Good day, and welcome to the Vertex Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Joe Crivelli, Vice President, Investor Relations. Thank you, and over to you.

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

Welcome, everyone, and thank you for joining us. Our third quarter performance demonstrated continued momentum in core strategic areas while managing specific market and customer headwinds. The strength of our strategy was evident in our strong cloud revenue growth, the increased margin leverage driven by automation initiatives and strong cash flow performance. We also saw accelerating traction in e-invoicing and improved SAP activity. However, offsetting this was the persistence of lower-than-typical growth from existing customer entitlements as previously discussed in our second quarter earnings call. In addition, the bankruptcy of 3 large enterprise customers as well as several accelerated migrations to our new cloud platform impacted customer retention metrics. I will highlight the specifics of all of this and their impact on certain metrics in a moment. Our revenue results for the third quarter were in line with our guidance, while adjusted EBITDA exceeded expectations. Revenue was $192.1 million, up 12.7% year-over-year. Subscription revenue grew 12.7% and cloud revenue growth was 29.6%. Adjusted EBITDA was a record $43.5 million, exceeding the high end of our guidance by $2.5 million and representing an EBITDA margin of 22.6%. And free cash flow was very strong at $30.2 million in the third quarter. In addition, annual recurring revenue, or ARR, grew 12.4% to $648.2 million. Average annual revenue per customer increased 12.4% year-over-year to $133,000. Scaled customer count grew 14%. Gross revenue retention or GRR, remained at 95% in the third quarter within our targeted best-in-class range of 94% to 96% and net revenue retention or NRR, decreased to 107%, down 1 point from the second quarter. First and foremost, I want to provide more specific details into the items that impacted customer retention metrics. As we have discussed each quarter, we experienced moderate customer turnover at the very low end of our…

Thanks, David, and good morning, everyone. I'll now review our third quarter financial results and provide guidance for the fourth quarter and full year of 2025. In the third quarter, revenue was $192.1 million, up 12.7% year-over-year. Our subscription revenue increased 12.7% to $164.8 million. Services revenue grew at 12.8% to $27.3 million, and our cloud revenue was $92 million in the third quarter, up 29.6% Annual recurring revenue, or ARR, was $648.2 million at quarter end, up 12.4% year-over-year. Our net revenue retention, or NRR, was 107% compared to 108% in the second quarter. This was impacted in the third quarter by factors David noted in his prepared remarks. Gross revenue retention or GRR, remained at 95% at quarter end within our targeted range of 94% to 96%. Our average annual revenue per customer or AARPC, was $133,484, up 12.4%. For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP in this morning's earnings press release. Gross profit for the third quarter was $142 million, and gross margin was 73.9%. This compares with a gross profit of $126.2 million and a 74% gross margin in the same period last year. Gross margin on subscription software revenue was 81.4% compared to 80.5% in last year's third quarter and 83.2% in the second quarter of 2025. And gross margin on services revenue was 28.8% compared to 35% in last year's third quarter and 33.1% in the second quarter of 2025. The lower margin was due to investments in automation that are expected to drive higher margins into the future. Turning to operating expenses. In the third quarter, research and development expense was $16.8 million compared to $12.9 million last year. With capitalized software spend included, R&D spend was $40.8…

Thanks, John. I have been in this industry for 26 years. I have seen it go through countless economic, regulatory and technological cycles. The enterprise segment customer has remained very consistent in their approach to solving their needs for effective tax compliance due to the mission-critical nature of their role. They don't buy on hype. They seek proof. They are focused on mitigating risk and delivering accuracy. They make purchase decisions for the long term based on value. So while we have noted some very specific headwinds to short-term performance in the past 2 quarters, we remain confident that the fundamental drivers for our long-term growth are strong and growing and that Vertex will benefit from them with improved performance as we move into 2026 and beyond. My recent experience at our customer conference reinforced my belief in the strength of our alliance partner relationships as we continue to lean into our partner-first strategy. Our leadership position in the enterprise segment certainly requires continued investment given the pace of accelerating regulatory and technological changes. And in doing so, we are positioned to reward our investors as a result. It is this confidence that is the primary driver for our Board's authorization of the $150 million stock buyback program announced today. I'm thrilled to now have Chris Young join our team and work side-by-side with him in our respective roles to ensure the company realizes the full potential of our opportunities and deliver strong financial performance for years to come. With that, we will take your questions.

[Operator Instructions] We have the first question from the line of Joshua Reilly from Needham.

I wanted to get your latest thoughts on how you expect the SAP ERP cycle to kind of play out from here. Clearly, there's a lot of companies that still need to migrate to S/4HANA to hit the 2027 deadline. It seems like that's a bit of a stretch. Curious, what's your thoughts in terms of the capacity out there to manage these migrations in the industry? And what are you hearing maybe that improved the deal flow a bit this quarter versus the last couple of quarters?

Yes, Josh, thanks for the question. I think industry-wise, I should say, I think the industry has been preparing for this for several years. So I know in talking to a number of our partners, they have a -- they've been ramping up staff in anticipation of sort of a back-end process for the migrations that are ahead. So that's what I know. I can't speak to any more in terms of the likelihood of any deviation in the deadline. SAP keeps reinforcing it. So I don't fundamentally see there's a reason changing. I think the -- we've talked about this. The pipeline has remained solid. It's been more the efficiency getting through the pipeline as deals occasionally at the customer level have been slow due to their own migrations, slowing down. I think we saw a little bit of the break in that in the quarter, and that's why we had -- we were able to highlight a number of SAP wins in the quarter primarily.

Got it. That's helpful. And then maybe a bit more color on -- was it 2 customers migrating to their own homegrown solutions? And is that a portion of their business with you migrating to the homegrown system or a full system -- and was that built into your prior guidance? Or did you find out about that after you put up your prior guidance?

Yes. No, this came out -- these are customers that didn't go to their homegrown system. They migrated to the Vertex next-generation cloud platform. As you know, any companies that are going through a cloud -- leading a cloud migration like we are, there's always a moment where you're paying 2 mortgages where you're paying mortgage on the new -- you've already relicensed with Vertex. You've gotten the uplift from them, and they're shutting down their old system. And it usually lags on for a short period of time. These were 2 companies that were extremely large customers of ours that had already migrated to our cloud at a significant price increase that also were able to shut down their system faster than we had built into our guidance because they made some internal progress on their systems that we were -- that they had not forecast when we had our direct engagement with them. So yes, we do factor that into our guidance as we look at our numbers going forward. But it's just these 2 happen to get things done faster than they had previously guided to us.

We have the next question from the line of Chris Quintero from Morgan Stanley.

And David, let me say, I know you're still going to be around, but it's been a pleasure working with you, and I wish you all the best in this next part of your life here. Maybe on the guidance, I think this is the second time in a row you guys have cut the guide, which I can't remember the last time Vertex has done that. And so just at a high level, has the guidance philosophy changed at all? And how are these kind of cuts informing your assumptions that you're putting into the Q4 guidance here?

Yes, Chris, thanks for the call. No, we have not done this before. You're right. In terms of our philosophy around guidance, this hasn't changed our guidance philosophy one bit. We continue to be thoughtful as we think through guidance. And again, as David had mentioned, there was a couple of things, obviously, this quarter that impacted us a little bit. Some of this BK and migration activity certainly had an impact. We certainly had an impact from some of the timing of deals that closed in the third and what we're expecting to see in the fourth quarter. And again, we continue to focus on that services strategy where we're trying to lead partner -- where we're trying to go partner first and sort of deemphasize that. And so there were the 3 kind of bigger contributors to what happened -- why the change for guidance in the fourth quarter. But there hasn't been a change in philosophy from our standpoint.

Got it. And then it seems like the entitlement growth has been kind of one of the main headwinds on your net retention rate and growth from expanding customers. So I'm curious, like are there any lessons in terms of like -- or anything we should keep in mind as it relates to kind of renewal cohorts as some of these customers have been renewing over the past few years?

Yes, Chris, I think it's a fundamental of trying to assess where our company -- our customers' growth rates are going to be as they grow through our revenue bands. Obviously, we don't have great visibility into each of our customers' forecast growth rate in terms of whether they're going to continue to just expand usage due to their own growth or not. And I think that's been the headwind we've tried to highlight pretty clearly in the data we've determined from -- when we spoke to you in Q2. And so it is something we're trying to see if we can get closer to understanding our customers actually growth guidance that they're giving to the market to see how that will flip to what we expect for revenue bands. But obviously, it's a little bit of a fine line of how much information we have there and how that actually will show up in our revenue bands based on their own revenue -- their customers' revenue timing. Unfortunately, it's sort of like 2 separate move from us.

We have the next question from the line of Alex Sklar from Raymond James.

David, I'll echo my congratulations on a fantastic career at Vertex here. Switching gears to -- I want to -- you hired a new Head of Sales in Europe as well. Can you just talk about that process? What was behind the change in leadership in Europe? And then how are you thinking about kind of Europe as an opportunity heading into 2026 versus maybe a couple of quarters ago?

Yes. Thanks for the kind words. I'm anxious to partner with Chris Young in the future of Vertex. And certainly, in my transition, I expect to be as Nonexecutive Chairperson of the Board. I will be quite active in helping continue to pursue the strategy of this company. I think Europe, it's timing of just a leadership change. We're continuing to expand the complexity of operations that we have over there with the acquisition of ecosio, and as we push further into the whole e-invoicing marketplace, we had a very good quarter in terms of continued growth there by the ecosio team and our team in general. And just the overall complexity of the opportunity increasing, felt like we wanted somebody who had been there and done that at a high level. And so it's just an up-level opportunity there. We really appreciate the gentleman that led that operation for years, but it was a great opportunity with someone we had good relationship connection to bring in, and so we capitalized on it.

Okay. Great. And then I don't know if you or John want to take this one. But just as we think about the Q4 growth outlook relative to the kind of the medium-term growth outlook that you spoke to earlier this year, how much of the headwinds like the true-ups, the bankruptcies, the early kind of shutting off of on-prem feel kind of 1x from your standpoint versus anything different about the market you're operating in today in terms of just the pace of technology changes or the pace of that SAP transition or e-invoicing adoption kind of broadly?

Yes. Maybe I'll start. I think that from an overall guidance in the midterm, I think the BK migration stuff, again, is stuff that we typically -- it was somewhat anomalous to the quarter. I don't think that that's something that's going to be a continual thing there. We have those types of things happen every quarter. What we saw though was just a real confluence of a number of real big ones happening in the quarter that really drove that. So I would say from that standpoint, I think that's -- that to me is somewhat anomalous. In terms of kind of other things, when we look at the -- when we look at sort of how the quarter plays out and we look at sort of what next year looks like. Keep in mind, as you comp us out to some of our prior year numbers that we did have a very large -- some very large true-ups in the fourth quarter of last year. And again, we're anticipating very little in the fourth quarter of this year. So it really -- it drives certain revenue growth next. It mutes a little bit of what the impact truly of this quarter is.

Right. I mean the actual growth rate for the quarter would be close to 13% if you took out those entitlements. And so I think that is notable. And I do think as you look forward in e-invoicing, I mean, obviously, we're just getting into the whole land-and-expand motion we've talked about that we think is really setting us up well as those France and Germany deadlines come on in 2026. That's really what we've been pointing for. And I think the timing of those adoptions are pretty much falling where we thought it will accelerate as we move into '26 pretty significantly.

We have the next question from the line of Adam Hotchkiss from Goldman Sachs.

David, echoing my best wishes to you. It's been great working with you. I wanted to touch on the comments you made on your customer conference in AI. What was it that customers from your perspective were most interested in from an AI perspective? And where are they from exploratory to actually starting to put some of these things into practice? And I know the Smartcat call on the retail side was interesting. How quickly can you get into other verticals and just get up and running with more customers on that side?

Yes. Yes, I think the approach we're taking with the -- thanks for the questions and the comments, certainly. The approach we're taking with AI with the human in the loop is an essential part of what the enterprise market is expecting because of the requirements for traceability when they get into audits and they have to justify the positions they took on a tax position and understanding the logic that's actually inside of the decision-making is really essential to their processes. So the fact that we're keeping the human in the loop, number one is critical. I think some of the agent-to-agent work we're doing, we highlighted the encouragement that we're actually directly working with the systems that they run their businesses on. So I highlighted on this quarter, the -- and in Microsoft, the first-ever agent-to-agent interaction between our platform and the Microsoft Dynamics 365 finance and supply chain platform is a really encouraging thing for our customers because it lets them know behind the scenes, there will be certain things that will be going on to support their ongoing time-to-value requirements. So I think that was a really well-received component of what we're doing in the market with -- as opposed to just pushing out AI in terms of direct -- like a ChatGPT type or Copilot, but actually taking it to a next level, we're able to drive efficiency and effectiveness in the market. I think Smartcat as an offering is a really exciting one, and we started to see some of the green shoots we thought were available to us because of the challenges our customers face in categorization of products. And so now we're going to start to focus beyond retail. We have that product ready. We're now moving that into trying to generate more in the retail space while we also start to ingest more data. And we'll look at that basically on a quarter-to-quarter basis, to be honest, in terms of how much we can ingest and make it viable for our customer base. Certainly, there's a lot of interest across the customer base for us to do that.

Okay. Great. That's really helpful color. And then on investments in e-invoicing and AI, just curious how those are tracking. I know that EBITDA did come in a little bit better this quarter. Are you still expecting that margin inflection? And I know that Chris isn't on the call, but just maybe reiterate your confidence level and when and sort of the magnitude of that margin inflection would be helpful.

Yes. Great question. We continue to be on track with the investments that we talked about, the ecosio investments of $4 million to $5 million per quarter and then the AI investments largely focused around some of the Smartcat activities that David just talked through. They are tracking very well. So we feel good about that. We feel good about the progress that we've seen to date. Again, the plan is to largely have a lot of that behind us as we get into the middle of next year. And I think that's -- we feel like everything is pointed towards that, and it continues to be pointed towards that. And we expect to start to see some of that leverage and some of that realization start to show itself up. We did have a good quarter this quarter from an overall margin perspective, and I think we are pleased with the results that came through that, but a lot of that has more to do with some of the leverage we're seeing throughout the rest of our business and just being thoughtful about spend as we entered the back half based on some of the conversations we had at the end of the second quarter. So again, I think we feel very good about the investment programs that are in place. We expect to continue them. We haven't had any significant changes in our plans in terms of timing or in terms of -- or level of spend. And so I think everything continues to move along there nicely.

We have the next question from the line of Jake Roberge from William Blair.

And David, I'll echo my congrats. It's been great working with you over the past few years. Just on the e-invoicing solution, could you talk about how that product compares to some of your competitors out there just from a country coverage perspective? And as we start seeing some of these larger countries like Germany and France go online next year, do you feel like that product is ready for prime time?

Yes, sure. Thank you for the kind words. Yes, number one, France and Germany, priority 1, the whole strategy from day 1 was always to make sure wherever there was a greenfield, meaning there was no competitive -- no competitor had already solved for a given country. That was our priority one in terms of where we've been investing. So we're ready for France, Belgium and Germany to compete on those and very comfortable as those regulations are going into effect with Belgium here in 2 months and the other 2 as we move into the middle to back half of '26. So yes, I feel very comfortable there, number 1. Number 2, we continue to expand our coverage. As you know, when we made the acquisition, we didn't buy a company that had coverage everywhere. We've been focused on the primary economies and continue to expand our coverage around the primary economies where e-invoicing is of the greatest import to our customers. Primary economies, meaning where large economies where our customers are doing a lot of business. Hence, the recent go-to-market partnership we announced with Brinta to accelerate our coverage in some key LatAm geographies like Mexico and Brazil, where a lot of our global multinationals have revenue, and we want to make sure we had coverage to be competitive in those regions. So yes, that continues to be a steady part of our build-out as we go forward. And that's the investment cycle that John was just highlighting that's going to run through the middle of next year.

Okay. That's helpful. And then there's obviously been some moving pieces over the past few quarters. But just thinking a bit longer term, could you double-click into the competitive landscape? And if you've seen any changes to win rates or competitors making more noise that might have been showing up at the edges this year?

It's funny. I literally just made sure, like I always do before these calls to check with my head of sales here in the U.S., in particular, where we have a lot of competitors. And no change whatsoever in the competitive dynamics in terms of win rate. Our strategy to continue to focus on the influencers that impact the market, our tight relationships with the Big 4 and other large accounting firms and the investment we're making to deemphasize our services revenue, which does impact short-term revenue. We've noted that, is also paying off by securing the win rates that we've enjoyed in the past and we continue to see. And certainly, some of the investments we're now making in areas like AI and Microsoft, I actually think are going to improve our opportunities in some of the new segments.

We have the next question from the line of Brett Huff from Stephens Inc.

Two for me. I know you guys have been doing a lot of work given the entitlement changes on digging in and making sure you had more visibility into kind of those entitlement changes. How should we think about those as they roll forward? We've gotten some questions on -- we know the entitlements have slowed a little bit. Is there a continued a couple of quarter sort of period that we have to get through? Is there anything kind of bolus or timing-wise that we need to pay attention to that this may last a little longer? Or how do you guys sort of frame that up?

Yes. Thanks for the question, Brett. Yes, in terms of entitlements and how that plays out, I don't think there's really any time frame for which this is going to change. There's nothing out there that's going to make -- turn this into a quicker rebound or even change the rebound too much. So I think it's going to just take a little bit of time for that to play out. And in the normal course of business through the normal renewal process, we'll see that work out. We try to -- we do our best to get in front of some of this visibility and do our best to try to make sure that we have that built into our forecast. But I think as we talked about the last time, some of this stuff comes up soon only just before the renewal base takes place. Overall, generally, this has, I think, a little bit more to do just with overall economic activity that's going on at customers. And then, again, to a lesser degree, some of their ability to migrate other systems they're using into the Vertex platform. So as they're doing other upgrades and other things, they're continually bringing and moving additional systems and additional entities that they have work going through onto our software. And so some -- if that slows because of other activities that they're doing, sometimes that can take a little longer. But I don't think there's really anything out there that's really going to drive or change this dramatically. It's just the passage of time. And again, as we said, we saw a little bit of that happen back around COVID. And again, as we got a little bit a couple of quarters through that, we started to see that snap back as activity picked up again, and I'm anticipating we'll see the same here.

Great. And the second question around SAP. Thanks for the comments earlier, both prepared and in the answers to questions. Can you maybe just a little bit more unpack that? Any anecdotal kind of conversations, change in tone around SAP migrations? It sounds like they were a little bit better this quarter. What is kind of the anecdotal feedback that you've gotten? I'm sure you had a lot of conversations at your user conference. Can you give us any more insight into how those decisions are being made or delayed?

Yes. I think the exchange was a really good -- it was just -- Exchange at our customer conference, it was just 2 weeks ago, 1.5 weeks ago. And I would say that it was very supportive of what we would expect as we move into '26 between our conversations with the large accounting firms that are all there, the many accounting firms that are there, as well as SAP directly. I definitely think that the activity in '26 is going to accelerate as we look forward based on what customers are telling us and what influencers are seeing in their growing backlog that they're going to be processing.

We have the next question from the line of Steve Enders from Citi.

David, congrats as well on prior statements on the call. I guess just to start, I want to ask or clarify, I think, a prior comment you made about seeing some -- there's some timing of deals that closed in the quarter that impacted things a bit. And I just want to get a little bit more clarity on if there were deal delays, maybe how that is manifesting in the pipeline or how you're kind of thinking about the future pipeline from here?

Yes. I appreciate the question and certainly the comments, Steve. The quarter closed largely at the back end of the -- Q3 largely closed at the back end, meaning September was a very large month. And I think that's a behavior where we expect to see again with good visibility. When we talk about pipeline in the quarter, it means stuff that's already through -- it's not caught up in that middle where like, oh, could they get delayed because of their whole ERP process slows down. When we talk about guidance -- John is thinking about guidance in the quarter, it's based on what he has visibility to that's already pretty far down the pipe of we've already been chosen. It's more about like legal getting through their process and the normal purchasing process, if you would, to close. And so I think the process is laid out pretty consistent for the quarter as we look forward to what we expect to be a normal quarter in Q4. It's our largest quarter, and we're typically headed to that way with December being the largest month, and I would expect no difference to that whatsoever.

Okay. And sorry, to clarify, there were deals that got pushed out or things that didn't close as you originally expecting here?

No, I think in Q3, we closed the deals we thought we were going to close. They closed later in the quarter than we expected for sure. That's why I said September was a very large month, which obviously cost us a little bit of revenue that would have normally been recognized in the earlier months of the quarter. And as we look forward to Q4, I think we're seeing the same setup where December is going to be a very large quarter, but the pipeline of activity in the -- is where we forecast to be and it is built into our thinking about guidance.

Got you. Okay. That's helpful. And just on ecosio, I appreciate the revenue contribution this quarter. But are you feeling like that is on track for this year now? Like did you kind of see the catch-up that you were expecting and I think on track for the -- was it a $16 million revenue number that you previously talked about? Is that still line of sight there?

Yes, absolutely. We still have line of sight for that. I mean I think they've made some real good progress, and we've seen some nice upticks in the business activity over there as well as the momentum that's underlying the pipeline. And so we absolutely still have line of sight to that. And again, between the combination of that and then the continued investment we're making in that business, we're all in on e-invoicing. And so I think we expect to see those results come through as anticipated.

And Steve, I think that just jumps to the deadline of Belgium is coming, and that's -- I think these are decisions that are being made, and that's why we have that kind of visibility. And I think you're going to see the exact same thing play out as we move next year into the larger economies of France and Germany, where France goes live in September, and I would expect to see a real increase in activity as we get through Q1, not so much, but certainly Q2 and into Q3, you'll see a real uptick. And then the same thing as we think about Germany going live in January of '27 with back half of Q4, which is pretty much consistent with what we've been telegraphing based on our experience.

We have the next question from the line of Andrew DeGasperi from BNP Paribas.

David, I'll add my own words as well. It's great working with you over the years and good luck in the Chairman role. Just wanted to -- over the last, I guess, Q&A, I'm just getting a message that between the e-invoicing opportunity, the SAP migrations, -- and then if you add kind of the easier comps relative to this year, I mean, is there any reason why your business shouldn't accelerate from a top line perspective next year? I know you don't give out guidance, just trying to get a better sense directionally where we're going.

Yes. Andrew, I'll take that. I'll start with that. Again, as we think about next year, we don't give -- we're not giving guidance now. We'll do that when we have our call in February for next year. But we do anticipate certainly top line revenue growth next year. I think there's a lot of fundamental factors that are contributing, again, as David talked about, the invoicing activity continues to be strong. The SAP pipeline and the activity that's there are going to be big contributors to growth next year. And so absolutely, we anticipate revenue growth into next year -- significant revenue growth into next year because of those factors that are out there and that are still very prevalent in the business.

Great. And then maybe just one in terms of the -- I think you mentioned some comments earlier about some customers are paying 2 mortgages. when they do these transitions. Just wondering how much of that customer base is right now doing that? Because if you look at your cloud versus on-prem revenue, obviously, I guess the question I have is, could we see a much broader dislocation between those 2 as we look into next year?

No, not at all. No reason to think that these -- first of all, we always have good visibility, and we work hard to factor that into our guidance so that it doesn't come up as a surprise in terms of what happened in Q3. So no, number one, I don't think -- and we only see typically, we talk about 2% to 3% of our customer base migrating every year. And I've talked about -- there's an on-prem base that's never going to go away. Subscription revenue is going to be around for quite some time. We're already up to close to 57 or so percent of our business is cloud, and that's where it's growing. And I think we'll see a slower -- we'll continue -- the ones that haven't migrated are going to be the longest to take the time to migrate just given the nature of those businesses that we know haven't migrated. So no, I see absolutely no reason to think we're going to have that kind of a surprise that occurred. It's just these customers did their shutdown faster than normal, but I'm not worried about that actually at all.

We have the next question from the line of Patrick Walravens from Citizens.

David, I think you first came to our conference in 2007. So it's been a pleasure working with you over the last 18 years. It's probably for Joe, but the prepared remarks didn't address the 2028 targets. So can we just address it head on? Are you reiterating the 2028 20% plus subscription growth and 30% plus cloud growth today?

Yes. I think the buyback is a signal by our Board for its confidence in the future of this company, 100%. And I certainly think we continue to be cloud first in everything we're doing. So I see no reason to fundamentally think that, that's going to shift away from the growth we expect in the future. And certainly, with what we're seeing in e-invoicing and -- what should pick up in '26 even more so from SAP as their deadline approaches, I don't see a reason to fundamentally shift anything we've said in our guidance. The numbers that you've seen in entitlements pull back, we saw this in COVID and then it snapped back nicely. I see, once again, just the fundamental nature of who the enterprise customer is. They're going to grow through bands, and we're naturally going to get those entitlements. And so no, I have no data to suggest a shift in what we're fundamentally what we've said.

Terrific. Terrific. And then can I just ask about the bankruptcies because I just looked 2 of them up quickly. And Party City and Big Lots, both of those were announced in December of '24. So how does that play out? Like, yes, how does that work?

So when companies file Chapter 11, sometimes they continue to be in business. They continue to operate for years. And as long as you're in business, you have to charge sales tax. So we've had customers in the past have gone bankrupt, and we continue to collect license revenue. It may be on a reduced rate because the revenue has gone down, but we continue to collect revenue from. These are ones that officially went away. And you don't know when that's going to end. We have no way of knowing that just because they file Chapter 11 doesn't mean we're necessarily going to see an immediate end of that license revenue.

We have the next question from the line of Rob Oliver from Baird.

David, first one for you is just one of the themes, I think, at the Analyst Day back in March was around tax not just as compliance, but as business enablement. And as part of that, you talked about not just the sort of the traditional enterprise channel, which has been a big focus of this call, but also some of the marketplaces like SAP Hybris and Salesforce Demandware. And obviously, Shopify is moving upmarket, and there hasn't been any comment on the call about this. So I really wanted to hear your view on where you guys are today relative to that opportunity where there really seems to be a burgeoning opportunity within the tax software market. And then I had a quick follow-up for John.

Yes, sure. I had Shopify on stage with me at my customer conference. really talking about the partnership and the work we're doing with them really working in lockstep as they continue to expand and they're rapidly succeeding upmarket. There's just a natural synergy between our 2 organizations. And so every quarter, I try to pick out a few wins that are notable. Coming out of Q2, there's a lot of questions about SAP pipeline. We had a really good quarter in SAP wins. So I thought I would just highlight a few of those on the call, but we continue to make progress across the entire base of our key technology ecosystem partners, number one. And number two, I see no reason that's not going to change. And in fact, -- you may have noticed we launched our Kintsugi powered by Vertex offering, which I think is just going to increase a new opportunity for us to generate growth in the future as we look at their ability to actually work at the lower end of the market, which is really highly suspect or highly appropriate for the type of solution that AI has -- that AI can deliver through Kintsugi.

Great. That's helpful. And then, John, just I know -- it seems like the challenge now is more about entitlements true-ups than it is about the ERP opportunities. So just on that topic, with kind of 2 quarters in a row of the guidance coming down, maybe talk a little bit more about how you factored those expectations into your guide for Q4 and how we might get comfortable with the thought that that's not caught you guys by surprise, I think, a couple of quarters here. So how to think about that headed into '26?

Yes. Thanks, Rob. Certainly, when we revised back in Q2, entitlements was a big part of the -- entitlements and true-ups were a big part of the story. And that certainly was something we took into consideration when we set that guidance. We continue to look at those, monitor those throughout this quarter. Again, a couple of other things that we pointed to this quarter that really impacted Q4 have less to do with the entitlements and the true-ups because I think we feel good about how we've captured that, but a little bit more had to do with -- around timing as well as some of the BK migration things that have moved along. Again, I feel like the BK migration, as I mentioned earlier, was somewhat anomalous and the timing of the quarter certainly is something that we're going to use and we'll continue to use as we think about our continuing -- our forecast for 2026 and then beyond as we manage through that. So that's what I would say, Rob, in terms of kind of how we're thinking about guidance. I don't think we've changed our -- we've not changed our philosophy in any way. So we'll continue to put our best foot forward and try to ensure that we are giving clear and accurate information out there.

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

Most of my questions have been answered. But if I just think about the bankruptcies, they were all in the like retail space. So that might be probably coincidence more than anything else. But John, can you just remind us where your biggest vertical concentrations are in terms of the book of business? And if you're at least within the retail sector taking a more conservative view given that that's where the bankruptcies were? And then I have one follow-up.

Yes. Good question, Samad. Thank you. In terms of kind of where our big verticals are, certainly, manufacturing is our largest. Retail kind of comes in soon after. And so they're bigger focus. We certainly have taken a look at some of the rest of the customers within our vertical of retail to anticipate if anything is out there. But at this point, there's really nothing in there that caused us to pause or adjust our thinking in terms of kind of any exposures there. We feel like we're very well reserved, and we're in a good spot.

Understood. And then maybe just on the long-term targets, I know Pat asked the question, but I'll ask it a slightly different way. I mean with the management transition going on with the headwinds that the business has faced, if I think about the 4Q guidance kind of pointing to what looks like about like high single-digit growth, it seems like 20% is a very tough lift to get to by 2028. And so why not get rid of those targets and make it easier, especially as the management transition? And just help us think about what's the path to getting to 20%.

Yes. I guess what I might start with, Samad, is again, I think we feel like all the overall demand drivers of the business that we've talked about, as David mentioned, are still there, and we feel good about those. There is some transition that's going on here, and we'll kind of -- we're going to certainly manage through that, as David has articulated over time. But I think at this point, we still feel like that the -- all the things that got us to those expectations back in the March time frame when we gave that are still in place and in play. And we expect to see some additional progress towards that as we think about '26 and then '27 certainly as well. And so in terms of kind of what we do with respect to longer-term guidance, I think we feel like it's a bit too early. And again, just given the demand that's in front of us, I don't know that it's the right time now to change anything.

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

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

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