Q1 2022 Vertex Inc Earnings Call

May 10, 2022

Yeah.

Greetings and welcome to vertex, Inc. First quarter 2022 earnings conference call.

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With Investor Relations at vertex. Please go ahead. Thank you good morning, everyone and thank you for joining us for our Texas Financial results Conference call for the first quarter ending March 31, 2022 on the call today, we have vertex CEO , David to Stefano and CFO , John Schwab before.

Before we begin allow me to provide a disclaimer regarding forward looking statements. This call has been in the Q&A portion of the call may include forward looking statements relating to the expected future results.

Any and are therefore unfolding statements our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward looking statements are subject to are described our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures additional information, including reconciliation between non-GAAP measure.

Information to the GAAP financial information is provided in the press release. This conference call will be available for replay via webcast on <unk> Investor Relations website at IR Dot vertex, Inc. Dot com with that I'll now turn the call over to David.

Thanks, Alex.

Welcome everyone.

2022 has started off incredibly well at vertex with solid growth and positive progression across many dimensions of our business, resulting in total revenues of $115 million up 17% year over year.

Our teams continue to execute well and drive momentum in the markets, we serve accelerating <unk> growth to 18, 9% in the first quarter, while maintaining strong EBITDA margins of 16, 6%.

We're seeing strong adoption persist from both new and existing customers.

Our <unk> grew to 110% this quarter, which speaks to the efficacy of our increased go to market investments and our ability to build trusted lasting relationships through a differentiated customer experience. These are cornerstones of our sustained success.

Our first quarter results also demonstrate the progression of our cloud revenues and the expansion of our installed base whether that is through regional expansion product cross sell sustained platform migrations and increased transaction volumes.

Cloud revenues continue to increase as a percent of total software subscription revenues from both new and existing customers in.

In Q1, 96% of our new logos were cloud and overall cloud now represents approximately 40% of total subscription revenues.

Overall I'm excited about our strong performance out of the gate and how well it sets us up for the remainder of the year.

First our core enterprise segment remains healthy and continues to widen.

These are the most dynamic companies in the world spanning every industry. They are at the heart of global Commerce growth and their performance durability is proven even in the most challenging of economic conditions.

We consistently leverage our market leading position by providing mission critical service in a large and growing global market.

And now we are replicating our formula for enterprise market success into Europe by combining strong partnerships fit for purpose solutions and customer reference ability.

We are extending the power of our platform by delivering enhanced capabilities and expanding the breadth of our tax content.

The market is responding well to our accelerated investments throughout the quarter, we experienced strong interest in our new edge and exemption management solutions and we've made huge investments in our content database in turn expanding our differentiation.

In fact, since our IPO, we have doubled the size and scale of our content database from $350 million in effective rates and rules to over $700 million. Today. This includes expanded verticals as well as global support and expansion in areas like Europe and Brazil.

Our content now supports tax determination and 195 countries around the world.

The strategic investments, we have made over the past 18 months are allowing us to extend both our addressable market and the value we can deliver to our customers.

With the acquisition of LCR to extent, we have the most complete and differentiated tax automation solution for S. E T.

Again this quarter, we saw how this acquisition is paying off by helping to increase our win rate in revenues tied to S&P deals.

We have a vision to accelerate global commerce to achieve this it will take a community of talented and aligned partners, who come together as a seamless network focused on customer experience and it's why we're building our solutions into all the major platforms powering global commerce backed by the largest community network.

Tax technology experts and partners in.

In the first quarter, we continued to see momentum in energy building in our go to market motions. Thanks to our focused approach with key partners.

We continue to see tremendous market opportunity and we believe vertex is in a unique position to connect business and government seamlessly across entire fabric of global commerce.

Our first quarter results underscore the durability of our business the strength of our customer and partner relationships as well as our ability to deliver sustainable profitable growth I am thrilled with how our strategy is coming together as cross border transactions in real time compliance become more course of business.

The option rates, a multi cloud strategy are on the rise for complex organization and the convergence of payments intact is accelerating.

Which will expand our addressable market even further.

All of this takes scale a proven track record and an end to end platform.

We are delivering intelligent automation with end to end capabilities content and insight to enable trusted transactions and confident decisions.

I'd now like to provide a closer look at the progress we're making in these areas and share a few examples from the quarter.

In our last call I announced the release of OS series Edge. This next generation solution moves tax content and applications to the edge of the cloud and beyond our.

Our solution enables a frictionless customer experience, regardless of where and when a transaction occurs.

Already in the quarter vertex edge is creating a buzz with companies looking for next generation solutions to support business growth.

In fact, our first win emerged out of a conversation in an industry Forum, where a current customer recommended and our solutions to a prospect.

The result was a seven figure net new logo win with one of the largest healthcare retailers in the U S. This fortune 25 company was re imagining their in store technology infrastructure. They saw value in moving away from their homegrown system to our tax engine and edge solution to ensure accurate.

Calculation as well as up to date rates and rules.

I think theres still reflects the incredible growth potential that still exist with enterprise and fortune 500 companies.

Many still maintained manual processes, which up until now had been good enough, but with increasing complexity gives us additional white space to further penetrate this highly valued area of our addressable market.

I'm also proud of this win because it exemplifies why we put so much emphasis on delivering exceptional customer experience. We know it sets us apart and Moreover, it's not easy to replicate these relationships and this level of trust are not built overnight and must be earned continually it requires people who get tax.

And technology and care enough to make it work in our customers' environments.

This is what the talented vertex team bring to the table each and every day.

When it comes to tax compliance complexity is rapidly emerging from multiple angles for our customers not only are they having to keep up with changing regulations, but it's companies undergoing business and digital transformation.

<unk> are contending with complex system and.

And Thats why tax technology is growing in value and demand.

The ability to address tax automation across multi cloud and multi tax type environments, where vertex itself and it's showing up in new logo and customer expansion deals.

We saw this in Q1 with a global data analytics and technology company, our ability to support multi system integration multi region and multi tax type requirements will enable one source of truth for their business across North America, EMEA and Asia Pac.

Key to this win was our cross application capability connecting their Salesforce and workday solutions to one central tax engine.

We also enjoyed a great competitive takeaway with one of our existing customers with a heavy M&A strategy. The company was managing 10 entities across multiple ERP and because of the various acquisitions. They were running three competitive tax solutions along with ours.

It was our ability to support multi system environments, which made the decision to standardize with vertex easy.

This savvy enterprise software provider truly understand tax complexity and saw vertex is the best solution to support their business growth.

In fact, we are the gold standard of the enterprise market enterprise customers also greatly value our vertical expertise to support the complex tax nuances specific to their industries.

Looking at key verticals across the S&P 500, we have a dominant position in the manufacturing sector broadly as well as technology retail and wholesale.

We also furthered our leadership in our leasing and telecom verticals in the first quarter with a handful of key wins.

The depth of our tax content the expertise of our teams and our end to end tax automation capabilities were a powerful combination for these customers.

And we had a large Q1 win in oil and gas, where we significantly expanded our content database.

On the content, which stands out for me in this deal is the tight collaboration with the SAP go to market team and our alliance partner <unk>.

Working in concert with their sales team, we're able to unlock increased value for our customers. This is just one example of how we are keeping our partner ecosystem to the next level.

Let me now pivot to our ecosystem growth.

We've expanded our global footprint with Oracle cloud infrastructure to provide increased support to meet data requirements outside of the U S and as a result, we are seeing increased interest in solid growth with both Oracle and Netsuite.

I've highlighted some of the work we're doing with that.

I'm also proud to share that we were recognized as the SAP Pinnacle award finalist for being one of the top three Isd partners in terms of driving revenue and opportunities through the store.

And in Q1, our retail solution was approved as a solution for the industry cloud for retail and has been added to the SAP store listings.

Combining our ecosystem specific offerings with the continued adoption of both OCI and S. Four Honda platforms has created sustained opportunity for us to grow our addressable market within their ecosystem.

And now through closer alignment with their sales teams, we are able to provide increased value for customers.

We continue to invest in expanding our mid market share as tax complexity is not limited to the largest organizations as mid market companies increase their digital presence complexity comes with it.

Our solutions are helping companies of all sizes access new markets and reduce the friction between commerce and compliance.

These companies are turning to vertex to ensure a single platform for tax calculation that tightly connects.

So a multitude of systems from front office applications, like billing and CRM and extending through back office, ERP and procurement systems as well as ecommerce platforms.

Another area I'm excited to highlight is the performance we experienced in Europe . This quarter, the strength of our capabilities with SAP.

And the depth of our global content enabled a six figure deal with a European chemical leader looking to streamline their tax process, our cloud solution, coupled with the accelerator and the LCR tools gave this new customer the confidence to automate tax calculation.

Beauty for us in competitive deals like this one is that no. One comes close to the breadth of our solutions for businesses running on SAP.

We've been making disciplined investments to propel our growth in Europe and through digital commerce platforms, and we continue to build momentum around our acquired tax most solutions with digital natives and e-commerce companies in rapidly growing sectors like gaming fitness and education.

Just as we are focused on building strong and lasting relationships with our customers and partners. We are also focused as an organization on strengthening our communities.

This support is more important than ever as we continue to face a global humanitarian crisis in Ukraine.

The people of Ukraine, or demonstrating incredible courage and our Hearts go out to all who are affected the vertex team stands United which global community and protecting our fundamental human rights. It is core to who we are and what we value guided by a deep respect for all people.

As I close out my comments today I cannot be prouder of the contributions of our global vertex team. We remain laser focused on our strategy. We continue to accelerate our go to market motions and bring product enhancements to market with speed and scale.

And we never lose sight of the importance of delivering exceptional value to our customers and continuously innovating for the future.

We are on course for another strong year and I'm incredibly encouraged by the opportunity we see for continued growth.

Now I'd like to hand, the call over to John for a look at this exciting quarter by the numbers.

Thank you David and good morning, everyone today I'm going to review, our first quarter 2022 financial results and provide second quarter 2022, and full year 2022 guidance.

Total first quarter revenues grew 17% year over year to reach $115 million exceeding the upper end of our quarterly guidance by $1 $5 million.

Our subscription revenues increased 16, 6% period over period to $97 $1 million.

Services revenues grew 19, 4% period over period to $17 $9 million.

Our annual recurring revenues or <unk> grew to $380 6 million at March 31, 2022, representing approximately 18, 9% growth over the comparable 2021 period.

Excluding the acquisitions of <unk> and LCR Dixon that were made during 2021, our <unk> grew at 17, 1%, which is an increase from 15, 1% that we reported in the fourth quarter of 2021.

Our net revenue retention rate or <unk> was 110% at March 31 2022.

Growing from 105% for the comparable 2021 period and from 108% in the fourth quarter of 2021, 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. So these amounts do not include the tax malware LCR Dixon results.

Our gross revenue retention rate or <unk> was 95, 6% at quarter end, which excludes internal migrations by customers to our cloud solutions, which were approximately 3%.

This is consistent with our prior performance, which has averaged between 94% 95%.

In addition to the AOR growth as mentioned above our returns processing managed services business generated recurring services revenue of over $6 million in the first quarter of 2022 as compared to $4 9 million for the comparable prior year period. This.

This service is a competitive differentiator and is a significant component of recurring revenue, which is not included in our <unk>.

At March 31, we had 4242 customers, reflecting a 30 customer decline mostly at the lower end of the market.

We view this as noise that we are not concerned with relative to the success of our strategy.

Keep in mind that our <unk> continues to grow and our RPC has grown from $86700 at December 31 to <unk> $89700 at March 31 2022.

With the success of our one to many strategy, where we utilized channel partners to sell and service smaller customers beginning in the second quarter. We plan to include those customers in our total customer count.

These customers will have a similar profile to those that we have lost at the lower end.

We expect that this change will increase our total customers by more than 200.

We continue to see strong year over year growth in our cloud based solutions, among both existing and new customers period over period revenues from cloud based solutions grew to $38 $3 million, an increase of 42% excluding acquisitions cloud growth was 38% year over year.

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 this morning.

On an overall basis gross profit for the first quarter was $80 $7 million, representing a 72% gross margin.

This compares with gross profit of $68 $4 million and a 69, 7% gross margin in the same period last year.

From a subscription software standpoint, our gross margin was 76, 6% as compared to 77%.

Gross margin on services revenues increased to 35, 3% from 28, 1% due to increased utilization.

Our first quarter research and development spend which includes our capitalized software development costs and cloud based customer solutions was $19 8 million, representing 17, 2% of revenues.

This reflects ongoing substantial investments in our cloud solutions integration of acquired technologies and ongoing expansion of connectors and Apis to continue the integration of vertex has capabilities into customer software platforms.

This spend reflects increases in development personnel through a more efficient and balanced use of our global development team positioning us well for R&D growth and capacity as well as capability.

First quarter, selling and marketing expense was $25 6 million or 22, 3% of total revenues, an increase of $6 $9 million and approximately 36, 5% from the prior year period.

This increase is due to ongoing funding of expanded go to market activities to drive future revenue growth.

We intend to continue to make additional investments in sales and marketing capacity to drive this growth.

First quarter General and administrative expenses was $26 2 million or 22, 8% of total revenues an increase of $5 $6 million from the prior year period.

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

Adjusted EBITDA was $19 1 million for the first quarter of 2022, an increase of $1 million over the prior year comparable period and it exceeded the upper end of our quarterly guidance by $2 $1 million, primarily due to our revenue performance and spend initiatives that shifted into the second quarter.

Adjusted EBITDA margin for the first quarter of 2022 was 16, 6% a 187 basis point decrease versus the prior year comparable period, primarily due to our investments in go to market activities and strategic investments to drive our operating leverage.

During the first quarter of 2022, we consumed $14 2 million and free cash flow, reflecting our ongoing investments in research and development and infrastructure modernization initiatives to support future revenue growth and operating leverage first quarter free cash flow represents a decrease of $2 $8 million from the comparable prior year period as.

As a result of our increased investments in these areas.

Historically, our cash flows in the first quarter are lower than the remaining calendar quarters as they are heavily influenced by variable compensation payments.

Turning to our liquidity, we ended the first quarter with over $97 $3 million in unrestricted cash and cash equivalents and $50 million and indebtedness.

As previously discussed we amended our $100 million credit facility in March with a new five year $250 million facility, consisting of a $50 million term loan and a $200 million line of credit.

We expect to utilize the facility primarily to fund working capital capital expenditures and permitted acquisitions and general corporate purposes.

Turning now to guidance for the second quarter of 2022. We currently expect total revenues in the range of 116 to $117 5 million representing growth of 11% to 12% from the second quarter of 2021.

Adjusted EBITDA in the range of $16 million to $18 million, representing a decrease of one two to $3 2 million from the second quarter of 2021 for.

For the full year 2022, the company continues to expect total revenue in the range of 479% to $483 million, representing annual growth of 13% to 14% from the full year of 2021.

And adjusted EBITDA in the range of <unk> $72 million to $75 million, reflecting our ongoing investments and acquisition integration as well as continued spend in research and development and selling marketing expense to pursue opportunities for growth.

We continue to anticipate that cloud revenue for 2022 will grow by 33% over 2021.

As a reminder, in the second quarter of 2021, we've recorded cloud based revenues of $2 $1 million from a tier based subscription amendment to our cloud customers that we had highlighted at the time, we do not anticipate a similar adjustment in 2022.

We are very pleased with the solid fundamentals of our business, which delivered strong quarterly performance in revenues and EBITDA and fueled strong first quarter, IRR and <unk> performance and with that we'll open the call up for questions.

Thank you.

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We have our first question from the line of Matt Stotler with William Blair. Please go ahead.

Hey, good morning, guys. Thank you for taking the questions. Maybe just wanted to start off from a high level. Obviously, there is a lot of a lot of different factors impacting the business environment right now.

Increased inflation concerns around that geopolitical impacts in Europe tight labor markets et cetera.

Q1, I mean, clearly the results were positive right acceleration in key metrics uptick in IRR strong <unk>, So would love to just get your.

I guess your observations or thoughts around some of those macro factors that you saw.

Seeing in the market and any thoughts on on those on a go forward basis.

Yeah.

Thank you for the question, Matt I appreciate the comments on the quarter.

I think as of this point in time, we are not experiencing any slowdown in pipeline activity.

Thank the complexity that are the tailwind of our industry continue to drive demand.

And it's not getting any easier for them because businesses are in a continual search for more growth.

The regulators are desperate to find ways to collect their money. So we're certainly seeing some audit pressure pickup in certain areas, which.

Which is again good for us because it ultimately fuels demand and there is still a steady march good activity as companies like SAP and Oracle have reported around their activity on the cloud that is certainly fueling some of the differentiated relationships. We enjoy there are driving some of our continued.

Pipeline views.

Got it that's helpful. And then maybe one on cloud growth, obviously continue to see some pretty robust growth in that segment of the business.

Any update on the contribution that you're seeing there from kind of new versus existing on premise customers migrating over obviously it sounds like it's a great engine for bringing in new customers. We will look to some thoughts on the installed base migration paths going forward as well.

Yes, Matt one of the things, we're finding is and Thats part of the strategy about bringing out new products as the more we start to surround our existing customers with new.

Cloud based solutions like our edge solution that we launched at the beginning of the year. It will drive more migration opportunities for us. So I think as we continue to bring out new products that are all cloud first and what we're building will continue to pull the customer base along.

I haven't seen any fundamental shift in that trajectory that we've been talking about but I do part of our strategy with what we're bringing forward is to pull them into that into that space moving forward as the year end year's progressed.

Got it that's helpful. Thanks again.

Thank you Matt.

Thank you we have next question from the line of Joshua Reilly with Needham. Please go ahead.

Hey, guys. Thanks for taking my question nice job on the quarter here.

I know Europe is a small business for you guys currently but you've been expanding your presence in the region. There have you seen any divergence between demand in that region versus the United States. Since the Ukraine conflict has begun and are you still adding sales heads at the scene Pat pieces last quarter in that region.

Josh.

We are still adding go to market activity and really what's driving it is a couple of things one the acquisition we made in tax Mo is giving us.

A differentiated conversation opportunity there and we're certainly seeing that as we continue to integrate in.

That product into our broader suite and the second is the relationships we've been talking about with SAP.

Because of the where we are in the SAP online store and how we're working now in parallel with their sales reps to do account planning that is driving demand opportunities for us more so than any of the offset that might be because of some of the political or economic uncertainty at this point in time. So we continue to want to bring more.

Due to market on the go to market side, because we're seeing a good uptick in activity and again being the dominant platform of large enterprises aligns perfectly to our strategy and so.

I still bullish on what we're trying to accomplish there.

And then you touched on it a bit on the increasing enforcement for the marketplace.

Put into effect last July in the EU, but can you just give us an update how much more enforcement are you seeing is it beginning to drive incremental customer interest.

It absolutely is yes, so I think enforcement is still at a fairly.

Quiet level candidly, but I think the the.

The recognition that the enforcement is coming is clearly surfaced in the dialogues, we're having and we're seeing a different nature of exploration of the merged vertex tax mow assets than we were in the past.

Got it thanks guys.

Thank you Josh.

Thank you we have next question from the line of Andrew de Gasperi with Aaron Berg. Please go ahead.

Okay.

Thanks.

My question on.

First of all on the customer counts you mentioned the loss of 30, just maybe if you can expand on that I mean, I would've thought.

It would have affected your gross retention rate, but it didn't.

Customers that might be at risk of turning off or are you just trying to sort of size what the activity is going in that pipeline.

Yes, Andrew Thanks for the question. This is John I'll start with that and David maybe you can add to it I think as we thought about the customer we looked at the customer activity, what we've seen and what we continue to see is some noise. There again, we had a 30 customer decrease but it's at the very very low end of the market and so again, it's customers that aren't necessarily.

Very profitable in terms of that perspective, and again, it's a very small land that we've had for a period of time, so youre not seeing any degradation in any of our grrr, our AARP C or anything else because again because of the size of the customers that we're losing again, what we're gaining is far in excess of the things that we're losing we're talking under tent that under $10000 annual.

<unk> again, it really arent our target market. So what we've done is we've put in place that wonder Manny strategy that we've talked about number of months ago to really find others that can help us sell and service at that lower end, so there'll be handling not only the initial customer context, but follow up contacts to assist with that to give them the care that they need to grow their businesses and so that's.

Our approach to at that level and so that's what's going to help us that's going to help us kind of move through and again largely it's a very similar clients. So those that are turned off but we have a different approach to being able to better manage them.

Yeah.

Got it and then maybe when we think about the enterprise contribution.

OCI.

Would you say that they've grown sequentially relative to Q4 and.

The contribution from this new relationship what I'd say.

I mean, how meaningful have you seen a definite material increase in terms of activity from that from that pipeline.

Yes, no absolutely the SAP.

When you combine the investment in new products like the painful accelerator that we brought to market and our global compliance product and then you add in.

The SAP relationship that we formed with their sales teams and the LCR Dixon acquisition. When you look at the <unk> of those three things.

We're definitely seeing a differentiated conversation with the S&P community.

Has us very excited because we know where we are within the S&P online store in terms of our success there and now we're able to continue to drive more customer value through the products and the relationships with the.

With the sales reps. So yes, we're definitely in a very different place with SAP, which is partially reason addressing the other question that was asked by Josh around Europe , we continue to see that given the primary platform that they are why it is supporting our enterprise strategy.

Yeah.

Thank you.

Thank you we have next question from the line of Samad Samana with Jefferies. Please go ahead.

Hey, good morning, Thanks for taking my questions, maybe first one John subscription revenue was quite strong in the first quarter I'm. Just curious was that more a function of seasonal strength and maybe price increases resetting or was that a function of.

New bookings that you guys talked about fourth quarter coming online just help me understand that kind of $4 million quarter over quarter increase versus last year I was kind of flattish from December to March.

Should we think about seasonality for the rest of the year with that in mind.

Thanks for the question <unk> I think when we think about sort of what that growth looked like in Q1. It was a couple of dimensions to it again, largely we had a nice Q4 and that Q4 rollover into the first quarter certainly cap certainly carry things in.

Again, typically Q4 is our strongest quarter in terms of kind of sales and booking activity that occurs and then it softens up in Q1 and starts to build throughout the year. So I think that's that same shape, we're anticipating to still stick with US. We are as you well know making investments in sales and marketing go to market activities to really continue to try to increase the opportunity as David has talked to.

So hopefully we'll continue to see that growth and healthy even to a greater extent as the back end of the as we progress throughout the year, but I wouldn't necessarily pin a lot of it to big price increases as you as you know we do have a regular kind of price increase kind of activity in motion as we've been in business for such a long time I would say the activity from 2021 into 2020.

Two isn't dramatically different than that because a lot of our price increases get set at the very end or at the middle to the end of the prior year. So that stuff is sort of locked in so I don't see that contributing any more than it has in the prior period's hopefully that's helpful.

Definitely and then maybe just stepping.

Stepping back.

The investment initiatives then.

I don't know not sure if I heard it correctly, but it sounded like maybe some of the spend may have slipped out of <unk> into two you just what was maybe the reason behind that is it just the hiring environment is that.

Is it within a certain part of the company's Opex structure. Just what are you guys thinking as far as spending initiatives that went into <unk> instead of one year and how should we think about kind of where that where that was one of their sales and marketing or R&D.

<unk> was largely hiring driven we certainly have been aggressive in the market with the.

Capacity additions, both in R&D and sales and marketing and continue to be and you're right. It is a tighter labor market and we did have a little bit of what we had planned it didn't come in quite as soon and then we had a couple of projects, where we intentionally just looking at all the different moving parts of activity, we slowed down a little bit and those are those are now just from a overall prior.

<unk> falling more into Q2 and beyond so it'll it goes expenses will catch up.

Great. Thanks, guys.

Yeah.

Thank you next question from the line of Pat <unk> with JMP. Please go ahead.

Oh, great. Thank you so much as Julian mentioned come from Pat just following up on that last question. I mean, how are you feeling about sort of your ability to attract and retain talent in this environment and then I have a follow up thank you so much.

Yes, Joe.

I think two things that are playing well for us.

And the R&D side some of the technology that we're starting to leverage more and more is pretty exciting to some of the folks that we're talking to and the and the R&D community and I think that has played well to attract the kind of talent that we're looking to add.

On the on the sales and marketing side again, I think some of the differentiated relationships that we enjoy we're able to talk to the community that are out there whether they be.

In our industry or related software sales industry about how we're able to bring them.

A differentiated go to market opportunity when theyre talking to pursuing new customers given things like the Oracle and SAP relationships and so I think the conversation is actually play pretty well for us.

It's just as you know it is a tight labor market in general to find the quality that you want but I think when we get in those conversations we've got really good stories on both the R&D front and the sales and marketing front that are that serve us well to secure the talent we're looking for.

That's really helpful. Thank you so much and then just.

On the continued investment in the mid market.

Are you feeling about your overall progress there and then can you remind us of sort of your expansion strategy in that segment. Thank you guys.

Yes, so mid market remains with 20% of our customers come from the mid market already so it is something we're looking to continue to expand.

I think we saw some.

We're seeing some good traction in areas like Salesforce and workday been very encouraged by some of the progress we've made there.

It's motivating us to accelerate some of our investment in the sales marketing and channel area.

When we think about Europe , it's largely an enterprise strategy mid market will play in there because it goes down to a level and we're going to sort of follow the SAP roadmap largely in the Europe mid market.

Okay.

Do you have any further questions Sir.

Sure.

Thank you so much.

We have next question from the line of Brad Reback with Stifel. Please go ahead.

Great. Thanks very much.

David as we think about the acceleration of investment.

And the business on the Opex side.

Should we be thinking that success would be a return to 20% IRR growth or something different than that.

And Brian I think our we've been consistent we believe that with the investment we're making in both sales and marketing customer success management and R&D and our content database as we continue to invest in those areas.

We believe we absolutely the durable growth rate of this company should be in that 20% range with margins that will start to come back higher as certainly we've talked about as our cloud continues to gain scale.

And we continue to leverage more of our content investment we would expect gross margin will accelerate which will serve ultimately driving the EBITDA margin as well.

That's great and then John on the it investments when should we expect to start seeing leverage and operational efficiencies from that.

Yes, I mean, we're going to continue to invest in those areas and that it's going to take us another it'll take us a little bit of time to get those to get those investments in there and start to seeing those things seeing them show up in some of the numbers and some of the events. So I think thats really pushed out.

Takes a little bit of time to start realizing that so we're still in the investment phase. The realization phase is probably you'll probably follows 12 months 12 months and then a little bit into the future certainly as you continue to perfect and get better as you as you drive.

That's great. Thanks, very much yeah. Thanks, Brett.

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We have next question from the line of Daniel Jester with BMO. Please go ahead.

Hey, good morning, everyone.

Just on the guidance.

Obviously, the first quarter came in above plan and the commentary around demand seems pretty good but you left the full year revenue guidance unchanged can you help us think about sort of what's going on in the back half of the year or are you just being conservative given the macro.

Yes, Dan Thanks for the question I'll start with this but I think youre right. We had a real nice quarter. We're pleased with the results that we that we have and we still think there's very good opportunity in the business, but consistent with what we did last year first quarter as good but we want to make sure that we've got a real good view on kind of how things are developing and how things are moving and we think it makes sense to wait.

Wait until the second quarter to evaluate whether we need to move that I mean again, we had a real nice beat in Q1, a couple of percentage points was terrific, but again, we want to be thoughtful conservative and mindful of some of the economic uncertainty that's in the economy now before we start moving things and changing them around.

Okay, Great and then I appreciate the context on the edge solution and the wind in the quarter can you just remind us like what is the catalyst that is going to get customers to come to that product and how different is it going to be relative to sort of the more traditional vertex offerings.

Is it going to be around sort of omnichannel refresh or like how do we think about sort of the catalyst for varian and get people to engage you on that one thank you very much.

It's really the evolution of business complexity.

<unk> are pushing growth to the edge, meaning they are looking to have transactions happen on a cell phone or an iPad or the sensor and the regulators want to make sure they're able to.

Bring tax at that level as well so at that point of need.

We've been able to now shrink the footprint of our <unk> series capability to via the edge product to that exact point of need and that differentiation really serves to the retail community exceptionally well because that's a very common form and we've certainly seen a.

<unk> back at ecommerce slows down a little bit more in store activity and that will drive via demand driver and then we're also seeing some interesting businesses that are not directly in retail that are looking for endpoint solutions as well across their operations. So I think its business model complexity.

Wanting because the regulators are taxing at the point of transaction wanting to have that accuracy built.

Built in.

He is going to be the demand drivers for those offerings.

Great. Thank you very much thank.

Thank you Dan.

Thank you we have next question from the line of Patrick <unk> with JMP. Please go ahead.

Oh, great. Thank you.

Yes.

David I, just wanted to drill down more so.

On FEP through three.

Three things number one.

What other options do you people have for tax calculations, if they are running.

Number two how does this.

Storm work.

And then number three I mean I'm hearing the same thing about people are moving to escort Honda, especially big companies, but it is kind of counterintuitive given the macro so why or why why is this happening now when there's so much uncertainty.

A lot.

Yes so.

Certainly consistent with whether it be sales and use tax or VA.

The manual or in house solutions have been developed and they have been good enough and so thats historically using either native functionality or the manual processes built around it had been the demand drivers of the path or the been the good enough solution to pass the demand driver now Pat is that really there.

<unk> in the regulations and the complexity of the business model cant be served by those capabilities anymore, and so thats been the tipping point, where now that we are able to work with their sales team and actually go in and deliver a differentiated customer value.

So.

<unk> is the first driver and that's what's different for us.

It's no different candidly than any other oracle relationship from the perspective of how they were solving it to know what they're looking for is a third party solution.

As far as the online store.

What it gives us it gives us.

More direct access to the SAP customer base, where they're able to go in and explore our product is differentiated way and then the sales team knows because of our status within the SAP sales team knows because of our status within the online store, it's a capability for them to promote <unk> to their customers and so I think thats whats helping us.

Again fuel more demand.

Opportunities and more pipeline activity.

As far as the S four migration.

I can't speak to what are the demand drivers, we don't get we don't.

We partner with them after they've made those decisions. We're certainly seeing good activity and have good visibility to a lot of dialogue I think it's consistent with the thesis you often ask about us like how is our cloud migration going I think that more and more companies continue to want to move their infrastructure to the cloud. It just it is they are still continuing on that journey.

And these are again are the largest enterprises in the world who have the durability to get through some of these economic the noise of some of the economic.

Conditions that I think obviously smaller companies are going to be more conservative than the larger companies and the last thing I would just add that supports that is I think during the pandemic. We saw a real slowdown in some of this activity because it functions of these large organizations had to focus on sustaining just operations and now theyre getting back.

Two because they know they can sustain on a remote.

Our remote basis, Theyre now getting back to the investments they need to be making in their business and I think that again serves us well for a durable tail here.

Okay Super helpful. Thank you, yes sure.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to David <unk> for closing remarks over to you Sir.

Well. Thank you everybody for joining our call today I look forward to coming back this summer to share more about the advancements we are already making take.

Take care.

Thank you.

Gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

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Greetings and welcome to vertex, Inc. First quarter 2022 earnings conference call.

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

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded and I would like to turn the conference over to your host.

<unk> with Investor Relations at vertex. Please go ahead. Thank you good morning, everyone and thank you for joining us for <unk> financial results conference call for the first quarter ending March 31, 2022 on the call today, we have vertex CEO , David to 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 expected future results for our company and are therefore portfolio 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 reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release. This conference call will be available for replay via webcast on <unk> Investor Relations website at IR Dot vertex Inc.

Dot com with that I'll now turn the call over to David.

Thanks Al kit.

Welcome everyone.

2022 has started off incredibly well at vertex with solid growth and positive progression across many dimensions of our business, resulting in total revenues of $115 million up 17% year over year.

Our teams continue to execute well and drive momentum in the markets, we serve accelerating <unk> growth to 18, 9% in the first quarter, while maintaining strong EBITDA margins of 16, 6%.

We're seeing strong adoption persist from both new and existing customers.

Our IRR grew to 110% this quarter, which speaks to the efficacy of our increased go to market investments and our ability to build trusted lasting relationships through a differentiated customer experience. These are cornerstones of our sustained success.

Cloud revenues continue to increase as a percent of total software subscription revenues from both new and existing customers.

In Q1, 96% of our new logos were cloud and overall cloud now represents approximately 40% of total subscription revenues.

Overall I am excited about our strong performance out of the gate and how well it sets us up for the remainder of the year.

First our core enterprise segment remains healthy and continues to widen.

We consistently leverage our market, leading position by providing mission critical services and a large and growing global market.

And now we are replicating our formula for enterprise market success into Europe by combining strong partnerships fit for purpose solutions and customer reference ability.

We are extending the power of our platform by delivering enhanced capability and expanding the breadth of our tax content.

The market is responding well to our accelerated investments throughout the quarter, we experienced strong interest in our new edge, an exemption management solutions and we've made huge investments in our content database in turn expanding our differentiation.

And the 195 countries around the world.

The strategic investments, we have made over the past 18 months are allowing us to extend both our addressable market and the value we can deliver to our customers.

With the acquisition of LCR.

We have the most complete and differentiated tax automation solution for SAP.

Again this quarter, we saw how this acquisition is paying off by helping to increase our win rate in revenues tied to SAP deals.

Backed by the largest community network of tax technology experts and partners.

In the first quarter, we continued to see momentum in energy building in our go to market motions. Thanks to our focused approach with key partners.

We continue to see tremendous market opportunity and we believe vertex is in a unique position to connect business and government seamlessly across entire fabric of global commerce.

Our first quarter results underscore the durability of our business the strength of our customer and partner relationships as well as our ability to deliver sustainable profitable growth.

Thrilled with how our strategy is coming together as cross border transactions in real time compliance become more course of business.

Adoption rates of multi cloud strategy are on the rise for complex organizations.

And the convergence of payments intact is accelerating which will expand our addressable market even further.

All of this takes scale a proven track record and an end to end platform.

We are delivering intelligent automation with end to end capabilities content and insight to enable trusted transactions and confident decisions.

I'd now like to provide a closer look at the progress we're making in these areas and share a few examples from the quarter.

In our last call I announced the release of OS series Edge. This next generation solution moves tax content and applications to the edge of the cloud and beyond.

Our solution enables a frictionless customer experience, regardless of where and when a transaction occurs.

Already in the quarter vertex edge is creating a buzz with companies looking for next generation solutions to support business growth.

In fact, our first win emerged out of a conversation in an industry Forum, where a current customer recommended and our solutions to a prospect.

Calculation as well as up to date rates and rules.

I think this deal reflects the incredible growth potential that still exist with enterprise and fortune 500 companies.

Many still maintain the manual processes, which up until now had been good enough, but with increasing complexity gives us additional white space to further penetrate this highly valued area of our addressable market.

And technology and care enough to make it work in our customers' environments.

This is what the talented vertex team brings to the table each and every day.