Q3 2025 Vertex Inc Earnings Call

Speaker #1: Good day and welcome to the Vertex, Inc. third quarter 2025 earnings conference call. All participants will be in the listen-only mode. Should you need assistance during the conference call, please signal the conference specialist by pressing star key followed by zero.

Speaker #1: After today's presentation, there will be an opportunity for you to ask questions. To ask a question, you press star and then one on your touch-tone phone.

Speaker #1: To withdraw your question, please press star and then two. Please note that this conference is being recorded. I would now like to turn the conference over to Joe Crivelli, Vice President, Investor Relations.

Speaker #1: Thank you and over to you.

Speaker #2: Hello, and thanks for joining us to discuss Vertex's third quarter results. David DeStefano, our President and CEO, and John Schwab, our CFO, are also with us today.

Speaker #2: 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.

Speaker #2: Our remarks today will also include references to non-GAAP metrics, a reconciliation of these metrics to GAAP is also provided in today's press release. This call is being recorded and will be available for replay on our Investor Relations website.

Speaker #2: I'll now turn the call over to David.

Speaker #3: Welcome, everyone, and thank you for joining us. Our third quarter performance demonstrated continued momentum in core strategic areas while managing specific market and customer headwinds.

Speaker #3: The strength of our strategy was evident in our strong cloud revenue growth, the increased margin leverage driven by automation initiatives, and strong cash flow performance.

Speaker #3: We also saw accelerating traction in e-invoicing and improved SAP activity. However, offsetting this was the persistence of lower than typical growth from existing customer entitlements as previously discussed in our second quarter earnings call, in addition, the bankruptcy of three large enterprise customers as well as several accelerated migrations to our new cloud platform impacted customer retention metrics.

Speaker #3: I will highlight the specifics of all of this and their impact on certain metrics in a moment. Our revenue results for the third quarter were in line with our guidance while adjusted EBITDA exceeded expectations.

Speaker #3: Revenue was $192.1 million, up 12.7% year over year, subscription revenue grew 12.7%, and cloud revenue growth was 29.6%. Adjusted EBITDA was a record $43.5 million, exceeding the high end of our guidance by $2.5 million and representing an EBITDA margin of 22.6%.

Speaker #3: And free cash flow was very strong at 30.2 million dollars in the third quarter. In addition, annual recurring revenue or ARR grew 12.4% to $648.2 million, average annual revenue per customer increased 12.4% year over year to $133,000.

Speaker #3: Scaled customer count grew 14%. Gross revenue retention or GRR remained at 95% in the third quarter, within our targeted best-in-class range of 94 to 96%.

Speaker #3: And net revenue retention or NRR decreased to 107%, down 1 point from the second quarter. First and foremost, I want to provide more specific details into the items that impacted customer retention metrics.

Speaker #3: As we have discussed each quarter, we experienced moderate customer turnover at the very low end of our customer base, and discontinuation of legacy product usage by customers who have migrated to our new cloud solutions.

Speaker #3: In Q3, we experienced an unusual impact in these areas. Certain enterprise customers, including Big Lots, Party City, and Joann Fabrics, canceled licenses due to bankruptcy.

Speaker #3: This impacted retention metrics by approximately $2 million. Additionally, we had three large customers who had previously migrated to our new cloud platform complete their own internal legacy ERP migrations faster than previously anticipated, which enabled them to downsize that portion of their subscription fees with us.

Speaker #3: This impacted NRR by another two plus million dollars. Beyond these anomalies, management was encouraged by the progress achieved across several of our ongoing growth initiatives.

Speaker #3: On e-invoicing, Cozio had a strong quarter and contributed revenue of $4.1 million. This is an increase of approximately 30% from their run rate in last year's third quarter, when we acquired the company.

Speaker #3: We have landed over 100 customers since declaring general availability in late March. All fit nicely into our expected land and expand experience. Additionally, we are seeing success with our integrated product strategy, which includes both e-invoicing and value-added tax compliance in one platform with full end-to-end documentation and audit support.

Speaker #3: In the third quarter, we continue to see an influx of new customers driven by upcoming e-invoice mandates, including Belgium, France, and Germany, which we expect to accelerate as those actual deadlines approach.

Speaker #3: Ongoing cloud migrations with ERP vendors including our partners SAP and Oracle remain solid with pipeline build improvements appearing. And the expense control initiatives we discussed last quarter are driving improving earnings leverage as demonstrated by our strong adjusted EBITDA and free cash flow results this quarter.

Speaker #3: This quarter's progress on our long-term growth initiatives validates we still have significant greenfield opportunity with enterprise customers that are currently using legacy homegrown or manual solutions for indirect tax compliance and are migrating to the cloud.

Speaker #3: We continue to believe we have approximately 3x opportunity with our existing installed base which we will penetrate by expanding usage throughout their organizations or by cross-selling additional products.

Speaker #3: And we have major tailwinds in front of us from the upcoming e-invoicing mandates in major countries like Belgium, France, and Germany. Demonstrating our confidence in Vertex's long-term growth opportunity today, we announced that the board of directors has authorized the repurchase of up to $150 million of Vertex shares in the open market.

Speaker #3: Coupled with our progress on several growth areas, I'm excited with the number of AI initiatives the team advanced in the quarter. We are executing on three fronts to commercialize AI, which are focused on enabling new logo wins and wallet expansion with existing customers.

Speaker #3: Driving enhanced customer retention through targeted ecosystem interoperability and participating in new segments ripe for disruption. We are seeing ongoing traction with our smart categorization offering and last week at our annual customer conference, we highlighted several new agentic capabilities on our cloud platform.

Speaker #3: These are focused on workflow capabilities and data management. The customer conference was our largest yet, with strong attendance from Alliance and tech partners highlighting the energy around our customer segment and market opportunity.

Speaker #3: And the AI sessions were clearly the most oversubscribed sessions by attendees. Additionally, at exchange, we shared some of the transformational work we are doing, including our pioneering of the first-ever agent-to-agent tax configuration capability for Microsoft Dynamics 365 Finance and Supply Chain.

Speaker #3: This is another step forward in creating a differentiated experience for Microsoft customers, bringing enterprise innovation to the mid-market. In October, we also launched Kintsugi powered by Vertex, which enables SMBs to automate key compliance functions while providing real-time dashboards for jurisdictional liability and exposure tracking.

Speaker #3: Powered by the Vertex Tax Engine, it delivers the same trusted accuracy in global content that enterprises rely on. In an AI-native experience built for agility and scale.

Speaker #3: This is just the first of many such new products and new initiatives that we expect to launch in partnership with Kintsugi. Exchange was also a clear reminder of the stark difference in tax compliance precision requirements between the enterprise customer and the SMB segment, where good enough is sufficient.

Speaker #3: These complex global multinational enterprises remain very cautious about how AI is being considered in their departments, due to inherent limitations. Several points were clear from our discussions there.

Speaker #3: Enterprise customers know that our solutions operate at the speed and scale they must have to support their business, embedded in the workflow of the critical order-to-cash process.

Speaker #3: Our implementations are complex. It's not uncommon for Vertex to be connected to multiple instances of SAP and instances of Oracle in another division, a legacy ERP solution installed in another, as well as multiple billing and CRM solutions.

Speaker #3: And we are providing tax answers across that architecture with no latency and enterprise-level accuracy. These enterprise customers cannot afford for a single customer to experience transaction delays as an AI engine spins through scenarios to deliver a tax answer.

Speaker #3: They rely on the accuracy Vertex provides in every transaction. Enterprise customers are audited constantly by taxing authorities and cannot afford any risk that a probabilistic AI-driven outcome subject to hallucinations delivers an inaccurate tax answer.

Speaker #3: And they need accountable traceability for tax decisions they take in their compliance. In addition, we estimate that as many as 70% of the tax rules in our content database are not easily mined by AI-driven web scraping.

Speaker #3: In the United States, below the level of state and county, tax rules for municipalities and tax overlay districts are hard to curate, sometimes embedded in meeting minutes that are not easily sourced on the internet.

Speaker #3: And in some districts, finding the latest tax rules requires a person-to-person phone call. And all of this requires human judgment and professional curation to codify into the tax content database.

Speaker #3: In addition, these tax rules are constantly changing at a historic pace. And this is likely to get worse with reduction in federal funding to states as a result of the recently approved tax legislation.

Speaker #3: I'll now highlight a few business wins. We saw improved momentum in the SAP ecosystem this quarter, driven by ECC to S/4 HANA conversions. These transitions created meaningful opportunities for Vertex to expand our footprint with existing customers and win new logos.

Speaker #3: In the third quarter, we partnered with an existing specialty retail customer on a major ECC to S/4 HANA transformation. As part of this initiative, the customer advanced their plan to standardize on Vertex, transitioning additional tax functions from a competitor to our cloud platform.

Speaker #3: This expansion resulted in mid-six-figure of new revenue and reinforces our role as a strategic partner in their modernization journey. Another long-standing customer in the manufacturing industry launched a company-wide transformation project this year, including a migration from ECC to S/4 HANA.

Speaker #3: As part of their transformation, the customer added VAT calculation across its operating regions and added several SAP tools, resulting in mid-six figures of new revenue for Vertex.

Speaker #3: This is an example of how our business grows during migration. In addition to receiving a significant like-for-like increase, many customers use this as an opportunity to license additional capabilities.

Speaker #3: An existing customer that is a leading North American energy services company expanded with Vertex to cover two companies it recently acquired. This customer, which is currently operating on a legacy Oracle ERP solution, selected our private cloud solution and will eventually migrate its entire infrastructure to the cloud as part of an Oracle Cloud transformation.

Speaker #3: This customer expansion drove low six figures of new revenue. While our AI-based smart categorization product is still in limited availability, we added a major grocery store chain to our customer base for this new product.

Speaker #3: The customer staff was struggling with the labor-intensive nature of tax categorization in its delivery business and is excited about the ability to automate this process.

Speaker #3: This cross-sell resulted in six figures of new revenue for Vertex. This gives you an idea of the magnitude of sales opportunities with this AI-driven application.

Speaker #3: At present, we are focusing on the retail industry; hence, the new business win. But over time, we will expand our capabilities to cover other industries.

Speaker #3: A leading aerospace and defense contractor recently selected Vertex as its preferred indirect tax solution for one of its consumer-facing subsidiaries. Fully displacing a competitor across its global operations, including Brazil and India.

Speaker #3: This competitive win underscores the strength of Vertex's tax content coverage in complex jurisdictions and is expected to generate mid-six-figure annual revenue. In addition, a global pharmaceutical company selected Vertex as its first external indirect tax provider to support its S/4 HANA transformation.

Speaker #3: This new logo win was driven by Vertex's proven global tax coverage, deep expertise in the pharmaceutical industry, and ability to manage complex requirements. This new business win—which was brought to us by our partner EY—will also drive mid-six figures of new revenue for Vertex.

Speaker #3: During a cloud transformation initiative, a global marketing services company replaced an incumbent competitor with Vertex, citing concerns about scalability and infrastructure flexibility. The customer valued Vertex's agnostic deployment model, which aligned with the CIO's preference for private cloud and optioned the competitor to not support.

Speaker #3: This strategic win sourced through our partner Grant Thornton, represents a six-figure new business opportunity. Finally, during the quarter, we won an e-invoicing opportunity with a global real estate investment trust, which is preparing for upcoming mandates in Belgium, France, and Germany.

Speaker #3: We will also cover Italy and Spain for this customer. Of note, this customer was driving mid-six figures of revenue for Vertex prior to this new business win; e-invoicing will drive high five figures of new revenue.

Speaker #3: Before I turn the call to John, let me address my succession that we announced in October. I approached the board of directors in early 2025 and told them of my plan to retire after 26 years at Vertex.

Speaker #3: However, I did not set a specific timeline as we wanted to make sure we had the right candidate in place. We launched a comprehensive search process led by the renowned management recruiting firm Spencer Stuart and considered both internal and external candidates.

Speaker #3: Ultimately, we found an exceptional new CEO in Chris Young. We will officially join the company next week. Our search surfaced outstanding candidates from top companies around the world, but Chris stood out as the clear choice.

Speaker #3: His strategic vision, experience in our ecosystem through his prior role as executive vice president of business development at Microsoft, and deep familiarity with global enterprises all point to his ability to drive growth and value creation.

Speaker #3: What truly sets Chris apart, however, is his commitment to fostering a positive performance-driven culture grounded in respect for people, a quality that aligns closely with our values and leadership philosophy.

Speaker #3: In addition, Chris was at the vanguard of Microsoft's push into AI and helped shape Microsoft's investment agenda in artificial intelligence and other frontier technologies.

Speaker #3: His forward-thinking perspective in that regard will be extremely valuable to Vertex and our shareholders. As for me, I'm not going anywhere. I'm merely transitioning.

Speaker #3: I will stay on as non-executive chairperson of the board, where I will bring all my energy in the months ahead to support Chris and his transition.

Speaker #3: John will now take you through the financials.

Speaker #2: Thanks, David, and good morning, everyone. I'll now review our third quarter financial results and provide guidance for the fourth quarter and full year of 2025.

Speaker #2: In the third quarter, revenue was $192.1 million, up 12.7% year over year. Our subscription revenue increased 12.7% to $164.8 million. Services revenue grew at 12.8% to $27.3 million.

Speaker #2: And our cloud revenue was $92 million, in the third quarter, up 29.6%. Annual recurring revenue, or ARR, was $648.2 million at quarter end, up 12.4% year over year.

Speaker #2: Our net revenue retention, or NRR, was $107% compared to $108% in the second quarter. This was impacted in the third quarter by factors David noted in his prepared remarks.

Speaker #2: Gross revenue retention, or GRR, remained at 95% at quarter end, within our targeted range of $94 to $96%. Our average annual revenue per customer, or AARPC, was $133,484, up 12.4%.

Speaker #2: For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP in this morning's earnings press release.

Speaker #2: Gross profit for the third quarter was $142 million, and gross margin was 73.9%. This compares with gross profit of $126.2 million and a 74% gross margin in the same period last year.

Speaker #2: Gross margin on subscription software revenue was 81.4% compared to 80.5% in last year's third quarter and 83.2% in the second quarter of 2025. Gross margin on services revenue was 28.8% compared to 35% in last year's third quarter and 33.1% in the second quarter of 2025.

Speaker #2: The lower margin was due to investments in automation that are expected to drive higher margins into the future. Turning to operating expenses, in the third quarter, research and development expense was $16.8 million, compared to $12.9 million last year.

Speaker #2: With capitalized software spend included, R&D spend was $40.8 million, for the quarter, which represents 21.2% of revenue. Selling and marketing expense was $43.4 million, or 22.6% of total revenues, an increase of $5 million and approximately $12.9% from the prior year period.

Speaker #2: And general and administrative expense was $38.4 million, up 2.6 million from last year. Adjusted EBITDA was $43.5 million, up 12.7% compared to $38.6% for the same period last year, and exceeding our quarterly guidance.

Speaker #2: This represents an adjusted EBITDA margin of 22.6%. As a reminder, adjusted EBITDA margins are being impacted in 2025 by accelerated investments to support the two acquisitions we made in 2024 related to e-invoicing and artificial intelligence.

Speaker #2: On the former, we are investing in a Cozio, which we acquired in August 2024, to accelerate country coverage and broaden our go-to-market infrastructure. This represents an investment of approximately $16 million to $20 million in 2025.

Speaker #2: On the latter, we're investing $10 to $12 million this year to productize our smart categorization product and adopt AI technologies in other areas of the business.

Speaker #2: In the third quarter, operating cash flow was $62.5 million. And free cash flow was $30.2 million. We ended the third quarter with over $313.5 million in unrestricted cash and equivalents.

Speaker #2: And $300 million of unused availability under our line of credit. As David mentioned, the board has authorized the share repurchase of up to $150 million.

Speaker #2: Now, turning to guidance. Reflecting the factors mentioned earlier, including customer bankruptcies and faster-than-expected legacy platform migrations, we now expect fourth quarter revenues of $192 million to $196 million.

Speaker #2: And for the fourth quarter, we expect adjusted EBITDA of $40 million to $42 million, reflecting an adjusted EBITDA margin of 21.1% at the midpoint. For the full year of 2025, we now expect revenues of $745.7 million to $749.7 million.

Speaker #2: Cloud revenue growth of 28% and adjusted EBITDA of $159 million to $161 million, reflecting a margin of 21.4% at the midpoint. David will now make some closing comments before we open up for Q&A.

Speaker #2: David?

Speaker #1: Thanks, John. I have been in this industry for 26 years. I have seen it go through countless economic, regulatory, and technological cycles. The enterprise segment customer has remained very consistent in their approach to solving their needs for effective tax compliance due role.

Speaker #1: They don't buy on hype. They seek proof. They are focused on mitigating risk and delivering accuracy. They make purchase decisions for the long term based on value.

Speaker #1: So while we have noticed some very specific headwinds to short-term performance the past two quarters, we remain confident that the fundamental drivers for our long-term growth are strong and growing, and that Vertex will benefit from them to the mission-critical nature of their with improved performance as we move into 2026 and beyond.

Speaker #1: My recent experience at our customer conference reinforced my belief in the strength of our alliance-partner relationships, as we continue to lean into our partner-first strategy.

Speaker #1: Our leadership position in the enterprise segment certainly requires continued investment, given the pace of accelerating regulatory and technological changes. In doing so, we are positioned to reward our investors as a result.

Speaker #1: It is this confidence that is the primary driver for our board's authorization of the $150 million stock buyback program announced today. I'm thrilled to now have Chris Young join our team and work side by side with him in our respective roles to ensure the company realizes the full potential of our opportunities and delivers strong financial performance for years to come.

Speaker #1: With that, we will take your questions.

Speaker #2: Thank you. Give us an update in the question-and-answer session. To ask a question, we press star and then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys.

Speaker #2: If at any time your question has been addressed and you would like to withdraw your question, please press * and 2. At this time, we'll pause momentarily to assemble our roster.

Speaker #2: We have the first question from the line of Joshua Reilly from Needham. Please go ahead.

Speaker #3: My questions. I wanted to get your latest thoughts on how you expect the SAP ERP cycle to kind of play out from here. Clearly, there's a lot of companies that still need to migrate to S/4HANA to hit the 2027 deadline.

Speaker #3: Seems like that's a bit of a stretch. Curious, what's your thoughts in terms of the capacity out there to manage these migrations in the industry?

Speaker #3: And what are you hearing maybe that improved the deal flow a bit this quarter versus the last couple of quarters?

Speaker #4: Yeah, Josh, thanks for the question. I think in a competitive industry-wise, I should say, I think the industry's been preparing for this for several years.

Speaker #4: So I know in talking to a number of our partners, they have a—they've been ramping up staff in anticipation of sort of a backend process for the migrations that are ahead.

Speaker #4: So that's what I know. I can't speak to any more in terms of the likelihood of any deviation in the deadline SAP keeps reinforcing it.

Speaker #4: So, I don't fundamentally see there's a reason for changing. I think we've talked about this. The pipeline has remained solid. It's been more about the efficiency of getting through the pipeline, as deals occasionally at a customer level have been slow due to their own migrations slowing down.

Speaker #4: I think we saw a little bit of the break in that in the quarter. And that's why we had—we were able to highlight a number of SAP wins in the quarter, primarily.

Speaker #3: Got it. That's helpful. And then maybe a bit more color on—was it two customers migrating to their own homegrown solutions? And is that a portion of their business with you migrating to the homegrown system or a full system?

Speaker #3: And was that built into your prior guidance, or did you find out about that after you put up your prior guidance?

Speaker #4: Yeah, no, this came out—these are customers that didn't go to their homegrown system. They migrated to the Vertex next-generation cloud platform. As you know, any companies that are going through a cloud migration like we are, there's always a moment where you're paying two mortgages, where you're paying mortgage on the new—you've already re-licensed with Vertex.

Speaker #4: We've gotten the uplift from them. And they're shutting down their old system. And it usually lags on for a short period of time. These were two companies that were extremely large customers of ours that had already migrated to our cloud at a significant price increase, that also were able to shut down their system faster than we had built into our guidance.

Speaker #4: Because they made some internal progress on their systems that we were—that they had not forecast when we had our direct engagement with them. So yes, we do factor this into our guidance as we look at our numbers going forward.

Speaker #4: But it's just these two happen to get things done faster than they had previously guided to us.

Speaker #3: Understood. Thank you. I'll pass along.

Speaker #2: Yeah. Thank you. We have the next question from the line of Chris Quintero from Morgan Stanley. Please go ahead.

Speaker #5: Hey, guys. Thanks for taking the questions. And David, let me say, I know you're still going to be around, but it's been a pleasure working with you.

Speaker #5: And I wish you all the best in this next part of your life here. Maybe on the guidance, I think this is the second time in a row you guys have cut the guide, which I can't remember the last time Vertex has done that.

Speaker #5: And so just at a high level, has the guidance philosophy changed at all? And how are these kinds of cuts informing your assumptions that you're putting into the Q4 guidance here?

Speaker #4: Yeah, Chris, thanks for the call. No, we have not done this before. You're right. In terms of our philosophy around guidance, this hasn't changed our guidance philosophy one bit.

Speaker #4: We continue to—we continue to be thoughtful as we think through guidance. And again, as David had mentioned, there was a couple of things, obviously, this quarter that impacted us a little bit.

Speaker #4: Some of this BK and migration activity certainly had an impact. We certainly had an impact from some of the timing of deals that closed in the third quarter and what we're expecting to see in the fourth quarter.

Speaker #4: And again, we continue to focus on that services strategy where we're trying to lead partner—where we're trying to go partner first and sort of de-emphasize that.

Speaker #4: And so there were three kind of bigger contributors to what happened—why the change for guidance in the fourth quarter. But there hasn't been a change in philosophy from our standpoint.

Speaker #3: Got Got it. Thanks for that, John. And then it seems like the entitlement growth has been kind of one of the main headwinds on your net retention rate and growth from expanding customers.

Speaker #3: So I'm curious, are there any lessons in terms of—or anything we should keep in mind as it relates to, I don't know, renewal cohorts as some of these customers have been renewing over the past few years?

Speaker #4: Yeah, Chris, I think it's a fundamental of trying to assess where our companies—our customers' growth rates are going to be as they grow through our revenue bands.

Speaker #4: Obviously, we don't have great visibility into each of our customers' forecast growth rates in terms of whether they're going to continue to expand usage due to their own growth or not.

Speaker #4: And I think that's been the headwind we've tried to highlight pretty clearly in the data we've determined from—we spoke to you in Q2. And so it is something we're trying to see if we can get closer to understanding our customers actually growth guidance, that they're giving to the market to see how that will flip to what we expect for revenue bands.

Speaker #4: But obviously, it’s a little bit of a fine line of how much information we have there and how that actually will show up in our revenue bands based on their own revenue— their customers’ revenue timing.

Speaker #4: Unfortunately, it's sort of like two separate moves from us.

Speaker #3: Thanks, David.

Speaker #2: Thank you. We have the next question from the line of Alex Skylar from Raymond James. Please go ahead.

Speaker #4: Great. Thank you, David. I'll echo my congratulations on a fantastic career at Vertex here. Switching gears to—I want to—you hired a new head of sales in Europe as well.

Speaker #4: Can you just talk about that process? What was behind the change in leadership in Europe? And then how are you thinking about kind of Europe as an opportunity heading into 2026 versus maybe a couple of quarters ago?

Speaker #4: Yeah, thanks for the kind words. I'm anxious to partner with Chris Young in the future of Vertex and, certainly in my transition, I expect to be the non-executive chairperson of the board.

Speaker #4: I will be quite active in helping continue to pursue the strategy of this company. I think Europe—it was timing of a just a leadership change where continuing to expand the complexity of operations that we have over there, with the acquisition of a Cozio, and as we push further into the whole e-invoicing marketplace, we had a very good quarter in terms of continued growth there by the Cozio team and our team in general.

Speaker #4: And just the overall complexity of the opportunity increasing felt like we wanted somebody who had been there and done that at a high level.

Speaker #4: And so it's just an up-level opportunity there. We really appreciate the gentleman that led that operation for years. But it was a great opportunity with someone we had good relationship connection to bring in.

Speaker #4: And so we capitalized on it.

Speaker #2: Okay, great. And then I don't know if you or John want to take this one, but just as we think about the Q4 growth outlook relative to kind of the medium-term growth outlook that you spoke to earlier this year, how much of the headwinds, like the true-ups, the bankruptcies, the early kind of shutting off of on-prem feel kind of 1X from your standpoint versus anything different about the market you're operating in today in terms of just the pace of technology changes or the pace of that SAP transition or e-invoicing adoption kind of broadly?

Speaker #2: Thanks.

Speaker #4: Yeah, maybe I'll start. I think that from an overall guidance in the midterm, I think the BK migration stuff, again, it was stuff that we typically—it was somewhat anomalous to the quarter.

Speaker #4: I don't think that that's something that's going to be a continual thing there. We have those types of things happen every quarter. What we saw, though, was just a real confluence of a number of real big ones happening in the quarter that really drove that.

Speaker #4: So I would say from that standpoint, I think that's to me is somewhat anomalous. In terms of kind of other things, when we look at the—when we look at sort of how the quarter plays out and we look at sort of what next year looks like, keep in mind as you comp us out to some of our prior year numbers, that we did have a very large—some very large true-ups in the fourth quarter of last year.

Speaker #4: And again, we're anticipating very little in the fourth quarter of this year. So it really drives—it drives certain revenue growth. It mutes a little bit of what the impact truly of this quarter is.

Speaker #2: Right. I mean, the actual growth rate for the quarter would be close to 13% if you took out those entitlements. And so I think that is notable.

Speaker #2: I mean, I do think as you look forward in the invoicing, I mean, obviously, we're just getting into the whole land and expand motion.

Speaker #2: We've talked about that we think is really setting us up well as those friends in Germany deadlines come on in 2026. That's really what we've been pointing for.

Speaker #2: And I think the timing of those adoptions are pretty much falling where we thought. It'll accelerate as we move into 2026 pretty significantly.

Speaker #3: All All right, great. Thank you both.

Speaker #4: Thanks, Alex.

Speaker #2: Thank you. We have the next question from the line of Adam Hodges from Goldman Sachs. Please go ahead.

Speaker #5: Great. Thanks so much for taking the question. And David, echoing my best wishes to you. It's been great working with you. I wanted to touch on the comments you made on your customer conference and AI, what was it that customers from your perspective were most interested in from an AI perspective?

Speaker #5: And where are they from exploratory to actually starting to put some of these things into practice? And I thought the smart cat call on the retail side was interesting.

Speaker #5: How quickly can you get into other verticals and just get up and running with more customers on that side?

Speaker #4: Yeah. Yeah, I think the approach we're taking with the—thanks for the questions and the comments, certainly. The approach we're taking with AI, with the human in the loop, is an essential part of what the enterprise market is expecting.

Speaker #4: Because of the requirements for traceability, when they get into audits, they have to justify the positions they took on a tax position. Understanding the logic that's actually inside of the decision-making is really essential to their processes.

Yeah, great question. Yeah, we we continue to be on track with the Investments that we talked about the eosio investment Investments of 4 to 5 million dollars per quarter. And then the AI Investments, um, largely focused around some of the smart cat activities that David just talked through. They are tracking tracking very well. So we feel good about that. We feel good about the, um, the progress that we've seen today. Again, the plan is to largely have a lot of that behind us as we get into the B to the middle of next year. And I think that's, you know we we feel like everything's pointed towards that and it continues to be pointed towards that and we we expect to start to see some of the you know some of that leverage and some of that realization start to show itself up. We did have a good quarter this quarter from an overall margin perspective and I think we were pleased with the results that uh, that came through that. But a lot of that has more to do with some of the leverage, we're seeing throughout the rest of our business and just being thoughtful about spend as we entered the back half. Uh based on some of the conversations we had at the end of the second quarter. So again, I think we feel very good about the investment programs that are in place.

We expect to continue them; we haven't had any significant changes in our plans in terms of timing or in terms of level of spend. And so, I think everything continues to move along there nicely.

Okay, great. Thank you. Both. You bet. Thanks.

Thank you. We have the next question from the line of Jake groberg from William Blair, please go ahead.

Yeah, thanks for taking the questions and and David I'll echo my, congrats it's it's been great working with you over the past few years um just on the the invoicing solution. Could you talk about how that product compares to some of your competitors out there just from a, a country uh, coverage perspective. And as we start seeing some of the these larger countries like Germany and France, go online next year. Do you feel like that products ready for for prime time?

Yeah sure thank you for the the kind words. Um yes number 1 France and Germany. You know priority ones the whole strategy from day 1 was always to make sure wherever there was a green field. Meaning there was no competitive, no C, no no no competitor had already solved for a, a given country that was our priority 1 in terms of where we've been investing. So we're ready for France, Belgium and Germany to compete on those and very comfortable. Um, as those regulations are going into effect with Belgium here, um, in 2 months and the other 2, as we move into the middle to back half of um 27 26. Excuse me. So yes, feel very comfortable. Their number 1 number 2. Um, we continue to expand our c

That's the investment cycle that John was just highlighting. Um, that's going to run through the middle of next year.

Okay that's helpful. And then there's obviously been some some moving pieces over the past few quarters, but just thinking a bit longer term, could you double click into the the competitive landscape? And if you've seen any changes to win rates or competitors, making more noise that that might have been showing up at the edges this year.

Uh, you know, it's funny. I literally just made sure like I always do before these calls to check with my uh, head of sales here at in the US in particular, where where we have, you know, there's a lot of competitors. Um, and no change whatsoever in the competitive Dynamics, in terms of win rate, um, you know, our our strategy to continue to focus on, um, the influencers that impact the market are tight relationships with the the Big 4 and other large accounting firms. In the investment we're making to de-emphasize our services Revenue which does impact short-term Revenue. We we've noted that um, is also paying off by securing the win rates that we, you know, we we've enjoyed in the past and we continue to see and certainly, some of the Investments we're now making in areas, like Ai and Microsoft, I actually think are going to improve, um, our opportunities, in some, some new with some of the, you know, new segments,

Great, thanks for taking me questions.

Thank you. We have the next question, from the line of Brett. Huff from Stevens Incorporated, please go ahead.

Good morning, and thanks for taking the questions. Um, 2 for me, uh, I know you guys have been doing a lot of work, given the entitlement changes on digging in, and making sure you had more visibility into, kind of those entitlement changes. How should we think about those as they roll forward? We've gotten some questions on, you know, we know this entitlements have slowed a little bit. Is there a continued a couple quarter, sort of period that we have to get through? Is there anything kind of, uh, bolus or timing wise that we need to pay attention to that this may last a little longer? Or how do you guys sort of, uh, frame that up?

Yeah, thanks for the question, Brett. Yeah. In terms of entitlements. And how that plays out. I don't, I don't think there's really any, you know, any time frame for which this is going to, this is going to change. Its there's nothing out there that's going to make turn this into a, you know, a quicker, a quicker rebound or any, or even a change the rebound, too. Too much. So I think it's going to just take a little bit of time for that to play out. And in the normal course of business through the normal, renewal process. We'll see that work out. We try to, you know, we do our best to get, you know, in front of some of this visibility and, and do our best to try to make sure that we have that built into our forecasts. But I think, as we talked about the last time, you know, some of this stuff comes up, you know, soon, you know, only just before the renewal base takes place overall generally, you know, this has I think a little bit more to do.

Just with overall economic activity, that's going on at customers. And then again to a lesser degree, some of their ability to migrate other systems, they're using into the into the vertex platform. So as they're doing other upgrades and other things, they're they're continually bringing and moving additional systems and additional uh, entities that they have work going through onto our software. And so some, if that slows because of other of other activities that they're doing sometimes that can take a little longer, but I don't think there's really anything out there, uh, that that's really going to drive or change change this dramatically. Um, you know, it's just a matter of the passage of time and again, as we said, we saw a little bit of that happen back around Koh and again, as as we got a little bit, a couple of quarters through that. We started to see that snap back as activity, picked up again. And I'm anticipating, we'll see the same here.

Great. Uh, thank you. And the second question around sap. Thanks for the comments earlier, both prepared and in the answers to questions. Can you maybe just a little bit more unpack that any anecdotal kind of conversations change in tone, uh, around sap migrations? It sounds like they were a little bit better. This quarter can, what is kind of the anecdotal feedback that you've got? And I'm sure you had a lot of conversations that your user conference can you give us any more, you know, insight into how, how those decisions are are being made, or or delayed.

Yeah, I think, um, the exchange was a really good. It was just, uh, exchanges our customer conference. It was just 2 weeks ago. Uh, we and a half ago and I would say that it was, um, very supportive of what we would expect. As we move into 26, uh, the between our conversations with the large accounting firms, that we, that are all their, the many accounting firms that are there part of this. Um, as well as sat directly. Um, I definitely think that that the activity in 26 is going to accelerate. Um, as we look forward based on what customers are telling us and what insulators are seeing in there that they're growing backlog that they're going to be processing.

Great, that's what I needed. Thank you so much.

Thank you.

We have the next question from the line of Steve Anders from City. Please go ahead.

Okay, great. Thanks for, um, taking the questions this morning and, um, David congrats as well. And I got the prior prior sentiments on the call. Um,

I guess just to start. I want to ask or clarify. I think a prior comment, you made about seeing some

You know, there's some timing of deals that that close in the quarter uh that impacted things a bit and and just want to get a little bit more clarity on, you know, if there were if there were deal delays, you know, maybe how that is manifesting in the pipeline or how you're kind of thinking about the future pipeline from, um, from here.

Yeah. Um, appreciate the question and and certainly the comments Steve, um, the, uh, the the quarter closed largely at the back end of the Q3 largely closed at the back end. Meaning September was a very large month. Um, and I I think that's a behavior where we expect to see again. We've, um, good visibility, when we talk about Pipeline and a quarter. It means stuff that's already through. Um, it's not caught up in that middleware like oh could they get delayed? Because of um their whole Erp process slows down. When we talk about guidance, when we're judging thinking about guidance in the quarter, it's based on what he has visibility to. That's already pretty far down the pipe of we've already been chosen, it's more about like legal getting through their process and the normal, you know? Um,

Purchasing process, if you would to close. And so, I think, I think the process is laid out pretty consistent for the quarter, as we look forward to what we expect to be a normal quarter in Q4. It's our largest quarter. And we're, we're typically headed to that way with December being the largest month, and I would expect no difference to that whatsoever.

Okay, sorry, but to clarify, there were deals that I got pushed out of or things that didn't close as you originally expected here.

Um, no. I think in Q3 we close the deals. We thought we were going to close them later in the quarter than we expected. Okay, okay.

Um, for sure, that's why I said September was a very large month which obviously cost us a little bit of Revenue, um, that would have normally been recognized in in, you know, in the earlier months of the quarter. Um, and as we look forward to Q4, I think we're seeing the same setup where December is going to be a very large quarter, but the pipeline of activity in the um, is is where we forecast to be. And it is built into our thinking about guidance.

Gotcha. Okay. That's, uh, that's helpful. And, um, just on a CO, appreciate the um,

The the revenue um contribution in this quarter but it it are you feeling like that is on track for this year? Now like could you kind of see the the catch up that you were

Expected, and I think on track for the, was it a $16 million revenue number that you previously talked about? Is that still in line of sight there?

Yeah, we should absolutely. We still have line of sight for that. I mean, I think they've made some real good progress and we've seen some nice upticks in the business activity over there, as well as, you know, as, as well as the momentum. That's, uh, that that's underlying their Pipeline and so, um, we we absolutely still have line of sight to that and, uh, again between the combination of that. And then the continued investment, we're making, you know, we're making in that business. We we're all in, we're all in on the invoicing and so I think, yeah, we we, we expect to see those results come through as anticipated and Steve. I think that just dubs to the, you know, the deadlines of Belgium is coming and that's uh, I think that, you know, these are decisions that are being made and that's why, you know, we have that kind of visibility and I think you're going to see the exact same thing play out as we move next year into the larger economies of France and Germany where France goes live in September and I would expect to see a, you know, a real increase in activities we get through

Uh, through Q1, not so much, but certainly Q2 and into Q3 you'll see, uh, a real uptick. And then the same thing as we think about Germany going live in January of '27, with the back half of Q4, which is pretty much consistent with what we've been telegraphing based on our experience.

Okay, perfect. Great to hear. And, um, thanks for taking the questions.

Thanks Steve.

Thank you.

We have the next question from the line of Andrew De Gasberry from BMP. Power bus, please go ahead.

Thanks, and uh, David. Um, I'll add my own.

Great working with you over the years and good luck in the chairman role.

To.

Over the last, I guess, Q&A, I just wanted to mention that, um, between the invoicing opportunity and the SAP migration.

And then if you ask kind of the easier comps relative to this year, I mean, is there any reason why your business shouldn't accelerate from a top-line perspective next year?

No, you don't get that guidance. Just trying to get a better sense of direction where we're going.

Here, but we do anticipate. Certainly Topline Revenue growth next year. I think there's a lot of fundamental factors that are contributing again, as David talked about the invoicing activity continues to be strong, the sap, the sap Pipeline and the activity, that's there are going to be big contributors to growth next year. And so absolutely, we anticipate, uh, Revenue growth Revenue growth in the next year, significant Revenue growth into next year because of those factors that are out there and that are still very prevalent in the business.

Right, and then, um, maybe just one on, in terms of the, um, I think you mentioned some comments earlier about some customers who are paying two mortgages.

Um when they they do these transitions, just wondering, you know how much of that customer base is right now, doing that because if you look at your Cloud versus on-prem and a revenue, obviously she I guess the question I have is could we see a a much broader dislocation between between those 2 as we look into next year.

No, not at all. No reason to think that these first of all we always have good visibility and and and you know, we work hard to factor that into our guidance so that it doesn't come up as a surprise, um, in terms of what happened in Q3 so no, number 1, I don't think that and we only see typically we talk about 2 to 3% of our customers migrating every year. Um and I've talked about you know, there's an on-prem base that's never going to go away subscription Revenue. Um is going to be around for quite some time. We're already up to close to 57 or so percent of our businesses Cloud. Um, and that's where it's growing and I think we'll see a slower. You know, we'll continue to

The the ones that haven't migrated are going to be the longest to take the time to migrate, just given the the nature of those businesses that we know have it migrated so no I see absolutely no reason to think we're going to have that kind of a surprise um that occurred. It just these customers did their shutdown faster than normal. But I'm not I'm not worried about that actually at all.

Right. Thank you.

Thank you. We have the next question from line of Patrick Val Raven from Citizens. Please go ahead.

Great, thank you very much. Um,

David, I think you first came to our conference in 2007, so it's been a pleasure working with you over the last 18 years.

Um,

It's probably for Joe, but you know the prepared remarks didn't address the 2028 targets. So can we just, you know, address it head-on? Are you reiterating the 2028?

You know, 20% plus subscription growth and 30% plus cloud growth today.

Yeah, I think the um I think the buyback is a signal by our board for its confidence in the future of this company. 100%. And I certainly think um we continue to be Cloud first and everything we're doing. So I see no reason to fundamentally think that that's going to that's going to shift away from the growth. We expect in the future and certainly with what we're seeing in E invoicing and, um, what should pick up

In 26 even more. So from sap as you know their deadline approaches um I don't see a reason to fundamentally shift. Anything we've said in our guidance uh the the the numbers that you've seen in entitlements pull back um we saw this in Co and then you know it snap back nicely. I see once again just a fundamental nature of who the Enterprise customer is they're going to grow through through bands and we're actually going to get those entitlements. Um and so no I um have no data to suggest a shift in what we are, we're fundamentally what we've said

No, terrific, terrific. And then can I just ask about the bankruptcy? Because I just looked up two of them quickly, um, and, uh, Party City and Big Lots. Both of those were announced in December of 2024.

So, yeah, how does that play out? Like, yeah. You know, how does that work? So, when companies file Chapter 11, sometimes they continue to be in business. They continue to operate for years, and as long as you're in business, you have to charge sales tax. So we've had customers, um, in the past have gone bankrupt, and we continue to collect licensed revenue. Um, it may be on a reduced rate because your revenue's gone down, um, but we continue to collect revenue from... These are ones that officially went away, and you don't know when that's going to end. We have no way of knowing that. Just because they filed Chapter 11 doesn't mean, um, we're necessarily going to see an immediate uh end of that license.

That license Revenue. Okay, great.

Yeah, sure. Thank you.

Which has been a big focus of this call, but also some of the marketplaces like sap hybrids. And, uh, Salesforce demandware and obviously, Shopify is moving up market. And there hasn't been any comment on the call about this. So I really wanted to hear you view your view on where you guys are today relative to that opportunity where they're really seems to be a burgeoning opportunity uh, within um, within the tax software market. And then I had a quick follow-up for John.

Yeah, sure. Um, I had Shopify on stage with me at my customer conference, really talking about the partnership and what we're doing with them. We're really working in lockstep as they continue to expand.

As they continue to expand and and they're rapidly succeeding up Market. There's just a natural Synergy between our 2 organizations and so, you know, every quarter I try to pick out a few wins that are notable, um, coming out of Q2. There's a lot of questions about sap pipeline. We had a, a really good quarter in sap, uh, wins. So I thought I would just highlight a few of those on the call, but, you know, we continue to make progress across the entire base, um, of of our C of our of our key technology, ecosystem Partners, number 1. Um, and number 2, I, I see no reason that's not going to change. And in fact, um, you may have noticed, we launched our, um, kugi powered by vertex offering, which I think is just going to increase, uh, a new opportunity for us to generate growth in the future as we look at, um, their ability to actually work at the at the lower end of the market, which is really highly suspect, uh, or highly. Uh,

Appropriate for the type of solution that AI has, um, you know, that AI can deliver through Kugi.

and then John, um,

You know, I know the is it seems like that the challenge now is more about entitlements true UPS than it is about um, the Erp um, uh opportunity. So just on that.

With kind of 2 quarters in a row of the of the guidance coming down. You know, maybe talk a little bit more about how you factor those expectations into your guide for a Q4 and how we might get comfortable with the thought that, you know, that's not caught you guys by surprise. I think a couple quarters here. So how to think about that had it into 26. Thank you very much. Yep. Thanks Rob. Uh, you know certainly, you know, when we we revised stock in Q2 entitlements was a big part of this or entitlements and true, I'm sure a big part of the story, um, and that certain was something we took into consideration when we set that guidance, you know, we continue to look at those monitor, those throughout this quarter, again, a couple of other things that we pointed to, this quarter that really impacted, uh, it impacted Q4, you'll have less to do with the entitlements and the true-ups. Because I think we feel good about how we've captured that but a little bit more had to do with uh around timing and as well as some of this BK, migration things that have moved along. Again, I feel like the BK migration as I mentioned earlier was somewhat an anomalous and the timing of the quarterly is something that we're going to use and we'll continue to use as we think about you know our

Are continuing our forecast for 2026 and then beyond, as we as we manage through that. So, um, I, that's what I would say robbed in terms of kind of how we're thinking about guidance. I don't think we've changed our, we've not changed our philosophy, in any, in any way. Um, so we'll continue to uh continue to put our best foot forward and try to ensure that we are giving clear and accurate information out there.

Much appreciated. Thanks very much for that.

Thank you.

We have the next question from the line of Somalia from Jeffrey. Please go ahead.

Hi, good morning.

Most of my questions have been answered, but, um, if I just think about the bankruptcies, they were all in the retail space, so that might be probably coincidence more than anything else. But, John, can you just remind us where your biggest vertical concentrations are in terms of the book of business? And if you're at least within the retail sector, are you taking a more conservative view, given that that's where the bankruptcies were? And then I have one follow-up.

Yeah, a good question, Sam. Thank you. Um, in terms of kind of where our big verticals are certainly manufacturing is is is our is our largest retail kind of comes in, uh, soon after. And so they're, they're bigger, they're bigger Focus. You know, we, we certainly have taken a look at some of the rest of the customers within our in our vertical of retail to anticipate. If anything is out there. But you know, at this point there's really nothing in there that caused us, you know, caused us to pause or adjust our thinking in terms of kind of any exposures there. Um we feel like we're

Very well reserved, and we're in a good spot.

Transition, uh, and just help us think about, you know, what's the path to getting to 20%?

Yeah, I I guess what, what I might start with Samad is again, I think we feel like all the under overall, demand drivers of the business that we've talked about. As David mentioned, are still there, and we feel good about those. Um, you know, there there is, you know, there is some transition that's going on here and we'll kind of M. Well, we're going to certainly manage that as David is articulated uh, over time. But I think at this point we still feel like that the all the things that got us to, you know, those expectations back in, you know, back in the March time frame when we gave that are still in place and in play and we expect to see, we expect to see some, you know, some additional progress towards that as we think about 26 and then 27 certainly as well. And so in terms of kind of what we do with respect to longer term guidance, I think it's I we feel like it's a bit too early and again just given the demand uh this in front of us. I don't know that it's it's the right time now to change anything.

Great, thank you for your patience.

Yep.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Joe Ci for any closing remarks.

Thanks, everybody, for joining us today. If you have any follow-up questions, or if you'd like to schedule additional time with the team?

Please send me an email at investors@inc.com. Have a great rest of your day, and we look forward to speaking with you in the coming weeks.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.