, Kate and thanks, everyone for joining us on the call today.

This year was remarkable in many ways and we continue to see the pace of change in the global business technology, and regulatory environments, creating entirely new complexities and challenges and managing indirect tax.

We believe our solutions will play an essential role as companies adapt their business models to support revenue growth through e-commerce platforms, and marketplaces drive resiliency and their global supply chain and accelerate their move to the cloud. We are very pleased with our fourth quarter results as we close out the year, we continued to deliver strong.

<unk> fiscal year performance, which reflects the durability of our business the strength of our customer and partner relationships and our focus on driving sustainable profitable growth.

We grew our total revenues by $16 five per cent for the full year to $374 7 million and our adjusted EBITDA was up 15, 5% year over year.

We ended 2020 with annual recurring revenue per customer of over $78000 up from 65000 at the end of 2019.

Our performance was driven by the outstanding efforts of our vertex team and partners around the world, whose dedication and focus to our customers. During these extraordinary times was on full display every day.

We are pleased with the continued growth of our cloud business for the full year. We grew our cloud revenues by 65% over 2019 and in Q4, we saw cloud revenue growth of 70 per cent compared to 54 per cent in Q3.

We believe the pandemic may have accelerated the migration of customers infrastructure and applications to the cloud leading to increased adoption of our cloud solutions among our existing customers.

Among our new logos the vast majority of wins were cloud deals, especially in the middle market, where tax complexity continues to increase.

Going forward as we estimate our cloud based subscription revenues to exceed 100 million in revenue in 2021, we expect a more normalized growth rate of 35 per cent plus for the year.

Our fourth quarter results also demonstrate that we continue to expand our revenues among large global multinational customers, who while they continued to move many of their applications to the cloud still want to keep their order to cash applications behind the firewall, especially outside of the United States.

We believe our hybrid approach to serving both cloud and on premise customer needs gives us a differentiated competitive advantage going forward as we pursue our addressable market globally.

Now I'd like to share some notable highlights from the fourth quarter.

First I'd like to start with our progress outside of the United States, which as I have discussed remains a key vector of growth for us going forward.

We continue to see increased demand for our solutions in both Europe, and Brazil, where businesses faced significant regulatory change and tax complexity. We continue to invest in these regions to further capitalize on emerging growth opportunities.

In Q4, we had a strategic win with the world's largest industrial manufacturing company.

They look to us from end to end solution for indirect tax management as part of their global S. E T S for Honda implementation.

This win speaks to the differentiated value of our end to end capabilities, our strong relationships with global technology and accounting partners.

This customer is a good example of challenges many multinational organizations face when they move their infrastructure to the cloud.

They want to leverage the cloud as much as possible.

But for either specific business or I T reasons, they want to keep their order to cash process behind the firewall without an on premise option. This customer would have continued using native functionality and internal work arounds in choosing vertex they can address their tax complexities today.

And have the confidence that we have an enterprise scale cloud solution when they are ready to migrate.

This customer is also implementing our chain flow accelerator for S. E T, which we just released in the fourth quarter as global enterprises continue to build a resilient and dynamic supply chains. The cross border shipping and moving of goods has significantly increased that compliance complexity and risk.

We developed a chain flow accelerator to help companies address this challenge.

This solution combines intelligent data visualization and data mapping within the S. E T user interface to streamline the management of that complex scenarios.

Associated with cross border supply chain transactions without manual effort or modifications.

This win is also notable because it leveraged our strong relationships with the tax technology advisory practices of the major accounting firms in both the U S and Europe to coordinate a truly global solution. These partners are a natural extension of our go to market motion and we've closed a number of large.

Deals this quarter and throughout the fiscal year due to the strength of these relationships.

Another Q4 highlight is in Brazil, where we've expanded our content database to serve the global breadth and depth required by our multinational customers doing business and one of the most complex tax environments in the world.

Our investment in this tax in 2020 has enabled us to deliver new and expanded tax content for some of the biggest companies on the planet in Q3, we helped one of these companies expand into new states in Brazil, requiring additional content for tax compliance there in the fourth quarter, we helped them expand even further.

By supporting five additional states in the country.

I'm encouraged by the performance of our global teams and the significant opportunities. We have ahead of us in those regions to support our global customers.

Okay.

In Q4.

We also continue to broaden and deepen our global technology channel and partner ecosystem to strengthen our solutions and extend our go to market reach.

We expanded our sales force integration supporting their lightning B to B E Commerce and order management applications.

We also added a number of new Microsoft Gold partners in the quarter I'm excited about the investments we are making in these areas going forward as tax complexity continues to move into the front office CRM E Commerce and procurement systems of today's global businesses.

We also continue to build on our long standing partnerships with SAP and Oracle in particular, our cloud to cloud integrations and support for S. E T S for Hana.

Oracle ERP cloud and cloud infrastructure.

In Q4, we worked with in S. E T platinum partner, who was implementing S. Forehand, a private cloud for our rapidly growing global health care company focused on innovative therapies. They chose us because of our ability to provide strong S. A P tax integration with enterprise scale capabilities for U S.

And global tax.

We continue to see increased demand through our Oracle cloud infrastructure partnership with prospects and customers with several Q4 wins attributed to the benefits of our cloud to cloud solution.

And we continue to build industry specific content and partner relationships to support key verticals, we expanded our partner ecosystem in the fourth quarter with a global leader in the leasing industry.

We're managing tax continues to be highly complex, particularly with consumers and sell or use tax.

New logo acquisition remains strong in the fourth quarter, among both enterprise and mid market customers.

Growing tax complexity exceeds the capabilities of their native ERP or homegrown systems.

This was the case with one of the world's largest quick service restaurant companies, who chose our solutions as part of their global point of sale rollout.

We're also enabling an online delivery service provider to scale tax automation within their payment processing systems to support the rapid growth of their business in the pandemic and we signed a premier health care network in the U S. Because of the cloud to cloud integration with our solutions and their work day implementation.

Average.

Among just are new logos grew to nearly 59000 in 2020 versus 53000 in 2019, demonstrating the continued market opportunity and value of our solutions in the enterprise and mid market segments.

Finally, our performance in the quarter was also driven by expanding our revenues from existing customers as our customers expand globally accelerate their omni channel strategies and adopt best of breed front office applications, we grow with them.

In Q4, we expanded our revenues with a number of customers, whose ecommerce growth has rapidly increased with the digital economy and in response to the pandemic.

Including a luxury fashion brand in online food delivery service company and one of America's largest sporting good retailers.

We continue to see our customers migrating to the cloud as their business needs change.

<unk>, a large specialty service provider and one of our longtime telecom customers. We believe this reflects the strength of our brand and our customers' confidence in us to support their hybrid it environments now in the future as they evolve.

I'm so proud of what we accomplished in 2020, and our ability to effectively balanced profitable growth with strategic investments in our technology and go to market scale.

And I'm equally encouraged by what we've already accomplished in the first quarter of 2021.

In January we acquired tell you tax edge technology, which we believe represents the future of indirect tax technology. Its container architecture enables customers to deliver tax solutions seamlessly.

We call the point of need wherever transactions are conducted.

Mobile applications or connected device and do this with tremendous scale and simplified management.

We believe this acquisition can also enable us to extend our global capabilities into adjacent markets like next generation payment and Iot platforms for a truly connected commerce experience.

The teams are actively working to integrate this technology into our solution Roadmaps.

In February we announced that Zalviso had joined our team as Chief Technology Officer, Sal is a recognized innovator and leader of global technology teams and ecommerce business intelligence and enterprise management software.

I'm, so excited about the strategic value and creative thinking that he brings to vertex.

In closing, our Q4 and full year results, reflecting during strength of our business the.

The experience and brand we have built over the past 40 years remains an essential ingredient to our success.

Despite the unique challenges of 2020, our business growth validates our strategy and the global market opportunity that exists for us in 'twenty 'twenty, one and beyond.

We are investing in the talent technology and partnerships needed to advance our vision to accelerate global commerce, and our team remains resilient and committed to our success and our customer.

With that I now turn it over to John to discuss our full year results and outlook for 2021.

Thank you David and thanks, everyone for your time.

Today, I'm going to discuss our fourth quarter and full year 2020 results and then we'll wrap up with comments on our capital structure and provide our first quarter and full year guidance.

Total fourth quarter revenues grew 15, 7% year over year to reach $99 $5 million.

<unk> revenues grew 15, 1% year over year to $83 $9 million.

These revenues were benefited by annual transaction based subscription adjustments accounting for approximately $1 $5 million of additional revenue.

Our services revenue increased 19% over the same period last year to $15 $6 million due to a significant number of yearend implementation and upgrade projects.

Total revenues for 2020 were $374 $7 million up 16, 5% from 2019.

Our annual recurring revenue or <unk> grew to.

$316 $4 million as of the end of 2020. This represents a 13, 6% year over year growth.

As David mentioned, we continue to see strong growth in our cloud based solutions, among both existing customers and new customers.

For the fourth quarter cloud revenue grew 70%, which is up from 54% in the third quarter of 2020.

We ended the full year 2020, with our cloud revenues growing 65% over the full year of 2019.

Going forward as our cloud based crosses $100 million in revenue in 2021, we are targeting a more normalized growth rate of approximately 35% per year.

We continue to lead cloud first on all of our new opportunities and believe that the shift to cloud presents a unique opportunity for the company to drive additional revenues and AOR growth.

We believe our hybrid approach to serving both cloud and on premise customer needs gives us a differentiated competitive advantage going forward as we pursue our addressable market globally.

Our net revenue retention rate or <unk> was 106% as of the end of 2020, demonstrating our customers' continued commitment to our software and solutions.

Our gross revenue retention remained at 91%, which is consistent throughout the 2020 quarters.

Notably here, our <unk> was impacted by approximately 300 basis points due to cloud migrations that occurred during 2020.

In discussing the remainder of the income statement. Please note that unless otherwise stated the references to our expenses operating results and per share results are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued today.

On an overall basis gross profit for the fourth quarter was $74 million, representing a 77% gross margin. This compares with gross profit of $61 $8 million and a 71, 7% gross margin in the same period last year.

The 100 basis point change reflects our investment in cloud infrastructure tax content and customer success management areas.

From a subscription software standpoint, our gross margin was 76, 8% as compared to 78, 5% in the prior year driven by continued investment in our cloud infrastructure tax content and customer success management.

Our gross margin in our services business increased to $38 four per cent from 34.0% in the prior year, we continue to see demand for services from implementation of new software as well as from existing customer projects, but anticipate that the margins will moderate.

For the full year subscription software gross margin was 77, 9% compared to 78, 2% in 2019.

And for the full year, our services gross margin was 34% in 2020 as compared to 39% in 2019.

Our fourth quarter research and development expense was $10 $4 million or 10 five per cent of revenues an increase of 130 basis points year over year, reflecting the increased spend on new solutions to expand our end to end capabilities.

For the full year R&D expense was 10, 6% compared with nine 2% in 2019.

Our selling and marketing expense was $19 $7 million in Q4 were 19, 7% of total revenues a decrease of 100 basis points year over year, which was primarily driven by a reduction in travel and in person marketing events due to COVID-19 restrictions.

However, these expenses increased by $3 $2 million or 230 basis points from the third quarter as we ramped up sales and marketing investments heading into 2021 for.

For the full year, selling and marketing expense was 18, 6% in 2020 as compared to 26% in 2019.

Our fourth quarter general and administrative expense was $21 $2 million or 21, 3% of revenues versus 21 seven per cent of revenues in the Q4 of 2019.

This decrease was driven by information technology infrastructure and other initiatives in 2019 that did not recur, but were partially offset by increases in public company operating costs in 2020.

For the full year general and administrative expense was 21% in 2020 as compared with 23% in 2019.

Our quarterly GAAP net income was $200000 compared to GAAP net income of $4 $7 million for the same period last year.

GAAP net income per basic and diluted class, a and class B share was effectively zero compared to GAAP net income per basic and diluted class, a and class b share of four cents for the same period last year.

Non-GAAP net income was $12 $3 million compared to non-GAAP net income of $14 $2 million in the same period last year.

Non-GAAP net income per diluted class, a and class B share was eight <unk>.

Compared to non-GAAP net income per diluted class, a and class b share.

Of 11 for the same period last year.

Our quarterly adjusted EBITDA was $19 $1 million up 11, 2% year over year, while adjusted EBITDA margin of 19, 1% was approximately 80 basis points lower than the same period last year, reflecting our investments in our research and development activities as well as the acceleration of our self.

And marketing.

Efforts.

For the full year, our adjusted EBITDA was $78 $4 million or 29% of revenues as compared to $67 $9 million or 21, one per cent of revenues.

Turning to our balance sheet and cash flow statement, we finished the year with $303 $1 million in cash and cash equivalents, reflecting the completion of our initial public offering where we raised proceeds net of underwriting fees of $423 million, which was used primarily to repay our $175 million term loan.

And pay per offering expenses, we generated $39 million in free cash flow for the quarter, a decrease from $34 $8 million in 2019 also reflecting our investment in product development and selling and marketing efforts.

We generated $49 $6 million in free cash flow for the full year, a decrease from $54 $9 million in 2019.

Turning now to our guidance for the first quarter of 2021, we expect total revenues in the range of $94 5 million to $96 $5 million representing year over year growth of approximately $5 nine to eight 1% and.

And adjusted EBITDA to be in the range of 15, 5% to $17 $5 million, representing an increase of approximately 200000 to $2 $2 million compared to the first quarter of 2020.

For the full year 2021, and consistent with the plan we outlined during the IPO. We currently expect total revenues in the range of $401 million to $405 million representing year over year growth of approximately 7% to $8 one per cent compared to 2020.

Adjusted EBITDA in the range of $68 million to $72 million representing year over year decrease of approximately $6 four to $10 4 million compared to 2020.

The adjusted EBITDA includes our acceleration of investments in global sales and marketing capacity, new product development and innovation plus an additional $2 million of increased operating expenses related to the acquisition of Italian tax in January of 2021.

As we had anticipated in 2020, we saw a slowdown of enterprise customer buying activity as some of their system upgrades pushed out into 2021 and 2022 and.

In spite of this we were able to grow the business during the year.

Timing and our acceleration of product development, and selling and marketing activities position us nicely as enterprise growth accelerates in 2021 and 2022.

This opportunity as well as continued regulatory changes and increases in complexity position us for future growth.

Additional modeling details underlying the outlook are as follows.

Our share our share count at December 31, 2020.

We had $120 million 117000 shares of class B common stock outstanding and approximately 26.327 million shares of class a outstanding.

Additionally, we had approximately $12 million 647000, common stock equivalents outstanding with a weighted average exercise price of $2 from 21 cents per share.

Our anticipated tax rate is expected to be approximately $25 five per cent.

Overall, we're pleased with the progress we have made on our strategic initiatives and the performance of our business and with that we're happy to open it up now for questions.

Operator, operator will you. Please open up the line for Q&A.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.

Our first questions come from the line of Brad Reback with Stifel. Please proceed with your questions.

Oh, Hey, guys how are you.

Great Brad how about yourself.

Very good very good.

Maybe starting from a high level competitively has anything changed out there.

No Brad.

We continue you know first and foremost to compete against the in house system. That's good enough until it is no longer good enough between regulatory change or or technology changes that are driving it we see Thomson Reuters primarily in the global market.

Our primary competitor when we go to for enterprise deals and as we go into the.

Middle market, we see we see both Thompson and <unk>.

And I have Alero and then overseas we continue to see silver is a formidable competitor.

Great and then switching gears on a R. R. Obviously this year was somewhat impacted by Covid and your commentary on customers pushing out for 'twenty, one and 'twenty two how should we think about when that growth rate reaccelerate.

Yes. This is John I'll take that Brad I think we think about growth kind of steadily building throughout the year as we ramp up our sales and marketing efforts like we talked about in the Q4 and we start to gain traction there and so we think that it'll start to happen a little more a little more heavily towards the back end of the year is that traction comes into play as well as the new products that hit the market that David talked about.

So I would see that a little bit more weighted towards the back of the year back half of the year for sure.

Great. Thanks very much.

You bet you bet. Thanks, Brad.

Yeah.

Thank you our net.

Questions comes from the line of Daniel Jester with Citigroup. Please proceed with your questions.

Great. Thanks, Good morning, everyone. So I just wanted to circle back to something that was said in the prepared remarks, I think David you talked about that.

You noticed some acceleration in digital transformation impacting you in 2020, but then John talked about sort of some enterprise delays. So could you just piece out exactly kind of what youre seeing maybe maybe small mid sized business versus the enterprise and how COVID-19 has impacted that and how are you.

You see the recovery trajectory going throughout this year. Thanks.

Sure I'll take a start and then John you can jump in and thank you Dan for the question.

I think.

Where we saw acceleration in the mid market as more companies are adopting workforce.

Salesforce workday and Salesforce as operating systems, we saw great opportunity, where that complexity of the regulatory environment and there are new technologies are creating demand for us and I think that's also where our value prop showed up and why we're able to drive the R&R new logos significantly.

In cloud across the business, obviously some of the larger enterprise organizations.

Organizations. We did see is we did see comp we had a lot of conversations and while we did see good good progress two things of note. There I think one we saw a deal where the where the large oracle or SAP implementation, maybe got put on hold and we have to deal with that and that will they'll survive with good enough until 'twenty, one or 'twenty two.

Additionally, you know it's important to remember we have a hybrid approach and so we continue to see large on premise deals being sold.

And so that'll that's good for us in the long term because when they are ready to migrate to the cloud we're doing great on those migrations when they happen, but we have to recognize that our hybrid approach gives the customer the opportunity to choose what's best for them and we think that's still a differentiated part of our strategy.

Thanks, and then just on day 2021 revenue guidance, John I think you mentioned that you know the framework was consistent with the IPO, but that's certainly the economy is a lot different than six to nine months ago and Theres a lot more sort of green shoots as we think about how the year progresses. So maybe philosophically how did you think about.

Approaching the guidance for the full year and what are your sort of expectations from a sort of a macro perspective. Thanks, Yeah. Dan. That's a good question I think as we think about sort of how things are going to play out as I mentioned, when we talked about a R. R.

I was going to build itself throughout the year and as you know as we recognize revenue ratably over the period it takes a little bit longer for it to kind of pull itself into the to pull itself into a revenue stream. So that's sort of how I think about sort of the tracking of it and the tracking of revenue, yes, we certainly do see opportunity out there and we're certainly capitalizing on that as well as building our sales force to further catheter.

Lies on it but I think over time that will continue to work itself into work itself into 'twenty and into 2020 one towards the back end and again the revenue follows and keep in mind. We did have a real nice we did have a real nice Q4, we did see a lot of activity in Q4, although we were benefited in the fourth quarter by.

About 1 million and half dollars of transaction based sort of true ups from a volume standpoint, so when you kind of compare it on a sequential basis theres a little bit of that that plays in there as well. Thank you. Thanks very much for the question.

Thank you.

Thank you. Our next question comes from the line of Brad sales with Banc of America Securities. Please proceed with your questions.

Oh, Great Hey, guys. Thanks for taking my question I.

Wanted to ask about the cloud if you had good results this year, 65% growth in cloud a R. R.

I think you are forecasting a deceleration there to 35.

Does the pandemic a accelerant if you will for cloud deployments in other words with work remote it's easier to deploy in the cloud versus on Prem.

And if so is that is that tailwind in the business, perhaps over is that implied in the guidance or is there something else going on with the with the deceleration in cloudy outlook. Thank you.

I'll I'll start and then I'll have John feel free to jump in I think.

Fundamentally it's now going to be over $100 million base. So 35% plus growth was we felt a more normalize just top of the trees answer, but I think it's important to remember Brad we lead everything cloud first in our sales and we see pretty consistently the overwhelming majority of our new logos were all cloud deals.

As our customers are expanding on omni channel and continue existing customers continue to grow allow us to grow our footprint within their base those are largely cloud deals.

We see it as a three different tranches its the new logos largely cloud overwhelmingly cloud the upsells and new sales to existing customers I'd say a majority of those are and then and then existing customers, though are still slow to migrate you know I think we saw a little bit of acceleration there, but nothing material that we would.

Yes, we've got a new trajectory for 'twenty, one around existing customers migrating.

Off of their on premise solution, yes, and just to add to that a little bit Brad what I would say is as David and I. Both mentioned the growth was about 65% on a year over year basis for the full year. Some of that is impacted by a couple of things. We did have a monster Q4 2019 in terms of our cloud sales and it was really just an absolute banner banner blowout quarter. So we certainly are dealing with.

Tough comp quarter, and then secondly, keep in mind, we did close on the <unk> acquisition in January of 2020. So that's also in those numbers sort of pulling that so when you look at sort of a little bit of a pullback that pullback has a couple of things going against the acquisition, certainly, notably being a decent sized piece of that so I just thought I'd point that out as well.

Great. Thanks, so much guidance and then one more if I may please just on some of the the headwinds you noticed in the business. This year with some of the deals are delays is that largely over do you have visibility for those deals coming back here with the pandemic and reopening it kind of happening gradually but.

What would you say there. Thank you so much.

Yes, I think you know it would be in the beginning of the pandemic. It was all I T shops, we're all hands on deck to get their entire Workforces global obviously large multinational enterprises that was a bigger challenge.

We have had I think the sales conversations are good.

Going forward here in terms of people are getting as you say more back to normal in terms of thinking about their IQ Roadmaps and we're really pleased with the Oracle OCI and SAP four Hana migrate.

Migrations that are now starting to resume those are obviously longer depending upon the size of the project. Those can be you know, 6% to 24 month implementations of which then we fit in that a certain slot. So it's really understanding where we are where they are in their timing, where we best fit into those projects.

Thanks, so much guys.

Thank you Brett.

Yeah.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next questions come from the line of Pat Walraven with JMP Group. Please proceed with your questions.

Oh, great. Thank you. Congratulations you guys I wanted to talk about telling you that attacks and then solve this guy.

Tell your tax first can you just go over again why you bought it and so it's Eric and Christian right are they both joining vertex.

Eric Yes, Eric joined.

Eric obviously has a deep history in the industry having architected.

Our <unk> technology for years, and we really were pleased with some of the innovations when he had gone out on a zone about where he was taking.

The indirect solutions at that point of need for mobile and Iot level.

Container, where you can really shrink the footprint of an enterprise solution down into that container, which we think will make it very attractive from a deployment perspective for our customers. So we saw great value in what they were building and wanted to make sure we got that integrated into wharf's products as quick as possible.

Okay, sorry, I messed up my question. So there were two Eric's right, there's Eric Eric.

Yeah.

Okay. Yeah. Both are they both are waiting or you're just that just Eric just the technology, Eric Eric Christian.

Okay.

And and his role is going to be.

What he is working in our innovation group driving the implementation you always in Arcata as the lead architect.

Around driving the.

Integration of that product into our into our product stack.

Okay, Great and then at the same time you have solved this get coming in so I'm sure you talked to you a gazillion candidates.

Why did you pick this one and and you know.

What where do you what are you going to tell him his top priority as comprehensive as al has an extraordinary background and experience that he spent the last 10 years in E Commerce, which is really critical to the front office space that we see as great growth opportunity, where complexity is accelerating so he brings that.

He used to be the CTO of business objects. So he has played in the data and be ice space, which I think there's opportunity there for us given the the large datasets that we touch and interact with regularly and then he spent some time in enterprise software. So he certainly understands our through his experience at SAP or ERP and back office.

<unk> footprint and the need to be you know at scale for the type of enterprise customers with Sal brings just a great wealth of innovation and experience to our team and we just couldn't be any more excited to have him join.

Great and what would you say the top priority is for him coming in here.

<unk> is focused across everything I just said he is accelerating our expansion in our E. Commerce platform area. He is accelerating our product roadmap. It's got some nice innovation about how we can accelerate certain deliveries of products and he's also very much focused on some of the inorganic things like tell you tax it.

This tax and other things we're looking at given his background in M&A about how we can accelerate that so those are probably the top three priorities.

Okay perfect. Thank you.

Thank you Pam.

Thank you. Our next question is coming from the line of Chris Merwin with Goldman Sachs. Please proceed with your questions.

Okay. Thanks, very much for taking my question I wanted to ask about net retention I know that dipped slightly in the quarter I imagine that's the impact I guess, the lingering effects from the pandemic as we move into 2021 here just curious how we should be thinking about the trajectory of that metric I know cross sell is a very important focus for you all with with the breath.

The product suite that you have so just curious any comments you can share about the trajectory of that metric. Thank you.

Yes, Chris Thanks, very much for the question in a very good one at that I think you are right as we looked at sort of the decrease a little bit of a drop here that we saw in the fourth quarter from an IRR standpoint, it's really driven by two things.

It relates to the cross sell migrations and the additional the additional volume we get with existing customers. So they were the two pieces that fell probably similarly, each shy kind of taking that down a little bit.

As we think about kind of where we are from that standpoint, and how this will kind of impact going forward as I mentioned.

Since this is largely driven by <unk> activity will start to see some of that a pick itself up in the back half of the year and as that picks itself back up we'll start to see improvements in this area, but it'll it'll moderate it'll moderate kind of where it is now maybe down a little bit, but then start to move itself back as we get more volume more volume coming in through <unk>, but again, we feel pretty good about it.

Our customer our customer base is very strong it's very durable. They continue to continue to buy additional entitlements and additional enhancements to the products that they have and so we feel pretty good about it.

As we move through and again as we continue to as we continue to migrate certain customers across the across the map from on Prem to the cloud theres opportunity there as well.

Great and maybe just to follow up on that last point around migrations I think he said that.

Paired remarks gross retention was around 91% and there was some impact to that number from cloud migration to the extent, you're obviously, keeping the customers and migrating to the cloud just want to make sure I understand.

Puts and takes around how migration would impact your crush retain great Yeah, Chris Great. Great point is as we measure and we monitor sort of our grrr to NR that work that I bought many people through when customers move out of one out of one solution into another solution. It shows initially getting to <unk> that they have left that solution. So it shows as a loss.

And then when it comes back in and when it comes back in.

As a new sale it shows the net adds into the <unk>. So it's a decrease for the <unk> and it's included in the increase in the final NRI number. However, it show it shows it going down when you get to the <unk> calculation, that's about 300 basis points and because of the conversion that that movement. There that movement certainly impacted you are initially and as people look at it and say hey, how can you.

B at 91% with such stickiness in such enterprise such enterprise software, it's really it's being impacted because of that move on an overall basis. If you did it on a customer basis I think it would tell a bit of a different story certainly is that movement takes place.

Does that make does that just clear that up a little bit.

Definitely thanks very much.

Thank you. Our next question is coming from the line of Stan slot skate with Morgan Stanley. Please proceed with your questions.

Perfect. Thank you so much guys.

Thank you for taking my questions.

Maybe just following up on Christian's question before.

On the cloud migrations right now how are you thinking about it into 2021.

And it didn't.

How much does that.

To the <unk> 35 per saying guidance that you have for cloud subscription revenue growth in the year and then I have a quick follow up.

I guess I'll just start and say, it's Dan is we built when we model. This out we didn't take any significant changes in assumptions from cloud migration because again as David had mentioned in some of his remarks, we're not really pushing customers and accelerating customers to move over to the cloud if the opportunity presents itself.

We're certainly going and talking to them about that but there's no force migration, that's taking place and so our anticipation for our cloud migrate from migration to the cloud from on Prem is really consistent with sort of how it has been the level that it's been in the past. So we're not anticipating any big jump there in terms of kind of how that activity place just on a bigger base now so it's for sure we try to be.

More thoughtful about what would be a good cloud growth rate.

I feel like we should be able to do 35% plus.

Okay perfect.

And then.

There's a little bit a little bit nuanced, but if we do the math of taking your.

Your average revenue per customer that you disclose and divide divide that into the ending IRR. It looks like the customer account has been declining for last three quarters.

Is that just is that just a function of maybe some churn.

At the low end is there is there something going on with the calculation that we need to be mindful of.

Just anything you can help us with that that'd be great. Thank you.

Yeah, I think standard as you hit it there is nothing going on with the calculation I think a lot of it really has more to do with the churn at the lower end a lot of smaller smaller type.

Customers there is a little bit more churn there perhaps than at the higher end, but I think thats. What you are saying we are doing some levels of consolidation as we think about as we think about that.

That can impact it slightly but I wouldn't tell you that our number of customers is really draw is dropping.

But as Lee at all it really more has to do with some of the churn at the low end because again as David talked about we continue to see a rise in the average IRR per customer.

Got it. Thank you so much thank.

Thank you from Houston.

Thank you our next questions come from the line of.

Oh, I'm, sorry, with William Blair. Please proceed with your questions.

Hey, guys. Thanks for taking my question.

Congrats on that channel cloud growth that was those pretty solid there.

I wanted to touch a little bit on sort of a more strategic question here, which is <unk> seen a bunch of consolidation or at least you're starting to see a bunch of consolidation in that office of the CFO space, whether it's compliance and tax whether it's Ah AP and tax Thats true.

Measuring intact.

How do you guys think about your role there and sort of maybe maybe maybe help US again I know you can't give an exact product roadmap and how do you think the company start to address that consolidation that broader space in say the next three to five years.

Yeah.

So very good question Bob.

It is an evolving world for sure I think it's important to note that a big part of our element is also in the it function.

We play very heavily because of the line item invasiveness of our product it's very much so.

The income tax level youre seeing more of that consolidation in the indirect tax space.

That consolidation plays out a little differently, because we're often a part regulatory and compliance is often a different part of the organization then the CFO that said.

Because of the strength of our partnerships with the big.

The global Big four.

Other big Alliance firms as well as the technology partners in the deep integration, we have with them it positions us well as those conversations continue to evolve and I would also tie it back to some of the conversations that was asked previously about zalviso joining us I think we see an opportunity for sell to bring some nice innovation there.

And expanding our product suite that will help us in that space.

Thanks, David and then maybe one for John.

Two parts.

John.

Quickly on the.

<unk>, which was 106% typically you guys had about a 5% price increase annually. So maybe help me bridge that and I think it might just be the churn that plays into it but help me understand like did you see any pressure on that 5% price increase this year did you give any concessions did you wave a little bit of it how should we think about that and then second part is is there any way to quantify the tailwind.

From.

The things Youre seeing at Oracle and SAP behind that is that it was obviously a headwind this year, but when you think over like not even next year, but over 24 months does that provide you know two to 300 basis point tailwind how should we think about that thank you.

Yes, no. Thank you for the question, let me take the first one first.

As it relates to sort of the <unk> and you think about the 106 and he said hey.

About a 5% price increase keep in mind as we build as we build there that 5% price increase really is to start with the <unk> number it starts with the 91 and to build itself up so we've not seen any impact from a pricing standpoint, our ability to pass price increases along to our customers is very consistent with where we were last year.

As I look at the numbers and so theres really been no impact there in terms of how that's gone so we feel pretty good about that.

Product, we deliver the tax content that gets delivered our customers continue to buy more and to get that and because of that they continue to invest in our product. So again price increases unaffected by anything and again the walk just again to the point I made earlier, it's a little bit lower from a cross sell cross sell migration as well as.

Additional volumes that are going through again as people as volume may have slowed for certain of our customers. So not a real big change there from from from a price increase standpoint really in the other two pieces that drove it so.

Sort of how that work that work goes.

I guess from the other standpoint kind of a tailwind that you talked about yeah again as I mentioned in my remarks, we did see a little bit of a pullback from those big enterprise customers listen I think we don't see.

As we look out we think those opportunities are still certainly there and as those movements in net migration and that activity takes place that as they migrate their systems to other things that should provide opportunity for us to be in the game and certainly driving driving additional revenue as those things come to be.

Great Great. That's very helpful. Gentlemen, Thank you alright, Thank you Bob.

Thank you. Our next question is come from the line of Smart Samana with Jefferies. Please proceed with your questions.

Hey, guys. This is Jordan Bret some for some odd thanks for taking my question and congrats on the strong quarter.

Just wanted to follow up on Pat's question last year, you acquired stocks and now this year tie your tax could you just remind us of your thoughts here on M&A.

You know Jordan appreciate you joining the call we continue to see opportunity to expand and it was it was a key part of our decision going public was to have more resources to make acquisitions as we expand globally I think there's a lot of opportunity to add content and select technology niche in niche and <unk>.

In acquisitions that will support the end to end suite that we continue to fill out as complexity continues to show up in the tax department. They are now looking for cross border customs and duties and other types of capabilities going forward and so we were consciously engaging in the market around those those opportunities.

Great. Thank you.

Sure.

Thank you. Our next question is coming from the line of Josh Reilly with Needham <unk> Company. Please proceed with your questions.

Hey, there guys. Thanks for taking my question.

If we look at the air our growth over the last several quarters and now your subscription revenue guidance for Q1 in the year I'm just trying to understand the delta there it seems a little bit wider than what I would expect.

Is it primarily conservatism around the macro environment right now or how should we think about the puts and takes there.

Yeah, I mean, a couple of things Josh. Thanks for the question again, we feel pretty good we feel good about what we've seen from a marketplace in terms of the activity that's out there the AOR growth as good as we think about sort of the quarter and we think about the growth in the quarter.

And as it translates into guidance a couple of things first keep in mind services does take a little bit of a dip in the first quarter. We have real strong we had a real strong Q4 from a services standpoint with customers trying to get some year end implementations and up and running so that was really good for US again on the back side of that is sort of drops a little bit from a total revenue standpoint from a from an.

Invoicing standpoint, when we take a look at 2020, we had a real nice we had a real nice year.

And there were some there were some anomalies a little bit in Q4 as I had mentioned some of that transaction based pricing true ups that happened in the fourth quarter not giant, but certainly impacting as we move forward. So we continue to see momentum from.

From a.

Our revenue standpoint that continues to grow but again some of the some of the activity in a little bit of a slowness in some of that push out that I talked about in my remarks that we saw in 2020 sort of manifest itself in revenue sort of as it rolls into 2021, that's how I would.

Summarize it.

Yeah.

Okay got it and then just a follow up so what's your go to market technology partners had been strongest in driving new business during the Covid era.

<unk>, obviously took a hit maybe at the high end, but in the mid market ERP is that more of a driver and then point of sale and procurement.

Just trying to understand you know.

What the drivers are there and then do you expect any shifts in those technology partners driving business in the post Covid macro.

I certainly think we're seeing good momentum in Salesforce, and workday and sort of the emerging as you say mid market players also at the enterprise level, we play with both of them very well at the enterprise level.

So I think that that space <unk>, all have been drivers of and Microsoft would be our primary drivers in the mid market. The relationship we have with <unk>.

Some of the additional gold partners that we've added from the Microsoft space have played well to be drivers.

Certainly going forward, the procurement and E Commerce space is where we see great opportunity for expanding relationships and integrations and that is something we're actively with some of the partnerships. We added in 2000 in Q4 were specific to that space.

Got it thanks guys.

Happy to Josh.

Thank you there are no further questions at this time I would like to turn the call back over to David to Stefano for any closing comments.

Thank you <unk>.

Closing I think we're well positioned to continue the momentum in our business heading into 2021, I am confident in our ability to capitalize on the significant growth opportunities ahead, while delivering significant value to our customers partners and shareholders. I'd also like to thank the entire vertex team for their tremendous efforts and commitment in what was truly an unprecedented.

At year. Thank you again for your interest in vertex and for joining our call today, We hope you and your families stay safe and healthy and we look forward to reconnecting soon.

Thank you. This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time type of per.

Great. Thanks.