Vertex at Needham Conference: Strategic Growth and Innovation

On Monday, 12 May 2025, Vertex (NASDAQ:VERX) participated in the 20th Annual Needham Technology, Media & Consumer 1x1 Conference. The company’s leadership outlined a strategic vision that combines robust growth prospects with innovative solutions in the tax software sector. While Vertex is optimistic about its position in the market, the discussion also acknowledged the challenges posed by regulatory changes and technological advancements.

Key Takeaways

• Vertex is transitioning from a content company to a software provider, focusing on indirect tax solutions.
• The company targets a software subscription growth of over 20%, driven by ERP migration and e-invoicing.
• Vertex’s pricing strategy includes annual increases of 4-5%, supporting predictable revenue growth.
• AI and e-invoicing are key areas of innovation, with potential to enhance Vertex’s product offerings.
• The company expects significant margin expansion post-2026, following its current investment phase.

Financial Results

• Subscription Growth: Vertex aims for a subscription growth rate exceeding 20%, supported by ERP migration to cloud systems and increased e-invoicing adoption.
• EBITDA: The company is targeting EBITDA margins in the high twenties, with an adjusted EBITDA margin of about 21% expected for 2025. Margin expansion is anticipated beyond 2026.
• Free Cash Flow: Vertex projects a conversion rate of over 70% of EBITDA to free cash flow, anticipating strong cash flow generation as the investment phase concludes.
• Investment Phase: Current investments, particularly in the Ocasio acquisition, are expected to drive future growth and margin improvements.

Operational Updates

• E-Invoicing: Vertex is focusing on e-invoicing as a major growth area, offering a comprehensive VAT compliance solution. The acquisition of Ocasio is set to bolster revenue in this segment.
• AI Integration: AI is being explored to enhance product categorization and user experience, although manual processes remain crucial for enterprise clients.
• SAP ECC Migration: The transition to cloud-based systems presents opportunities for Vertex to acquire new clients and expand existing relationships.

Future Outlook

• Growth and Profitability: Vertex is poised for strong growth, with increasing tax complexity creating demand for its solutions.
• Investments: The company’s investment strategy, focusing on expanding country coverage and market capabilities, is expected to yield significant returns post-2026.
• Sales Strategy: Vertex is concentrating on the European market, leveraging its multinational presence without expanding its U.S. salesforce.

Q&A Highlights

• Pricing Strategy: Vertex implements annual price increases of 4-5%, which are typically well-received by clients.
• Market Verticals: The company maintains a strong presence in sectors such as manufacturing, retail, and technology.
• Competitive Edge: Vertex differentiates itself through relationships with the Big Four accounting firms and its technological capabilities.

In conclusion, Vertex’s presentation at the Needham Conference highlighted its strategic initiatives and growth potential in the evolving tax software landscape. For a detailed analysis, refer to the full transcript below.

Full transcript - 20th Annual Needham Technology, Media & Consumer 1x1 Conference:

Josh Riley, Analyst, Needham: Josh Riley, and I’m an analyst on the enterprise software team here at Needham. This morning, we’re excited to have, Vertex, including CEO David DeStefano and CFO John Schwab. I think this is an interesting time to be looking at Vertex, so I think this, fireside should be pertinent.

And we have some more detailed questions than maybe just, you know, topical overviews that I get from investors, so I think this should be good stuff. So, David, maybe you can start off with an overview of Vertex for those, less familiar.

David DeStefano, CEO, Vertex: Yeah. Sure, Josh, and thanks for having us on the call. Really looking forward to connecting with with the group today. So, yeah, Vertex has been around for forty seven years. The history of the company started in content for sales and use tax in The US back in the late seventies, really producing specific data.

And sales and use tax, eventually evolved into VAT, so handling now, globally all indirect taxes or transaction taxes, sales tax, use tax, VAT, that you know fees that are incurred. And basically what now Vertex has evolved from a content company, which was one of our core assets as we grew into a software company that integrates that content into technology, plugs into the largest ecosystems, you know, financial systems in the world, for the largest enterprise customers in the world. We represent about 60% of the Fortune 500, have over 4,000 customers worldwide and basically solving a key friction point as companies look to expand into different geographies and the challenges they face as they adopt new technologies that were never designed for indirect tax, and we deal with it all the way through the life cycle.

Josh Riley, Analyst, Needham: Got it. And then just as a reminder, I forgot to mention this at the top, but, we’ll leave maybe three to five minutes at the end. If anybody has any questions, they can either email me at jriley@needmco.com or, enter them in the chat box. Alright. So one of the questions I get quite a bit is how has inflation impacted your business over the last several years?

And can you maybe explain your pricing model and rough vertical end market exposure, and have you benefited from higher nominal dollars, running through the economy?

David DeStefano, CEO, Vertex: Yeah. So, I’ll start here, and and, John, you’re welcome to to join in as needed. So inflation, obviously, we raise prices annually. We’ve learned over the years with enterprise customers. We raise all customers for the following year in the middle of the summer.

So they get a chance to put it into their budget. We’ve learned by working together with them, this is a much easier way to get our price increases approved. And because they’ve already factored it in, don’t get surprised. So whether you build in January 1 or December of the following year, you already know what our price increase is going to be. And typically, we realize about a 4% to 5% bump from increases.

Our customers are a lot of our customers are on three year contracts. So what’ll happen is they’ll have a set price with increments for the three years. And so we’ll get inflation on or price increases on those customers who have come due for a new one, and then it’ll cycle through as works out. So it’s moved kind of nice and consistently. Some customers who run legacy products might receive a 10%, fifteen % price increase because they’re we’re supporting older lines to meet them where they are in their migration journey.

But the benefit for us ultimately is they’re going to migrate with us when they move. The pricing model itself is based on bands. So it’s not transaction based for the core business. It’s based on revenue bands. So, we look at the revenue per, that the customer is running through our system, And basically, that’s what we’re charging on.

As the company grows, it will go through different brackets. And there’s enough wiggle room that gives them a lot of predictability in their pricing, but they have we have the opportunity and we do see that as customers grow through, they’ll make a big acquisition or something, we’ll get moved on to that. And so they’ll push them into a higher bracket, for all of it. As far as our business, the way it works, because of the diversity of all of our customer base, I mean, tax is like the ultimate horizontal. It affects all companies.

And so we don’t have any focus on any one, you know, deep area that would cause us to be at risk relative to market performance. We’re strong in manufacturing, retail, the technology space, you know, oil and gas now, basically you name a vertical, and Vertex has got strong presence in any one of them, giving us a lot of protection from, you know, anomalies in the market. But, John, feel free to add to that.

John Schwab, CFO, Vertex: No. I think I think from from a pricing model standpoint, you hit it. I mean, the revenue bands are critical for us, and and, you know, we don’t see a lot of variability in normal day to day activities with customers. Again, they have a good year. They don’t typically go through bands.

A lot of the expansion we see is when companies are adding addition you know, adding additional units or or different segments into the, into the mix. They had the Southeast Division. They get the Northeast Division. They then go through a revenue band. We see that happen very frequently.

And so that’s really one of the key drivers there as as people expand through that over time.

Josh Riley, Analyst, Needham: Got it. Very helpful. So one of the items that, I don’t believe got discussed at the analyst day, but I get asked quite a bit, is is the mix of your business by product area. And maybe you can just discuss, you know, broadly, is the tax determination and remittance the largest source of revenue, and maybe what are some other significant products in terms of, generating revenue?

David DeStefano, CEO, Vertex: Yeah. So we, being, starting here in North America, sales and use tax determination is by far the largest source of of our opportunity. But it’s important to understand that when we get invited in to solve a customer’s problem, it’s typically for just one part of their business. If you think about a large multinational, they’re running on probably six to 12 ERP systems. They’ve got business operations all over the world.

We’re brought in, like, let’s say, it’s a large auto manufacturer. We’re brought in to solve sales tax on automobile manufacturer, auto. We don’t get trucks. Like, trucks is run by a different ERP. Maybe it’s a different operation.

Maybe they acquired it. So you’re solving one problem. And then over time, through our land and expand model, you’re building out that that opportunity to expand wallet share. And so, basically, it’s sales tax and use tax, determination and VAT would be then the third. And then you move into, as you said, remittance or compliance where you’re handling basically the processing of the return and ultimately the customer filing it.

If you look beyond that, this is where we continue to add new products. We’ve been building a lot of things around like certificate center and which is handling all of the exemption certificates customers have to deal with or our accelerators which are improving the experience they’re going to have in the ERPs especially as our customers are moving to the cloud. Our SAP accelerator has been a great add to us. And then we’ve added things like edge, which is actually as customers are moving their infrastructure to the edge, they need to have tax at the edge as well. And so if you imagine, you know, now tax being calculated on a mobile phone because somebody’s delivering that service to your house and they need to be able to calculate the sale at your house, we had to build an edge capable solution to to just componentize our our solution down to that level and still have it communicate with the master system.

So that’s kind of the breakdown of how it works. And typically, you know, our model has been proven. You see our NRR. It’s a highly land and expand model where we’re in solving problem one and then over time, it might be sales tax determination today. And three years from now, we get that determination.

And then two years after that, you know, they’ve got a use tax problem because they’ve they’ve gone into a new business line. And so it really follows that pattern for all customers.

Josh Riley, Analyst, Needham: Got it. Alright. So as we look at your customer base, you have, I believe, approximately 4,900 plus direct customers. Yes. Can you discuss the opportunity to migrate the 9,000 SAP ERP ECC?

It’s a bit of a word fill there. And give us a sense of how much this could drive new logos for you, and, you know, how significant is the pipeline?

David DeStefano, CEO, Vertex: Yeah. Sure. So, you know, obviously, an end of life is forcing a lot of customers to think through when do they want to migrate, and how are they what are they going to be the disruptions to their business as they go through that. Vertex has about, I don’t know, about 40% roughly of our customers are currently SAP users, of which maybe a thousand of those are already are ECC users. So within our customer base, we’re seeing some discussions and we are involved in opportunities and we’ve started to see migrations happen.

But on top of that, there’s a lot of other SAP ECC users we’ve never had the good fortune of working with. That means typically, given we’re the largest provider to enterprise the enterprise market, that means they’re largely doing in house solutions. That could be because it was good enough, for what their tax problem was or they customize something with their in house team and it worked. The challenge they face is as they move to the cloud, what they had custom isn’t gonna integrate well into the way, the the SAP cloud works. And so that’s gonna create an opportunity for that or a requirement for them to rethink how are they gonna solve tax.

And so we’re definitely seeing as we look at our new logos over the past, I would say, three quarters for sure, as we’ve really started to see a little bit of a steadier increase in migrations, new logos that we never historically had had the opportunity to work with. So we’re getting after that a couple of different ways. One way is we have a direct sales team and obviously we work very closely with the big four as they are the large influencers as customers are going through that base are going through that transition. But the other piece that’s really exciting for us is we’ve had the opportunity to work now with SAP salespeople both here in The US and following on, but now building momentum over in Europe where we’re working directly with SAP sales rep as they are talking to the customer about going through a migration, to say how are gonna solve for tax, and they are getting quota relief by referring Vertex in. So clearly we view this as a mission critical part of our growth story for the next couple of years because it’s a natural tailwind.

We positioned ourselves strongly with the big four with the SAP sales reps getting quota relief and then our direct team. And we’re kind of swarming as much of this base as we can to try to expand wallet share with existing customers and land new logos.

Josh Riley, Analyst, Needham: Got it. That’s helpful. In terms of products, e invoicing is clearly the standout item that investors are currently focused. Maybe just cover a couple items here. How is the market for e invoicing developed?

What do customers do currently? And then, are these well, let’s start with that. And then there’s a couple items. I don’t wanna over yeah. Go ahead.

Alright.

David DeStefano, CEO, Vertex: Thank you, John.

Josh Riley, Analyst, Needham: It’s a lot of questions in one question.

David DeStefano, CEO, Vertex: Yeah. E invoicing has emerged as a new regulatory or a recently heated up regulatory requirement. E invoicing, the concept, has been around for several years now, started in Latin America, but it’s moved into Europe. And what’s gotten the attention of a lot of global multinationals is some of the biggest economies in the world are adopting it. So what requirement is just as a baseline, Josh, to make sure we’re we’re all understanding it is, in real time, in many jurisdictions, you’re not having to send your invoice to the government.

So instead of just having electronic invoice between a buyer and a seller, you actually have to have it go first or it’s simultaneously up to the government. And the government is collecting all that data, and they are then holding it. And at the end of the month, when you file your VAT return, they can compare all of the invoice data and what you charged in VAT with what you paid in VAT at the return and decide is in fact it it, you know, does it reconcile and did you pay us the right amount? And they’re doing this because there’s a very significant VAT gap out there. IDC and and other bill Belentis have some reports out there that show the the VAT gap being, you know, hundreds of millions of dollars that that governments are trying to get their fair share on because they feel like there is either incorrect filing or potentially fraud, and this is their way to try to address that.

So it’s become an extremely hot item because a lot of multinationals who have historically used a point solution in Ecuador and a different provider in Brazil and maybe a third provider in Hungary are now saying, you know what, if people like PwC are saying 200 regimes around the world are going to adopt some form of e invoicing over the next five years, we want a global provider. We want a single throat to choke that’s handling all this on a global basis. And so that’s why it becomes so exciting for us is because we see it as a great opportunity to get involved with all of our multinationals who have the largest invoicing volume, as being the provider of choice around the globe wherever they have to deal with this requirement.

Josh Riley, Analyst, Needham: Got it. And and so maybe just to touch on a couple follow-up items with that is, what do customers do currently, or how does the workflow work? And then are these gonna be primarily greenfield opportunities for you because they don’t have any solution whatsoever right now?

David DeStefano, CEO, Vertex: So, that’s what I was saying about they have they have point solutions in different they have point providers in some of the countries that currently require e invoicing, Ecuador, Brazil, Hungary, example. Yeah. We’re gonna be using different providers. And what they’re saying to us is, I want one provider who can handle my e invoicing in every jurisdiction I do business. And so it’s, on one hand, it’s a replacement of what they’re doing in some of those existing countries like Ecuador, my example.

And then in the new regimes where it’s being adopted, France and Germany, Two of the largest economies in the world, it’ll be a greenfield for us because they don’t have to they currently don’t have to deal with it, but they’re going to have to they’re going to have to in ’26 for France and over a phased approach in ’26 and ’27 for Germany. And so there’s that’s where there’s greenfield. And then, obviously, if PwC is accurate in their forecast, there’s about 55 countries or so that require it now, and we’re headed towards 200. So as more and more regimes are adopting it, countries are adopting it, it becomes a greenfield in every new country that has that’s requiring this. And and the challenge for business is the points of data that the government of France wants off of the invoice for it to validate you paid the right amount is not the same in the points of data that Brazil wants, is different than what Malaysia wants.

And so the complexity just escalates because governments are looking for different points of data off of the invoice, and what we’ve built is a solution that is able to scale and pull harvest the right invoice data for each jurisdiction that we’re covering.

Josh Riley, Analyst, Needham: Got it. That’s very helpful. And then, like, in France and Germany, where they don’t have to do e invoicing right now, they still have to file the VAT returns at the end of the month in some way. Right? Just maybe not in real time.

Is that the right way to

David DeStefano, CEO, Vertex: interpret Yeah. So we we we call it we call it, like, real time filing and periodic filing because you do periodic. It’s, like, once a month. And e invoicing is, real time or, you know you know, continuous con you know, continuous transaction control.

Josh Riley, Analyst, Needham: Sure. Yep. Okay. So as we look at the product functionality for eInvoice, do you ultimately feel the differentiation comes from having a broader indirect tax compliance functionality, an end to end solution for VAT compliance, or do you think a standalone e invoicing solution can be differentiated? A little bit of a leading question.

David DeStefano, CEO, Vertex: No. It’s a it’s a fair question. No. I obviously, the transmission of e you know, if you think about what EDI is, which e invoicing is leveraging off of that basic technology concepts that EDI has been around forever, The transmission of an invoice is a commodity and standalone while our customers have the largest invoice volume in the world and there’s certainly money to be made by providing that, it’s going to be a race to the bottom if it’s all you’re doing is e invoicing. What we have found though by talking to a lot of customers the design of our product is the challenge they face is the invoice data they’re sending in in real time doesn’t foot, doesn’t reconcile with the VAT filing that they have at the end of the period.

And that’s because of a series of complexities that occur inside of a business that causes that differentiation. And so they’re having to do a lot of manual efforts. And so where we’re seeing differentiation is now in two in in its several key areas. The first is we integrated our product to be integrated of real time filing, e invoicing, and VAT compliance. And the reconciliation happens inside of the product.

You don’t have to move the data. You don’t have to go to different providers where you might be using three different e invoice providers and have different VAT return providers. And so now you have it all in one. And and the reality is all those little individual country point providers that are out there don’t do VAT returns. And so packaging it together and and and simplifying the reconciliation is differentiation number one That’s allowing us to get value for what we’re bringing to market versus just commodity.

And then the second the second piece I would highlight is we have integrated into the financial systems, SAP and Oracle leveraging our our, years of experience about how to integrate in and create a frictionless extraction of data without disrupting the flow of business. By doing that, we’re also able to automate how the invoice data is getting into the e invoicing solution, which our competitors, if you look at a point provider, they have no idea how to integrate into SAP and Oracle at the level that we do. And so they’re making more manual requirements on the customer to get the data into the system for e invoicing. So that’s a big advantage. And then the third is tax determinations.

If you think about it, every time you send a VAT a e invoice up to a government, you are in effect giving them a mini You’re saying on this invoice, I charge the following amount of VAT. So the tax department is saying, wanna be sure that I actually had accurate determination of the tax and calculation that went on the invoice before I sent it. And so we’re now seeing this approach of talking to the customer and saying, let’s look at all the way from how we integrate to our determination, giving you confidence of what goes on the invoice to then what’s filed to then what’s put on the return. And that seamless integration all on one platform a single, you know, single touch point on the data all the way through the system is really our key differentiation.

Josh Riley, Analyst, Needham: Got it. Yeah. That’s a great description of the differentiation. Awesome. Okay.

So as we look at, integrating AI into your end markets, there’s maybe a couple items to touch on here. Maybe start off with, there’s a concern that AI could impact your value proposition or commoditize your offering. Maybe we’ll start with that one and then one follow-up.

David DeStefano, CEO, Vertex: Yeah. Certainly, we look at AI as a as a potential exciting technology to expand what we bring to market and also, you know, under trying to us understand where there could be risk. One of the things we’ve learned over the years is that a lot of the requirements of an enterprise customer is to have they need to customize certain elements of it of their solution. So being able to configure and write your own custom rules, great example. A lot of enterprise customers, when they locate a facility in a different tax jurisdiction, they will negotiate for special sales tax or use tax exemptions so they can drive better business out of that jurisdiction, which the government local government can oftentimes be very happy to afford them that.

So you have to overwrite the rules of how how tax will work into your system for those jurisdictions where you’ve negotiated special right you know, special rights. And so that can be that can’t that has can only be done manually, which AI can’t solve for. So that’s problem one. Problem two is a lot of the jurisdictions below the state level in The US don’t provide updates digitally. So if you want to get the sales and use tax rates in a parish in Louisiana, you’d have to call the local provider, the local jurisdictional leader there, which we do.

We built relationships with all 10,000 around The US to make sure we’re getting what’s changed lately in your rules, your rates, how do we and then how do we interpret that, put it in the system. Again, it’s a manual part of our process. It’s it impacts our cost of goods sold. That’s why we have over a hundred tax professionals that work inside of us making sure our content database is robust. But again, it isn’t digitized.

So AI has potential to add certain value and we can talk about that, but it’s really not going to disrupt what we do because of some of the manual and unique things that exist in the in the space that we are in.

Josh Riley, Analyst, Needham: Got it. And then just following up on that then, there you know, there’s also opportunity with AI as well with, you know, you have smart categorization out now or coming out. And then is there a pipeline of more opportunities to generate incremental revenue from AI as well?

David DeStefano, CEO, Vertex: Yes. So we’re looking at AI a few different ways. So we’ve already launched our copilot, which is, you know, just a user experience allowing the customer to have better value use of our product with leveraging AI. That’s kind of table stakes now. SmartCat is a great example of where we can leverage AI.

One of the biggest challenges that customers face is their product categories have to be mapped. However they sell their products, to our tax categories so that it can go through the determination engine and calculate tax properly. And the challenge for the customer is their products, SKUs are always changing. The customer the business is adding new products. They may bundle a product in a different way for a certain jurisdiction.

Hey. We’re gonna sell this this product with this service in this jurisdiction. Well, the tax rules for that may be very different if it’s sold as a bundle versus just if it’s sold as a product or just as a service. And so now they’re selling it three different ways inside of the same jurisdiction, and the rules literally can be different depending upon how it’s packaged up. And so categorization is a challenge.

The customer’s always trying to to do. So what we’re doing is leveraging AI to try to look at how do we identify what a product is and, you know, bottle of my bottle of my plastic bottle of water, how is it how is it built? What are the components of it, all of which could affect how it’s taxed, and then how it might even be consumed. Is it sold as a as a bundle of 24, or is it sold as a single bottle of water? All those things can impact categorization.

And so being able to identify that using AI and we start to train a purpose built model, and I say that specifically because the worst fear for a customer is hallucinations when it comes to tax. Meaning, I need a one or a zero. I need the confidence. And Vertex has built its brand on accuracy and the confidence that we’ve given customers that our content database is going to be able to get it right. And so we’re working very closely with a number of early adopters with our current release.

We’ve picked some of the hardest retail. Imagine going down a grocery store aisle. We picked some of the hardest areas that where product categorization challenges are. And working with some customers on bringing our first release out in the market. It’s in what we call limited availability already.

And then over time, we’ll build out more rows of the grocery store and then into manufacturing, etcetera. I just came back with John from European customer conference. And a lot of our big manufacturing companies based in Germany are like, when are you going to get to some of the equipment that we want identified so we can use it for categories. So we’re getting a lot of good interest. And then we look beyond categorization, You know, these agentic agentic, I guess, bots or whatever you wanna call them, agentic AI capabilities where we can leverage the data that runs through our entire system.

You’ve got our content database and all the customers’ transactional data. We’re seeing some very interesting things both in terms of AI insights that we can bring and how we can look at certain workflow challenges that they have to face and where we may be able to automate them using AgenTeq AI. So we’re clearly exploring a lot of things. What I will say, and the last thing I’ll say in this is we’ve learned over forty years of bringing product to market. We work very closely with the big four and very closely with our customers in codesigning our products because we want to make sure there’s actually going to be uptake on what we bring to market.

And so by having them have their finger you know, fingerprints on the design, that has worked well for us for adoption.

Josh Riley, Analyst, Needham: Got it. Very helpful. In terms of other product areas, it seems there’s a pretty significant opportunity with adjacent products for what you term compliance. Maybe can you just discuss the opportunity there, and how have the attach rates trended for these products over the last several years?

David DeStefano, CEO, Vertex: Yeah. You know, it’s, I’m smiling only because, you know, you think forty seven years of doing this, and we brought a lot of products to market. We’ve proven our brand. We’ve got great GRR. Our customers don’t leave us.

And every time we bring a new product to market, no matter how long the customer’s been working with us, the first thing they ask us is, well, who else is using it? And I want to work I want to know somebody in my industry that’s already getting value from it. And so our adoption is kind of an interesting process for us. But once we get it, then the flywheel takes off. And so that’s why I’m kind of smiling when you say that because we’re always looking at bringing new products to market.

What I what we have found is obviously e invoicing is clearly the new hot adjacent product that we’re bringing to market, and we we’re seeing some value in. The Edge product we launched a couple years ago, that has been very effective. Some of the new e in, the new ecommerce capabilities we acquired, from the Taxamo acquisition a few years ago, we’re certainly seeing some stuff around Validator and InvoiceIQ, especially again with e invoicing. So we’re starting to see some uptick as how those are going. And, you know, it’s it’s one of those things where, the customer really as our customer success function begins to work with them and educate them on all the capabilities, they slowly will adopt more and more, over time.

And so it kind of runs like this, and then it kind of goes like that. And we’ve seen that in every product launch we’ve ever done. It just kind of follows that pattern of get me some referenceability, get your, you know, we call them the golden 10, get your golden 10 customers who are up and running on the product, and then you can begin to add, you know, then you can you can start to to grow from that, you know, that process. Attach rates really vary by customer profile. So we came out with a very specialty product in leasing, and it’s been phenomenal in the leasing space, but it only covers it’s only specific to a leasing community.

So it really depends on what we bring to market, how much of of the segment it it, you know, it can cover. But it’s know, that’s kind of the pattern it follows, Josh. Pretty straightforward.

Josh Riley, Analyst, Needham: Very helpful. Very helpful. Okay. So moving on to some go to market questions. You’ve always been historically a direct sales business with partners maybe influencing for your products.

How has this evolved, and and how do you maximize the opportunity with multinationals in e invoicing relative to your historical sales mall model?

David DeStefano, CEO, Vertex: Yeah. So the great news is, the relationship we enjoy between our direct sales team and our customer success function, we’re for our US multinationals, we’ve just added e invoicing into their quota requirements and added it into their quiver’s in their arrow, and they’re having active conversations. So we didn’t have to add a sales force, and we’re able to leverage our direct sales force for e invoicing in particular. What we’ve seen over time is that the channel and doing more indirect sales is actually becoming an important part of our model, especially as we moved into like the Microsoft ecosystem. So historically, Vertex was largely an SAP and Oracle ecosystem focused because that’s where the largest multinationals reside.

But as Dynamics has taken off, we’re seeing more customers want to do that certainly in Workday. And so having to develop new relationships in channel, We’ve gone from just the big four to now probably the top 15 accounting firms. We’ve all built significant practices about who how they’re influencing, and getting more into the VAR channel where we’re working with, you know, some of the big SIs. Some SIs. Infosys has standardized on Vertex as their provider of choice for all their implementations that they’re working on as a tax provider.

So we’re certainly looking at ways we can expand that. As we go into the beauty of the big four is they’ve got the Dock region covered with PwC or Deloitte or whomever. So I can call the US leader, PwC down in Houston that we work with, and I can say, hey, Tim, I’m going over to meet with some of your customer. Matter fact, I did this in Tokyo just recently. I said I was going over to Tokyo.

Can I meet with some of your partners there, about some opportunities we’re looking at in in Japan? And next thing you know, I’ve got, you know, access at the top level. So being able to leverage those relationships of the big four where they’re located globally will support our invoicing and all of our expansion opportunities as we as we grow.

Josh Riley, Analyst, Needham: Got it. Yep. And there’s a nice revenue opportunity for the consultants too, right, in terms of integrating this stuff. Because somebody is a software

David DeStefano, CEO, Vertex: It’s a very symbiotic relationship because we are partner led in all of our implementations, meaning we’re really pushing them to be the lead on implementing. And it’s because they are not only implementing our software, but, normally, they’re having to do process reviews and other things which are advisory and not things we even do. And so they really can expand a relationship inside of that when they refer us in. And so it has worked well for us to partner with them.

Josh Riley, Analyst, Needham: Got it. Alright. So one of the key key items that you’ve highlighted over the last several years is cloud migrations aren’t set to accelerate in any given year. Is that still the case? And do you move to a go to market model at some point that incentivizes migrations?

David DeStefano, CEO, Vertex: Yeah. Yeah. I know. Our our you know, we try to meet our customers further. I’m smiling one because it it it it’s something we talk about regularly, and we’re like, how do we accelerate this?

But we’ve if I will tell you this, Josh, if the if the because this is really not controlled by tax, it’s much more controlled by the CIO. And if the CIO is young and looks like you, we have a chance that they’re probably accelerating their move to the cloud. And if the CIO looks like me, chances are they’re not in a rush to migrate to their infrastructure to the cloud because we’re really following what the customer is doing with their infrastructure. So while I would never say never that we won’t at some way a forced migration say we’re going to end the life in one of our products, It’s not something that we are rushing to do because, our customers value how we have stayed with them in their journey. And our GRR approves when they’re ready to migrate, they’re migrating to us.

We’re going to get a nice upsell. We typically are going to get probably 25%, thirty five % increase in, you know, like for like on the same product and be able to maybe even sell other new stuff as part of the migration, but, it’s not something we’re rushing to do.

Josh Riley, Analyst, Needham: Got it. Alright. So we went through a period a few years ago where you accelerated, sales investments. Can you discuss where these dollars were allocated, and and should we be thinking about another wave of sales investments today along with the product investments that are being made?

David DeStefano, CEO, Vertex: Yeah. The good news is with the acquisition of e invoicing, the bulk of that is going into our existing sales base. And the other things we’re looking at like smart CAD and some of the data management capabilities don’t really require adding salespeople. Around e invoicing specific to the Ecosio acquisition outside of The U. S.

Is probably the only place I see real true organic growth requirements in capacity. There’s some jurisdictions. Europe, little different than The US market. Salesmen can be based in Oklahoma and sell them to Texas, except for maybe when it’s football season, but largely they can sell. However, when you you move into Europe, you need a French team in France.

You need a German team in German. So for the larger economies, you really have to have everybody partnered together in the like jurisdiction. So for e invoicing, we’re looking to add some capacity. But other than that, it would really only be based on opportunistic demand that would require us to ever add sales. And I think you’ve seen some of the leverage from our sales and revenue line in terms of our sales and marketing costs relative to revenue over the past couple of years because we’ve started to cross over that threshold, and I don’t think that’s going to change.

We talked about a little bit some incremental around e invoicing in sales, and then I think that’s I think we’re pretty well positioned right now.

Josh Riley, Analyst, Needham: Got it. And just within Europe, do you think the plan ultimately becomes to build a team out in all of the 26 EU countries? Or is that a

David DeStefano, CEO, Vertex: bit No. That’s not going to be like I think there’s some jurisdictions we absolutely you know, if you’re based in London, you you seem to be able to sell well into into Scotland or or Ireland. Sure. Yep. But there so so I don’t and or if you’re in, you know, I think, France or, Spain and and Portugal, it it seems to work pretty well from what we’re hearing and what we know.

So there’s some jurisdictions that won’t be required for

Josh Riley, Analyst, Needham: You get some synergies there.

David DeStefano, CEO, Vertex: Yeah. Absolutely. Alright.

Josh Riley, Analyst, Needham: So, in terms of the competitive landscape, I generally highlight that this is an area where you really differentiate with your tax content and the software that you’ve developed. How do you view your differentiation, and how much is the library of tax content driving that differentiation? That’s a question I get a lot from investors.

David DeStefano, CEO, Vertex: You know, I I really view our differentiation as far broader than that. I think that, you know, tax content is certainly something I’m really proud of. We do have the largest database, and and the customers appreciate the accuracy we provide from it. Although they’re always asking us for more content because things are always changing, it definitely is a part of where we always are going to invest. But I view it as far broader.

Simple ones, certainly the influencers, the big four, huge part of our differentiation. They’ve all built the largest practices. A lot of them use our software internally for their own outsourcing practices. That makes them very aligned to to Vertex. I think referenceability is enormous.

If you’re leaving an in house solution and you are migrating to an, to a new provider, you’re you’re looking at trust, and you’re looking at who else in my space have you done business with that’s as complex as I am? And they all think they’re the most complex in the world. So having, you know, seven or eight of the top 10 in every major vertical, the Fortune five hundred, gives us incredible referenceability. The technology capability to configure to the rules and the the customization custom, that is required for an enterprise unique enterprise customer that we can do inside of our software is differentiated. And then lastly, our ability to network and connect four or five multiple disparate systems into a single tax solution is clearly something we differentiate.

And the reason why I highlight all that, Josh, is it takes all that to win a deal. And so when a custom when a competitor says, oh, I’m gonna move into your space, it’s like if you don’t have all of that, you’re not moving into my space. You’re you’re you’re just you’re, you know, you’re gonna compete on one element, but, really, for the the the sophisticated customer, that’s not gonna be enough.

Josh Riley, Analyst, Needham: Got it. That’s very helpful. Alright. So moving on to some financial questions. If we look back at the financial targets outlined at the analyst day, my take is they were better than what investors were expecting in terms of software subscription growth of 20% plus and EBITDA margins of high twenties, 70%, plus conversion of EBITDA to free cash flow, I think, were the real highlights.

Maybe we can just unpack these a little bit in in terms of accelerating subscription growth rate. What are the kind of the key factors there?

David DeStefano, CEO, Vertex: Yeah. Sure. John, you wanna go?

John Schwab, CFO, Vertex: Yeah. What yeah. I’m happy to take that. You know, from a subscription growth standpoint, I think you heard David really outline a number of different things that were out there. Certainly, that ERP tailwind that’s out there.

As people are moving to the cloud and they’re moving things there, that is certainly one that is a major driver. Right? And it’s not just SAP. It’s it’s some of the others as well. You heard us mention on the call this this past quarter.

Oracle continues to be a big driver of opportunity for us. And so as as our customers are moving to the cloud, no matter what ERP they’re in, it’s bringing up the logical question of, okay. What are we gonna do? And so that’s gonna continue. And that that tailwind, whether there’s, you know, the the SAP kinda ECC deadline or there’s just natural migration, I think that’s gonna yeah.

We’re activity there, and and that accelerating opportunity is one that we think is gonna drive business for a number of years. So that’s one. You know? And and certainly, e invoicing is out there. And as David articulated, that is a that is you know, through the new acquisition of Ocasio that we did back in September, that activity is gonna continue to continue to ramp, not only with, you know, leveraging our existing installed base of US multinationals, but also as those new countries come up, as those larger com countries are coming online with the mandates, that is driving that bigger that bigger opportunity to look more broadly and come up with an end to end solution.

So those couple those are two of the key drivers that are out there. And in addition, you know, there’s a number of other activities from a, you know, from a revenue standpoint that will continue to go there. Again, complexity is only increasing, and we we thrive in complex environments with complex, you know, with complex tax problems that our customers have to solve. And and so that’s an area where where we certainly excel, and we don’t see that letting up anytime soon. And I think those are the the they’re kind of the key drivers that are gonna help that in addition to some of the new products that are out there.

You mentioned SmartCat. There’s a number of things around data that are gonna continue to drive rev you know, drive revenue opportunity for us as things yeah. As complexity continues. And I think we’re well positioned to be able to capture that.

David DeStefano, CEO, Vertex: Yeah. Going further, John John, on EBITDA margin now, just make sure we highlight some of the leverage we’re starting to see.

John Schwab, CFO, Vertex: Yeah. No. Certainly. For you know, from an adjusted EBITDA standpoint, I think, Josh, you mentioned earlier, we we went on an an investment phase, back back at the time we went public. And I think when we got to the end of that, we certainly saw ourselves inflect and saw the real strong free cash flow as well as adjusted EBITDA come from that.

And, you know, we’re we continue to see great, you know, great results from, you know, the leveraging of those investments that we had previously done as well. And we also expect that we’re gonna see that start to continue here in here as we get through this investment phase. Now the the difference between the two investments, you know, this investment phase we’ve talked about, really, it’s driven by investments in Ocasio to get our country coverage where it needs to be to ensure that we’ve got go to market and SMEs in the places where our customers are gonna be. And, you know, they’ve got they’ve got defined terms. We’ve talked about eighteen to twenty four months from the time of acquisition, Josh.

And so what I expect to see is that, you know, we’re working through 2025, making those investments. As we get through into early part of twenty twenty six, you mid part of twenty twenty six, you’ll start to see, again, that inflection and that leverage start to show itself. And, you know, we’ve been able to demonstrate that, you know, in 2023 when we completed our last, investment phase, and I think you’re gonna see that happen again. And so you’ll see you’ll see us, you know, kind of right now, our our adjusted EBITDA margin is expected to be about 21% for 2025. You’ll start to see that move, but much more meaningfully when we get through that investment phase at the end in the middle of twenty twenty six.

And so look for that. I think that’s really important. Again, our business has demonstrated that we can get leverage out of the investments that we’ve made, and we’ll continue to do that. The investments we’ve made in selling and marketing, g and a, those types of things are bearing fruit. And so I expect to see real nice leverage come out of g and a.

I expect to see some in selling and marketing. And what we’ll see is we’ll see that r and d spend, which is elevated because of the spend that we’re making for the Ecosio products and some of the AI investments, start to moderate back that 18 to 19% of revenues that that has been our historical average.

Josh Riley, Analyst, Needham: Got it. Alright. Well, we only have one minute left, but maybe just to follow-up, just one quick item on the financial targets is once we get past the second half of twenty six and you start you’re talking about this period of leverage, from that point to the f y twenty eight financial targets, should we then kind of expect linear improvement towards those targets annually, or could there be some step function changes, to get to them?

John Schwab, CFO, Vertex: Yeah. That’s a great question, Josh. I think as we get through that 2026 period, I think you’ll start to see that, yeah, you’ll start to see a bit of a pop there, and I think that will start to you’ll start to see some linearity in sort of how this works itself through. I don’t know of any particular one off items that are gonna drive a big step function change. But, again, if you look in the areas that I mentioned, those you know, that that departmental, and now that that departmental discussion I just had, that’s where it’s gonna come from.

But I think you’re gonna start to see some real nice real nice linearity in sort of how that kind of progresses along. So we’re excited about that again because we feel like we can see it coming. We have seen it in the past, and I think the investments we’ve made in the business have been good ones, and they’ve been, they certainly are demonstratable in the financials.

Josh Riley, Analyst, Needham: Awesome. Alright. Well, with that, unfortunately, we’re out of time, but wanna thank the Vertex team for the time today and everybody listening in.

David DeStefano, CEO, Vertex: Thank you.

John Schwab, CFO, Vertex: Excellent. Thanks, Josh.

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