VERX

Core Business and Customer Metrics

• Customer metrics remain stable: gross revenue retention holds at 95%, and net revenue retention (NRR) remained stable at 105% for the second consecutive quarter, demonstrating the durability of Vertex's customer base and the deep embedding of its solutions in mission-critical workflows.
• Average annual revenue per direct customer grew 9.2% year-over-year, while scaled customer growth was 8% in Q2. Overall customer count increased year-over-year and sequentially.
• Growth in expansion within the existing install base and new logo acquisition is below internal expectations, partially due to slower-than-anticipated cloud migration conversions, which remains a key priority for the second half of 2026.

E-invoicing Business Progress

• E-invoicing was the strongest area of operational execution in Q2, with growing momentum across all regions driven by upcoming mandatory compliance requirements in France and Germany, and increased customer demand for global compliance solutions.
• Vertex won multiple six-figure enterprise e-invoicing deals in Q2, including a mid six-figure cross-sell win with an existing customer for compliance in France and Finland. France was a key demand catalyst in Q2, with additional demand expected from Germany and other upcoming mandates over time.
• The company is integrating e-invoicing capabilities across the Vertex, Ecosio, and Brenta platforms, aligning its country product roadmap with demonstrated customer demand.

AI Transformation Progress

• Vertex's AI strategy has two core pillars: improving internal operational efficiency, and building differentiated customer-facing AI capabilities. AI-related revenue is not yet material, but internal efficiency gains are already tangible.
• Company-wide active adoption of core AI tools reached 89% in Q2, up from 68% in January 2026. AI integration across engineering workflows has delivered a 34% improvement in engineering efficiency, with a 30% increase in pull request merge rates from the January baseline.
• In customer delivery, AI-supported e-invoicing business rule generation has cut onboarding time by ~50%, and an AI-powered country expansion tool enabled onboarding of 3,500+ rules across 50+ formats 70% faster than legacy processes.
• Early adoption of customer-facing AI tools like Vertex Intelligence and smart categorization has been encouraging, providing valuable product feedback and developing a nascent sales pipeline. The company is building an AI-first connected tax platform, with near-term focus on customer validation, commercial model development, and production rollout of capabilities.

Strategic and Leadership Updates

• The company has strengthened its executive leadership team with four new senior hires: Chief Marketing Officer Allison Serra, Chief Operations Officer Aneel Jaeel, Chief People Officer Chetelle Lynch, and newly announced Chief Product and Technology Officer Bala Chandran, adding deep experience in enterprise software scaling, cloud modernization, and AI leadership.
• Multiple cross-sell, up-sell, and competitive displacement wins in Q2 aligned with core strategic demand drivers: growing transaction volume and global complexity, enterprise ERP cloud modernization (across SAP, Oracle, and Microsoft ecosystems), and increasing compliance requirements that favor Vertex's broad, reliable platform.
• The April 2026 value creation cost discipline plan is already delivering meaningful earnings leverage, with adjusted EBITDA growing 33% year-over-year to $51 million, and adjusted EBITDA margin expanding 400+ basis points year-over-year to 25%.
• Integration of the Brenta acquisition for AI-native Latin American compliance capabilities is progressing ahead of expectations, with strong team collaboration, retained customer relationships, and a larger regional opportunity than initially projected, though full integration will take additional time.

• Q3 2026 revenue guidance is set at $208 million to $211 million, with Q3 adjusted EBITDA guidance of $55 million to $57 million.
• Full-year 2026 revenue guidance is narrowed to a range of $825 million to $830 million, maintaining the midpoint of the prior range after stronger-than-expected first half performance.
• Full-year 2026 adjusted EBITDA guidance is increased to $206 million to $210 million, up from the prior guidance range of $202 million to $208 million, reflecting the impact of cost reduction actions and stronger than anticipated operating leverage in the first half.
• Full-year 2026 cloud revenue growth guidance is revised down to 18% from the prior higher forecast, reflecting slower-than-expected cloud conversion activity from on-premise installations in the first half of the year.
• Management expects adjusted EBITDA margin to progress steadily to the high 20% range by the end of 2027, and expects free cash flow conversion to adjusted EBITDA to reach approximately 70% by Q4 2027, up from the Q2 2026 pro forma rate of 26%.

Total company revenue for Q2 2026 was $204 million, growing 10.5% year-over-year. Subscription software revenue grew 10.7% year-over-year, while services revenue grew 9.4% year-over-year. Annual recurring revenue (ARR) grew 10.5% year-over-year, in line with expectations. Cloud revenue grew 17.9% year-over-year in Q2, bringing year-to-date cloud revenue growth to 19.3%. The e-invoicing segment is growing materially faster than the overall corporate growth rate, with strong ARR and revenue growth and ramping deal volume ahead of upcoming European regulatory mandates, but is not yet a material contributor to total revenue. AI-related revenue is not yet material to overall performance.

• Slower-than-expected customer decision-making and elongated sales cycles for cloud migrations and new deals create revenue timing uncertainty, as customers extend IT project timelines and prioritize resource allocation, which has already pushed some deal closures into subsequent quarters.
• While customer adoption of AI solutions is tracking ahead of early expectations, customer organizational change management requirements for new AI workflows can extend decision timelines for commercial adoption, delaying revenue recognition for new AI products.
• Scaled customer growth slowed quarter-over-quarter in Q2, partially due to deal slippage, creating some uncertainty around growth in the higher-value customer segment that will require monitoring through the second half.
• E-invoicing revenue contribution from upcoming mandates may be weighted more heavily to later quarters than initially planned, as customers complete implementation closer to mandate effective dates, limiting near-term revenue upside from this high-growth segment.

Q: How is Vertex helping risk-averse tax customers feel comfortable adopting AI solutions? / A: Vertex has learned from early experience with its smart categorization AI product that customer adoption requires more than just a new tool, because AI changes existing operational workflows that often involve multiple cross-functional teams. Vertex uses a forward-deployed engineering model to work directly with customers to redesign processes and train teams alongside rolling out AI tools. Adoption of the Vertex Intelligence AI co-pilot is growing steadily quarter-over-quarter, and customers face internal pressure from C-suite leaders to adopt AI-driven automation, so long-term adoption trends are positive even if decision timelines are extended.

Q: Why are cloud conversions slower than expected, and is this a permanent or temporary issue? / A: Slower cloud conversions are driven by elongated enterprise IT decision-making, as customers take a more thoughtful approach to projects requiring capital deployment. Customers often have mixed on-premise and cloud environments already, and IT prioritization for migrations is often tied to broader ERP transformation timelines that have also shifted out. This is a timing issue, not a lost demand issue: customers still plan to migrate, they are just taking longer than management initially modeled, and no customers have canceled migration plans entirely.

Q: What is the pattern of e-invoicing demand for new logos vs cross-sell to existing customers, and when will we see meaningful revenue acceleration? / A: E-invoicing is delivering on the original strategic thesis of both growing net new logos and driving cross-sell to existing Vertex customers. Q2 saw strong overall customer growth largely driven by e-invoicing, with many new smaller customers coming in, and multiple early large multi-six-figure cross-sell wins in the existing install base. ARR growth will start to accelerate in Q3 as customers finalize contracts ahead of the September 2026 French mandate, with revenue acceleration following in Q4. Multi-country expansion is just starting to emerge, with broader cross-region consolidation demand expected to ramp in 2027 after customers validate initial single-country implementations.

Q: How is the slowdown in cloud conversions impacting long-term cloud guidance, and what will drive cloud growth acceleration? / A: Management built the lower 18% full-year 2026 cloud growth guidance based on the slower conversion pace seen in the first half, which is the current base case. E-invoicing, which is 100% cloud-based, is expected to drive cloud growth acceleration in the back half of 2026 and into 2027 as mandates go into effect and adoption ramps. New AI capabilities are being positioned as an incentive for on-premise customers to migrate to the cloud, and the new Chief Product and Technology Officer has deep experience migrating large customer bases from legacy to cloud offerings, which is expected to improve migration execution over time.