VERTEX Q3 2026 EARNINGS CALL - VERTEX INC

Financial Performance:

• Total revenue reached $213.3 million, an 11% year-over-year increase, exceeding the high end of guidance.
• Software subscription revenue grew 10.2%, while services revenue grew 15.8%.
• Annual Recurring Revenue (ARR) increased 11.7% year-over-year to $724.3 million; cloud revenue growth accelerated to over 20% in the quarter and is expected to be 19% for the full year.
• Gross retention rate (GRR) was 95%, and Net Revenue Retention (NRR) increased to 106%, up one point sequentially.
• Non-GAAP gross margins hit record highs: 77.6% overall, 84.6% for software subscriptions, and 37.7% for services.
• Adjusted EBITDA grew nearly 50% year-over-year to $64.8 million, surpassing guidance by $8 million, with margins reaching 30.4%.
• Free cash flow was $25.2 million, while pro forma free cash flow was $33.8 million (52% of Adjusted EBITDA).
• Cash EBITDA increased to $36.7 million, a significant improvement from $11.2 million a year prior.
• Share repurchases totaled $27 million in Q3; $83.6 million has been repurchased under the $150 million authorization since November 2025, with $66.4 million remaining.

Guidance and Future Outlook:

• Q4 revenue guidance raised to $215–$217 million; Adjusted EBITDA guidance raised to $58–$60 million.
• Full-year revenue guidance raised to $828.9–$803.9 million (midpoint increased by $2.4 million).
• Full-year Adjusted EBITDA guidance raised to $217.9–$219.9 million (midpoint increased by $10.9 million).
• Management expects to operate at approximately 30% Adjusted EBITDA margins in 2027, with potential for expansion beyond that over time.
• Expected 11% revenue growth in Q4 at the midpoint, excluding a discrete loss of a payroll OEM customer.
• GRR and NRR are expected to decline by approximately one point in Q4 due to the payroll OEM loss, but core determination retention remains strong.
• Full-year ARR growth is projected to be robust, with e-invoicing expected to significantly outpace overall company growth.

Business Segments and Product Lines:

• E-invoicing ARR grew over 100% year-over-year, driven by the French mandate launch and the Brinta acquisition.
• Launched "Vertex Sol," an AI-powered, connected platform integrating tax decisions, workflows, and compliance evidence.
• Introduced a new brand identity reflecting a shift toward an "end-to-end" decision-to-defense tax and compliance lifecycle.
• Secured a strategic partnership with Avanade as an e-invoicing technology partner.
• Key new customer wins include a global technology hyperscaler (5-year agreement), a digital commerce platform, a food packaging company, an athletic footwear brand, a global identity security provider, and a pharmaceutical company automating VAT across 23 countries.
• Significant expansion within existing install bases across SAP, Ariba, Oracle, and Workday/Salesforce environments.

Market and Competitive Landscape:

• E-invoicing mandates in Germany, France, and others (2027–2029) serve as major catalysts, with additional mandates expected in Spain, UK, and other global regions.
• Market trend toward consolidation where multinationals replace local providers with a single global platform to simplify operations.
• Strong win rates and competitive displacement in high-volume enterprise environments (e.g., displacing on-prem legacy systems).
• AI adoption is accelerating; Vertex reports >100% improvement in engineering efficiency and nearly double code contribution throughput.
• Dibanjan Saha (CEO of DataRobot) joined the Board to enhance AI expertise.

Risks and Challenges:

• Discrete loss of a payroll OEM customer negatively impacted Q4 guidance and NRR/GRR metrics by approximately one point.
• Revenue guidance for Q4 is slightly below the implied run-rate of the prior quarter due to the OEM loss and specific marketing expenses for Vertex Exchange.
• Macro environment regarding entitlements has stabilized but remains below the peak activity levels seen in 2024/early 2025.
• E-invoicing growth rates of 100% are not expected to be sustained every quarter as the business scales.
• SAP modernization timelines have become elongated for some customers relative to previous 2027 deadline expectations.

Management Commentary and Tone:

• Tone was highly confident, citing Q3 as "tangible evidence" that the company is delivering on its value creation plan and priorities.
• Management emphasized successful stabilization of the core business and material improvement in profitability and cash flow.
• CEO Chris explicitly stated the company is "moving forward faster than we've ever moved before," highlighting the transition from a tax determination company to an end-to-end compliance platform.
• Strong emphasis on the success of the "Vertex Exchange" event and the positive feedback regarding the new brand and product strategy.

Analyst Questions and Answers:

• Vertex Exchange Feedback: Management reported universally positive feedback from customers and partners regarding the new branding and "Vertex Sol."
• Pricing Strategy for Vertex Sol: Some capabilities will be bundled, while advanced AI features (e.g., smart categorization) will carry additional charges based on value.
• French Mandate: Successfully executed with no major issues; transaction volumes are ramping, and it serves as a catalyst for future consolidation opportunities.
• On-Prem vs. Cloud: While customers can use products on-prem (e.g., the new footwear win), Vertex remains focused on driving cloud migration for optimal capability access.
• Service Revenue: Strong growth driven by e-invoicing implementation and MSO/tax filing activities; management prioritizes partner ecosystem growth over aggressive internal service expansion.
• E-invoicing Trajectory: High growth expected to continue through 2027 and beyond, supported by new partners and upcoming mandates in 2027–2029.
• Margin Durability: Improved margins are attributed to structural cost actions and operating discipline, with no one-time items; further reinvestment in e-invoicing and Vertex Sol is planned.
• Sales Organization: Current sales team is capable of selling end-to-end solutions; international leadership has been strengthened (e.g., Carlos Mercuriali).
• C-Suite Engagement: Broader product scope (decision-to-defense) is successfully elevating conversations to higher executive levels within customer organizations.

Other Key Points:

• Engineering efficiency has improved >100% since the beginning of the year, with AI-assisted review supporting nearly 90% of code contributions.
• The "Value Creation Plan" has structurally improved the earnings profile, with benefits phasing in ahead of the original timeline.
• Management highlighted the opportunity to help customers modernize ERP environments and automate complex business processes as a primary growth driver alongside mandates.
• The French mandate implementation demonstrated the company's ability to execute on complex compliance requirements even with changing regulations up to the week prior to launch.