Q3 2022 Vertex Inc Earnings Call
Good day and welcome to the vertex incorporated third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Joe Crivelli, Vice President of Investor Relations. Please go ahead.
Good morning, everyone and thanks for joining us for vertex as conference call for the third quarter ended September 32022, I'm, Joe Crivelli, Vice President Investor Relations, David Stefan <unk>, our CEO and John Schwab, Our CFO joining me on the call today.
As a reminder, this call including the Q&A portion of the call May include forward looking statements related to our expected future results. Our actual results may differ materially from our projections due to risks and uncertainties. These risks and uncertainties are described in our earnings release and filings with the Securities and Exchange Commission today's remarks will also.
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 our Investor Relations website and with that I'll now turn the call over to David.
Thank you Joe welcome everyone and thank you for joining us.
<unk> value proposition of delivering end to end indirect tax determination and compliance capabilities was on full display in the third quarter.
Total revenue was a record $126 2 million up 14% compared to last year's third quarter and $2 million above the high end of our third quarter guidance.
We have now delivered double digit growth and outperformed our revenue guidance to nine consecutive quarters since going public.
And once again delivered strong profitability.
Adjusted EBITDA was $20 7 million, which also exceeded the high end of our third quarter guidance by over $2 million.
Finally, we saw solid growth across the key measures by which we monitor success in the market.
<unk> grew in the quarter to $411 million up nearly 17% year over year.
<unk> was at 109%.
Up from 106% for the same period in 2021 and.
<unk> held steady at 96% up from 95% in the same period last year.
We achieved these strong results in what was a challenging environment for most tech companies with economic uncertainty technology decision makers are scrutinizing their budgets more carefully and in some cases elongated sales cycles.
We believe our third quarter results are proof of the durable consistent and profitable growth.
<unk> has delivered for over 40 years, and our ability to weather adverse economic cycles.
It also reflects the inherent benefit of being the leading provider in the enterprise market, which is far more stable in recessionary times than the SMB segment.
This is because our solutions are not just a nice to have they are a must have especially for companies focused on business diversification and global expansion.
Every time, a customer adds new products or services and every new way of buying and selling they adopt creates additional tax impacts to the business.
In addition, during challenging economic times governments rely on the enforcement of indirect taxes to sustain their revenues.
This leads to additional audit pressures on corporate taxpayers, which in turn leads to demand for vertex solutions.
Our third quarter performance underscores the value vertex brings to our customers every day and confidence in our solutions to manage compliance at scale for global enterprise.
It also speaks to the strength and durability of our partnerships.
With leading technology providers and accounting firms.
In October we held the annual vertex exchange conference in Las Vegas, where we welcomed a record number of customers partners and industry thought leaders, representing the most dynamic businesses in the world.
Attendees showed great interest in the new solutions, we've introduced to the market and our recent acquisitions.
And it was positive sentiment for our approach for a single extensible global platform to deliver value to the business faster.
With flexibility built in we can support our customers as their business evolves.
It's a key reason why customers remains so loyal to vertex as they require new compliance capability and migrate to the cloud.
At exchange <unk>.
Customers confirmed they need three things from vertex of solutions increased speed improved compliance accuracy.
And enhance value from their technology investments.
As an example conversation that exchange with a new customer from the oil and gas vertical who remarked it since installing vertex. He knows he has less audit risk and has enhanced the efficiency of the team to work on other challenges.
This was a tremendous validation in an industry, where we have made a significant investment over the past several quarters.
These conversations reinforced the value of our strategy and the investments we've been making to build on our VAT tax content database deliver new solutions and expand go to market capacity.
Now, let me shift to a few business insights from the quarter.
We had another strong quarter in Europe , where we are replicating our formula for enterprise market success by combining strong partnerships.
Fit for purpose solutions and customer reference ability.
We understand that drive continued success, we must think global but act local meaning that while companies are looking for global capabilities and solutions is still critical and these deals that we demonstrate a connection to and an understanding of the local environment and that is why we are investing in the growth of our teams and partnerships in region.
Our relationships with the world's leading technology platforms consulting firms and implementation partners often cement the decision just like vertex in competitive deals.
In Q3, we earned the business of a leading European based Fortune 500 company in the food and beverage industry.
We won this in partnership with SAP and Grant Thornton.
This customer needed a cohesive solution to support their global digital transformation.
Their mission was clear make it easier for the customers to do business with them.
To get there they are implementing the best of breed digital platforms for all their key business processes.
Our certified connectors will allow them to seamlessly plug into the technologies they rely on each day.
<unk> SAP, Microsoft D 365, and Salesforce.
We are uniquely positioned with a solution that can support all of their systems simultaneously.
Our connectors enable vertex to be integrated into the integral systems, where transactions are occurring in the business today.
This creates seamless intuitive and intelligent experience for our customers.
Throughout the year, we've been working closely with Microsoft to enhance our support for <unk> hundred 65, and we recently released a new update with.
With enhanced capabilities for e-commerce on this platform.
We're seeing an uptick in interest in wins as a result.
A great example, in the third quarter was a leading diversified metal solutions provider managing over 100 entities across the nation. The company was looking to consolidate their business.
On one ERP platform.
In the enterprise scale solution to replace their manual in house processes for tax management.
Our understanding of the specific challenges metals companies face in the industry specific solutions they need to connect with enabled this win.
Another key area of differentiation is our single multi tax type platform that helps our customers to meet their end to end global requirements across a multitude of systems and enables scale.
Let me now highlight a competitive cloud takeaway.
In this win customer experience is job one for this point of sale solutions provider <unk>.
<unk> solution. They selected from vertex includes global tax calculation with deployment on the edge.
And multi systems integrations to SAP.
Net suite and their e-commerce platforms, using salesforce and their mobile app.
The incumbent provider could not meet these requirements.
This customer also selected our newly released test suite tool.
On that point I'm really excited about the new tools, we released in the third quarter test suite, which is purpose built for S&P automates.
And expands the scope of testing for our customers.
We also launched flux builder in Q3, both tools are part of our suite of offerings that improve end to end processes and user experience for our customers running on SAP.
After only one month in the market, we're already seeing pipeline growth for these tools.
This quarter, we had multiple six figure install base deals tied to global expansion and cloud migration.
A global 500 healthcare company was one of them moving from our on premise solution to our cloud solution as part of their S. E. T S forehand on initiatives like.
Like most of our on premise customers they chose to stay with vertex on their journey to the cloud thanks to our strong connection to their ERP and procurement solutions, but also our ability to support their consumers use tax requirements.
Their years of proven confidence in the results. Our solution provides made the decision to stay with vertex a no brainer, because taxpayers value accuracy and risk avoidance.
Far above their deployment choice of cloud or on premise.
Due to these successes we continue to see how our end to end platform robust global tax content and trusted partner ecosystem are differentiating us in deals and delivering value for our customers.
Our relentless commitment to deliver exceptional customer experience was recognized this quarter.
Vertex was rewarded Idc's 2022, SaaS VSAT award for tax.
This award recognizes the industry's leading SaaS providers, what makes it even more meaningful is that winners are determined based on a survey responses from over 2000 global companies of all sizes, who were surveyed on 30 different metrics, including brand user experience and value.
And in Idc's 2022, SaaS Paas survey vertex received the highest rating among SaaS tax vendors for overall customer satisfaction.
This is a testament to the hard work of the entire vertex team.
Now I'd like to hand, it over to John for a deeper look at this quarter's numbers and then I'll make a few closing comments before we transition to Q&A.
Thanks, David and good morning, everyone I'll now review, our third quarter financial results and provide fourth quarter and full year guidance in the third quarter revenue was $126 $2 million up 14% compared to last year's third quarter our subscription.
<unk> revenues increased 15, 3% period over period to $106 4 million and services revenue grew seven 7% period over period to $19 $9 million.
Annual recurring revenue or <unk> was $411 $5 million in the quarter, representing 16, 6% growth over the comparable 2021 period.
Net revenue retention or NRI remained strong at 109%. This was up from 106% in the comparable 2021 period.
This metric continues to demonstrate our customers' ongoing commitment to our software and solutions.
Gross revenue retention or <unk> was <unk>, 96% at quarter end. This is consistent with the second quarter and an increase from 95% in the third quarter of 2021.
Our returns processing managed services business generated recurring revenues of over $18 million year to date through the third quarter of 2022 as compared to $15 3 million for the comparable period in the prior year.
This service is a competitive differentiator and generates consistent recurring revenue, but is not included in our IRR.
At September 30, we had 4230 direct customers and 268 indirect customers for a total customer count to 4498.
While this is slightly down from 4508 total customers at the end of the second quarter I want to provide some additional context.
As noted in previous calls most of our customer turnover is in the small business segment of the market. For example, the average IRR for customers that churned in the quarter was less than $10000 per year.
This is in part driven by our ongoing strategy to move small business customers into our indirect channel.
By contrast, we continue to see very healthy growth in the enterprise segment of the market, where we focus by example, our number of customers generating greater than $100000 of AOR grew into the low to mid teens, both on a year over year and on an annualized sequential basis.
It is also noteworthy that our average annual revenue per customer or a RPC has steadily increased and was $97300 in the third quarter up from $93850 in the second quarter.
Note that RPC is based on the direct customer count only.
We continue to see strong growth in our cloud based solutions among both existing and new customers revenues from cloud based solutions grew to $43 8 million, an increase of 31, 3% over the prior year comparable quarter.
As I discussed in 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.
Gross profit for the third quarter was $87 $6 million and our gross margin was 69, 4%. This compares with gross profit of $78 9 million.
And a 71, 3% gross margin in the same period last year.
As a reminder to investors in 2022 operating expenses are being impacted by investments that we're making for our continued growth, including R&D sales marketing and it infrastructure.
And accordingly in the third quarter, our research and development expense was $9 8 million or seven 7% of revenues compared to $9 million or eight 1% of revenues in last year's third quarter or.
Our total R&D spend which includes capitalized cost is up $4 $3 million year over year in the quarter and $8 4 million year over year for the nine months period.
Selling and marketing expense was $27 9 million or 22, 1% of total revenues, an increase of $4 8 million and approximately 25% from the prior year period.
And general and administrative expense was $29 3 million or 23, 2% of total revenues an increase of $4 $4 million from the prior year period.
Our growth investments in turn impacted the year over year comps for our earnings metrics.
Adjusted EBITDA was $20 7 million for the third quarter of 2022, a decrease of 600000 over the prior year comparable period.
And adjusted EBITDA margin for the third quarter of 2022 was 16, 4% down 29 basis points from last year.
Turning to the balance sheet, we ended the third quarter with $72 4 million of unrestricted cash and cash equivalents total bank debt was $49 $2 million and investment securities totaled $6 $1 million.
For additional liquidity, we also have $200 million of unused availability under our line of credit.
Turning now to guidance for the full year of 2022, we are increasing our guidance for both revenue and adjusted EBITDA.
Accordingly, we now expect.
Total revenue in the range of 484, five to $487 $5 million.
Representing annual growth of 14% to 15%.
Adjusted EBITDA in the range of $73 million to $77 million.
And we continue to expect that cloud revenue will grow by approximately 33% in 2022.
The full year guidance translates to fourth quarter revenues in the range of $124 million to $127 million.
Representing year over year growth of 11% to 14% and.
Fourth quarter adjusted EBITDA in the range of 15, 4% to $19 $4 million.
This takes into consideration that our performance exceeded our third quarter guidance due in part to certain expenses moving to the fourth quarter. Accordingly, our adjusted EBITDA will be lower on a sequential basis.
In closing we are pleased with the third quarter financial results up and down the P&L and balance sheet. The numbers were solid and we delivered these results while continuing to invest in our business to unlock incremental growth opportunities.
Our guidance reflects our optimism as we have increased our outlook for both revenue and adjusted EBITDA for the full year of 2022.
We will provide additional color on our outlook for fiscal 2023, when we announced the fourth quarter results in early March.
David will now make some closing comments before we open for Q&A.
David.
Thanks, Sean and closing it was a great quarter for vertex in reviewing our third quarter results I believe investors can see the durability of our business model and the value we deliver for our customers as I said earlier vertex indirect tax solutions are not a nice to have they are mission critical in today's global economy.
Tax automation is a must have.
Tax complexity continues to increase and homegrown solutions can no longer keep pace. This.
This makes up 80% of our Tam by our estimates and represent a sustained opportunity for vertex as companies change their business model and evolve their technology platforms.
We are investing to accelerate and maximize our growth opportunities and we are seeing positive results.
Vertex has the product set that customers need on their global Commerce journey at our end to end platform grows more comprehensive as our R&D investments bear fruit.
We have a highly experienced team to help complex businesses makes sense of indirect tax regulations.
Connect their disparate technology systems to remain compliant.
Wherever and however, they do business in.
Underpinning it all as the industry's most comprehensive tax content database.
Which is a clear competitive strength.
We continue to expand our relationships with existing customers, while onboarding new ones.
And we meet our customers, where they are with solutions that work for them and their it infrastructure. This allows us to deliver shareholder value through dependable durable top line growth and strong profitability.
As you can tell I am proud of what we built which wouldn't have been possible without every one of my vertex teammates I.
Thank you all for your hard work now lets pause for your questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Joshua Reilly with Needham. Please go ahead.
Alright, well, thanks for taking my questions and nice job on the quarter here guys in a tough environment.
We all know you guys made a lot of sales investments here over the last 18 months I'm not sure the greater resources in the field.
Combined with the ERP migration project remaining on track, maybe a little bit better than what you would expect in the current macro offsetting.
The more general difficult macro consumer trends that we're seeing out there.
Thanks, Josh for the question.
Thank you in particular, when I think about the ROI, we're seeing from our growth in Europe . The expansion of our go to market teams in Europe , and the customer success management function to key areas of our go to market investments I think that is a direct result of the increased capacity of the quality of the people, we've been able to hire and starting to build.
A true engine around both of those areas. So I think those are really the drivers of the success that we saw more than.
Anything that I would say is offset by the economy.
Okay.
Okay got it and then.
Maybe we can get some more color on the expenses that moved to.
Q4 from Q3 or some of these expenses onetime in nature or will they be more in the ongoing run rate of the business.
Hey, Josh it's a little more kind of stuff that we're looking for from an investment standpoint. There was some investment themes. We wanted to get after in the third quarter that some of those projects didn't necessarily get completed will push into the fourth quarter and again, it's all part of that investment kind of envelope that we've been talking about that were heavy in here in 2022. So some will continue but the majority of that stuff is really does.
Investment related that will really start bearing fruit and that at the next year.
Thanks, guys.
The next question comes from Matt Stotler with William Blair. Please go ahead.
Hey, there good morning, Thank you for taking the questions maybe.
Maybe just just one to double click on what Youre seeing from a macro environment right obviously.
Executing above expectations.
You talked about some of the resilience of the business.
But would love to maybe get some more granularity on the kind of puts and takes there.
Any particular places you're seeing strength versus weakness and how youre thinking about that.
Those dynamics heading forward.
Thank you for the question, Matt, Yes, I think like a lot of tech companies, we're seeing a little bit of more discipline from customers in their buying decisions.
Unfortunately, we haven't seen too many elongated sales cycles, but it is something we're carefully monitoring to make sure. We've got our fingers on the pulse of whats decisions are being made I think because of the fact that our our software is so mission critical to what businesses need as youre going through either expansions into new jurisdictions or technology refresh.
As part of their.
<unk> transformation, we remain on the on the critical path of of.
Something they have to buy any way and so we've not seen material shifts there.
Got it that's helpful and maybe just one follow up on the average revenue per customer.
Pretty pretty impressive growth there.
Three or four points sequentially.
Little over 17% year over year growth in <unk>.
Could you just dig into what's driving that expansion of that metric and kind of the sustainability of that growth rate going forward.
You bet I think theres two distinct drivers of what's causing that if you think about since we've gone public we are investing a lot more in R&D and so we are increasing the number of capabilities. We're delivering in the end to end solutions, we're providing and so by doing that we are creating more opportunities for our sales team to deliver more value to customers and then the second reason is.
The customer success management functions, we're really starting to build out that capability, we're seeing good uptick and embracing of that allowing our sales teams to focus more on new logos and our customer success management function to drive more revenue per customer I think both of those.
Our key drivers and then the last piece I would add is we continue to expand in some of the ecosystems like Microsoft we're seeing good adoption of some of our of the upper end of the middle market and I think that continues to drive new revenue growth for us per customer.
Very helpful. Thank you again.
Yes sure.
The next question comes from Adam Hotchkiss with Goldman Sachs. Please go ahead.
Great. Good morning, and thank you very much for the questions to start David with love to just dig in on some of the drivers behind competitive wins Youre seeing could you talk a little bit about how win rates have been evolving and how you weigh the catalyst behind that between your content database and things you're doing on the tech innovation side, when you talk to customers how <unk>.
Are some of the innovations youre doing like containerization blocks builder in some of these other things and driving incremental adoption and then I just had a quick follow up sure Adam.
I would say that continuing to add new capabilities by listening to our customers and really allowing them to co design. Some of the solutions. We bring to market is really a valuable part of the success we're enjoying in from.
From a competitive perspective, because the customers know they have a voice in how we're bringing things to market and solving the problems. They have from a competitive perspective, there hasn't been too much of a change from what we consistently see.
Pretty much in the mid and upper end of the market. It's Thomson Reuters, who we compete with and that remains consistent and outside the U S. We certainly see Thompson and <unk> being are our primary competitors and that really has not changed.
Adam It really appears to be have lost Adam.
Our next question comes from Daniel Jester with BMO capital markets. Please go ahead.
Hey, good morning, everybody. Thanks for taking my question.
David maybe could you just remind everybody where we are on this investment cycle, obviously, you've been investing very deeply in the business since the IPO, which has pressured margins and cash flow are we going to start to harvest. Some of this in 2023 is 2023 still going to be an investment year love sort of a sense of where we are in this churn.
Yes, David Thank you for the question.
Consistent with the plan, we have been investing heavily in go to market tax content database at our R&D on new products and I think thats been the drivers of our growth in the revenue growth that we've enjoyed we absolutely have seen it impact free cash flow, but I think we are coming to the end of some of that as we move into 'twenty three.
I think youll start to see the true ROI from that start and cash flow from that stope in the back half of 'twenty, three and certainly we'll be watching the economic environment to make sure. Our our pipeline remains strong we're fortunate being an enterprise player we have good visibility into our pipeline and so.
I'll also give us the the metrics, we need if we need to slow down any of those investments.
Got you and then just a follow up on tax I know, maybe an update on on how that is progressing the integration and getting that out to clients in Europe . Thanks.
Yes and taxable.
It's really a global solution, it's not just Europe and I think what we're seeing now.
With some of the marketplaces, we've been winning as we're realizing great opportunity from that investment and its starting to show up in more and more situations, where we can expand.
Share of wallet with our customers existing customers as they're looking to continue to diversify their businesses with their own private marketplaces, and all that the taxable resources have been and capability has been well received in the market.
Great. Thank you very much.
The next question comes from Andrew <unk>. Please go ahead.
Good morning.
Just wanted to ask a question on the customer count specifically I think you mentioned the lower end customers are transitioning to indirect.
I was just wondering first of all is there a lag between that transition and then as those customers move to the indirect channel is it likely that you could benefit from a margin perspective longer term.
Yes, Andrew Great question. Thanks, we appreciate it I think we are seeing we are seeing the customers move again. They are moving we are seeing some degradation as they move and find other solutions I think as we've transitioned our go to market focus our go to market focus is on looking at looking at those those smaller customers.
Through the indirect channel. So it is taking some time to build that up I think from an overall standpoint, I think I don't anticipate any big swing wild swings in our in our margins and how that would impact our margins over the longer term, but it's something that we really feel like we need to stay after continue to have a solution that's out there and make sure that its being put forth in the best possible way.
We think that indirect is the way to go there.
Got it and I guess that means that you would spend less resources for those customers that are generating under 10000 a year.
Sure.
Yes.
It makes sense.
Alright, and then I guess on the <unk>.
Just broadly speaking I'm trying to get a pulse on the different end markets and geographies can you maybe elaborate what's going on in Europe .
And versus U S and maybe what verticals are stronger versus others.
So from a from a Europe perspective.
I realize it's booking a little against the trend that a lot of tech companies are seeing we continue to see good activity and had a good quarter relative to our expectations and I think it's because of few things I've spoken in the past about the importance of our partnerships with SAP and the alliances and that is really is really taking hold and we're doing a lot of work with.
The direct sales teams that I think so we're delivering more customer value in those conversations which is secured and then the other piece is the reference ability talked about for a number of quarters now the importance of having more key customers who are referenced whipple to their peers as you go to expand in a geo and we.
Have really begun to build some marquee customers in Europe that are giving us strong references.
Plays very well at the enterprise market. It's a playbook we've run in North America for years, and we're seeing it start to bear fruit with our go to market investments in Europe , the other piece relative to verticals.
I'm thrilled with the investment we made in oil and gas and our team has done a great job of learning.
And really building some expertise in that discipline and we're seeing good uptick there while not a vertical the edge solution that we've we've advanced this year is really getting some nice traction and we're seeing some considerable opportunities to expand that as we move into 'twenty three.
Great. Thank you.
The next question comes from Keith <unk>.
Morgan Stanley . Please go ahead.
Hey, good morning, it's Jonathan on for Keith Thanks for taking the questions.
You talked about churn at the low end of the market. What gives you confidence that this doesn't permit upwards.
Yeah, well I think <unk>.
<unk> 40 plus years.
During the business at the enterprise market, we're very confident that and in fact, if you look at our year over the last.
Six quarters, it's grown.
<unk> bin.
<unk> been very solid every quarter. So I think we know it from that perspective, I think you have to understand back to the history of where we got into that low end of the market. It was the introduction of our cloud product as a proof point, we didn't want to expose our brand at the upper end of the market. So we intentionally took on a myriad of smaller customers.
And not surprising as we have now perfected and they'll have the recognized as one of the leading SaaS solutions in the industry.
We're focused on the enterprise the mid and enterprise market and so that low end of the market not surprised at all we're seeing some of that churn, but it really is not part of our core strategy. So it doesn't it doesn't affect me at all.
Thanks for that color, there and wanted to dig into some of the questions.
On the investment side or how are you thinking about your investments at the mid market, particularly given what we're seeing in the backroom environment.
Yes, Greg.
Appreciate the question I think what we're trying to do there is be really targeted into a few ecosystems that we know there's considerable customer pain and market opportunity as opposed to a broader.
Let's build 100 connectors and just spray the market with.
With a lot of investment that may not pay off and so I think the team has got a very disciplined approach about the unique areas. We're trying to go real deep and deliver value prop in a very specific ecosystems in the mid market to try to manage that risk.
Helpful. Thanks, guys.
Thank you.
The next question comes from Brad Reback with Stifel. Please go ahead.
Great. Thanks, very much David can you remind us how you guys get paid and so much as if your customers business flows.
And they use you less does that mean, you get paid lacks alert truly fixed.
So we have a we have revenue bands in our licensing licensing and so those revenue bands give each customer a broad range, both up and down before they would change ranges and having been through the OE dollars nine recession and what happened in O. One I'm pretty comfortable feeling like those bands are well a portion to minimize that.
The exposure.
Short term down and affect one customer, but not really affect our overall.
Revenue strength.
That's great and then switching gears AOR growth decelerated a bit sequentially after being in a bit of a higher range for the last few quarters.
How should we think about that.
Should we think about the reasons for that and then how should we think about that growth rate going forward. Thanks.
Yes, no very.
I appreciate the question Brad I think as we think about the $16 six we feel very good about what that number is we think it's strong and healthy growth. We're proud of how that result has come through I think as we think about we look at the rest of our business. We look at some of the other metrics. They continue to be very strong, but again I think when we think about moving forward and what that what that means as we go for.
A word now we need to be mindful of mindful of the last year, we had a very strong back half of the year. So we have to be attentive to that and especially given some of the kind of economic considerations that are out there we want to be very mindful and we are mindful when we set our guidance to ensure that we kind of took that into account as well. So we're trying to be thoughtful about that but in terms of we don't necessarily guide to.
But again I think we're mindful of kind of what the economic environment is looking like and how we're shaping up as it relates to that.
That's great thanks very much.
Thank you.
The next question comes from Steve Anderson.
Please go ahead.
And then just I just want him.
Quick a quick housekeeping question and was there any FX impact in the quarter that impact either the.
Revenue of our downside to call out.
No nothing to speak up.
Okay.
Helpful. And then just a higher level just wanted to dig in a little bit more on the mid market investments, you're making it seems like having really good traction with the Microsoft ecosystem and naturally those are that's kind of called out but how are you guys thinking about the opportunity in.
Kind of a further investments you're making to kind of penetrate the mid market mid.
Mid market ecosystem at this client.
Yes, Steve I think again back to the point of discipline I think what we've proven to ourselves over the years with the ecosystem, we invest in taking Oracle and Sap's examples by going really strong and the quality of our integrations.
The understanding of their customer base working closely with the partner and the ecosystem around that we've been able to deeply.
Our win rates and all justify the success, we have and so I think we are applying the same playbook to a few select mid market channels as opposed to a.
Spray and pray build 100 connectors and hope we get uptake in the environment and so I think thats still translating well and so I think that youll hear more of those successes in very.
Staged ecosystems as opposed to just broad a broad base of that mid market and I think that discipline not only it also gives us a metering of our investment portfolio, which I think again in the current environment is prudent.
Okay, and then just on the macro I just want to clarify a little bit more it doesn't seem like there's anything that's impacting the top of funnel and new pipeline build but is there anything that you would call out that's either.
Is there a slowing in terms of deals come in or anything to call out that you are seeing anything at least on the pipeline side.
And the law of large numbers, we saw a few sales cycles elongated, but nothing that I'm overly concerned about at this point, it's something we're going to monitor very carefully as we get deeper into the fourth quarter obviously.
And we tried to be we've raised our guidance because we still have good visibility to our pipeline I think it's a reflection of the strength of our offerings and the mission criticality of what we do.
But it will be something we monitor very carefully as we think about the rest of the year. We watch the rest of the year unfolded, we think about 2023.
Okay perfect. Thanks for taking the questions sure.
The next question comes from Patrick <unk> from JMP Securities. Please go ahead.
Oh, great. Thanks, and let me add my congratulations.
I have a couple so first of all John that cloud looks like it accelerated right. I mean, I think you added one nine and revenue and cloud revenue.
Sequentially last quarter and this quarter was $3 six so is that just.
What's the reason for that is something something positive going on is it just the way the revenue gets recognized.
Yes, I mean listen I think as.
You will know Pat I mean, we've been focused on cloud first I mean, that's where all our development resources sources are going that is where the sales team is focused that's what we put that as what we are going to market with and I think that activity and the investments we've been making as David talked about are really starting to bear fruit and we're starting to see a lot of the activity. There again 90 plus percent of the new logo opportunities that come.
And are looking for cloud as you would expect because that's the product that we've been really putting most of our effort behind in getting ready. So I think it has a lot to do with that and it's a lot to do with that investment cycle that we've talked about.
Awesome and then.
Just another big picture one for you Jonathan.
And you mentioned a couple of these things so far but just.
Clearly youre not guiding yet for 2023, but what sort of key points would you want investors to keep in mind.
Yes, you are right, we don't give guidance out for the.
For 2023, as we sit here today I think we feel that we've got a very strong business that business has been growing nicely. We've had nice topline growth through 2022 things have been going well, we've been able to we've been very thoughtful about the guidance that we put together for throughout 2022.
2021, and 2022 and very mindful of that so we're going to be we're going to certainly proceed proceed in a similar fashion with the prudence that we've done in the past, but again as we think about next year is we're going to take a little bit more time to kind of evaluate some of those bigger macro things that I think are starting to play out a little bit more but again from the place where we sit with mission critical soft.
We're in the long the long sort of pipeline that sort of that we operate in because of the nature of the customers. We have we feel pretty good about what when we talk about visibility we feel like we've got nice visibility as to what the future portends.
Great and then David for you are you are you guys hiring I'd highlight 90 open jobs on the website.
Are you finding it easier to get talent given that not a lot of other people are hiring anymore.
We are we are still hiring we've been fortunate we still have opportunities for growth.
And I think that it is something we will obviously be very thoughtful about here again, managing pipeline and opportunity with with our hiring trend, but yes. We are actively still hiring in the hiring environment has gotten a little easier. It's still I think for engineering talent and tax talent. It is still a tighter environment than maybe some others, but certainly that.
All read some recent layoffs that might free up some wonderful capacity for us in the future.
Alright, great. Congratulations thanks, guys. Thank you.
The next question comes from Ahmad homeowner with Jefferies. Please go ahead.
Hey, everyone. This is Jordan <unk> on for some odd.
Congrats on the impressive results, especially in light of the tough macro.
I wanted to ask a quick follow up to <unk> question for you John .
So obviously cloud growth of 33% is pretty strong and it implies that the net new.
Revenue per client in the fourth quarter is about double that of washed so.
Could you remind us are you incentivizing your enterprise customers to switch from on Prem to cloud. How are you doing that would be a discounting or any feature incentives or anything like that.
No. We don't have programs to Incent that again, you need to remember as we as we talk a little bit through this the primary driver. The primary person that we are focused on spending time with them and marketing to our the tax directors et cetera. When it comes down to the decision making around deployment typically that falls into some into another area of the company.
When somebody Thats involved in the decision in the process, but really it's a little bit of a different decision and that decision many times, whether it's cloud or whether it's on Prem is going to is going to really follow whatever the path of the of the technology cycle that the company's Iran. So while we would love to push that many times, it's part of a bigger a bigger wholesale move when we see customers migrating.
It's not hey, we're just taking our tax technology and moving it to the cloud. It's more things are getting moved or there is or there is a push to digitization that they haven't had before.
Great. That's really helpful and a quick follow up profitability was in process you called out a pushout in some expenses into the fourth quarter.
Still free cash flow and maybe it was a bit lighter than we expected initially and it looks like part of that was working capital. So were there any changes may be to collections or anything working capital worth calling out and how should we think about how working capital is going to trend had maybe the fourth quarter and then through 2023.
There weren't any changes to anything that we've done with respect to working capital and how that has played out over the handful of quarters I think what I would tell you is when we look to the fourth quarter. When we look to the fourth quarter fourth quarter is typically when a lot of those year end billing start rolling in so it's usually a strong cash generative quarter for us historically.
We anticipate to see again, an uptick in the amount of cash that's coming in so we expect to see that but I think as we've talked about this year in 2022 has been a big investment year.
Certainly manifest itself.
A lot of cash and extra cash flow drain than in the prior years, but I think this is part of the plan that David has outlined and we're continuing to stick to that we feel good about we feel good about the investments that we're making we're starting to see we're starting to see the ROI start to show itself and we hope to see more of that show up in 2023.
Great appreciate you taking my questions.
Sure.
The next question comes from Adam Hotchkiss with Goldman Sachs. Please go ahead.
Thanks for the follow up guys and apologies for the connection issues. After my first question earlier.
John just wanted to dig in a little on how youre thinking about going forward, obviously, some real durability and gross retention could you just again on the upsell side.
What are you seeing customers prioritizing the current macro between incremental geos and products is that any different than what you would typically see and then could you just remind us when you think about prior slower macro environment like the global financial crisis, the impacts if any to volume down sell.
<unk> or holding steady at renewal for customers and anything youre seeing there over the last couple of months. Thanks. So much sure no. Thanks, Adam appreciate it in terms of kind of our NRI again. The IRR continues to be very strong were pleased with the results that we're seeing there I wouldn't say, there's a real difference in the types of the types of products of the Geos.
The areas that Thats really coming from we haven't seen a big move there in terms of kind of the components that make that that makes that stuff up. So that's not been a real big that's not been a real big driver and we feel pretty good about how that's going to play out how that will play out as we move forward and the second part of your question. The second part of your question Adam I, just want to make sure I get that.
Yes, no could you just remind us what.
When you look back at prior slower Matt right.
Yes, yes, no problem.
We look back at the prior the prior sort of slowdowns or turn downs in the economy again on an overall basis. The company grew through those grew through those nicely and so we feel very good about sort of what that might mean to us in terms of the componentry. That's made that makes up the NRI again.
It's a customer by customer specific thing I think what we expect we may see is that we may see some of that those additional entitlements are those additional volumes with certain of the customers starting to slow down a little bit like so additional volume with existing products might not be as robust as it had been because the economies are slowing down which makes sense, but again there.
That will continue to be customers certainly in the enterprise expanding their geographic footprint and doing things that they can too to bring bring tax into solutions like ours that are going to allow them for a global or allow for a global solution.
Great Super helpful. Thanks for the follow up.
Sure.
This concludes that question answer session I would like to turn the conference back over to Joe Crivelli for any closing remarks.
Thanks, everybody for joining us today, if you have follow up questions or would like to schedule time with the team. Please E Mail me at IR at vertex, Inc. Dot com and with that thanks and have a great day.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.