Vertex Q3 2026 Earnings Call - VERTEX INC

Financial Performance:

• Total revenue reached $213.3 million, up 11% year-over-year, exceeding the high end of the guidance range.
• Software subscription revenue grew 10.2%, while services revenue increased 15.8% driven by e-invoicing implementations and tax filing.
• Annual Recurring Revenue (ARR) rose 11.7% to $724.3 million; cloud revenue growth accelerated to over 20%.
• Adjusted EBITDA was $64.8 million (up ~50% YoY), finishing $8 million above guidance with a margin of 30.4%, surpassing the high-20s target a full year early.
• Gross margins improved significantly: overall non-GAAP margin at 77.6% (+370 bps YoY), software subscription margin at 84.6% (+316 bps YoY), and services margin at 37.7% (+886 bps YoY).
• Free cash flow was $25.2 million, with pro forma free cash flow at $33.8 million (52% of Adjusted EBITDA); Cash EBITDA increased to $36.7 million from $11.2 million YoY.
• Retention metrics stabilized: Gross Revenue Retention (GRR) at 95% and Net Revenue Retention (NRR) rose 1 point sequentially to 106%.
• Share repurchases totaled $27 million in Q3 ($83.6 million YTD), with $66.4 million remaining under the authorization.

Guidance and Future Outlook:

• Q4 revenue guidance raised to $215–$217 million; Adjusted EBITDA guidance raised to $58–$60 million.
• Full-year revenue guidance increased to $828.9–$830.9 million (midpoint raised $2.4 million).
• Full-year Adjusted EBITDA guidance increased to $217.9–$219.9 million (midpoint raised $10.9 million).
• Full-year cloud revenue growth expectation set at 19%.
• Management targets approximately 30% Adjusted EBITDA margins for 2027, with potential for further expansion over time.
• Full-year ARR growth is expected to outperform overall company growth, with e-invoicing expected to grow significantly faster than the core business.
• Q4 GRR and NRR expected to decline by ~1 point due to a discrete loss of an OEM partner in the payroll tax business.

Business Segments and Product Lines:

• E-invoicing: ARR grew over 100% YoY, driven by the French mandate launch, Brinta acquisition contributions, and the Avanade partnership.
• Vertex Sol: New AI-first brand identity unveiled, offering a connected end-to-end tax and compliance experience (decision, compliance, defense) with continuous governed records.
• AI Integration: Engineering efficiency improved >100% via AI-assisted coding; AI expertise added to the Board with the appointment of DataRobot CEO Dibanjan Saha.
• New Customer Wins: Secured a low seven-figure expansion with a global hyperscaler (SAP/Ariba), a mid-six-figure e-invoicing deployment with a digital commerce platform, a low seven-figure displacement with an athletic footwear company (SAP ECC), and a VAT compliance win with a global pharma company (SAP S4 HANA).
• Platform Expansion: Broadening capabilities beyond tax determination to include compliance automation and ERP modernization across Oracle, SAP, Workday, and Salesforce ecosystems.

Market and Competitive Landscape:

• Mandate Catalysts: Active French mandate implementation followed by upcoming mandates in Germany (Jan 1, 2027), Norway, Slovakia, and Spain, with further mandates scheduled through 2028–2029 (including UK).
• Competitive Positioning: Strong win rates in e-invoicing; leveraging global scale to consolidate local providers for multinational clients.
• SAP Ecosystem: Continued healthy migration activity tied to SAP modernization programs, though some 2027 deadlines appear elongated in the market.
• Global Reach: Expansion into new geographies (Brazil, Latin America via Brinta) and preparation for mandates in the Middle East, Africa, and Asia.
• Trends: Enterprises are prioritizing "decision-to-defense" lifecycle management, ERP modernization, and automation to navigate complex compliance.

Risks and Challenges:

• Discrete Loss: A meaningful loss of an OEM partner in the payroll tax business, impacting Q4 GRR/NRR by approximately $1 million but not indicative of broader business health.
• Non-linear Margins: Adjusted EBITDA margins are not expected to be linear quarter-over-quarter due to timing of investments and expense fluctuations.
• Mandate Complexity: Evolving and multi-phased mandates in various countries may require ongoing operational adjustments and reporting expansions.
• On-Premise Support: While prioritizing cloud growth, the company continues to support on-premise customers (e.g., SAP ECC), balancing migration goals with legacy commitments.

Management Commentary and Tone:

• Confidence: Management expressed strong confidence in the execution of the value creation plan, citing tangible progress in stabilizing the core business and improving profitability.
• Transformation: Emphasized a shift from a tax determination company to a global, end-to-end tax and compliance platform provider ("Vertex Sol").
• Operational Discipline: Highlighted improved operating efficiency, engineering throughput, and cost structure as foundational to future cash flow and margin expansion.
• Strategic Pivot: Noted a deliberate move toward selling to the C-suite and expanding the conversation from tax to broader enterprise transformation.

Analyst Questions and Answers:

• Vertex Exchange Feedback: Feedback on the new brand and "Vertex Sol" was universally positive from customers and partners; energy described as significantly higher than previous years.
• Pricing Strategy: Vertex Sol includes both embedded capabilities (no extra charge) and premium add-ons (e.g., smart categorization) with separate charges.
• French Mandate Execution: Successfully executed despite last-minute regulatory changes; pipeline for consolidation from local providers is a key follow-on opportunity.
• E-invoicing Growth Trajectory: 100% Q3 growth is not sustainable quarter-over-quarter, but the segment is expected to significantly outperform the overall company growth in 2027 and beyond.
• Service Revenue: Strong Q3 services growth attributed to e-invoicing implementation and tax filing; strategic focus remains on growth discipline rather than volume at all costs to support partner ecosystem.
• Macro Environment: "Entitlements" (tax refunds/credits) activity has seen a modest resurgence from prior lows but remains below 2024 levels.

Other Key Points:

• Board Enhancement: Dibanjan Saha (CEO of DataRobot) joined the Board to strengthen AI strategy and scaling expertise.
• Go-to-Market Evolution: Sales team is being leveraged to drive "end-to-end" conversations, with new international leadership hires (e.g., Carlos Mercuriali) supporting global expansion.
• Partnership Ecosystem: Avanade selected as the exclusive e-Invoicing Technology Partner, broadening market reach for global compliance.
• Reinvestment Strategy: Proceeds from margin improvements are being reinvested into e-invoicing growth and the development of Vertex Sol to drive long-term efficiency.