Hello, good morning and greetings. Welcome to Vertex's Third Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. At this time, all participants are in listen-only mode. And at this time I will turn the conference over to Joe Crivelli, Vice President of Investor Relations. Mr. Crivelli, you may now begin.

Hello, and thanks for joining us to discuss Vertex's third quarter financial results. I'm Joe Crivelli, Vice President, Investor Relations. David DeStefano, our President and CEO; and John Schwab our CFO, are on the call with us today. As a reminder, during this call, we may make forward-looking statements about expected future results. Our actual financial results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Please note that our remarks today will also include references to non-GAAP financial measures. A reconciliation of these non-GAAP metrics to GAAP is also provided in today's press release. This conference call is being recorded and will be available for replay via webcast on our Investor Relations website. I'll now turn the call over to David.

Thanks, Joe. Welcome everyone and thank you for joining us. Once again in the third quarter Vertex delivered excellent financial results, driven by consistent strong execution. Revenue in the third quarter was $145 million, up 15% year-over-year. Adjusted EBITDA was $26.6 million, up 30% compared to last year's third quarter. This represents an EBITDA margin of 18.4%. In addition, in the third quarter we delivered 18% year-over-year growth in ARR consistent GRR at a SaaS best-in-class level of 96%, NRR of 111% for the second quarter in a row. Average annual revenue per customer of nearly $113,000, up 16% year-over-year. And growth in scaled customer count, representing customers with annual revenues greater than $100,000, up 15% year-over-year for the fourth quarter in a row. This reflects our ongoing success in the underpenetrated enterprise market. I'm very proud of these results which demonstrate the outstanding effort of our global teams and the pay-off of our multiyear growth investment that began in 2020 and largely wrapped up in the second quarter with the launch of our new ERP system. The result is continued strong revenue growth and now accelerating earnings leverage, something we expect to continue in the fourth quarter and beyond. By investing earnings back into the business over the past three years, we are now selling into new markets and have built a growth engine that we believe will propel us to $1 billion of revenue and beyond. In addition to modernizing our corporate infrastructure, our investment in additional R&D and strategic acquisitions allows us to bring new capabilities and products to market faster than ever. The expansion of our go-to-market channels has enhanced our revenue opportunity with both new and existing customers. And while these investments impacted Vertex's bottom line from mid-2020 through the first half of 2023, they…

Thanks David and good morning, everyone. Today I'm going to review our third quarter financial results and provide guidance for the fourth quarter and full year of 2023. Total third quarter revenues grew 14.9% year-over-year to $145 million, exceeding the upper end of our quarterly guidance by approximately $2 million. Subscription revenues increased 14% period-over-period to $121.3 million. Our services revenues grew 19.5% to $23.7 million. And cloud revenue was $54.6 million in the third quarter, up 24.8% from last year. As David mentioned, our customer metrics remained solid. ARR was up 17.8% year-over-year. NRR was 111% and GRR was 96% in the third quarter. And AARPC, which is based on our direct customer count was $112,690 in the third quarter up from $109,170 in the second quarter of 2023. Non-GAAP gross profit for the third quarter was $103.4 million, representing a gross margin of 71.3%. This compares with $87.6 million and 69.4%, respectively in the same period last year. Non-GAAP gross margin on subscription software revenue was 78.3% and non-GAAP gross margin on services revenue was 35.3%. Turning to non-GAAP operating expenses. In the third quarter, research and development expense was $15.4 million compared to $9.8 million last year. With capitalized software spend included, total R&D spend was $28.4 million for the third quarter, which represents 19.6% of revenue as compared to 15% of revenue in the prior year period. Our selling and marketing expense was $31 million or 21.4% of total revenues. This is the fourth consecutive quarter that selling and marketing expense has been relatively steady in the low $30 million range, reflecting the moderation of our investments in the go-to-market over the past year. General and administrative expense was $31 million or 21.3% of total revenues. This is down approximately $2.3 million sequentially as some of…

Thanks, John. So to wrap it up, it was another great quarter for Vertex. We have built an execution engine that is delivering strong and durable financial results in what has been a challenging economy for many SaaS companies. We're fortunate that our offerings are a must-have, not a nice-to-have for our enterprise customers. Tax compliance is required in strong and challenging economic time. This is what makes our solution so sticky, and is the foundation of the consistency in our GRR and NRR. With the investments we've made and the results they are delivering, over the next few years we see a clear path to the Rule of 40 metric long-term revenue growth, in the mid- to upper teens and EBITDA margins in the low to mid-20s. Unlocking this kind of performance was the North Star of our growth investments. And from here on out, it's about delivering the same consistent execution that we have since we went public in mid-2020. I am confident the Vertex team is up to the task With that we'll take your questions. Operator, please go ahead.

Operator Thank you very much. We'll begin the question-and-answer session [Operator Instructions] And our first question comes from Chris Quintero from Morgan Stanley. Chris, please go ahead. Q – Chris Quintero: Hi, guys. Good morning. Congrats on the strong set of results here. Net Menu adds came in kind of the highest for Q3 and maybe kind of full year so any sense of what the channel mix is of where this new customers are coming and we talked about continues to accelerate momentum with SAP and you mentioned some nice customer wins there. So just curious how big of a contributor maybe the partnership with SAP was in the quarter.

Yes, Chris, I appreciate the question. SAP clearly, is a strong tailwind given all the investments we've made right now in new offerings in the SAP space, the LCR-Dixon acquisition and all the work we're doing with our go-to-market teams and our partners. Collectively, that has clearly started to improve our pipeline and it's creating a nice tailwind. But what's been really great is, we're able to leverage the playbook we've been running in SAP and we're starting to improve execution in Microsoft, NetSuite, Workday and we had some really nice wins. And so while AARPC did rise nicely, we actually saw a good diversification of wins across the different ecosystems we're focused on. Q – Chris Quintero: Got it. That's very helpful. And then on the fewer conversations around moving to the cloud, what's your sense? Do you think that's more kind of like macro-driven, more secular? And as more kind of existing customers stay on that on-prem version? Does that change your calculation and thinking around pricing between the two different versions?

As you know, we made the switch to have the same pricing for cloud that we do on-prem. So we're getting the same subscription revenue regardless of whether an existing customer is upping their – expanding their wallet share with us with another on-prem license or in unique stack patterns like the one we highlighted in the call where a defense industry, there are certain governors on where they can have their data and being able to support them where they're at has always been a key differentiator for us Chris. And so I'm really pleased with the actual. We're able to sustain such strong cloud growth and yet grow AR even more. And margins picked up, as a result because of that – it's obviously, more profitable for us when they're buying on-prem. So it's actually been a really nice shift in strategy that's working incredibly well for us.

Excellent. Thanks, David.

And our next question comes from Matt Stotler from William Blair. Matt, please go ahead.

Yes, great. Thanks for taking my question and nice results. Wanted to ask on the strong NRR number. I think it's the second quarter in a row of record level there. Is this sustainable? And perhaps is there even additional upside to this metric? Thanks.

Matt, a key part of our strategy was to invest in building out a customer success function over the last several years and combine it with the new product suite that we've been expanding and the acquisitions we made also that we could better serve our existing customers. And I think what you're seeing is the execution on that and the maturity of that strategy is playing out really nicely. We don't guide to NRR, but I'm certainly pleased with the progress the team is making to make sure we're delivering value across our entire customer base.

Great. And then just wanted to follow up on the commentary around fewer on-prem migrations. If you could just give a few more details on what's driving that? Thanks.

Yes. So we – one of the things we've always talked about Matt in our process is we meet the customer where they are in their digital transformation journey and support them as they're ready. And I think our GRR proves when they're ready, they are migrating with us because it's much more about the content than it is the underlying platform. And so we're I think it's just episodic to where customers are in their journey with migrations that we – that that ebbs and flows a little bit. But fundamentally not seeing any change in GRR and the fundamental shift continues. I think it's also important to remember that 90% of all the new logos that we're winning are on the cloud. So we're still leading with cloud and it is where we see the bulk of our new logos. But we've got a wonderful installed base and some of those customers are just on their journey at different paces.

Perfect. Thank you. Appreciate it.

And we now have a question from Joshua Reilly from Needham. Joshua, you may proceed.

All right. Thanks for taking my questions. Nice job on the quarter here guys. What are you seeing in terms of customers allocating budget to your category of products maybe exiting 2023 versus a year ago? Are you seeing larger budget opportunities year-over-year which it appears that's the case, given some of these large wins? And what if any macro risks do you see exiting the year that could maybe impact some of the spending to close out the year?

Josh, always good to talk to you. I think fundamentally, there's three major tailwinds that affect our opportunity set. The one is, business model changes M&A and we highlighted a couple of things we saw in the quarter, where M&A deals were happening and we were getting expanded wallet share. You've got the regulatory environment which is only getting more complex, as governments are taking on more debt and looking for new ways in the indirect space to raise revenue. And then lastly, the ongoing digital transformations that businesses are going through. And I think that diversification of business drivers has given us the consistency of performance. And I think it's much more about our execution against those drivers that's driven our numbers up so much this year. And certainly, we haven't guided anything for 2024, but those three factors work in a really nice balance for us and I see that continuing as we move forward fundamentally.

Got it. And then you had a nice beat on the operating income here in the quarter. John, can you help us think about the operating leverage going forward without guiding to 2024? Should investors -- should we assume that we will continue to be in a period of harvesting the investments that you've made? Or should is there another cycle of spending maybe coming in 2024? Thanks guys.

Yes. Great question, Josh. Thank you. Yeah, as I think about leverage and kind of how we think about that moving across the -- across the years again we've talked about G&A being an area we think there's opportunity for leverage there. And that's an area that we'll continue to be focused on. Again having the ERP upgrade behind us and kind of moving forward with that, we feel very good about the opportunity to be able to leverage that going forward. And I think you've seen in our results the selling and marketing expense has been has been fairly flattish for the last handful of quarters. And so that's another area that again after we got through the big build period in that 2021, 2022 time frame you're starting to see a little bit of moderation in that area. So they're are a couple of the areas that I would say that we feel good about leverage. Again, R&D is one we're always going to be very mindful of because that's kind of the key to our future success. And so we'll continue to monitor that and determine kind of what the right spend area is there. But again, I always hate to put a little bit of a governor on that just given the opportunities that are out there with our blue chip customer base.

And we'll proceed with the question from Steve Enders from Citi. Steve, go ahead.

Okay. Great. Thanks for taking the question this morning. I guess I want to ask a little bit about the Shopify partnership that was announced recently. I guess how does this -- I guess how does this relationship kind of come together and evolve? And how are you thinking about where -- how this changes the customer base and how you kind of go after and attack the mid-market moving forward here?

Yeah. Super excited, Steve about this new opportunity. The team has worked incredibly hard. It started because we had a number of customers that were in the -- that had made acquisitions over the years or whatever and suddenly had a division that was using Shopify. And they were not comfortable with the answers they were getting in tax, relative to what they were getting in ERP. And so our customers and our team went to Shopify and talked about new opportunities, we could work together if they would open up their API. As they were aligning their strategy to move upmarket to the enterprise space, they saw it as the natural adjacency of what they want to do in tax was to work with us. And so it really has played out perfectly. And I see it as opening up as you know both the middle market and the enterprise market for -- to align well with Shopify strategy.

Okay. Great to hear. And then John, I guess I just want to get a better sense for now that we're through the ERP implementation, did that have any impact on billings or cash collection in the quarter? And I guess what kind of recovery did you see from 2Q on that front and 3Q? And how should we think about that going into Q4 as well?

Yes, Steve, good call-out. On the last call, I did mention that we did see a little bit of a slowdown in some of the collections at the end of the second quarter. I think as mentioned we started to see that come back in the third quarter and feel very good about that Now as I think about look to the fourth quarter fourth quarters are typically our largest kind of cash generation quarter. A lot of the billings go out a lot of those year-end customers. And so we feel very good about the processes and where we stand with respect to the new ERP system. And so I don't know that there's any significant change with respect to what we should think from a result standpoint because of any of that because of the move to the new system.

Okay. Perfect. Thanks for taking the questions this morning.

Thanks very much, Steve.

From Adam Hotchkiss from Goldman Sachs. Please go ahead.

Great. Thanks for taking the question. David I just wanted to follow-up on the partner front a lot new here with SAP Microsoft Workday and now Pagero and Shopify. I recognize there are idiosyncratic drivers of all of these. But if we take a step back is there any commonality in what is giving you guys the edge in each of these ecosystems and why things are inflecting now?

I think the market we play in is the most desirable market the enterprise and upper mid-market and that's where these players all want to align. And given our brand and reputation our partner ecosystem with the SIs and Big 4 and the influencers that are so critical to winning these deals I think they see they can -- there's a real symbiotic -- back to Shopify is a great example. We're going to help them win deals in the enterprise space. I mean that's part of their rationale for working with us in that opportunity is we can actually help them grow their base as well. And so I think that's the symbiotic whether you look at a Pagero, which sees itself already as an enterprise and mid-market player they're going to get access to a much broader customer base with a much larger invoice volume which they see as very attractive for their growth opportunity and it works perfectly with what we need to do to support our end-to-end compliance needs for our customers. So I think that's the reason you see the magnet being drawn our way.

Okay. That's really helpful. And then I noticed you added Chirag Patel as CSO intra-quarter. Just what was the driver of making the change for that role? And what gaps are you looking to fill there?

Yes. Chirag brings an incredible resume is a serial entrepreneur was at EY has had his own start-up businesses over the years successfully transitioning those. Grew up his legacy in Oracle so he understands our space incredibly well. And as we think about innovation John was highlighting R&D spend and the importance of that we still see a lot of frontiers so there's opportunities. And I think Chirag's going to bring a keen eye and a discipline that will help us be even more efficient and effective at driving new opportunities in the market. So I'm really excited about bringing that kind of talent into Vertex.

Really helpful. Thanks David.

Yes. Good talking, yes.

And our next question comes from Alex Sklar from Raymond James. Alex, please proceed.

Great. Thank you. Dave on the e-invoicing partnership with Pagero, can you just help frame what percentage of your 4,300 customers have international operations that e-invoicing is going to be relevant to. And then any rough range in terms of what an ACV for that solution might look like given you're working with the partner there?

Yes. I can't -- I mean I can -- all I can say is the predominance of large multinationals by nature at the enterprise space and upper mid-market space operate in more than one country. So it's certainly a unique opportunity that our base is seeing as a problem set that they've been solving with point solutions and they're not happy. And it was a key driver to the whole strategy was to bring together a global solution with a global provider. And we really see it as a great win. I'm not -- we haven't gotten into any of the pricing on a public basis. But fundamentally, if you think about the invoice volume that the types of customers we work with running through these countries, it's certainly a -- we see it as a very sizable opportunity as we think about our revenue growth rate looking forward in '24, '25 and beyond as customers start to move to more of a global solution for their e-invoicing.

Okay. That's great color. John just following up on Steve's question regarding free cash flow. Outside of the billing timing and that's snapping back there, can you just give some added color on the right way to think about EBITDA to cash flow conversion? And if there's any way to quantify what may have been a nonrecurring component of CapEx this year as we think about 2024?

Yes. I guess a couple of ways to think about that. From an EBITDA to cash flow standpoint, again, I think we talked a little bit this year, that we would be certainly free cash flow positive. I think longer term, what we've seen is we've seen that in the past, I can tell you that the company has operated about a kind of 70% or so kind of free cash flow conversion from EBITDA. I anticipate certainly we'll be able to get back there as we kind of move through these investment cycles like we're doing now and get into the right cadence there. So we feel pretty good about that. As far as CapEx goes this year, again, I want to -- I would tell you there's probably the best part of -- in the area of about high teens in terms of millions of spend that would not recur in the following year. So again, related to some of these infrastructure items that David had talked about. So, in that range that's what I would guide you to in terms of kind of nonrecurring. But obviously, there's continued spend in the capitalized software and other areas that will recur. So we'll keep that out there. But that's what I think from a nonrecurring piece.

Okay. Perfect. Thank you, both for the answers.

Thank you.

And we'll proceed now with a question from Samad Samana from Jefferies. Samad, go ahead.

Hi guys. Thanks for taking my questions. This is Jeremy on for Samad. Follow-up on the net adds. It looks great all around. But I think the rest came in a lot higher than we expected given the emphasis on the indirect channel. Can you talk about what your strength there as well? And is there an opportunity for this to remain elevated?

I think the -- great question. I think there's a -- basically, if you think about our focus and playbook we're running in NetSuite and Microsoft and Workday, I think we're beginning to build the type of execution and the brand that we hope to and we're going to continue to run that playbook firmly in that space. And I think the team has done a nice job of securing enhanced new logo wins. We don't prognosticate in terms of going forward what that's going to look like, but I'm really pleased that we've disciplined ourselves to a few ecosystems and the teams are running across the partner ecosystem and the tech -- the tech firm in a very focused way and you're seeing that kind of execution in the numbers.

That's useful color. And useful color on some of the customer behavior on cloud versus on-prem. I guess, have you noticed any additional change from the close of the quarter through October and November, whether that's change in deal cycles or anything like that?

I don't have any specifics on change in deal cycles this early in the quarter. But fundamentally, everything we're doing is leading cloud. As I said, I think 90% of our new logos are cloud anyways. And you're still seeing that cross-sell where existing customers who have on-prem for one module will advance in the cloud with a new module. And so we still see that opportunity and that is really where the teams lead, but no new shift in mix in any way. And as I noted earlier, with our new on-prem pricing we're actually enhancing gross margins when they go that way because obviously we don't have to bear any of the on-prem costs. So it's -- the hosting cost. So it's actually working out strategically very well for us.

Got you. Thanks for taking my questions, guys.

And our next question comes from Pat Walravens from JMP Securities. Pat, please go ahead.

Oh, great. Thank you. Congratulations to you guys. It's great to see the performance here. All right, David what is the most important thing for Vertex to get right in 2024?

In 2024? Execution focus that continues to drive operating leverage. That's what we're going to be. That's where we're really heads down. We've come through a big investment cycle for the last several years. We've put ourselves into place. And now it's about executing and reaping the margin performance that we expect as we look forward.

Awesome. And then if I could do a follow-up. When you -- you mentioned customers increasing their entitlements a couple of times with different customers, which I thought was super interesting. What is driving that? And how does it work when they increase their entitlements?

Yes. Pat, this is John. I'll take that. I think what we're seeing is that we're seeing a number of different expansion opportunities with existing customers. And so what that typically means is they're using the same products, but they're expanding their use to different divisions, different areas, different geographies. And then when they do that they typically roll through a pricing tier that we've created. When they roll through that pricing tier then we have the opportunity to increase the annual amount that we charge. So that's the typical cadence that we see and the reasons for people breaking through.

Yeah. If I could build on that Pat. It's a really good point John made. I think it's important to remember that we go in and we solve a problem for a large multinational we're only solving it typically in one division or one operating area of their business. And so that just creates an LTV opportunity over time, especially if we've now built out our customer success function where they're going back in and talking about what about the Division B, C, D and E that we can add the sales tax that we've covered in Division A. And so we really -- that's really what you're seeing in that example is where companies are consolidating more of their other units where they're using a competitor or using an on-prem or an in-house solution that they then want to say why don't we just standardize across more of our divisions on Vertex?

Great. Thank you.

[Operator Instructions] And we will continue with a question from Daniel Jester from BMO Capital. Daniel, please go ahead.

Hey, this is Kyle Aberasturi on for Dan. Thanks for taking my question. Can you just dig a bit further into the Celera cloud migration? I guess, does this change any sales strategy in Q4? Or any changes there? How are you thinking about that? And then, I guess how you're preparing for 2024? Do you guys expect consistent trends heading into the New Year?

Yes. Certainly, no change in strategy. I think again the real focus is on execution. We've worked hard to put ourselves in this position. The team has done an amazing work. We've gone through the investment journey and to get to this point and now it's about execution. So no -- absolutely no shift in strategy. As far as 24 goes we've not launched guidance yet but we clearly are seeing the tailwinds that we've highlighted around things like SAP and the regulatory environment very much supporting the type of performance that we expected when we embarked on this strategy.

Great. Thank you. And one quick one for me. So I appreciate the color on Shopify. I guess how are you guys thinking about any more or any additional type of marketplace or e-com growth in the business? Thank you.

You know, we continue to work on the platforms where our customers are doing business and looking for new opportunities to expand in partnerships there. So we're going to be -- continue to be very disciplined in areas that we think open up a considerable customer base opportunity for us to bring our capabilities to bear. And Shopify clearly presented that and we're super excited to be partnering with them. And we'll continue to look that way. Obviously, we've done other platforms like Miracle and really seeing great growth there and some others. But it's all driven by where our customers at the middle and enterprise market are doing business is where we need to be playing.

Terrific. I'd like to just add one thing unrelated to this matter I just wanted to point out when Alex Sklar asked the question a bit back about non-recurring CapEx spend, I answered the question with respect to the ERP spend that we had. That was the total amount of ERP spend. About 60% or 65% of that spend happened last year the other portion happened this year. So I just wanted to draw a line of clarification there. That was the total cost not just the cost in the current period. So thank you very much.

And this concludes our question-and-answer session. I would like to turn the conference back over to Joe Crivelli for some closing remarks.

Okay. Thanks everybody for joining us today. If you have follow-up questions or if you'd like to schedule additional time with the team please send me an e-mail at ir@vertexinc.com. Have a great rest of your day and we look forward to speaking with you in the coming weeks.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.