Vertex, Inc. (VERX) Q3 2025 Earnings Call Transcript

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Overview

The earnings call reflects strong financial metrics, optimistic guidance, and strategic investments in AI and e-invoicing, which are expected to drive growth. While there are macroeconomic challenges and ERP migration slowdowns, the company has strategies to mitigate these. The Q&A session reveals confidence in meeting revenue targets and strategic partnerships, supporting a positive sentiment. Despite some uncertainties in entitlement recovery and the impact of bankruptcies, the overall outlook remains positive with growth drivers in place.

Key Financial Performance

Revenue $192.1 million, up 12.7% year-over-year. The increase was attributed to strong cloud revenue growth and strategic initiatives.

Subscription Revenue $164.8 million, up 12.7% year-over-year. Growth driven by customer adoption and retention.

Cloud Revenue $92 million, up 29.6% year-over-year. Growth attributed to ongoing cloud migrations and ERP vendor partnerships.

Annual Recurring Revenue (ARR) $648.2 million, up 12.4% year-over-year. Growth driven by customer expansion and retention.

Average Annual Revenue Per Customer (AARPC) $133,000, up 12.4% year-over-year. Growth attributed to increased customer spending.

Gross Revenue Retention (GRR) 95%, consistent year-over-year. Maintained within the targeted range of 94% to 96%.

Net Revenue Retention (NRR) 107%, down 1 point from the second quarter. Decline due to customer bankruptcies and faster-than-expected migrations.

Adjusted EBITDA $43.5 million, up 12.7% year-over-year. Exceeded expectations due to expense control initiatives and operational efficiencies.

Adjusted EBITDA Margin 22.6%, consistent with revenue growth and cost management.

Free Cash Flow $30.2 million, strong performance attributed to operational efficiencies and cost control.

Gross Margin 73.9%, slightly down from 74% last year. Decline due to investments in automation expected to drive future margins.

Research and Development Expense $16.8 million, up from $12.9 million last year. Increase due to investments in AI and automation.

Selling and Marketing Expense $43.4 million, up 12.9% year-over-year. Increase driven by growth initiatives and customer acquisition efforts.

General and Administrative Expense $38.4 million, up $2.6 million year-over-year. Increase due to operational scaling and strategic investments.

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Operating Highlights

AI-based smart categorization product: Added a major grocery store chain to the customer base, automating tax categorization in its delivery business, resulting in 6 figures of new revenue.

Kintsugi powered by Vertex: Launched to enable SMBs to automate compliance functions with real-time dashboards for jurisdictional liability and exposure tracking.

Integrated product strategy: Includes e-invoicing and VAT compliance in one platform, driving customer adoption.

E-invoicing mandates: New customers driven by mandates in Belgium, France, and Germany, with over 100 customers landed since March.

SAP ecosystem: Improved momentum driven by ECC to S/4HANA conversions, creating opportunities to expand footprint with existing customers and win new logos.

Cloud revenue growth: Increased by 29.6% year-over-year, reaching $92 million in Q3.

Expense control initiatives: Driving improved earnings leverage, demonstrated by strong adjusted EBITDA and free cash flow results.

AI initiatives: Focused on enabling new logo wins, enhancing customer retention, and entering new segments.

Share repurchase program: Board authorized repurchase of up to $150 million of Vertex shares.

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Risk or Challenges

Customer bankruptcies: The bankruptcy of three large enterprise customers (Big Lots, Party City, and JOANN Fabrics) led to license cancellations, impacting customer retention metrics by approximately $2 million.

Accelerated migrations: Three large customers completed internal legacy ERP migrations faster than anticipated, downsizing their subscription fees with Vertex and impacting net revenue retention (NRR) by over $2 million.

Customer retention challenges: Moderate customer turnover at the low end of the customer base and discontinuation of legacy product usage by customers migrating to new cloud solutions negatively affected retention metrics.

Economic uncertainties: The persistence of lower-than-typical growth from existing customer entitlements was noted as a headwind, reflecting potential economic pressures.

Regulatory and compliance complexity: The pace of regulatory changes and the complexity of tax compliance, especially in global jurisdictions, require significant ongoing investment in content curation and compliance solutions.

AI limitations: Enterprise customers are cautious about adopting AI for tax compliance due to risks of inaccuracies, lack of traceability, and the inability of AI to mine certain tax rules effectively.

Margin pressures: Investments in automation and acquisitions (e.g., ecosio and AI initiatives) have temporarily lowered margins, with expectations of future improvements.

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Guidance & Outlook

Revenue Expectations: Fourth quarter revenues are expected to be between $192 million and $196 million. Full-year 2025 revenues are projected to range from $745.7 million to $749.7 million.

Cloud Revenue Growth: Cloud revenue growth is projected to be 28% for the full year of 2025.

Adjusted EBITDA: Fourth quarter adjusted EBITDA is expected to be between $40 million and $42 million, with a margin of 21.1% at the midpoint. Full-year adjusted EBITDA is projected to range from $159 million to $161 million, reflecting a margin of 21.4% at the midpoint.

E-invoicing Mandates: Upcoming e-invoicing mandates in Belgium, France, and Germany are expected to accelerate customer adoption and revenue growth as deadlines approach.

AI and Product Development: Investments in AI technologies and product development, including the smart categorization product, are expected to drive future growth and operational efficiency.

Customer Base Expansion: The company anticipates significant growth opportunities with enterprise customers migrating from legacy systems to cloud solutions, estimating a 3x opportunity within the existing installed base.

Share Repurchase Program: The Board of Directors has authorized a share repurchase of up to $150 million, reflecting confidence in the company's long-term growth potential.

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Shareholder Return Plan

Share Repurchase Program: The Board of Directors has authorized the repurchase of up to $150 million of Vertex shares in the open market. This decision reflects confidence in Vertex's long-term growth opportunities and is aimed at rewarding investors.

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Key Q&A

Q:What are your thoughts on the SAP ERP cycle and the capacity to manage migrations in the industry?

A:The industry has been preparing for the SAP ERP cycle for several years, with partners ramping up staff for upcoming migrations. SAP has reinforced the 2027 deadline, and the pipeline remains solid. Deal flow improved this quarter due to a break in customer-level migration delays.

Q:Can you provide more details on the two customers migrating to homegrown solutions?

A:The two customers did not migrate to homegrown systems but to Vertex's next-generation cloud platform. These were large customers who migrated at a significant price increase and shut down their old systems faster than expected, which was factored into future guidance.

Q:Has the guidance philosophy changed after recent guidance cuts?

A:The guidance philosophy has not changed. The recent cuts were due to factors like BK migration activity, timing of deals, and a shift to a partner-first services strategy. These factors were the main contributors to the guidance change.

Q:What are the lessons learned regarding entitlement growth and its impact on net retention rate?

A:The challenge lies in assessing customer growth rates and their impact on revenue bands. Vertex is working to better understand customer growth guidance to align expectations, but visibility into customer forecasts remains limited.

Q:What led to the leadership change in Europe, and how is Europe viewed as an opportunity?

A:The leadership change in Europe was due to the increasing complexity of operations, including the acquisition of ecosio and expansion into the e-invoicing marketplace. Europe is seen as a significant opportunity, especially with upcoming e-invoicing deadlines in France and Germany in 2026.

Q:How do you view the Q4 growth outlook relative to medium-term growth targets?

A:The BK migration activity in Q3 was anomalous and not expected to be a recurring issue. The Q4 growth outlook is muted due to large true-ups in the prior year, but the underlying growth rate would be close to 13% without these entitlements. E-invoicing deadlines in 2026 are expected to drive significant growth.

Q:What are customers most interested in regarding AI, and how quickly can Vertex expand AI offerings to other verticals?

A:Customers value the 'human in the loop' approach for traceability in audits. Vertex's agent-to-agent work with platforms like Microsoft Dynamics 365 is well-received. The Smartcat offering is gaining traction in retail, and expansion to other verticals will depend on data ingestion and customer interest.

Q:How are investments in e-invoicing and AI tracking, and when is margin inflection expected?

A:Investments in e-invoicing and AI are on track, with ecosio investments at $4-5 million per quarter. Margin inflection is expected by mid-next year as these investments are completed. The company is seeing leverage in other business areas and remains on track with its investment plans.

Q:How does Vertex's e-invoicing product compare to competitors, and is it ready for upcoming deadlines?

A:Vertex's e-invoicing product is focused on primary economies like France, Belgium, and Germany, which are priorities for upcoming deadlines. The company is expanding coverage through partnerships, such as with Brinta for LatAm regions, and feels prepared for the 2026 deadlines.

Q:What is the competitive landscape like, and have there been changes in win rates?

A:There have been no changes in competitive dynamics or win rates. Vertex's strategy focuses on partnerships with influencers like the Big 4 accounting firms and investments in AI and Microsoft integrations, which are expected to improve opportunities in new segments.

Q:What is the outlook for entitlement changes and their impact on revenue?

A:Entitlement changes are expected to normalize over time through the renewal process. The impact is tied to customer economic activity and system migrations. There is no specific timeframe for recovery, but past patterns suggest a rebound as activity picks up.

Q:What is the anecdotal feedback on SAP migrations, and how are decisions being made?

A:Feedback from the customer conference indicates that SAP migration activity is expected to accelerate in 2026. Influencers and SAP partners report growing backlogs, supporting the expectation of increased activity as the deadline approaches.

Q:Were there deal delays in Q3, and how does this affect the Q4 pipeline?

A:There were no deal delays in Q3, but many deals closed later in the quarter, impacting revenue recognition. The Q4 pipeline is strong, with December expected to be a large month, consistent with historical patterns.

Q:Is ecosio on track for its revenue targets, and how does it align with e-invoicing deadlines?

A:Ecosio is on track for its $16 million revenue target, with strong pipeline momentum. The upcoming e-invoicing deadlines in Belgium, France, and Germany are expected to drive further growth, aligning with Vertex's strategy.

Q:What is the long-term revenue growth outlook given the current challenges?

A:Despite current challenges, Vertex expects significant revenue growth next year, driven by e-invoicing, SAP migrations, and easier comps. The company remains confident in its long-term growth drivers.

Q:How does Vertex view the impact of customers paying 'two mortgages' during cloud migrations?

A:The impact of customers paying 'two mortgages' is minimal, as only 2-3% of the customer base migrates annually. The on-prem base is expected to persist, and cloud revenue continues to grow steadily.

Q:Are the 2028 targets for subscription and cloud growth still achievable?

A:Vertex sees no reason to shift its 2028 targets of 20%+ subscription growth and 30%+ cloud growth. The Board's confidence is reflected in the recent buyback, and demand drivers like e-invoicing and SAP migrations remain strong.

Q:How does Vertex address bankruptcies in its customer base?

A:Bankruptcies do not immediately end license revenue, as some companies continue operations under Chapter 11. Vertex monitors these situations and adjusts expectations as needed.

Q:What is the progress in expanding partnerships with marketplaces like Shopify?

A:Vertex continues to strengthen partnerships with marketplaces like Shopify, which is moving upmarket. The company is also exploring new opportunities with AI-powered solutions like Kintsugi to address lower market segments.

Q:How has Vertex adjusted guidance to account for entitlement and true-up challenges?

A:Vertex has factored entitlement and true-up challenges into its guidance, focusing on timing and BK migration impacts. The company remains committed to providing clear and accurate forecasts.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing the potential challenges in achieving the 2028 targets, despite questions about the feasibility given recent guidance cuts and current growth rates. They also provided limited detail on the specific timing and scale of entitlement recovery, as well as the exact impact of bankruptcies on revenue.

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Earnings Word Cloud

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Vertex, Inc. (VERX) Q3 2025 Earnings Call Transcript