Q4 2022 Vertex Inc Earnings Call

Speaker 1: The ST.

Speaker 2: Greetings. Welcome to Vertex's fourth quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation.

Speaker 2: If anyone should acquire operator assistance during the conference, please press star 0 from your telephone keypad.

Speaker 2: Please note this conference is being recorded.

Speaker 2: At this time, I'll now turn the conference over to Joe Graveli, Vice President of investor relations. Mr. Graveli, you may now begin.

Speaker 2: Hello and thanks for joining us to discuss Vertex's financial results for the fourth quarter and year-ended December 31, 2022. I'm Joe Crivelli, Vice President, Investor Relations. With me on the call today are David DiStefano, Vertex's President and CEO , and our CFO , John Schwab. Thank you for joining us today.

Speaker 2: As a reminder, during this call, we may make forward-looking statements related to 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.

Speaker 2: 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.

Speaker 2: This conference call is being recorded and will be available for replay via webcast on our Investor Relations website.

Speaker 2: With that, I'll now turn the call over to David.

Speaker 3: Thanks, Joe. Welcome everyone and thank you for joining us. I'm pleased to speak with you today about Vertex's financial results.

Speaker 3: Businesses today face immense regulatory change and indirect tax complexity.

Speaker 3: These challenges intensify as they expand into new regions, diversify offerings, and accelerate e-commerce growth. And that's why we continue to see tax technology growing in both value and demand.

Speaker 3: Our company's vision to accelerate global commerce has never been more relevant.

Speaker 3: Our solutions give enterprise and mid-market businesses alike the confidence to manage tax compliance at scale in over 20,000 jurisdictions around the world.

Speaker 3: Against this backdrop, Vertex executed extremely well in 2022, finishing on a high note with our best quarter of the year.

Speaker 3: Revenues in the quarter reached a record 131.1 million, up 17.4% from Q4 2021. This is the highest year-over-year revenue growth that we have delivered at the public company, and we close the fourth quarter with a just a debit of 20.8 million, up 8% from last year.

Speaker 3: Our strong performance in an uncertain economic environment reinforces the durability of our business, the financial strength of our customer base, and our ability to sustain profitable growth.

Speaker 3: Re-cashlow in the quarter was 24 million, which helped us deliver positive recastlow for the full year while making a multi-million dollar growth investment.

Speaker 3: We are seeing benefits from our strategic acquisition and the targeted investments we are making in R&D, go-to-market, and ecosystem expansion.

Speaker 3: These investments are helping us further penetrate the $22 billion addressable market for tax automation solutions.

Speaker 3: Our investments are focused in four key areas.

Speaker 3: First, expanding our install base through accelerated go-to-market investment to drive customer success and high-value new logos within our target markets.

Speaker 3: Second, broadening and deepening our strategic partnerships.

Speaker 3: Third, strengthening our global presence with a spotlight on Europe .

Speaker 3: And finally, driving new product innovation with heavy investment in emerging technologies and tax content to have the power to transform our industry.

Speaker 3: And we are seeing adoption from both new and existing customers evidenced by strong performance across all our key performance indicators for customer success in the fourth quarter.

Speaker 3: ARR was $431 million, up 16.5% year over year. NRR was 110%, up from 108% last year. GR was 96%, up slightly from 95% last year. And average annual revenue per customer increased 16%.

Speaker 3: from last year's fourth quarter and exceeded $100,000 for the first time in our history.

Speaker 3: On the technology front, we continue to advance our next generation cloud solution to offer even greater scale and elasticity.

Speaker 3: We are enabling tax calculation at the point of transaction with the latest edge computing technology.

Speaker 3: And we are accelerating our use of intelligent automation.

Speaker 3: to help our customers increase efficiency, reducing the friction between commerce and compliance.

Speaker 3: Ortex also continues to make significant investments in our tools and technology to enable our tax professionals business operations.

Speaker 3: Vertex also continues to make significant investments in our tools and technology to enable our tax professionals' business operations. Through intelligent automation, our technology is able to make significant investments in our technology.

Speaker 3: data and analytic tools and robotic process automation, we are driving operational efficiencies and adding more content faster than ever before.

Speaker 3: We're proud to help the most dynamic and discerning businesses on the planet stay compliant with our tax content database which has more than 700 million effective rates and rules.

Speaker 3: And our performance in 2022 confirms for me we are just getting started. We have only scratched the surface of our addressable market.

Speaker 3: given the multiple trends triggering the need for tax automation.

Speaker 3: This gives me confidence that we can continue to grow both our top and bottom lines as these tailwinds take hold and accelerate.

Speaker 3: I'd like to share a few business highlights from the quarter illustrating these trends.

Speaker 3: Today, a significant segment of enterprise markets still relies on home-grown solutions or manual processes to address indirect taxes.

Speaker 3: This means incredible growth potential still exists within this highly valued segment of the addressable market where we are the clear market leader.

Speaker 3: As tax complexity grows, compliance becomes unmanageable, triggering a need for change.

Speaker 3: As an example, one of the leading global commodities trading companies in Europe reached a tipping point when new regulatory requirements for near and real-time reporting pressure tested manual processes and their ability to maintain compliance.

Speaker 4: The time was right to automate tax determination in the cloud, and our ability to win this competitive six-figure deal was based on three things.

Speaker 5: The technical capabilities of our cloud solution to support data accuracy in every global jurisdiction with tight integration into their SAP platform.

Speaker 5: The reference ability of current customers who represent some of the most influential and complex businesses in Europe

Speaker 5: and the expertise demonstrated by our in-region Vertex team.

Speaker 5: This is a differentiated value that allowed us to achieve record growth in our business in Europe in 2022.

Speaker 5: When we speak with prospective customers, our ability to uniquely connect disparate systems to a single-tax platform is another clear differentiator.

Speaker 5: This led to a significant six-figure ARR win this quarter.

Speaker 5: We were selected by one of the largest consumer insurance companies in the United States as their provider of choice for indirect tax automation.

Speaker 5: This significant new logo opportunity was driven by the company's implementation of CUPA for procurement.

Speaker 5: As they integrated Coupa into their Oracle infrastructure, it was the ideal time to transition from their homegrown indirect tax system, which could no longer keep pace with their compliance needs in today's modern cloud ecosystem.

Speaker 5: Another area of investment that I touched on earlier centers on new product innovation.

Speaker 5: We had a notable win in the quarter that highlights how our continued portfolio enhancement to better support the SAP ecosystem makes Vertex the clear choice for tax technology in that space.

Speaker 5: After being spun off from their parent company, our cloud solution was selected by a well-known consumer products brand.

Speaker 5: to manage sales tax compliance.

Speaker 5: The company was familiar with our industry recognized customer experience and the strength of our solutions.

Speaker 5: having previously used our managed services offering. As an independent company, they needed a tax engine that connects seamlessly to SAP. They also licensed our Plus tools that launched in 2022 with the acquisition of LCR Dixon.

Speaker 5: This deal reflects the value we are receiving from this strategic investment and gives us an edge with the most complete and differentiated tax automation solution for SAP.

Speaker 3: Each quarter, I highlight how trusted relationships across the partner ecosystem create value for our joint customers and differentiate us in competitive deals. Across the board, we continue to enhance our integrations globally with our strategic partners and actively engage with their sales team.

Speaker 3: Additionally, we are working closely with our alliance partners to focus on key ecosystems where we share strength and differentiation.

Together, we deliver a better overall experience for our customers. In the mid-market, we continue to work closely with Microsoft Dynamics team and strengthen our technical integrations and go-to-market motions together. In the quarter, we had multiple deals where we were able to drive value for Microsoft customers.

As an example, our solutions allowed a premium retailer in the U.S. to consolidate tax and billing systems as part of a larger financial systems transformation on Microsoft Dynamics 365.

Our unique ability to integrate into multiple financial systems for accurate tax calculation allowed us to win this new logo.

This retailer now has a trusted tax partner that is supporting their long-term omnichannel strategy.

So the highly competitive deal as the customer was using solutions from two of our competitors in other areas of their business.

Another powerful example of how our multi-systems integrations and partner relationships are setting Vertex apart from the competition involves a national restaurant chain looking to streamline their tax processes.

Their systems integrator, top block, brought us into the opportunity. The fact that we were named a preferred ISV and premier partner for their work day financial environment was key to earning their confidence.

The strength of our tax content for the food and beverage industry reinforced at Vertex

is the right choice to help them manage tax compliance.

Looking forward, I'm excited to build on our preferred position within Workday in 2023 and beyond.

Across all our highlighted wins this quarter, the breadth and depth of our tax content database is a clear advantage for us time and again. The expansion of our vertical specific tax content is another example of how investments we are making are quickly delivering value to our customer and shareholders.

B2B marketplaces are growing at a rapid pace and emerging regulations...

to ensure governments get their fair share of the revenue on these new platforms.

This creates increased complexity for businesses using this e-commerce channel. Because of this, Marketplaces continue to be a focal point of our growth efforts and we continue to leverage the acquisitions of Taximo and its integration with our other products to strengthen our partnerships with Marketplace operators.

A great example of this was how we expanded our relationship with Miracle in the fourth quarter. Miracle is a leading enterprise SaaS platform that powers over 300 online marketplaces.

We initially announced our strategic partnership in 2021 with an integration to help their customers comply with emerging VAT e-commerce regulations.

This quarter, we launched an enhanced connector to enable full-service global support for miracle expansion into North America.

Interestingly enough, Miracle also became a new customer of Vertex in Q4, which is very common with many of our tech partners.

They are customers as well as go-to-market partner, which I think speaks volumes about our leadership in the industry.

Before I turn the call to John , I want to thank the entire Global Vertex team who have worked hard to get us to this inflection point.

Their relentless commitment to deliver an exceptional customer experience was once again recognized this quarter by Help Desk Institute.

Vertex achieved HDI Support Center certification, which is an internationally recognized standard for best practices.

in customer support and the highest level of recognition for customer experience. And quite frankly, that is something enterprise customers deeply value and we consistently differentiate on.

We are the only tax technology provider to earn this level of certification.

And we've now done it twice. I could not be prouder of our team. When you work with the best customers and partners in the industry, you also attract top talent. We have continued to invest in and grow the Vertex team. Among the new additions to our team in 2022, we welcome Brad Cameron, as Senior Vice President of Software Engineering. I could not be more excited to have Brad join us from Salesforce. jazz.

to lead our world-class engineering team in the development of our next generation of solutions and continue to advance technical innovation.

Since we were in public, we have been laser focused on increasing our product and tax content leadership, expanding our go-to-market capabilities, and making and monetizing targeted strategic acquisitions.

and reflecting on our performance in quarter and all of 2022, our team is executing well across every area of our business in direct alignment with that strategy.

John , I will now hand the call over to you to provide additional details on the quarterly results.

Thanks, David, and good morning, everyone. I'll now review our results in detail and provide financial guidance for the first quarter and year. In the fourth quarter, revenue was $131.1 million, up 17.4%, compared to last year's fourth quarter. By April 2021, the Committee has heard FIELDS COVID-19horror news about a new pandemic.

And for the full year, total revenue is $491.6 million, up 15.5% from 2021.

This exceeded the high end of both our fourth quarter and full year revenue guidance by $4.1 million.

Annual recurring revenue, or ARR, was $431.1 million at the end of the year, representing 16.5% year-over-year growth. Net revenue retention, or NRR, remained strong at 110%. This was up from 108% in the comparable 2021 period.

and up a point from 109% in the third quarter.

Gross Revenue Retention, or GRR, was 96% at quarter-end, consistent with prior quarters and within our targeted range of 94 to 96%.

These metrics continue to demonstrate the stickiness of our solutions as well as the strength of our customer relationships.

Our Returns Processing Managed Services business generated recurring service revenue of over $24.4 million for the full year compared to $20.8 million for the comparable prior year period.

We also processed over $13 billion of tax payments for our customers and earned over $1 million of cash from the float on the funds. Customer count increased in the fourth quarter. At December 31, we had 4,559 total customers, up by 61.

from 4,498 at the end of the third quarter.

As we've discussed with investors previously, customers with ARR greater than $100,000, or scaled customers, is a better metric than gross customer count to gauge our sales performance in the enterprise space and upper middle market where we focus.

Accordingly, in the fourth quarter, scaled customers grew 15% compared to the prior year and 17% on an annualized sequential basis. Our average annual revenue per customer, or AARPC, continues to steadily increase and was $100,500 in the fourth quarter.

up from $97,300 in the third quarter.

Note that AARPC is based on the direct customer account which is disclosed in the press release.

Cloud revenue was $46.6 million in the fourth quarter, up 34.4% compared to the fourth quarter of 2021.

This was also up $2.8 million from $43.8 million in the third quarter.

Full year cloud revenue was $168.9 million, up 33% year over year, and in line with our guidance.

For the remainder of the income statement discussion, I will be referring to non-GAAP metrics.

All of these non-gap metrics are reconciled to gap results in the earnings press release that was issued this morning.

Gross profit for the fourth quarter was $94.4 million and our gross margin was 72%. This compares with the gross profit of $79 million and 70.7% gross margin in the same period last year. Knowne can their

Gross margin on subscription software was 78.4% compared to 76.9% in last year's fourth quarter and 76.5% in the third quarter of 2022.

Gross margin on services revenues was 36.8% compared to 39.2% in last year's fourth quarter and 31.3% in the third quarter of 2022.

Turning to operating expenses.

In the fourth quarter, research and development expense was $11 million compared to $10.1 million last year.

For the full year R&D was $40.1 million.

With capitalized software spend included, R&D spend was $22.5 million for the fourth quarter and $83.9 million for the full year, which represents 17% of revenues for each period, reflecting our ongoing investments in new product development and enhancing existing products to address customer needs.

Selling and marketing expense was $33.2 million, up 25% from last year's fourth quarter.

For the year, selling and marketing expense was $115.3 million, up 26% from last year.

The quarterly and year-over-year increase was a result of the expansion of our go-to-market and customer success organizations in 2022.

Our general and administrative expense was $28.8 million, up $5.7 million from last year. For the full year, our general and administrative expense was $112.7 million compared to $89.5 million last year.

This increase is due to the infrastructure investments we are making to support long-term growth.

Adjusted EBITDA was $21 million in the fourth quarter, an increase of $1.8 million year over year.

And for the full year, our adjusted EBITDA was $78.7 million up $700,000 from last year.

Now turning to cash flow, we delivered $23.7 million of free cash flow in the fourth quarter. This enabled us to deliver positive free cash flow for the full year despite the significant growth investments we made in 2022. Accordingly, for the full year, our free cash flow was a positive $3.4 million.

We ended the fourth quarter with $91.8 million in unrestricted cash and cash equivalents. National bank debt was $48.9 million and investment securities totaled $11.2 million.

dollars of unused availability under our line of credit.

Vertex has demonstrated throughout our history as a public company that we are thoughtful about our approach to guidance and strive to deliver on these promises consistently.

Given the current economic uncertainty, we have been mindful with our 2023 expectations.

Accordingly, for the first quarter of 2023, we expect.

Total revenue in the range of $131 to $133 million, which would represent 15% year-over-year growth at the midpoint.

and adjusted EBITDA in the range of $19 to $21 million, which would represent an increase of approximately $1 million at the midpoint.

And for the full year 2023, we expect total revenue in the range of $550 to $556 million, representing annual revenue growth of 12.5% at the midpoint.

adjusted EBITDA on the range of $92 to $96 million, representing an increase of more than $15 million at the midpoint. We believe that cloud revenue will grow by approximately 27% in 2023.

This guide reflects our view of the business in the early going of 2023.

As we have mentioned, we believe Vertex's revenue base will be resilient even if the economy does turn downward. David will now make some closing comments before we open up to Q&A. David?

mention we believe Vertex's revenue base will be resilient even if the economy does turn downward. David will now make some closing comments before we open up the Q&A. David? Thanks John .

A few points to leave you with before we open the call for questions. First, I'm very pleased with our performance in the fourth quarter and in 2022 as a whole.

It's clear to me the investments we've made are helping us attack the significant growth opportunity in front of us.

This is showing up in our double-digit growth, strong profitability, and positive cash flow in the fourth quarter.

We are where we had expected to be when we began our investment strategy two years ago.

We are where we had expected to be when we began our investment strategy two years ago. Second.

While we continue to invest in our strategy and growth intentions, we are nearing the point we no longer intend to accelerate investments.

In the back half of 2023, these should taper off and the growth trends will start to be even more visible to our investors.

And finally, we will continue to take prudent steps to invest wisely and strengthen our financial position as we have throughout our 40-year history.

During economic downturns, taxing authorities rely heavily on revenues from indirect taxes to fund budgets, and enterprise customers still invest for the future. This drives ongoing demand for our solutions and allows us to continue to grow even in recessionary times. Our team is executing well, and we are energized about 2023 and beyond.

With that, we'll take your questions. Operator, please go ahead.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone will indicate your line is in the question queue.

You may press star 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Thank you. Our first question today is coming from the line of Matt Stotler with William Blair. Please just hear with your questions. Hey there. Appreciate you guys taking the questions. Maybe just to start off with one on the macro, you obviously have some interesting commentary. It seems like you guys are obviously not seeing particularly...

and deal cycles, what have you, I would love to just double click on your observations there.

Sure, Matt. So, you know, fundamentally no usage concerns. You know, the product is exceptionally sticky. We have pretty strong price uptake, you know, relative to our GRR and, you know, our install base that we're not seeing any downward pressure there at all.

I think on the deal cycle, I think customers remain thoughtful. The value prop of our software and our solutions continues to show through versus our competitors. Customers continue to drive both digital transformations, and this is really what enterprise customers are focused on, digital transformation.

ERP upgrades and other system upgrades to get drive more efficiency in their business and those are those things continue to serve us well. We do see occasional deals that will miss by a month of when we expect them but we have not seen material push off or we're canceling budget on this project. We've not experienced that yet.

Got it, it's helpful. And then maybe one, kind of looking forward, you mentioned emerging tech and some of your investments in emerging tech there. Would love to kind of get your view on where you're focused on in terms of additional kind of capabilities there and what you're most excited about in the R&D pipeline at this point.

Yeah, so we continue to expand on our Edge and Edge solutions and cloud platform. I continue to think that that is a strength for us that will be a differentiator. Looking forward, we've had a number of healthy discussions about data, data transformation, data intelligence, and we see some opportunities there.

And then we're always staying close to driving ML and AI and thinking about more automation both in our business and in our solutions. And so those are areas that I think will continue to push forward in 23 and beyond.

Great. Thanks again. Thank you, Matt.

Nice job on the quarter here. I think if you look at in-store retail, I think it continued to be stronger in Q4 than maybe what people expected. Can you just discuss your exposure to in-store retail versus e-commerce and how is the Edge cloud solution, which I think has been out now for roughly a year?

how that's either helping you win net new customers or routine customers you have and migrate them to the cloud.

Sure. Josh, I think the great news is our customer base is really well balanced across both e-commerce and in-store. So it's sort of like left pocket, right pocket. We've enjoyed success on both sides. So when the pandemic hit and we saw people start shifting heavily to e-commerce, we were running omni-channel for our customer base. And so we enjoyed sort of an uptick there and now we're seeing it.

more on the in-store side. And I think that's the benefit of our position with the enterprise customer base. We're on both sides and edge is really furthering that experience. It's really getting uptake across not only retail, but we're seeing other deployments where customers really want to containerize their solutions and they're seeing value in what we're doing there.

So, we're seeing good uptake there. Got it. That's helpful. And then, if you look at your Q4 subscription revenue, I guess a couple quick questions there are, was there any overages in the quarter there to note in the subscription revenue line item? And then, as you look at how customers are buying, it's based on revenue.

in terms of to call out, in terms of if there's anything that was above normal. So I would say there's really nothing there. And then we think about kind of new opportunities and what people are buying from a band level. I wouldn't say that there's anything there that's driving us, that's causing for change. We're not seeing people taking anything down or buying less than they normally would.

in anticipation of something in the future. So again, that stuff does get trued up, so it really gets caught up, but we're not seeing people, we're not seeing people buy anything lower. There's really nothing meaningful in the numbers yet that are indicating any kind of a pullback there. Got it. Super helpful. Thanks, guys. Bye bye.

Maybe first to start off on the guidance for 23, 27% growth in the cloud. If I have my math right, implies maybe 5% growth in the rest of the business. So can you just provide a little bit more context about beyond the cloud, what your growth expectations for the different other parts of the business are this year.

Yeah, thanks for the question Dan much appreciated. Again, as we think about growth, again you've called out cloud and we feel pretty good about where that's going to come in. Again, as we've talked about, the on-prem business is going to continue to be there and be something that our customers use and those that have it may continue to add on to that. But we've seen a nice split between people adding additional...

additional cloud onto their existing on-prem infrastructure as well as adding some on-prem activity if they need it. So we're seeing some modest growth that's going to come out of that. And then from a services standpoint, we're going to see that increase a little bit over last year in terms of kind of what our growth expectations are. My guess is that's going to be in that.

Gotcha. That's helpful context. Thank you. And then on the free cash flow, certainly a big improvement in the fourth quarter. As I think the 2023 and your comments that we're starting to end the investments, how should we think about the EBITDA, the free cash flow conversion? Can that tighten up into later this year?

And again, I anticipate that we'll see a bit of improvement from a free cash flow standpoint, but I'm really looking towards 2024 to see that start to move more meaningfully as we get ourselves past these investment cycles.

Great, thank you very much. You bet. Our next question is from the line of Andrew DeGasseberry with Varenburg. Please proceed with your questions.

Maybe can you elaborate a little more what drove that new logo growth? And then in terms of SAP, obviously that's a relatively new relationship. If you could elaborate as well in terms of what the contribution was from them, was it more meaningful in Q4 than you've seen it before? Thanks.

Sure, sure. So I think a couple things there. The first is the continued investment we made in Microsoft and the Microsoft connectors and our strength growing in that ecosystem, I think as well as workday. Those are the two areas that I think we saw some real nice new logo wins. I would add Salesforce as well.

That partnership continues to grow nicely and I think those three ecosystems and the investments we've made there are starting to drive more activity, which serves the new logo growth that you referenced. I think broader, SAT, while obviously we've got a 30 plus year relationship with SAT, but the relationship in working with their...

accelerator, our plus tools, the depth of our integration, you bring that together and you start going and talking to the SAP sales teams, we're really able to differentiate in a meaningful way. And so I think that supports both our European growth and some of our North American growth that you saw in 2022 and will continue in 2023.

I think from a customer account perspective, as David was alluding to, there's a lot of drivers there that are pushing things along and giving us opportunity for growth. Again, we continue to see good logo growth in each of the periods and we feel good about the motions that are there. Again, we did have a nice Q4 in terms of that and again we started to see some of that mid-market activity go up.

where we do our best and that's that's that scaled customer. So we're going to continue to report that and hopefully that'll give people a real good understanding of kind of how the business drivers are moving. That's helpful and then maybe on the margins just wondering is there any movement on the stock base comp that we should be aware of? I mean it seems to have gone down this year relative to 2021.

as a percent of revenue. Just maybe if you could elaborate a little more on that, that'd be helpful.

Yeah, historically when you take a look at it, Andrew, as we came through the IPO that we had some overhang of things that kind of had the best of some old granted things that we really had to get caught up on just in the normal accounting pace. So I think we're seeing a little bit of that and a little bit of that go away and now we've got our normal pace as we go forward in terms of kind of what we've been granting.

Got it. Thank you. You bet.

Next question comes from the line of Samad Samana with Jefferies. Please just use your questions. Hi, good morning. Thanks for taking my questions. Maybe first just I wanted to follow up on the cloud revenue outlook. John , did you maybe unpack how you're thinking about conversions versus new attach at existing customers versus new customer acquisition?

into cloud that are looking for it. We continue to see with our existing customers that have on-prem that as they look to buy, it's about a 50-50 kind of ratio that 50% are buying additional on-prem, other 50% are buying into the cloud and using the cloud in addition to their on-prem, creating a hybrid environment. So I think that's.

That continues to be a very strong motion there. And again, given some of the uncertainty as we kind of look forward, we're not exactly sure how this is going to impact people's move to further digitization. We haven't seen any impact on our pipeline yet as it stands, but I think as people think about where to spend money, I think that's something out there that they may kind of hold on and use the on-prem for slightly, a little bit longer perhaps.

I think I don't expect to see a whole lot different, but it's something that we're gonna certainly keep our eye on and probably be talking to you guys about going forward. Thanks.

Very helpful. And then maybe, David, a follow-up for you, just thinking about the partnerships and how they've ramped. Would you say that from a distribution perspective that the partnerships are kind of firing on all cylinders? Is there more gas left in terms of – Okay.

expanding their indirect tax partnership. Workday is expanding in Europe , which will give us another partnership there. We're also seeing good motion now starting up in Microsoft. I think that's probably the one that I see the most growth potential in, both within the ecosystem and some of the work we're doing with them.

as both a customer and a partner where I see great opportunities. Great, very helpful. Thank you. Our next question is from the line of Keith Weiss with Morgan Stanley . Please proceed with your questions.

I think you already touched on macros to a degree, but I wanted to understand what is contemplated in your outlook from a macro perspective. I think as we built the guidance we were trying to be very thoughtful with what we've done.

kind of what we've done in the past and how we've delivered. I think we've had a pretty good pace of sort of, I'll say under promising and trying to over deliver in terms of kind of expectations. And I think as we thought about guidance and we thought about the future, you know, we built some of that into mind as we look forward. And so that's kind of been how we built that in a very general standpoint. So.

that there are concerns on people's minds, we've not yet started to see them show up. But that said, I think we wanted to be mindful as we built guidance that that could start to manifest itself at some point, but we feel good about what we've put out there for now.

Got it, that's helpful. Can you help us understand what you're thinking around the opportunities and incremental investments in the mid-market?

Sure, we are laser focused in the ecosystems of Microsoft Workday. We're seeing great uptake in Salesforce. And being targeted again, we look at the platforms that a majority of mid-market businesses run on and the growing into corporate and enterprise customers. That's really our focus.

our investments, I think, are well suited for that right now. I'm comfortable with our go-to-market team, and we continue to just add quality around both the content that we use to support that customer base, as well as some of the new offerings that we have coming forward.

Our investments, I think, are well-suited for that right now. I'm comfortable with our go-to-market team, and we continue to just add quality around both the content that we use to support that customer base, as well as some of the new offerings that we have coming forward. I'll call you guys, thank you. Thank you everybody.

Our next question is from the line of Steve Enders with Citi. Please proceed with your question.

Okay, great. Thanks for taking the question here. I guess I want to ask a little bit about the key catalysts for adoption and what you've been seeing both within the quarter and if there's been any changes, do you think about new top of the puddle or new opportunities coming in that are in the pipeline right now?

Sure, so there's three fundamental drivers for our business. They are either going to be a business model transformation, whether you're adopting omni-channel, you're making acquisitions, something that's fundamentally disrupting the normal way a business operates as they search for or pursue revenue growth, which makes it hard for a tax department to keep up. The second-

these large multinationals have multiple ERP systems, multiple invoicing billing systems, and so they can be upgrading any one of those through an acquisition they had made over the years, and that again will be a disruptive force for change. And that will be our entree into an organization that we then land and expand, which has sort of been our...

The regulators are always looking for more revenue. They need to get their portion to fund their budgets. So they'll increase audit pressure, or they will see continued complexity as we are seeing around the world. And then we're fortunate enterprise customers that we target are really still very much focused on digital transformation.

and system upgrade for efficiency. So we're still seeing really good drivers in those areas in the dialogues we're having. Okay, so I guess as you think about the new top of funnel coming in in the pipeline, is there been any change in that? And I mixed there because, you know, there I think there has been a lot more maybe commentary in this call versus some of the past about macro, you know, macro impacts beginning to come in there. So you're wondering how you're...

You know, seeing new opportunities, you know, floating and giving some of those. No, I think I didn't. I think, you know, I would say it's still running the traditional way that we have the experience in the past and when I, you know, again, when I add to it the new motions we have with the sales teams of some of these larger ERPs.

Okay, perfect. That's a helpful context there. I guess just as we think about the geographic view and footprint of Europe has been a good point of growth for a bit now. So just kind of wondering how you're thinking about Europe going forward from a demand perspective.

for again our target customer base is SAP. We have the most differentiated set of capabilities between our chain flow, the LCR Dixon Plus tools that we've added, the depth of integrations, and now this customer referenceability, I can't emphasize that enough, having the largest customers in Europe working with our software has really given us a further differentiation because it's a small community of tax...

players and so they really want to talk to who else you're doing business with in the region. And that has helped us and then when I look at some of the new reg changes as they continue to evolve near and real time reporting, all those things play well in our favors as we look forward in Europe . So I remain confident that the team is going to continue to execute well. Okay, perfect. Great to hear it. Thanks for taking the question. Thank you. Our next question is from the line of Alex.

Yeah, I guess when we think about sort of the pipeline and what we're seeing European companies focused on, clearly we've got a lot of US companies doing business in Europe , but the European companies certainly are focused on VAT, certainly focused on some of the VAT solutions that we've been offering. I think David called out and mentioned kind of the chain flow, et cetera, but I think more and more as Europe continues to evolve, complexity is coming into it.

that needs and those vat needs are requiring automated solutions to get through and we're seeing it start with only the largest companies in Europe and I think that's going to continue to proliferate and kind of follow its way down. I don't know that there's a whole lot, you know, again, I think he talked about chain flow, we talked about those things, I think they're the key drivers and they're a little bit perhaps a little bit different than things that can solve in the US which are perhaps can start a little bit more with sales and use which are a little more US-centric type

and talking to our customers about what their demands are. We are seeing a growing conversation and opportunity to expand our product portfolio in that area. And it is something we are actively pursuing.

Okay, great. And then, John , one for you. In terms of kind of the embedded assumptions around hiring for 2023, how are you thinking about growth investments broadly and any areas you're going to be pulling back on in the back half of the year? John , do you want to start? Please, I think it's time we get there first. Cheers!

David touched a little bit on it earlier in his remarks. As we think about growth, we anticipate we'll be hiring certainly in 2023. We continue to focus on our engineering teams and bringing new products to market and those new products to market, require additional investment in personnel.

I think that's very important and I think as we think about some of the other go-to-market activities, we feel really good about the positioning of our go-to-market teams in terms of the growth that they've seen over the last couple of years. So we feel good about that, but I think we're going to be looking across the board at different opportunities there, but I think again, our growth focus continues to be on.

New product, go to market, looking at Europe , just as David has kind of discussed throughout here. They're kind of the areas that we're going to continue to lean in on. Again, we do see some of the internal projects that we've been doing for the last year or so start to lighten up, but that's more internal stuff and outsourced resources there. All right, great. Thank you both. Our next questions come from the line of Adam Hatchis.

against you in the enterprise versus some of those that are more down market and trying to work their way up market.

Sure. I think we've enjoyed strengthening in our competitive dynamics from our side. I think with the product portfolio and the focus we put into the platforms that we focus on, the team is doing exceptionally well in that area. Our primary competitor in the enterprise market remains Thompson, no change there whatsoever. And we treat them obviously as a very formidable competitor.

Our tax content database, the depth of our ERP, the referenceability, the big four relationships, all of those dynamics come into play as a differentiator for us. And I would be remiss if I didn't highlight the customer success and customer experience organization. You know, big customers, larger enterprises are very discerning about that customer experience and support that they're gonna get. And we continue to...

to leverage that, Adam, and Differenti in our win rate across that. As far as we go into the mid market, that's what we're running the competitors that are looking to move into that space from the SMB side. And I'd say, you know, in the ecosystems that we're focused on, we're starting to see growing traction and success with our solutions. And our win rate, you know, we're not intending to, again, peanut butter spread the market there. I don't think that's a...

a sustainable economic model for us. We really want to be able to drive EPIDAQ as well. And so our focused investments are in the ecosystems that we see the largest number of players that will evolve to be enterprise companies for us in the long term. That served us well for 40 years, and we're very focused there. Great. No, that's really helpful, thanks. And then, John , when you think about the major growth drivers that are embedded into guidance, how are you approaching expectations for new logos versus net expansion drivers like new Geos products, volume in this environment? Any...

particular strengths that call out? Yeah, I think as we thought about guidance, as we thought about guidance, again, I think we, as I mentioned earlier, we feel pretty good about kind of what we've built in Europe and how that's been going. We've been building that for the last, you know, since the IPO for the last couple of years. And so, you know, that, that group is largely getting in place and now we're getting some time, some time with everybody to really, you know, kind of hone our skills. So I think.

We feel good about that. From a new logo standpoint, that's always an area of focus for us. We think the opportunity there to continue to kind of lean in and work with some of these partners that David talked about is really going to help us find some new logos and generate some new logo activity. But we'll start to see incremental improvement there. Again, the customer base we have is so strong. That's why historically we've seen kind of 70% of new opportunities come from existing customers. But we intend to kind of try to drive new logo opportunity and grow that over time.

David, so summing it all up, what are your top two or three priorities for this year?

Execution, execution, and execution. I think we have invested heavily in our new product portfolio, our sales and marketing capacity, our customer success, and customer experience organizations. And Pat, I really want to see the team just continue to stay focused on that. I think we're fortunate to work with the best customers in the world, through the best partners in the world.

and so investing in those folks is really critical to our success.

All right, congratulations again. Thank you, Pat. At this time, we've reached the end of our question and answer session, and I'll turn the call to Joe Krivelli for closing remarks. Thanks everybody for joining us today.

If you have any follow-up questions or if you'd like to schedule additional time with the team, please reach out to me via email at iratvertex.com.

questions or if you'd like to schedule additional time with the team, please reach out to me via email at IR at Vertex.com. Thanks and have a great day.

This will conclude today's conference. We disconnect your lines at this time. Thank you for your participation.