Q2 2024 Vertex Inc Earnings Call
Speaker Change: Good morning and welcome to the Vertx, Inc. Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal Conference Specialist by pressing the star key, followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Joe Crivelli. Please go ahead.
Operator: All participants will be in listen-only mode. If you need assistance, please signal the conference specialist by pressing the star key, followed by zero. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the call over to Joe Crivelli.
Joe Crivelli: Hello, and thanks for joining us to discuss Vertx's second quarter financial results. The call is being recorded and will be available for replay on our Investor Relations website. I'll now turn the call over to David.
Joe Crivelli: Hello and thanks for joining us to discuss Vertx's second quarter financial results.
Joe Crivelli: The call is being recorded and will be available for replay on our Investor Relations website. I'll now turn the call over to David.
David: Welcome everyone, and thank you for joining us. In the second quarter, we delivered on several important strategic and financial priorities. The financial results once again had numerous highlights, but I want to cover the strategic developments that we have announced recently as they position us for sustaining the profit-driven growth that has been the hallmark of our company for more than 45 years. Earlier today, we announced the acquisition of Ocozio, a fast-growing Austrian company specializing in e-invoicing and EDI for $69 million in cash, along with a multi-year revenue-based
David: Welcome everyone and thank you for joining us. In the second quarter we delivered on several important strategic and financial priorities.
David: The financial results once again had numerous highlights, but I want to cover the strategic developments that we have announced recently as they position us for sustaining the profit-driven growth that has been the hallmark of our company for more than 45 years.
David: The non-uniform proliferation of e-invoicing mandates, with several large economies soon to adopt new requirements, is making global reporting compliance more challenging for our enterprise customers. With this acquisition, we unlock additional value for our customers while opening new market opportunities for Vertx. This acquisition will enable us to address the burgeoning opportunity of e-invoicing head-on. We were attracted to Ocosio for a number of reasons.
Speaker Change: The non-uniform proliferation of e-invoicing mandates, with several large economies soon to adopt new requirements, is making global reporting compliance more challenging for our enterprise customers.
Speaker Change: With this acquisition, we unlock additional value for our customers while opening new market opportunities for Vertx.
Speaker Change: This acquisition will enable us to address the burgeoning opportunity of e-invoicing head-on.
Speaker Change: We were attracted to Ocosio for a number of reasons.
Speaker Change: First, it's a scalable, fully cloud-based platform.
Speaker Change: Second, its ability to handle e-invoicing across many countries that it mandates today.
Speaker Change: Third, its ability to quickly expand coverage as new mandates are introduced. And fourth,
David: In fact, we have been working on integrating their technology on our platform since February as a potential partner, so we intend to launch our combined offering shortly. So I'm pleased to welcome the entire Ecosio team to the Vertx family and look forward to bringing the two organizations together in the third quarter. Also, in late June, we announced the acquisition of PAC-specific artificial intelligence capabilities. This technology will apply AI to simplify and expedite the manual and time-consuming processes of tax categorization.
Speaker Change: In fact, we have been working on integrating their technology on our platform since February as a potential partner, so we intend to launch our combined offering shortly.
Speaker Change: By bringing together Vertx and Ecosio, we can deliver a comprehensive global solution with reliable end-to-end indirect tax reporting along with continuous transaction control or CTC capabilities.
Speaker Change: to mitigate the risk of non-compliance. This in turn will streamline the entire compliance life cycle from tax determination through reporting.
Speaker Change: So I'm pleased to welcome the entire Ecosio team to the Vertx family and look forward to bringing the two organizations together in the third quarter.
Speaker Change: Also in late June , we announced the acquisition of PAC-specific artificial intelligence capabilities.
David: This involves matching a customer's SKUs with applicable tax rates wherever it does business globally. Tax categorization is required not only when implementing a new Vertx solution but is also an essential ongoing task as SKUs, rates, and jurisdictional rules are constantly changing. Getting this right is critical for achieving tax accuracy, especially for high volume businesses that must manage indirect tax compliance globally at scale.
Speaker Change: This involves matching a customer's SKUs with applicable tax rates wherever it does business globally. Tax categorization is required not only when implementing a new Vertx solution.
Speaker Change: But it's also a central, ongoing task as SKUs, rates,
Speaker Change: and jurisdictional rules are constantly changing.
Speaker Change: Getting this right is critical for achieving tax accuracy, especially for high-volume businesses that must manage indirect tax compliance globally at scale.
Speaker Change: Consistent with a hallmark of our 45 years of success, numerous customers have signed up to be design partners to ensure we deliver with excellence.
David: Additionally, beyond product categorization, we will be deploying the acquired AI capabilities to support furthering our industry-leading tax content database and applications with our data management capabilities. We are excited about the commercial and financial potential of this technology and this acquisition. Adjusted EBITDA was $38.5 million, and adjusted EBITDA margin was 23.9%.
Speaker Change: Additionally, beyond product categorization, we will be deploying the acquired AI capabilities to support furthering our industry-leading tax content database and have application with our data management capabilities.
Speaker Change: We are excited about the commercial and financial potential of this technology and this acquisition.
Speaker Change: Revenue was $161.1 million in the second quarter of 15.3% year-over-year, software subscription growth was 15.8%, and cloud revenue growth was higher than our full-year guidance at nearly 30%.
Speaker Change: Adjusted EBITDA was $38.5 million and adjusted EBITDA margin was 23.9%.
David: While the increase in free cash flow is in part due to the AR collections catch-up that we have discussed previously, the performance still far exceeded our internal expectations. Scaled customer count, which represents customers delivering annual revenue of over $100,000, grew 14% year-over-year, and GRR was 95% in the second quarter, which achieves our targeted best-in-class range of 94% to 96%. Two of our customer metrics were impacted by the completion of our SysTax acquisition in the second quarter. John will provide more color in a moment.
Speaker Change: While the increase in free cash flow is in part due to the AR Collections catch-up that we have discussed previously, the performance still far exceeded our internal expectations.
Speaker Change: Scaled customer count, which represents customers delivering annual revenue of over $100,000, grew 14% year-over-year, and GRR was 95% in the second quarter, which achieves our targeted best-in-class range of 94% to 96%.
Speaker Change: Two of our customer metrics were impacted by the completion of our Sysfax acquisition in the second quarter. John will provide more color in a moment.
David: Including SysTax, ARR was $548.4 million, up 17.3%, and average annual revenue per customer was $123,560, up 13% year over year. While the overall revenue growth rate and customer metrics were strong and in line with our expectations, they were a bit lower than the last two quarters. This is in part due to the planned strategic slowdown in implementation services and the publicly reported slower than expected migration acceleration of SAP ECC customers to HANA S4.
John: Including SysTax, ARR was
John: $548.4 million, up 17.3%, and average annual revenue per customer was $123,560.
John: They were a bit lower than the last two quarters. This is in part due to the planned strategic slowdown in implementation services and the publicly reported slower-than-expected migration and acceleration of SAP ECC customers to HANA S4.
David: Beyond that, we did see somewhat lower cross-sell and up-sell activity in the first half of the year. On the flip side, a more positive trend was the second quarter was our second best of the last two years for new logo revenue, and June was the best month of the year for cross-sell and up-sell. Given our visibility into second-half opportunities, we remain confident in our outlook and have narrowed our full-year revenue guidance to the upper part of the range. John will discuss this in a moment.
John: We have also substantially increased our adjusted EBITDA guides.
David: Finally, I'll note that in the second quarter, we were gap earnings positive for the third quarter in a row. And while this may change temporarily in the back half due to integration expenses related to Ecosio, we believe the ability to deliver positive gap earnings and positive free cash flow makes Vertx an uncommon DAS company. Now, turning to notable wins in the quarter.
David: One of the biggest wins in the second quarter was with an existing customer in the food delivery industry. This customer renewed his contract with Vertx in May. In addition to a significant increase in entitlements, the customer also upgraded its mobile transaction processing systems to Vertx O-Series Edge. The result was more than seven figures of new revenue for Vertx. Also in the second quarter, organic growth for a global specialty food and beverage retailer led to additional tax determination entitlement.
John: Now, turning to notable wins in the quarter.
John: One of the biggest wins in the second quarter was with an existing customer in the food delivery industry.
John: Also in the second quarter, organic growth for a global specialty food and beverage retailer led to additional tax determination entitlements.
John: As transaction volumes rise with increased adoption of their mobile app, we are expanding our partnership to meet their growing requirements. We've seen increased investment over the life of the partnership, with revenue from this top 10 customer now in the mid-7 figures.
David: An SAP-driven ECC-to-S4 HANA cloud transformation resulted in a mid-six-figure competitive upsell for a transportation equipment manufacturer. As part of their move to the cloud, this customer took the opportunity to address increased demand and complexity with their leasing services. Our differentiated industry-specific tax content turned this opportunity in our favor. In total, this ended up being a four-fold increase in ARR for this longstanding customer. A cloud transformation resulted in a mid-six-figure win for a national clothing retailer.
John: An SAP-driven ECC-to-S4 HANA cloud transformation resulted in a mid-six-figure competitive upsell for a transportation equipment manufacturer.
John: As part of their move to the cloud, this customer took the opportunity to address increased demand and complexity with their leasing services.
Speaker Change: Our differentiated, industry-specific tax content turned this opportunity in our favor. In total, this ended up being a four-fold increase in ARR for this long-standing customer.
Speaker Change: As part of their analysis, the customer did solicit competitive bids.
Speaker Change: A cloud transformation resulted in a mid-six-figure win from a national clothing retailer. This long-standing customer had relied on Vertx to support their business in North America, EMEA, and AsiaPac.
David: This long-standing customer has relied on Vertx to support their business in North America, EMEA, and Asia-Pacific. Investors are sometimes surprised at the number of major companies that still calculate indirect tax with homegrown solutions. As an example, we had a win in the second quarter with a subsidiary of one of the largest financial services companies in the world that wanted to sunset their internally developed VAT calculation solution. Another example along these lines, Vertx won a low six-figure new customer when a multi-billion-dollar data analytics company re-evaluated its approach to indirect taxes in conjunction with the consolidation of multiple ERPs to a single instance of Oracle.
Speaker Change: The burden of maintaining a tax engine within their infrastructure was great enough to initiate their move to the cloud with Vertx in advance of a larger ERP migration. This 24-year customer did not see competitive bids during the process, which is evident of their confidence in Vertx and our solutions.
Speaker Change: Investors are sometimes surprised at the number of major companies that still calculate indirect tax with homegrown solutions. As an example, we had a win in the second quarter with a subsidiary of one of the largest financial services companies in the world that wanted to sunset their internally developed VAT calculation solution.
Speaker Change: Another along these lines, Vertx won a low six-figure new customer when a multi-billion dollar data analytics company re-evaluated its approach to indirect taxes in conjunction with the consolidation
David: Due to the nature of their business, they needed a flexible solution that could manage a high volume of transactions when subscription billing activities peak at month-end. Interestingly, the incumbent solution was a combination of two competing data overlaid by the company's own manual process. Likewise, a National Facilities Management Provider selected Vertx to support its implementation of Workday Financial. Organic growth changed their tax scenarios, requiring greater agility to support business expansion. The customer was using one of our competitors previously, but they had outgrown their capabilities, which were focused on the small business segment of the market, and we were looking for a partner that could support their aggressive worldwide growth plan.
Speaker Change: of multiple ERPs to a single instance of Oracle.
Speaker Change: Due to the nature of their business, they needed a flexible solution that could manage a high volume of transactions when subscription billing activities peaked.
Speaker Change: Interestingly, the incumbent solution was a combination of two competitors' data overlaid by the company's own manual processes.
Speaker Change: On the new logo front, we had a number of competitive displacements. An international professional services provider selected Vertx over an incumbent competitor to support its SAP S4 HANA cloud transformation journey. This led to high six figures of new revenue for Vertx.
Speaker Change: Likewise, a national facilities management provider selected Vertx to support its implementation of Workday financials. Organic growth changed their tax scenarios requiring greater agility to support business expansion.
Speaker Change: Their existing solution was not able to scale and meet their complex needs. Additionally, they were extremely unhappy with the level of customer service from an incumbent competitor who had been largely unresponsive. The result was a new scaled customer for Vertx.
Speaker Change: And on the international front, we had a six-figure new logo win with a Brazilian fashion company that was implementing Oracle Cloud. We referred into the deal through our partnership with Shopify.
Speaker Change: Finally, we just went live with a major Japanese conglomerate that selected Vertx to support a 58-country global tax automation project spanning North and South America, EMEA, and AIPAC. This 18-month implementation project was one of the most complex ever completed by Vertx.
Speaker Change: and one that we believe our technology is singularly qualified to handle in the indirect tax automation industry.
Speaker Change: Thanks, David, and good morning, everyone. I'll now review our second quarter financial results and provide guidance for the third quarter and full year of 2024.
Speaker Change: In the second quarter, revenue was $161.1 million, up 15.3% compared to last year's second quarter. Subscription revenue increased 15.8% period-over-period to $136.4 million.
David: Services revenue grew at 12.8% to $24.7 million. Excluding SysTax, ARR was $542.3 million, up 16%, and AARPC was $126.400, up 15.8%. These non-GAAP metrics are reconciled to GAAP results in this morning's earnings press release. Gross margin on our subscription software revenue was 80.4% compared to 78.4% in last year's second quarter and 78.6% in the first quarter of 2024. And general and administrative expenses were $30.6 million, down $2.6 million from last year.
Speaker Change: Services revenue grew at 12.8% to $24.7 million.
Speaker Change: As we have mentioned previously, we are intentionally slowing services revenue growth this year by steering implementation revenue to our channel partners, who are an important referral source for our new software opportunities.
Speaker Change: As a result, we expect services revenue growth to continue to decelerate in the third and the fourth quarter.
Speaker Change: Cloud revenue was $66.3 million in the second quarter, up 29.6% from last year's second quarter, and ahead of our guidance for the year.
Speaker Change: And Gross Revenue Retention, or GRR, remained at 95% at quarter end, within our targeted range of 94 to 96%.
Speaker Change: Accordingly, including SysTax, ARR was $548.4 million, up 17.3% compared to last year's second quarter, and AARPC was $123,560, up 13%.
Speaker Change: There was no GRR or NRR impact from the inclusion of SysFax.
Speaker Change: For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP results in this morning's earnings press release.
Speaker Change: Gross profit for the second quarter was 118.8 million dollars and gross margin was 73.7 percent. This compares with gross profit of 99.1 million dollars and 70.9 percent gross margin in the same period last year.
Speaker Change: Gross margin in our subscription software revenue was 80.4% compared to 78.4% in last year's second quarter and 78.6% in the first quarter of 2024.
Speaker Change: And our gross margin on services revenue was 36.8% compared to 30.5% in last year's second quarter and 40.5% in the first quarter of 2024.
Speaker Change: And general and administrative expense was $30.6 million, down $2.6 million from last year.
Speaker Change: Adjusted EBITDA was $38.5 million, an increase of $16.5 million, or 75.2% year-over-year, and exceeding the high end of our quarterly guidance by $5.5 million.
Speaker Change: Our earnings quality is demonstrated by our very strong cash flow in the second quarter.
Speaker Change: Operating cash flow was a record $57.7 million and free cash flow was a record $36.9 million.
Speaker Change: This was in part impacted by improved accounts receivable collections that had been necessary since we converted the ERP system last year. We estimate that this had a positive impact on free cash flow of approximately $10 to $12 million.
Speaker Change: We believe that there will be additional gains to be had here, so we are optimistic that we can continue to deliver strong, positive free cash flow on an ongoing basis.
David: We ended the second quarter with $325.5 million of unrestricted cash and cash equivalents and no bank debt, and our investment securities totaled $8.7 million. For additional liquidity, we also have $200 million of unused availability under our line of credit. As noted in the Ecosio press release this morning, we will use approximately $69 million of cash when we close the deal, which is expected to be later this quarter. Now, turning to guidance for the third quarter of 2024.
Speaker Change: For additional liquidity, we also have $200 million of unused availability under our line of credit. As noted in the Ecosio press release this morning, we will use approximately $69 million of cash when we close the deal, which is expected to be later this quarter.
Speaker Change: We expect Ecosio to contribute approximately $15 million of revenue in the first full year after closing and to be modestly dilutive to Adjusted EBITDA for the first two years after closing as we continue to invest in the business before turning Adjusted EBITDA accretive in the third year.
Speaker Change: We expect total revenue in the range of $164 million to $167 million, which would represent 14.1% year-over-year growth at the midpoint.
Speaker Change: We do not break out revenue guidance between software and services, but I do want to provide some added color here and note that the planned slowdown in services will impact our overall revenue growth rate more noticeably in the third quarter. We do expect software revenue growth to remain in the high teens in the third quarter fueled by strong cloud growth.
Speaker Change: Despite accelerating second-half investments, including AI-related R&D, we expect adjusted EBITDA in the range of $33 to $35 million, which would represent an increase of $7 million at the midpoint.
Speaker Change: Prior guidance was $650 to $660 million. We now expect adjusted EBITDA in the range of $139 to $145 million, representing a year-over-year increase of over $40 million at the midpoint.
Speaker Change: This is also a significant increase from the prior guidance of $130 to $135 million.
David: Prior guidance was $650 to $660 million. We now expect adjusted EBITDA in the range of $139 to $145 million, representing a year-over-year increase of over $40 million at the mid-term. This is also a significant increase in the prior guidance of $130 to $135 million. David will now make some closing comments before we open up for Q&A.
Speaker Change: David will now make some closing comments before we open up for Q&A. David?
David: Thanks, John . In summary, it was an eventful first half of 2024.
David: Our strong financial performance is possible thanks to the winning formula we have put in place to drive success. We are extending our global capabilities and the power of our unified platform while strengthening our partner relationships and consistently delivering exceptional customer value and service. Because of this, customers continue to turn to Vertx when their business complexity grows and disrupts their ability to be as tax compliant as they need to be. Our market-leading indirect tax solutions and 900 million rule content database are mission critical for our customers looking to support business growth and manage continuous compliance globally. We will now begin the question and answer session.
David: This was evident in the deals we won this quarter as customers selected Vertx to effectively manage indirect taxes across multiple enterprise applications, global jurisdictions, and high transaction volumes.
Speaker Change: With that, Operator, please open the call for questions.
Operator: To ask a question, you may press star then 1 on your telephone keypad. At this time, we will pause momentarily to assemble our roster. Our first question will come from Brad Reback with Stifel. You may now go ahead.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To withdraw your question, please press start and 2.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Brad Reback: Great, thanks very much. David, on your commentary around lower cross-sell and up-sell in the first half of the year, how would you sort of break that out between a lower renewal cohort in the first half versus sales execution? And then I have a quick question.
Speaker Change: And we did see a little bit of a pullback. I think if you recall, we did have a very strong Q4, and we got a lot of benefit there. While those numbers are still there, some of that backlog and some of that activity really got spent. And it's not uncommon for us to see a little bit of a slower start to that cross-cell-up-cell activity as the years get going. And so we feel like we're on target there. And I think from an additional entitlement standpoint, there was also a piece there that was a little bit softer in the second quarter. So that's sort of how you see that little bit of a pullback that you saw in the NRR ratio.
David: Okay, that's great. And then on NRR...
Speaker Change: Okay, that's great. And then on NRR.
Speaker Change: I know it was down 1% year over year, but it was actually down 2 percentage points sequentially.
Speaker Change: which is a bit of a larger move given the backward-looking nature of that metric.
Speaker Change: Was it the same issues impacting that, that impacted...
David: They were the big drivers, Brad. It's a great question.
Speaker Change: You know, the lower cross-cell OPSOL, or were there other items there? Thanks.
Speaker Change: They were the big drivers, Brad. It's a great question. They were the two big drivers. Again, cross-sell, up-sell, really, was the one that was softer, again, driven by the fact of that real strong...
Speaker Change: Again, the budgets were a bit depleted, so not uncommon for us to see that, and again, I think that kind of carried its way through. So we weren't really surprised by it, and again, the guidance we gave for the full year, we have confidence in how we're going to work through the back end of the year.
David: They were the two big drivers. Again, cross-sell and up-sell really was the one that was softer, again, driven by the fact that we had such a really strong Q4. Again, the budgets were a bit depleted, so it was not uncommon for us to see that. And again, I think that kind of carried its way through. So, we weren't really surprised by it. And again, the guidance we gave for the full year; we have confidence in how we're going to work through the back end of the year. Great, thanks for...
Speaker Change: Great. Thanks very much. Thank you.
Operator: Our next question will come from Joshua Reilly, with Needham.
Speaker Change: Our next question will come from Joshua Reilly with Needham. You may now go ahead.
Joshua Reilly: All right, great. Thanks for taking my questions here. Congratulations on the Ecosio acquisition.
Joshua Reilly: All right, great. Thanks for taking my questions here. Congrats on the Ecosio acquisition. I guess a couple of details on the deal here. First, I believe they operate in about 30 countries. What is the right number?
Joshua Reilly: I guess a couple of details on the deal here. First, I believe they operate in about 30 countries. What is the right number in terms of where most of your business and your customers are operating today? And then second, is there any type of provision in the deal agreement that would allow another bidder to come in with a separate offer? And then I have a follow-up. Yeah, John.
Speaker Change: In terms of where most business and your customers are operating today, and then second, is there any type of provision in the deal agreement that would allow another bidder to come in with a separate offer? And then I have a follow-up.
John: Yeah, Josh, I appreciate the two questions. And just to satisfy the latter one, because obviously, we had an experience here in Q1 of this year, no, this is purely regulatory, a perfunctory regulatory process. There's no open bidding process, no window that can change the outcome.
John: It's just the regulators going through their normal approvals process for any transaction. As far as the opportunity here is concerned, I think Ocosio really gives us the ability to expand our business in a number of ways. And the technology they have is really the main reason why we were so excited about the opportunity moving forward. And I see great potential in us bringing that into the market here. We've been working with them for months, and we'll be ready to hit the market here in Q3.
John: Got it. And then, you know, just following up on that, it also appears they have an EDI solution, which would be a new market for you guys. There's obviously a lot of legacy and modern cloud players in that kind of product set. Is that something that you would imagine further investment in and entering that market kind of aggressively as well as e-invoicing? Thanks, guys. You know, the focus with the 30 countries they cover is really, Josh,
Speaker Change: got it and then
Speaker Change: You know, just following up on that, it also appears they have an EDI solution.
Speaker Change: And I think as we go through the journey together, we'll explore that further, but both sides are exceptionally clear. The focus and the opportunity is really in the CTC space.
Speaker Change: to be supportive of our customers' needs in those jurisdictions.
Speaker Change: So I do view it much more as a timing issue than anything else. I'm not seeing any fundamental competitive dynamic changes at all. Certainly our brand and the support we get from our partners around new cross-sell opportunities has not changed at all. So I'd really be just – I'm very comfortable saying it's a timing issue.
Operator: Great, helpful. And then just a quick follow-up relative to the current Pagaro partnership, to the extent that you guys can or are willing to comment, we'd like to hear how we should think about the potential either transition there or unwind or what the right way to think about that is and timing. Thank you.
Speaker Change: Great. Helpful. And then just a quick follow-up relative to the current Pagaro partnership, to the extent that you guys can or are willing to comment, we'd like to hear how should we think about the potential either transition there or unwind or what the right way to think about that is and timing.
Speaker Change: Yeah, yeah, Rob. Spot on. We should address it head on. We'll be looking to unwind that moving forward here. Obviously, it's served us
Rob: But now moving forward here with the wonderful technology we acquired, and actually...
John: Great. Much appreciated. Thanks, guys. Yeah. Thank you, Rob.
Speaker Change: Great. Much appreciated. Thanks, guys. Yeah, thank you, Rob.
Speaker Change: Just want to follow up on that Ecosio acquisition. Is there any color you can provide on their growth rate? I know you mentioned high growth. And then the $15 million in revenue contribution that you expect over the next 12 months, are those inclusive of synergies or just stand-alone Ecosio?
John: Yeah, the $15 million is the, you know, we believe that's the standalone Ecosio. There'll be a modest amount of synergy that's in there, but that's, we'll be getting up and going. But we wanted to kind of give people a feel for the size and magnitude of Ecosio on a standalone basis as they evaluate sort of what we paid versus the size of the acquisition. So that's what we wanted to give from that standpoint.
Speaker Change: Yeah, the $15 million is the, you know, we believe that's the standalone Ecosio. There'll be a modest amount of synergy that's in there, but that will be getting up and going. But we wanted to kind of give people a feel for the size and magnitude of Ecosio on a standalone basis as they evaluate sort of what we paid versus the size of the acquisition. So that's what we wanted to give from that standpoint.
Speaker Change: I mean, the growth rate's been impressive. We don't give specifics out on their growth rate. We want to go, you know, honor the process of actually auditing. They were a private company. But it was an impressive growth rate that actually attracted us to the business and their technology. Yeah, for sure.
Operator: Got it. That's, that's helpful. And then I wanted to take a step back and ask about AI at a higher level. You know, we've seen companies adopt AI to create. That's it. Congratulations, guys.
Speaker Change: Got it, that's helpful, and then I wanted to take a step back and ask about AI at a higher level. You know, we've seen companies adopt AI to create, you know...
Speaker Change: Internal software tools across multiple different use cases.
Speaker Change: As we've often said, our number one competitor is the in-house capabilities of the customers we work with. That's often what we're replacing, and so it's not surprising to me that a leading-edge company like Amazon is exploring how they can apply AI. I think in that scenario, they're using it primarily for just invoice validation, which is more of a finance accounting versus a tax compliance solution.
Speaker Change: Scalable products that support our customers not only in the short-term but also in the long-term.
Speaker Change: are built to design around the changes that are going to happen with the legislative and business models that they're dealing with. And so I'm feeling very well positioned with what we're doing, and the fact that so many customers are interested in being design partners on what we've recently acquired tells me we're on the right track.
Speaker Change: Our next question will come from Steve Enders with Citi. You may now go ahead.
Steve Enders: Okay, great. Thanks for taking the questions here.
Steve Enders: Yes, sure, Steve. The, you know, as we've said in the past, I think, from the time we went public, we typically follow two to four quarters behind.
Steve Enders: a big ERP transformation in terms of their success impacts our success. And it typically takes two to four quarters to see that. They announced in June of last year this end of life.
Steve Enders: meaning the largest companies in the world would go first, and there are bigger implementations that take more time to unfold. I think the small companies are, you know, the Gartner data and other SAP data that we're seeing suggests the mid-sized companies, and when I mean that, like, you know, the 1 to 10 billion sized companies, are taking a more prudent path, meaning they're going slower in their migrations. So I think we had expected a little more of an uptick sooner in the beginning of this year from some of the masses. We saw some of the big boys that we've started to be engaged with, but less so with that mid-size that would create a volume push.
Steve Enders: I think as we start to think about our guidance in the second half of the year in the pipeline, that is starting to shift.
Steve Enders: And with that cloud growth rate, we're still enjoying it, you know, 29.9 or 5%, just really in a good position to continue to drive cloud through the SAP platform.
Operator: Okay, that's a super helpful context there. I guess maybe just again, digging into kind of the second half expectations a little bit more here, I guess, both with
Speaker Change: I guess maybe just again digging into kind of the second half expectations a little bit more here I guess both with
Speaker Change: Like, I guess, how comfortable are you feeling about...
Speaker Change: The ramp up here into second half revenue and the expectations around that, and I guess anything else to kind of call out of the impact that that might have, or it feels like some of that's shifting over into 25.
Operator: Okay, perfect. Great to hear it. Thanks for taking the questions. Yeah, sure. Thanks.
Speaker Change: Our next question will come from Daniel Jester with BMO Capital Markets. You may now go ahead.
Daniel Jester: Are there any sort of big particular projects that you envision, you know, one of the things I noticed, and maybe this is a follow-up on sort of an earlier question, is that, you know, it seems like most of their
Speaker Change: Certainly they have global coverage even though their primary customer base is based in Europe just like our customer base is a lot of it is based in the US but they have
Speaker Change: globalmedia.com
Speaker Change: the CTC requirements for
Operator: Okay, that's very helpful. Thank you. And then on the comment you made about the smaller growth in entitlements as you've gone through the first half of the year, I'm just wondering, you know, should we be thinking about this like, you know, in 2022 and 2023, when inflation is very high, maybe your customers lifted the bans on renewal to sort of a You know, in that environment, now we're going into a more moderate environment, you know, or, you know And if so, you know, how should we expect this sort of thing to play out for the remainder of this year, maybe the next?
Speaker Change: Okay, that's very helpful. Thank you. And then on the comment you made about the the smaller growth of
Speaker Change: as you've gone through the first half of the year. I'm just wondering, you know, should we be thinking about this, like, you know, in 2022, 2023, very high-inflation environment, you know, maybe your customers lifted the bans about renewal to sort of a...
Operator: Thank you very much.
Speaker Change: Great, thanks so much for taking the questions. I guess just to start, I think you mentioned that this was the second best new logo quarter for the business. Any particular verticals or regions of strength to call out and then?
Speaker Change: Yeah, sure.
Speaker Change: between going live with Azure, the launch of our TCS solution earlier in the year, some of the things we're doing inside that ecosystem, highlighted another Shopify success. We continue to appreciate their support in our partnership and enjoy.
Speaker Change: I think that's the primary question you asked.
Speaker Change: As far as, are you going to handle the rest of that? In terms of new logos, I wouldn't say there's been any concentration in any particular industry or segment of the business. I think we had real nice participation kind of across the spectrum of the companies that we serve and the types of industries we participate in.
John: Okay, that's great, really helpful. And then, John, just on gross margin, that came in really strong this quarter. Just puts and takes around that metric as we go into the back half and going forward. How should we think about what that looks like over the medium term?
John: Yeah, you know, we did see a nice jump in margins. But as I think about the rest of the year, I'm not anticipating seeing any additional growth coming out of that area. I think we did have a really good quarter. We've seen success in leveraging the scale of the business over time. Again, we were a little surprised to see that come in as strong as it did. And so, I think we're somewhere in between, kind of somewhere in between in terms of kind of what that looks like for the rest of the year.
John: We expect that they'll, you know, that leverage will continue, but I don't anticipate seeing any upside from sort of where that is right now. Having a point or two increase in margin was certainly very strong. We're pleased with it. Okay, super helpful.
Speaker Change: Our next question will come from Alex Sklar with Raymond James. You may now go ahead.
Alex Sklor: Great, thank you. I had to start off with a two-part question on Ecosia. First, maybe for you, David, is this all you need from an e-invoicing kind of technology standpoint, or are there any benefits or kind of scales of scale benefits or technology benefits to owning another Ecosia-like solution?
John: And then the second one, just for you, John , on the COJO. Any more context on the earn-out targets, what kind of growth is being factored or retention targets that you're embedding in that earn-out in any color and over what time period? Thanks.
David: Yeah, okay. I'll take the first one related to technology. You know, given our customer base and all, what we've learned is we really want to bring forward a single technology platform that best integrates with our current core platform and makes it easier for our customers to have a great experience. So the intent will be to build out on the platform we have versus trying to buy small businesses in other jurisdictions and then cobble them together in some way.
David: Given our customer base and all, what we've learned is we really want to bring forward a single technology platform that best integrates with our current core platform and makes it easier for our customers to have a great experience. So the intent will be to build out on the platform we had versus trying to buy small businesses in other jurisdictions and then cobble them together in some way. We think that's a harder road to go at times and so we're going to target our investment on building on the platform. That was a big part of our diligence and having the good fortune to partner with them for so many months and work on that gained a lot of confidence that it scales well.
David: We think that's a harder road to go at times, and so we're going to target our investment on building on the platform. That was a big part of our diligence, and having the good fortune to partner with them for so many months and work on that gained a lot of confidence that it scales well. So that's the approach we'll be taking there.
John: In terms of additional color regarding the earnout, I think we talked about it; it's revenue-based, and it goes over a three-year period. You know, I'm not at liberty to kind of talk through the mechanics of kind of what those earnout targets are. What I would say is, as you would expect from a smaller company, they have had some significant growth over the years. We expect that that significant growth will continue, and we base that, you know, we base the earnout on that, you know, on the growth trajectory of a company sort of in that size range.
Speaker Change: In terms of additional color regarding the earnout, I think we talked, it's revenue-based.
Speaker Change: It goes over a three-year period.
Speaker Change: I'm not at liberty to talk through the mechanics of what those earn-out targets are. What I would say is, as you would expect from a smaller company, they had some significant growth over the years. We expect that that significant growth will continue, and we base the earn-out on the growth trajectory of a company in that size range.
Speaker Change: Okay, I appreciate that. Great call from both of you. Maybe just one more follow-up for you, David, on the back of Adam's question. New logo contribution to ARR ticked up this quarter. You called out a few competitive displacements, and I'm just kind of curious if anything's changed in terms of how you're viewing the vended displacement opportunity going forward.
Operator: You know, obviously, those are always
David: You know, obviously, those are always opportunistic, you know, it continues to be typically as a customer outgrows a competitor or the service of the competitor is not where the customer expects it, that we get that phone call. That can be triggered by a transformation that's ongoing or the business model is just getting more complex and our competitor can't keep up.
Pat Walravens: Our next question will come from Pat Walravens with Citizens JMP Security. You may now go ahead.
Pat Walravens: Oh, great. Thank you and congratulations on the acquisition, you guys. One for each of you, starting in the weeds a little bit, John. Why is the allowance for doxil accounts relatively so high? So this quarter is $17.7 million, I think, or 15% of accounts receivable. And by comparison, I was just looking back when Avalar was acquired in 2022. It was like 5%. I would have thought it would have been the other way around because you're more of an enterprise. So, um, what do we need to understand there?
Speaker Change: You may now go ahead. Oh, oh great. Thank you and congratulations on the acquisition you guys.
John: Yeah, I can't comment on Avalara's ratios and our ratios. We have our policies we've been maintaining for long periods of time regarding how we set our allowances and how we work through them. But our allowance methodology has been very consistent over periods of time. Again, because we bill annually in advance, sometimes it could be a bit larger than others because, again, the offset is the full amount of annual billing that goes on.
John: However, that said, I think we've seen that allowance grow over the last year or so, and a lot of it had to do with some of the implementation of our new ERP system. Now that you've seen the nice quarter we had from a cash flow perspective and an accounts receivable perspective, I expect to see that start to tick down a little bit in terms of the makeup of that. So a little bit had to do with that bump, but we feel very good about the progress we made in 2024 and especially the progress in the second quarter, where we really saw that cash flow come out. So in terms of the collectability of our accounts receivable, it's very, very strong. We have a blue-chip client base and have not experienced any significant issues with respect to collectability.
Speaker Change: So, a little bit had to do with that, that bump, but, yeah, we feel very good about the progress we made in 2024, and especially the progress in the second quarter where we really saw that cash flow come out. So, in terms of kind of the collectability in our accounts receivable, it's very, very strong. We have a blue-chip client base and have not, you know, have not experienced any significant issues with respect to collectability there.
David: Okay, great. And then David, you know, putting execution to the side for a second, from a strategic point of view, what is the most important thing for you guys to get right over the next 12 months?
David: You know, the two acquisitions we made position us well. So from a strategic perspective, I now see us moving forward with those two and bringing new things into the market. We've got some interesting things we're doing with AI that we think we can bring forward in data management and in supporting our customers with a user experience. And then ultimately, the platform, the cloud platform that we're building out, there are now natural adjacencies that start to open up for us as we look at both industry verticals we can exploit as well as potential other compliance areas over time.
Speaker Change: And then ultimately, the platform, the cloud platform that we're building out, there's now natural adjacencies that start to open up for us as we look at both industry verticals we can exploit, as well as potential other compliance areas over time.
Operator: Oh, that's interesting. Can we get a hint on an example of that, of an adjacency?
Speaker Change: That's interesting. Can you get, can we get a hint on what, like an example of that, of an adjacency? I want to continue to prove to you that we deserve the right to earn that, Pat, before we share all that, but trust me, you know, we did what we did as the first two steps, but we're continuing to look at new opportunities.
David: I want to continue to prove to you that we deserve the right to earn that path before we share all that, but trust me, you know, we did what we did as the first two steps, but we're continuing to look at new opportunities. All right, great, thank you.
Operator: All right, great. Thank you.
Operator: Again, if you have a question, please press star then 1. Our next question will come from Jake Rober with William Blair.
Speaker Change: Again, if you have a question, please press star then 1.
Jake Rober: Thanks for taking the question. Just from a go-to-market perspective, do you feel like you have the right team in place to address the invoicing opportunity in Europe? Or is there more that you need to kind of ramp up on that front now that you fully have that product in place with Ecosio?
Speaker Change: Thanks for taking the question. Just from a go-to-market perspective, do you feel like you have the right team in place to address the invoicing opportunity in Europe , or is there more that you need to kind of ramp up on that front now that you fully have that product in place with Ecosio?
David: Yeah, I think in Europe we've got decent coverage. There will probably be a couple of strategic hires that we'll make in that space. And then obviously, we want to be really thoughtful about how we go and support our U.S. customer base with the right talent. So definitely, part of our investment over the next two quarters that we teed up in the guidance includes some thinking about how we're doing that. And we'll give you more specifics on that guidance once the acquisition is actually closed.
Speaker Change: And then obviously we want to be really thoughtful about how we go and support our U.S. customer base with the right talent. So, definitely part of our investment over the next two quarters that we teed up in the guidance.
Speaker Change: includes some thinking about, you know, how we're doing that and we'll give you more specifics on that guidance once the acquisition is actually closed.
David: Okay, helpful. And then I know that the former Pagaro partnership was still very early days, but for the deals that you had already closed with that partnership, what will happen with those logos now that you're unwinding the relationship? Is that just a smooth transition over to Ecosio, or is there anything else to think about on that front?
Speaker Change: Okay, helpful. And then I know that the former Pagaro partnership was still very early days, but for the deals that you had already closed with that partnership, what will happen with those logos now that you're unwinding the relationship? Is that just a smooth transition over to Ocosio or is there anything else to think about on that front?
David: Yeah, the good news is that the way that our team designed the portal, the ability to swap out one provider's back-end for another's is pretty straightforward. We never really put that relationship where another partner actually has a direct relationship with our customer. We always own those relationships. So it's it's a very smooth and easy swap out.
Speaker Change: Yeah, the good news is, the way that our team designed the portal, the ability to swap out one provider as a back-end for another is pretty straightforward. We never really put that relationship where another partner actually had the direct relationship with our customer. We always own those relationships.