VERTEX Q3 2026 EARNINGS CALL - VERTEX INC

Explicit Guidance:

• Q4 2026 Revenue: Guidance raised to $215M–$217M, implying 11% YoY growth at the midpoint (adjusted for payroll OEM loss).
• Q4 2026 Adjusted EBITDA: Guidance raised to $58M–$60M, including marketing expenses for Vertex Exchange and growth investments.
• FY 2026 Revenue: Full-year range raised to $801.4M–$803.9M (midpoint increased by $2.4M; transcript contained typo "828.9 to $803.9" corrected to logical range based on context).
• FY 2026 Adjusted EBITDA: Full-year range raised to $217.9M–$219.9M (midpoint increased by $10.9M).
• FY 2026 Cloud Revenue Growth: Expected to be 19%.
• FY 2027 EBITDA Margins: Targeting approximately 30% Adjusted EBITDA margins during 2027, with potential for further expansion over time as incremental revenue flows through the more efficient cost structure.
• FY 2027 Retention Metrics: Expect Gross Revenue Retention (GRR) and Net Revenue Retention (NRR) to decline by approximately one point in Q4 2026 due to an OEM loss in payroll tax; core determination retention trends remain improved throughout 2026.

Business-Segment Outlook:

• E-invoicing: Expected to grow significantly faster than Vertex overall in 2027 and beyond, driven by mandates in Germany (2027), Spain, Norway, and Slovakia (Jan 2027), and additional mandates in 2028–2029 (including UK). While Q3 saw >100% ARR growth, management does not expect to sustain this exact pace quarterly but anticipates consistent outperformance vs. company average.
• Cloud Revenue: Accelerating to >20% growth in Q3; full-year growth expected at 19%, with e-invoicing (100% cloud) as a primary driver.
• Services Revenue: Grew 15.8% in Q3 driven by e-invoicing implementation and MSO/tax filing activities; strategic goal is not to maximize services volume but to partner with implementation partners to allow for partner-led growth.
• Customer Cohorts: Continued "land and expand" momentum in the install base (e.g., hyperscaler 5-year low-seven-figure expansion) and new logos in athletic footwear, digital commerce, food packaging, and pharmaceuticals.
• Product Lines: Launch of Vertex Sol (AI-powered tax and compliance experience) to connect tax determination, e-invoicing, compliance, reporting, and defense into a single governed record. Pricing model will feature embedded capabilities (e.g., Vertex Intelligence) included in core purchase and premium features (e.g., smart categorization) as add-ons.

Market and Competitive Outlook:

• Demand Trends: Shift toward "decision-to-defense" lifecycle solutions rather than standalone tax engines; customers modernizing ERP environments and seeking automation for complex global operations.
• Consolidation Opportunity: Expect global multinationals to consolidate fragmented local e-invoicing providers (e.g., after French mandate) into a single global partner to reduce management overhead and procurement complexity.
• Competitive Positioning: Improved win rates in e-invoicing and successful displacements in complex environments (e.g., SAP ECC, on-prem scenarios) indicate a strengthening competitive stance.
• Geography Expansion: Continued expansion of content coverage (e.g., Brazil) and e-invoicing capabilities (via Brinta acquisition for 9 Latin American countries); targeting expansion into Middle East, Africa, and Asia as mandates mature.

Macro / Industry Outlook:

• Entitlements: Observing a "normal environment" with a resurgence in entitlement activity compared to the previous year, though not seeing the "true-ups" experienced in 2024/early 2025.
• Mandates: Structural catalysts remain strong through 2029 (Germany, France, UK), with expectations of multiple phases and additional reporting requirements (e.g., e-invoicing evolving to include other reporting types) driving sustained demand.
• SAP Modernization: Cloud migrations remain healthy, though timelines for customers reaching the 2027 SAP deadline appear elongated; Vertex expects to capture downstream migration activity aligned with current customer execution.

Strategic Initiatives:

• AI Integration: AI improving engineering efficiency by >100% (code throughput nearly doubled) and supporting 90% of code contributions; extending AI to requirements, scoping, testing, and validation to drive operating leverage.
• Board Level AI: Appointment of Dibanjan Saha (CEO of DataRobot) to the Board to guide the "AI-First" transformation.
• Partnerships: Strategic partnership with Avanade as an e-Invoicing Technology Partner to enhance global reach and compliance support.
• Reinvestment: Reallocating savings from value creation plan into e-invoicing growth and Vertex Sol development to fuel future growth and customer retention.
• Capital Allocation: Share buyback program has $66.4M remaining; $27M repurchased in Q3.

Risks and Headwinds to Outlook:

• OEM Loss: Discrete loss of a payroll tax OEM expected to reduce Q4 GRR/NRR by ~1 point and impact revenue by ~$1M; not viewed as indicative of broader customer health deterioration.
• Non-Linear Margins: Adjusted EBITDA margins may not grow linearly quarter-to-quarter due to timing of investments and expenses.
• Implementation Timelines: Customer migration schedules (e.g., SAP deadlines) may be extended, potentially pacing demand differently than historical expectations.
• Sustainability of Growth: E-invoicing growth rates (>100% in Q3) are not expected to be sustained every quarter.

Management Tone on the Future:

• Confidence: Strong and building; management states they are "just getting started" and have "increasing confidence" in the growth trajectory following stabilization of core business and profitability improvements.
• Execution: High confidence in delivering on prior commitments, evidenced by Q3 results exceeding guidance on revenue and EBITDA.
• Strategic Shift: Describes the transformation as "moving forward faster than we've ever moved before," emphasizing a shift to a connected, AI-enabled, end-to-end platform.
• Hedges: Acknowledges that individual quarterly results will fluctuate based on investment timing, but the long-term "value creation plan" has structurally improved the earnings and cash flow profile.