Vertex, Inc. Q2 FY2025 earnings call

Key Points

• Second quarter results were in line with initial guidance but macroeconomic factors affected customers, leading to a reduction in full-year guidance.
• Highlighted revenue growth, subscription and cloud revenue growth, ARR, GRR, and NRR.
• Discussed macro impacts on ERP migrations, causing elongated deal cycles and pipeline build delays.

Operational Highlights

• Europe showed momentum, with Ecosio's annual recurring revenue reaching $10.8 million, a 33% increase from the prior quarter.
• E-invoicing initiatives were successful, with early customers returning to add additional country coverage, demonstrating a land-and-expand model.
• New business wins included a leading European truck manufacturer expanding its relationship, a major automobile manufacturer migrating to the cloud, and wins in the food delivery and gaming industries.
• AI investments like the Kintsugi program and CoPilot within the platform were highlighted for enhancing customer experience and efficiency.

In the second quarter, revenue was $184.6 million, up 14.6% year-over-year. Subscription revenue grew 15.7% and cloud revenue growth increased to 29.9%. Adjusted EBITDA rose to $38.4 million, with an EBITDA margin of 20.8%. Annual recurring revenue (ARR) grew 16.1% to $636.6 million. Average annual revenue per customer for Vertex stand-alone increased 12.7% year-over-year to $142,600, and scaled customer count growth was 16%. Gross revenue retention (GRR) remained at 95% within the targeted range, while net revenue retention (NRR) decreased to 108%, attributed to lower additional entitlements growth and regulatory changes in Brazil.

Third Quarter 2025

• Expected revenues of $190 million to $193 million and adjusted EBITDA of $38 million to $40 million.

Full Year 2025

• Revised revenues to $750 million to $754 million, cloud revenue growth of 28%, and adjusted EBITDA of $156 million to $160 million. This reflects ERP conversion slowdown, lower entitlements, and true-up revenue impacts.

• Macro environment affecting customers' growth rate and delaying deal activity.
• Regulatory changes in Brazil causing compliance confusion for customers, impacting deal activity.
• Slowdown in ERP migrations elongating deal cycles and pushing out pipeline build.

Q: Chris Quintero asked about e-invoicing momentum and David responded, then another question from Steve Enders' proxy, etc. For example: Q: I wanted to ask on the guide. First, the cloud guide that stayed in place. So I'm curious, is the macro impact that you're calling out here more on the on-prem and services side? Just help us marry kind of the lower total revenue guide versus the maintained cloud revenue guide.

A: Yes, Chris, thank you for the call. Appreciate it. I think as I think about the guide and I think about the adjustment down, I kind of break it into a couple of different pieces. I think the largest driver what I think about it is really coming from entitlements, it's entitlements, which is our customers' usage of activity. We typically don't have a tremendous line of sight into that 60-ish days or so. So as those renewals are happening, we're starting -- we're then getting window what the uptick is going to be and then to the extent that there's a true up what that's going to look like. And so as Q2 developed, we started to see a little bit of -- we started to see that, that activity was lower than it's been in the past and especially in the real larger the real larger additional entitlements, those big 6-figure type of deals, the volume was much lower than we had seen. And so the good news is we haven't seen pullbacks or any changes going the other way, but just the magnitude of those additional entitlements are certainly lower than we've seen in prior quarters. And again, that's part of the driver for our NRR dropping from that 109 back to 108. So I think based on that trajectory, we really looked at that -- we looked at that and that really weigh heavily as we think about what the guide looks like. So when you take that into consideration, then you also take into consideration true-ups, which aren't very typically a giant piece of our revenue. But can be significant, and they have 100% revenue impact in the quarter in which they occur. We certainly pulled that back a little bit as we thought through that. And then finally, the last piece really has to do around the elongation of some of those sales cycles. So that's sort of how I kind of box out each of those different pieces. But we feel good and confident with the guidance that we've set and our ability to achieve it.

Q: Got it. And then I want to follow up on the e-invoicing momentum that you're seeing, really, really encouraging to see. But just as you've seen those early customers come back to you and add additional country coverage. Like what are some of those early learnings that you're seeing in terms of the adoption rate for that product so far?

A: Yes, I'll take this one. So Chris, I think it's a couple of factors. One, the value of our end-to-end offering is really differentiating us and playing well in the market, meaning that we've got the front end of that termination engine, the middle point, the invoicing transmission and then the VAT compliance all on the platform. And I think that's really being validated as point number one. I think point number 2 is that this is a classic land and expand model. As we prove out to the customer that we can deliver on this they come back and say, right now we want to expand it because they're all focused on getting a single global provider as the proliferation of these invoicing requirements are expanding and getting more complex they're really looking for a single provider on a single platform. And that's playing right into our strategy. So I'm really pleased with the early pipeline deal cycles are typically running 3 to 6 months, depending upon what the customer -- how big the customer wants to start. So if you recall, we went live with the product in general availability at the very end of the first quarter. So we're just through our first 3-month cycle and already seeing really nice build -- and I think that should -- no reason that will continue as we continue to expand our country coverage.