Q2 2021 Vertex Inc Earnings Call

August 11, 2021

[music].

Greetings and welcome to the vertex incorporated second quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference.

Please press Star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to uncle here with vertex Investor Relations Day, you you may begin.

Thank you good morning, everyone and thank you for joining us for <unk> financial results conference call for the second quarter ending June 32021 on the call today, we have vertex CEO, David as Stefano and CFO, John Schwab before we begin allow me to provide a disclaimer regarding forward looking statements. This call, including the Q&A portion of the call may include forward looking statements related to the.

<unk> 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 in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures additional information, including a reconciliation.

Delineation between non-GAAP financial information for the GAAP financial information is provided in the press release.

This conference call will be available for replay via webcast through vertex has an investor relations website at IR Dot vertex, Inc. Dot com.

I'll now turn the call over to David.

Thanks, Jay and thank you all for joining us today.

It was just over a year ago, when we began our journey as a public company.

Today I'm pleased to share our results for the second quarter of 2021, which exceeded our guidance total revenue is up 15% year over year.

Our strategy to connect business and government seamlessly across the fabric of global Commerce with end to end tax automation has never been more critical is a strategy that is resonating more and more of our global customers prospects and partners alright.

Alright accelerating growth in Q2 reflects the unwavering focus of the entire global vertex team on executing our strategy as we invest in delivering new products organically and through acquisitions like <unk> tell you tax and tax them, all while extending our go to market and ecosystem strength.

Our cloud revenues grew 59, 5% year over year coming from both new logos and existing customers consistent.

Consistent with previous quarters, we continue to see an overwhelming majority of the new logos choose our cloud products for flexibility scale and integration to the worlds major business application.

Current customers are continuing to add our cloud products as part of their hybrid strategy as well as migrating fully to the cloud and expanding their transaction volumes globally.

Enterprise and mid market businesses alike continue to choose vertex as they expand their business models.

<unk> Global Omni channel strategy and continue their digital transformations.

We believe our unified platform multi cloud strategy and deep partnerships are a powerful combination that allows us to serve an expanding addressable market and grow with our customers.

This was proven once again in the quarter with multiple six and seven figure deal in an overall average annual recurring revenue per customer of over $80500.

At the end of the day, though it's about delivering great customer experiences powerful solution and trusted relationships.

This is what drives our success.

We've talked before about our hybrid strategy and why that continues to differentiate us in the market and how we often co exist with our customers in both cloud based front office and traditional back office environment.

Today, many of our customers, while our solution both in their own environment and also have a cloud deployment.

They are already on the cloud journey with us.

Can't emphasize enough how important it is for tax professionals have confidence and consistency in their tax outcomes across all of their systems and for the it professional confidence in enterprise scalability is essential. These requirements are why we continue to have strong customer retention rate and why.

Our customers continue to adopt our cloud product as they advance their roadmaps.

To better illustrate the value we bring to our customers I'd like to share a recent example, within the retail space.

Over the past year businesses of all types have had to quickly pivot operations in response to supply chain disruption and a massive uptick in online sales.

The retail industry in particular has felt these challenges.

While other tax solutions emphasize solving problems solely in the E. Commerce channel vertex has been able to support the unprecedented online growth along with all the other aspects of their omni channel solutions consistently and seamlessly. This is a requirement for serving the mid market and large retailers.

More specific.

Our team worked with one of the top athletic apparel retailers, who was looking for a single solution to support three distinct business needs the solution needed to support the back office E Commerce and in store transactions.

Very common requirement for retailers they can't afford to lose a sale due to a disruption in internet service or a spike in demand.

This business imperative for retailers to the consistent reason their customers like vertex over our competitors, our ability to deploy and integrate deeply throughout all parts of the transaction infrastructure gives retailers confidence they can maintain optimal performance and reliability in all areas of their business.

This is something that cannot get from native cloud only solutions.

For Texas vision to accelerate global commerce by delivering innovative global solutions and digital capabilities have never been more relevant.

Explosion e-commerce, we've seen prior to and throughout the pandemic is not slowing giving way to incredible growth potential across nearly every industry and both <unk> and <unk> markets.

This growth goes hand in hand, with an increase in cross border sales as businesses maximize the new market opportunity enabled by ecommerce.

The dynamic regulatory environment continues to add complexity to the mix for both enterprise and mid market businesses. This quarter saw land market legislation that will impact how business is transacted in the European Union in the years ahead, much like wafer in the U S.

The new laws under the EU that e-commerce package impose additional compliance burdens with changes to rates threshold.

Mittens processes for BDC marketplaces merchants conducting cross border transactions and the supply chain to support them last quarter, we announced the strategic acquisition of tax them up cloud native pioneer intact from payment automation for global ecommerce and marketplaces.

We expect sustained growth opportunities with these capabilities as the impact of this legislation plays out.

This acquisition also creates a significant opportunity to reach a broader segment of the market. We are now delivering sellers an end to end turnkey solution that automates real time, bad calculations and reporting obligations to help enterprises e-commerce providers in both B to B and BDC marketplaces reduce friction and.

Where everywhere transactions are done.

I'll share a couple of stories, highlighting our tactical products and the unique value proposition they are bringing.

The first relates to a win for the very successful European startup that was growing close to 40% annually with no signs of slowing down.

Like many other b to B e-commerce providers, they needed to better understand their customer journey on their website to better support their expansion into new regions and countries.

We partnered with the CFO at this mid market web services provider to provide a global solution to manage their worldwide compliance requirements.

While other competitive solutions were considered vertex with taxable capabilities was the clear choice for the company due to the breadth and depth of our compliance solution and our integration with their subscription billing application.

Another example, this past quarter was with an e-commerce provider of an online membership platform for funding.

This customer is growing at nearly 20% year over year, the pain of managing over 7 million invoices for their international customers each month across more than 20 regions had become too great.

Wanted one global tax provider with the capabilities to support international invoicing with speed and scale. Additionally.

Additionally, the company the significant business in Taiwan, where every invoice.

Cross border transaction must include a lottery number the government has been very forceful in applying fees for noncompliance.

This was a critical business need or ability to handle this and other complex E. Invoicing requirements made the difference in this competitive win.

In addition to expanding our technical capabilities, we continue to strengthen our ability to support e-commerce and marketplaces by extending our relationships with top marketplace providers multi solar marketplaces have exploded in popularity and usage.

But so is the complexity and associated regulatory requirements, putting a greater responsibility for tax on the marketplace when facilitating transactions between sellers and buyers.

In June we announced our expanded partnership and new VAT integration with Miracle, a key infrastructure platform for hundreds of marketplaces with the changes in bat regulations. We believe this partnership will be important to supporting our strategy to expand in both the EU and beyond as marketplaces over the world.

Emerging regulatory pressures.

When we look at our performance throughout the quarter. One thing that stands out for me is the undeniable power of our extensive partner network, which includes technology leaders channel partners and the broader tax consulting community.

Our investment to expand the breadth and depth of these relationships fuels, our growth innovation and results.

Looking across our notable wins for the quarter the advocacy of our consulting and implementation partners is a consistent element in both new logo deal and cross sell opportunities with existing customers.

We are the go to tax technology partner for the top 10 largest accounting and consulting firms in the world.

Not only because of the strength of the relationship we have built but because our solutions can solve the challenge their customers face and connect to the critical core business applications. They rely on to compete in today's global Commerce environment.

These partners are not just serving the enterprise market.

Also have midmarket clients, who have reached a level of complexity that requires the technical capability business integrations and partnerships that we provide for a consistent and accurate answer.

I wanted to share two examples of competitive takeaways that show, how we are serving as the hub for tax and compliance connecting data across multiple systems and leveraging the strength of our partner network.

Here commonality from these scenarios with one representing a mid market win and the other involving an enterprise customer.

But the challenge remains the same.

First I'll start with the competitive takeaway that exemplifies the strength of our integrated platform to support the growing operating system complexities for companies in the mid market and how our capabilities to support Omnichannel business and the trusted relationships. We have built allow us to dominate and these sales cycles.

The company was looking for a global solution with enterprise performance and scalability that cut across multiple systems.

They are running net suite, one world and sales force in addition to Zara.

Partnering up with their accounting team and Zara.

We were able to show the advantage of our connected platform to support their expanding business needs.

This win exemplifies something that is easy to talk about doing but it's an exceptionally harder to deliver.

Which is being able to efficiently and effectively team with the customers' Si partner to enable multiple source operating systems to work with a single tap solution at enterprise grade and scale.

Our partner relationship and team of experts continue to differentiate us and deliver a sought after customer experience.

The same scenario holds true for the enterprise companies, who often rely on a web of systems to run their businesses. My Second example is with a global manufacturing company, who had grown through numerous acquisitions over time, some of which were running on competitive tax engines.

In addition, they were dealing with a high volume of exemption they approached us with a need to connect data.

Cross back office, ERP leasing and procurement solutions.

Our ability to seamlessly connect across multiple systems and drive performance in such a complex environment enabled a sizeable takeaway from their existing on premise legacy provider.

The company moved to our cloud solution for tax determination, an exemption certificate management.

This was also a great example of the growing connection between tax from procurement in Q2, we released our certified integrations for the Cooper business spend management platform to further support businesses as they put a greater focus on procurement and spend optimization.

Additionally, I'd like to highlight how we continue to strengthen our leadership and differentiation within complex industry verticals.

In June we announced the integration of our solution for leaseback with Alpha Star Alpha is a best in class technology provider that power some of the worlds biggest names in automotive finance.

The fact that we deliver a single platform for all indirect tax types that interfaces with a multitude of systems is critical.

We continue to focus on building these integrations and expanding our partnerships to reduce the inherent friction that our customers experienced between commerce and compliant.

When I think of the complete value proposition, we bring to our customers. It's the confidence in our technology, our deep commitment to their success and the true partnership that we formed together and that's something we're very proud of at vertex.

The business and regulatory environments are changing fast.

Every new way to produce procure and sell create tax complexity tech.

Technology, not only has to keep pace it needs to be a step ahead, and that's where vertex comes in.

This is the connecting point between commerce and compliance that I continue to talk about.

That's why we are significantly increasing our R&D investments in cutting edge cloud native technology.

LNG professionals, who get both tax from technology and expanding our co innovation efforts with our customers and partners.

This is enabling us to deliver more products and expanded capabilities to our customers.

Last quarter, we announced the release of the vertex indirect tax accelerator for Oracle fusion cloud enterprise resource planning.

Since the accelerator was released in April we're already seeing rapid adoption from new companies as well as existing customers.

This reflects the value of co innovation and shows how delivering end to end capabilities is strengthening the overall stickiness of our solutions.

We have significant opportunity to further expand internationally and we continue to invest in our software and solutions outside of the U S. Most notably in Latin America and Europe.

As the global regulatory environment continues to grow in complexity, we continue to provide new and expanded tax content for <unk>.

Kris coverage in Brazil.

Which is one of the most complex tax environments.

Our work there is enabling some of the world's largest companies to expand their business in Latin America.

And just this morning, we announced the release of our advanced cloud based solution for simple vivat compliance.

The vertex cloud that compliance solution provides the advanced features to support the changing tax environment across Europe, and other countries that required digitization of value added tax and goods and services tax.

The solution centralized and streamlined compliance as companies enter new territories and indirect tax filings become more complex.

This new solution was developed through our design partner program and enables us to accelerate customer time to value with capabilities.

In our modern user experience that truly differentiate this solution from other products on the market.

Feedback I received from the customers, who participated like national instruments highlight workflow automation and advanced data management and validation capabilities as the key to driving better accuracy and efficiency and their returns.

As we look ahead I am extremely excited about our product pipeline highlighted by expanded content and capabilities for marketplaces.

Ml, driven product categorization edge technology, as well as new insights and analytic capabilities.

Look forward to reporting on that in upcoming calls now.

Now I'll hand, it over to John for more detailed look at our second quarter results.

Thank you David and good morning, everyone today, I'm going to discuss our second quarter 2021 financial results and provide an update on our third quarter and full year 2021 guidance.

Our total second quarter revenue grew 15% year over year to reach $104.9 million exceed.

Exceeding the upper end of our quarterly guidance by $4.9 million.

Our subscription revenue has expanded 15, 9% year over year to $89.6 million, our second quarter subscription revenues were benefited by an annual tier based subscription amendments contributing approximately $2.1 million in additional revenue in the second quarter.

Our services revenue grew at nine 8% year over year to $15.3 million.

Our annual recurring revenue for <unk> grew to $336.2 million at June 32021, representing approximately 14, 1% growth year over year exclude.

Excluding the impact of tax amount of the <unk> increase over the first quarter of 2021.

Our net revenue retention rate or NR was 106% at quarter end growing from 105% in the first quarter of 2021, demonstrating our customers' ongoing commitment to our software and solutions for.

For purposes of clarification and only includes those customers that were with us at the beginning of the measurement period, which does not include tax amount.

Our gross revenue retention rate for <unk> was 94, 3% at quarter end, which excludes the internal migrations by customers to our cloud solutions, which were approximately 4%.

This is consistent with prior performance, which has averaged between $94.95 per cent.

At June 30, we had approximately 4175 customers demonstrating organic growth as well as the impact from the tax net acquisition.

We continue to see strong growth in our cloud based solutions, among both existing and new customers in the second quarter of 2021 cloud based revenues were $32.1 million, representing 59, 5% growth year over year.

This amount reflects $2.1 million from the tier based subscription amendment previously noted.

Excluding that amount cloud revenue growth was 49, 1%.

We have continued to see growth from our cloud based solutions and we anticipate that our 2021 full year cloud revenue growth will exceed 40%.

We believe our hybrid deployment approach is essential for us to meet the complex needs of our customers and is a competitive differentiator.

While new logos predominantly favor our cloud solutions many of our existing customers deploy our solutions in their own environments and in the cloud to manage their business needs.

Now some statements on expenses in discussing the remainder of our income statement. Please note that unless otherwise stated all references to our expenses operating results and per share results on a non-GAAP basis, all non-GAAP financial measures are detailed and reconciled to our GAAP results in the earnings press release that was issued this morning.

On an overall basis gross profit for the second quarter was $74.7 million, representing a 71, 2% gross margin. This compares with gross profit of $65.4 million and a 71, 7% gross margin in the same period last year.

From a subscription software standpoint, our gross margin was 77, 3% as compared to 78, 8% with the unfavorable variance driven by continued investment in our cloud infrastructure and our customer support.

Gross margin in our services revenues increased to 35, 3% from 32% due to increased utilization during the second quarter of 2021.

Okay.

Our second quarter research and development spend which includes our capitalized software development cost was $19.5 million, representing 18, 6% of revenues. This reflects the substantial investments in our cloud platform and new cloud offerings as well as continued expansion of connectors and Apis to integrate per Texas capabilities to menu custom.

Software platforms.

Research and development expense net of capital of the nation was $11.4 million or 10, 8% of revenues an increase of 40 basis points year over year.

Second quarter, selling and marketing expense was $23.3 million for 22, 2% of revenue as compared to 17, 8% in the prior year period.

This is an increase of $7.1 million to fund additional go to market activities and drive future revenue growth.

We intend to continue to make additional investments in sales and marketing capacity to drive further opportunities.

Second quarter General and administrative expense was $28 million for 19, 8% of total revenues a decrease of 10 basis points year over year.

Our adjusted EBITDA was $19.2 million, a decrease of $2.3 million year over year exceeding the upper end of our quarterly guidance by $2.7 million in the aggregate.

Adjusted EBITDA margin was 18, 3% in the current quarter of 530 basis point decrease versus the prior year.

Yeah.

Turning to liquidity and cash flows we ended the second quarter with $101.6 million in cash and cash equivalents and no indebtedness.

This reflects the use of cash on hand during the quarter of approximately $200 million for the <unk> acquisition in May.

During the second quarter of 2021, we generated $16.8 million from free cash flow second quarter free cash flow represents a decrease of $1.8 million compared to prior year, reflecting an increase in investments in research and development and selling and marketing activities during the quarter as previously discussed.

Turning now to guidance for the third quarter of 2021. We currently expect total revenues in the range of $104 million to $106 million representing growth of nine 9% to 12, 1% from the third quarter of 2020 and.

And adjusted EBITDA in the range of $15 million to $17 million, representing a decrease of five 5% to $7.5 million from the third quarter of 2020.

For the full year the company expects total revenues in the range of $414 million to $417 million, representing annual growth of 10, 5% to 11, 3% from the full year of 2020 and adjusted EBITDA in the range of <unk> $68 million to $72 million, representing a decrease of $6 four to $10.4 million.

For the full year 2020, reflecting additional spend in research and development as well as selling and marketing expenses to drive growth.

We are very pleased with the strong fundamentals of our core business, which delivered sequential quarterly growth in <unk>.

<unk> and cloud revenue during the second quarter.

Expect the positive momentum in our core business to continue as we progress through the year, which is reflected in our upwardly revised guidance.

Note that our revised guidance includes an adjustment to our expectation for the timing of revenue contribution from the <unk> capabilities for the balance of the year.

This is driven primarily by two reasons first we have decided to accelerate the integration of <unk> capabilities with the vertex capabilities because the market feedback is that our combined capabilities provide the best customer experience in addressing the new regulations.

We are six weeks into the regulatory compliance challenge and we want to ensure that we're properly positioned from the start to maximize our potential with respect to this opportunity and minimize potential product migration disruption in the future.

And secondly, the predictability of revenue timing around the adoption of new tax technology surrounding landmark legislation can be uneven as we saw with wafer.

We continue to believe that <unk> will have a meaningful impact on our 2022 revenues and beyond due to the timing of the acquisition and the tailwind from the recently enacted marketplace and E Commerce regulations mentioned above.

We continue to believe that our investments in our selling and marketing as well as product development is warranted given the opportunities that are in front of us and we will continue to invest in the business to drive growth.

On an overall basis, we are pleased with the progress we have made on our strategic initiatives and the performance of our business and with that we'll open the call up for questions.

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

A confirmation tone will indicate your line is in the question queue.

You May press star two if he would like to remove your question from the queue and for participants using speaker equipment and may be necessary to pick up for your handset before pressing the star keys.

Our first question is from Pat <unk> with JMP Securities. Please proceed.

Oh, great. Thank you and.

Congratulations on the Reacceleration of the business.

David can I, just go really big picture to start us out, which is you had five quarters where.

The business is decelerating and now you have this really nice reacceleration and.

During the period of de acceleration and one other things that you were pointing to was hey, if people aren't implementing ERP debt.

It is a headwind for us how has that environment changed.

Hi, Thanks for the feedback and the question.

We've clearly seen a shift in our pipeline activity with workday SAP and Oracle as their businesses have begun to ramp back up and we're seeing good we have good visibility to what's coming in the second half of the year as well so that's clearly changed.

For the favor and I would also just acknowledged our progress both in the middle market and in the E Commerce space, both continued to progress well.

And then for can I ask just one more which is when you look at the.

The competitive environment and sort of the demand levels overall domestically versus internationally how are they different.

I think it's a more mature tax technology market in the U S. They're more comfortable with third party bolt on solutions historically the communities in Europe in particular had been relying more on SAP native functionality again for the mid size and larger enterprises that we serve and.

I think that has shifted as a result for some of the regulatory change and that's the the momentum we're seeing and the opportunities, but that's been the it's a maturity issue I think really with the comfort newness of third party bolt ons versus trying.

Trying to get by with need of functionality and workarounds.

Alright, great. Thanks, very much and congratulations again, thanks again for that.

Our next question is from Samad Samana with Jefferies. Please proceed.

Hi, good morning, Thanks for taking my questions and nice to see the strong results.

So maybe John just a couple of clarifying questions. The IRR contribution from tax about <unk> in the quarter can you either give us what that was or maybe what the organic ending <unk> dollar amount was.

Yes, we don't we aren't going to break out the IRR by customers. So I think we did in our guidance for last year. We did say that they were going to be about a half a million dollars worth of revenue some odd.

Sure.

It's in that zone in terms of the from an IRR from an IRR standpoint.

As I mentioned, we were positive we were positive from an AOR growth standpoint, including them. So it.

It's under it's under $5 million in that zone. So.

Okay. That's very helpful. And then Greg Yeah, absolutely and then just as I think about the cloud guidance for above 40% I just wanted to make sure I get clarification is that organic cloud growth for for 2021 or does that include the contribution from <unk>.

In 2021.

Organic it will it will have there will be cloud included in our cloud revenue will be the will be the result of tax NOL, but that rate that number organic will be above 40% and with it will still be above 40%.

Okay, Great and then maybe zooming out.

David It is.

The examples on the call today were very helpful in thinking about deal activity picking up it certainly sounds like.

You are more confident in the back half I'm curious just as far as when you think about the pipeline is it more is there a type of customer or is there a type of vertical that you are seeing more strength than just maybe help us understand the pipeline composition, that's giving you kind of that added confidence looking into the back half of the year, yes.

I appreciate the question Youll complexity remains the primary segment driver more than anything we're just see continual regulatory and system complexity being our strongest play into the market and it happens across pretty much all the verticals.

I'm very excited about the leasing opportunity that's a very complex area that we just enhanced our capabilities in but it applies to retail it applies the manufacturing it's really about complexity that is the tipping point and we continue to see that being the primary by buying driver.

Great. Thank you so much for taking my questions.

Sure.

Our next question is from Joshua Reilly with Needham <unk> Company. Please proceed.

Hey, guys congrats on the strong quarter and thanks for taking my questions.

If you look at the triggers for customers, making it seems an indirect tax here, how would you kind of rate the importance of ERP versus making it seems in your procurement or billing system over the last couple of years is there has there been any change.

And what's driving customers to make a change on their tax platform.

It's interesting it's a great question and what's interesting about that Josh has a lot of times. It's we're already in the customer, let's just say with their ERP. We were in there for years and now they just make an upgrade to their procurement system they've adopted Cooper as an example, or they bought they're now going to omni channel and so we're adding our footprint there it's much more about.

The adoption is much more driven by a change that will break an in house system that they were using or where the native functionality is no longer to be going to be good enough more so than they have to do a big cloud lift and shift or a big lift and shift in their ERP that would be a volume driver that does happen, but it's more just we're already in this space and they're looking to expand their footprint.

Typically the driver that we're going to we're going to grow off of.

Okay, Great and then sales and marketing ramp pretty significantly here in Q2, how much of that is related to the tax from our acquisition in the model here I'm, assuming that's a small portion of it.

Versus organic investments increasing here and then how should we think about the growth in sales head count for the rest of the year. Thanks guys.

I'll take I'll take that Josh I guess from the first part in terms of kind of where the spend is the spend is really the majority of that is organic spend really focused on the mid market and the growth and the opportunity. We see there I think that's where our initiatives have been really focused and that's where we've been driving towards so that's where the majority of that comes from and I think in terms of kind of personnel standpoint, we continue to.

Grow in the sales and marketing group I don't have a number in terms of the number of ads that we had in the last in the last quarter or so but again, we continue to add personnel there because again the opportunity is in front of us and we want to make sure we attack the.

It while it's there.

Our net thanks guys.

Thanks, John Our next question is from Brad Reback with Stifel. Please proceed.

Great. Thanks, very much could you guys go a little deeper on this tier based pricing what drove that.

Likely hood of that is repeating next year.

Yes. This is John I'll take that Brad Yes, we did have we have one customer that exceeded its transaction volume thresholds and it somewhat of a unique contract and the contract requires an amendment.

Based on this new tiers based on their tier structure and then again it resulted in additional revenue for the previous subscription period, and then it reset for them on a go forward basis. It is a bit of a one off thing I know, we had something unrelated matter in the fourth quarter of last year, but.

It's something that just had to do with the volume increase and again more of a unique bespoke contract we have with a with one of our larger customers.

Got it and then maybe just thinking a bit longer term on the cloud business, obviously, a good sequential well good.

Uptake in the growth rate from 35 per quarter.

Going forward, but we think longer term how should we think about the sustainability of what the organic growth rate of that business. Thanks.

So that's where everything we sell all of our new products are built cloud all of our all of our efforts with our sales teams are to sell cloud first of all I would that will be the primary driver of all of our growth going forward.

Okay. Thank you.

Our next question is from Bhavan Suri with William Blair. Please proceed.

Hey, guys. This is Matt Stotler on for <unk>, Thanks for taking the questions.

Good to see the the.

Expanded VAT tax capabilities I would like to maybe double click on the international opportunity more broadly.

What's your updated thoughts on kind of the roadmap and where you go from here and thoughts on how for Texas position in those markets versus the other domestic landscape.

Sure. Thanks, Matt I appreciate the question so.

Clearly continuing to bring new product and new content is a primary focus outside the U S as well as expanding our sales and marketing footprint, we have been targeting in Europe because of some of the landmark legislation some of our strong partner and ecosystem presence over there and so that's clearly a footprint.

In America, we've really focused on content, where some of the regulatory environments. There are far more complex and so we continue to invest there and now as we're seeing with the tax from the acquisition in this marketplace legislation it will pull us into other jurisdictions I mentioned the opportunity that we closed in Taiwan, I think we're going to see more and more opportunities globally.

As we as the legislation continues to drive change around the world.

Got it that's helpful. And then maybe just one more on the partner front.

Would love to get maybe just some updated thoughts on.

At this point what portion of revenue and what portion of the business is influenced by partners and then specifically looking at.

Kind of pieces of the partner channel debt include economic relationships.

With bars, and maybe <unk>, specifically, how progress is going there in terms of expanding those relationships as well.

Take the beginning of that specifically on partners and partners are an expense for part of our relation if you think about complex businesses mid size and larger enterprises anytime, they're making a large technology purchase theyre going to typically run a process often with an RFP and so that's going to be run by our partner our partner in the process and so we work very closely we have a large.

Just talk technology practices with with the top 10 accounting firms, we work very closely with ESI means a broader si community in the mid market and they continue to be a large influencer in all of our deals.

From a from a go to market activity. They are a critical element of our success I think on the economic side, we continue to expand our relationships.

John I know if you want to build them yeah, I think we expand we're expanding our relationships down into the Si community and some of those have a bit more of a there's some from.

From sharing that goes on down there the bigger relationships at the higher end with the big for in the large accounting firms typically do not.

And in exchange of cash or monetary monetary things between the two between us and them. So.

But again I think as we move down and again that strategy to move down into that mid market space as we get more involved with some of those partners down there the relationships are a bit different and will result in additional additional commissions, if you will being paid.

Right that's helpful. Thanks again.

Our next question is from Brad Sills with Bank of America Securities. Please proceed.

Oh, Great Hey, guys. Thanks for taking my question here I wanted to ask just a follow up to your comments earlier on investments and insights and analytics.

Are those investments where do you see the opportunity is this.

Something where you see an analytics layer embedded into the core application or do you see an opportunity for potential upsell.

Two an add on or a premium edition if you will.

As you as you monetize.

Analytics.

Okay.

More of a new offering Brad it's certainly something if you think of the line item Invasiveness that we have in our business with what indirect taxes. We touched every line item of every transaction that happens and so the data that we are able to touch as significant and can provide great insight both to the tax department and to the broader business.

In terms of the way you Dimensionalize and so we see a lot of opportunity to expand there.

That's great. Thanks, so much and in the past I know you've mentioned fairly low penetration in the installed base is a big opportunity to.

To expand within existing accounts and these larger global organizations can you remind us kind of where you are with just expansion and what is the catalyst here for for accelerated potential accelerated expansion is it just simply as these firms departmental upgrade erp's they add vertex.

Digital transformation cloud those are those are a few key catalyst any just color on the key drivers of the expansion opportunity and where that could go from here. Thank you.

We continue to invest in our CSM capacity in practice to kind of can do to deliberate and enhanced customer experience as well as critical as our product product development roadmap and the volume of products, we're bringing to market. So that really gives more opportunity to go to that customer base highlighting the analytics product as an example, and provide more value.

<unk> and further entrench ourselves across the organization. Additionally, as you noted.

Theres great opportunity as we continue to work with the parent company to work with their divisions as they make acquisitions.

Continue to grow their businesses to then provide our solution and extended down into their divisions and so it's really a <unk>.

Three dimensional approach I think it's it's expansion of our own CSM capacity and capability. It's continuing to further the number of products, we bring to market to support them and then lastly kantar.

Continuing to follow them, where they go through their acquisitions in their growth strategy, so as they're upgrading systems.

We continue to be the the additional add on its procurement its ecommerce its omni channel as they continue to digitally transform their businesses.

Great. Thanks, so much sure.

As a reminder, the star one on your telephone keypad, if he would like to ask a question. Our next question is from Stan <unk> with Morgan Stanley. Please proceed.

You have done it on for Stan Congratulations on the quarter you. Please elaborate on what the $2 one onetime bad debt was two subscription revenue in Q2 and I also have one additional question.

Sure sure that we had one customer that exceeded the transaction volume thresholds and it was a unique contract as I'd mentioned earlier in the contract required a quick and amendment based on the new tier structure.

And when we put them into that it resulted in additional revenue from the previous subscription period, and then reset them. So they can.

So at the right level on a go forward basis. So it really is something that couldnt have been anticipated entirely until we had to we had to manage it through in the current quarter.

Did you just call that out and make sure people had seen that that was impacting positively the results for the <unk>.

Results for the subscription revenues.

Understood. Thank you and then.

Sort of on the beat in Q2 revenue was up by five three but for full year guidance, increasing by $3 five.

Taking a cloud growth.

<unk> guide by $4 million.

So can you elaborate on why the conservative approach looking for a second half of the year.

Yes, I mean, there's a couple of pieces again, we do have the one time sort of unique unique revenue thing in there in the current quarter, but then I think as we look through the rest of the year, we feel good about everything that we've been seeing in the market as mentioned, we did take down a little bit of our expectations around some of the tax no tax net contribution, but we feel we feel very positive about it.

It's more of a timing thing and then again getting the product more fully integrated with our product and so I think that was a peak day, where that kind of the two pieces that are there.

I would say are the bigger are the bigger drivers. When you look at when you look at sort of what that guidance looks like but we feel we feel very good about the performance of the business and again I think it really reflects the strength and the good things that are happening in the metrics that we've reported out.

Great. Thank you so much you.

You bet. Thank you very much.

We have reached the end of our question and answer session I would now like to turn the call over to David Distefano for closing remarks.

Thank you 2021 continues to be an exciting year for vertex our markets and our customers that we serve momentum continues to build across all market segments and our cloud portfolio. Our strategy has is committed to deliver new products expand our partner ecosystem accelerate go to market investments and make strategic acquisitions, we are.

Innovating across every aspect of our business and differentiating through our technologies robust content trusted partnerships and exceptional customer experience.

This mix will allow us to drive long term sustainable growth and lead the markets we serve.

I am proud of the continued progress we are making and the tremendous efforts of the vertex team to enable our customers to transact to comply and grow with confidence.

Thank you.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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Okay.

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Greetings and welcome to the vertex incorporated second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.

<unk> and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Note. This conference is being recorded I will now turn the conference over to uncle here with vertex Investor Relations. Thank you you may begin.

Good morning, everyone and thank you for joining us for for Texas Financial results Conference call for the second quarter ending June 32021 on the call today, we have vertex CEO, David as Stefano CFO, John Schwab before we begin allow me to provide a disclaimer regarding forward looking statements. This call, including the Q&A portion of the call may include forward looking statements related to the.

Future results for our company and are therefore for the statements or 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 in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures.

Additional information, including reconciliations between non-GAAP financial information for the GAAP financial information is provided in the press release.

Conference call will be available for replay via webcast through vertex has an investor relations website at IR day at vertex, Inc. Dot com with that I'll now turn the call over to David.

Thanks, RJ and thanks.

You all for joining us today.

It was just over a year ago, when we began our journey public company.

Today I'm pleased to share our results for the second quarter of 2021, which exceeded our guidance total revenue is up 15% year over year.

Our cloud revenues grew 59, 5% year over year coming from both new logos and existing customers consistent.

Current customers are continuing to add our cloud products as part of their hybrid strategy as well as migrating fully to the cloud and expanding their transaction volumes globally.

Enterprise and mid market businesses alike continue to choose vertex as they expand their business models.

<unk> Global Omni channel strategy and continue their digital transformation.

We believe our unified platform multi cloud strategy and deep partnerships are a powerful combination that allows us to serve an expanding addressable market and grow with our customers.

This was proven once again in the quarter with multiple six and seven figure deal in an overall average annual recurring revenue per customer of over $80500.

At the end of the day, though it's about delivering great customer experiences powerful solution and trusted relationships.

This is what drives our success.

Today, many of our customers, while our solution both in their own environment and also have a cloud deployment.

They are already on the cloud journey with us.

I can't emphasize enough how important it is for tax professionals that confidence and consistency in their tax outcomes across all of their systems and for the it professional confidence in enterprise scalability is essential. These requirements are why we continue to have strong customer retention rate and why.

Our customers continue to adopt our cloud product as they advance their roadmaps.

To better illustrate the value we bring to our customers I'd like to share a recent example, within the retail space.

Over the past year businesses of all types have had to quickly pivot operations in response to supply chain disruption and a massive uptick in online sales.

The retail industry in particular has felt these challenges.

While other tax solutions emphasized solving problems solely in the ecommerce channel vertex has been able to support the unprecedented online growth along with all the other aspects of their omni channel solution consistently and seamlessly. This is a requirement for serving mid market and large retailers.

Let me be more specific our team worked with one of the top athletic apparel retailers, who is looking for a single solution to support three distinct business needs the solution needed to support the back office E Commerce and in store transaction.

Very common requirement for retailers as they can.

Can't afford to lose the sale due to a disruption in internet service or a spike in demand.

This business imperative for retailers did the consistent reason their customer select vertex over our competitors, our ability to deploy and integrate deeply throughout all parts of the transaction infrastructure.

As retailers confidence they can maintain optimal performance and reliability in all areas of their business.

This is something that cannot get from native cloud only solutions.

For Texas vision to accelerate global commerce by delivering innovative global solution and digital capability has never been more relevant.

Explosion e-commerce, we've seen prior to and throughout the pandemic is not for giving way to incredible growth potential across nearly every industry and both <unk> and <unk> markets.

This growth goes hand in hand, with an increase in cross border sales as businesses maximize the new market opportunity enabled by ecommerce.

The dynamic regulatory environment continues to add complexity to the mixed for both enterprise and mid market businesses. This quarter saw land market legislation that will impact how business is transacted in the European Union in the years ahead, much like wafer in the U S.

The new laws under the EU that e-commerce package impose additional compliance burdens with changes to rates threshold and remittance processes for BDC marketplaces merchants conducting cross border transactions and the supply chain that supports them last quarter, we announced the strategic acquisition of tax them out.

And cloud native pioneer intact from payment automation for global ecommerce and marketplaces.

We expect sustained growth opportunities with these capabilities as the impact of this legislation plays out.

Where everywhere transactions are done.

I'll share a couple of stories, highlighting our tactical products and the unique value proposition they are bringing.

The first relates to a win for the very successful European startup that was growing close to 40% annually with no signs of slowing down.

Like many other b to B e-commerce providers, they needed to better understand their customer journey on their website to better support their expansion into new regions and countries.

We partnered with the CFO at this mid market web services provider to provide a global solution to manage their worldwide compliance requirements.

Another example, this past quarter was with an e-commerce provider of an online membership platform for funding.

This customer is growing at nearly 20% year over year, the pain of managing over 7 million invoices for their international customers each month across more than 20 regions had become too great.

Wanted one global tax provider with the capabilities to support international invoicing for speed and scale. Additionally.

Additionally, the company into a significant business in Taiwan, where every invoice.

Cross border transaction must include a lottery number the government has been very forceful in applying fees for noncompliance.

This was a critical business need or ability to handle this and other complex E. Invoicing requirements made the difference in this competitive win.

In addition to expanding our technical capabilities, we continue to strengthen our ability to support e-commerce and marketplaces by extending our relationship with pop marketplace providers multi seller marketplaces have exploded in popularity and usage.

But so is the complexity and associated regulatory requirements, putting a greater responsibility for tax on the marketplace when facilitating transactions between sellers and buyers.

Emerging regulatory pressures.

Our investment to expand the breadth and depth of these relationships fuels, our growth innovation and results.

We are the go to tax technology partner for the top 10 largest accounting and consulting firms in the world.

Not only because of the strength of the relationship we have built but because our solutions can solve the challenge it in their customers face and connect to the critical core business applications. They rely on to compete in today's global Commerce environment.

These partners are not just serving the enterprise market.

Also have midmarket clients, who have reached a level of complexity that requires the technical capability business integrations and partnerships that we provide for a consistent and accurate answer.

Here commonality from these scenarios with one representing a mid market win and the other involving an enterprise customer.

But the challenge remains the same.

And the trusted relationships, we have built allows us to dominate the knee sales cycles.

The company was looking for a global solution with enterprise performance and scalability of ex cut across multiple systems. Today. They are running net suite, one world and sales force in addition to Zara.

Partnering up with their accounting team and Zora.

We were able to show the advantage of our connected platform to support their expanding business needs.

This win exemplifies something that is easy to talk about doing but it's an exceptionally harder to deliver.

Which is being able to efficiently and effectively team with the customers' Si partner to enable multiple source operating systems to work with a single tax solution at enterprise grade and scale.

Our partner relationship and team of experts continue to differentiate us and deliver a sought after customer experience.

The same scenario holds true for the enterprise.

<unk>, who often rely on a web of systems to run their businesses. My Second example is with a global manufacturing company.

Rone through numerous acquisitions over time, some of which were running on competitive tax engines.

In addition, they were dealing with a high volume of exemption.

Coached us when they need to connect data.

Cross back office, ERP leasing and procurement solutions.

Our ability to seamlessly connect across multiple systems and drive performance in such a complex environment enabled a sizeable takeaway from their existing on premise legacy provider.

The company moved to our cloud solution for tax determination, an exemption certificate management.

Additionally, I'd like to highlight how we continue to strengthen our leadership and differentiation within complex industry verticals.

In June we announced the integration of our solution for leaseback with Alpha Star Alpha is a best in class technology provider that power some of the worlds biggest names in automotive finance.

The fact that we deliver a single platform for all indirect tax types that interfaces with a multitude of systems is critical.

We continue to focus on building these integrations and expanding our partnerships to reduce the inherent friction that our customers experienced between commerce and compliance.

When I think of the complete value proposition, we bring to our customers. It's our confidence in our technology, our deep commitment to their success and the true partnership that we for them together and that's something we're very proud of vertex.

The business and regulatory environments are changing fast.

Every new way to produce procure and sell create tax complexity.

<unk> not only has to keep pace it needs to be a step ahead, and that's where vertex comes in.

This is the connecting point between commerce and compliance that I continue to talk about.

That's why we are significantly increasing our R&D investments in cutting edge cloud native technology talented professionals, who get book packaging technology, and expanding our co innovation efforts with our customers and partners.

This is enabling us to deliver more products and expanded capabilities to our customers.

Last quarter, we announced the release of the vertex indirect tax accelerator for Oracle fusion cloud enterprise resource planning.

Let's see accelerator was released in April we're already seeing rapid adoption from new companies as well as the existing customers.

This reflects the value of co innovation and shows how delivering end to end capabilities and strengthening the overall stickiness of our solutions.

We have significant opportunity to further expand internationally and we continue to invest in our software and solutions outside of the U S. Most notably in Latin America and Europe.

As the global regulatory environment continues to grow in complexity, we continue to provide new and expanded tax content to increase coverage in Brazil, which is one of the most complex tax environments.

Our work there is enabling some of the world's largest companies to expand their business in Latin America.

And just this morning, we announced the release of our advanced cloud based solution for simple buyback compliance.

The vertex cloud that compliance solution provides the advanced features to support the changing tax environment across Europe, and other countries that require digitization of value added tax and goods and services tax.

The solution centralized and streamlined compliance as companies enter new territories and indirect tax filings become more complex.

This new solution was developed through our design partner program and enables us to accelerate customer time to value with capabilities.

In a modern user experience that truly differentiate this solution from other products on the market.

As we look ahead I am extremely excited about our product pipeline highlighted by expanded content and capabilities for marketplaces.

And ml, driven product categorization edge technology, as well as new insights and analytic capabilities.

We look forward to reporting on that in upcoming calls now.

Now I'll hand, it over to John for more detailed look at our second quarter results.

Thank you David and good morning, everyone today, I'm going to discuss our second quarter of 2021 financial results and provide an update on our third quarter and full year 2021 guidance.

Our total second quarter revenues grew 15% year over year to reach $104.9 million exceeding the upper end of our quarterly guidance by $4.9 million.

Our subscription revenue has expanded 15, 9% year over year to $89.6 million, our second quarter subscription revenues were benefited by an annual tier based subscription amendment contributing approximately $2.1 million in additional revenue line second quarter.

Our services revenue grew at nine 8% year over year to $15.3 million.

Our annual recurring revenue for <unk> grew to $336.2 million at June 30 of 2021, representing approximately 14, 1% growth year over year ex.

And the impact of tax and about the <unk> increase over the first quarter of 2021.

Our net revenue retention rate or NR was 106% at quarter end growing from 105% in the first quarter of 2021, demonstrating our customers' ongoing commitment to our software and solutions.

For purposes of clarification and only includes those customers that were with us at the beginning of the measurement period, which does not include tax amount.

Our gross revenue retention rate for <unk> was 94, 3% at quarter end, which excludes the internal migrations by customers to our cloud solutions, which were approximately 4%.

This is consistent with prior performance, which has averaged between $94.95 per cent.

At June 30, we had approximately 4175 customers demonstrating organic growth as well as the impact from the tax net acquisition.

This amount reflects $2.1 million from the tier based subscription amendment previously noted ex.

Moving that amount of cloud revenue growth was 49, 1%.

We have continued to see growth from our cloud based solutions and we anticipate that our 2021 full year cloud revenue growth will exceed 40%.

We believe our hybrid deployment approach is essential for us to meet the complex needs of our customers and is a competitive differentiator.

While new logos predominantly favor our cloud solutions many of our existing customers deploy our solutions in their own environments and in the cloud to manage their business needs.

All non-GAAP financial measures are detailed and reconciled to our GAAP results in the earnings press release that was issued this morning.

On an overall basis gross profit for the second quarter was $74.7 million, representing a 71, 2% gross margin. This compares with gross profit of $65.4 million and the 71, 7% gross margin in the same period last year.

Gross margin in our services revenues increased to 35, 3% from 32% due to increased utilization during the second quarter of 2021.

To many customer software platforms.