Q2 2025 Vertex Inc Earnings Call
Good day and welcome to the Vertex, Inc. Second Quarter 2025 Earnings Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then 1 on a touchdown phone,
if you would like to withdraw your question, please press star then 2
Turn the conference over to Joe relly, Vice President investor relations. Please go ahead.
Hello, and thanks for joining us to discuss for Texas. Second quarter results, David de Stefano, our president and CEO, and John Schwab our CFO are also with us today.
During this call, we may make forward-looking statements about expected future results. Actual results. May differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission.
Our remarks today will also include references to non-gaap metrics. Our reconciliation of these metrics to Gap is also provided in today's press release. This call is being recorded and will be available for replay on our investor relations website. I'll now turn the call over to David
Welcome everyone, and thank you for joining us.
In the second quarter, we delivered results that were in line with our guidance and investor expectations.
However, as the quarter progress, for the first time we saw a macroeconomic factors that have been noted in the software industry in 2025 impact, our customers and begin to affect their activity with us. We took action to mitigate this but it necessitated a reduction in our full year guidance. We will discuss all of this in today's call.
For the second quarter Revenue was 184.6 million of 14.6% year-over-year. Subscription Revenue, grew 15.7% and Cloud Revenue growth increased to 29.9%.
Adjusted ebitda rows to 38.4 million. Representing an ibadan margin of 20.8%
In addition, annual recurring revenue (ARR) grew 16.1% to $636.6 million.
Average annual revenue per customer for vertex, Standalone increased 12.7% year-over-year to 142,600.
Growth in scaled, customer count was 16% as a reminder. This number represents our customers with annual revenues, greater than 100,000 dollars and demonstrates. Our ongoing success in the underpenetrated Enterprise Market.
Gross, revenue, retention or grr remained at 95% in the second quarter within our targeted. Best-in-class. Range of 94 to 96%.
Finally net revenue retention or nrr decreased to 108% down 1 point from the first quarter. We attributed the decrease to 2 main factors lower growth of additional entitlements as our customers annual growth has slowed keeping them within current bands of usage.
And recent regulatory changes in Brazil, create a compliance confusion for customers, which resulted in delayed deal activity for some of our large multinational customers.
More broadly, in addition, to the macro impacting, our customers growth rate, we have seen a Slowdown in Erp migrations, thus elongating our deal Cycles. This is consistent with what publicly traded Erp providers. Noted in their quarterly, earnings reports,
This has the downstream impact of also pushing out pipeline bills. We attribute this to the overall macro environment as our Enterprise customers are being more cautious about software. Spend as a result of this, we recognize the need to take immediate actions to control expenses and deliver on adjusted ibaa margins.
These included leveraging efficiency from internal technology Investments and reducing planned headcount growth, which will give us better, expense trajectory, as we look into 2026 and Beyond.
John will discuss how all of this impacts our guidance in his remarks.
The short-term environment does not impact our confidence in the long term growth expectations, we shared at investor day earlier this year. This is because our business has multiple significant Tailwind, many of which are still ahead of us.
First, the ongoing Cloud Erp upgrade cycle. This has been stubbornly slow in 2025. As I mentioned earlier, however, deadlines for conversion, are looming over the next 2 and a half years and we fully expect this motion to accelerate over this time frame.
Second governments, all over the world are looking for new ways to generate Revenue to meet their obligations and reduce federal funding in. The recently passed us tax bill will further pressure state and local budgets.
In our 2025, midyear us rates and rules report. We noted that the US saw a 24% increase in sales, tax rate changes and new rates compared to the same period last year. This in turn creates complexity and increases demand for our Solutions.
Existing compliance and Technology roadmaps.
We Believe even more changes are likely as inflation, global trade disruptions.
And federal tax policy around tariffs compound to create both opportunity and uncertainty. This is the Hallmark of what we do. Best make sense of that complexity for global companies at scale.
Additionally, our win rates in the Enterprise Market remain consistently strong and stable of these delayed deals have now, already closed in the third quarter, this confirms our experience at the strong, underlying demand, and customer Commitment. If we have worked hard to earn remains solidly in place despite dealing being impacted by larger forces.
The durability of our customer base remains outstanding, churn was lower on a dollar basis in the second quarter compared to both the first quarter and the same period last year. This demonstrates strong products, stickiness, and high customer satisfaction, providing a robust foundation for future growth. In addition, our team secured some key, new logo wins in the Oracle and sap ecosystems as well as several. I invoicing successes that mitigate it. Some of the second quarter, headwinds
In context with these long-term growth drivers, let me share some highlights from the second quarter particularly around Europe, e invoicing and the Investments we've made in our Global platform.
We had good momentum in Europe, which was in part driven by accelerating growth at a cozio where annual recurring Revenue reached 10.8. Million is 33%. Increase from the prior quarter. We are seeing strong deal flow driven by the upcoming launch of invoicing in Belgium.
Which is mandating the use of e-invoicing beginning on January 1st 2026, the acceleration in demand due to the Belgian invoicing launch BS. Well as the 2 largest economies in the EU are still on the horizon. With brands that begin mandating, invoicing beginning in September 2026 and Germany. Beginning, January, 1st 2027,
Our growth thesis in invoicing is unfolding as anticipated. Customers
who adopted our solution earlier this year are already returning the license additional country coverage early indications. Suggest that e invoicing is shaping up to be a classic Landon, expand motion, mirroring the trajectory of our core indirect tax business and supporting sustained nrr growth.
Our invoicing solution has also been recognized by industry experts in July Gartner, included vertex, in its research, study develop a global invoice and compliance strategy, supporting Global e, invoicing compliance.
From a product standpoint, we continue to build the global compliance platform of the future, combining thoughtful AI and automated workflows tightly embedded in our ecosystems and powered by our content and data.
Is a strategy that's resonating with our customers and partners around the world.
Our consumi investment is accelerating our second half. AI roadmap supporting new product functionality increased efficiency and a greater customer experience. This relationship is also generated opportunities to support their focus on the good enough requirements of the SMB Market.
Also on the AI front. We are working with several Ai and Cloud hyperscaler providers, and ecosystem Partners on using vertex. Agentic AI agents natively within their application. Workflows, these agents work within the ecosystem and Leverage The Services of our vertex Cloud platform to orchestrate more, advanced capabilities.
These vertex value added AI agents can be seamlessly enabled within their marketplaces of the Enterprise application providers and embed it within the financial and compliance workflows, enabling a new level of customer value, and stickiness.
As an example in the Microsoft Azure, ecosystem, we built strong relationships at the executive Technical and go to market levels coupled with new AI Innovations. This will continue to enable us to expand our mid-market opportunity even further
In addition, we launched co-pilot within our platform, giving customers in platform, knowledge and product documentation with a single click feedback has been great and adoption continues to grow.
I'll now highlight a few new business wins among our install base customers. We are seeing a growing Trend towards globalizing, their tax operations.
Driving both more usage of our Solutions, and expanding our footprint.
As an example, in the second quarter, a leading European truck manufacturer, which has been a Vertex customer since 2009, expanded its relationship with Vertex during an SAP ECC to S/4 migration. The customer, which had previously licensed Vertex only for its U.S. operations, expanded its entitlements to cover its global operations and licensed additional Vertex tools.
Additional annual revenue and nearly doubled, our annual volume from this long-standing customer.
In addition, a major automobile manufacturer migrated to the cloud with vertex, as part of its sap, ECC, to S4 Hana Cloud transformation Journey.
The customer also expanded its entitlements. So it could consolidate additional operations into its vertex contract as part of the project.
The result was 7 figures of additional annual revenue with this long-standing customer.
Also, during the corner.
1 of our first invoicing, customers committed to expand country coverage with vertex.
This customer started with vertex in 4 countries and after a successful launch, is now expanded to several additional countries. Driving nearly a hundred thousand dollars of new annual revenue,
As I noted earlier we're especially excited that this is an early proof. Point that e invoicing will be an ongoing land and expand motion for vertex.
The new customers we acquire in the early stages will provide a strong foundation for significant future Revenue opportunities.
A leading Global Aerospace and defense manufacturer selected vertex for invoicing.
As I noted earlier, this was driven by the upcoming Belgian mandate which will kick off in January. However, we expect additional invoicing opportunities with this long-standing customer.
Turning to new logos, we want a customer in the food delivery industry after an intensely competitive Bake Off with an incumbent competitor. The customer was unhappy with the competitors per transaction based pricing, which led to extremely high costs for this high. Volume. Business vertex is revenue based pricing model provided them with the predictability consistency and stability of costs.
This competitive, takeaway included sales and value added tax calculation, as well as several vertex tools.
The customer also signed on to be 1 of our early adopters for smart categorization.
The 6-figure deal.
Which was in the Shopify. Ecosystem was facilitated by our partner KPMG.
In Europe, we want a new MID 6-figure customer in the gaming industry. When an oracle Cloud transformation, LED them to explore third-party indirect tax Solutions
This new customer relationship included, vat. Consumer use tax and sales tax calculation as well as address cleansing.
A manufacturer of popular collectible toys switched to vertex as part of a global Microsoft d365 cloud transformation.
The result was mid 6. Figures of new annual revenue,
The customer was previously using a competitor in the US and Native Erp Tax Solutions in Europe.
But was getting incorrect, tax answers due to a flawed integration. In addition, the competitor's support to resolve these issues was unsatisfactory. The implementation, which was led by our partner dma included in e-commerce component with connectivity. To the company's instance of big Commerce for online sales, our Global Tax content coverage was also a significant differentiator as the customer had aggressive International expansion plans,
Finally, a major public utility selected vertex to displace an incumbent competitor as part of an oracle Cloud transformation. This 3 year, mid 6-figure deal, included sales and consumer. Use tax calculation on Oracle Cloud, along with the exemption certificate manager and other tools. Purchase Consulting was also engaged by our partner. PWC to assist with the implementation
throughout our 5 years as a public company, we built a reputation for under promising and overd delivering the second quarter fell below that standard and we take that seriously. We're taking clear focused steps in the short term to ensure we're executing at the level we expect of ourselves and that of our investors
While also remaining steadfastly focused on the long-term and the great Market opportunity, we have in front of us.
John will now take us through the financials.
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 2025
In the second quarter revenue is 184.6 million up 14.6% year-over-year.
To 3.4 million of Revenue, during the quarter accordingly on an organic basis, Revenue was 181.2 million and revenue. Growth was 12.4% in line with expectations for the quarter.
Subscription Revenue, increased 15.7% period over period to 157.8 million.
Our services Revenue grew 8.3% to 26.7 million.
Excited about 4 Points to Cloud Revenue growth.
Annual recurring revenue or ARR was 636.6 Million. At quarter end, the cozio added 10.8 million to ARR up from 8.1 million in the first quarter.
Approximately 600,000 dollars of this increase is due to favorable foreign currency translation adjustments.
Excluding a cozio organic ARR was 14.1%.
Net revenue retention or nrr was 108%, compared to 110% at last year's. Second quarter and 109% from the first quarter of 2025
as David noted, the decrease in nrr was attributable, to lower deal activity from some of our large multinationals and a decline in additional entitlements, in the Enterprise Market due to Regulatory and tariff driven economic uncertainty
Gross revenue retention or trr remained at 95% at quarter end within our targeted range of 94 to 96%.
Average annual revenue per customer or a PC for vertex. Standalone was 142,584 up 12.7% from last year's. Second quarter,
Including the impact of a cozio AAR, PC was 130,934.
Note that in the third quarter, we will lap the acquisition of a cozio. So metrics such as ARR and average annual revenue per customer, will be consistent on a year-over-year basis.
Now 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.
Gross profit for the second quarter was 140.1 million and gross margin was 75.9%, this Compares with gross profit of 1118.8 million and 733.7% gross margin in the same period last year.
Gross margin on subscription software was 83.2% compared to 80.4% in last year's second quarter and 82.6% in the first quarter of 2025.
Gross margin on Services. Revenue was 33.1% compared to 36.8% in last year's, second, quarter and 31.1%, in the first quarter of 2025.
Now, turning to expenses in the second quarter, research and development expense was $18.1 million compared to $12.7 million.
With capitalized software, spend included R&D spend was 38.9 Million for the second quarter, which represents 21.1% of Revenue.
Selling and marketing expense was 44.6 million or 24.2% of total revenues an increase of 7.6 million and approximately 20.6% from the prior year period.
General and administrative expenses were $38.1 million, up $7.4 million from last year.
adjusted IBA was 38.4 million roughly flat with a year ago quarter and in line with the midpoint of our quarterly guidance
in the second quarter, our operating cash flow was 46 million and as anticipated, free cash flow was positive at 19.6 million.
We ended the second quarter with over 284.4%.
And for additional liquidity, we also have $100 million of unused availability under our line of credit.
Now, turning to guidance for the third quarter of 2025, we expect revenues of 190 to 193 million and adjusted e that uh of 38 to 40 million.
For the full year. We now expect revenues of 750 to 754 million.
Cloud Revenue, growth of 28% and adjusted, EBA 156 to 160 million.
This guidance reflects the following first, the previously mentioned slowdown a Erp conversions, which has an impact on Deal conversion and pipeline build.
And lowered entitlements, as well as true up Revenue as our customers are largely remaining within their usage bands.
David will now make some closing comments before we open up for Q&A. David?
Thanks, John to wrap things up. Well, we had a solid performance in the second quarter across several metrics.
Providers remain in place.
But with the continued uncertainty, in the macro environment, I believe we have taken prudent steps while not under-serving our long-term value, proposition, and Market opportunity,
With that, we will take your questions.
Thank you. We will now begin the question and answer session to ask a question. You may press star then 1 on your touchtone phone, if you are using a speaker-phone please pick up your handset before pressing the keys.
If at any time your question has been addressed and you would like to withdraw it. Please press star, then 2
at this time, we will pause momentarily to assemble our
And today's first question comes from Chris Quinta with Morgan Stanley. Please proceed
Hey David, hey John, good morning, I wanted to ask on the guide um first the cloud guy that that stayed in place. Um, so I'm curious is the macro impact that you're calling out here more on the on-prem and, and services side just help with Mary kind of the, the lower total revenue guide versus the the maintained Cloud Revenue guide.
Yeah, Chris, thank you for the call. I appreciate appreciate it. You know, I think as I think about the guide and I think about the, the adjustment down, I kind of break it into a couple of different pieces. I think the largest driver, when I think about it is really coming from entitlements, you know, it's it's entitlements which is our customers usage of activity. We typically don't have a tremendous, uh, line of sight into that 60-ish days or so. So as those renewals are happening, we're starting, we're then getting wind of what the what the up uptick is going to be. And then to the extent that there's a true of what that's going to look like and so as Q2 developed we started to see a little bit of, we started to see that that activity was lower than, it's been in the past and especially in the real larger. Uh, the real larger additional entitlements, those those big 6 Figure type of deals. The, the volume was much lower than we had seen. And so, you know, the good news is we hadn't seen pullbacks or any changes going the other way, but just be magnitude of those additional entitlements is certainly lower than we've seen in Prior quarters. And again, that's part of the driver for our and for our and our dropping from that 109.
Back to 108. So I think based on that trajectory we really looked at that we looked at that and that really weighed heavily as we think about what the guide looks like. So when you when you need to take that into consideration then you also take into consideration true-ups which aren't you know very you know typically a giant piece of our revenue of our Revenue but they can be significant and they have a 100% you know Revenue impact in the quarter in which they occur. You know, we we certainly pulled that back a little bit as we thought through that. And then finally, the last
Piece really has to do around the elongation of some, of those sales Cycles. So that's sort of how I I, I kind of box out each of those different pieces. But, you know, we feel we feel good and confident with the guidance that we've set in our ability to achieve it.
Got it. Thanks John. And then 1 to follow up on the e-invoicing momentum that you're seeing really really encouraging to see. But just as you've seen those early customers come back to you and add additional um country coverage. Like what are some of those early learning that you're seeing in terms of the adoption rate for for that product so far?
Yeah, um I'll take this 1, so Chris, I think it's a couple factors 1. Um the value of our end to end offering is really differentiating us and playing. Well in the market meaning that we've got the front end uh that termination engine the Middle Point, the invoicing transmission and then the that compliance all on the platform. And I think that's really being validated as Point number 1. I think Point number 2 is that this is a classic land and expand model as we prove out to the customer that we can deliver on this. Um, they they come back and say right now we want to expand because they all focused on getting a single Global provider. Um as the as the proliferation of these invoicing um requirements or expanding and getting more complex. They're really looking for a single, you know, a single provider on a single platform and that's playing right into our strategy. Um so I'm really pleased with the early pipeline Bill Deal, Cycles are typically running 3 to 6 months.
Depending upon whether the customer how big the customer wants to start. So if you recall, we went live with the product um in general availability at the very end of the first quarter. So we're just through our first 3 month cycle and already seeing really nice bills. Um and I think that should you know, no reason that 1 continue as we continue to expand our country coverage
Excellent. Thanks. David
Yeah, you're welcome.
In the next question is from Steve Enders with City. Please proceed.
Hi, thanks. This is George. Kaw on for Steve. Uh, I wanted to Circle back to the
He laid out at your recent investor day. I mean, just based off of what you've seen and what's implied in the guidance here, it looks like you're looking at a bit of a deceleration through the end of the year, tied to all the things that you discussed on the call here. Does that change at all how you guys are thinking about that kind of longer-term accelerating growth outlook? Just any color there.
Yeah, George. It's a super fair question and and we spent a lot of time as you can imagine thinking about that. I think when we looked at it and we we actually looked at the the the the transactional volume that's happening in invoicing and that the type of regulatory Tailwinds that we're that we're seeing actually accelerate in that area um, as, as a key driver and the number 1, and then number 2 as we continue to expand um with sap and Microsoft and some of the ecosystems with some of the work we're doing. Um, we continue to see that cloud migration being a persistent driver for them, which means the Tailwind has to continue for us because it's so disruptive to a tax department. And so we really paused on, like, do we change anything? Um, and those Tailwinds are are so solidly in place right now. Um, there was no compelling reason to think that the company isn't going to resume its, uh, its normal. I mean, this franchise has been around for 45 years. We've been through these Journeys, where we see economic blips, um, but the steady
Durability of our customer base and then the continued growth, both in new logos and recurring and um, you know, cross-functional sales as our customers continue to grow has not changed. The fundamental model is just rock solid and so I that's why we felt really confident in sustaining, you know, our current position on it should play out as we expect
Okay, great, that's really helpful. Um and then in the prepared remarks, you alluded to maybe some changes in your hiring plans for the year. Just love a little more detail there. What are you expecting to change? And how should we think about the the model impacts their
Yeah, I think what we've looked at that and said, you know, um, we've been gaining leverage from internal Investments we've made, um, we disclose to investors over the, you know, the past several years, on internal leverage about where we can drive more efficiency in the business and gain scale to ultimately Drive margins. We prioritize some of those as we saw some of the short-term transactional, you know, challenges that John describes in our performance and leaning into that look. Then you start to assess itself in terms of well, the moment you need in future headcount. And so most of the pullback is in areas that are not strategic to the, you know, the core strategy that I just focused on in terms of how we advance our number 1, priority around the invoicing and how we continue to optimize against Microsoft Oracle and sap. It's more in other areas of the business that are going to be less impacted by those strategies.
Got it. Thanks for taking the questions here.
Thank you.
The next question is from Joshua Riley with GM. Please proceed.
All right. Great. Uh, thanks for taking my questions. Uh, maybe just starting out. Can we get some more color on how the quarter progressed? And what happened post q1 is that print was pretty strong, and it seemed like the pipeline, uh, was pretty strong for the balance of the year. Was it, was it really just the end of June, where the weakness started to come into play or help us, understand how the linearity of the quarter progressed?
Yeah, in terms of in terms of how the quarter progressed, what I would say is when I think about kind of q1 and the activity and q1, we had a nice. We had a good q1 as Q2 started to develop. Again, we started to see a little bit of a little bit of softness as we got through May and you know, as we got, you know, April seems strong. As we got through May, we started to see a little bit of a little bit of softness start to show up, but we didn't think it was, you know it was yeah we wanted to Monitor and manage it to see what that happened and then as we got through May and then into June we that's when we started to see a bit of that elongation a little bit of that. Push out again, very similar with how the the additional entitlements and that activity that I described earlier sort of played out during the period. So it really really manifested itself towards the back end of the quarter. And again that's why we you know, stopped and took a pause and made sure that we understood some of the big drivers that were gathering that were building in the business.
Got it, that's helpful. And then you kind of alluded to a little bit slower activity in the sap ECC base. If I interpreted the signal there correctly, what do you think is going on there and and why haven't the trajectory of those deals accelerated? Uh, this year, like maybe we would have expected
A little longer hopefully get through some of the Tariff uncertainty in the macro challenges. They'll be able to absorb that expense model and I think that's kind of the basic feedback we're hearing. Um, we don't have obviously direct visibility into those, but I, I think that seems to be the themes that we are. We're most hearing, it's, it's just pushing out the, the timing of those, um, creating a little bit of that bubble, that that it's going to come in the back, end of the process, which is really going to be 26 and 27.
Understood, thank you.
In our next question is from Adam Hotchkis with Goldman Sachs. Please proceed.
Great. Thanks so much for taking the question. Um, David. I I'd be curious how you think about the deals that did get pushed from Q2 into Q3, I think you had mentioned, you, you closed some quarter today. Um, is there any way you can sort of quantify for us, what percent of those deals that that were pushed have been closed? Or you have a sort of near-term lens on on when those might be closed versus, you know, folks that um, have sort of delayed indefinitely due to those conditions. Thanks.
Yeah. Um Adam I don't I I think delayed indefinitely would be a wrong characterization because they're still going through their migrations. Um, they're still going to address the issues have to address the issue of tax. It's just a question of the pacing of the Erp adoption and whether they're, you know, you and I have had the conversation. I think I've spoken to investors about. Um you know, it's a it's a the process of it.
Integration. We get brought in about the midpoint of a of an of a, uh, onboarding of a of a new Cloud offering. And so in terms of the customer adopting, a new Erp system, and so if those are pushing in the early periods where they're slowing down their process, then it's pushing our process out. And I think that's really, you know, a contributing factor here. Um, I don't have visibility to how many number of deals closed. I know from the sales teams, and we talked to them weekly, and, and monthly, we have different processes to do that. I'm, I'm comfortable that they are closing. I think it's just the timing issue again. Um, in terms of pacing it to where the customers migration processes.
Okay, great, that's really helpful. And then John just on guidance philosophy and maybe how that's evolved. Um, on this print relative to, you know, how you've looked at things previously, in particular related to things like entitlements and true Ops, uh, would you say you're taking a, a particularly conservative view on the second half of the year around entitlements and true-ups relative to what you've done, uh, historically, or, you know, is this, is this something that's just purely reflecting what happened in the second quarter?
Yeah, I think Adam, what I would say that is this, I think we took into consideration what we saw develop in the second quarter and how it developed and the types of and the types of customers that that came from and built and certainly built that in. I wouldn't say that we have changed our philosophy at all. Certainly they were the levers that we kind of pulled on to make the changes that we pulled but I I wouldn't say that we have changed on our philosophy of how we think about it but I think what we did see is that magnitude uh start to come down in terms of kind of those true-ups. And again they're the ones that have a big. A big impact on dollar dollar dollar for dollar in the revenue line items. But again, similarly, with the additional entitlements. Same thing. I think we're just re-evaluating based on what we're seeing and, and trying to be very thoughtful about how we think about that going forward. I think we've always had a pretty conservative philosophy around guidance and setting it and making sure that we have good visibility in there. And I think as we saw a little bit of that visibility, uh, get get hazy in the in the second quarter. We wanted to make sure we adjusted accordingly.
Okay, great. Thank you very much.
The next question is from Rob Oliver with beard. Please proceed.
Great, thank you. Good morning. Thanks for taking my questions. Um, the first 1 is on, uh, just the sap comments, um I don't sap called out on their call. Some weakness in public sector which I know is not an end market for you guys as well as in North American industrial and Manufacturing. So I I know. Uh, David you mentioned, you know, somewhat limited visibility into into exactly where those deals are for you guys and when you're brought in, but to the extent that perhaps you've gotten color from, you know, your CRM your sales, folks as to where that weakness was so we can match that up with some of you know the other companies that we follow which are actually calling out strength within the sap Channel and then I had a quick follow-up.
Far out. Um, but the softness is largely focused. I think, in the US where, um, I think there's been reports of of, some of that slow down that you noted. And I think that given that's our larger market, um, that has been our larger market opportunity and remains. So that's why it's showing up more impacting us, more of actually had a strong European, uh, quarters as we noted. Um, but that's a smaller part of our business still. And so I think that's kind of, you know, where we're seeing it the most
Okay helpful. Thank thanks. David. And then John just a quick follow-up for you. Maybe a 2-part here 1. Uh 1 is um just maybe a coral area to Adam's question earlier. Just about guidance philosophy. You know. Uh going back to the analyst day. Obviously sap is an important part of the story as our Erp. Migration is broadly for you guys and you know, given the absence of V visibility and and you know, getting tripped up here very early after the analyst day. How that might impact how you think about, you know, uh, your, you know, the contribution from sap in any given year and how you got to that and then, um, you know, is there any potential impact or how do we think about the margin trajectory into next year? You know, is the accelerated investment cycle kind of need to be pushed out a little bit. Thank you.
Okay. Um thank you, I appreciate it. Robbed a couple of a couple of good questions there. The first, um, in terms of kind of our view of trajectory of sap, and as we think about sort of longer term, you know, I I don't think as David described earlier in 1 of the earlier questions. Yeah. I I don't think there's a change in our view on sort of the end markets and our ability to drive to to drive growth into the future and and we feel good about that. And so I think we obviously are taking all of the, you know, all all the factors into consideration as we think about guidance. And we think about our plan and how the businesses developing over time. But I don't think there's anything that I'm seeing that occurred this quarter, that that occurred, this quarter, that would change how we're looking at either, the longer term plan or our, our the way that we're evaluating different contribution, different contributors into our longer term growth. Uh, algorithm
Um, in in terms of margins. Uh again I think as as David had also had mentioned, you know, we did take some actions in terms of of ensuring that we we've got a good cost structure in place but also prioritizing some of those investment areas ensuring that we're getting after invoicing getting the country coverage that we need and continuing to build out for those goals because again, that's going to be a driver of our success as we move forward. So we continue to focus on those important things. Again, we still feel good about that investment. Uh, the investment program that we're on, we talked about again that country coverage, extending through the middle, you know, getting that up and going some AI Investments and really that plays itself out through the middle of next year. And I think then we'll start to see more leverage come. But we're we certainly
Just given some of the headwinds that we saw are being very mindful around our cost structure and the uh and the contribution that we're seeing there. So um, we'll see how that develops over time but I think we're still focused on those Investments. We're still and we are still focused on driving that leverage in our business and trying to trying to find ways to accelerate it where where possible
Great. Thanks. John. Appreciate it.
Thank you.
Our next question is from Andrew D. Gasberry with BNP Perry boss please proceed.
Thanks for, uh, taking my question, I guess. Um, in terms of just to follow up with, uh, Rob's question. Um, that just to be clear that sort of Leverage expect in the back half of next year, that is not changing, right? Um, as these Investments are getting pushed out and I have a follow-up. Thanks.
Yeah, I don't think we're we're, we're going to alter our. Um, we haven't offered any guidance for 26, s***, obviously. Um, the fundamentals of our strategy are, you know, as I said we we're not a quarterly performance is critical. We understand that the long term, strategic opportunities. We're pursuing are are significant enough. We 1 of you thoughtful about what we back off on. Um, I'm going to look to see where we can deliver leverage from our internal Investments already, and and use that to to drive continued, um, margin opportunity to fund the long-term strategic things that we're pursuing. Um, but pursuing the invoicing expansion right now is Mission, you know, we think it's, it's strategically High.
Round that we have to complete. Um, it'll put us in the best position to, you know, for the long term durability that we've enjoyed for 45 years. So that's why we're not going to back off that.
Great. And um, that's helpful. And then I I guess I wanted to follow up on the, I think you mentioned on the call earlier some, uh, compliance confusion for customers. I was at Brazil. I think you mentioned, um, maybe you could just expand on that. What did that mean? I mean how impactful was that like relative to all the other uh factors you've listed as to the the the lower guidance?
John roughly. Sure. Yeah so that that's about the impact to nrr that it was but the bigger issue there is um Brazil has introduced a new vat um set of requirements that will actually they have 2 different sets of requirements in place. Right now, they have their legacy system and they are transitioning into this new 1 over a period of 10 years, which is actually creating confusion for customers in terms of how much has to be applied again, you know, how much has to be complied against the old rules versus the new regulations as are being phased in and it is clearly caused some frustration for customers down in that area. Um, we view that actually, that, that confusion and, and frustration to be another complexity that will serve us. Well, and we've got a number of initiatives that are moving forward in Brazil right now to actually address. So I'm I'm actually strategically super pleased with how we're positioned and we're delivering value. But in the short term, again customer deal flow. Got has slowed a little bit as customers are sorting through what their compliance needs are going to be and
That that's all that was. Um, but in the long run, again, it's just enhanced complexity from The Regulators that only creates opportunity for us.
Understood. Thank you. That's very helpful.
And our next question is from, Brent bracelet with Piper Sandler. Please proceed.
Thank you. Good morning. Thanks for taking the question here. I wanted to go back to the on-prem license versus Cloud discussion. Very clear entitlements and true-ups are are more variable here. That's the the drag on the second half. My question here is, is around the longer term Trend. Um, why would you see on Prem license? Maybe start to be a bit of a drag, especially if we start to see a more acceleration to, to cloudier P. I know you're agnostic. It's the smart thing to do. But curious, if, if you see any sort of early signs that, um, some of these migrations, um, might become a longer term Dragon license, but, uh, potential accelerate to Cloud,
Yeah, I want to make sure I'm understanding your question. I think that fundamentally when customers migrate from on-prem to the cloud we get we get a typically a 30 to 40% increase dollar for dollar for the same license. So it's not a drag when those existing customers who are on-prem moved to the cloud, It's actually an upsell opportunity for us. Um, so just to make sure I'm I'm paying off that part of the story, I think. Um, because everything we're doing is cloud first, probably 90 to 95% of all of our new logos. And with our platform expansion, we're continuing to drive
Our activity to the cloud, um, and onto our platform. I see that being the accelerant for our future growth, um, not to drag the migrations will happen. Um, it actually will will start to eliminate over time, will be the, the true-ups because we'll have as, as Cloud. It's over 55 or so percent of our Revenue now, and as it continues to accelerate and become, you know, probably 60 70 80% of our Revenue. It'll be more, just the entitlements. And we won't have those 1-off true-ups anymore in the on-prem business, uh, because it'll become a smaller percentage of our total revenue.
Got it. Very clear. So it's the true-ups that, uh, might be impacted entitlements. Um, you know, we'll continue in that in that cloud. Mix shift helpful and then and just last 1 here on e-invoicing in Europe specifically. Um, if I think about the momentum there over 30% sequential growth, it is very small. Uh Belgium is very small but France and Germany are are 10x, larger GDP areas. I'm curious to hear are there different competitors in each country in in the EU that you have to fight against um, uh, and and then from a timing standpoint, when would you start to see, you know, France, if that doesn't happen until September 20th to 6th and, and Germany and 2027, when would you start to see some of those deals light up?
In the next 2 years, is exactly our target market. And so that's where we're focused and the number of competitors. They're really shrinks down to, you know, solos and solos. And, uh, Thompson are probably the 2 primary ones that have the same capabilities. The similar capabilities that we would have that we would be most of our rfps we're seeing
and France and Germany, France and Germany should start to light up here as we get to the back half of this year, probably more so France. Um, just because of the looming deadline, and then really much more into 2026, which is pretty consistent with what we've said, all along the race for us was and which is why we're not slowing down. Our investment. In the invoicing is we want to be where we need to be. We already have France in our, you know, we've already covered France. We can handle it right now, but we want to be in all the right jurisdictions with our investments over the next 12 months. Hence the investment cycle, we're in, so that we're we're incredibly. Well, positioned, as customers are making Global decisions on who are going to be our providers. We've got the country coverage, um, and and the protocols, they need in place to, to provide
Helpful color. Thank you.
The next question is from Alex. Clar with Raymond James, please proceed.
Great. Thank you. Um, David and your prepared remarks, you talked about some of the expected state and local budget pressures from from reduced Federal funding. You've been operating for 40 plus years. What, what have you seen in Prior Cycles when State budgets are are tightened in terms of accelerating?
Rate and complexity changes. And, and then more importantly, how that correlates to buying vertex
Yeah, so um the the the new tax bill was passed by the federal government here, changing Medicaid and food stamp funding to States. Um, so Mission critical for their citizenship that they're going to have to address indirect taxes. The most predictable form of revenue for a government. So I think, um, we have seen consistently in the past when governments are in search of Revenue, they turn a transaction tax. They do it somewhat in rates. Um, they do it, more in rules, rates are helpful. Um, but obviously it's hard to get reelected if you're a local politician and you just keep raising the sales tax rates so they come up with more complexity in the rules. Um, they'll add a sugar tax into a beverage or something like that again, which increases compliance pain for our, for the prospects, which creates demand opportunities for us. Um, and that's, that's what we have seen in the past and I, I don't see any reason why that's not going to continue again, because of the predictability of the revenue and because of the, the need to fund.
These gaps that are now increasing as a result of the of the new tax bill.
Okay, great color there. And I have another 1 on on the invoicing to add to the bunch today, but in terms of the partner Channel, you've got a mature partner channel for your core Solutions. How does that look on the e-invoicing Opportunity House? Enablement, been there? How, how much of e-invoicing deals are partner influence versus the rest of your business?
Yeah, we've made a very important decision to work very much through the same partner, uh, channel that we built, uh, our brand with for years. So we are working very closely with all of the alliance Partners. Um, and we are, you know, we are leveraging them. We've enabled them, uh, we're training them, uh, in terms of how they can Implement our software, um, our invoicing solution and then bring more value around it for their own, for their own practices. And so it's uh, it's a key part of our of our go to market strategy, um, and they are active in most of the transactions that we're we're securing right now.
Um, you know, that that's we expect that to continue because tax is such a critical part of the decision process. And so that the the Big 4 are going to be players in that space. And we see it as a natural.
To continue to leverage the relationship, it actually opens up the entire end and platform even more for them. In terms of how they can work, um, across our platform with their customer base by by, you know, this is a good point of entry, that then allows them to bring more, you know, demonstrate where else they can bring value in the process.
All right, great color. Thank you.
And our next question is, from Patrick Wall, Ravens with citizens JMP Securities, please proceed.
Oh great, thank you. Um, so at the analyst day in March, you guys guided the 2028 Revenue growth in the High Teens
subscription 20% plus in Cloud 30% Plus
Are you standing by those targets?
Yeah. We're not as I said uh earlier Pat you know I I appreciate cloud is going to remain the primary focus of everything we sell. Um so it's going to continue to be a the material growth driver and everything around the invoicing and the classic land and expand model that is becoming I see that driving both nrr and continued cloud.
Um, fundamentally that hasn't changed. All the all the activity that has slowed in the Erp Cloud migration or hasn't materialized. Like we thought it would in is still going to play out and we are still incredibly well positioned, um, around how we can leverage that and we continue to expand our, our relationship inside of uh areas like Microsoft, um, where we're now on the Microsoft commercial Marketplace. So giving us a broader, uh, a broader footprint, inside of the Microsoft ecosystem, uh, I definitely feel those those targets. Um, are not something we should back off of at this point.
Okay, and then great, thank you. The follow-up would be. Um, I mean the stock was already down, you know, 38% year to date, right? Instead be down more today uh is the board considering a buyback.
You know, bye bye.
Yeah, no, I appreciate the question Pat. I mean it's something that we certainly will consider and get some thought too. Um, and uh, you know, and and something that we will, you know, update people on as as needed. But it's, you know, we'll continue to pay attention to it and monitor the stock and consider that and the other uses of our Capital uh, as we evaluate our, uh, our model.
Thanks. Thank you both.
The next question is from Jake robers with William Blair please proceed.
Yeah, thanks for taking the questions. Um, I understand things have been a little bit slower on the migration front, but but curious what you're actually hearing from sap in your other partners on when those headwinds start to Abate is, is it all just a macro timing, dynamic, or are you seeing saps kind of extended deadlines have any impact on 1? Customers might look to go online, uh, with your platform.
Haven't seen any initial indications of that. Um, I think you need special approvals and you have to make certain Investments to even secure that extension. So, um, certainly we've seen no shift in their public, announcements about their intent to move that forward at the current deadline. Um, and I think again, it's not the only driver of cloud migration it it's a, it's a current across the ecosystem. It's occurring in our Oracle opportunities. It's a big driver of some of the Oracle wins. We had in the quarter. Um, it's occurring in the now um, more. So in the Microsoft Dynamics area. Um, where we're seeing you again new? We we're expanding our relationship there and seeing New Opportunities. So I don't see that fundamentally changing. Um, and at this point, I haven't seen any change in the deadline
Okay, that's helpful. And then I know most of the impact to the guide was relayed to migration activity in trips but just wanted to double click on on how that initial ramp for invoicing has been and just how win rates for that solution. Um might compare to to kind of the core platform. I know it's it's a much earlier solution but just curious what you're seeing early days on that front.
Yeah, I I you know, I think um, um uh, I think I'm seeing the things I thought I would see in terms of the Strategic value of our differentiation playing really well. And competitively with the node to comment around the need to continue to build out the countries. Um, so there are, uh, you know, countries that are companies that are just focused on an individual region that, our, our cloud-based approach is playing really well with the end-to-end value prop. Um, when a c customer says, yeah, but as part of this, I need to handle country X and it's not 1. We are currently covering, then we, we don't show up as well. Um, that's why we're, we're putting such uh, urgency on continuing to expand our footprint um, across the globe in terms of country coverage to make sure that's not a competitive differentiator that we can't compete on.
Very helpful. Thanks for taking the questions.
And this concludes our question and answer session. I would now like to turn the conference back over to Joe crelly for any closing remarks.
Thanks everybody for joining us today. If you have, any follow-up questions or would like to schedule additional time with the team, please send me an email at investors vertex inc.com have a great rest of your your day and we look forward to speaking to you in the coming weeks.
The conference is now concluded. Thank you for attending today's presentation and you may now disconnect