Vertex, Inc. Q3 FY2025 earnings call

Core Strategic Areas

• Continued momentum in core strategic areas with strong cloud revenue growth, margin leverage from automation, and strong cash flow.
• Accelerating traction in e-invoicing and improved SAP activity.

Customer Retention Impact

• Persistence of lower-than-typical growth from existing customer entitlements, bankruptcy of 3 large enterprise customers, and accelerated migrations to new cloud platform impacted customer retention metrics.

Growth Initiatives

• Ecosio had strong quarter with $4.1 million revenue, over 100 customers landed since general availability.
• Integrated product strategy with e-invoicing and VAT compliance in one platform.
• Ongoing cloud migrations with ERP vendors like SAP and Oracle with pipeline build improvements.
• AI initiatives advancing, including smart categorization and agent-to-agent tax configuration capabilities.

Business Wins

• Improved momentum in SAP ecosystem with ECC to S/4HANA conversions, new revenue from specialty retail and manufacturing customers, expansion with energy services and grocery store chain customers, and competitive wins in aerospace, defense, pharmaceutical, and marketing services sectors.

Vertex Inc.'s third quarter revenue was $192.1 million, up 12.7% year-over-year. Subscription revenue grew 12.7%, and cloud revenue growth was 29.6%. Adjusted EBITDA was a record $43.5 million, exceeding guidance. Annual recurring revenue (ARR) grew 12.4% to $648.2 million. Average annual revenue per customer increased 12.4% year-over-year to $133,000. Scaled customer count grew 14%. Gross revenue retention (GRR) remained at 95% in the third quarter. Net revenue retention (NRR) decreased to 107%, down 1 point from the second quarter.

Fourth Quarter

• Expected revenues of $192 million to $196 million.
• Expected adjusted EBITDA of $40 million to $42 million, with an adjusted EBITDA margin of 21.1% at the midpoint.

Full Year 2025

• Expected revenues of $745.7 million to $749.7 million.
• Expected cloud revenue growth of 28%.
• Expected adjusted EBITDA of $159 million to $161 million, with a margin of 21.4% at the midpoint.

• Lower-than-typical growth from existing customer entitlements.
• Bankruptcy of 3 large enterprise customers impacting retention metrics.
• Accelerated migrations to new cloud platform by some large customers affecting NRR.

Q: Joshua Reilly from Needham asked about SAP ERP cycle and deal flow.

A: David DeStefano said industry prepared for SAP migrations, pipeline solid, and saw a break in deal flow slowness in the quarter.

Q: Joshua Reilly asked about customers migrating to homegrown systems.

A: David DeStefano said these were customers migrating to Vertex's next-generation cloud platform, and it's factored into guidance.

Q: Adam Hotchkiss from Goldman Sachs asked about AI and investment tracking.

A: John Schwab said investments in ecosio and AI are tracking well, with plan to see margin inflection by mid-next year.

Q: Andrew DeGasperi from BNP Paribas asked about top line growth next year.

A: John Schwab said anticipate significant revenue growth next year due to invoicing activity, SAP pipeline, etc.

Q: Patrick Walravens from Citizens asked about 2028 targets.

A: David DeStefano said no reason to shift from previous growth targets as enterprise customers will grow through bands.