Q2 2023 Vertex Inc Earnings Call

August 9, 2023

<unk> the conference over to Joe Crivelli, Vice President of Investor Relations. Mr. Gabelli you may now begin.

Hello, and thanks for joining us to discuss for Texas second quarter financial results I Am Joe Crivelli, Vice President Investor Relations, David <unk>, our president and CEO and John <unk>. Our CFO are joining me on the call today as a reminder, during this call. We may make forward looking statements about expected future results, our actual financial results.

May differ due to risks and uncertainties. These.

These risks and uncertainties are described in our filings with the Securities and Exchange Commission.

Please note that our remarks today will also include references to non-GAAP financial measures. A reconciliation of these non-GAAP metrics to GAAP is also provided in today's press release.

This conference call is being recorded and will be available for replay via webcast on our Investor Relations website, I'll now turn the call over to David.

Thanks, Joe welcome everyone and thank you for joining us our team continues to execute our strategy with excellence, resulting in strong second quarter financial results and furthering our competitive differentiation.

Very excited about where we are as a company we've.

We've made growth investments over the past three years to accelerate go to market success deliver.

Deliver new products and advance our capabilities through acquisitions and organizational modernization work.

We're seeing the return from these investments starting to take hold.

The second quarter demonstrated our anticipated steady progression of increased revenue growth.

And margin improvement, we added $21 million of recurring revenue in the second quarter alone. The highest we've reported as a public company driving a 17, 5% increase.

Year over year and IRR.

<unk> remained consistent at 96%, while NR climbed to 111%, which represents another record high for vertex.

The average annual revenue per customer continues to grow quarter by quarter.

Ended over $109000 in Q2 up 16% year over year.

Total revenue was $139 7 million.

Exceeding the high end of our financial guidance for the second quarter and.

And adjusted EBITDA was $22 million at the high end of our guidance.

John will provide an update on our full year guidance in a moment.

Also this quarter growth of our scaled customer count those customers with annual revenues greater than $100000 accelerated to 15% year over year.

This reflects our ongoing success in the vastly underpenetrated enterprise market.

The most dynamic companies in the world spanning every industry.

The heart of global Commerce growth and the durability of their performance is evident even in challenging economic conditions.

These scaled customer wins position us for future NOI growth and enhanced profitability with the proven land and expand efforts of our market leading customer success teams.

A combination of new logo wins, along with major existing customer expansion deals contributed to our strong second quarter performance and reflects the sustained growth of the lifetime value of our customer base.

We have a vision to accelerate global commerce to achieve this we are building our solutions into all the major platforms powering global commerce.

By trusted partner relationships that help differentiate us in deals and deliver extended value to our customers.

Again this quarter, we saw how our partnerships are paying significant dividends.

We continue to build on the 25 plus year partnership with SAP to extend the value we provide to our joint customers.

Perfect has the most complete indirect tax solution in the SAP ecosystem, especially when combined with the unique capabilities of our SAP certified chain flow accelerator and uniquely strong customer reference ability, we enjoy as the leader in the enterprise market.

I've also previously shared how we are driving an entirely new sales motion with S&P designed for growth to.

To better support our joint customers and our go to market efforts I'm incredibly proud to announce that vertex <unk> series is now an SAP endorsed apps for the North America region.

This enables even greater collaboration between our respective sales and marketing teams to accomplish our collective revenue goals. Accordingly, we are seeing accelerating momentum in the SAP ecosystem.

We had several high profile wins in the second quarter, including a leading global semiconductor manufacturer and a major manufacturer of private label food products.

Both customers engaged vertex to support tax transformation as part of their S. Forehand on migration initiatives.

We also helped one of the world's largest manufacturers of branded food products automate their manual processes around use tax to ensure they were not over paying suppliers and creating audit risk.

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In each case.

SAP platform transition drove mid six figures of annual recurring revenue for vertex demonstrating the magnitude of this opportunity.

Uh huh.

We expect this will continue to be a new business driver for vertex in the coming years.

[music].

Are customers still on ECC, a platform that S&P has announced they will stop supporting in 2027 migrate to S. 400 in the second quarter. We also want a high six figure deal from a leading medical diagnostics company.

Following our company merger they engaged in a global S. Four migration initiative to consolidate systems and selected vertex cloud for tax automation as part of this process. This was a highly collaborative process with the team to provide the best joined solution for the customer our chain flow accelerator and data visualization tools, which.

<unk> enhanced the company's got tax compliance in Europe , where key to their decision as well as our ability to link multiple systems to a single tax system by global scale.

We're seeing the value of our focused and collaborative approach extends across our entire partner ecosystem as companies leverage our connected solutions as part of their tax transformation efforts.

As an example in the second quarter, one of our longtime Oracle customers implemented a cloud first strategy to support their business growth.

Because of the trusted relationship we have earned over the years. They chose to continue their journey with us and transition to our cloud solution.

This deal reflects not only how we can seamlessly transition with our customers when they are ready to move to the cloud, but also the importance of our differentiated customer experience.

We also significantly expanded our relationship with a major marketplace for tickets to live events. The Companys global growth drove their need to move to the cloud and modernize their indirect tax solution.

In conjunction with our partners at Oracle. This OCI cloud deployment resulted in seven figures of new revenue for vertex.

We're also driving customer value with workday, where we are enabling seamless indirect tax management for our joint customers in the cloud.

Their sales team brought us into the conversation with the West Coast health care provider to modernize their manual tax property.

Thanks to the strong connections we have built with workday, we won a six figure new logo deal to automate consumer use tax.

We also won a new local deal with one of the largest waste management companies in the U S. This customer was looking to improve their business processes by consolidating their homegrown and disparate billing system on one platform that could work harmoniously with workday.

They are a trusted advisor and implemented as a key partner for vertex and brought us into this competitive evaluation process in.

In addition, our ability to effectively manage exemption certificates and support real time jurisdiction classification with our Lat long locator ultimately set us apart from the competition.

Tax complexity increases as businesses diversify their offerings expanded in new regions or grow their customer base for us.

This can be new opportunities within our existing customer base, either through our new offerings or by increasing use of their existing solution as transaction volumes grow.

In the second quarter, one of our largest customers a global food and beverage retailer signed the contract expansion that included a seven figure increase due to the high sales volume and user growth.

Adoption of their mobile App is rapidly growing along with a number of items in each order.

With this they needed to support the variety of locations, where mobile orders are taking place.

High performance and reliability. They are experienced with vertex cloud solutions are the hallmarks of why they trust us with their thriving business.

While I enjoy highlighting how we are selling new offerings through Upsells cross sells or new logos the.

The increased use of our solutions by existing customers represents another pervasive benefit of being the leading provider of indirect tax solutions to the largest companies in the world.

Last quarter, we discussed our leadership in the food delivery industry.

We expanded our relationship with one of the major players in this space in the second quarter. This new three year deal augments usage for marketplace support and drove six figures of additional annual revenue for vertex.

Uh huh.

Okay.

[music].

Our edge offering was a significant differentiator as the customer's business model is mobile <unk>.

<unk> pinpoint accurate tax calculation from any location.

We believe we're still in the early days of advancing various and diverse business solutions for our edge offering across multiple industries.

Edge deployment enables greater flexibility and scalability, regardless of where transactions occur.

We are also continuing to invest in our database to drive expansion into key growth markets.

As of the end of Q2, our robust tax content database covers over $840 million effective rates and rules with.

With the Ryzen mobile commerce.

More of our customers are subject to telecommunications taxes. As a result, we are seeing the investment we've made in telecommunications content drive significant new business opportunities.

As an example in the second quarter, we won an eight figure multiyear contract from one of the Big three U S based telecom leaders.

This major contract was driven by key vertex differentiators, including our communication tax content as well as our edge product to support the company's nationwide retail presence.

I'm also thrilled to highlight in the second quarter were one of the world's leading providers of cloud software and infrastructure selected vertex to support their growing telecommunications business.

Upsell to an existing customer relationship will drive mid six figures of additional annual revenue for vertex.

Turning to the international market, we won a six figure deal with a mid market gaming company based in Singapore, who was looking for a long term partner to support their growth in the U S.

The company owns one of the fastest growing free to play RPG video games with numerous avenues for in game purchases.

Getting the tax rate was incredibly important to them to create the best user experience for their gamers.

Initially they contracted with us to manage their returns filing in the states.

This quarter, we expanded our footprint with a five year deal that includes our cloud solution for tax determination to create a smooth process and and as.

As you can imagine reducing latency and ensuring uptime are top of mind in their business.

We're also able to earn the business of a European manufacturers of aviation products.

When they acquired a U S company that runs vertex as a result of this acquisition, we were able to win the parent company EU business driving six figures of additional revenue.

Before I close I'd like to take a moment to share my perspective on artificial intelligence and while we are excited to leverage that even further as we incorporate AI technologies into our offerings.

At vertex, we see the adoption of advancements in AI is unambiguously strategic building on our long history of technology innovation.

Over the past few years, we've seen that AI has the power and potential to augment our most valuable resource our.

Tax technology experts and revolutionize how we approach indirect tax software by combining human expertise with AI capabilities, we can optimize workflows and elevate the user experience.

We've accelerated our investments in AI to realize and advance our commercial strategies.

Our R&D investment is focused initially on streamlining content management, delivering actionable insights and enhancing the customer experience using AI powered co pilots.

Our products interact with many types of data as a result, we can use AI to correlate data identify patterns and offer deeper insights for our customers.

We can also leverage AI to automate parts of the tax content curation process, while maintaining a control framework to ensure the accuracy precision speed and performance our customers' need for taxable transactions.

In its current state AI as a probabilistic technology, which gives an answer that is close or good enough, which is often acceptable for recommendation engines.

But in the enterprise market, we serve where an incorrect tax answer can lead to massive penalty a deterministic answer is required our solutions combined multiple technologies to take advantage of both probabilistic and deterministic technologies.

These pair with the appropriate use cases to work with our tax technologists and customers to increase productivity improve user experience and empower decision intelligence.

By applying emerging AI technologies in thoughtful ways, we can drive enhanced productivity usability and value for our customers.

We will have more to share as these investments evolve John will now take you through the financials.

John .

Thanks, David and good morning, everyone today, I'm going to review, our second quarter financial results and provide guidance for the third quarter and full year 2023.

Total second quarter revenues grew 17, 1% year over year to $139 7 million exceeding the upper end of our quarterly guidance by approximately $2 7 million. Our subscription revenues increased 16, 6% period over period to $117 8 million and services revenue.

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<unk> grew 22% to $21 $9 million.

Annual recurring revenue or IRR was $467 7 million at quarter end up 17, 5% year over year.

Uh huh.

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Our net revenue retention or NRI increased to 111% up from 110% for the first quarter of 2023 and the prior year.

And our gross revenue retention or <unk> was <unk>, 96% at quarter end consistent with prior quarters and within our historical range of 94% to 96%.

Our average annual revenue per customer or AA RPC continues to steadily increase and was $109170 in the second quarter.

Up from $104370 in the first quarter of 2023.

Note that <unk> is based on the direct customer count, which is disclosed in our earnings press release that was issued this morning.

Our cloud revenue was $51 2 million in the second quarter of 27, 3% from last year.

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

Gross profit for the second quarter was $99 1 million and gross margin was 79%. This compares with gross profit of $84 $3 million and a 77% gross margin in the same period last year.

Gross margin on subscription software revenue was 78, 4% compared to 76, 9% in last year's second quarter and 78, 4% in the first quarter of 2023.

Gross margin on services revenue was 35% compared to 36% in last year's second quarter.

Turning to operating expenses in the second quarter research and development expense was $11 9 million compared.

Compared to $9 $8 million last year.

With capitalized software spend included R&D spend was $24 9 million for the second quarter, which represents 17, 8% of revenue as compared to 16, 6% of revenue in the prior year period.

Our selling and marketing expense was $31 8 million or 22, 7% of total revenues, an increase of $3 $2 million and approximately 11, 3% from the prior year period.

Corporate center the next available comfort specialist will be with you momentarily.

Okay.

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

Yes.

Hum.

Uh huh.

[music].

Selling and marketing expense growth has since moderated as we reached the end of our heavy investment period.

And our general and administrative expense was $33 $3 million or 23, 8% of total revenues an increase of $5 million from the prior year period.

Welcome to the Viva Conference Center next available conference specialist will be with you momentarily.

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The increase is due to the infrastructure investments, we are making to support our long term growth.

G&A expense was also up $4 million sequentially. Our ERP modernization went live in the second quarter and was the major driver of the sequential increase.

As this investment is now mostly complete we expect G&A expense growth to moderate going forward.

Welcome to the Viva Conference Center. The next available conference specialist will be with you momentarily.

Adjusted EBITDA was $22 million in the second quarter of 2023, an increase of $4 $2 million year over year and in line with the upper end of our quarterly guidance.

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While both operating and free cash flow were negative in the second quarter. This was largely due to the ERP modernization project, which caused a slight delay in the timing of billing and collection activity of certain customer accounts.

Okay with IRA.

This billing delay has been corrected and I'm very confident that the cash collections will normalize in the coming months.

We continue to expect free cash flow to be positive for the full year.

The vertex energy.

Demonstrating this we have already seen significantly higher than usual cash collections in July .

We are not hosting.

Vertex Inc. On our bridge.

We ended the second quarter with over $41 $9 million in unrestricted cash and equivalents and total bank debt was $48 million our investment securities totaled $11 2 million for additional liquidity. We also have $200 million of unused availability under our line of credit.

Which are you looking for.

Yes.

I can connect it to that.

In the coming months.

We continue to expect free cash flow to be positive for the full year.

Demonstrating this we have already seen significantly higher than usual cash collections in July .

Turning now to guidance.

In the third quarter of 2023, we expect total revenue in the range of 141% to $143 million, which would represent 13% year over year growth at the midpoint.

And adjusted EBITDA in the range of $24 million to $26 million, which would represent year over year increase of approximately $7 2 million at the midpoint.

Turning now to guidance in the third quarter of 2023, we expect total revenue in the range of 141% to $143 million, which would represent 13% year over year growth at the midpoint.

The strong first half financial results set vertex up well to outperform our initial expectations for full year of 2023.

Accordingly, we are increasing our full year guidance as follows.

We now expect total revenues for the year in the range of 556% to $562 million, which represents 14% full year growth at the midpoint up from 12, 5% growth at the midpoint than our prior guidance.

And adjusted EBITDA in the range of $24 million to $26 million, which would represent year over year increase of approximately $7 2 million at the midpoint.

The strong first half financial results set vertex up well to outperform our initial expectations for full year of 2023.

We are also increasing our full year adjusted EBITDA outlook to a range of <unk> $93 million to $97 million up from $92 million to $96 million, our new guidance represents a year over year increase of $16 million at the midpoint.

Accordingly, we are increasing our full year guidance as follows we.

We now expect total revenues for the year in the range of 556% to $562 million, which represents 14% full year growth at the midpoint up from 12, 5% growth at the midpoint than our prior guidance.

We continue to expect cloud revenue growth of approximately 27% for the full year.

David will now make a few closing comments before we open up for Q&A David.

Thanks, John I'm extremely proud of the entire <unk> team collectively they are driving this business to grow profit and build shareholder value I want to acknowledge and thank them all.

We continue to expect cloud revenue growth of approximately 27% for the full year.

Every employee throughout the organization worked extremely hard over the past few years to strengthen our company for the long haul and to build on our 40 year track record of success.

David will now make a few closing comments before we open up for Q&A David.

From the outset of our journey I expected us to achieve new Heights, a revenue acceleration and strong profitability. In Q2 show me that we are where we expect it to be and have good visibility to continue executing on our strategy.

Thanks, John I'm extremely proud of the entire <unk> 16, collectively they are driving this business to grow profit and build shareholder value I want to acknowledge and thank them all.

Every employee throughout the organization worked extremely hard over the past few years to strengthen our company for the long haul and to build on our 40 year track record of success.

Our growth investments are paying off.

Our market leadership position is strengthening and we are confident in our ability to sustain increasingly profitable growth net net we believe we are well positioned to continue our current trajectory for the foreseeable future.

From the outset of our journey I expected us to achieve new heights, our revenue acceleration and strong profitability. In Q2 show me that we are where we expect it to be and have good visibility to continue executing on our strategy.

Our increased guidance for the balance of the year reflects that.

With that we will take your questions. Operator. Please go ahead.

Our growth investments are paying off our market leadership position is strengthening and we are confident in our ability to sustain increasingly profitable growth net net we believe we are well positioned to continue our current trajectory for the foreseeable future our increased guidance for the balance of the year reflects that.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star.

That we will take your questions. Operator. Please go ahead.

Sorry, Keith.

Our first question is coming from the line of Joshua Reilly with Needham <unk> Company. Please proceed with your question.

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

Can you just explain how the mix of leads has shifted somewhat with more deals coming from.

<unk> worked in Microsoft dynamics versus historically, primarily Oracle and SAP and does this shift have any impact on your forecasting or visibility to demand and has it overall increased your level of net new leads.

The Star Keys.

Our first question is coming from the line of Joshua Reilly with Needham <unk> Company. Please proceed with your question.

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

Stronger growth here. Thanks.

Can you just explain how the mix of leads has shifted somewhat with more deals coming from Salesforce, workday, and <unk> and Microsoft dynamics versus historically, primarily Oracle and SAP and does this shift have any impact on your forecasting or visibility to demand and has it overall increased your level of net new leads.

Thanks, Josh I would say overall it has increased our number of leads in general I would say, though we continue to see with our motions with SAP and Oracle continues to be exceptionally strong I view this as being very additive as part of our strategy. We have been very conscious about moving into targeted.

With the stronger growth here. Thanks.

It is below our SAP and Oracle and we're seeing good progress there and so to me, it's very additive what's been fascinating to me is the size of deals that we're getting from those newer ecosystems are still we're still able to drive up our RPC.

Thanks, Josh I would say overall it has increased our number of leads in general I would say, though.

We continue to see with our motions with SAP and Oracle continues to be exceptionally strong I view this as being very additive as part of our strategy. We have been very cautious about moving into targeted ecosystems below SAP Oracle and we're seeing good progress there and so to me, it's very additive what's been fascinating.

Think that just speaks to the volume the value of how complexity solving for complexity is valued in the market so well.

Yeah.

Got it and then the adjusted EBITDA margin guidance was left unchanged, even with that maybe the slight beat in the quarter. I guess, you would say or the higher end of our guidance and I think investors are expecting some growing operating leverage here going forward. How are you thinking about investments versus profitability, maybe here in the second half and as we.

As the size of deals that we're getting from those newer ecosystems are still we're still able to drive up our RPC I mean, I think that just speaks to the volume the value of how complexity solving for complexity is valued in the market so well.

We go into 2024.

Got it and then the adjusted EBITDA margin guidance was left unchanged, even with maybe the slight beat in the quarter. I guess, you would say or the higher end of guidance and I think investors are expecting some growing operating leverage here going forward. How are you thinking about investments versus profitability, maybe here in the second half.

Well as.

As you May know our EBITDA margin is progressive progressed in the first two quarters and it's projected to increase notably in Q3 and Q4. So we continue to see operating leverage coming from the business as we move through the back half of the year that was built into our year and we've now raised that.

I continue to see because we are ahead of schedule on our revenue forecast we are being.

As we go into 2024.

Well as we as you May know our EBITDA margin has progressed it progressed through the first two quarters and it's projected to increase notably in Q3 and Q4. So we continue to see operating leverage coming from the business as we move through the back half of the year that was built into our year and we've now raised that.

Mindful of our investments and taking advantage of opportunities we're seeing in the market AI is an important part of that that decision, making rubric right now and we're seeing good opportunity to continue to pursue that.

As we've said all along the margins will increase as the year goes on and we're seeing that and we expect that will continue.

I continue to see because we are ahead of schedule on our revenue forecast we are being more.

23, and then into 'twenty four.

Great. Thanks, guys.

Thank you. Our next question is coming from the line of Chris <unk> with Morgan Stanley . Please proceed with your question.

Hey, guys congrats on the strong results here.

As we've said all along the margins will increase as the year goes on and we're seeing that and we expect that will continue into <unk>.

We've been hearing from system integrators, and other enterprise software company that we are seeing a bit of a deceleration.

23, and then into 'twenty four.

<unk>, new implementation work around large transformational deals, but it seems like that is not affecting you as much is there anything you would attribute your ability to put up these strong results. Despite that kind of broader backdrop, and then I have a follow up for John sure.

Great. Thanks, guys.

Thank you. Our next question is coming from the line of Chris <unk> with Morgan Stanley . Please proceed with your question.

Hey, guys congrats on the strong results here.

Sure Chris I think that you have to remember theres a number of drivers that lead to our business opportunities. The first is anything that changes in the Companys operating business model, which may have nothing to do with their systems. So it could be a change.

We've been hearing from system integrators, and other enterprise software company that we're seeing a bit of a deceleration in new implementation work around large transformational deals, but it seems like that is not affecting you as much is there anything you would attribute your ability to put up these strong results. Despite that kind of broader backdrop, and then I have a follow up for John .

The way they are expanding their revenue model to making acquisitions or expanding into new jurisdictions, all which could put pressure on the tax department that generates demand for us that has absolutely nothing to do with the systems are running on the second is the regulatory environment and we are definitely seeing a heated regulatory environment has got as governments continue to find new ways.

To generate revenue again, no impact whether you're changing your systems or not that can cause for an opportunity for us to add value with our capability and then then we see it in the and then obviously when we get it from system changes. So I think thats why were still able to see strong results because we are a diversified source.

The way they are expanding their revenue model to making acquisitions or expanding into new jurisdictions, all which could put pressure on a tax department that generates demand for us that has absolutely nothing to do with the systems are running on the second is the regulatory environment and we are definitely seeing a heated regulatory environment has got as governments continue to find new ways.

Pool of what are the demand drivers for our business.

To generate revenue again, no impact whether you're changing your systems or not that can cause for an opportunity for us to add value with new.

Got it very clear.

John .

For the full year total revenue guidance, but kept the cloud revenue.

Our capabilities and then when we see it in the and then obviously when we get it from system changes. So I think thats why were still able to see strong results. Because we are a diversified source pool of what are the demand drivers for our business.

So should we interpret that as you're expecting better performance with on Prem and services compared to cloud are you confident in better performance across the board.

Well I think what we saw in the first half anyway was real strong performance coming out of certainly coming out of on Prem and so I think as we as we thought about that we wanted to make sure that that was reflected in the guidance that we put forward again, we feel very good about what the what the back half of the year. It looks like for cloud I think 27% growth is very strong and against us and we feel services are in and <unk>.

Got it very clear.

John you raised the full year total revenue guidance, but kept the cloud revenue.

So should we interpret that as you're expecting better performance with on Prem and services compared to cloud are you confident in better performance across the board.

Very good shape, we think there's opportunity as we move forward throughout the year for additional services both in the MSL side as well as in some of the consulting implementation.

Excellent. Thank you.

Thanks, Chris.

Thank you. Our next question is coming from the line of Adam Hotchkiss with Goldman Sachs. Please proceed with your question.

Great. Good morning, and thanks for taking the questions I guess to start David with Gist.

We think there's opportunity as we move forward throughout the year for additional services both in the <unk> side as well as in some of the consulting implementation.

It'd be great to get an update on how things are going in Europe , I know that things have been improving for you. They are from a partner in our reference ability perspective, and you mentioned some things on the call, but would just be curious if you saw that momentum accelerate this quarter as part of the strength in the quarter.

Excellent. Thank you.

Thanks, Chris.

Thank you. Our next question is coming from the line of Adam Hotchkiss with Goldman Sachs. Please proceed with your question.

Yes, no I wouldn't say it accelerated we haven't seen any material degradation, but I would not say, it's accelerated I really like the pipeline of activity that we're building.

Great. Good morning, and thanks for taking the questions I guess just start David would just be great to get an update on how things are going in Europe , I know that things have been improving for you. They are from a partner in our reference ability perspective, and you mentioned some things on the call, but would just be curious if you saw that momentum accelerate this quarter as part of the strength in the quarter.

If you again, you think about Sap's got 30, or 40000 customers. We only have 800 or so of those so as they continue to March due to the migration plans on that.

They're driving we continue to see more opportunities than we ever historically saw because of the new motions, we have with us I wouldn't say, it's accelerated but I am.

Yes, no I wouldn't say it accelerated we haven't seen any material degradation, but I would not say, it's accelerated I really like the pipeline of activity that we're building.

Im confident that we continue to see good activity in this space.

If you again, you think about Sap's got 30, or 40000 customers. We only have 800 or so of those so as they continue to March due to the migration plans on that they're driving we continue to see more opportunities than we ever historically saw because of the new motions, we have with us I wouldn't say, it's accelerated but.

And opportunities for continued growth.

Got it.

Helpful. And then would just be curious what kind of demand youre seeing for some of your earlier product cycle story like chain flow accelerator and edge.

Those are evolving versus expectations.

Yes, it's just been a real differentiator both of those are real differentiation with a focus first on edge. If you think about how infrastructure is moving to the edge taking out to the edge was a key strategic initiatives that our team launched a couple of years ago.

Im confident that we continue to see good activity in this space.

And opportunities for continued growth.

Got it.

Really helpful. And then would just be curious what kind of demand youre seeing for some of your earlier product cycle stories like chain flow accelerator and edge.

We are still in the very early days of of traction there, which to me is very encouraging because the use cases of how customers are looking to deploy continues to evolve, which just tells us we're going into different industries in different spaces than even the team dreamed of as customers get creative and taking advantage of that technology with which to me is very exciting.

How those are evolving versus expectations.

Yes, it's just been a real differentiator both of those are real differentiation with a focus first on edge. If you think about how infrastructure is moving to the edge.

As to the edge was a key strategic initiatives that our team launched a couple of years ago and we're we're still in the very early days of of traction there, which to me is very encouraging because the use cases of how customers are looking to deploy continues to evolve, which just tells us we're going into different industries in different spaces than even the team dreamed of.

<unk> flow being the only certified SAP offering in the market are certified by SAP offering for many of our relative to our competitors really gives us a differentiation in that space. We find when we start talking to the SAP sales reps, they see that as a real value add to the customer experience and that has really opened up some interesting door.

As customers get creative and taking advantage of that technology with which to me is very exciting chain flow being the only certified.

For us so both offerings are in a very good place as I've said in the past reference ability is a huge issue and as we get these early adopters and they get satisfaction for a year or two they become very strong references and that really starts the flywheel of opportunity for us and so I think we're in the we're following a.

Offering in the market as certified by SAP offering for many of our relative to our competitors really gives us a differentiation in that space. We find when we start talking to the SAP sales reps, they see that as a real value add to the customer experience and that has really opened up some interesting doors for us. So both offerings are in a very.

Traditional pattern, where we're seeing that uptick.

I think that's going to be a tailwind as we go into our installed base for future and our opportunity in the future.

Good place as I've said in the past reference ability is a huge issue and as we get these early adopters and they get satisfaction for a year or two they become very strong references and that really starts the flywheel of opportunity for us and so I think we're in the we're following a traditional pattern, where we're seeing that start uptick.

Got it really helpful. Thanks, David.

Great.

Thank you. Our next question is coming from the line of Daniel Jester with BMO capital markets. Please proceed with your question.

Hey, good morning, Thanks for taking my question, David maybe just a comment on the competitive environment is a lot of big wins that you mentioned in your prepared remarks, where those competitive takeaways and maybe just overall have you seen the competitive environment at the moment. Thank you.

That's going to be a tailwind as we go into our installed base for future and our opportunity in the future.

Got it really helpful. Thanks, David.

Great.

Thank you. Our next question is coming from the line of Daniel Jester with BMO capital markets. Please proceed with your question.

Yes.

There was.

The top of my head I think there might have been one or two that were specifically takeaway. The bulk of those were net new I think we continue to see a large underpenetrated opportunities. I've said, you know just the number of installs of Oracle and SAP.

Create enormously fertile ground for us.

To just to continue to expand penetration in our in our core segment the.

Yes.

The competitive dynamics, what I continue to see is most of our focus on price, which tells me the value of what we're delivering is really differentiated and competitors resorting to price as the only way to try to compete against us being materially lower than already and so I think our customers still continue to be.

There was.

At the top of my head I think there might have been one or two that were specifically takeaways. The bulk of those were net new I think we continue to see a large underpenetrated opportunities. I've said you know just the number of installs of Oracle and SAP create enormously fertile ground for us.

So just to continue to expand penetration in our in our core segment.

US the wins because they value the complexity that we're solving for them.

The competitive dynamics, what I continue to see is most of our focus on price.

In the upmarket and continues to be Thompson as our primary competitor.

When we get into the mid market, that's where we'll typically see avalere, we're moving into that that middle market space.

Tells me the value of what we're delivering is really differentiated and competitors resorting to price as the only way to try to compete against us being materially lower than already and so I think our customers still continue to give us the wins because they value the complexity that we're solving for them in.

And then largely still silver.

When we when we're competing in.

Overseas.

Great. Thanks, and then John I appreciate the color on the operating cash in the quarter and some of the issues there as I think about the seasonality for the back half are you going to get some catch up at some of those billing issues get done and maybe you can just give us a little bit more color about the trajectory of cash generation for the remainder of the year.

In the upmarket and continues to be Thompson as our primary competitor.

When we get into the mid market, that's where we'll typically see avalere, we're moving into that that middle market space.

And then largely still silver.

When we're competing in.

Yes, Dan. Thanks, so much for the question. Yes, you are right I think what we expect to see in the back half of the year typically the back half is our strongest Q4 is our strongest cash generation quarter, and we anticipate that to be the same but as I mentioned in my prepared remarks, we did see an uptick in cash or cash receipts coming through in July .

Overseas.

Great. Thanks, and then John I appreciate the color on the operating cash in the quarter and some of the issues there as I think about the seasonality for the back half are you going to get some catch up at some of those billing issues gets done and maybe you can just give us a little bit more color about the trajectory of cash generation for the remainder of the year. Thank you.

Consistent with what we would've expected as we did see a bit of a slower cash month in June . So I think we are seeing that get caught up and I do anticipate us to get back on certainly back on track there in very short order and that is going to again add to the add to the momentum that we're going to see as we roll into the fourth quarter, which is traditionally our strongest quarter. So we feel pretty good about how that's going to going to shape up because I think.

Yeah, Dan. Thanks, so much for the question. Yes, you are right I think what we expect to see in the back half of the year typically the back half is our strongest Q4 is our strongest cash generation quarter, and we anticipate that to be the same but as I mentioned in my prepared remarks, we did see an uptick in cash or cash receipts coming through in July .

It is going to follow the same historic patterns as we've seen in the past.

Okay. Thank you very much.

Thanks.

Thank you. Our next question is coming from the line of Matt Stotler with William Blair. Please proceed with your question.

Hi, there. Thank you for taking the questions I think first off let's double click on some of the commentary you've given around SAP.

And maybe Oracle as well I'll, let you just double click on how youre expanding those relationships right. David I think you mentioned some new sales motions with S&P, if you could dig into that a little bit more and then extrapolate that too.

Going to follow the same historic patterns as we've seen in the past.

Okay. Thank you very much.

Thanks.

Thank you. Our next question is coming from the line of Matt Stotler with William Blair. Please proceed with your question.

How do you expect it opens up more of those substantial install basis with those two partners.

Hi, there. Thank you for taking the questions I think first off let's double click on some of the commentary you've given around SAP and maybe oracle as well.

Yes so.

We continue Matt. Thanks for the question, we continue to expand our motion in a number of ways. So we've talked to a number of times about the unique product set that we've added through acquisitions and product that we built we now have very differentiated product. When you then take that and we moved it.

Just double click on how youre expanding those relationships right. David I think you mentioned, some new sales motions with S&P, if you could dig into that a little bit more and then extrapolate that to how you expect it opens up more of those substantial install basis with those two partners.

And to start working with their sales teams, where there is actually there.

They're being rewarded for bringing us into opportunities now we've reached endorsed app status, which will give us a whole new.

Yes, so we.

We continue Matt. Thanks for the question, we continue to expand our motion in a number of ways. So we've talked to a number of times about the unique product set that we've added through acquisitions and products that we built we now have very differentiated product. When you then take that and we moved.

Collaboration experience with their sales and marketing teams to get more access to their customer base. So we continue to.

To surround that SAP opportunity in multiple levels and what it's also done for us which has really been fascinating.

Into start working with their sales teams, where theres actually.

Is there are some of the largest size like an IBM, who historically we had not worked with we are now partnering with them on a number of very large transformations that they're involved in and so I think it's also moved us into an even broader circle of Si partners that are referred seeing opportunities, where we're partnering with to bring customer value and customer.

They are being rewarded for bringing us into opportunities now we've reached endorsed app status, which will give us a whole new.

Collaboration experience with their sales and marketing teams to get more access to their customer base. So we continue to.

To surround that SAP opportunity in multiple levels and what it's also done for us which has really been fascinating.

Success, So I'm really pleased with the way the team is continuing to capitalize on this opportunity as.

Is there are some of the largest size like an IBM, who historically, we had not worked with we're now partnering with them on a number of very large transformations that they're involved in and so I think it's also moved us into an even broader circle of Si partners that are referred to seeing opportunities, where we're partnering with to bring customer value in cusp.

As we move down you mentioned Oracle, we continue to enjoy a very strong motion with them as well they are a longtime trusted partner.

<unk> given us access to both their cloud and their app teams and so we're working on both sides.

To access customer opportunities and bring that.

<unk> success, so I'm really pleased with the way the team is continuing to capitalize on this opportunity.

Bring bringing joint value prop to the customer and we're seeing great experience from the customer in terms of quality of performance of our products on the OCI platform, which really has shown up well in competitive situations.

We moved down you mentioned Oracle, we continue to enjoy a very strong motion with them as well they are a longtime trusted partner.

Given us access to both their cloud and their app teams and so we're working on both sides.

Very helpful. Thank you and then as a follow.

Follow up on MLR next year.

That ticked up again to 111% I think.

<unk> access customer opportunities and bring that.

A new high rate.

Bringing joint value prop to the customer and we're seeing great experience from the customer in terms of quality of performance of our products on the OCI platform, which really has shown up well in competitive situations.

Let me just walk through what the drivers are there and what do you think that metric can go from here.

Yeah, I'll start with the overall and then Doug you hit the specifics.

I think we continue to focus on our customer success.

Very helpful. Thank you.

Function and I think that's really where we're seeing the uptick of growth in terms of we continue to build new products. We had a very clear strategy, we build new products. We have the best customers in the world, we need to be able to bring those products to the customer base successfully educate them on what we have and be there when theres opportunities to add value and we're seeing a good motion to continue.

And as a follow up on MLR, you'll see that tick up again to 111%.

I think a new high rate.

Just walk through what the drivers are there and what do you think that metric can go from here.

Yeah, I'll start with the overall and then Doug you hit the specifics.

We continue to focus on our customer success.

To evolve as the maturity of that that function in the investments we've made over the last couple of years to build that out is playing out. We also saw some very nice entitlement expansions in the quarter, which again I think speaks to the largest customers in the world. This is the heart of global Commerce Theyre continuing to drive their businesses forward and that usage on our.

<unk> usage on existing products continues to be the backbone of our growth as for the specifics of the breakout I'll, let Jon highlight that yes, I think it really starts with the stability that you've seen in the <unk> that we've had that they're posting 96% kind of for the last number of quarters real strong number there and again to David's point has to do a lot with the customer success teams and really.

<unk> evolve as the maturity of that that function in the investments we've made over the last couple of years to build that out is playing out. We also saw some very nice entitlement expansions in the quarter, which again I think speaks to the largest customers in the world. This is the heart of global Commerce Theyre continuing to drive their businesses forward and that usage on our expanding.

Staying in front of where what our customer needs are and then as we think about sort of the growth drivers that kind of take it from there up to your NRI.

Usage on existing products continues to be the backbone of our growth as for the specifics of the breakout I'll, let Jon highlight that yes, I think it really starts with the stability that you've seen in the <unk> that we've had that they're posting 96% kind of for the last number of quarters real strong number there and again to David's point has to do a lot with the customer success teams and really.

Sure.

Again, there are three components that really make it up it's really the cross the cross sell and migration activity, that's taking place with those existing customers as they expand into different.

<unk> products that we said that we serve as well as additional entitlements David touched upon and then finally the last piece is price increases and again, we're seeing growth in Egypt, we saw growth in each of those areas over the last quarter and so we feel pretty good about that opportunity Thats. There again, you are right. Matt. This is our first kind of high debt. Our first 111 that we've seen we feel very proud of that but again due to a lot of the hardware.

Staying in front of where our customer needs are and then as we think about sort of the growth drivers that kind of take it from there up to your NRI NR again, there are three components that really make it up it's really the cross.

Cross sell and migration activity, that's taking place with those existing customers as they expand into different different products that we said that we serve as well as additional entitlements David touched upon and then finally the last piece is price increases and again, we're seeing growth in Egypt, we saw growth in each of those areas over the last quarter and so we feel pretty good about that opportunity Thats. There again you are right. Matt. This is our first.

Work on the front end again, followed by good product Thats coming through in nice nice adoption of that product playing out in the market.

Great. Thank you again.

Okay.

Thank you. Our next question is coming from the line of Andrew de Gasperi with Bahrenburg. Please proceed with your question.

Kind of high debt, our first 111 that we've seen we feel very proud of that but against due to a lot of the hard work on the front end again, followed by good product thats coming through in nice nice adoption of that product playing out in the market.

Alright, Thanks for my questions just first on the guidance for the full year.

Based on the Q3 that youre laying out it sounds like you're guiding for an implied growth of 11% and total revenue for Q4.

Great. Thank you again.

Yes.

Thank you. Our next question is coming from the line of Andrew <unk>.

I mean, given your recent history in Q4, you tend to really come in strongly and given your comments on the free cash flow being strong that quarter.

With Bahrenburg. Please proceed with your question.

Alright, Thanks for my questions just first on the guidance for the full year.

Is there any way that this is really just conservatism on your part.

I mean based on the Q3 that you're laying out.

For that number.

And then I have a follow up thanks.

Sounds like you're guiding for an implied growth of 11% and total revenue for Q4.

Yes, Andrew Thanks for the question again, I think as we saw we had posted some very good results for the first half as we set guidance. We continue to be very thoughtful about how we think about what the future looks like we feel like the business drivers are strong, but we're always mindful of kind of some of that stuff deeper into the year. We just want to make sure that we have confidence in the level. That's there so we try to be.

Given your recent history in Q4, you tend to really come in strongly and given your comments on the free cash flow being strong that quarter.

Is there any way that this is really just conservatism on your part.

For for that number.

As we set that guidance and look at look at what that could be again, we did bring up some of that guidance in the back and again on an overall basis, we're increasing the <unk>.

And then I have a follow up thanks.

Yes, Andrew Thanks for the question again, I think as we saw we had posted some very good results for the first half as we set guidance. We continue to be very thoughtful about how we think about what the future looks like we feel like the business drivers are strong, but we're always mindful of kind of some of the stuff deeper into the year. We just want to make sure that we have confidence in the level. That's there so we try to be.

Increasing the amount of the amount of revenue growth from our initial guidance that we set but again, we just always want to be very thoughtful about what the back half looks like.

And then on the cash flow side I know the ERP modernization is going to improve cash collection billings growth.

As we set that guidance and look at look at what that could be again, we did bring up some of that guidance in the back and again on an overall basis, we're increasing the <unk>.

Growth probably will come in much higher than Q2, but I'm just wondering.

What other benefits besides G&A should we see in the model I mean is capex intensity going to decline.

Increasing the amount of the amount of revenue growth from our initial guidance that we set but again, we just always want to be very thoughtful about what the back half looks like.

So anything else that you could highlight.

And then on the on the cash flow side I know the ERP modernization is going to improve cash collection billings growth.

Growth probably will come in much higher than Q2, but I'm just wondering.

What other benefits besides G&A weighted should we see in the model I mean is capex intensity going to decline.

Ending are coming towards an end is really going to allow us to then see a little bit more of the flow through come to the bottom line and then again with the kind of the getting on getting the cadence that we developed over years and years with our older system is going to allow us to get into much better visibility with respect to with respect to kind of future client need getting the billings out there ensuring the <unk>.

Anything else that you can highlight.

Yes, I think thats, a good call out Andrew again, Theres a couple of pieces. When we think about the ERP modernization again, the actual cost of the ERP modernization has certainly built into the free cash flow and so that going away that ending are coming towards an end is really going to allow us to then see a little bit more of the flow through come to the bottom line and then again with the kind of the.

Accuracy getting stuff done so we feel very good about the opportunity to leverage that system to give us better through better throughput from the beginning of the funnel, which started sales and goes right through the backend, which is the billing and collection on the back side. So it's going to give us a little bit of benefit throughout the organization, but from a cost standpoint, a lot of that really is resident in the G&A area.

Getting on getting the cadence that we developed over years and years with our older system is going to allow us to get into much better visibility with respect to with respect to kind of future client need getting the billings out there ensuring the accuracy getting stuff done. So we feel very good about the opportunity to leverage that system to give us better through better throughput from the beginning.

Great. Thank you.

Sure.

Thank you. Our next question is coming from Alex Sklar with Raymond James. Please proceed with your question.

Of the funnel, which started sales and goes right through the backend, which is the billing and collection on the back side. So it's going to give us a little bit of benefit throughout the organization, but from a cost standpoint, a lot of that really is resident in the G&A area.

Thank you Dave I wanted to start with the eight figure telecom provider when you're talking about in the quarter can you just elaborate a little bit more on how you got pulled into that opportunity what were they using before booking with you and maybe what the catalyst was for them kind of switched what they had been doing previously.

Great. Thank you.

Sure.

Thank you. Our next question is coming from Alex Sklar with Raymond James. Please proceed with your question.

Yes so.

They were they were existing customer of ours that we were expanding our relationship with <unk>.

Thank you Dave I wanted to start with the eight figure telecom provider when you talked about in the quarter can you just elaborate a little bit more on how you got pulled into that opportunity what were they using before booking with you and maybe what the catalyst was for them to kind of switch what they had been doing previously.

I have.

Through acquisitions and other they have a number of diverse system some of which we didn't have access to previously in terms of working with you oftentimes when we get into a customer. The catalyst is initial pain point, but there is a series of other parts of their business that we don't get initially get a chance to serve and that's part of our land and expand motion as well.

Yes so.

They were they were existing customer of ours that we were expanding our relationship with <unk>.

We'll continue to work that relationship and they.

I have.

Through acquisitions and other they have a number of diverse system some of which we didn't have access to previously in terms of working with you oftentimes when we get into a customer. The catalyst is an initial pain point, but there is a series of other parts of their business. So we don't get initially get a chance to serve and that's part of our land and expand motion as well.

Look to make changes in our system or they run into a challenge with another part of their operating business Thats. When we step in what I think was one of the nice catalyst with two big catalyst here one was our edge computing solution I think again as they were thinking through the point of need challenges. They were facing they were struggling with some of the quality and accuracy they were getting from them.

We'll continue to work that relationship and as they.

From the <unk>.

In house capabilities, they had and so the switching over to our edge really gave them the confidence that they need and then the second was we continued to invest in our in our telecommunication content.

And we covered I think we've reached a point with them that we were at the point, we can give them. The sufficiency of coverage that really excited them to handle this new part of their business and so those are the two big drivers of why we continue addressing content and continue to bring new capabilities to market. It just opens up more opportunities with existing customers and it fit really well in this situation.

The in house capabilities, they had and so switching over to our edge to really give them the confidence that they need and then the second was we continued to invest in our in our telecommunication content and we covered.

Okay. That's great color. Thank you and then John maybe one for you as you start to lap the faster investment period started last year can you just talk about the growth and ramp sales reps you have.

We've reached a point with them that we were at the point, we can give them. The sufficiency of coverage that really excited them to handle this new part of their business and so those are the two big drivers of why we continue addressing content and continue to bring new capabilities to market. It just opens up more opportunities with existing customers and it fit really well in this situation.

Seen any increase in terms of the number of reps that are attaining quota versus prior quarters.

Yes, again as you mentioned, we did make some pretty good investments in the sell in selling and marketing areas to drive opportunity both domestically as well as in <unk> as well as in Europe , and I think we are starting to see some of that is some of that benefit play out again some of the investments in the U S. We're focused on some of the channels as David has mentioned that where we target certain of those certain.

Okay. That's great color. Thank you and then John maybe one for you as you start to lap the faster investment period started last year can you just talk about the growth and ramp sales reps you've.

You've seen any increase in terms of the number of reps that are attaining quota versus prior quarters.

Those bigger named bigger named ERP systems, and other systems to ensure that we're really canvassing the market to get those opportunities.

Yes, again as you mentioned, we did make some pretty good investments in the sell in selling and marketing areas to drive opportunity both domestically as well as in <unk> as well as in Europe , and I think we are starting to see some of that that is some of that benefit play out again some of the investments in the U S. We're focused on some of the channels as David has mentioned that where we target certain of those.

From an overall productivity standpoint, I really don't have anything to report out in terms of kind of what that what that looks like but we are beginning to see the traction of some of those investments that we've been making we feel pretty good about again as we continue to develop and nurture some of these newer relationships along.

Certainly those bigger named bigger named ERP systems, and other systems to ensure that we're really canvassing the market to get those opportunities from an overall productivity standpoint, I really don't have anything to report out in terms of kind of what that what that looks like but we are beginning to see the traction of some of those investments that we've been making we feel pretty good about again as we continue.

We feel like we're starting to see the opportunities as David had mentioned earlier around some of those some of those second tier next level down tier ERP.

ERP groups.

Alright, Thank you both for the color.

Thank you.

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

Develop and nurture some of these newer relationships along we.

Okay, great. Thanks for.

So we feel like we're starting to see the opportunities as David had mentioned earlier around some of those some of those second tier next level down tier.

Thanks for taking the questions. This morning.

I guess I just want to ask first on the strong IRR side, I mean pretty pretty impressive growth there.

<unk> groups.

Alright, Thank you both for the color.

Are you feeling about the broader demand environment and the pipeline for the rest of the year end.

Thank you.

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

Yes.

Any larger deal kind of pulled in or anything may be surprising to the upside in the quarter as well.

Okay, great. Thanks for thanks.

Thanks for taking the questions. This morning.

I guess I just wanted to ask first on the.

I don't think anything surprises to the quarter I think we had coming out of Q1, we had pretty good visibility to the quarter and that the team did a nice job of executing to get on plan.

The strong IRR side, I mean pretty pretty impressive growth. There how are you feeling about the broader demand environment and pipeline for the rest of the year.

We have we do have good visibility to our forecasting for the rest of the year and I think that's why we've been comfortable to raise guidance.

I guess were any larger deal kind of pulled in or anything maybe surprising to the upside in the quarter as well.

Sure.

Because we enjoy very diverse drivers of opportunity and we've been successful in expanding some of those relationships, we've been talking about Microsoft or SAP et cetera, I think.

I don't think anything surprises to the quarter I think we had coming out of Q1, we had pretty good visibility to the quarter.

<unk> did a nice job of executing to get on plan.

We have we do have good visibility to our forecasting for the rest of the year and I think that's why we've been comfortable to raise guidance.

Those are those are really good balances to some of the uncertainties that.

The economy is still continues to present for some.

I think thats why we feel as confident as we do with our numbers.

Because we enjoy very diverse drivers of opportunity and we've been successful in expanding some of those relationships, we've been talking about Microsoft or SAP et cetera, I think.

Okay great.

Context there.

And then John maybe I'll ask the question a little more directly just on the impact in the quarter from.

On the billings and cash flow asked is there any way to think about.

Those are those are really good balances to some of the uncertainties that the economy is still continues to present for some and I think thats why we feel as confident as we do with our numbers.

Magnitude or the actual.

What the actual impact was in <unk> and maybe how we should be thinking about that line or into <unk>.

Okay, Great that's helpful context there.

Yes.

What I would tell you is again.

And then John maybe I'll ask the question a little more directly just on the impact in the quarter from.

As I saw the results come through our cash collections were a little bit software a bit soft in the month of June again, I've seen that then start to show back up in July I still think we've got a little room to room to go from a cash collection standpoint, So I don't really have a magnitude number to kind of pass to pass around so I think but I do feel like again as I mentioned in my prepared.

On the billings and cash flow.

Is there any way to think about.

The magnitude or the actual.

Actual impact was in <unk>, and maybe how we should be thinking about that client or into <unk> now.

Yes, again, what I would tell you is again.

Yes, the billing the billing delay is resolved that's done we're right on target the cash collections are starting to come in and have been coming in as we saw in July I anticipate that to continue as we continue to again make up for some of that building that was delayed and we will start to see that show up and again, a big piece of some of the drivers we move forward through the back half.

To pass around so I think but I do feel like again as I mentioned in my prepared remarks.

From a free cash flow standpoint is really going to be around the lack of spend with the.

Billing the <unk>.

Billing delay is resolved that's done we're right on target the cash collections are starting to come in and have been coming in as we saw in July I anticipate that to continue as we continue to again make up for some of that building that was delayed and we will start to see that show up and again, a big piece of some of the drivers we move forward through the back half from a free cash flow standpoint is.

The implementation fees and everything else that is now largely part of our operating system. So I don't have I don't have a full magnitude number for you, but again I think you can see on a six month to six month basis, we're about $10 million behind from where we were a year about a year ago, and so I anticipate to see certainly hopefully bridging that and making making up some pretty good progress on that through the back half of the year.

Going to be around the lack of spend with the.

Okay perfect. Thanks for taking my questions you.

The implementation fees and everything else that is now largely part of our operating system. So I don't have a full magnitude number for you, but again I can think you can see on a six month to six month basis, we're about 10 million behind from where we were a year about a year ago, and so I anticipate to see certainly hopefully bridging that and making making up some pretty good progress on that through the back half of the year.

You bet.

Thank you. Our next question is coming from the line of Patrick Wahl relevance with JMP Securities. Please proceed with your question.

Oh, great. Thank you and congratulations it's great to see.

So last quarter I remember you guys told us in January was a little slow and then you made it up in March.

Okay perfect. Thanks for taking my questions you.

Was the linearity like in Q2.

You bet.

It was better.

Thank you. Our next question is coming from the line of Patrick Wahl relevance with JMP Securities. Please proceed with your question.

I think it was definitely better than we had seen certainly Q1 was.

A little bit of an anomaly for our business.

Oh, great. Thank you and congratulations it's great to see.

We definitely saw more more alignment there across the quarter, we typically as a business do a little better the last month of every quarter. That's it's not hugely different but it is always a little bit better at the end of at the end of the quarter.

So last quarter I remember you guys told us that January was a little slow and then you made it up in March.

Was the linearity like in Q2.

It was better.

And I think this quarter was no different but there was no anomalies like it was in Q1.

I think it was definitely better than we had seen certainly Q1 was.

A little bit of an anomaly for our business.

Great and then.

On the whole AI front David.

Let me ask it this way.

What questions have you sort of been exploring internally.

In terms of.

<unk> AI may impact your business when it would have been the things <unk> been trying to get the answer to before you before you before you determine your strategy.

And I think this quarter was no different but there was no anomalies like it was in Q1.

And we are very active in this area I. Appreciate the question Pat we have we've been looking at it both internal productivity and external customer experience I think AI becomes a critical part of our customer experience going forward and what we're really looking for on the commercial side is how it can.

Great and then.

On the whole AI front David.

Let me ask it this way.

What questions have you sort of been exploring internally.

In terms of.

How AI may impact your business when it would have been the things <unk> been trying to get the answer to before you before you before you determine your strategy.

Hence the value, we deliver to existing customers and potentially open up new markets for us and I think the team is doing some very interesting things there that are creating some some interesting opportunities for us as we started internally really productivity, obviously, the large amount of data that we touch and cure rate, how we do that can we be more productive there.

We can leverage our tax technologists to do the best and most high value work to add.

To the customer experience and leverage the technology.

Technology capabilities, which we've always done we've used ml for years in our business and now. This is just sort of a next generation of technology to drive productivity, which ultimately gives us more leverage in our bottom line and those are the really true I think its important to note that the.

We can leverage our tax technologists to do the best and most high value work to add.

I made the comment about probabilistic and deterministic. It is so important one of the things. Our brand is built on is the quality of our content and you can't be approximately right you've got to be our customers count on us.

To the customer experience and leverage the technology.

The accuracy that we deliver and so I think thats something.

Vigilant in making sure we're not doing anything to rush something in that would undermine the brand and trust that we've earned over 45 years.

Great. Thank you.

Mhm.

Thank you as a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad.

The accuracy that we deliver and so I think thats something.

Our next question is coming from the line of Brad Reback with Stifel. Please proceed with your question.

Vigilant in making sure we're not doing anything to rush something in that would undermine the brand and trust that we've earned over 45 years.

Great. Thanks very much.

John just a tactical question the cost of services was up pretty substantially quarter over quarter were there any one time items in there.

Great. Thank you.

Mhm.

Thank you as a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad.

Yes. Thanks for the question Brad cost the cost of services was up what we what we have seen is that there is an opportunity sort of we believe developing in the backend and we need to make sure that we get after some of the additional hiring to ensure we've got the labor in there to to manage some of those costs that are going forward. So there has been some additional head count that we've added there to get ourselves ready for what we do.

Our next question is coming from the line of Brad Reback with Stifel. Please proceed with your question.

Great. Thanks very much.

John just a tactical question the cost of services was up pretty substantially quarter over quarter were there any one time items in there.

<unk> is coming and again early days there is some there is a bit of slowness in terms of getting up to full productivity and utilization that we would expect there. So I think that was at play a little bit and that are in that area and developing that so that was one that was probably the biggest piece that was driving some of that down again I expect we will see that crew get up to speed and moving fast and so hopefully we.

To see that rebound.

Great and then David as we think about the cost savings that you'll generate from the new ERP system.

Think it's coming and again early days there is some there is a bit of slowness in terms of getting up to full productivity and utilization that we would expect there. So I think that was at play a little bit and that are in that area and developing that so that was one of them that was probably the biggest piece that was driving some of that down again I expect we'll see that crew get up to speed and moving fast and so hopefully we.

And the other investments you've made how do you think about what gets to drop to the bottom line versus what gets reinvested in the business, maybe asking it slightly differently do you think there is a step function up in margins.

To see that rebound.

Great and then David as we think about the.

In the near term or is it sort of a moderate increase in the margin profile over the next couple of years. Thanks, Yes. Good question, Brian I think in the.

The cost savings that you'll generate from the new ERP system and.

And the other investments you've made how do you think about what gets to drop to the bottom line versus what gets reinvested in the business and maybe asking it slightly differently do you think there is a step function up in margins.

We'll continue to see nice solid performance across our our EBITDA margin as we move into 'twenty four.

In the near term or is it sort of a moderate increase in the margin profile over the next couple of years. Thanks, Yes. Good question, Brian I think in the <unk>.

All the investments, we're making on the front end of our of our sales and our customer success and our content has put us in a position now to have more drop to the bottom line and so I think when we thought we think about it is if we're seeing acceleration and opportunities we're not going to let those go and so I would always invest in sales and marketing and R&D if it's <unk>.

Back half of this year, we're already moving margins from EBITDA margin from 15 to $17 five and then up to 19 in Q4. So we are already planning for an increase in leverage there and I would expect that we'll continue to see nice solid performance across our our EBITDA margin as we move into 2000 and for all.

Something that's opportunistic.

And again, we're outperforming in revenue because we're seeing more opportunities than we thought I'm not going to I'm not going to Miss those just to throw it to the bottom line, but otherwise there'll be a natural progression that's going to happen from this business we are already building.

The investments, we're making on the front end of our of our sales and our customer success and our content has put us in a position now to have more drop to the bottom line and so I think when we thought we think about it is if we're seeing acceleration and opportunities we're not going to let those go and so I would always invest in sales and marketing and R&D if it's something.

Suitable margin improvement in the back half.

<unk> forecast and I would expect that will continue.

Great. Thanks very much.

That's opportunistic.

Yes.

And again, we're outperforming in revenue because we're seeing more opportunities than we thought I'm not going to let I'm not going to miss those just to throw it to the bottom line, but otherwise there'll be a natural progression that's going to happen from this business. We're already building considerable margin improvement in the back half in our forecast and I would expect that will continue.

Thank you there are no additional questions at this time, so I'd like to pass the floor back over to management for any additional concluding remarks.

Alright, thanks, everybody for joining us today as always if you have follow up questions. Please reach out to me IR at vertex, Inc. Dot com and have a great rest of your day.

Great. Thanks very much.

Yeah.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.

Yes.

Thank you there are no.

Additional questions at this time, so I'd like to pass the floor back over to management for any additional concluding remarks.

Alright, thanks, everybody for joining us today as always if you have follow up questions. Please reach out to me IR at vertex, Inc. Dot com and have a great rest of your day.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.

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Q2 2023 Vertex Inc Earnings Call

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