Q3 2021 Vertex Inc Earnings Call

November 10, 2021

Greetings and welcome to the vertex Inc. Third 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 and.

And please note that this conference is being recorded.

Now I'll turn the conference over to your host market Hara you may begin.

Thank you good morning, everyone and thank you for joining us for Texas Financial results Conference call for the third quarter ending September 32021 on the call today, we at vertex CEO, David de Stefano and CFO John Schwab.

Before we begin to 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 expected future results for our company and are therefore, Florida 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 or describe.

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 to the GAAP financial information is provided in the press release.

This conference call will be available for replay via webcast to vertex as Investor Relations website at IR <unk>, Inc. Dot com with that I'll now turn the call over to David.

Thanks on kit and thank you all for joining us today.

We delivered a strong third quarter in both our topline and Bottomline performance total revenue growth outperformed our guidance again, this quarter and was up 17% year over year wildly.

Cloud revenues also grew over 45% year over year.

The value, we're bringing to the market is resonating now more than ever as companies continue to scale tax automation across their operations.

Through the focused efforts of our global team, we delivered great execution across all areas of the business.

We are seeing positive impact from our continued investments in R&D go to market and ecosystem expansion.

I'd like to share some overall highlights from the quarter.

First we're seeing notable strength in our enterprise segment, among both new logos and existing customers.

Our win rate in this market remains substantial as the breadth and depth of our solutions help customers address the complexity of tax compliance brought on by the accelerating forces with digital transformation and E Commerce.

Our ability to serve the largest companies on the planet has been a durable growth lever for us throughout the pandemic and continues to drive growth opportunity at budgets for finance transformation gained momentum.

Among our existing customers, we saw the expansion of wallet share with our enterprise customers through Upsells Cross sells and the addition of strategic products.

And we continue to see a steady stream of customers migrating from posting our solutions in their environments to our cloud platform.

Also in Q3, we added a number of notable new logos with the help of our partners.

Our extensive ecosystem of technology accounting and consulting partners is unmatched in our category and continues to get stronger.

We continue to deliver the world's most trusted indirect tax technology solutions, which we do at a scale and complexity beyond any other vendor in the market.

At the same time, we continue to make key acquisitions that position us for future growth.

As I noted we had continued growth in our cloud revenues in Q3, we're seeing more companies select our cloud product and the enterprise and mid market, where our unified platform multi cloud strategy and deep partnerships continue to differentiate us and drive strong win rates for our sales and partner teams.

This was the case in Q3 with a multibillion dollar interactive Entertainment company running on Workday.

The company is experiencing rapid business growth with a continued rise in the popularity of online gaming.

By the nature of their business, they're contending with a high volume of micro in game purchases taking place all over the globe.

This challenge their existing cloud solution and triggered a competitive takeaway by moving to our cloud solution, they're now able to scale with confidence.

Like so many other customer stories I share with you the depth of our IP and our integrations played a big role in this win.

This highlights the strength of our integration and it's indicative of other pipeline opportunities, we see with workday.

We also continue to deepen our integration and go to market motions with Microsoft and Salesforce ecosystem as well as the major e-commerce providers.

Today, we are firing on all cylinders with our SAP and Oracle partnerships, where we have incredibly strong relationships our business technical and go to market levels.

With continued investment in these longstanding partnerships, we have even greater visibility and confidence as our enterprise pipeline continues to grow.

Looking across our noble win with both S&P and Oracle for the quarter the advocacy of our consulting and implementation partners is a consistent element in these deals.

In September we announced the acquisition of LCR Dixon to expand our global tax automation portfolio for S. E T.

We are very happy to welcome industry thought leaders Susie to Jetblue richer and the extended LCR Dixon team to vertex.

Our broader partner ecosystem, including Big four consulting partners and accounting firms recognize the value of the deep knowledge in tax technology and the <unk>.

SAP ecosystem, the LCR team brings to our organization this.

This acquisition was a natural extension of our partnership with LCR that has spanned nearly a decade further strengthens our leadership in the state.

Let me give you an example power of our combined offerings as it relates to a recent opportunity with a fortune 500 medical device manufacturer. The company was looking to automate tasks and M across multiple tax site as part of their global STP transformation.

Seamless integration between our compliance solution, our chain flow accelerator for SAP and our LCR Dixon tool enabled a true end to end solutions to support the company's growth and led to another great six figure deal for us.

In the quarter, we had another important milestone in the S. E T ecosystem that will benefit our customers and partners.

We achieved certification as built on SaaS business technology platform for Brazil.

After building the first cloud integration for S. Four on a cloud a few years ago. This new integration will allow us to further extend our solutions to customers, who must contend with the high complexity of doing business in Brazil.

Similarly, we continue to expand our partnership with Oracle.

Oracle cloud infrastructure.

Enabling us to extend our penetration to new logos within the Oracle customer base.

This quarter, we had a notable competitive win with one of the nation's leading energy providers, even as a fortune 100 company manual processes, we're still plaguing the tax department partnering.

Partnering closely with Oracle and one of our big four lives as we were able to support their business with an end to end solution.

Our Oracle accelerator and seamless integration with OCI served as Differentiators in the sales cycle to win this new logo.

Digital transformation is gaining momentum in the back office ERP as evidenced by the key wins I highlighted but to truly achieve our vision to accelerate global commerce.

Customers must couple of solutions to support their front office transaction systems as well.

Increasingly they choose vertex across their global operations for the ability to scale deliver consistent tax results, regardless of where transactions take place and to enable frictionless customer experience as they grow their omni channel presence.

We had an incredible opportunity this quarter to support one of our longtime retail customers a fortune 20 company.

Undergo a large finance transformation project to modernize their point of sale experience.

This customer was already using our solutions for use that in their ERP and procurement systems, but for sales tax they had been managing taxability across nearly 10000 stores with a custom solution that required significant manual effort.

This was a seven figure deal that allow us to expand our relationship across multiple tax sites and business system.

Globally, we continue to see increased demand for our solutions as digital Commerce continues to proliferate and companies are now able to reach any customer anywhere in the world at any time this.

This has created a truly global economy, bringing more and more business into new geographies and introducing the complexity of value added tax and cross border transactions.

This quarter, we released our new cloud based solution to automate and streamline back compliance supporting complex legislation requirements in the EU, Spain, Hungary, and other parts of the world.

We are already seeing traction with some notable wins this quarter.

Along with the momentum in both Europe, and the U S with accounting firms, who are looking to enable tax automation for their customer base.

We've made these significant investments in new cloud products.

Our tax content database continues to be a critical decision factor for our customers and a key part of our land and expand motion.

Our global tax research team continues to expand our coverage leveraging ml and AI technologies, the new content at speed and scale across verticals and countries.

Since our IPO last year, we have grown our content database to over 500 million data driven effective tactual supporting indirect tax compliance.

I'm so excited about the momentum we continue to see outside the U S. Let.

Let me share a quick example of a global wins that really stood out to me in the quarter.

We were brought into a competitive sales cycle for an innovative new automotive business.

But one of the largest chemical manufacturers.

Theyre, new venture brings them into entirely new industry vehicle manufacturing.

We were able to come in and demonstrate the value of our seamless integration. So there S. A T system, including our shameful accelerated product, which we had released earlier this year.

The parent company manages 20 autonomous businesses, so as we deliver value to the startup. We also see the opportunity to leverage our proven growth model across the entire family of enterprise.

I think this deal also highlights the strength of the vertex brand.

Companies of this caliber and wants to know that we've walked a mile and the shoes that they are stepping into.

Building a brand of trust and integrity is an essential part of our leadership in the enterprise space.

But we have marquee customers willing to share their experience gives companies like the even greater confidence in choosing us as a long term partner.

Across Europe, we're seeing increased demand for our solutions across segments and use cases.

Earlier this year, we acquired taxi mode to advance our strategy to automate compliance and commerce across the entire value chain of cross border transactions.

As ecommerce continues to open new avenues for business to sell through the impact and complexity of taxes, extending well beyond core ERP.

In the global digital economy transaction tax regulations are shifting to where customers are buying as opposed to where the suppliers are.

Further increasing the burden of compliance for businesses.

This quarter, we saw increased traction with digital native companies that are balancing that increased tax complexity with the need to support rapid business growth.

This was the case in Q3 with a leading online learning platform and an internet hosting provider in both cases, the strength of our end to end capabilities allowed us to support their global compliance requirements for multiple reasons.

We also launched tactical assure in Q3.

This product allows the merchant to meet their obligations under the new EU got more in the form of a term key pays you go solution packs similar sure simplifies the entire process for merchants, who are not equipped to handle remote seller obligation and prefer to focus on their core business.

Marketplaces also continued to be an exciting area of opportunity and growth for us.

Since launching our integration with the Miracle marketplace platform. In Q2, we are seeing pipeline growth in both Europe, and the U S coming from existing customers and new logo demand for both D to C and b to B companies across multiple industries as the enforcement of EU regulations ramp up we expect this growth.

To accelerate.

An example of this is a new customer we brought it on this quarter that serves as the E Commerce engine, but one of the largest grocery retail groups.

Depth of our tax constant for the food and beverage industry drove the selection of our retail Pos an exemption certificate management solutions.

Earlier, I highlighted our cloud revenue growth in the quarter I'd like to hover on this growth driver for our business for just another moment.

We continue to win with our cloud capability in fact, 94% of our new logos in Q3 selected our cloud solutions to handle their enterprise scale tax requirement.

We continue to see increasing demand and preference for our solutions and mid market cloud opportunity at <unk>.

Part of our one to many strategy let.

Let me highlight our expansion with vacuum Attica.

I was excited to share that in September we received the fulfilled by <unk> certification.

We are the first and only tax technology provider to achieve this certification and with it we are creating a frictionless experience for axiomatic or customers as a fully bar driven network.

He has just some great highlights from the quarter, but as they look to the future and the growth opportunity in front of US one thing is clear we can never stand still.

As a team we passionately push ourselves to continually innovate for the future, we're investing heavily to expand our offerings with enhanced AI machine learning edge computing and containerization, along with many other emerging technologies.

Well anchoring and building off of our powerful core we continue to expand and evolve our end to end tax solutions with unrivaled tax content and the exceptional service our customers have come to expect from vertex.

As these calls continue to reinforce trusted relationships, we forged with our partners and customers remain a key element of our success.

And one we will focus on and continue to strengthen.

Because we understand to power global Commerce, It will take a community of talent tax professionals and partners to drive the speed and scale of innovation.

As I've shared today, we have considerable opportunity to continue to serve customers at every stage of their journey and grow our revenues with them.

Not only does it take advanced technical capabilities deep business integration, but also a trusted partnerships with our customers and this is why we are deeply committed to an exceptional customer experience and investing in customer success throughout vertex.

I'd like to share a few quick examples of how this showed up in the third quarter.

We recently hosted our exchange conferences in both the U S and Europe, bringing a record number of customers partners and prospects together to engage on the future of indirect tax.

The conversations we have with our customers and partners at these events affirms our strategy and the value we're delivering every day.

The vertex brand continues to reflect trust integrity and quality and that is something I am extremely proud of.

This past quarter. We've also seen an increase in vertex University enrollment, we now have over 30000 learners, who get training certification and are part of a vibrant community of tax technologists. We believe we invest in their success. It further strengthens our brands and their advocacy of vertex in the market.

One area I don't get the highlight is often in these calls, but it's foundational to who we are as a company is the strength of our values driven purpose led culture.

That purpose is to build trusted relationships at work in business and in our communities.

Our global team just completed our third annual global week of service.

Our employees participated on three continents to make a difference and give back to the communities, where they work and live.

It's because of these outstanding efforts of the vertex team both in and outside of the office and we will continue to drive business growth and impact around the world.

Thank you for your time today now I'd like to turn it over to John for a more detailed look at our Q3 results.

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

Total third quarter revenues grew 17% year over year to reach $110 $7 million exceeding the upper end of our quarterly guidance by $4 $7 million.

Our subscription revenues expanded 15, 7% year over year to $92 $3 million. Our services revenue grew at 24, 4% year over year to $18 $4 million.

Our annual recurring revenues or <unk> grew to $352 9 million at September 32021, representing approximately 15, 1% growth year over year.

<unk> includes approximately $1 $9 million of IRR from the acquisition of LCR Dixon. It was completed in September of 2021.

Excluding the acquisition of LCR Dixon and tax and though our IRR grew at 13, 2% on a year over year basis, which is an increase from 12, 8% that we reported in the second quarter of 2021.

Our net revenue retention rate for NR was 106% at quarter end consistent with the second the second quarter, demonstrating our customers' ongoing commitment to our software and solutions.

For purposes of clarification NR only includes those customers that were with us at the beginning of the measurement period, which does not include taxes or LCR Dixon.

Our gross revenue retention rate or <unk> was 94, 5% at quarter end, which excludes internal migrations by customers to our cloud solutions, which were approximately 4%.

Consistent with prior performance, which has averaged between 94% 95%.

At September 30, we had 4258 customers demonstrating growth as well as the as well as the impact from tax <unk> and LCR Dixon acquisition.

At September 30th number includes 72 net new customers from the LCR Dixon acquisition.

We continue to see strong growth in our cloud based solutions, among both existing and new customers in the third quarter of 2021 cloud based revenues were $33 $3 million, representing 45, 6% growth year over year.

Excluding the impact of acquisitions cloud growth was 41% for the third quarter.

We anticipate that our full year 2021 organic cloud revenue growth will exceed 40%.

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

On an overall basis gross profit for the third quarter was $78 9 million, representing a 71, 3% gross margin.

This compares with a gross profit of $67 5 million and 71, 4% gross margin for the same period last year.

From a subscription software standpoint, our gross margin was 77, 7% as compared to 78% with a slight decline driven by continued investment in customer experience packs content in our cloud infrastructure.

Gross margin on services revenues increased to 39, 4% from 35, 4% due to increased utilization in the third quarter.

Our third quarter research and development spend which includes our capitalized software development costs and cloud based customer solutions was $17 $4 million, representing 15, 7% of revenues.

This reflects substantial investments in our cloud platform, our new cloud offerings integration of acquired technologies and ongoing expansion of connectors and Apis to continue the integration of their Texas capabilities into customer software platforms.

The third quarter, selling and marketing expense was $23 1 million or 29% of total revenues, an increase of $6 7 million and approximately 350 basis points from the prior year period.

This increase is due to the funding of additional go to market activities to drive future revenue growth.

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

Third quarter General and administrative expense was $24 9 million or 22, 5% of total revenues an increase of $6 $5 million from the prior year period.

This increase was primarily driven by planned strategic investments in information technology infrastructure business process reengineering integration costs and other initiatives to drive future operating leverage.

Adjusted EBITDA was $21 4 million a decrease of $1 2 million on a year over year basis, adjusted EBITDA exceeded the upper end of our quarterly guidance by $4 $4 million due to some spend initiatives shifting into the fourth quarter.

Adjusted EBITDA margin was 19, 3% in the current quarter, a 450 basis point decrease versus the prior year due to the investments in our go to market activities and new product development.

Now turning to liquidity and cash flows we ended the quarter with $47 $5 million in cash and cash equivalents, which reflects the use of cash on hand during the quarter for the LCR acquisition in September.

During the third quarter of 2021, we generated $15 $4 million in free cash flow.

The third quarter free cash flow represents a decrease of 400 that $400000 compared to the prior year.

Turning now to guidance for the fourth quarter of 2021, we currently expect.

Total revenues in the range of $108 million to $110 million representing growth of eight 5% to 10, 6% from the fourth quarter of 2020.

And adjusted EBITDA in the range of $15 million to $17 million, representing a decrease of $2 one to $4 1 million from the fourth quarter of 2020.

For the full year 2021, the company currently expects total revenues in the range of $422 million to $424 million, representing annual growth of 12, 6% to 13, 2% from the full year of 2020.

And adjusted EBITDA in the range of $74 million to $76 million representing.

Representing a decrease of 2.4 to $4 $4 million from the full year 2020, reflecting additional spend in research and development as well as selling and marketing expenses to drive growth.

These expectation the expected guidance takes into consideration the seasonal slowdown in our services business in the fourth quarter and assumes a minor contribution from the LCR LCR Dixon acquisition due to revenue recognition rules.

We are very pleased with the solid fundamentals of our business, which delivered strong quarterly performance with revenue EBITDA.

<unk> and cloud revenue during the third quarter, which resulted in our upwardly revised guidance.

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

Overall, we're very pleased with the progress we've made in our strategic initiatives and with the performance of the business.

And with that we'll open it up for questions.

Operator can you. Please open the line for Q&A.

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

A confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, we ask that you limit yourself to one question and a short follow up.

One moment, please while we poll for questions.

Our first question comes from the line of Joshua Reilly with Needham <unk> Co. You May proceed with your question.

Yeah, Thanks, guys nice job on the quarter.

So maybe starting out.

When a customer migrates to the cloud you know there is a pretty healthy uplift in terms of <unk> I think it's like 40% to 50% upon conversion.

You look at the <unk> growth year to date here.

Is there any color on how much has been a result of this uplift from conversions.

Either cross sell up sell.

Existing customers or net new customer growth.

Yes, Josh this is John just in terms of sort of the customer migration as we talk about when we go through our <unk> calculation, we sort of the migrations are about three to four 3% to 4% averaging of customers migrating over and thats been fairly consistent over a period of time. So I don't have a number of exactly what the increases, but we've talked about that being <unk>.

The 40% that at times, we can see flow into the numbers. So it's not not tremendously significant but it certainly is a number that we are excited about when we see that conversion happens.

Okay, Great and then maybe two quick model questions professional services gross margin in the quarter was above recent trends anything to note. There and then what are you assuming in Q4 guidance for LCR revenue. Thanks, guys, yes.

Josh I'll take those in terms of sort of the increase in the services margin really largely driven by utilization in the <unk> and services during the period. So a lot of activity there good activity and driving driving the driving utilization up and and margins up.

And I guess in terms of the LCR contribution in the fourth quarter vary it's going to be very minor contribution again due to the Rev. Rec rules, it's a couple hundred thousand dollars.

Our product revenue not lot.

And then obviously, we'll see that flow into next year over time as that as that works through and then from a services standpoint again. It is a slower quarter for services. The fourth quarter that is so a handful of $100000 in there as well again, just reflecting that slower period, but that's kind of what we had assumed.

Great. Thanks, guys.

Our next question comes from the line of Andrew de Gasperi with Baron Baird. You May proceed with your question.

Thanks for taking my question I guess first on the LCR addiction acquisition I mean could you maybe elaborate a little bit what does this do to your <unk> relationship and what was the rationale behind the acquisition that you already had a partnership with them.

Yes, Andrew this is David Thank you for the question.

SAP is one of our most strategic partners and LCR clearly had some.

Unique tools that we and other industry players, we're leveraging as they went to market to compete for S&P deal. So acquiring the tools give us full access as we compete for new SVP deals in the future and given the growth rate, we're seeing in our S&P pipeline. It became very strategic to make sure. We had we continue.

Leading develop a leading share there.

Got it and then with.

In terms of the vacuum Attica I mean, this seems to be kind of ERP.

ERP solution for like very small businesses.

Around 3000, so far but I was just wondering I.

I mean, how how kind of the I know you mentioned your strategy of growing at the lower end of the market, but just wondering how long what is your typical customer.

Likely to engage with at that level.

So again one of the key things Great question, one of the key things about that strategy is it's a one to many strategy for us. So we will really accu matic is really going to drive that so it really gives us that sell through motion that we don't have the <unk>. We can continue to focus on our midmarket and enterprise market, but where we see unique opportunities where our cloud solution is being preferred for.

A vendor like axiomatic that we're happy to partner with them and allow them to drive the sales motion going forward.

But I think it's going to be as you know it will probably be in that.

There are small revenue customers and it's probably going to be 225000 size revenue opportunity that will flow through to us without without the overhead of pursuit that we normally have for our more complex customers.

Got it and then lastly on the map.

With the acquisition of tack small CR.

Is there any impact to margins or the investment cycles, you will make I know you mentioned additional sales and marketing investments just curious to know like what.

How does this sort of play out in the numbers maybe in the near term.

Yes from a numbers standpoint, I think we're going to continue down as you know we've been.

Continuing to ramp up spending in selling and marketing and certainly those areas. We will continue to focus on driving that now with some additional additional potential tools out there as well as developing different go to market strategies for those products that we can bundle with our with our existing products. So we're working on that I don't know I don't expect to see a significant change due to the.

Due to the acquisition of LCR as we move forward, but I think it's really just a carry on of the of the real good progress we've been making.

Great. Thank you sure.

Our next question comes from the line of Samad Samana with Jefferies. You May proceed with your question.

Hi, This is Jordan <unk> on for Simeon. Thanks for taking my question, David and John Congrats on the strong results. So I wanted to touch on <unk> for a minute last quarter you adjusted expectations on Chuck's most near term contribution as you accelerated integration to vertex could you give a quick update on how that integration is progressing.

Sure Yeah, we're really pleased with the progress that we're making with the teams in terms of the e-commerce and marketplace elements of the integration that we've talked about as well as we noted in the quarter, we were able to release the <unk> assure product out into the market.

Ahead of schedule, which I think is showing the progress we're making with the overall integration process. So happy with the way things are moving there.

Awesome. Thank you and then just kind of pivoting a bit many companies have called out the tougher hiring environment in the current and the prior quarter. So in terms of your own sales and engineering departments would you say hiring during the quarter was in line with expectations ahead or behind.

I'd say it was largely in line there are certainly areas, where it is more competitive certainly from a talent perspective, I think as I've noted the pandemic has been good for us and that it really opened up our talent aperture a lot broader than we've ever had before and so we've been able to find talent and unique places that historically, we might not have hired into.

So that has actually helped us in certain ways in finding talent, but it's obviously, it's a continual thing we focus on each and every day.

Great. Thanks for taking my questions.

Sure.

Our next question comes from the line of <unk> with William Blair. You May proceed with your question.

Hey, Good morning, this is Matt Stotler off of the bond.

A couple of quick ones from me.

Maybe first.

ERP migrations in.

<unk> kind of replacement processes have obviously been a significant trigger for adoption of your solutions.

Historically, and you've talked obviously, you're investing in the acquisition here seems it seems very interesting.

But you talked last quarter about kind of this lag if you will in terms of.

Yes, if youre replacement cycles and processes kicking back in and then vertex youre kind of getting pulled in those conversations.

We'd love to just get an update on kind of the progress you are seeing there how that's been playing out both in terms of conversations in bookings as we've gone through kind of Q3 and towards the end of the year.

Sure, Matt and thanks for the question clearly.

The visibility we have and the confidence we have in our pipeline given the work we've done with SAP.

And Oracle.

<unk> migrations that theyre going through both are giving us.

Strong belief that we continue to see progress and see the green shoots of growth that we've been talking about for a while so very pleased with the visibility we have as well as even with workday I think those pipelines are all progressing nicely.

Got it that's helpful and then maybe just on international.

We are very large and underpenetrated opportunity lost launched the VAT compliance solution in the quarter any update just on.

I guess the either.

Conversations you are having interest in that product early traction or.

In terms of kind of contribution there and then as Youre thinking about.

Investments to drive further adoption and growth internationally I would love to just get an update on those two.

Sure.

One of the beauties of our business relationship with our customers as we bring in a lot of design partners to co design the offerings.

And that cloud product that we released is a great example of it because what it enabled us to do was also begin to understand where the market opportunities were with existing customers and so we saw that fall through once we released the product with some of the key wins, we enjoyed in the quarter and now have a pipeline building off of it. So I think that has served us well and we look forward to that.

Product continuing to progress as we move forward in 'twenty two.

Strategically I think we've talked about obviously there are opportunities with the growing legislation around invoice.

Real time real time requirements that we continue to progress both in our R&D efforts as well as elsewhere to explore how we can capitalize on those for future for future growth.

Got it thanks again.

Our next question comes from the line of Pat <unk> with JMP. You May proceed with your question.

Oh, great. Thank you and congratulations guys nice to see this.

The piece is starting to come in in the business accelerating so David first question for you is pretty Big picture as you look out to <unk>.

Kip.

Prep and build the foundation for next year what are your top.

Two or three priorities.

Yes, I think doubling down Pat on our.

Sales and marketing acceleration.

Since we're making there and continuing to focus there see opportunities because of the demand cycles. So we want to make sure. We're in front of us as well as our product roadmap. We really made good progress this year in turning out new products I'm excited for what's lined up for the early part of next year and really keeping our focus on those two things are our top priority.

For our success in 'twenty, two and beyond.

Alright, Great and then my second question is I just thought it's interesting the way you reeled off.

SAP Oracle and <unk>.

Workday is as where you saw the pipeline progressing.

I would just love to hear sorry at the Big picture thought on each of those so I mean in the case of S. A S.

I assume it's everyone moving to as for Hana, but.

But.

Just what youre seeing with each of those and where you fit in I think would be really interesting for investors sure certainly both in the U S and in Europe. As you know they are the largest platform in Europe as well and so we're seeing those opportunities that I would tie or EBIT into that as well.

Really enjoy a great relationship on the procurement side and have some differentiated capabilities. There that we continue to see opportunities as both Cooper and <unk> are continuing to progress in the market.

Oracle they have been wonderful partnering around the OCI platform and as they continue.

Continue to get access to what's interesting there in both SAP and.

And Oracle so our relationships are expanding we're getting access to a lot of new logos, just paying off how underpenetrated the spaces.

Our customer base relative to the Oracle and SAP customer bases and we continue to have good visibility to growing pipelines in both segments.

Workday again, I think we highlighted a great win on the call as customers are progressing with workday, we're starting to see more and more progress because of the IP, we put in our integration and our win rate continues to improve there.

Okay, great. Thanks very much.

Sure.

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Our next question comes from the line of Brad Reback with Stifel. You May proceed with your question.

Great. Thanks, very much guys as I look towards the <unk> guide beyond.

A fair amount of conservatism any other reasons the business would be down sequentially. After if you look back over the last three years, it's sort of grown about $4 million to $5 million from <unk>.

Yes.

I'll take that Brad in terms of sort of as I thought we thought about the guide a couple of things I think first keep in mind Q4, Q4. This Q4, we anticipate that it would be a bit of a slowdown from a services standpoint, I kind of called that out in my prepared remarks, we do anticipate seeing a little bit of that a little bit of slowness coming in from that perspective, So I think thats one thing <unk>.

In mind, a year ago same quarter, we did have a $2 million positive impact from a from a volume from a volume play from one of our customers, where we got to catch that revenue up so that is in there when you kind of do a quarter to Q4 to Q4 comparison that pieces in there as well so I want to make sure I point that out we did not anticipate a similar thing in this quarter. So.

Two big things I would point out, but I don't know that theres anything else.

Big picture driving any of anything other than the things you've mentioned.

Great. Thanks very much.

Our next question comes from the line of Stan <unk> with Morgan Stanley You May proceed with your question.

Perfect. Thank you so much guys and good morning, everybody.

Hello from my end, just maybe a high level question.

We're all starting to hear more about cloud.

Cloud ERP migrations picking up this year.

What are you seeing as far as the only because of this move of clouded or piece of ERP systems to the cloud this year and what kind of effect is it having on your business.

And then I've a follow up yes, sure I think Bryan. Thanks for the question I think we continue to see what the market experience.

You are referring to and it's giving us a lot of confidence because the cloud our cloud adoption and the new logo wins, we're getting the growth of our new cloud revenue shows the continued pace of acceptance and adoption of our cloud capabilities as customers are making those decisions to go to cloud so that's actually working well.

Got it got it and then I have a couple of quick.

Quick housekeeping items for John just on the on the organic cloud.

41%.

So if we kind of back into it looks like there's about $1 million in there from a tax Moe.

So I.

I guess when you will.

What I wanted to just understand is how youre thinking about the shape of tax and most contribution to the year versus the $9 million.

Initially we're.

We're looking for because it looks like there was a 500 in Q2 of $1 million in Q3. So does that mean that we're going to have about $7 5 million of revenue from tax amount in Q4, and then also on customer count.

It looks like organic customer count went up by about <unk> 11 logos in the quarter is there anything that we need to be mindful of as far as just interpreting the Q3 results.

Yes, two things first first and let me hit on tax amount from a tax standpoint, youre right about $1 million was and it was in the quarter.

I anticipate there being.

Some modest growth in that I wouldn't say anything near what you. Just described I think as we talked about a bit of that delay is going to push things out into the into 2022, when we talked about that at the last quarter. So I wouldn't anticipate a significant growth as you just had mentioned so I would kind of kind of modest growth on top of that $1 billion that we just had in there.

And then as far as unique pardon unit count as far as unit Count goes Youre right. Its about 11 11 customers on a net basis increase over the prior.

Over the prior and we feel pretty good we feel pretty good about that obviously as you know we do have churn sort of some of the lower end and what we do see is that the certainly the new customers that we're getting in our far surpassing the amount of IRR that we're losing from some of the churn that we see in the business.

Perfect. Thanks, guys.

Terrific. Thanks, Dan.

At this point, we have reached the end of the question and answer session. I will now turn the call back over to David Distefano for closing remarks.

Thank you I am so proud of the continued progress, we're making and the tremendous efforts of the vertex team. This quarter. Thank you for joining us today I look forward to our next call.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Okay.

Thanks Simon.

Sure.

What I mean.

[music].

Greetings and welcome to the vertex Inc. Third 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.

And please note that this conference is being recorded.

And now I'll turn the conference over to your host market Hara you may begin.

Thank you and good morning, everyone and thank you for joining us for Texas Financial results Conference call for the third quarter ending September 32021 on the call today, we had vertex CEO, David to Stefano and CFO John Schwab.

Before we begin to 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 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 our.

This conference call will be available for replay via webcast through <unk> Investor Relations website at IR <unk>, Inc. Dot com with that I'll now turn the call over to David.

Thanks, Don Kit and thank you all for joining us today.

We delivered a strong third quarter in both our topline and Bottomline performance total revenue growth outperformed our guidance again, this quarter and was up 17% year over year.

Wild revenues also grew over 45% year over year.

Value, we're bringing to the market is resonating now more than ever our company continue to scale tax automation across their operations.

Through the focused efforts of our global team, we delivered great execution across all areas of the business.

We are seeing positive impact from our continued investments in R&D go to market and ecosystem expansion.

I'd like to share some overall highlights from the quarter.

First we're seeing notable strength in our enterprise segment, among both new logos and existing customers our win rate in this market remains substantial as the breadth and depth of our solutions help customers address the complexity of tax compliance brought on by the accelerating forces of digital transformation and E Commerce.

Among our existing customers, we saw the expansion of wallet share with our enterprise customers through Upsells Cross sells and the addition of strategic products.

And we continue to see a steady stream of customers migrating from hosting our solutions in their environments to our cloud platform.

Also in Q3, we added a number of notable new logos with the help of our partners.

Our extensive ecosystem of technology accounting and consulting partners is unmatched in our category and continues to get stronger.

We continue to deliver the world's most trusted indirect tax technology solutions, which we do at a scale and complexity beyond any other vendor in the market.

At the same time, we continue to make key acquisitions that position us for future growth.

As I noted we had continued growth in our cloud revenue in Q3, we're seeing more companies select our cloud product and the enterprise and mid market, where our unified platform multi cloud strategy and deep partnerships continue to differentiate us and drive strong win rates for our sales and partner teams.

This was the case in Q3 with a multibillion dollar interactive Entertainment company running on Workday.

This company is experiencing rapid business growth with a continued rise in the popularity of online gaming.

By the nature of their business, they're contending with a high volume of micro in game purchases taking place all over the globe.

This challenge their existing cloud solution and triggered a competitive takeaway by moving to our cloud solution, they're now able to scale with confidence.

Like so many other customer stories I share with you the depth of our IP and our integrations played a big role in this win.

This highlights the strength of our integration and is indicative of other pipeline opportunities, we see with workday.

We also continue to deepen our integration and go to market motions with Microsoft and Salesforce ecosystem as well as the major e-commerce providers.

Today, we are firing on all cylinders with our SAP and Oracle partnerships, where we have incredibly strong relationships our business technical and go to market levels.

With continued investment in these longstanding partnerships, we have even greater visibility and confidence as our enterprise pipeline continues to grow looking.

Looking across our noble win with both S&P and Oracle for the quarter the advocacy of our consulting and implementation partners is a consistent element in these deals.

In September we announced the acquisition of LCR Dixon to expand our global tax automation portfolio for SAP.

We are very happy to welcome industry thought leaders Susie to Jetblue nature, and the extended LCR Dixon team to vertex.

Broader partner ecosystem, including Big four consulting partners and accounting firms recognize the value of the deep knowledge in tax technology and the S&P ecosystem. The LCR team brings to our organization.

This acquisition was the natural extension of our partnership with LCR that has spanned nearly a decade further strengthens our leadership in the state.

Let me give you an example of the power of our combined offering as it relates to a recent opportunity with a fortune 500 medical device manufacturer. The company was looking to automate tact end to end across multiple tax site as part of their global S&P transformation.

Seamless integration between our compliance solution our chain flow accelerator for SAP.

And our LCR Dixon tool enabled a true end to end solutions to support the company's growth and led to another great six figure deal for us.

In the quarter, we had another important milestone in the ecosystem that will benefit our customers and partners we.

We achieved certification as built on Sap's business technology platform for Brazil.

Similarly, we.

We continue to expand our partnership with Oracle.

Oracle cloud infrastructure.

Enabling us to extend our penetration to new logos within the Oracle customer base.

This quarter, we had a notable competitive win with one of the nation's leading energy providers, even as a fortune 100 company manual processes, we're still plaguing the tax department.

Partnering closely with Oracle and one of our big four lives as we were able to support their business with an end to end solution.

Our Oracle accelerator and seamless integration with OCI served as Differentiators in the sales cycle to win this new logo.

Digital transformation is gaining momentum in the back office ERP as evidenced by the key wins I've highlighted but the truly achieve our vision to accelerate global commerce, our customers must couple of solutions to support their front office transaction systems as well.

We had an incredible opportunity this quarter to support one of our longtime retail customers a fortune 20 company as they undergo a large finance transformation project to modernize their point of sale experience.

This customer was already using our solutions for use tax in their ERP and procurement systems, but for sales tax they had been managing taxability across nearly 10000 stores with a custom solution that required significant manual effort. This.

This was a seven figure deal that allow us to expand our relationship across multiple tax sites and businesses.

Globally, we continue to see increased demand for our solutions as digital Commerce continues to proliferate and companies are now able to reach any customer anywhere in the world at any time this.

This has created a truly global economy, bringing more and more businesses into new geography, and introducing the complexity of value added tax and cross border transactions.

This quarter, we released our new cloud based solution to automate and streamline back compliance supporting complex legislation requirements in the EU, Spain, Hungary, and other parts of the world.

We are already seeing traction with some notable wins this quarter.

Along with the momentum in both Europe, and the U S with accounting firms, who are looking to enable tax automation for their customer base.

We've made these significant investments in new cloud products.

Our tax content database continues to be a critical decision factor for our customers and a key part of our land and expand motion.

Our global tax research team continues to expand our coverage leveraging ml and AI technologies, the new content at speed and scale across verticals and countries.

Since our IPO last year, we have grown our content database to over $500 million data driven effective tactual supporting indirect tax compliance.

I'm so excited about the momentum we continue to see outside the U S. Let.

Let me share a quick example of a global wins that really stood out to me in the quarter.

We have brought into a competitive sales cycle for an innovative new automotive business.

And by one of the largest chemical manufacturers.

Theyre, new venture brings them into entirely new industry vehicle manufacturing.

We were able to come in and demonstrate the value of our seamless integration so their SAP system, including our shameful accelerated product, which we had released earlier this year.

The parent company manages 20 autonomous businesses, so as we deliver value to the startup. We also see the opportunity to leverage our proven growth model across the entire family of enterprise.

I think this deal also highlights the strength of the vertex brand.

Companies of this caliber and want to know that we've walked a mile and the shoes that they're stepping into.

Building a brand of trust and integrity is an essential part of our leadership in the enterprise space.

But we have marquee customers willing to share their experience gives companies like the even greater confidence in choosing us as a long term partner.

Across Europe, we're seeing increased demand for our solutions across segments and use cases.

Earlier this year, we acquired taxi mode to advance our strategy to automate compliance and commerce across the entire value chain a cross border transaction.

As ecommerce continues to open new avenues for business to sell through the impact and complexity of taxes, extending well beyond core ERP.

In the global digital economy transaction tax regulations are shifting to where customers are buying as opposed to where the suppliers are.

Further increasing the burden of compliance for businesses.

This quarter, we saw increased traction with digital native companies that are balancing that increased tax complexity with the need to support rapid business growth.

We also launched tactical assure in Q3.

This product allows the merchant to meet their obligations under the new EU got more in the form of a term key pays you go solution <unk> assure simplifies the entire process for merchants, who are not equipped to handle remote seller obligation and prefer to focus on their core business.

Marketplaces also continued to be an exciting area of opportunity and growth for us.

To accelerate.

An example of this is a new customer we brought it on this quarter that serves as the E Commerce engine, but one of the largest grocery retail group.

The depth of our tax constant for the food and beverage industry drove the selection of our retail Pos an exemption certificate management solutions.

Earlier, I highlighted our cloud revenue growth in the quarter I'd like to hover on this growth driver for our business for just another moment.

We continue to win with our cloud capability in fact, 94% of our new logos in Q3 selected our cloud solutions to handle their enterprise scale tax requirements.

We continue to see increasing demand and preference for our solutions and mid market cloud opportunity as part of our one to many strategy let.

Let me highlight our expansion with vacuum anika.

I was excited to share that in September we received the fulfilled by <unk> certification.

We are the first and only tax technology provider to achieve this certification and with it we are creating a frictionless experience for axiomatic or customers as a fully bar driven network.

These are some great highlights from the quarter, but as I look to the future and the growth opportunity in front of US one thing is clear we can never stand still.

While anchoring and building off of our powerful core we continue to expand and evolve our end to end tax solutions with unrivaled content and the exceptional service our customers have come to expect from vertex.

As these calls continue to reinforce trusted relationships, we forged with our partners and customers remain a key element of our success.

And one we will focus on and continue to strengthen.

Because we understand to power global Commerce, It will take a community of talent tax professionals and partners to drive the speed and scale of innovation.

As I've shared today, we have considerable opportunity to continue to serve customers at every stage of their journey and grow our revenues with them.

Not only does it take advanced technical capabilities deep business integration, but also trusted partnerships with our customers and this is why we are deeply committed to an exceptional customer experience and investing in customer success throughout vertex.

I'd like to share a few quick examples of how this showed up in the third quarter.

We recently hosted our exchange conferences in both the U S and Europe, bringing a record number of customers partners and prospects together to engage on the future of indirect tax.

Conversations we have with our customers and partners at these events affirms our strategy and the value we're delivering every day.