Greetings, and welcome to Vertex, Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. And I'd like to turn the conference over to your host, Ankit Hira, with Investor Relations at Vertex. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for Vertex's financial results conference call for the first quarter ending March 31, 2022. 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 and forward-looking statements are subject to and 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'll now turn the call over to David.

Thanks, Ankit. Welcome, everyone. 2022 has started off incredibly well at Vertex with solid growth and positive progression across many dimensions of our business, resulting in total revenues of $115 million, up 17% year-over-year. Our teams continue to execute well and drive momentum in the markets we serve, accelerating ARR growth to 18.9% in the first quarter while maintaining strong EBITDA margins of 16.6%. We're seeing strong adoption persists from both new and existing customers. Our NRR grew to 110% this quarter, which speaks to the efficacy of our increased go-to-market investments and our ability to build trusted lasting relationships through a differentiated customer experience. These are cornerstones of our sustained success. Our first quarter results also demonstrate the progression of our cloud revenues and the expansion of our installed base, whether that is through regional expansion, product cross-sell, sustained platform migrations and increased transaction volumes. Cloud revenues continue to increase as a percent of total software subscription revenues from both new and existing customers. In Q1, 96% of our new logos were cloud. And overall, cloud now represents approximately 40% of total subscription revenues. Overall, I'm excited about our strong performance out of the gate and how well it sets us up for the remainder of the year. First, our core enterprise segment remains healthy and continues to widen. These are the most dynamic companies in the world spanning every industry. They are at the heart of global commerce growth, and their performance durability is proven even in the most challenging of economic conditions. Second, we consistently leverage our market-leading position by providing a mission-critical service in a large and growing global market. And now we are replicating our formula for enterprise market success into Europe by combining strong partnerships, fit-for-purpose solutions and customer referenceability. We are extending the…

Thank you, David, and good morning, everyone. Today, I'm going to review our first quarter 2022 financial results and provide second quarter 2022 and full year 2022 guidance. Total first quarter revenues grew 17% year-over-year to reach $115 million, exceeding the upper end of our quarterly guidance by $1.5 million. Our subscription revenues increased 16.6% period-over-period to $97.1 million. Services revenues grew 19.4% period-over-period to $17.9 million. Our annual recurring revenues, or ARR, grew to $380.6 million at March 31, 2022, representing approximately 18.9% growth over the comparable 2021 period. Excluding the acquisitions of Taxamo and LCR-Dixon that were made during 2021, our ARR grew at 17.1%, which is an increase from 15.1% that we reported in the fourth quarter of 2021. Our net revenue retention rate, or NRR, was 110% at March 31, 2022, growing from 105% for the comparable 2021 period and from 108% in the fourth 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 95.6% at quarter end, which excludes internal migrations by customers to our cloud solutions, which were approximately 3%. This is consistent with our prior performance, which has averaged between 94% and 95%. In addition to the ARR growth, as mentioned above, our returns processing managed services business generated recurring services revenue of over $6 million in the first quarter of 2022 as compared to $4.9 million for the comparable prior year period. This service is a competitive differentiator and is a significant component of recurring revenue, which is not included in our ARR. At March 31, we had 4,242…

[Operator Instructions] We have a first question from the line of Matt Stotler with William Blair.

Maybe just wanted to start off from a high level. Obviously, there's a lot of different factors impacting the business environment right now, increased inflation concerns around that, geopolitical impacts in Europe, tight labor markets, et cetera. But Q1, I mean, clearly, the results were positive, right? Acceleration in key metrics, uptick in NRR, strong GRR. So I would love to just get your -- I guess, your observations, your thoughts around some of those macro factors, anything that you're seeing in the market? And any thoughts on those on a go-forward basis.

Thank you for the question, Matt. I appreciate the comments on the quarter. I think as of this point in time, we are not experiencing any slowdown in pipeline activity. I think the complexity that are the tailwinds of our industry continue to drive demand and it's not getting any easier for them because businesses are in a continual search for more growth, and the regulators are desperate to find ways to collect their money. So, we're certainly seeing some audit pressure pick up in certain areas, which is, again, good for us because it ultimately fuels demand. And there's still a steady margin of good activity as companies like SAP and Oracle have reported around their activity on the cloud. That is certainly fueling some of the differentiated relationships we enjoy, they are driving some of our continued pipeline views.

Got it. That's helpful. And then maybe one on cloud growth. Obviously, we continue to see some pretty robust growth in that segment of the business. Any update on the contribution that you're seeing there from kind of new versus existing on-premise customers migrating over. Obviously, it sounds like it's a great engine for bringing in new customers. We'd love some thoughts on the installed base migration path going forward as well.

Matt, one of the things we're finding is, and that's part of the strategy about bringing out new products is the more we start to surround our existing customers with new cloud-based solutions like our Edge solution that we launched at the beginning of the year, it will drive more migration opportunities for us. So I think as we continue to bring out new products that are all cloud first and what we're building, it will continue to pull the customer base along. We haven't seen any fundamental shift in that trajectory that we've been talking about. But I do -- part of our strategy with what we're bringing forward is to pull them into that space moving forward as the year and years progress.

We have next question from the line of Joshua Reilly with Needham.

Nice job on the quarter here. I know Europe is a small business for you guys currently, but you've been expanding your presence in the region there. Have you seen any divergence between demand in that region versus the United States since the Ukraine conflict has begun? And are you still adding sales heads at the same pace of last quarter in that region?

Josh, we are still adding go-to-market activity. And really what's driving it is a couple of things. One, the acquisition we made in Taxamo is giving us a differentiated conversation opportunity there, and we're certainly seeing that as we continue to integrate and that product into our broader suite. And the second is the relationships we've been talking about with SAP. Because of where we are in the SAP online store and how we're working now in parallel with their sales reps to do account planning, that is driving demand opportunities for us more so than any of the offset that might be because of some of the political or economic uncertainty at this point in time. So we continue to want to bring more capacity to market on the go-to-market side because we're seeing a good uptick in activity. And again, SAP being the dominant platform of large enterprise and it aligns perfectly to our strategy. And so I'm still bullish on what we're trying to accomplish there.

And then you touched on it a bit on the increasing enforcement for the marketplace rules that were put into effect last July. But can you just give us an update how much more enforcement are you seeing? Is it beginning to drive incremental customer interest?

It absolutely is, yes. So I think enforcement is still at a fairly quiet level, candidly. But I think the recognition that the enforcement is coming has clearly surfaced in the dialogues we're having and we're seeing a different nature of exploration of the merged Vertex-Taxamo assets than we were in the past.

We have next question from the line of Andrew DeGasperi with Berenberg.

First, on the customer count, you mentioned the loss of 30. Just maybe if you could expand on that. I mean I would have thought it would have affected gross retention rate, but it didn't. So I guess, first, maybe can you give us an idea of how -- what's the typical contract size for these customers? And also, you mentioned the 200 or so that you're going to add in the next quarter. Should we assume those are kind of customers that might be a risk of turning off? Or are you just trying to sort of size what the activity is going in that pipeline?

Yes, Andrew, thanks for the question. This is John. I'll start with that, and David, maybe, you can add to it. I think as we thought about the -- we looked at the customer activity, what we've seen and what we continue to see is some noise there. Again, we had a 30-customer decrease, but it's at the very, very low end of the market. And so again, its customers that aren't necessarily very profitable in terms of that perspective. Again, at a very small end that we've had for a period of time. So you're not seeing any degradation in any of our GRR, our ARPC or anything else because, again, because of the size of the customers that we're losing, again, what we're gaining is excess of the things that we're losing. We're talking under $10,000 annual customers, again, that really aren't our target market. So what we've done is we've put in place that one-to-many strategy that we've talked about a number of months ago to really find others can help us sell and service at that lower end. So they'll be handling not only the initial customer contact but follow-up contacts to assist with that to give them the care that they need to grow their businesses. And so that's our approach at that level. And so that's what's going to help us kind of move through. And again, largely, it's a very similar client to those that are turned off, but we have a different approach to being able to better manage them.

Got it. And then maybe when we think about the enterprise contribution, I mean, SAP, OCI, would you say that they've grown sequentially relative to Q4? And is the contribution from this new relationship with SAP? I mean, how meaningful -- have you seen a definite material increase in terms of activity from that pipeline?

Yes. No, absolutely. The SAP, you combine the investment in new products like the chain flow accelerator that we brought to market in our global compliance product. And then you add in the SAP relationship that we form with their sales teams and the LCR-Dixon acquisition. When you look at the triumvir of those three things, we are definitely seeing a differentiated conversation with the SAP community that has us very excited because we know where we are within the SAP online store in terms of our success there. And now we're able to continue to drive more customer value through the products and the relationships with the sales reps. So yes, we're definitely in a very different place with SAP, which is partially the reason addressing the other question that was asked by Josh around Europe, we continue to see that given the primary platform that they are, why it is supporting our enterprise strategy.

We have next question from the line of Samad Samana with Jefferies.

Maybe first one, John, subscription revenue was quite strong in the first quarter. I'm just curious, was that more a function of seasonal strength and price increases resetting? Or was that a function of new bookings that you guys talked about in the fourth quarter coming online. Just help me understand that kind of $4 million quarter-over-quarter increase versus last year was kind of flattish from December to March, just -- and how should we think about maybe the seasonality for the rest of the year with that in mind.

Yes. Thanks for the question, Samad. I think when we think about sort of what that growth looked like in Q1, there was a couple of dimensions to it. Again, largely, we had a nice Q4 and that Q4 rollover into the first quarter certainly carry things in. Again, typically, Q4 is our strongest quarter in terms of kind of sales and booking activity that occurs. And then it softens up in Q1 and starts to build throughout the year. So I think that same shape. We're anticipating to still stick with us. We are, as you well know, making investments in sales and marketing, go-to-market activities to really continue to try to increase the opportunity, as David's talked about. So hopefully, we'll continue to see that growth and hopefully even to a greater extent as the back end of the -- as we progress throughout the year. But I wouldn't necessarily pin a lot of it to big price increases. As you know, we do have a regular kind of price increase kind of activity in motion as we've been in business for such a long time. I would say the activity from 2021 into 2022 isn't dramatically different than that because a lot of our price increases get set at the very end or at the middle to the end of the prior year. So that stuff was sort of locked in. So I don't see that contributing any more than it has in the prior periods. Hopefully, that's helpful.

Definitely. And then maybe just stepping back in terms of the investment initiatives. And I don't not sure if I heard it correctly, but it sounded like maybe some of the spend may have slipped out of 1Q into 2Q. Just what was maybe the reason behind that? Is it just the hiring environment? Is it within a certain part of the Company's OpEx structure? What are you guys thinking as far as spending initiatives that went into 2Q instead of 1Q? And how should we think about kind of where that was, whether it's sales and marketing or R&D.

Samad, it was largely hiring-driven. We certainly have been aggressive in the market with capacity additions, both in R&D and sales and marketing and continue to be. And you're right, it is a tighter labor market, and we do have a little bit of what we had planned. I didn't come in quite as soon. And then we had a couple of projects where we intentionally just looking at all the different moving parts of activity, we slowed down a little bit, and those are now just from an overall prioritization falling more into Q2 and beyond. So they'll it'll -- those expenses will catch up.

We have next question from the line of Pat Walravens with JMP.

Great. This is Joey Marincek on for Pat. Just following up on that last question. I mean, how are you feeling about sort of your ability to attract or retain talent in this environment? And then I have a follow-up.

Yes, Joey, I think two things that are playing well for us. In the R&D side, some of the technology that we're starting to leverage more and more is pretty exciting to some of the folks that we're talking to in the R&D community. And I think that has played well to attract the kind of talent that we're looking to add. And then on the sales and marketing side, again, I think some of the differentiated relationships that we enjoy, we're able to talk to the communities that are out there, whether they be in our industry or related software sales industry about how we're able to bring them a differentiated go-to-market opportunity when they're talking to pursuing new customers, given things like the Oracle and SAP relationships. And so I think the conversations actually play pretty well for us. It's just -- as you know, it is a tight labor market in general to find the quality that you want. But I think when we get in those conversations, we've got really good stories on both the R&D front and the sales and marketing front that serve us well to secure the talent we're looking for.

That's really helpful. And then just on the continued investments in the mid-market, how are you feeling about your overall progress there? And then can you remind us of sort of your expansion strategy in that segment?

Yes. So the mid-market remains -- 20% of our customers come from the mid-market already. So it is something we're looking to continue to expand. I think we saw some and are seeing some good traction in areas like Salesforce and Workday. I've been very encouraged by some of the progress we've made there and it's motivating us to accelerate some of our investment in the sales and marketing and channel area. When we think about Europe, it's largely an enterprise strategy, mid-market will play in there because SAP goes down to a level, and we're going to sort of follow the SAP roadmap largely in the Europe mid-market.

We have next question from the line of Brad Reback with Stifel.

David, as we think about the acceleration in investment in the business on the OpEx side, should we be thinking that success would be a return to 20% ARR growth or something different than that?

Brad, I think our -- we've been consistent. We believe that with the investment we're making in both sales and marketing, customer success management and R&D and our content databases. We continue to invest in those areas. We believe we absolutely -- the durable growth rate of this company should be in that 20% range, with margins that will start to come back higher. Certainly, we've talked about as our cloud continues to gain scale and we continue to leverage more of our content investment, we would expect gross margin will help accelerate, which will serve ultimately driving the EBITDA margin as well.

That's great. And then, John, on the IT investments, when should we expect to start seeing leverage and operational efficiencies from those.

Yes. I mean we're going to continue to invest in those areas. It's going to take us another -- it will take us a little bit of time to get those investments in there and start seeing those things -- seeing them show up in some of the numbers and some of the events. So I think that's really pushed out. It takes a little bit of time to start realizing that. So we're still in the investment phase. The realization phase is probably -- it probably follows 12 months and then a little bit into the future, certainly, as you continue to perfect and get better as you drive.

[Operator Instructions] We have next question from the line of Daniel Jester with BMO.

Just on the guidance. Obviously, the first quarter came in above plan, and the commentary around demand seems pretty good. But you left the full year revenue guidance unchanged. Can you help us think about sort of what's going on in the back half of the year? Or are you just being conservative given the macro?

Yes, Dan, thanks for the question. I'll start with this. But I think you're right. We had a real nice quarter. We're pleased with the results that we have, and we still think there's a very good opportunity in the business. But consistent with what we did last year, first quarter is good. But we want to make sure that we've got a real good view on kind of how things are developing and how things are moving. And we think it makes sense to wait until the second quarter to evaluate whether we need to move that. I mean, again, we had a real nice feat in Q1, a couple of percentage points was terrific. But again, we want to be thoughtful, conservative and mindful of some of the economic uncertainty that's in the economy now before we start moving things and changing them around.

Okay. Great. And then I appreciate the context on the edge solution and the win in the quarter. Can you just remind us like what is the catalyst that's going to get customers to come to that product? And how different is it going to be relative to the more traditional Vertex offering. Is it going to be around sort of omnichannel refresh? Or like how do we think about sort of the catalyst to vary and get people to engage you on that one?

Yes. It's really the evolution of business complexity where businesses are pushing growth to the edge, meaning they're looking to have transactions happen on a cell phone or an iPad or via a sensor. And the regulators want to make sure they're able to bring tax at that level as well. So at that point of need, we've been able to now shrink the footprint of our O Series capability to via the edge product to that exact point of need. And that differentiation really serves the retail community exceptionally well because that's a very common format, and we've certainly seen a growth back as e-commerce slows down a little bit more in-store activity, and that will drive -- be a demand driver. And then we're also seeing some interesting businesses that are not directly in retail that are looking for endpoint solutions as well across their operations. So I think it's business model complexity and wanting -- because the regulators are taxing at the point of the transaction wanting to have that accuracy built in is going to be the demand drivers for that -- those offerings.

We have next question from the line of Patrick Walravens with JMP.

David, I just wanted to drill down more. So on SAP, three things. Number one, what other options do people have for tax calculations there running SAP? Number two, how does this SAP store work? And then number three, I mean, I'm hearing the same thing about people are moving S/4HANA, especially big companies, but it is kind of counterintuitive, right, given the macro. So why is this happening now when there's so much uncertainty?

Yes. So certainly, consistent with whether it be sales and use tax or VAT, the manual or in-house solutions have been developed and they have been good enough. And so that's historically using either SAP native VAT functionality or the manual process they built around it, have been the demand drivers of the past or they've been a good enough solution in the past. The demand driver now is that really there -- the complexity in the regulations and the complexity of the business models can't be served by those capabilities anymore. And so that's been the tipping point where now we are able to work with their sales team and actually go in and deliver a differentiated customer value. So that is the first driver, and that's what's different for us. It's no different, candidly, than any other Oracle relationship from the perspective of how they were solving it to now what they're looking for as a third-party solution. As far as the online store, what it gives us a more direct access to the SAP customer base, where they're able to go in and explore our product in a differentiated way. And then the sales team knows because of our status within the SAP sales team knows because of our status within the online store, it's a capability for them to promote their to their customers. And so I think that's what's helping us to gain fuel more demand opportunities and more pipeline activity. As far as the S/4 migration, I can't speak to what are the demand drivers. We don't get -- we don't -- we partnered with them after they've made those decisions. We're certainly seeing good activity and have good visibility to a lot of dialogue. I think it's consistent with the thesis you often ask about, how is our cloud migration going? I think as more and more companies continue to want to move their infrastructure to the cloud. It just -- it is -- they are still continuing on that journey. And these are, again, are the largest enterprises in the world who have the durability to get through some of these economic noise of some of this to the economic conditions that I think, obviously, smaller companies are going to be more conservative than the larger companies. And the last thing I would just add that supports that is, I think during the pandemic, we saw a real slowdown in some of this activity because IT functions of these large organizations had to focus on sustaining just operations. And now they're getting back to because they know they can sustain on a remote basis, they're now getting back to the investments they need to be making in their business. And I think that, again, serves us well for a durable tail here.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to David DeStefano for closing remarks. Over to you, sir.

Well, thank you, everybody, for joining our call today. I look forward to coming back to summer to share more about the advancements we are already making. Take care.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.