Greetings and welcome to the Vertex, Inc. Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ankit Hira, Investor Relations at Vertex. Thank you. Please go ahead.

Thank you. Good morning, everyone and thank you for joining us for Vertex’s financial results conference call for the fourth quarter and full year ending December 31, 2021. On the call today, we have Vertex CEO, David DeStefano and CFO, John Schwab. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today’s remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release. This conference call will be available for replay via webcast through Vertex’s Investor Relations website at ir.vertexinc.com. With that, I will now turn the call over to David.

Thanks, Ankit and welcome everyone. Our fourth quarter capped off a very strong year results as we delivered more than $425 million in revenue and annual recurring revenue growth of 17% compared to fiscal year 2020. I want to thank the entire Vertex team around the world for executing our strategic playbook and exceeding our goals. Our performance was fueled by full year cloud revenue growth of 46% and cloud revenue per customer growing by 10% for the year. Client solutions continued to dominate our new logo deals and we continue to see our installed base, choose our cloud tax automation as they accelerate their overall cloud transformations. Hundreds of six-figure deals contributed to our revenue growth this year, balanced across our software and services business as well as new logos and cross-sells. We have a growing customer base, representing the largest and most dynamic businesses around the world. Vertex has referenceable customer depth in nearly every industry vertical due to our extensive content database and we have demonstrated consistently in strong dollar-based net expansion rate. Our Q4 2021 net revenue retention rate was 108%, which represents an increase from 106% we recorded, both at the end of last quarter and year ago period Q4 2020. We continue to lead in the enterprise space while we invest in growing our mid-market share. We have multiple levers to pull when driving NRR growth through up-sells, cross-sell, cloud migrations, regional expansion and automating tax types from sales, use, communications, VAT, leasing and others. As we said throughout the year, we continued to increase our investments to capitalize on the large and growing opportunities ahead, while our proven durability of our business model enables both accelerated growth and strong balance sheet to sustain positive free cash flow. So while we deliver short-term performance,…

Thank you, David, and good morning, everyone. Today, I’m going to review our fourth quarter and full year 2021 financial results and provide first quarter ‘22 and full year ‘22 guidance. Total fourth quarter revenues grew at 12.2% year-over-year to reach $111.7 million, exceeding the upper end of our quarterly guidance by over $1.7 million. Total revenues for 2021 were $425.5 million, up 13.6% from 2020. Our subscription revenues increased 13.1% year-over-year to $358.4 million, and our services revenues grew at 15.9% year-over-year to $67.1 million. Our annual recurring revenues, or ARR, grew to $370.2 million as of year-end, representing approximately 17% growth over 2020. Excluding the acquisitions of Taxamo and LCR-Dixon that were made during the year, our ARR grew at 15.1%, which is an increase from 13.1% that we reported in the third quarter of 2021. Our net revenue retention rate, or NRR, was 108% at year-end, growing from 106% reported at both year-end of 2020 and the third quarter of 2021, demonstrating our customers’ ongoing commitment to our software and solutions. For purposes of clarification, NRR only includes those customers that were with us at the beginning of the measurement period. So these amounts do not include the Taxamo or LCR-Dixon results. Our gross revenue retention rate, or GRR, was 95% at quarter end, which excludes internal migrations by customers to our cloud solution, which were approximately 3.5%. This is consistent with prior performance, which has averaged between 94% and 95%. In addition to the ARR growth, as mentioned above, one area that I believe requires mention is our managed services outsourcing business. This returns processing business generated recurring services of over $20 million in 2021, processed over $10 billion of customer payments and posted growth of 20% from 2020. This is a competitive differentiator and is…

[Operator Instructions] Our first question is coming from Samad Samana of Jefferies. Please go ahead.

Hi, good morning. Thank you for taking my question. Maybe first, just as I think about the guidance for 2022, John, can you help us understand how we should think about maybe organic cloud revenue expectations that are embedded in that guidance?

Yes. I think, Samad, when we think about organic, I gave the estimate that we think we’d be growing cloud at 33% on a year-over-year basis. I think as we think about organic cloud, we think that will be – if you take out the first couple of periods where we didn’t have the tax activity, and that’s where the main driver is, that’s about 3%. So we’re about 30% organic.

Okay. Great, thanks for that clarity. And then maybe stepping back, David, I think that you sounded quite enthusiastic about what’s going on with Oracle and SAP. And if I measure that, I guess maybe the last couple of years where ERP replacement activity had slowed down a little bit. Can you maybe just help us understand, are you seeing an increase in the pace there, especially as things may move a little bit closer to back to normal here in the U.S.? Just what are you seeing in terms of those replacement cycles? And is that ultimately leading to an uptick in your own deal activity as customers look to make a switch at the same time?

Yes. I appreciate the question. I’d actually start with more than just the – more than just a technology refresh, but it’s actually much more around the active collaborations we’re now having with the OCI team at Oracle and the SAP team. We’re actually working deals directly with their account teams, which has been a new motion for us. Really excited about the opportunity that expanded both here in the U.S. and is taking hold in Europe. So that’s the fundamental shift more so than just the normal. As you noticed, the normalization of increased activity that we’re seeing between Oracle and SAP as they continue to grow their businesses.

Great. Maybe just if I could squeeze one more in. Just on the Shopify integration that you just mentioned, I wanted to make sure I understood it correctly. Is Vertex now going to be integrated natively into that from an OEM perspective or is it going to be available in the Shopify app store? Just trying to understand how the nature of that relationship changed?

Yes. Remember it’s through bold commerce. That’s our daily checkout. They work with Shopify on the checkout process, and we have customers now that are anxious to work with our integration with bold as a way to work on the – their larger Shopify opportunities where they are dealing with – want to get a consistent answer across the front office and back office, and so we’re seeing a lot of push by our customers to leverage the bold relationship.

Understood. Thanks again for taking my questions, guys. Appreciate it.

Thanks, Samad.

Thank you. Our next question is coming from Joshua Reilly of Needham & Company. Please go ahead.

Hi, guys. Thanks for taking my question. So clearly, your e-commerce is slowing this year globally. How would you characterize your exposure to e-commerce versus in-store retail sales? And with in-store retail rebounding this year, how much does that help you overall in terms of new business activity?

Yes, Josh, we clearly benefit from the entire retail space, but we also don’t – it’s important to note, we don’t have an overdependence on any vertical. So we’ve got breadth across oil and gas, manufacturing, food delivery, predictive vertical, we’ve got a strong presence. So we didn’t probably get all the run-up in e-com that maybe we could have in the past. I see the continued growth in the in-store activity as being nothing but continuing the relationships we enjoy across major retailers. So it will continue to be an element of growth for us.

Okay, great. And then the average revenue per customer kicked up nicely again in the quarter. How do you think about this metric over the next year as you begin to ramp mid-market customers? And then how should we think about the mix of customers using more volume of the platform versus buying additional modules in that metric? And then was this mix consistent throughout the year?

Let me try to pay off a few different points there that you asked, Josh. So I think, fundamentally, we continue to expand our base – our revenue base within the existing customers. We brought out five or six new products last year. We’ve got a pipeline of new opportunities like what we talked about with edge on the call here, the new edge computing, which is actually going to serve retail very heavily, which was a point you asked a moment ago. That will allow us to continue to expand wallet share with existing customers and grow average revenue per customer by the same token. As you know, our activity in the mid-market as we continue to increase our indirect investment – indirect channel investment is – and typically at a lower price point. So, I think there is actually a good balance. We have seen that progress, and I would assume, it’s going to be fairly consistent growth in that area because of the amount of work we are doing with our customer success management investment and the new products we are bringing to market that allow us to go broader and deeper with our existing customer base.

Got it. That’s super helpful. Thanks guys.

Sure Josh.

Thank you. Our next question is coming from Matt Stotler of William Blair. Please go ahead.

Hi, good morning guys. Thanks for taking the questions. I think maybe one to start with on the development roadmap. I mean you guys have put together some pretty compelling pieces with obviously, cross-border, increasing search of guys like SAP, the computing solution. As you think forward – and there is obviously a lot of things that are early in terms of ramp and it sounds like a great pipeline development, but as you think beyond that, I mean what are the most compelling additional opportunities that you see to continue to expand that product portfolio? And what are you getting in terms of feedback from the customers in terms of what they are looking for? And how that’s informing your roadmap here?

We rolled out the tax VAT compliance product last year through a design partner program. And what we actively do with our customers is bring them in to help co-design offerings. Some of the things we are looking at now leveraging AI and ML, it’s being very much driven by some of the conversations we are having with them and where they are. The ITI product that we rolled out in the fourth quarter, which is really around visualization, data analytics, also driven off of them. We will be adding a lot of functionality to that throughout the year. So, those are two key initiatives that really are driven actually by customer design programs that we run. And the beauty of that is, it also affords us to start to create a pipeline as we bring those products out because the customers are active in the workflow and design of the product.

Got it. That’s helpful. And then maybe one from a high level, something that we have seen kind of across the market over the first several months of this year, there were some issues, obviously, supply chain issues? There is kind of labor tightness – labor market tightness and it has been impacting some people in terms of implementation cycles. Clearly, from the results doesn’t seem to be impacting you guys in a particular way. I would love some color on what you are seeing from that perspective, specifically with implementation capabilities and headcount both as it pertains to what you can do internally, what you are seeing from your partners and your customers as you are progressing through the year here?

Yes, it’s a great question, Matt. I think we are really fortunate because of the alliance partner network that we have built, and the amount of work they do around our product, the ecosystem around our products is significant across the top 15 to 20 implementation firms. And so, that’s a really powerful capacity for us to help our customers when implementations are needed, plus our own internal staff as we continue to manage that. So, I am very comfortable from an implementation perspective. While we have a nice pipeline of activity to be implemented and our partners do as well, we have a nice pipeline of activity to be implemented and our partners do as well. I think fulfillment in time is not an issue we are overly focused on right now, given the current labor – the capacity challenge you know.

Great. Thanks again.

Okay. Sure.

The next question is coming from Andrew DeGasperi of Berenberg Capital Markets. Please go ahead.

Thanks. Good morning guys. I just wanted to expand on the SAP sales relationship that you mentioned that it’s expanded. I was just wondering, has the sales force been incentivized? Had their incentives changed with regards to Vertex?

I don’t have visibility to that directly. We have been partnering with SAP for 20 years plus. I think they become so comfortable with our methodology, our product integration, which is so important to them and the quality of who our customer base is and sort of that referenceability that we get. When you look at that all combined and then some of the new offerings we have brought together like Chain Flow and LCR-Dixon, all giving us a unique perspective into supporting the SAP base. They have become very open to engaging with us. The quality of the collaborations are great. It’s really helped us in account planning, and I think it will allow us to serve the customer base far better than we ever had.

Thanks. And then on the new customer growth, I mean it’s one of the strongest quarters I have seen so far. I just wondered how much more partners involved in those?

Yes. Andrew, we have continued heavily to invest in our sales and marketing last year. I think we grew almost 20% in our investment in that capacity – in capacity in that area. And a lot of it was focused on that mid-market channel, we continue – we expect to do more of that this year. And so they were certainly a driver of a part of that. I would highlight again back to some of the OCI and SAP success that we enjoyed, also those partners being critical to some of the new logos we were able to add. There is a vastly un-penetrated base within Oracle and SAP that don’t have automated tax solutions. They have hundreds of thousands of installs, and obviously, we don’t have that many customers. So, there is an opportunity for us to continue to grow just within that ecosystem that we are really excited about.

That’s helpful. Maybe for the last one, on the credit facility amendment clearly expanding that, just wondering if – should we expect some additional M&A this year, given a valuation of more appealing in the market for some of the assets you might be interested in.

Yes. Thanks very much, Andrew. Appreciate it. The amendments to the credit facility is something we wanted to do to make sure that we put ourselves in a position so to the extent that opportunities become available. We have got a significant amount of which that’s available to kind of pursue something. So, we will see. We are opportunistic. We are thoughtful about what’s out there, and we have got our eyes open to see what’s going to happen. But right now, there is nothing to report or nothing that’s certainly planned, but we will always be looking.

Thank you.

Thank you. The next question is coming from Patrick Walravens of JMP Securities. Please go ahead.

Great. Thank you and congratulations, you guys. It’s really nice to hear the improved tone. David, just very big picture, so if I look at it, your business decelerated for four quarters in a row. And then since then, AR – and this is on an ARR basis. And then since then, ARR has gone 13%, 14%, 15%, 17%. So, just very big picture, what has been going on that’s been driving that?

Yes. Pat, I really appreciate your question, and thanks for the comment about our – really proud of what the team delivered. When we think about the market, in general, we talked about as we went public, SAP and Oracle were a big part of that as we hit the pandemic in – at the beginning of midyear 2020, we saw a slowdown for Oracle and SAP. We are talking to a lot of CIOs that are larger customers. They were focused very much on can we keep our business running remotely. We are not going to focus on new investment in automating tax. As we got to the second half, near the end of ‘20 and into early ‘21, we started to see that cycle begin to change. They were all proving they could run their business successfully, and there was an opportunity to address concerns that hadn’t been done like automating tax. We typically follow two quarters to four quarters behind a decision to acquire a new technology platform and move to the cloud, the way our customers are moving more with OCI and SAP HANA S/4. And so we are following that very naturally, which is what gives us confidence as we look forward in ‘22 for the pipeline of activity that we are seeing coming and these new advanced relationships we are building with SAP and Oracle.

Alright. That’s super helpful. And John, for you, can you just sort of remind us what the drivers are in terms of the difference between revenue and ARR because revenue decelerated and ARR accelerated, which one you think is a better metric? I think we probably have answer that, but yes, if you could just remind us…

Yes, I would love remind you that yes, we consistently pay attention very heavily to ARR and the ARR growth because ARR revenue, we believe is sort of a lagging indicator. The ARR gives us that leading indication of kind of the efficiency of the sales team, what’s getting sold, how those things are going to turn into revenue in the future. And with our strong metrics around GRR, we are not – we don’t see any fall off there. So, I mean that’s why we think it’s a tremendously dependable measurement to use to kind of evaluate how that’s going.

Okay. Got it. Thank you.

You bet.

Thank you. Our next question is coming from Daniel Jester of BMO Capital Markets. Please go ahead.

Great. Good morning everyone. Maybe just to build on Pat’s first question about sort of the high level overview. David, you have been retooling the business towards growth for a couple of years now. Can you just maybe philosophically help us think about where we are in that journey? Is 2022 going to be the year in which the vast majority of those investments are fully in place and starting to contribute, or is some of this structural pivot of the business going to extend beyond this year?

It’s a great question, Dan, and great to talk to you again. We are – I think we are in an important year around those investments. I am really excited about what the team did accomplish in some of the investments we have made in R&D and the products we are starting to roll out that put us in a really good position as we enter ‘22. I think we come out of ‘22, it will be a major – the team will have accomplished a lot to position ourselves for the future growth that we are pursuing in the market. We will continue to invest in sales and marketing spend because the opportunities in front of us are going to be there. I think the R&D investment, we expanded our capacity 18% last year, which I am really proud of the team to have done that. And we are going to continue to monitor that, and – but I think that will start to normalize after we get through this bigger – the rest of this investment cycle here in ‘22.

Got it. And then in the prepared remarks, there was a comment about making some changes in your services business and to maybe push a little bit more of that to your partners. Could you expand on what exactly is going on there? Thanks.

Absolutely. We have consistently and always value the quality of our alliance relationships. They are essential to our success. They are often a referral source for that ARR that John was just speaking about, and we work very closely with them. So, we have always sort of metered our growth in services to make sure we are supporting that alliance base. And we made a decision this year that we wanted to – we have been growing a little faster than we typically had over the past few years, and so we were excited about the way the team performed, but we also wanted to be thoughtful about sustaining the quality of alliance, relationships because as we are accelerating with SAP and OCI around deal flow, it will be – we will need to make sure we can fulfill everything that needs to be implemented and that will really fall in that ecosystem. So, we want to make sure we are doing proper partner relationships there for the long-term. It served us well for the past 30 years, and we want to continue to do that.

Got it. And if I could sneak one more in, if I recall, last year, there was some churn in your client base at the very, very low end of the market. Obviously, clients are growing again. So, is that – are we past that, or is that still something that we should be taking into consideration for the year ahead? Thank you.

Yes. I mean I think, Dan, as we think about it, there will continue to be a little bit of churn at the very, very low end. Again, I think – the thing that I think is important to emphasize here, as you look at our average ARR per customer growing over time, I mean it’s growing in the face of kind of these minor, very small customer movement that we have seen at the very, very low end. So, they are still a little bit left, but I wouldn’t anticipate it very much at all.

And I would just build on that to say, Dan, look at our GRR quarter-in and quarter-out, it doesn’t change. Its rock solid, and the ones we lose really are largely M&A-driven. Actually, the bulk of what disappears from us is much more off of M&A. We are not seeing any cloud migrations losses at all.

Got it. Thank you very much.

[Operator Instructions] The next question is coming from Stan Zlotsky of Morgan Stanley. Please go ahead.

Hi guys. This is Benton on for Stan. Thank you for taking my questions. I would love to start out with understanding just how far down market do you guys see yourself going as we move forward and then just additional impact that’s having on your go-to-market strategy. I know you earlier referenced that sort of indirect method that you guys are utilizing, I would like to tap into sort of the direct impact that’s also having on your sales team?

Yes. So, as far as market segments, we are pretty clear with our team that through the indirect channels that we are building, we are investing in, we are engaging with customers typically in that $50 million – $40 million, $50 million at the low-end revenue and growing. That’s our mid-market space up to $400 million, $500 million. The – and then the rest of that would be what we would call enterprise. Anything below that, we are able to access through the relationships like Acumatica, CPA.com, which is much more of a one-to-many where we only have to deliver to Acumatica, and they are selling and supporting those customers. So, we are actually growing our customer base. We only count Acumatica as one customer, but in fact, there are a significant number of users on that space and through the CPA.com relationships that continue to use our software, but we only bill the source, not all the individual customers. So, we actually don’t count them. So, that’s how we support the low end of the market without having to distract our sales teams or invest in a number of channel relationships that really wouldn’t be as profitable to us and wouldn’t be as cash flow as strong to us as what the mid-market and enterprise market is. So, I think that was the first part of your question. Could you repeat the second part?

Yes. Just trying to better understand your go-to-market strategy that – and the direct impact that’s having on your sales and marketing team.

Yes. Okay. So, I think I hit most of that. Our strategy is very clear, again, across those three segments. Direct sales serving the enterprise market very closely with either our partner sales teams, like SAP and OCI, or working directly with our alliance partners. In the mid-market, it’s more of an indirect motion directly into the channel, and we continue to build out capacity and relationships there. And then lastly, that down market will be much more of a one-to-many. And there are a number of relationships we are forming there to just be the cloud provider, but not have to have the sales force requirement. So, all that capacity spend I talked about in sales and marketing, which we grew – approximately sales and marketing about 20% in capacity last year, is all really focused on the mid-market and enterprise market. We don’t need to tie up that capacity to pursue the down market.

Got it. Thank you. And then just one more additional question for me, from a geographic perspective, how are you guys accounting that – for that in terms of better growth and so the growth potential you see going forward?

Yes, Europe is a very largely untapped market. It’s really because of the complexity – the regulatory complexity that’s going around VAT and some of the regulations that have been rolled out is making it more complex. It’s creating – accelerating opportunity, but it’s a very un-automated space, meaning, if you remember, our largest competitor is the in-house solution that’s been good enough, and we are seeing that start to fracture as e-invoicing real-time requirements, some of the compliance changes and even tax determination changes are showing up in the EU. Our new SAP – our expanded SAP relationship that I was referring to is really going to allow us to accelerate growth in Europe, because SAP is the largest platform for enterprise customers over there. So, I feel like we are really well positioned as that market continues to grow. And then there is Latin America, where we – content is king down there. We made an important acquisition, Systax, a couple of years ago that we are really pleased with the way that’s performing. We are going to look to continue to support that investment and expand going forward because it’s a great opportunity in that market.

Thanks so much.

Yes. Sure. Thank you.

Thank you. At this time, I would like to turn the floor back over to Mr. DeStefano for closing comments.

Thank you. I would like to thank everyone for their time today. And I look forward to coming back together with you in May to share more around the advancements we are already making in 2022.

Ladies and gentlemen, thank you for your participation and interest in Vertex, Inc. You may disconnect your lines. You log off the webcast at this time, and enjoy the rest of your day.