Vertex Inc - Ordinary Shares Class A Aktie

Good morning, and welcome to the Vertex Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Joe Crivelli, Vice President of Investor Relations, for introductory remarks.

Hello, and thank you for joining us to discuss Vertex's third quarter financial results.

As noted on Slide 2, 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 webcast is being recorded and will be available for replay on our Investor Relations website. You can queue up for the question-and-answer session at any time by raising your hand in the bottom right corner of the OpenExchange portal.

I'll now turn the call over to Chris.

Welcome, everyone, and thank you for joining us. The third quarter was a very strong quarter for Vertex and importantly, it demonstrates that we are delivering on the commitments we made earlier this year. We said our priorities were to stabilize the core business, improve our operating discipline and profitability and create a stronger foundation for durable growth. Q3 provides tangible evidence of our progress against each of those priorities. Our revenue grew 11% and finished above the high end of our guidance. Adjusted EBITDA grew nearly 50%, exceeding the high end of our guidance by almost $8 million and driving adjusted EBITDA margins above 30%. Customer retention has stabilized, our growth indicators are improving and the Value Creation Plan is delivering benefits, ahead of the timeline that we originally anticipated.

While individual quarterly results will reflect the timing of investments and other expenses, the actions we have taken to sharpen our focus and improve our cost structure have established a more efficient operating model. This, in turn, has materially increased the earnings and cash flow potential of the company. Now turning to e-invoicing. We continue to see very strong momentum with ARR up over 100% year-on-year. Growth in e-invoicing contributed meaningfully to the re-acceleration in cloud revenue, we saw during the quarter as well. This reflects strong execution, the successful launch of the French mandate and the contribution from Brinta. Both our ecosio and Brinta teams continue to perform ahead of the plans, that we established when we acquired each of those businesses, reinforcing our confidence in the long-term opportunity.

As the business scales, we will not expect to sustain growth at this level every quarter, but we do continue to expect e-invoicing to grow significantly faster than Vertex overall. And the opportunity ahead remains significant. During the quarter, we strengthened our strategic partner ecosystem, and we're honored to be selected by Avanade, as its e-invoicing technology partner. This relationship reflects the growing demand for global e-invoicing solutions and further enhances our ability to support organizations navigating complex compliance requirements.

Finally, several countries have mandates coming in 2027, including the next phase of Germany's e-invoicing mandate that takes effect on January 1st, and there are additional mandates through 2028 and 2029. These collectively provide another important set of catalysts, as businesses prepare for the new requirements. More broadly, multinational companies need a partner that can combine tax determination, e-invoicing and compliance across global complex operations. With the momentum we are seeing today and additional mandates still ahead, we believe e-invoicing can become an even stronger contributor to Vertex's overall growth.

As I've shared for much of this past year, AI is becoming an increasingly important part of how we operate Vertex, and we're seeing measurable progress. Since the beginning of the year, engineering efficiency has improved more than 100%, and our teams are now delivering nearly twice the code contribution throughput. AI-assisted review now supports nearly 9 in 10 code contributions, helping our engineers move faster and improve consistency, while retaining human oversight and accountability. And these gains are beginning to scale across engineering. We're also taking what works and applying it more broadly across teams, while extending AI beyond coding in other parts of the development life cycle, including requirement scoping, testing and validation.

The opportunity here is bigger than producing more code. It's about increasing our capacity to innovate, while improving the efficiency of how we deliver. Over time, we believe that can become an important source of operating leverage. We're also adding AI expertise at our Board level. We recently welcomed Debanjan Saha, CEO of DataRobot, a proven leader in scaling AI, data and cloud businesses to our Board of Directors. His perspective will be incredibly valuable, as we continue building an AI-first Vertex. And that's the internal operating proof. At Vertex Exchange last week, we showed how the same AI-first approach is beginning to shape the experience that we deliver to our customers.

Last week at Vertex Exchange, we unveiled a brand -- a new brand identity, which you see reflected in today's presentation. It's an outward expression of the transformation underway at Vertex. We are building on nearly 50 years of tax expertise with new energy, greater focus and a more connected approach to global indirect tax and compliance. That direction came together at Exchange through our Decision-to-Defense positioning, connecting the tax decision inside a transaction to the work and evidence that follow from determination and e-invoicing through compliance, reporting and ultimately defense.

Our ambition is to help our customers manage that life cycle as a connected whole, rather than as a series of separate activities. We also introduced Vertex Sol, our vision for a more connected AI-powered tax and compliance experience. Sol brings intelligence, workflows, decisions and evidence together through a continuous governed record. The opportunity is to automate more of the manual work around a tax decision, improve visibility and help our customers act with confidence while keeping tax professionals in control. We are already building towards that vision. Our continuous compliance agents help tax teams identify potential exposures and prioritize follow-up before period close, while Vertex Intelligence connects users to specialized capabilities within their existing workflows.

These are practical steps towards making tax and compliance more connected, proactive and easier to manage. The customer perspectives shared in Exchange, simply reinforce the importance of that foundation. Even as businesses adopt the latest technologies, the need for accurate, reliable and defensible tax outcomes remains. Our approach combines AI with the tax content, technology and domain expertise our customers rely on, helping connect and automate more of their work without compromising visibility or control. That same need is showing up in the business that we won this past quarter. Tax and compliance are playing a more strategic role in the broader transformation work that our customers are undertaking.

They are not just buying a tax engine. They are modernizing ERP environments, preparing for new compliance and e-invoicing requirements, expanding into new markets and automating increasingly complex business processes. In that environment, we're seeing enterprises turn to Vertex, because of the breadth of our platform, the depth of our content and our ability to support complex global environment, we're seeing enterprises turn to Vertex because of the breadth of our platform, the depth of our content and our ability to support complex global operations. Let me provide a few examples. We continue to see significant opportunities to expand within our installed base.

A great example is a leading global technology hyperscaler, where we completed a new 5-year agreement representing a low 7-figure expansion across multiple Vertex capabilities in its SAP and Ariba environment. This highlights the opportunity to grow alongside our largest customers, as their tax and compliance needs evolve. A leading global digital commerce platform completed a mid-6-figure expansion in its e-invoicing deployment, across several additional markets supporting approximately 2.7 million invoices annually. This customer operates on its own internally developed technology platform, demonstrating that our opportunity extends beyond the major ERP ecosystem as global complexity and e-invoicing requirements increase.

Internationally, a global food packaging company completed a mid-6-figure expansion, as part of a broader ERP and tax modernization program. The development spans 18 entities across 5 countries in an Oracle environment and creates additional expansion opportunities, as the transformation progresses. Together, these examples demonstrate the strength of our land-and-expand opportunity and our ability to grow alongside customers as their tax compliance and e-invoicing needs evolve.

Turning to new logos. We added a leading global athletic footwear and apparel company through a low 7-figure competitive displacement. The customer selected Vertex to support its e-commerce and point-of-sale operations as well as its SAP ECC ERP, demonstrating our ability to compete and win in complex high-volume enterprise environments. We also added a global identity security software provider as it established an independent Workday and Salesforce environment following its divestiture from a larger software company. The customer selected a broad set of Vertex capabilities to support its global tax requirements across multiple geographies and technology ecosystems.

In Europe, a pharmaceutical company selected Vertex to automate VAT or VAT compliance across 23 countries, as part of its SAP S/4HANA environment. The win is an example of our ability to combine tax determination, compliance automation and ERP integration to simplify global complex tax performance. Across these examples, what stands out is they are being driven by the same long-term trends that we continue to discuss with investors, ERP modernization, evolving compliance requirements, the growth of e-invoicing and the need for greater automation in tax and finance functions. Whether customers are expanding their use of Vertex or selecting us for the first time, we continue to see demand for the content, the integrations and scale required to support our customers' global operations. Combined with the operating changes we have made across Vertex, these opportunities give us greater confidence in our ability to drive growth, while delivering significantly greater earnings and cash flow.

Now I'll turn the call over to John to discuss the financials in detail. John?

Thanks, Chris, and good afternoon, everyone. As Chris said, the third quarter demonstrates that we are delivering against the commitments we established earlier this year. We have stabilized the core business while materially improving profitability, and this quarter highlights the significant earnings leverage delivered by the Value Creation Plans and our increased operating discipline.

Turning to revenue on Slide 13. Our total revenue was $213.3 million, up 11% year-over-year and above the high end of our guidance range. Software subscription revenue increased 10.2%, while services revenue increased 15.8%. Importantly, we saw encouraging momentum in our recurring revenue metrics. Our annual recurring revenue increased 11.7% year-over-year to $724.3 million, while cloud revenue growth accelerated to more than 20%. We view the improvement in ARR growth as an encouraging indicator of the underlying trajectory of the business, as we move forward to 2027.

Turning to customer metrics on Slide 14. Gross revenue retention was 95% and net revenue retention increased by 1 point sequentially to 106%. Our average annual revenue per direct customer was $145,793 in the third quarter, up 9.2% year-over-year. Our scaled customer growth was 9% in the third quarter, while our overall customer count was up on both a year-over-year and sequential basis.

Turning to profitability on Slide 15. Both overall gross margins and software subscription gross margins were the highest we've delivered as a public company. This reflects the hard work the team has done to reshape the Vertex financial profile over the past year. Overall, non-GAAP gross margin was 77.6%, up 370 basis points year-over-year. Our software subscription gross margin was 84.6%, up 316 basis points, and our services gross margin was 37.7%, up 886 basis points.

Earlier this year, we told you that the actions we were taking would materially improve the profitability of Vertex. We're now seeing those commitments reflected in the results. Adjusted EBITDA was $64.8 million, up approximately 50% year-over-year and nearly $8 million above the high end of our guidance range. Adjusted EBITDA margin reached 30.4%, putting us well ahead of the timeline we had previously outlined to exit 2027 with margins in the high 20s. Looking forward, we expect to operate at approximately a 30% adjusted EBITDA margin levels during 2027. In addition, we believe we can expand margins beyond that over time. Additional benefits from the Value Creation Plan are expected to phase in, as we grow revenue on a more efficient cost structure, and we expect a greater portion of that incremental growth to flow through to earnings. That said, adjusted EBITDA margins will not be linear from quarter-to-quarter. Our free cash flow was $25.2 million, while pro forma free cash flow was $33.8 million or 52% of adjusted EBITDA.

Turning now to Slide 16. We also said that improving earnings needed to translate into significantly stronger cash generation, and that's exactly what we're beginning to see. Adjusted EBITDA less capital expenditures or cash EBITDA increased to $36.7 million in the third quarter, up from $11.2 million a year ago. This reflects both the significant increase in adjusted EBITDA and greater capital efficiency with more modest capital expenditures even as we continue to invest in the longer-term growth of the business. The magnitude and pace of improvement are important. The Value Creation Plan has structurally improved our earnings profile, and we are converting our increased earnings power into cash generation at a faster pace. As an example, in just 2 quarters, our cash EBITDA has increased from approximately $14 million to $36.7 million. We believe that there is additional opportunity ahead as we continue to realize the benefits of the Value Creation Plan and maintain discipline around both operating expenses and our capital investments.

Now turning to guidance. Given the performance of the business in the third quarter and the ongoing impact of the cost actions, we expect fourth quarter revenue of $215 million to $217 million and adjusted EBITDA of $58 million to $60 million, which includes marketing expenses associated with the Vertex Exchange and targeted investments to support future growth. For the full year guidance, we are raising the revenue range to $828.9 million to $830.9 million, an increase of $2.4 million at the midpoint. We are increasing the full year adjusted EBITDA guidance to $217.9 million to $219.9 million, an increase of $10.9 million at the midpoint. And we now expect cloud revenue growth to be 19% for the full year.

While we don't guide to GRR and NRR, I do want to call out that we expect both metrics to decline by approximately 1 point in the fourth quarter, reflecting the loss of an OEM in our payroll tax business. The financial impact of this loss is fully reflected in our guidance. Importantly, retention trends in our core determination business have improved throughout 2026, and we do not view the specific loss in payroll tax, as an indicator of broader customer health. Despite the headwind, our Q4 guidance implies healthy revenue growth of 11% at the midpoint.

Before I wrap up, I'll note that in the third quarter, we repurchased $27 million of shares at an average price of $13.26. Since the $150 million buyback program was first launched in November of 2025, we have bought back a total of $83.6 million worth of shares, at an average price of $14.11 and have $66.4 million remaining under our authorization.

With that, I'll turn the call back to Chris for some closing comments. Chris?

Thank you, John. Let me close where I started. Earlier this year, we laid out a clear set of priorities for Vertex, stabilize the core business, materially improve our profitability and cash generation and position the company to return to stronger, more durable growth. We are delivering against those commitments. Customer retention has stabilized. We have materially changed the earnings and cash flow profile of Vertex. And the acceleration we saw this quarter in ARR, cloud growth and NRR provides encouraging evidence that the underlying growth trajectory of our business is improving in the core.

We also know the work is not finished. Our focus now is to build on this progress, continue to strengthen the performance of the business and capitalize on the opportunities we see across e-invoicing, AI and the broader Vertex platform. Q3 was a strong quarter. And importantly, it demonstrates our ability to execute against the commitments we make. We entered the fourth quarter from a position of greater operating and financial strength and with increasing confidence in our ability to build on that progress.

Finally, our new brand identity, which you have seen reflected in the presentation this morning, is also an outward expression of the transformation underway at Vertex. We're proud of our history, but we're bringing in new energy, greater focus and a different way of working to every part of this company, because Vertex is not standing still. We're moving forward faster than we've ever moved before. You can see that in the third quarter results, and we're just getting started.

With that, we'll take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Jared Levine with TD Cowen.

This is Patrick Brian from TD Cowen on for Jared Levine. I wanted to ask how the feedback was coming out of the recent Vertex Exchange event in Las Vegas, especially from our technology partners and customers?

Thanks for the question. We had a great week last week at Vertex Exchange, and we were happy to welcome many of our customers, partners, several of our investors and analysts, were there with us as well at the event. And the feedback we've gotten universally have been extremely positive from the experiences that they had in the breakout sessions to what we shared in the keynote with Vertex Sol, where we've taken the product portfolio. The positive -- the feedback has been positive across the board. And even as I think about what we saw on social around the event was just incredibly different than the energy we've seen in the past, and it's a testament to all the great work the teams have done to build our portfolio, to work with our customers, partners and build out the road map. So we're very excited. We got a lot of great feedback. And yesterday, it was a great week, and now we're on to delivering everything.

And if I could add a follow-up. I just wanted to ask how the new branding of Sol changes your approach to pricing.

The branding and the pricing will be different. Sol is, as we shared last week, Sol is really an end-to-end set of capabilities that we've introduced. Some of those capabilities will be part of the core product portfolio as is. Others will be extra relative to what customers choose to purchase from Vertex. A good example would be some of our AI capabilities today like Vertex Intelligence are embedded in the product experience already. There is no additional charge for that for our customers. But we have other capabilities like smart categorization, which are extra based on the value that they bring and the way those products operate. Vertex Sol will have similarities to that, where there will be aspects of Vertex Sol that are part of the overall purchase platform, what customers get, but there will be elements of Vertex Sol, which will have separate charges associated.

Your next question comes from the line of Brett Huff with Stephens Inc.

Two questions. One, the French launch, I think, is something we've all been looking forward to. And while I know it's early days, can you give us anecdotes or conversations or early returns or anything that just to give us a little insight into how that's going? I know it went off well, and there was no hitches, but any sort of feedback you're getting from the teams and the customers?

We were very pleased with the French mandate launch. It was a mandate that many people watched very closely, because it was one of the more complex mandate requirements. And I think even as I mentioned to some of you, like that mandate, there was aspects of that, that were changing even up to the week prior to going live at the beginning of September. We were able to execute very successfully with our customers, help them through the testing phase, bring them live. And that success was reflected in the growth numbers that we shared earlier in the presentation. We saw 100% ARR growth in our e-invoicing business. And again, that will ramp because of we're bringing customers live and September was only partway through the third quarter. So we feel really good about how that went.

Our customers are very pleased. We're tracking that work very closely. The implementation work that was -- that led to ultimately going live with customers. We continue to see transactions ramp and so we're very happy with our execution around that mandate.

Great. Second question for me is a little bit bigger picture. I know you and the team have spent a lot of time trying to kind of compress the feedback loop between customers and the team, to get the right products out. Can you talk a little bit about how that feedback fed into the Sol launch and some of those sort of nuances that I think you've really hit the nail on the head with. I think the process is something that you guys are really getting down, I just want to hear how that went?

As you -- as I've shared with many of you, one of the priorities I set for myself personally when I came into the company was to engage deeply with our customers and to really go out and talk to customers, ones that are happy with Vertex, ones that might have been less happy with Vertex, it didn't matter. Like I really wanted to talk to a variety of customers. And that focus has really translated into how our team has been engaging with customers. And so what you saw last week with Vertex Sol is -- I wouldn't call it a culmination. It's the first phase of our engagement really as we're changing how we engage, how we learn from customers, how we bring their feedback into what we're developing. At Vertex Exchange, we had some specific breakout sessions with customers who are really providing us more detailed feedback, particularly with certain features of our products like the AI capabilities that we're bringing.

And so we are absolutely changing how we engage, we think about our customers. And we're really just getting started there as well, Brett. Like that's a place where we believe we can use AI to scale our listening systems to really make sure that we're feeding all of that into our product capabilities, our product road map in ways that are going to help us go even faster than we're already starting to move.

Your next question will be audio only with Patrick Walravens with Citizens.

Great. Congratulations, Chris. It's great to see it working. Can I drill down on 2 things that you guys brought up on the call. First of all, the athletic footwear displacement. You said that was SAP ECC. Chris, was that on-prem?

There are elements of it that are on-prem. That is correct as well as other pieces of it, but there are elements that are on-prem.

Okay. And so the point of that is, is that still a competitive advantage for you guys that you can do on-prem and a lot of others can't?

Our view all along, Pat, has been while we want our customers to be on our cloud platform, and we've talked about that a lot. That's where they get the best capabilities. That's where they get our newest features first. That's obviously where most of our investment is placing. We're migrating customers to the cloud. We do support customers that run the product on-prem and that we stay true to that commitment, but we are focused on driving cloud growth with our business and having our customers on that platform.

All right. Got it. And then can we hear a little bit more about the loss of the payroll OEM? I didn't quite understand what was going on there. What exactly happened there?

So we lost an OEM in our payroll tax business, it's a discrete loss. We specifically know what it was about. We understand what it means. It's reflected in our guidance. But it was meaningful enough that we wanted to call it out for everyone, disclose it, but we do not see it as any evidence of a broader deterioration in the business. As John pointed out, it will be reflected in GRR and NRR metrics. And so we just wanted to get ahead of that, share that. We understand it. But again, we're at the midpoint of our Q4 guidance, we'll grow 11%. We're going to deliver on the year and then some. And so we feel good about the trajectory of the business. But again, that was meaningful enough to call out.

Your next question will come from Andrew DeGasperi with BNP Paribas.

Sorry, I can't go on video for some reason or here we go. So my first question would be related to the Vertex Exchange conference you had. And I was really impressed with the customer list that you had on stage. I think I heard OpenAI, from Amazon and DoorDash, among others. And I think one of the things that I was surprised is that some of these customers were asking you to expand your service in new geographies, that you weren't part of before. And I was just curious to know how important is it to expand in these new markets, as it relates to content? And should we be seeing some progress going forward on that front?

So we -- Andrew, that's been an important focus for us over the course of not only this year, but the last several years. A lot of the country-level expansion is related to e-invoicing, but not exclusively. We also have expanded content coverage. One of the big deliverables we've had over the course of this year is to expand our coverage for content in Brazil, which relates to our core tax determination business, there in that country. And so we continue to expand where we're building and covering. I also mentioned, we've talked about this previously. We acquired a company, called Brinta earlier this year. They brought to us 9 additional countries in Latin America. They give us an end-to-end capability across our e-invoicing needs.

And so we'll continue to expand. There are other geographies that are going to come online with mandates. Like in Europe alone, as I mentioned earlier on the call, we've got mandates Germany, for example, Norway, Slovakia scheduled for January of 2027, but further mandates coming in '27. Spain is on the docket. Beyond that, you've got mandates in 2028 and even in 2029, where you start to see countries like the U.K. And we expect further expansion, further mandates to come in other parts of the world, Middle East, Africa, parts of Asia. And our objective is to be able to expand around the world with our customers, be their end-to-end, partner for this, irrespective of where they need to be a global mandate for tax and tax compliance.

And that's really helpful. And then as a follow-up, I wanted to maybe get an update on the current macro environment. I know last year, it was a bit of a tough period as it related to entitlements. So just curious to know, maybe, John, if you could give us a sense of where we are on that front and if there's -- if we're finally turning a corner there?

Yes. What I would say is -- Andrew, thanks for the question first. What I would say is we continue to see a normal environment there. Entitlements have made a bit of a comeback from where they were a year or so ago. I think we spent a lot of time talking about that. We are seeing an improvement in some of that activity, which is good. I think it's never exactly where we want it to be, but we are seeing some nice movement there. We aren't seeing the big kind of true-ups, that we have talked about in the past. I mean this quarter, it was a very, very small number that was there. So we're not seeing a lot of activity like we had in '24 and a little bit in the early part of '25. So I just want to call that out we're not seeing that. That's not really changing the game at all. However, again, it is nice to see a little bit of a resurgence in the entitlement area.

Your next question will come from Chris Quintero with Morgan Stanley.

Congrats on a nice set of results here. Maybe first on kind of what are you guys seeing in terms of cloud migrations? We heard from SAP recently talking about some really good migrations, especially as it relates to kind of AI helping drive some of those customers wanting to move over to the cloud. And so I'm curious if you're also kind of seeing that dynamic, too?

Chris, we are continuing to see cloud migrations. That's been, as you know, a big area of focus for us. I would say trends are continuing. We saw a healthy movement in Q3. Those trends are continuing. But where we see the biggest movement in cloud is in our e-invoicing business, right? That's all cloud, and that's where we're seeing one of the biggest drivers. But we do continue to see migration. We do continue to participate in those. Some of the customers I highlighted are in that -- are sort of in that consideration set. So we'll continue to work with customers on it.

Obviously, one of the big sets of conversations or categories of conversations that we were having last week at Vertex Exchange was with customers moving to the cloud, so they can take more advantage of the new capabilities we're delivering, like all the great new things we're going to deliver with Vertex. So having access to the cloud and being on that path is going to be really part and parcel of their ability to get the most out of it. So we're working with customers around it. As you know, large complex multinationals have a variety of different priorities they're often balancing. And I think as I've shared on previous calls, cloud, on-prem, you might have a mixture of that depending upon the company itself. Inside the company, they have different deployments on different timelines. So we continue to drive that. And every customer I've talked to is on the path. At some point, it's just different timelines, different priorities there.

Yes. That's great to hear. And then maybe as a follow-up, Chris, you've been in the seat for about a year now. You've talked to customers, you've talked to investors. I'm curious from your perspective, what do you think investors today are underappreciating about the Vertex story?

I think investors are starting to appreciate the business and really what we've got here. I think somebody mentioned earlier the blue-chip customer base that we've got. I think what investors are also starting to appreciate is how we're delivering against our commitments. Now I've only been here a year. We need to prove to you that we can deliver against our commitments. So you saw that in our revenue growth. You saw that in our profitability growth. Those were all things that we said we would deliver and we've been delivering that, and we'll continue to do that.

The underlying growth picture is improving. You saw that in ARR growth. You've seen that in what we're doing in NRR and GRR. Again, so like you can see the underlying movement, the e-invoicing growth in the business. We've been talking about that, but we're showing that now. And so those are some of the drivers that we see that I think investors are starting to see now, and we'll continue to prove it. We'll continue to show you all, but that's what I want you all to see that trajectory. And I think Q3 was a great demonstration of that.

Yes. It's a great execution.

Your next question comes from the line of Daniel Jester with BMO Capital Markets.

This is [indiscernible] on for Dan Jester. It looks like services revenue came in stronger in 3Q compared to our model. Can you provide a bit more color on what drove the strength in the quarter and how we should be thinking about services revenue for the rest of the year?

Yes. Services revenue did perform nicely. We saw 15.8% growth on a year-over-year basis. And I think a lot of it has to do with some of the implementation around the e-invoicing activity that's been going on. Again, Chris talked about France and the mandate coming. There's activity that surrounds that. In addition, we had a nice quarter around our MSO business and the tax filing business that we have. And so those pieces both drove the growth there. But when I think about the services business, strategically, it's not our goal to increase service business at all costs, because we really spend a lot of time working with our partners, implementation partners, accounting firms and others that offer that service. And we like to partner with them and make sure that they're sort of at the forefront of services activity. So while we're pleased with the opportunity that we saw there and the growth that we saw there in the third quarter. It's not an area that we're really leaning into dramatically, because we want to make sure that there's enough to go around for our partner community.

Helpful. And then just a quick follow-up with e-invoicing ARR growing roughly 100%. I guess how should we think about the growth trajectory in 2027, especially as Germany ramps up?

I did not catch that?

How about I start with that. I think the question was with the e-invoicing growth about 100%, what do we think about the future and the growth opportunity that's there.

One of the drivers of the business that I see as even a bigger opportunity than I would have thought of a year ago is our e-invoicing business. And much of what we're seeing in the trends, the mandates, the need for customers to have a global partner that help them. We see a lot of opportunity. So we -- while I don't expect that every quarter we will have the exact same growth rate because of the high numbers, I do expect to significantly outperform the rest of Vertex from a growth rate perspective with this business. I also go back to -- we brought on some really interesting new partners like Avanade, that we announced this quarter, again, who will be helping us take that capability to market, which expands our reach, expands our coverage, expands the growth opportunities.

And then as we talked about a little bit earlier, we'll have other countries coming online. That all creates opportunity for us. So this part of the business, we believe has tremendous growth potential. We are continuing to invest in this business for growth, and we're pleased with our execution so far, but there's still a lot more work for us to be done.

Your next question comes from the line of Billy Fitzsimmons with Piper Sandler.

We'll move on to our next question with Alex Sklar with Raymond James.

We'll move on to the next question with George Kurosawa with Citi.

Hi, can you hear me?

Now we can, George.

Okay. Great. I wanted to double-click on that payroll OEM situation and the Q4 guide came down a tick on the revenue side relative to what was implied from last quarter. Are we right to think that excluding that isolated customer event, the Q4 revenue guide would have been maintained or possibly raised?

I think that's about right. That's how we thought about it. And again, the payroll piece was probably about $1 million or so for the quarter of an impact.

Okay. Okay. Perfect. And then the French mandate going live, I wanted to double-click on that. Maybe if you could compare the pipeline you're seeing for that for maybe new customers before the mandate went live to maybe now. I could imagine any customers that didn't opt for a modern solution may now be feeling the pain of that. So just get a sense of how long-dated the catalyst some of these mandate go-lives are?

Yes. So the French mandate was definitely a bigger driver of pipeline in the first part of this year than it is today, right? A lot of companies were going live with us, with other providers. But we do think there's going to be follow-on opportunity, because there is a percentage of the market that picks a local provider. We expect many of like anyone who's picked a local provider will likely want to consolidate over time. That's something we've talked about that, because we service global multinational customers. Ones that over the years have picked the local providers for various countries, that may or may not have been what they've done in France, but there could have been other countries for which they picked the local provider. They're going to want to consolidate.

And I would tell you the conversations we've been having even as recently as last week at Vertex Exchange, that opportunity is absolutely on the table to consolidate to make sure, because the global multinationals definitely see the need to have one global provider or at least one main global provider where they have more of their e-invoicing business. It just simplifies their operations, simplifies their ability to scale, the management overhead and even just the procurement process across not having to have many, many different vendors they're dealing with in different countries. And that's an opportunity that is there for us. It's something our customers have told us for a long time. Now they're seeing us prove our capability, and we're having those conversations.

Your next question comes from the line of Alex Sklar with Raymond James.

Can you hear me?

We got you.

Okay. Great. So the host needs to turn on my video. But maybe first one for you, Chris. Just the idea as you push further into selling a tax and compliance platform, how does that influence your sales hiring plans? Any change in the persona that you're looking for? And then just maybe any color on what you've seen from a sales productivity standpoint to date?

We've got a really strong go-to-market organization. I mean, Vertex has built, as I've talked about a lot, we've built a really incredible customer roster and a lot of that is testament to the whole company, but the sales organization, the men and women who represent us in front of our customers every day have done a phenomenal job of building that book of the business. So that being said, as we expand from being a tax -- primarily a tax determination company to one that help that drives more of an end-to-end compliance capability, the Decision-to-Defense end-to-end that we've talked about and what's represented in Vertex Sol, it is going to require that we've got the ability to help our customers understand how to value that, how to think about that. And there will be places where I think growing our sales capabilities, our skill sets will be important. The good news is we sell really well to global multinationals. I think we need to build on that. We need to go deeper with our customers. They're asking for it, and that's where we're leaning in.

Okay. Great color there. And then maybe just a follow-up on the e-invoicing. I don't know if Chris or John, do you want to take this. But I'm curious if the French mandates has helped drive customers to thinking about consolidating more of their e-invoicing requirements on Vertex or most of the success in the quarter was just from landing the French wins?

I would say a lot of the 2026 motion has been about starting getting to the mandate, meeting the mandate. But as we go forward, there's a lot more conversation with customers around consolidation. We saw some of that over the course of the year, where as I've talked about even on previous earnings calls, we have several large customers who are doing multiple countries with us and have added and continue to add countries over time, and we expect that to continue. The French mandate certainly because it's a large economy is a catalyst for more of that, particularly where, like I talked about a moment ago, particularly where people have picked a local provider in a smaller geography, a smaller jurisdiction, we have the opportunity to consolidate some of that and our ability to execute on the French mandate and the French mandate provides a lot more. But I mean it gives customers confidence and momentum around that move.

Your next question will be audio only from the line of Billy Fitzsimmons with Piper Sandler.

Good to see the results and the profitability upside. Apologies for not being online, a bunch of prints this night. I guess my question, the first one is just we cover SAP as well. If I go back kind of a year for Vertex, there's a lot of excitement around the potential tailwinds from the 2027 deadline kind of pulling through extra demand for Vertex. How has that kind of progressed relative to your expectations, both a few quarters ago and call it, over the last 90 days relative to maybe what you would have expected?

Yes. Billy, the -- we continue to see a healthy set of migrations around SAP, a couple of things I'll say about that. Number one, that -- like we are at the front end of that process. We tend to be further downstream from that decision. But a lot of the customer wins that we see, a lot of our migration activity is tied to an SAP modernization program, that they're running themselves. We've seen a healthy clip there. I think the expectation setting relative to a 2027 deadline, that I think has become elongated for many people. And I've talked to partners of ours who are well embedded in the SAP ecosystem and do a lot of the SAP work themselves, even they will tell you, there's extended timelines for a lot of customers. And so we're -- they feel as though the work that's flowing through to Vertex is in line with what they're seeing actually happening in the market.

Your next question comes from the line of Jacob Zerbib with William Blair.

Congrats on the solid results. Just one question for me. I wanted to follow up on something you spoke about at Exchange. You mentioned that a goal for you is to kind of elevate the Vertex conversation to the C-suite. Can you talk a little bit about that and how those conversations are progressing?

I think Vertex, as we talked about a lot and demonstrated, I think, at Vertex Exchange, we have so much more to offer customers than just pure tax determination, which is where kind of the company was founded, it's the end-to-end Decision-to-Defense where we're doing all of it, helping customers with their entire compliance life cycle. That gives us, I mean, that broader view and that broader set of capabilities, more global footprint for our customers. It changes the dialogue around Vertex. Like we're not -- this company was founded a little bit like almost 50 years ago and primarily focused on tax determination for a long time, and the company has done incredibly well around that.

Now with e-invoicing, with what we're doing around compliance, with what we're adding with Vertex Sol, we have an end-to-end set of capabilities to bring to our customers. We're more global today, and we're getting more global every day in our business. And that's going to make us more strategically relevant to our customers and it increases the kinds of conversations we're having at different levels in the organization. So it's a build from where we are, building on our source of strength, expanding what we could do and that makes us something that's more relevant to different types of folks at different types of leaders in our customer organizations. That being said, we're still very focused on making sure we service the customers we've always dealt with super well. That's what builds the confidence and gives us the foundation to go help them do more.

Just a follow-up, do you anticipate kind of on the back of that, any significant changes to the go-to-market or the structure over there as it pertains to kind of driving that conversation further up?

Yes. The good news for us is we've done a great job of building out our enterprise customer footprint and we have some very skilled senior reps, who are capable of selling end-to-end. The people who cover some of the folks that you saw on stage, which are very large global multinationals have proven their ability to scale the relationship, solve different problems for our customers. And so I feel good about the sales team that we have. I think there's opportunity to expand as we become more international. We've brought in new leadership, for example, in our international business. Carlos Mercuriali, who leads our team there, joined us earlier this year. He's got a background in this world, spent over 10 years at SAP himself. So we're really -- we're excited about the opportunity, and we want to continue to grow in all parts of the world.

Your next question comes from the line of Patrick Schulz with Baird.

Just maybe starting with some of the e-invoicing mandates and I appreciate all the color you provided so far. Just maybe talk about how much more upfront investment is needed to fully enter these markets as the mandates come online in '27, '28 and beyond. And maybe just touch on the competitive landscape a little bit there. How have your win rates been? And what are you seeing in terms of competitiveness in there? Is it getting a little bit stronger?

So a couple of things. Patrick, I think number one, the way we think about entering new companies now has become like we're faster at that, like we got more process and we'll continue to just add that. That's part of it. But I really think of that less as an upfront onetime investment, and it's more part of the run rate of business, like as we grow. The other thing is countries aren't necessarily static in their mandates. They add pieces, there's multiple phases. Germany is in a multiple phase, for example, France will have other phases. We expect that some countries -- many countries will add different reporting type requirements. So like e-invoicing may be the first, but then they may add SAF-T, they'll add other types of reporting requirements.

And so we'll continue to grow with our customers to help them meet the breadth and depth of the mandates and the evolution of what will happen in any given country. And so that's going to be just become part of the business, part of the cost of delivering. As it relates to the overall competitive landscape, we feel very good. Again, given where we were a year ago, we feel very good about our growth. Our win rates are improving in that business, again, reflected in the 100% ARR growth year-on-year. We're progressing really, really well. We're really pleased with how the Brinta team has added to our team, the performance of the team that came from ecosio originally, how everybody is coalesced around one Vertex to bring that to market on behalf of our customers. And there's more momentum to build. There's more to be done, and we're going to continue to compete and win in these spaces. But we're still growing and there's still a lot more share out there to gain on our behalf.

No, perfect. Appreciate that, Chris. And maybe, John, just a follow-up on the margin side, strong performance this quarter. Just want to get a little bit more color on the durability of the new margin profile. How much of the outperformance is being driven by cost actions taken earlier this year versus what is still to come down the road? And maybe where are your top reinvestments were focused on for next year to help reaccelerate growth?

Yes. I mean a couple of things that we feel very good about the durability that you've seen. The numbers reflect real strong performance. The Value Creation Plan is taking effect. We've seen it in the numbers. We feel good about the flow-through that we saw during the quarter. I mean, I think it really demonstrates the fact that it's working. During the same quarter, we delivered very strong results from a go-to-market perspective and sales perspective. So I think it's really paying off the way that we thought it would. We feel good about it. I mean the structural changes that we're making, the different ways that we're working in all the different areas of the business, whether it's development, R&D, go-to-market, back office, all of those things are playing out, and there's still more to come.

I mean the good news is we did our action back in May. Costs have still continued to kind of flow through the business as we've kind of executed on that over time. And we feel good about the fact that as we turn the page into next year that there's opportunity in front of us, we're going to go get after it. And so we feel very good about that. I'm very pleased with it. And again, it is very durable. There weren't any onetime items in there that were driving things -- driving those costs down for any reason. So the opportunity is really in front of us. We're going to go get it, and we're focused on that for '27.

I'll just add there. We're very focused on productivity improvement. One of my goals is that we just -- we get into this, and we talked about this in the last earnings cycle, I'm very focused on creating capacity in the organization, capacity to move faster, capacity to deliver more. The only way we do that is just have like a relentless focus on being more productive being us and that allows us to just take on more. And some of that we'll see show up in the financials. Some of that we should see in the form of product delivery, which over the long run drives more growth, more better competitiveness for us. And that allows us to invest, for example, like as we continue to grow as fast as we are in the e-invoicing business, we're investing back in that business for further growth.

Delivering Vertex Sol. We're investing in that part of the business, because we believe that's part of our long-term growth trajectory as part of our long-term customer satisfaction and retention. So we see a lot of opportunity, and those are just 2 examples of places where we're reinvesting in the business.

Your next question comes from the line of ... There are no further questions at this time. I would like to turn the call back over to Joe Crivelli for closing remarks.

Well, thanks, everybody, for joining us. As always, if you have follow-up questions or would like to schedule more time with the team, please reach out to me at [email protected]. Thanks, and have a great week.

All right. We can go ahead and get started. Thank you all for coming today. I have the pleasure of hosting Vertex CEO, Chris Young; and CFO, John Schwab. Chris and John, thank you both for being here with us today.

I would like to -- we're going to touch on some more near-term dynamics. But first, I'd like to start with a little bit more maybe the longer-term, higher level view of the business. So Chris and John, when you look 5 years out, what do you want Vertex to become that it's not today?

So well, first of all, thanks for having us here. A couple of points I think they're really important. Vertex really exists to help our customers manage their tax and compliance across a full life cycle of activity. We've been calling that decision to defense because we've grown up as a tax calculation company. That's what Vertex was known for. We're 45 (sic) [ 48 ] years old. But if you think about a customer's compliance requirement, it cuts across that entire life cycle from how you decide, how you categorize a product all the way through to how you calculate, prove compliance, file, pay and then ultimately defend yourself if you find yourself in an audit. And that's a life cycle. It goes on continuously. What you learn at the end of that process needs to get filter back into the upstream part of it.

And so traditionally, we focused more on the front end, the calculation piece. With our entry into e-invoicing, we're now more across the compliance spectrum. But we think there's real opportunity for us to expand and really help our customers tackle a lot of the manual work that happens across that entire life cycle. Case in point, yesterday, I was with a customer, very large well-known retailer out of the western part of the country here. And they were describing to me, "Hey, we closed our year in August. And guess what? We have a bunch of spreadsheets that we're using to close the year, close the quarter. We're pulling data from you guys and a bunch of other places in order to pull all the numbers together.

We believe the close process, the reconciliation process, the audit process, so many of these that we can help our customers just do faster, go more quickly by bringing more AI capability to that as part of the entire decision to defense life cycle. And so in 5 years' time, we want our customers to be able to look back at us and say, we can close faster. We can do it with more confidence. We can do it with less reliance on third-party outsourcing and that sort of thing to get to the right answer. And that's really what Vertex should bring.

And so as you begin this next chapter for Vertex, where do you see the greatest opportunity to sharpen the company's strategy or execution?

I think we have several opportunities. I think, first of all, the market opportunity is there. We have a very durable customer base. We have over 60% of the Fortune 500 work with Vertex already. We have a substantial share in large global manufacturers outside of the U.S. and large retailers outside of the U.S. But we -- and we've seen substantial growth now from a small base, but it's really starting to materialize in our e-invoicing business. I've been talking a lot about this over the course of the last couple of months. That part of our business is now becoming more established as part of Vertex. And so we think the opportunities are all there. The pieces now that we're layering in are severalfold.

The first one is AI internally to how we work, getting more efficient, more effective. We've talked about our value creation plan at Vertex, which is going to drive more expansion of our cash EBITDA, which also will drive growth in our free cash flow numbers for the business. John showed a chart at the end of our earnings in the last cycle where we showed the growth and what we're driving from an EBITDA less CapEx perspective in the business. So you can already see with the VCP, we're driving more growth on the bottom line. That's supported by what we're doing from an AI perspective. We've been able to bring down contractor counts. We're changing how we develop software. We're changing how we support our customers. We're changing how we implement. We're changing how we operate most of our processes inside the company using AI, and we're really in the middle of that. And so as we exit 2026, going into 2027, operationally, we see -- we expect to see the full pull-through from that.

And that's on the internal side as it relates to our customer base. We've started to introduce a few revenue-generating products. We've got more coming in our pipeline. And as we look out into 2027, we think AI, as I mentioned, going after some of those manual workflows that our customers have today offers us more opportunity as we kind of look out in the future.

So a lot of really exciting pieces to that. Maybe on the flip side, though, when you think about this transformation, which part carries the greatest execution risk?

I think for us, we've got a lot of different pieces to the business that we need to make sure all come together well, so we can continue to drive growth. For example, we've had to do a few acquisitions to participate in the e-invoicing opportunity. We bought ecosio 2 years ago. We just recently acquired Brinta. They've become a good part of Vertex, but integrating all these pieces is something we're working through. We have to make sure that we're ready for the mandates. Like, for example, the French mandate came online in 2 weeks ago, September 1. That's gone well so far. So we're pleased with where we are on that. But we've got Germany coming. We've got Spain next year. And so making sure that we're ready for each one of these is an important part of what we're doing. But so far, operationally, we've been able to hold up really well as these mandates are coming along, and we're seeing growth in the business as a result.

Yes. So you talked about your large customer base, really high retention. We'll talk a little bit more about e-invoicing as an opportunity. But -- what would you say are the largest opportunities for you to deepen those customer relationships within that large base and sort of drive stronger expansion?

E-invoicing is one of our biggest opportunities there because a lot of our growth over the years has been to expand the use of the tax engine across different parts of our customers' franchise. And while some of those opportunities are still there, again, I'll go back and reference the customer I was with yesterday. One of the conversations with that customer is to expand -- even though they're a large Vertex customer, they're a 7-figure a year customer. Even with them, there's an opportunity to expand calculation in their franchise to other parts of their business. So there's still a durable growth opportunity, we believe, in the core part of our business.

But where we see real growth, like more kind of near-term growth opportunities is to be able to cross-sell, upsell e-invoicing into our installed base. And we started to see in the second quarter, the first real signs of that where some of our core Vertex customers who have been using us for determination were buying larger packages of e-invoicing for their franchise. And that was for France, even looking backwards across other economies like Belgium, Italy, Poland was another driver. Several of them are looking forward to Germany. And so we're starting to see some activity right now in the pipeline around Germany. And then we've got our eyes on Spain, which comes next year.

And we believe as we go through 2027, as we've got an established footprint with these customers, if we're doing determination with them, if we've got a couple of their large economies, we can go back to them and cross-sell e-invoicing for other countries where maybe they picked a local provider in the past or picked a competitor of ours in the past, there's an opportunity for us to consolidate. So they've got one compliance player across that entire decision to defense life cycle. And that's really the opportunity we see in front of us. And there's a lot -- like while there is a net new customer opportunity there, cross-sell, upsell is a major part of our thesis.

Can you talk a little bit more about the land and expand motion? Obviously, the e-invoicing mandates that you mentioned are a key catalyst for driving customers to look for new solutions. But if you could just tell us a little bit more about your land and expand strategy and maybe what products or use cases have the greatest impact there?

So our largest base, installed base of determination today. So most of our customers start there. They've been using Vertex for determination. Usually, it's North American sales and use tax, sales or use tax, but it's usually both. That's the largest installed base from which we work. Oftentimes from there, we can expand into value-added tax, which is going to take us outside of the U.S. Exemption certificate management, that's a big part of -- a big complementary aspect to our business. So customers get exemption certificates for all kinds of reasons. The life cycle of those certificates have to be managed, got a product for that. And then from there, it's the opportunity to expand into e-invoicing, and that's where we're seeing the most work from our customers today. Customers will say, "Hey, we trust you, we use you for North American sales and use tax. hey, we know we're doing business in France or we're going to do -- we're doing business in the UAE.

We're doing business in Taiwan. We need to -- we need to use you there. India is another big one right now for a number of our customers. And they'll say, "Hey, we already use you here. We want to use you for e-invoicing in this country.

And usually, what will end up happening is we start in one country, we prove that out, then we add another country, then we usually add 1 or 2 more countries. And so we've seen a steady progression in the growth of the number of countries that we add with these installed base customers. And we think that it's an important part of our expansion opportunity. And as I mentioned, today, that's largely been a greenfield opportunity, greenfield in the sense that it's an existing Vertex customer who needs to comply with a mandate in a certain place. they put us in place for that. But if in another country, they've already got another provider, the opportunity for us in the future now that we're in that customer with e-invoicing in one place or multiple places is to just consolidate the whole franchise with Vertex. And so that's how we see the land and expand model building out over the course of not just this calendar year, but 2027 and even beyond that.

Right. So in light of this, you're making a lot of changes across product, marketing, go-to-market execution. What are some of the early indicators that you're seeing that tell you that these changes are gaining traction?

So a couple of really important indicators for us. For example, we've now been able to reduce headcount pretty substantially and with a pretty substantial curve through the rest of this year on the number of people that we're using in product development, yet we've maintained and even increased the throughput in terms of what we're delivering to the marketplace. And so I'm pleased to be able to see how we're leveraging AI to make sure that we're driving either the same or better output, but bringing costs down. That's largely been in the form of contractors. We use a number of contractors in terms of the delivery of different aspects of our business. We've been able to reduce our reliance on contractors. You're seeing that show up in the expense lines for Vertex. It's what's showing up in the cash EBITDA numbers that we shared in the last earnings call. And that's a really important leading indicator of the efficiency that we're able to drive on leveraging AI in parts of our business. That's part one.

We're seeing a lot more focus on utilizing AI in other aspects of our business. Customer support is a big area for us. Implementation and professional services is another category. It's a heavily human-intensive part of our business. We believe we can shrink the time required to get customers live with our solutions and do the implementation process a lot more efficiently than we are now. And that's all starting to show up in terms of our delivery numbers, our staffing numbers across these different parts of our team. So that's internally.

As it relates to external, earlier this year, we launched our first commercial product, which is smart categorization -- gone to school on that one. We got that into several retailers. They're all using it in production. They're all revenue generating for us now. But we've learned a lot about implementing these kinds of tools in the context of the customers' business process. There's a lot of change management required. That's for certain. It does require a lot of FDE resource. And in a Vertex context, I would tell you, FDE has a dual meaning for us and for our customers. It's not necessarily forward deployed engineer, which is what you think about when you think about AI and FDEs. It's a forward deployed expert in our case. So like in smart categorization, you actually need the tax expertise to be applied upstream to help customers make decisions around how to categorize product. And so oftentimes, we're bringing our tax experts into the mix as part of some of these implementation processes and using the new products and the new tools that are AI related.

So it's been a learning experience for us as a company that's really graduating from being more focused on delivering tools to our customers to these more solutions-oriented capabilities to our customers like smart categorization. We're really going to school on what that takes and what it's going to mean in terms of how we help our customers move from something they did manual, maybe it was ad hoc, not necessarily well documented, cuts across different departments to really giving them a true AI-driven process that's something that's going to be repeatable and sustainable. And so we've seen some early success. We've learned a lot, prepared to bring that to a lot more of what we deliver to customers as we look out.

So sort of on the internal side of that, John, maybe a question for you. As margins move to the high 20s, how do you think about the balance between operating leverage and continued investment in some of these growth opportunities?

Yes. I mean I think as Chris mentioned, certainly, we have seen leverage come out of the value creation plan, and that's been good. We talked about that at the second quarter call. But I think what we're starting to see now is that what that opportunity creates this more investment opportunity for us as we go forward, places where we can reinvest in products and really drive that throughput into the product base that's out there. So we're going to continue to leverage in and make investments in AI, make investments in e-invoicing, make investments in the platform. And that's how we think about this as we move forward. And I think that's going to be one of the things that we -- when we think about uses of capital as we move forward, I mean that's certainly one where we can think about leveraging it into other opportunities like M&A. And I think that's part of the playbook as well. It's not just resting where we are right now, it's really looking forward and leveraging that cash as an opportunity to really invest back into the business.

And sort of to that point, you did just touch on this briefly, but sort of on the free cash flow side, how do you think about that balance between investing in e-invoicing, AI, strategic M&A and returning capital to shareholders?

Yes. I mean we're going to want to continue to make sure we're keeping up with the investments. It's a very important piece of it. And again, because we create more opportunity with the leverage that we're getting, there are areas where we can invest and create additional capacity. I think we demonstrated that with -- from an M&A perspective with the Brinta acquisition and the ecosio acquisition. So we're going to continue to make investments where we see that, that makes sense that are going to generate the highest return that's out there.

So Chris, you mentioned this sort of in your introduction, but you described the opportunity as moving from tax determination to decision to defense. What does Vertex need to own across that life cycle? And maybe tell us a little bit more about that.

We already own many of the key pieces of that, the determination piece. We are increasingly in the e-invoicing piece, which is that real-time compliance move that has to -- that reporting that has to happen. We do offer tools for filing. We do that in North America. We have that for our global customers. We have an outsourced service in that category as well. That's a place where I think we can do a lot more with AI. I think filing is something that's a heavily manually intensive process today. It's a process that can be automated. And that's something that we're very focused on as we look ahead is to make that a much more automated process, a much more scalable process and move that from where customers do it themselves, they need to use a tool to do it to something that just is an automated process for them.

It's just driven by an AI agent -- they just -- they tell it, here's how many places we got to file, here's the format. It determines the format. It pulls the data directly from the tax engine, produces the filing on behalf of the customer. We do that today in the form of an outsourced service as well. That's an option for customers. That's a place where we think we can drive a lot more AI opportunity for us. And I will tell you, that's a place where in our business, we're really seeing the leverage we can get from AI, not just from a product -- like not just from a dollar savings perspective, but productivity in the form of our ability to cover more use cases for the customer.

So tax filing is a lot -- for most people who have not in this world, I didn't come from the world, but it's a lot more -- it's far more complex than it sounds. Like people think tax, they think, oh, yes, you file some form with the government, you're done. The reality is there are thousands of filing formats that you have to deliver depending upon what kind of business you're in. Like if you just pick one like fuel taxes in the economy, like that could literally require thousands of different filings that have to happen all across jurisdictions around the U.S. as an example, and then even more when you go outside the U.S. Each one of those filings has a different format. It requires certain information. You actually have to apply tax expertise to know how to do a filing ultimately. So you don't just apply tax expertise in the original calculation or in the categorization. It's applied all the way downstream, all the way through the audit process ultimately.

And that's a place where we're seeing AI expand our ability to produce more output for the customer, to file more places, to do it more quickly, to do it more efficiently. And that's one of my goals for Vertex is not just to be able to do things in a less expensive way, but to expand the jurisdictions we can cover, expand the types of businesses and product types we can cover, services types we can cover to move more nimbly. Like, look, we're seeing it around the country, just in this country already, states and localities are now trying to look to -- inevitably, as federal subsidies into the states go away, states turn to taxes to be able to service their constituents. And a lot of states are now under pressure to keep income tax growth at a minimum.

So what do they do if they can't grow income tax, they go to sales and use tax. That's how they collect receipts. That's how they fund what they do. That means they're going to tax more products, more solutions. They're going to try to do it in more interesting ways because it's something that people don't see in their everyday lives. as clearly, like when you get a paycheck, you know how much you gave the government when you get your income tax removed from your paycheck. But it's harder to know like if I'm paying a little bit of tax on this service and paying tax on this product and paying tax for this thing or that thing, that all creates a ton of complexity that all complexity that flows through to our customers, it's complexity that we manage on their behalf. And it's one of the reasons why this becomes something that's more useful for our customers going forward rather than less.

Yes. I think there's a lot of fair points in there. And I have some more questions on e-invoicing that we're definitely going to get to. But as you were explaining some of these different complexities and how manual the process is and all the different regulations and requirements that go into it, I would be remiss if I didn't ask you how that sort of contributes to Vertex's moat in this world now with Frontier models coming in. What's sort of your view on the moat of the business and how that complexity factors into that?

So we have an incredible franchise with our customers today. But AI is going to be involved. But there's not a world where AI isn't a factor in everything. My world view is AI will be a factor in every facet of our lives, no matter what happens going forward. So that on the table, that being said, we help our customers in nearly 20,000 jurisdictions in the U.S. and then many, many more thousand jurisdictions outside the U.S. That requires us to be able to do everything from the state level all the way down to unincorporated municipal areas.

And that's something that requires oftentimes preexisting expertise. For example, we're often talking to local authorities where we'll explain to them why something that they've done is actually wrong or inconsistent with the rule or a piece of legislation that they might have had before, and we'll help them reconcile that so that the tax -- it all -- it actually works well for them and it works well for the businesses that are doing business in their specific jurisdiction. A lot of times, tax rules don't get published right away. The simplest way to say it is sales and use tax in the U.S. is not as simple as a rate card gets posted everywhere where you got to pay tax. Oftentimes, tax is interpreted. And one of the best analogies I ever heard when I first got to know Vertex was a bottle of water is a great example. This same bottle of water, let's say you're in New York Penn Station. If you buy it in a vending machine, it might be taxed one way. But if you go into a restaurant in the same place and somebody opens the water for you and pours it into a glass, it's taxed differently.

It's very hard to determine the nuances on that just by reading what's written on a website as an example. And so that's a place where having the expertise, being able to do the identification of where the changes are being made, what they're -- how to interpret the way certain rules are written or legislation is written is really, really important. And that's one of the aspects of expertise that we bring. And that expertise exists all the way up and down that decision to defense life cycle, all the way from how do I categorize the product in the first place to how do I calculate the tax to how do I report it to a government. If I'm -- as I say, I'm outside of the U.S. now, I'm sending an e-invoice.

The e-invoice format is based on tax expertise to how I file to ultimately how I defend my decision in an audit context. So each one of those aspects requires a lot of expertise, and I think that gives us a really, really solid foundation. All that being said, we're incorporating everything -- AI into everything that we do so that we can amplify the expertise of our people. In the long run, AI will do more, but we really believe we can provide even more value to our customers and make it a part of what we deliver as opposed to have something -- have it be something that's solely taking part of what we do today.

So sort of on that point, tax requires deterministic outcomes.

That's right.

AI is a probabilistic technology. Where should an agent be allowed to act autonomously? And where should it never be making the final decision?

So one of the important points of what we do and which is why I believe our franchise is very durable is we have really 2 core deterministic control points in that whole decision to defense life cycle. One is the calculation engine. And that's got to be right, 100 times out of 100, 1,000 out of 1,000. And so that's a deterministic engine. It -- today, we calculate billions of transactions. We do it autonomously. Customers around the world trust it. I don't see that changing anytime soon. And there's really no benefit to changing that if you're a customer because that's what you rely on. It works today. It's very efficient in many ways.

The other one is e-invoicing. That's a many-to-many transaction model. It requires you to have certain formats that you send information to the government, you receive information back. You do that on behalf of many companies around the world, and that's yet another deterministic network-based model that I believe is durable irrespective of what happens on the AI around it. It's the manual processes that go on around the engines and the e-invoicing platform are places where AI will start to increasingly be used to help with pulling together documents to interpret certain information to -- for example, we use AI in our product today. A customer can ask it, why did you calculate the tax on this good and this transaction in a certain way? It makes it a lot easier. Those are the kinds of questions people would literally call us into our support desk to get an answer to that question.

And increasingly, the goal is to be able to have a lot of that information available to the customer where they're using the product. So it's making our products easier to use, which improves overall customer satisfaction. But where you'll let an AI maybe take on part of the manual effort, like, let's say, that spreadsheet work that I described earlier, ultimately, we think there's going to be a model. In fact, we're building something that we call our AI Trust Center, which will allow our customers to govern how much they let AI do in different processes and let the AI graduate itself into certain tiers of trust, where you go from an AI is just a question-and-answer engine like a copilot, all the way up to where you let it run autonomously based on a set of parameters or rules that you set.

And then there's a whole series of maturity levels in between that where you can govern and then you can even roll back based on the behavior of the model itself because where you run into issues is you don't want the AI to start interpreting anything in your franchise the way you would want people to do it because ultimately, then when you've got to defend yourself in an audit, if it's not auditable and if it's not explainable, somebody ultimately is going to be on the hook for that. By the way, that's not a terrible rule for anyone to have. Increasingly, it's a rule that we're trying to use internally ourselves. Like people use AI today, for example, to do analysis to present an argument to write up something on a topic. And my only rule for everybody is like you can use AI, but you need to be able to stand behind every word in every sentence and every calculation in every table that you give me. As long as you can do that, you can use AI all you want.

I think that's a fair model. Maybe you want me to make that a little bit broader implemented. I do want to switch gears a little bit back to e-invoicing because there's a couple of important things that I wanted to ask you on that. But you mentioned France earlier. Maybe just tell us a little about how are things going now that, that mandate launched, I think it was September 1.

Yes. So we did go live on September 1. The industry went live on September 1. We're flowing transactions now in France. As expected, there's a ramp there. I think there's -- obviously, not every transaction that happened in France on September 1 was e-invoiced. I don't think the whole industry got there. But we've seen a steady progression, and we've seen a steady ramp ever since that day. I will tell you, though, here's a good example of where the -- being on top of the content matters. The week before France went live, they actually changed some of the formats.

Interesting.

Yes. So it's like this is -- when I talk about this being a dynamic business where it's constantly changing, that's a good example. Like -- and this is just the reporting formats changed the week before. We were able to get it all done. We were ready for September 1. But that's -- to me, that's just another example of the dynamism that's going on in this market, and it's one of the reasons why you have to stay on top of a lot of the changes. But so far, so good on France. We're continuing to focus on ramping our customers through the rest of the month and into the back half of the year. There are still people signing up today who are going to be signing up for France. And we're obviously working quickly to get them up and running as quickly as possible. And -- but we've got Germany coming up in January, which is the next big country to come online.

So obviously, mandates can be really the key catalyst to land that first customer. But what moves you from 1 to 3 to 4 different countries on e-invoicing and sort of turns invoicing into more of a platform decision?

So mandates are the catalyst that gets us up and running. There are a couple of different ways in which we become the full platform for our customer across all the countries where they're going to do work. One is, hey, we've done some consolidation. Brinta was an acquisition we did a couple of months ago that brought several countries in Latin America into the -- sort of into the franchise with e-invoicing. We've seen already in their existing installed base some growth. We've already started to cross-sell and upsell to some of those countries into our installed base. For a while, Vertex has had customers, large customers of ours that said, when you can cover my countries, I want to use you. But before we had country coverage, the answer was simply if we can't cover it -- if you can't cover it, we're just going to go elsewhere. And so that's what customers did in cases like Mexico has been requiring e-invoicing for 10 years.

So for our customers who are e-invoicing in Mexico, they weren't using us. Now our customers can use us. And so we're now having those conversations about consolidating that e-invoicing business with us because we can cover that, and that's what we bring with Brinta. What's great about Brinta, too, is they had a really, really, really interesting way in which they were able to serve some of the more scalable businesses like a lot of the ridesharing businesses in Latin America, which are some of the faster growth in the delivery businesses in Latin America, which are some of the faster growth business platforms that we're seeing coming out of that -- those economies right now. Brinta has been one of the platforms of choice for them. You now bring in the Vertex determination, the maturity that we've got, and we think we have a real opportunity to grow that franchise as well.

And then we're just steadily adding countries organically in addition to what we brought on with Brinta. So India, the UAE, those are all countries that are -- that we've started to bring online, and we'll do more to service our customers. And so we believe that while the mandate has been the catalyst for the business, as we start to do more countries with certain customers, then the conversation becomes easy. It's like, okay, we do calculation with you. You're doing determination calculation with us. You're doing some e-invoicing with us. Let's just do all of it. So that means your entire data set is on Vertex. And that's where we're headed as we kind of get through the rest of this year into 2027 and beyond.

Great. So we're coming up on time. So I'd like to just finish with a high-level question. And John, please feel free to jump in here as well. But in your view, what is the most misunderstood part of the Vertex investment case?

Well, I guess one of the first things I would say is we've gone through the last 6 months, there's been a lot of change. And I think over that 6 months, I think people have gotten over the fact that we do have a moat that's out there that's viable, that's there. They've seen some stabilization in our business. We grew back our gross revenue retention. We've seen nice solid growth the last couple of quarters out of the business.

And I think people are really looking for the inflection point. What's going to drive the inflection from taking us from kind of 10% to 12% into that 12% to 14%? And when is that going to come? I think Chris talked about it, a lot of the pieces there, e-invoicing being one of them, it's really a nice driver of the business. Again, then in the little bit of a midterm kind of longer-term basis is really AI and the AI opportunity that's there. So I think it's really -- I think people are getting comfortable with where the business sits right now. They're getting comfortable about what's in front of us, but it's up to us to demonstrate the execution of the things that Chris talked about today.

Great. We are all at time. Chris and John, thank you so much for joining me on stage today.

Thank you. Appreciate it.

Thank you.

Good morning, and welcome to the Vertex First (sic) [ Second ] Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Joe Crivelli, Vice President of Investor Relations, for introductory remarks.

Hello, and thanks for joining us to discuss Vertex' second quarter results. Chris Young, our President and CEO; and John Schwab, our CFO, are with us today.

As noted on Slide 2, 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. And I'll now turn the call over to Chris.

Welcome, everyone, and thank you for joining us. Our second quarter results demonstrate 2 key points. First, the durability of the Vertex business. Revenue grew 10.5% year-over-year to $204 million at the high end of our guidance range. Second, we are beginning to translate greater operating focus and cost discipline into meaningful earnings leverage. Adjusted EBITDA increased 33% to $51 million, above our guidance range and adjusted EBITDA margin expanded by more than 4 percentage points year-over-year to 25%.

The second quarter provides tangible evidence that the actions we are taking to sharpen our priorities, improve our execution and operate more efficiently are producing results. That said, we still have work to do on growth. Expansion within the installed base and new logo performance are not yet at the level we expect, in part because cloud conversions have been slower than expected this year.

Our customer metrics remain stable. Gross revenue retention was 95% and net revenue retention was 105% for the second consecutive quarter. The message in those numbers is straightforward. Our customer base remains durable, and our solutions remain deeply embedded in mission-critical workflows. At the same time, we need to improve expansion, cross-sell and the way we manage customer migrations. Those are important priorities for the second half.

E-invoicing was one of the strongest areas of execution in the quarter. Momentum increased during the quarter across all geographic regions, supported by the approaching French mandate, upcoming German mandate and by customers taking a broader view of global compliance. This matters strategically. Global compliance is moving closer to the transaction itself. Customers increasingly need to determine the right tax outcome, execute the transaction in accordance with local regulations and report it to the relevant authorities and then finally maintain the evidence required to defend it. Vertex is well positioned to help our customers manage that entire life cycle from decision to defense. That is the broader opportunity we are pursuing across tax determination, e-invoicing, reporting, returns and compliance.

Now as I mentioned, e-invoicing was one of the strongest areas of execution in the quarter. The business continues to perform well in advance of upcoming mandates with very strong growth in both ARR and revenue that's materially above the overall corporate growth rate. Importantly, we continue to see both new e-invoicing revenue and the number of our e-invoicing wins ramping considerably as we move throughout the year and towards the implementation dates for the upcoming French and German mandates. I'm pleased that we won several 6-figure enterprise e-invoicing deals in the second quarter, including a mid-6-figure win for an existing customer driven by mandates in just 2 countries, France and Finland.

France was an important catalyst in the second quarter, and Germany and other country requirements will create additional demand over time. We are aligning our country road map to demonstrated customer demand and working to integrate our capabilities across Vertex, ecosio and Brinta. Q2 represented meaningful progress, but we are focused on consistent execution in this business to grow it into a material contributor to our overall growth.

Now let me turn to AI. I've been clear that becoming AI-first has 2 dimensions for Vertex. The first is changing how we operate. We are using AI to improve the speed, quality and economics of work across engineering, customer support, tax research, IT and our managed services operations. The second is changing what we deliver to customers. Over time, we believe AI can make tax and compliance more proactive, more explainable and increasingly automated. We are making measurable progress on the first dimension. And while we are building capabilities required for the second, AI-attributable revenue is not yet material to Vertex. At this stage, the most relevant evidence is whether AI is improving how quickly we build, how efficiently we onboard customers and how effectively we are solving real customer problems.

Across the company, active use of core AI tools has increased to 89%, up from 68% in January. Adoption is important, but it's only the starting point. In engineering, AI is now embedded across the development life cycle. Across the majority of our teams, our internal measurements indicate a 34% improvement in engineering efficiency with pull request merge rates increasing 30% from our January baseline. We are also applying AI to specific customer delivery bottlenecks. AI-supported generation of e-invoicing business rules has reduced onboarding time by approximately 50% in the applicable workflow. Separately, our country expansion agent has enabled the team to onboard approximately 3,500 rules across more than 50 formats, about 70% faster than the prior process. The next step is to translate these capabilities into customer-facing product value.

In our product, we see a steady increase in adoption of our Vertex Intelligence embedded AI, which helps customers with everything from answering a basic question on tax treatment to translating a full set of tax updates into tax rules. More broadly, we are developing an AI-first connected tax platform that's designed to help customers move from reactive product-by-product work towards more proactive compliance workflows. Some elements of that platform are still in development and our immediate goal is to validate them with customers, move the right capabilities into production and establish clear commercial models.

Early customer adoption of Smart Categorization has been encouraging with strong usage patterns helping validate the value proposition while providing important feedback that shaped our understanding of how customers will deploy the solution. Those learnings are informing our go-to-market efforts, and we're starting to see a pipeline of opportunities develop as additional customers evaluate the technology.

Over time, we expect to measure our AI progress through customer adoption, customer outcomes and revenue, but we are not fully there yet. The operating improvements we are seeing give us greater confidence that AI will become both a meaningful productivity driver and an important source of product differentiation for Vertex. The customer activity in the quarter reinforces the durability of our core business and the opportunity to expand it.

Across both existing customers and new logos, we saw 3 consistent buying patterns. Customers are expanding their use of Vertex as their transaction volumes and global complexity increase. They are standardizing on Vertex as part of broader SAP, Oracle and Microsoft Cloud transformations. And in competitive situations, they are choosing Vertex when they need the content, scale, integration and control required to manage complex tax and compliance environments.

Let me give you some examples. First, we expanded our footprint with a leading mobility and delivery technology company. The customer continues to grow and broaden its operations, leading to significantly higher volumes. This entitlement expansion resulted in mid-6 figures of additional revenue for Vertex. Second, we secured a high 6-figure expansion with a consumer packaged goods company as part of its SAP cloud transformation. This win extended our relationship across multiple geographies and tax types, while also leveraging our best-in-class SAP software and Vertex Consulting. And third, we won a competitive displacement opportunity in the Oracle ecosystem with a major quick service restaurant operator. The customer was using Vertex in one area of its business while using a competitor elsewhere. The customer chose to standardize on Vertex to modernize and simplify its existing technology environment, resulting in a mid-6-figure expansion that includes multiple Vertex solutions and services. These are different customers in different industries, but the strategic pattern is the same.

Business growth creates more volume and complexity, ERP modernization creates an opportunity to simplify and standardize and increasing compliance requirements make the breadth and reliability of the underlying tax platform more important.

We saw the same demand drivers in our new logo activity. During the quarter, we won new customers that were replacing internally developed processes, moving through SAP cloud migrations and responding to increased transaction volume. Those wins across the Microsoft, Oracle and SAP ecosystems and included both focused initial deployments and broader platform engagements. The first example is a low 6-figure win with a telecommunications infrastructure leader. This is an example of an enterprise customer that outgrew a manual solution and needed to automate its indirect tax processes.

The second example is a low 6-figure win with a global management and technology consulting firm. The customer was moving through an SAP cloud migration and selected Vertex for North America Sales Tax, Consumer Use Tax, SAP Accelerator and our Consulting services.

The third example is a high 6-figure win with a building products distributor. In this case, transaction volume growth was the catalyst and the customer selected a broad set of Vertex capabilities. We consistently demonstrate through our execution that we can enter through a specific tax or compliance requirement and then establish the foundation for a broader relationship over time. That land and expand opportunity is important. Our Q2 retention metrics demonstrate the durability of the installed base, but our expansion performance is not currently where we want it to be. Improving the way we convert successful initial deployments into broader customer relationships is one of our clearest growth opportunities.

Now before turning the call over to John, I'd like to spend a moment on a topic that's important to me. One of our top priorities since me joining Vertex has been strengthening our leadership team with executives who have successfully scaled enterprise software businesses through periods of transformation and growth. Allison Cerra joined as Chief Marketing Officer to sharpen our market positioning and brand and demand generation capabilities. Aneel Jaeel joined as our Chief Operations Officer to drive greater operational discipline, technology modernization and AI-enabled transformation across the company. In June, Chatelle Lynch joined as Chief People Officer to strengthen talent, organizational effectiveness and accountability as we move through this period of significant change.

And today, we are pleased to announce that Bala Chandran has joined Vertex as Chief Product and Technology Officer, adding significant experience in product innovation, cloud modernization and AI leadership at a critical point in our evolution. These leaders bring the experience and leadership capacity to improve our execution going forward.

We have a durable customer base, an important position in global tax and compliance, improving operating leverage and meaningful opportunities in e-invoicing and AI.

We also have work to do to accelerate our growth, improve our expansion and turn our product vision into measurable customer and commercial outcomes. I believe we now have a stronger leadership team and a clearer operating agenda to do that work with greater focus and urgency.

Now I'll turn the call over to John to discuss the financials in detail.

Thanks, Chris, and good afternoon, everyone. As Chris noted in his remarks, the second quarter results demonstrated stability in the business across revenue growth and customer metrics. In addition, we saw good results from our value creation plan announced in April, which drove significant earnings leverage in the second quarter.

On Slide 13, our total revenue was $204 million, up 10.5% year-over-year and at the high end of our guidance for the quarter. Our subscription software revenue was up 10.7% and services revenue was up 9.4%. Our annual recurring revenue was up 10.5%, in line with expectations. And our Cloud revenue was up 17.9%, bringing the year-to-date Cloud revenue growth to 19.3%.

Turning to customer metrics on Slide 14. Our gross revenue retention was 95% and net revenue retention remained stable at 105% compared to the prior quarter. Our average annual revenue per direct customer was $142,997 in the first (sic) [ second ] quarter, up 9.2% year-over-year. Our scaled customer growth was 8% in the second quarter, while overall customer count was up on both a year-over-year and a sequential basis.

Now turning to profitability on Slide 15, where you can see the impact of the value creation plan beginning to take effect. Overall, non-GAAP gross margins increased 15 basis points year-over-year. This was driven by higher margins in the software business, as you can see on the slide.

Adjusted EBITDA was $51 million, up 33% from last year's second quarter for an adjusted EBITDA margin of 25%. As noted on last quarter's call, we expect to see steady progression towards a high 20s adjusted EBITDA margin between now and the end of 2027.

Our free cash flow was a positive $2.7 million but was impacted in the second quarter by costs associated with the value creation plan, including severance and consulting fees. Free cash flow was $13.2 million on a pro forma basis for a free cash flow margin of 6.5%. In addition, the second quarter pro forma free cash flow represents a free cash flow to adjusted EBITDA conversion rate of 26%. Likewise, we expect to see a steady upward march of this number over the next 6 quarters as the impact of the value creation program takes root, and we expect to exit the fourth quarter of 2027 with a conversion rate of approximately 70%.

To give investors another view of the earnings and cash flow potential of the business, on Slide 16, you see adjusted EBITDA less capital expenditures over the past 6 quarters. Here, you can clearly see the earnings leverage in the business as quarterly adjusted EBITDA has increased 37% or $14 million during that time frame. Capital expenditures reflect investments we are making in the business in both our compliance business as well as in our Artificial Intelligence, both in our internal systems and product development.

As you can see on the far right column, adjusted EBITDA less capital expenditures has more than doubled during this time frame. As I noted earlier, we expect that the value creation program will unlock even more earnings and free cash flow potential over the coming quarters.

Turning to guidance. Given the performance of the business in the second quarter and the ongoing impact of the cost actions, we expect third quarter revenue of $208 million to $211 million and third quarter adjusted EBITDA of $55 million to $57 million. For full year guidance, we are narrowing the revenue range to $825 million to $830 million, and we're increasing the full year adjusted EBITDA guide to $206 million to $210 million from $202 million to $208 million previously. We now expect Cloud revenue growth to be 18% for the full year.

Before I wrap up, I'll note that in the quarter, we repurchased $26.5 million worth of shares in the second quarter at an average price of $13.17. Since the $150 million buyback program was launched in November, we have bought back a total of $56.6 million of shares at an average price of $14.55 and have $93.4 million remaining under our authorization.

With that, I'll turn the call back to Chris for closing comments. Chris?

Thanks, John. Let me close with 3 points. First, Q2 demonstrated the durability and earnings potential of the Vertex business. Revenue was at the high end of our guidance, adjusted EBITDA exceeded our expectations and customer retention remained stable. Second, we are seeing tangible progress from the actions we have taken to improve our operating model. We are executing with greater focus and discipline, expanding margins and creating additional capacity to invest in the areas that can strengthen our growth over time. And third, AI is improving the speed and efficiency of selected engineering and customer delivery workflows while we continue building customer-facing capabilities.

Our next objective is clear: translate those operating gains and product investments into measurable customer adoption and over time, commercial value. We entered the second half with a stronger cost structure, ramping productivity, improving momentum in compliance and e-invoicing and a leadership team built to execute the next phase of our transformation.

With that, we'll now take your questions.

[Operator Instructions] Our first question will come from Christopher Quintero with Morgan Stanley.

I wanted to ask -- it was really great to hear about all the internal AI work that you all have been doing and working on. But from a customer perspective, just curious, typically, tax accountants have been a bit more risk averse and a bit slower moving. So curious from the Vertex perspective, what are you doing to enable your customers to be even more comfortable about adopting some of these AI technologies and solutions you're developing?

Chris, thanks for the question. One of the most important things we've had to do and we've learned a lot of this with Smart Categorization is we've really had to send people in -- almost in a forward deployed engineering model, which you hear a lot about in the AI world, to work with our customers to help them because what we -- look, one of the biggest learnings, I think I talked about this a little bit on the last call, but with Smart Categorization is you're not only offering your customers a tool, but you're changing the way they work. They've had a series of processes built up around how they categorize products. Sometimes there's different people from different groups, different functional areas in the company involved. And I think I've shared in the past an example of one of our customers with their marketing team was actually involved in some of the categorization because a lot of the upfront SKU generation for product starts there in that part of the business. And then obviously, finance and accounting gets involved later when you're actually getting down to a tax determination and reporting decision around that.

And so we've had to work with a number of our customers to help them think through not only here's the tool and how well does it actually categorize a product, but then what's the change in operational model around that? How do you think about that? How do you staff for that? And we're seeing that in other conversations we're having. Now that has positives. It also just, in some ways, takes more time.

One of the positives is I'm seeing opportunities for us to send engineers in to work with customers to solve upstream product problems that were different than ones that we've anticipated in the past, places where they might have had frustration, for example, with our products I think actually through AI, we can build bridges into the determination experience and actually improve our overall posture with our customer as well as the opportunity to sell them something additional.

On the downside, which is something I know you've talked about is, in some cases, it takes a little bit longer to get them to make the decision. But as I'm talking to customers, the message is clear. They're getting messages from their CFOs, their CIOs. Obviously, those come from the CEO usually. And they are wanting to move in this direction. They are wanting to adopt more tools. When I look at just some of our Vertex Intelligence, our equivalent of a Copilot adoption where it's just a general AI capability in our product, we're seeing steady month-over-month, quarter-over-quarter increases in engagement with that tool, we're tracking monthly active users, daily active users. So we're seeing it.

So long answer to your question, a lot of engagement there. And then obviously, we're hard at work on making sure that we're going to ship more AI capabilities to our customers as we get through the next few months and quarters of Vertex.

Got it. That's helpful, Chris. And then just as a quick follow-up on the Cloud revenue guide. You guys talked about slower Cloud migration. So just curious maybe what you guys are seeing in terms of the drivers behind those slower Cloud migrations?

Yes. I guess, first of all, Chris, thanks for the question. When we put together the Cloud guidance, we felt good about kind of where we stood at the time. I think we did anticipate a higher level of Cloud conversions taking place -- and both in our installed base as well as in the new logo activity. And so in the first half, we didn't really see that happen and that pattern continued -- and that continued into the second quarter. So we reassessed our view on kind of where the guidance needed to be.

That said, I think there's just an overall kind of elongation of people making decisions to make technology moves into other areas. Wherever it's going to require capital and further deployment, et cetera, I think people are really pushing and taking a thoughtful view of exactly how fast to move. And that impacted our business and the amount of conversion. I think when we think about it from our standpoint, it's -- from our standpoint, this is really a conversion timing issue. It's not a revenue issue. It's taking revenue that is not currently in subscription or on-prem and moving it into the cloud. And it's really a left pocket into the right pocket from an overall revenue standpoint.

So I want to make sure that we call that out. And as you know, we continue to support our customers just -- in their deployments, whether they're on-prem or in the cloud, whatever meets their needs best. And we're going to continue to work to improve the cloud -- their cloud conversion expansion as well as new logo execution.

One thing I'll just add there, Chris, because I know this question is something that's come up is that there's -- we're seeing more -- again, more customers that have mixed environments. They have some cloud. As I talk to more customers, I'm finding more and more examples of customers that might have some element of the Vertex estate cloud deployed, they have more -- they have legacy Vertex deployments as well. Oftentimes, when I'm talking to them, one of my first questions is, why haven't you moved it all to the cloud? And I get a mixture of answers. There's IT, there's prioritization. So I just -- I give -- I share that with you to just give you a bit more color around what we're seeing and hearing from customers. It continues to be, hey, we really like Vertex. We're consolidating more on Vertex, but it may take us some time to get there. We still, as you know, are, to some extent, a recipient of what happens in the ERP migrations as well. So we end up being impacted by that. So as ERP migrations go to some extent, later on in that journey, the Vertex migrations happen as well. So we're managing through a mix of that.

But as John said, the best -- the most important point here that we want to make sure everybody understands is these are not lost customers. These are just customers who are taking longer than we initially built out and expected and are planning than they would to get to migrating the cloud on the Vertex deployment.

Your next question will come from Jared Levine with TD Cowen.

I was hoping to start here in terms of the demand environment. Can you talk about how that progressed over the quarter and what you're kind of seeing so far into 3Q here?

We've seen a pretty stable demand environment as I kind of look back out over where do we see the pipeline at the beginning of the quarter? What was it like in the first part of the year coming and going into Q3? I would tell you, we've seen a good mixture of cross-sell, upsell opportunity in our base, which, as you know, is an important part of our revenue model. We've seen new logo wins. I will point out that and John mentioned this a moment ago, I do think it's important. We have seen some elongation in sales cycles. We've seen some situations where customers, we were expecting a deal to close in 1 month and then closing in the next month because they had to go through procurement cycles.

We did have a new logo 7-figure deal that we were expecting to close in June that immediately came in, in July, but we didn't get it in for this past quarter, as an example. So we are seeing some of that where -- which is different than again as we expected. But at an overall demand level, pipeline level, there's a lot of activity out there. We're seeing a tremendous amount of new activity in and around our e-invoicing mandates and that part of our business. Obviously, that remains off a smaller base for us, but we're very pleased with that activity. And the 7-figure deal I just mentioned a minute ago, which has now come in, in the month of July. That's net new business. A lot of that's around more traditional tax determination.

Got it. Great. And then so far year-to-date, you have outperformed your 2 quarterly revenue guidance, but did affirm the annual revenue guidance here. Anything to call out in terms of guidance philosophy or visibility in terms of that approach here to affirm that guide midpoint?

Yes. I mean what I would say is that our first half performance was good. We felt very good about that, and it gives us confidence in achieving our full year outlook, certainly. We had some good things that hit in the first half of the year, strong management of churn that we had talked about a lot last year and the early part of this year. And so -- but we wanted to make sure that we really balance some of that first side -- that first half upside with a more measured view of the second half, including the growth rate -- as you can see, the growth rate in the third quarter, as well as some of the continued variability in the revenue timing that Chris was talking about in terms of kind of the elongation that's going on as well as mix and some of those longer deal cycles.

And so I think we just wanted to be thoughtful about all the things that we're seeing in the environment and to make sure that we kind of thoughtfully put together guidance that put us in a range that, again, that gives us good visibility into the achievement in the back half. So that's kind of the overall. And I think it really has to do with the first part of your question, which just was like what's the environment like and how are things feeling. And so we want to make sure we bake that all in. That's kind of how it came out.

Yes. And that said, we raised our guidance on EBITDA for the year, which is something we're very proud of. And obviously, we're working hard to bring in as much business as we can see out there for the back half.

Your next question will come from Billy Fitzsimmons with Piper Sandler.

Chris and John, I think it was clear that it sounds like the delta in the full year cloud revenue growth guide was more of a near-term blip than a, call it, a structural challenge. And just to double-click on this, based on what you both are saying, is it fair to say that some customers are maybe prioritizing other AI projects internally, which is maybe pushing out some of the blocking and tackling around the on-prem cloud migrations? And if so, when do you expect that to maybe fade or reverse? I know it's hard to say in real time, but I guess what's the catalyst to that kind of moving back to the pace you initially expected?

I think -- so there's several components of our cloud revenue, Bill. I think a couple of things. One, we do expect cloud revenue growth to see some acceleration based on our e-invoicing business. And as we get through actual invoices flowing through, French mandate is one that we'll see in September here, so at the end of this quarter. Obviously, we've got the Germany one coming up at the beginning of the year. And pre that mandate, we expect some improvement there in the number of invoices.

So e-invoicing will be another -- and we had some good activity this quarter. So e-invoicing is one that will ramp. That's cloud revenue. So we expect that to be a positive in our overall cloud revenue growth rate going through the back half of this year and into 2027. So that's number one.

Number two, on cloud migrations, it's hard for us to get a good read on what trade-offs are being made. So why -- where are they trading off timing, for example, in their overall set of IT projects. As you know, to some degree, we probably speak a little bit more to tax people than we do to IT people, generally speaking. But what we -- what I can say is, there's -- it is taking customers a little longer on deals. My sense is like across the IT franchise, a lot of different organizations are taking a look at where are they spending money, how are they spending money, where are they spending their resources. And so we do expect everything I'm hearing and what we expect to see is a continued move to the cloud. Like every -- again, just if I give you -- if I harken back to some of the examples I shared a moment ago, like whenever I'm talking to customers, more and more I'm discovering partial franchises in the cloud, a real desire to move more to the cloud.

Part of what we need to do, this is where we still have work to do more as we go through the back half of this year and into next year is we're trying to give them more incentive to move to the cloud. More of our -- delivering more new features, more AI capabilities, that all creates a forward motion and a forward incentive for our customers who want to move more to the cloud.

We started -- I think I may have mentioned this, when we first launched a number of our AI capabilities, many of them were really more focused on our cloud franchise. We started to broaden the availability of that to our on-prem customer base so that they can start to use more of our AI tools. I consider that a [ carrot ] to make it more attractive to customers wanting to move to the cloud. So this is something that we've got a lot of focus on.

I will also point out a comment I made on the call. We've just brought in a new leader for our product and engineering team. He comes to us most recently, ran a large part of the business in the health care space at Oracle. So not only does he understand regulated industries, but as you know, really has spent a lot of time on how they bring their customer base forward from more traditional methods to cloud-based capabilities. And so I'm really -- I feel very good about our ability to get our customers migrated. And obviously, we'll have to work through their own internal planning and budgeting cycles, but doing everything we can to give them incentive on the Vertex side to move there.

Perfect. I appreciate the color. And if I could sneak in a second one. It's now been a couple of months since you acquired Brinta that gave you an AI-native footprint in Latin America, arguably one of the more complex environments for real-time compliance globally. How has the integration progressed relative to your initial expectations?

I would say the Brinta team has done -- I mean it's been great to have them on the team. They have some really great customer relationships. We see more opportunity even in region than I would say we saw before Brinta became part of Vertex. So I would say, overall, it's going really well. As you know, integrating any different companies that come from different places, there's always -- there's always challenges. It always takes longer than you want. And we're trying to make sure that we bring this along at a pace where we keep the best of what Brinta brings to Vertex, but we also want to make sure that we don't -- we also want to get them to integration, but we also want to make sure we don't break what they've done really well. And so that's going to take us a little bit of time. But we're pleased with what they've done. We're pleased with the new business opportunities that they're bringing to us. They've come in and partnered really well with different teams across other parts of Vertex. And like I said, I'm even encouraged by some of the new business opportunities we see in Latin America because of it. So it's on a really small base.

Primarily, we were -- we started our journey with Brinta because they helped us close some of the country-level gaps in our ability to meet a number of the mandates in Latin American countries. But I think what's been really positive is we're seeing a broader market opportunity environment that we're opening up because they're now part of Vertex. And so I think that's a really important opportunity for us.

Our next question will come from Samad Samana with Jefferies.

I guess, first, just to follow-up on the guidance. John, is this -- do we now consider the guidance to be derisked on the cloud side? Is it -- should we extrapolate that the conversion activity you guys are seeing in the first half of '26 is probably the new normal? So both kind of in consideration of the 2026 guidance, would you say that you feel extremely confident or is that derisked? And then again, should we kind of use this as the conversion activity template as we think beyond the '26 outlook for cloud as well? And then I have one follow-up.

Yes. From a cloud standpoint, Samad, I think we're calling what we see. What we're seeing there is a lower conversion ratio. And that conversion ratio -- just that conversion activity isn't happening at the pace that we thought. And so I mean, this is what we're seeing, and this is what's built in for the rest of the year. And again, I'm not sure I can sit here and call it, and I think we'll see it show up in the numbers, but that's how I'm thinking about it as it plays through. So that's what we wanted to make sure that we took into account and make sure everybody got -- felt good about where we ended and why we ended there.

From an overall guidance perspective, I think as we look at the back half, there's still a decent amount of pipeline, as Chris said. And again, we are seeing -- there is some activity in the back half of the year around elongation of deals and other things. So I wouldn't say we didn't just set this up and say, all right, this is a risk-free plan by any stretch. There's always risk in everything that we do, and there's always a lot of deals that have to get closed to make the numbers. So I wouldn't necessarily -- I certainly wouldn't say that. But I think what we wanted to make sure is we took into consideration what we saw in the first half as well as kind of the pipeline for the activities that we're seeing now and sort of roll that through, and that's what we came out with. So that's the best I can tell you. Hopefully, that was helpful, but happy to take a follow-up if you have one.

Yes, that was helpful context. I appreciate that. And then maybe just on the -- just maybe again to get some better context around the quarter. If I think about the scaled customer growth, it's still growing high single digits, but it did decel quarter-over-quarter. Is there anything onetime in nature there that we should be aware of? Or is that maybe -- is the same thing that's impacting cloud conversions maybe impacting new scaled logo growth? Just help us understand what drove that slowdown?

Yes. I think, Samad, I think that, one, it's 1 quarter. So we're -- at this point, we're watching it closely. As I mentioned earlier, we did see some deals move between quarters. The one deal that I mentioned that slipped out is a 7-figure deal for us. It was a June deal and ended up coming in July. So that would factor into that percentage as an example. Certainly one we're very happy to close. So we are seeing some movement there. But we get scaled customers come to us in a variety of different ways. We have obviously net new logos. We have growth with existing customers. Again, some of we expect to see our e-invoicing customers, particularly as we start to ramp on these mandates, they are likely to move from smaller customers to more scaled. And so we think there's -- we don't see any trend here that would suggest we're going to trend down on this metric. We expect that we should continue to have good growth in this metric, but we didn't see it this quarter, and we certainly want to see it better as we look forward. And we'll keep -- we'll stay on top of it. Obviously, we'll keep reporting it. So it's certainly something that we pay attention to.

Your next question will come from Steve Enders with Citi.

I guess I want to ask on just the e-invoicing dynamics that you're seeing? And how is that maybe playing out versus how you're expecting those deals to kind of come through for the year? And how are you kind of thinking about when, I guess, the -- when like the bulk of customers will start to adopt and maybe move from a single country to expand and adopt more of a full platform opportunity over the next couple of years here?

So we saw our first examples. So I would tell you, Steve, and what we saw in the first quarter was lower than we would have wanted in terms of multiple countries and that sort of thing. We saw the activity we expected to see in Q2. We saw customers that were starting to not only just do the French mandate, but would add a second country as part of that. I think I mentioned one of the examples in the call, I mentioned France and Finland being the driver. We are now starting to see customers that would start in one country like Poland and then add a second. And so like when we think about the growth potential in our e-invoicing business as we get through this quarter into the fourth quarter, even beginning and going into 2027, that's where some more of the growth will come from. We're expecting the growth to come from is people that are going to move to do the mandate, meet the mandates that are out there, like France being the big one right now, Germany coming. There's Spain next year, which is another one. But amidst all that, the expectation is that we're going to have some of our more -- our larger customers that start to say, okay, now that I'm doing one country with you or a second country with you, as we deliver on that, let me add a third, let me add a fourth, and this becomes a growth opportunity for us.

And so we're just starting to see that behavior in our customer base where you're seeing meaningful growth opportunities across more than one country. And then ultimately, that leads us into the motion that we want to get from this where customers start to say, great, I just want to consolidate everything with you. Like I -- maybe I made a decision in Mexico like 4 years ago, 5 years ago, now let's circle back. And that's an expectation that we have as we get into back half of really Q4 and probably '27 is where we expect to have more of those kinds of opportunities. And that's really what this business represents for us in terms of potential.

Okay. No, that's great to hear. And then maybe attaching that to the numbers a little bit. And I think we're still talking about revenue acceleration into Q4. It looks like ARR is still decelerating a little bit. Just how should we think about the timing between when these things start to impact ARR and we start to see the acceleration on that metric and then give us confidence on the revenue side going into Q4?

Yes. I mean I think you'll see that start to play out here in the third quarter, again, because ARR is going to lead the revenue. And so that's going to start as adoption for the French mandates gets moving. There's more activity there. Again, we started to see activity in the second quarter. We're going to see a bit more of it now as we're getting closer and closer to the date. And as that occurs, we're going to start to see that show up in ARR. And then naturally, then that's going to turn into revenue soon thereafter. And again, it will start kind of working itself in ratably over the year because that's typically how people are buying and how they're thinking about it from an overall usage standpoint. So that's how to kind of think about it, and that's kind of the path that we have. And so we'll start to see it this quarter and then again, revenue inflects a bit more next quarter, the fourth quarter that is.

Your next question will come from Brett Huff with Stephens.

Two questions from me. First one is a little bit of a follow-up on the e-invoicing. The original thesis, if I recall correctly, was definitely a lot of cross-sell into our big customers who should be using you all for e-invoicing, but also there was some new logo stuff that you had built in. Now that we're a little further down the pipe on that, is that all kind of coming out like you saw like new versus cross-sell, et cetera, leaving aside the adoption part.

We are seeing that, Brett, which is great. So both in Q2, we saw a growth in the overall number of customers at Vertex. And a lot of that growth is largely driven by the performance in the e-invoicing business. A lot of those customers come in at a smaller sort of ARR per customer number than our traditional tax determination customers. So we saw customer growth overall, which is good. And a lot of that we can attribute to what we saw in e-invoicing. But we also saw some of our -- I would say, some of our early 6-figure -- multi-6-figure cross-sell opportunities into our installed base for the e-invoicing mandate. So we saw a good mixture of both of what we want to see.

Now look, from where I sit, Brett, I want to see more of those, particularly the latter example, where we're driving more multi 6-figure cross-sell opportunities into our installed base. But the activity that we saw in Q2 and what I expect to carry into Q3 in the back half of this year gives me good confidence that those 2 aspects of our thesis are happening. We're growing our overall customer base, selling to net new logos in this space, particularly in Europe. And then secondly, we are also driving cross-sell, upsell into the Vertex installed base, particularly for e-invoicing.

That's helpful. And one quick follow-up, again, still kind of a big picture one. Another angle on the AI question. Early on, when you and I were talking with clients, you set up the expectation that, look, this is a build year. Next year, we'll start to see some metrics or revenue or whatever. And I think that's still obviously going to happen. As we get into the fourth quarter, we're getting a little more into the brass tacks on things like that. What are the metrics that we should be looking for measurable or anecdotal to give us a sense that you're building that muscle and getting those products getting ready to go GA?

One, Brett, we've got -- for example, we have got our Vertex Exchange event coming up in the fourth quarter of this year. My expectation is that we'll be able to say a lot more about our product road map and strategy and even introduce some new capabilities at that -- in and around that event. So that's certainly a big milestone for us. We've got to have the product -- the way I like to think about it is like we have to have the product on the truck if we want our team to be able to sell it and bring it to customers. This is a virtual truck. It's an autonomous truck actually is the way to think about it since it's AI related. But we need our AI capabilities out there available to customers as we go into 2027. And I feel really good about the progress we're making there.

As I mentioned briefly on the call, really building out a connected platform that's got a tremendous amount of AI capability with it. That's all in progress. But you said it well at the beginning, Brett, this is more of a build year with the expectation that we have those capabilities exiting the year, and we've got more for our teams to be able to sell to customers going into 2027. If we can pull in, if we can obviously go faster than our expected time lines, maybe we're starting to sell more in 2026, but we're really more focused on this being a 2027 event.

Your next question will come from Joshua Reilly with Needham.

I wanted to get the latest update on the SAP, ERP, ECC transition outlook and what you're seeing in terms of capacity for these conversions in the next 2 years versus what's currently being done by consultants. And if enterprise buyers are simply buying the 2030 extended maintenance instead of making the migration right now, and did that have any impact on the lowered cloud revenue guidance?

Yes. So we haven't had any real change in the activity that we're seeing. We had good -- we look at our ecosystem, we had a good set of wins across the board, whether it's SAP, Oracle, Microsoft wins across the board. I would tell you we haven't seen a material shift in the velocity of migrations, but we do continue to see migrations. We continue to see them happen. I think -- I wouldn't say the velocity though has shifted. And so that's why I think you're seeing a little -- you're seeing a reasonably steady progression in our numbers as well. Like we're not seeing any material change in the way these migrations are happening one way or the other. It's just they're happening. We're continuing to move along with them. And so that kind of -- those expectations are built into how we're laying out our guidance for the quarter and for the year.

Got it. That's helpful. And then just one quick follow-up. On the NRR outlook, what are the puts and takes maybe we should be considering for the second half of the year here? You've got the e-invoicing volumes kind of kicking in as a tailwind. Is there any change that you're seeing in terms of mid-market customer churn maybe that's kind of burning off there that could also be a bit of a tailwind? Or anything else we should be considering?

Yes. Thanks for the question, Josh. In terms of kind of the NRR componentry, again, I think you picked the real kind of tailwind, again, is some of the e-invoicing opportunities that Chris talked about and the opportunity to sell that into the existing customer base. There will certainly be something there something we can -- that we're excited about that's going to go on.

There -- in terms of churn and kind of where things are, as I said earlier, I think we felt good about kind of some of the progress we've made in those accounts, whether they're middle market or even some of the larger ones from last year. I think it was the third and fourth quarter where we had some significant changes into the churn numbers that we had seen in the past. And so we feel good about the types of things we've done to improve that. And again, we feel like we're making good progress. And so perhaps there could be a little bit of upside as things play out. But again, I just -- we don't guide to it. And I would just say that we feel good about the work we've done through the first half, and we expect to continue that into the second half. So again, that will -- it will fall where it does, but we're pleased with what we've shown.

Your next question will come from Rob Oliver with Baird.

Chris, first one for you. The 6-figure opportunity with one of your core customers on just 2 geographies has to be pretty tantalizing when you think about the kind of global opportunity around e-invoicing. So I'm just wondering, as you've now been in the seat now for a few quarters, as you're talking to those customers, how are they thinking about e-invoicing? Are they thinking about it the way you talked about it in response to an earlier question, like we expect more consolidation. Did they want to consolidate that? Or is it still kind of viewed as maybe a fragmented market by region? And then I had a quick follow-up for John.

Rob, thanks for the question. In reality, the catalyst to buy is still based on mandate, right? That's still the #1 reason customers are making decisions. That being said, as the number of mandates increase and therefore, the number of countries that these customers have to cover increases, they're getting to a point where there's a lot of sprawl and complexity. And some companies, that's fine because those companies, like depending upon how a company is structured, they may actually be structured in a way where every regional or country-level finance department runs reasonably autonomously. And those are the companies that are not necessarily thinking about how do they consolidate.

That being said, there's also a quite large cohort of companies that exist that operate at a global level. And so they are the ones that are starting to talk to us about, okay, how -- like even if where we've made decisions, we do want to be able to consolidate on Vertex because look, there's a lot of -- a tremendous amount of information for them. There's also a lot of risk, right? If they don't do this properly, if they've got some countries that don't work at the same level as other countries, they open themselves up for different regulatory risk to be audited, et cetera. And so there is a real driver for -- again, for some -- for a number of companies that we're talking to.

And so while I don't necessarily think that we're going to have the same buying behavior driven by that as we do by the mandate where you just have to be compliant, that we are seeing that as an increasing lever in the conversations that we're having. And look, we're still early. So a lot of customers, they're saying, "Hey, look, show me you can deliver -- once we get through that, then we can start to talk about adding another country and adding another country. And look at the places where we've got customers that have already added more than one country, several of them have done that with us. They said, okay, prove it in one place. We've proved it then they add the next one. We proved that they add the next one. And then I think then it just kind of open up for us into more opportunities.

So we think that thesis is strong. We think it's a good opportunity for us as we look forward. Part of our planning as we look into 2027, we're going to have to really take a step back and take that into account. This year has been more about just really focusing on getting it sold, getting it delivered, making sure we can operate well. Next year, we start to turn our attention more to how do we really scale this thing beyond what we're doing today.

Great. Really helpful. Thanks, Chris. John, for you, just going back to the change in the cloud growth, obviously, pretty meaningful change. And I know in response to an earlier question, you did say that, hey, you're calling them as you see them kind of today. I guess another way to ask would be relative to the new 18% target, how should we think about kind of that -- the roll-in of the e-invoicing mandates and the impact on that? Because that's going to be all cloud. And clearly, that's going to be important to making that number in the back half of the year. So in light of sort of Chris' comment about, hey, we're trying to win those mandates. In terms of visibility, just help us get comfortable on how you were able to project some of that.

Yes. Thanks. I appreciate the call -- the question, Rob. I think as Chris talked about, we do have visibility, the activity in the back half of the year around e-invoicing and what the mandate is going to drive. And so we factored that into kind of the activity we're seeing in the back half. Again, keeping in mind that a lot of the activity that we're going to get in Q3 and Q4 as those things are just getting up and going is not going to be at its full potential when it's fully out there and moving. Again, as Chris talked about, there's obviously the land and expand that you see. But even still as companies are just kind of coming on to the platforms and whether that's September or a little bit later, we're seeing a little bit of delays in terms of how customers are behaving towards bringing things up and getting them moving. The mandates are going to be effective, but I think there is a little bit of latitude there, but we are seeing a big press even still as we sit here in August of customers that are wanting to make sure that they're ready on time.

So we're going to get less of an impact in revenue from that in the third and the fourth quarter perhaps because of the volume that's really going to kick through, and that's really more of a fourth quarter thing. So we took that into consideration when we built out the revenue forecast. That's embedded in there certainly. And again, offset by some of the headwinds that we saw around cloud conversion from our existing customers that are on-prem moving to cloud and then some of the new logo activity.

Great. Thanks, John. Appreciate it, Chris. We've noticed Allison's impact already in terms of your presence and the changing in the branding and stuff like that, creating a broader attack zone for you guys. So I just wanted to call that out as well, some great hires for you guys.

Your final question will come from Andrew DeGasperi with BNP Paribas.

I just wanted to touch on one of the comments you made earlier in the prepared remarks, Chris, in terms of the competitive displacement with an existing customer that was using a competitor. I think it was a quick-serve restaurant example. And I just wanted to maybe understand like how many of those customers do you have that are potentially using multiple solutions for tax compliance? And do you see a potential move in either direction in terms of ideally to Vertex, consolidating to Vertex on that front? And should we see more of that in the next few quarters?

It's hard to put a percentage on it, Andrew, because some of it is driven -- some of it happens in a dynamic way. Like M&A determines a lot of that, for example, you may have one company that's using Vertex and then they acquire another company. Now they're using Vertex plus somebody else. It could go the other direction. And that's kind of constantly changing and happening. So what I would say is there's always a persistent percentage like of our customers that have multiple solutions. Oftentimes, they have a lead solution, but they might have a business unit or a smaller group that's using a secondary solution. But I will say it's not uncommon when I'm out there talking to customers, and I have a steady cadence of these customers I'm talking to, it's not uncommon to run into customers who are Vertex customers, but they're using somebody else or they -- I'll talk to -- I just talked to a company the other day, a customer the last week, she told me, they're an advertising agency. They were merged with another relatively large one, and that's a consolidation opportunity for us, but they were using a mixture of the ERP, they were using some other third-party tools. And that's just a good example of M&A creating that opportunity for us. And that's where we're always going to see some mixture of Vertex-only shops, but other Vertex shops that have third-party tools there. And also where we ultimately end up in some of these places that happens in the reverse as well. So it's reasonably common not pervasive and usually not the desired -- it's never the desire to stay with the people I talk to.

Got it. And then, John, I had a question. I know in the past, we talked about entitlements in terms of how you kind of expected a certain number to ramp up over time. Just curious to know, has that changed in terms of your expectations relative to last quarter? I know you talked about deal slippage or something like that, but I'm just curious to know like within your existing customer base, are we seeing any improvement there?

Yes. Maybe slightly, Andrew, nothing that I would call -- that was worthy enough to call out as a big driver of opportunity in the quarter. But it was -- it was something -- it's certainly something we were focused on last year. I started to see a little bit of stability in it over the last couple of quarters, and I saw the same this quarter. So I'd say it feels a little bit better than it has in the past, but I'm not -- again, not ready to kind of stand up and say we're past that. I think there's still some time to go there. But again, our customers are going to continue to build their businesses and drive their businesses and that presents opportunity for us. So we're about a year out from when we started talking about this last year. And I think time will tell here over the next couple of quarters if we start to see that change, we'll certainly call it out.

There are no more questions at this time. I'd now like to turn the call back over to Joe Crivelli for closing remarks.

This is John Schwab, but thanks, everybody, for joining us today. If you have any follow-up questions or want to schedule some additional time with the team, please reach out to Joe at [email protected]. Thanks a lot, and have a great day.

Good morning, and welcome to the Vertex First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Joe Crivelli, Vice President of Investor Relations, for introductory remarks.

Hello, and thanks for joining us to discuss Vertex's first quarter results. Chris Young, our President and CEO; and John Schwab, our CFO, are with us today. As noted on Slide 2, 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 Chris.

Welcome, everyone, and thank you for joining us. Vertex delivered strong first quarter results. Revenue was $196.6 million and adjusted EBITDA was $44.1 million, both above the high end of our guidance for the quarter.

Notably, customer retention, usage patterns and buying behavior were all consistent with what we saw exiting last year, even as the macro environment remains mixed and IT spending scrutiny persists. But more importantly, this quarter reinforces the fundamentals of our business. Vertex is at the center of mission-critical, highly regulated workflows that our customers rely upon. We are building upon that foundation as we move forward and as we intentionally reshape Vertex for our next chapter.

Over the past several months, I've spent significant time with customers, partners, our team members and investors. One message came through clearly. Vertex has extraordinary assets, including trusted data, deeply embedded integrations and a unique role in global compliance, but we need to operate differently to fully unlock that value in an AI-driven and increasingly real-time regulatory world. And that understanding is what is driving our change.

That brings me to the value creation plan that we announced in April. I want to be clear that this was a deliberate leadership decision to reset how Vertex allocates capital, talent and attention. We took decisive action to improve our cost structure, free up resources to invest in growth areas and ultimately improve profitability and cash flow.

The outcome was a targeted cost action that included a reduction in force and other efficiency measures to position us for the future. This is a reset to reinvest, which will enable us to continue investing behind the highest impact areas of our strategy, including e-invoicing and compliance, our AI road map, customer support and execution speed, all while also improving operating leverage.

John is going to discuss the financial impact shortly. Our e-invoicing business continues to perform well in advance of upcoming mandates with very strong growth in both ARR and revenue that is materially above the overall corporate growth rate. Importantly, we expect revenue to ramp later this year after mandates are enacted in France and again in 2027 when mandates in Germany come online. To accelerate our e-invoicing product strategy, in the first quarter, we acquired Brinta, an AI-first compliance and e-invoicing start-up for e-commerce that's based in Latin America.

With Brinta, we gain a very talented technical team that has creatively applied AI and a modern architecture to solve compliance and e-invoicing requirements for companies in countries like Mexico, who have had these requirements the longest. Brinta adds country coverage in Latin America, but it's far more than that. It brings an AI native architecture built for the most complex real-time compliance environments in the world. That capability includes automation, control, speed and auditability, which is where global compliance is ultimately heading.

Brinta's offerings are focused on eliminating manual work where it creates the most friction such as onboarding and data mapping, invoice data extraction and product classification. That combination of automation with control is critical in regions like Latin America, where accuracy, auditability and regulatory evidence are nonnegotiable.

Now I want to spend some time on artificial intelligence and how we're approaching it at Vertex. I'd like to explain why I think AI expands Vertex's competitive advantage. There's been a lot of discussion about whether AI will disrupt enterprise software. Our view is that AI strengthens platforms that already function as trusted systems of record, especially in regulated environments like tax and compliance.

A February 2026 study by EY-Parthenon entitled AI's Impact on the Software Economy confirms this. This study identifies deep vertical SaaS as one of the most defensible segments in enterprise software. These are companies with software built on domain-specific workflows, complex integrations and regulated use cases.

Vertex squarely fits that profile with durability driven by embedded tax and compliance workflows, broad ecosystem integrations and long-standing operational data. In an AI-driven world, that foundation ensures AI enhances our platform rather than displaces it, strengthening a system customers already depend upon for mission-critical, highly regulated processes at scale.

In enterprise tax, trust is the product. Tax answers must be 100% accurate, explainable, auditable and repeatable across tens of thousands of jurisdictions and constantly changing rules. That requires a deterministic core, authoritative content and a system that can withstand scrutiny, not a probabilistic black box.

In addition, Vertex is not adjacent to the workflow. We're embedded in the order-to-cash transaction flow. When tax breaks, companies can't transact that makes switching costs high, not because of licensing, but because the operational risk of disruption is unacceptable at enterprise scale.

Finally, we are not standing still. We are moving quickly to embed AI more directly into our products and operations as well as build new ones, but in a way that preserves governed outcomes.

To put a finer point on this, today, half the companies named in CIO Magazine's March 2026 ranking of the most powerful AI companies are using Vertex to calculate indirect tax. We believe this is a strong validation of our AI moat. Our AI product strategy will be transformational, yet pragmatic with targeted use cases driving measurable impact and responsible governance from day 1.

Our tax engine remains foundational as the deterministic govern system of record that enterprises depend upon to transact, report and comply with confidence. Our focus with AI is to modernize how work gets done in and around the core systems, embedding intelligence into the workflows across tax determination and e-invoicing where most of the manual effort, cost and operational friction still lives.

Processes like onboarding, data mapping, classification, configuration, reconciliation, exception handling and ongoing change management are adjacent to the core engine, but they determine how effectively that engine can be used at scale.

Our AI strategy is about reshaping that operating layer, reducing manual work, increasing speed and allowing tax teams to operate proactively while keeping the core outcomes correct, explainable and auditable. And to make this more concrete, our first commercial AI product, smart categorization shows how this model works in practice.

On our last earnings call, we discussed smart categorization, which automates one of the most manual and error-prone process workflows that sits around the tax engine, categorization of a company's product SKUs for tax. The data we see from live customers' usage of smart cat as they have moved to production is very encouraging. Every active smart categorization customer is expected to send 100% of their catalog through the platform for categorization. Usage grows week after week and the productivity impact is substantial. Observed categorization time drops from more than 1.5 minutes per product to just a few seconds.

Slide 11 provides a visual cue to help investors understand an example customer profile for smart categorization. Think about a large retailer with thousands of locations across the U.S. and tens of thousands of SKUs in every store. That retailer is subject to literally millions of iterations of tax rules across their product category. And the retailer SKUs and locations and the tax rules they are subject to are constantly changing.

The key takeaway is this, smart categorization confirms that our AI operating model works in practice. It shows AI applied around the system of record, removing friction from critical workflows while preserving deterministic trusted outcomes, with production usage established, the next phase is ramping the commercial motion in a disciplined way. We are also using AI inside Vertex to change the way the company operates. A good example is our customer support and services organization.

Support workflows sit alongside our core tax and compliance platforms. It requires deep domain expertise, consistent judgment and the ability to triage and resolve issues effectively, especially as our customer base and product portfolio continue to grow.

We're using AI to augment that work by summarizing cases, surfacing relevant diagnostics and knowledge and helping route issues to the right teams more quickly. The goal is straightforward, allow our experts to focus on judgment and resolution, while AI handles the repetitive analysis and intake work. And early results indicate that analysts can manage meaningfully higher case volumes with better consistency without sacrificing quality, which has a direct impact on our operating leverage over time.

The reason I highlight this is that it reflects the same operating model you've seen in our products, AI applied around the system of record, embedded in real workflows, improving efficiency while preserving accountability. I continue to be very energized by the high-quality blue-chip customers that depend on Vertex for indirect tax accuracy. First, notable wins with existing customers. On our February 2025 earnings call, we highlighted a win with one of the large leading players in the artificial intelligence large language model space.

The initial relationship was for Vertex e-commerce, supporting tax determination for their digital marketplace operations. In the first quarter of this year, this customer expanded its partnership with Vertex to include e-invoicing across multiple jurisdictions as well as O-Series for global sales and value-added tax determination across several business units.

This expanded relationship now represents annual recurring revenue in the multiple 7 figures and reinforces the key point. Even for one of the pioneers in the AI space, Vertex is the trusted choice for managing complex indirect tax requirements at scale.

In the SAP ecosystem, we won a high 6-figure new contract with one of the major airlines. This deal included expansion of their use tax volume, additional tools such as SAP Accelerator and Plus tools and engagement with Vertex Consulting as well as migration of all on-prem instances of Vertex O-Series to the cloud, and a leading social media company that is also a major player in artificial intelligence, expanded their use of Vertex solutions in the Oracle ecosystem, resulting in mid-6 figures of new annual revenue.

Turning to new logos. A company in the health care industry switched from competition to Vertex for North American sales and use tax and also engaged Vertex Consulting to assist with the integration with their Workday ecosystem. This resulted in low 6 figures of new annual revenue beginning in the first quarter. We secured a mid-6 figure new logo in the chemical manufacturing sector, driven by a customer's expansion into additional business segments and the adoption of Vertex for North American consumer use tax, SAP Plus tools, address cleansing as well as Vertex consulting services.

And in the fashion and apparel industry, we won a high 6-figure new deal driven by the customers' transaction volume growth. This engagement encompassed sales tax in North America as well as global value-added tax calculation.

Before I turn the call to John, I'll wrap by saying that the first quarter was a strong start to the year. I'm encouraged that retention is stabilizing and that we delivered results that were above both investor expectations and our own guidance for the quarter. We are seeing good results from our e-invoicing business and believe that global compliance is one of the biggest opportunities that we have in front of us.

With that, I'll turn the call over to John to discuss the financial detail. John?

Thanks, Chris, and good morning, everyone. As Chris noted in his remarks, the first quarter results demonstrated stability in the business across revenue growth, customer metrics, and we also saw good early progress on earnings leverage.

On Slide 17, total revenue was up 11.1% year-over-year to $196.6 million and above the high end of our guidance. This outperformance was driven in part by higher services revenue in the quarter. As you can see on the slide, software subscription revenue was up 10.9% and services revenue was up 12.2%.

Our cloud revenue was up 20.7%. This was a bit lower in the first quarter than our full year estimate. However, the shift towards cloud revenue away from on-prem continues to advance with cloud revenue now approaching 60% of our total subscription revenue. We expect this transition to continue and that we will see acceleration as all of our e-invoicing and compliance revenue is cloud-based. Annual recurring revenue was up 11.2%, essentially flat compared to the growth rate in the fourth quarter.

Turning to customer metrics on Slide 18. Our gross revenue retention was 95% and net revenue retention remained stable compared to the prior quarter. Our average annual revenue per direct customer was $140,464 in the first quarter, up 11% year-over-year. Note that the growth rate in AARPC has moderated. However, this is largely due to the continuing influx of new e-invoicing customers, which generally onboard at a lower initial contract amount than our tax calculation customers. Growth in our scaled customer count remained at 12% in the first quarter.

Now turning to profitability on Slide 19. Overall, non-GAAP gross margins increased 50 basis points year-over-year. This was driven by higher margins in the services business, as you can see on the slide. Our adjusted EBITDA was $44.1 million, up 18.4% from last year's first quarter. As you dig into the income statement, remember that the first quarter expenses are impacted by our sales kickoff, which occurs in January as well as payroll taxes, which are seasonally higher in the first quarter.

Free cash flow was positive $7.7 million. As a reminder, our free cash flow is typically negative in the first quarter due to the same seasonal expenses I just mentioned. This is only the second time that we've been free cash flow positive in the first quarter since we went public.

I'll now discuss the April cost actions and how they will impact profitability going forward. Turning to Slide 20. On April 28, we reduced our workforce by approximately 9%. In addition, we are also significantly reducing the third-party spend across the company.

As Chris noted, this decisive action was taken to improve our cost structure, free up resources to invest in growth areas and improve our cash flow and profitability. In 2026, we expect the following impacts. In the first quarter, we recognized a pretax charge of $6.2 million, consisting of severance and other benefits. These costs are included in the general and administrative expense line of the income statement and are reflected as severance expense in our adjusted EBITDA reconciliation.

In addition, we incurred approximately $2.6 million of incremental costs to execute the action. These costs are also included in G&A expenses in our income statement and are reflected as transaction costs in our adjusted EBITDA reconciliation.

Cash payments to execute this initiative are expected to be completed in 2026. And on a fully annualized run rate, we expect the cost action to save approximately $60 million to $70 million of cash savings per year beginning in 2027, again, net of reinvestments in the business. Obviously, this drives dramatic change in Vertex's income and cash generation profile.

Let's discuss how this impacts guidance for 2026. Given the performance of the business in the first quarter and the impact of the cost actions, we expect second quarter revenue of $200 million to $204 million and second quarter adjusted EBITDA of $47 million to $50 million. And for the full year, we expect revenue of $823.5 million to $831.5 million, which is unchanged from our prior guidance.

We are increasing adjusted EBITDA full year guide to $202 million to $208 million from $188 million to $192 million previously. And we continue to expect full year cloud revenue growth of 25%, driven in the back half by ramping e-invoicing revenue from newly launched e-invoicing mandates.

Finally, I want to discuss the 2028 targets that were set at Investor Day in March 2025. The value creation program has accelerated the time line for us to achieve the profitability and free cash flow targets that was set at the time. In fact, we now believe that we will achieve those targets in 2027. However, the business has changed significantly in the past year and revenue growth is now in the low double digits. We believe this is the growth rate investors should underwrite for the medium term.

Before I wrap it up, I'll note that we bought back $20 million of shares in the first quarter at an average price of $14.59 per share. And with that, I'll turn the call back to Chris for some closing comments. Chris?

Thank you, John. So to close, the first quarter results were strong and represent a good start to 2026. We are encouraged by the stability we saw in the business across revenue growth and customer metrics. In addition, I'm pleased that profitability is already inflecting even before the results of our April cost actions take effect. But it's important to understand that Vertex is changing deliberately and with urgency.

We are reshaping the company to be more focused, more profitable and better positioned to lead as compliance and tax move closer to real time and as AI becomes embedded in everyday enterprise workflows. The actions we've taken improve our financial performance, but they also enable reinvestment into the highest impact opportunities in front of us. I'm confident that this reset will produce a stronger Vertex, one that delivers both durable growth and meaningful returns for shareholders over the long term.

Thank you for your time today, and we will now take your questions. Operator?

[Operator Instructions] Your first question will come from Chris Quintero with Morgan Stanley.

I'm liking the new format. Maybe first question on the value creation plan. You guys mentioned cutting some third-party spend. So can you just provide a bit more color around where you're actually cutting and how you're thinking about doing that?

Yes, Chris, thank you very much for the question. Appreciate it. No, I mean, spend, again, we talked about headcount certainly was a piece of it. And then the third-party spend, it's a combination of just spend that we have within the organization as well as some contract labor and other costs of things we use in our day-to-day space. I mean keep in mind, we continue to use other labor to support the activities of our personnel that are here, and that's a piece of it as well.

Got it. And then the change around the 2028 targets, you mentioned that the business has changed significantly. So can you just break that down? What does that exactly mean? And how does that perform the new low double-digit growth rate you're talking to?

Yes. I mean, I'll start with it, and Chris can certainly add. But I think as we've seen the business, and we gave our guidance back in about a year or so ago, I feel like the macro environment has changed. I mean we were looking at growth rates then in the mid-teens and with acceleration opportunity in front of us. I think we've seen that soften a bit in the back half of last year. And I think we feel kind of where we are right now, we feel good about the progress that we're making on the targets that we've set, but we wanted to make sure that we address the targets that were out there for longer term, which we're pointing at to high teens revenue growth.

So we wanted to make sure that the investors are underwriting kind of the business as it is today with the opportunities that are in front of us. We feel very good that those opportunities are all still there. E-invoicing demand, the activity of that activity, the AI opportunities that are there. They are good things that we are excited about and believe are going to drive our growth, but we want to make sure that we put numbers out there that we felt comfortable with, the Street felt comfortable with, and they could have confidence in our performance and achieving it.

Yes. Chris, thanks for the question. John, I just want to add a couple of points. We want to stay very focused on our execution for the year. That's paramount to us. And we want to give you all a sense of what we're seeing. So really strong performance on profitability and cash flow, which should allow us to arrive at some of those 2025 Investor Day targets more quickly. But on the revenue side, we want to give you a picture of what we're seeing right now in the business with e-invoicing, compliance still to mature, because that starts to come from a revenue perspective to us later. Think of our e-invoicing as more of design wins in some respects with revenue to come online as the mandates happen. And then increasingly, as we build out our AI roadmap in the longer term, we have expectations for growth there as well.

Your next question will come from George Kurosawa with Citi.

Okay. I'm on for Steve Enders here. Maybe just to start on the cloud revenue guide. You maintained the 25% target. I think you delivered 21% this quarter. So obviously, a fairly steep acceleration implied for the rest of the year. If you could help just disaggregate some of the drivers there, what gives you confidence in delivering on that?

Maybe, John, I'll start, and I'll ask you to add anything that I missed. So as you saw, cloud -- the way we thought about cloud revenue growth for the year is the following. You start with your e-invoicing design wins. A big part of our growth in cloud will happen as compliance the e-invoicing sales ramp and revenue ramps as transactions flow through the systems later in the year.

So while we start a little bit lower on cloud revenue growth, which is kind of what we started to see in Q4, we talked about that on the first quarter call as well. We do expect, and we can see line of sight to our 25% target for the year, which we've shared with you all as e-invoicing and compliance sales ramp and revenue transactions ramp through the course of this coming year.

Okay. Great. And then I did want to touch on the value creation plan. I think you called out $60 million to $70 million in cash savings on a run rate basis. You raised the EBITDA guide here by $15 million. Maybe just to help bridge the gap there just in terms of maybe there's some timing component, maybe there's conservatism, and it sounds like there's a level of reinvestment as well. If you could just help us understand the moving pieces.

Yes. I mean I think you hit some of the big pieces again. We see the ramp coming in, the profitability coming in. Again, we did the action at the end of April. So the second quarter doesn't get the full benefit of it of the personnel reduction. We will see that more fully in Q3 and Q4. Some of the activity that I talked about with respect to contractors really is a bit of a phased approach that will phase in throughout the year.

Again, there's specific, we've got line of sight to each of those and how they're going to roll through, but it will take time for that to fully map itself through the rest of the year. So that's what gives us the confidence in our ability to achieve that $65 million -- get that $65 million midpoint for next year for sure. But that's a little bit -- that's the timing that's going to be at play.

I think one important thing to keep out that we talked about cash savings. This is real true cash. It includes some of our spend typically gets capitalized. So when we talk about the cash, it's got a -- it's got an impact that is outside of the realm of the adjusted EBITDA. So I wanted to make sure we called out what the actual component of that $65 million, $60 million to $70 million plus.

I do want to just add one piece because you did mention it, George. We are reinvesting in certain areas of the business. Obviously, our compliance and e-invoicing business, the acquisition of Brinta represents one of those reinvestments that we're putting back into the business. We're investing in our AI roadmap in the business as well as the internal transformation that we're going through for the course of the year. So it's very important to note that while we're expecting some improved financial performance, that does include with investment baked back into it, investments in future growth opportunity as well as further efficiency gains in terms of changing how we work inside the company. So it's very important to make sure that, that's noted.

Yes. And I think just to put a finer point on sort of the phasing in, as we talked about, I think that phase in will work out roughly about $4 million or so in Q2, and then $4 million, $5 million and $6 million to kind of take that $15 million, which was the implied midpoint uptick in guidance for each of the respective quarters.

Your next question will come from Joshua Reilly with Needham.

As you think about infusing more AI into your business, one area I was curious here is your thoughts around implementations. That's still a pretty time-consuming and complex process. How can you use more AI in the implementation process to unlock more of the TAM that's still in that kind of custom homegrown solution area and hasn't wanted to shift because of complexity around making a change?

Joshua, thanks for the question. You're very right. The AI opportunity for implementations and frankly, across our services business is high. One of the initiatives I've highlighted is that even in our managed services organization, part of what we're doing with AI is going to allow us to unlock a lot of the backlog that we have in the business because the human sort of process-oriented onboarding mechanism takes us longer today. And as we automate more of that, we'll be able to actually move revenue through the pipeline more quickly.

And then as it relates to our implementation, our consulting services, you're absolutely right. There's many different places in the process where we could use AI to get more efficient. Think about just the upfront component of gathering all the requirements, understanding all the system components of a very complex infrastructure for customers that is a massively time-consuming process.

We can automate a tremendous amount of that upfront process using AI, again, which will compress a lot of the early meetings that have to take place so that you can move forward through it.

The second piece is you can actually use AI to prebuild a lot of the connected, you have the prebuild on the connector work that's required for ERP integration. And one of the other items that we've talked about, not as much in earnings, but in other -- in our press releases and in other forms is some of the agents that we're building on the ERPs themselves. Those agents that we're building, we've announced one for Microsoft as an example. We're working with our other large major ERP partners to build agents in their ecosystem.

Now that will allow us to have much more front-loaded view, if you will, of what's in the ERP system and how that flows down into the tax determination system that we bring to bear. And so those are just some examples of ways in which bringing AI into our ecosystem is going to help us get our customers up and running more quickly, whether it's working with us on the tax engine side or on the e-invoicing side or across all of it.

Got it. Very helpful. And then just one quick financial question. There's -- how should we think about the conversion of EBITDA to free cash flow now following the value creation plan? And there's obviously some moving parts with that. And is there going to be a quarterly impact with those costs as well?

Yes. Thanks, Josh, for the question. No, from a free cash flow standpoint, again, we feel like we're significantly improving our position because of the cost takeout and how that's going to relate. I think we feel very good about the targets we established. And I think I mentioned that in my prepared remarks around what that means for next year, and we should be kind of converting over closer to that 70% range that we put out there as a target.

However, in the near term, right, we certainly have cost to execute some of these transactions, et cetera. But on an overall basis, we're significantly improving where we are from an EBITDA standpoint, EBITDA margin standpoint as well as free cash flow because it's both pieces. That savings, again, that $65 million midpoint is a true cash savings. That's real cash to the business. That will not all -- that is on a full year run rate. So that's not all going to impact this year. But I think we'll see that come through, and we'll see some nice improvement on margins as the year progresses.

Our next question will be audio only from the line of Patrick Walravens with Citizens.

I don't know why it's audio only. Sorry about that. So a few questions, Chris. Congratulations on the start here. So Vertex bought Ecosio in 2024. They made the investment in Kintsugi in 2025, and now you have Brinta in 2026. I mean I spent a fair amount of time on this company, and I'm a little confused. So if you could just walk me through how those things are different, and maybe how the environment changed where those investments made sense, I think that would be really helpful.

Pat, thanks for the question. I appreciate it. So the way I think about it is the following. When we acquired Ecosio 2 years ago, just about, the goal there was to enter the e-invoicing market. We saw the mandates coming, particularly in Europe, and we saw that, that was very complementary to our value-added tax calculation business. So value-added tax, and then the downstream e-invoicing component to meet the government mandates that were coming online in Europe were going to be important to our business. That's -- and that was the initial driver for acquiring Ecosio so that we can be in that business.

You'll note that there were other competitors of ours have also entered that business around the same time. And so Ecosio was really the foundation. What Ecosio -- the way Ecosio started is they were an EDI company. And if you think about it, e-invoicing is really just a -- I would describe it as an expression of one of the core use cases for EDI. It's about taking an invoice, submitting it to the government, getting a response back so that you're able to prove compliance.

And ultimately, we're moving towards a world where many governments are going to -- in different parts of the world are going to want to have almost near real-time access to transaction data as it's happening, because that allows them to reduce the amount of that, what they call the VAT gap, right? So what gets reported at the end of a reporting period versus what they see and collect, the gap between -- the gap shrinks there, and that's something that's really important.

And it's one of the reasons why we got into that business because, again, it's very close to our value-added tax calculation business, and it's -- and that was the initial thinking there. Kintsugi is almost a very different. So the next acquisition, as you mentioned, Kintsugi, a very different strategy there. The company invested in Kintsugi, partially because of our need and desire to stay very close to the ecosystem of start-ups that are coming into the market with AI-driven solutions around tax.

As we've talked about on previous calls, while a lot of the new entrants into this market are using AI, they tend to play at the lower end of the market and much more -- much less complex scenarios than we operate in.

Today, what we see across kind of the start-up landscape are companies that are going after the small end of the SMB market, and that's where Kintsugi plays. That being said, we have partnerships with Kintsugi. We announced a joint partnership where we're working with them in the cpa.com ecosystem. That tends to service smaller businesses. There's a solution that we're working on with Kintsugi and NetSuite, where Kintsugi is working with us in our tax determination engine for sales and use tax to serve a lot of the NetSuite ecosystem as well. So we're able to serve them in multiple ways, both directly and in partnership with Kintsugi.

And so those are -- and so the investment in Kintsugi was about moving ourselves forward into the AI landscape and really keeping close to the ground in terms of what was happening with some of the start-ups that are in this space, as you know, they're not the only one in the space.

And then let me bring you to Brinta. One of the conversations that was happening last year as the company got going with e-invoicing and compliance is that for our global multinational customers, when they wanted to do business with an e-invoicing provider, one of the main questions they would ask us is, well, can you cover us across all the countries where we need to meet these global mandates, not just in Europe, not just in Belgium or Poland or France or Germany upcoming, but Latin America, Latin America, Mexico in particular. Mexico is the first country to have these kinds of mandates.

And so last year, that was something that we determined, we needed to add to our portfolio. And I think that led to a partnership with Brinta. What we decided, however, as we got to know the Brinta team is that there's a lot more that they bring to the table. Now they're solving compliance for some of the most challenging environments like Mexico and Brazil that have real-time reporting requirements around e-invoicing.

And then secondly, they do help us with country coverage. But the third piece is they also bring a tremendous amount of AI expertise, got a very talented team that really understands payments in a quite complex landscape. And so we believe Brinta brings to us technology. It brings a lot of expertise in ecosystems that we value. And in many ways, what they are experiencing is the future of compliance and where this is headed. And so we -- all that is coming together as part of our solution set. So long answer to a short question, but there are a lot of moving pieces here, and I wanted to make sure I gave you a holistic answer.

Our next question will come from Brett Huff with Stephens.

Chris, I'll give you my congratulations, too, on getting off to a strong start. Thanks for the clarity and the pragmatism on getting after some of the efficiencies. Two quick questions. One is just a confirmation. Did you all say that the $65 million midpoint cash saves were already net of investment? Or we should think -- we should haircut that by some amount to think about '27 EBITDA?

Yes, Brett, they're net of investments. They're already net. That's already taken out.

And any -- Chris, I think when we were talking before, you had talked about -- you didn't give us a percentage, but in our minds, kind of how much of whatever the gross are you now reinvesting? Or do you have a sense of that yet?

We're still working through some of the specifics, but we've earmarked a good portion. I would say we've earmarked more than 10% of the growth back to investing in the business. And the key areas are simple. It's e-invoicing and compliance. I think Brinta would be an example of that. We've been growing our staff and our team, our technology investments in that space all throughout the year, even prior to the Brinta acquisition. And then our AI roadmap is a big piece. We're bringing in new people. We're adding our resources around that so that we can -- that's something we've talked about quite extensively is that my goal is to go -- is to lean in much harder to our AI roadmap and some of the investment out of this is to lean into that.

And then the third piece is to lean into investments we need to make in order to become a more AI-first company in how we work, which I think in the long run, creates even more efficiency. It's not something that we see in the immediate term, but it's an investment we make today so that as we enter into '27, '28, you can see those efficiencies flow through to how we operate Vertex.

Great. Second question is on revenue. Thanks for the clarity on the updated kind of medium term, long term. We appreciate that. One of the things you've talked about is kind of the cadence of AI new products. And in my mind, it's probably building this year and starting to sell next year, but correct me if that's incorrect and give us a sense of how that cadence will come out and when you guys see some GAs and things like that.

Yes. So Brett, it's an important question. So in the first quarter, we -- the way I want you to think about our product portfolio for AI. So there's 3 categories of AI first. One category is how we work with AI inside of Vertex. On the product side, there's 2 categories. First category is AI capabilities that enhance the existing Vertex product experience. So think about that as AI augmentation for configuration, tax rules, how customers handle the data updates that they get from us. Those are all copilots in our product. Those are all elements of our AI strategy, and we shipped several new agents in the course of the first quarter that -- and we had a press release around this to announce those agents. That's about making the Vertex product experience better.

But now as you start to think about more elements of our future roadmap where I believe we unlock more addressable market opportunity, are in parts of our product portfolio that I would say, are exemplified by smart categorization, where what we're doing there is really augmenting the workflow of our customers, reducing the time spent by our customers in a workflow that happens in and around the tax determination and compliance processes that we support through a lot of our autonomous engines. And so that smart categorization is the first such example. Our roadmap is in that category is something that we will ramp towards, as we go towards the end of this year and into 2027.

Our next question comes from Adam Hotchkiss with Goldman Sachs.

I'll ask Brett's question maybe in a slightly different way. How do -- how should we think about AI and AI monetization within the context of the revenue targets you laid out today? Is there really much baked in there? Or would material monetization of current and near-term products generally be upside? And I think it goes to this broader question of how should we expect you to benchmark AI ROI for investors? I know it's early, but should we, from a financials perspective, think about this through pricing power, aiding retention? Or could we really start to see you at some point break out an AI ARR? Appreciate it.

Thanks, Adam, for the question. I would answer that in a couple of ways. I'd say, first of all, using AI internally, we expect to get more efficient. And while I won't categorize what we've just done as an AI-related move, our expectations are that we can actually operate more efficiently as we look forward in the business. So that's one way in which we're thinking about this. From a product perspective, I'll go back to those other couple of categories that I mentioned. I do believe AI is going to help us improve our overall customer experience.

As we noted in the last call, there was -- I talked about opportunity for improvement in terms of the overall customer experience, simplifying the product experience, whether that's how customers have to configure tax rules, how they manage the data updates that we give them, how they think about configuration setup. We've got customers now that are -- like some of our -- like one of our more technical customers, as an example, they were in a form-5 question exchange in one example with one of our AI copilots as they were looking to actually to do a configuration themselves. And it was a successful exchange. And you can imagine like that is an exchange that in the past would have had to happen with someone either in customer support or maybe our professional services organization, maybe some phone calls, some WebExs. This is something that they -- that we're able to solve now in a more automated way with AI.

So I would put that in the category of improved customer satisfaction, improved time to value for our customers. The third -- that's harder to quantify, but it's in our competitiveness equation as we look forward. The third one is really unlocking new market opportunity with -- by augmenting our customers' workflow, taking work out of their -- off of their plate so they can be more efficient. They can focus on other elements of their workflows. And I would tell you that is still nascent, right? So smart categorization is the early part of that. We've -- what's really changed in smart categorization since we talked about it in the first quarter is now our customers are in production with smart categorization.

We're able to observe them seeing real-time savings. They're all moving towards putting their entire catalog through smart categorization, and we're seeing transactions. We're seeing categorizations grow week-on-week. But this is replacing workflow for them. So there's also a piece of this where we're learning how do we work with customers, how does that scale? How do we have the right attach motion with the rest of our business as we seek to scale that as part of our go-to-market efforts? So we're in that phase with it right now.

And then the next piece is to start to layer on other AI solutions like smart categorization that, again, help augment the workflow of our customers, save them time, save them expense. And that's where I think as we get into some more maturity with those, we'll be able to share longer term what we believe that will mean for us in terms of revenue and market opportunity.

Okay. Great. That's helpful framing, Chris. And then, John, I know international revenue, relatively smaller portion for you today, but you do have quite a bit of exposure to the multinational enterprises. I'd be curious how, if at all, some of the macro dynamics in the Middle East have or have not impacted either actual deals or volume-related things like true-ups?

Yes. We've not seen a significant impact with what's going on over there in the Middle East, et cetera, with our business per se directly. It certainly hasn't impacted true-ups, hasn't impacted that kind of information. We've yet to see a significant impact on sort of the pipeline activity and deal activity because it's, what, a month or so out. But again, we'll keep everyone posted on any developments we see there. But for now, we've not seen a significant impact.

Our next question will come from Daniel Jester with BMO Capital Markets.

Maybe to go back to the 2028 prior targets and maybe sort of wrap up the conversation there. So the lowered growth rate that you suggested today, maybe can you help us think about software subscription growth rate in the new framework and cloud subscription growth rate in the new framework on that sort of longer-term perspectives?

Yes. Again, I think our view of sort of those kind of low double-digit growth in my mind is kind of that 10% to 13%. That's kind of the zone that is in there. In terms of cloud, I didn't -- we didn't pull out a specific cloud piece of that right now. Our guidance for this year is 25%, as you've heard us reiterate. My expectation is that cloud will continue to be a meaningful part of that. Now over time, that will start to soften a little bit due to the fact that, again, the base is getting bigger, Dan.

So I'm not -- we're not giving a specific target out to that exact piece of it. But that's how we think about it. That's how we think about growth. Again, software is a big piece of that. We don't see services at this point becoming a more outsized portion of this over time. Again, we continue to ensure that we're being very thoughtful with our partner community from a services standpoint to ensure that we're supporting them and what they're doing as they support us in the software side of the house. So I don't see it changing materially over time in the target period.

Okay. That's really helpful. And then on the -- on e-invoicing, one of your competitors in this space has sort of built their business through rolling up lots and lots of geographically diverse acquisitions. And so maybe just, Chris, on sort of follow-up on the acquisition in Latin America. Do you on the e-invoicing side now feel like you have the geographic footprint that you need to solve this for your customers? Or should we expect more sort of tuck-ins to fully build out the capabilities on the e-invoicing side?

Thanks, Daniel. We do feel we've got adequate country coverage for our global multinational customers. The Latin American footprint was absolutely one of the categories where we wanted to move more quickly to make sure that as the global customers issued an RFP that we were able to comprehensively respond to that RFP. So we cover Europe, we cover countries in Latin America. We cover countries in Asia.

Today, based on all the conversations we're having with customers, we're able to cover their needs wherever they are. I -- this business is changing as things change, if there's more opportunities, if we need to move more quickly in kind of building out the entire end-to-end platform.

I won't say we'll never do anything else, but I think at this point, we feel very strong about our technology footprint. We feel very strongly that we've got a great network. We've got great AI capabilities, and we've got really strong country coverage, but the compliance landscape is moving. We're moving to a very continuous compliance-oriented posture, certainly outside of the U.S. today. Who knows if it makes its way into the U.S. at some point. But we feel very, very good about our ability to help our customers manage their global mandate.

Our next question will come from Rob Oliver with Baird.

You guys have been busy a lot in a short period of time. So excited to see all the changes. I have two questions. Chris, I'll start with you. So you guys talked about 60% cloud revenue and the growth of that cloud revenue with obviously e-invoicing and compliance being cloud native. So that's going to be a natural driver, I think the initial part of that. As you look at the core customer base around sort of tax determination that Vertex has.

Historically, you guys have been more agnostic towards cloud on-prem. Obviously, that's changing. But I'm wondering how important those contract renewals are over the next year or 2? I know you're not forcing conversions, but whether conversion to cloud becomes more important in a world where the cloud availability of things like compliance, e-invoicing, AI become more central to the value proposition of Vertex's offering? And then I had a follow-up.

Rob, thanks for the question. And yes, the answer is we're -- from a new business perspective, we're very focused on cloud. Like we really -- we want our customers to move to a modern platform. That allows us to give them more value more quickly, our new features, our new capabilities as we roll out AI oriented experiences, they're able to take advantage of that much more quickly. And frankly, to get the benefit of an end-to-end platform, that's going to help them solve not just like a tax calculation problem, but really help solve some of their broader compliance requirements.

So the goal is for customers to move in this direction. And I can tell you, like new customers are very much coming online as cloud customers, even our existing customers. In fact, I just talked to like a large pharmaceutical customer of ours the other day who's been around Vertex for over 10 years. So they had an on-premise instance. They're actually adding a cloud instance to it. So they're not going to decommission the on-prem right away because of some of their own internal IT requirements, but they're adding the new is going to the cloud.

And so you can see the direction of travel there is in the right orientation where the new things they're doing with us are going to be cloud-based. They're not anchoring us to what they've done in the past. And that's very much the motion we want to be with. We're trying to meet our customers where they are as much as possible. And the cloud direction is really what that's all about.

Okay. Great. Helpful. And then I guess just a higher-level question about the industry and the growth rate now having been in the seat now for a quarter plus and having been around the software industry long time. I'd love to hear your perspective. It sounds from our perspective, like talking to many of your competitors that everyone is kind of hovering around that kind of low double-digit just around teens growth.

I know when John was asked earlier, he called out kind of macro as kind of a leading industry for the change. There's obviously a lot of changes happening across the industry and within the financial suite. And I know you guys just kind of reset the targets. So I'm not asking you to add new targets. But I guess what I would ask is, philosophically, is that what we should think about where this growth rate is for this industry, Chris? Or is it something where as AI becomes more infused, we're thinking ultimately about a higher top line growth rate potentially for the tax and tax-related AI business?

I think the way to think about this is that the base calculation and determination aspect of the business is probably in this territory. But the reality is the compliance requirements are expanding and changing where government say, this is why e-invoicing and compliance is such an important growth adjacency to our determination business because governments are asking, they're setting different requirements. They're saying, look, we're not going to wait for the end of a period for you to file and tell us what you owe us. We're going to tell you what you owe us because you're going to send us all the invoices in real time, and we're going to -- this is outside the U.S. primarily where this is happening today, but you could see versions of this happening in the U.S. as well, particularly at the state level. And we'll see -- we'll watch for this kind of change to happen.

But -- so while we -- while I would tell you the traditional calculation part of the business is probably there, there's higher growth opportunities in the global compliance e-invoicing part of our business. And we do think that as we can help our customers automate more of the manual effort that happens in and around compliance and tax that, that does unlock more growth opportunity as well. But we want to kind of level set our investors on where we see things today based on the bulk of our business being in the determination part as we mature these other businesses as part of our portfolio.

Our final question will come from Andrew DeGasperi with BNP Paribas.

I guess back to the comments you made so far on this call, I'm just trying to sort of put together the -- I guess, the change in terms of the midterm targets. And I'm just curious to know in terms of philosophically, if you look at your strategy today, since you come on board, do you think the focus has shifted more towards profitability versus top line growth at a high level? Or is it, in fact, this is really all due to the macro environment and that there is potential for top line to accelerate once you -- once that environment improves?

Andrew, thanks for the question. There's absolutely top line growth potential. Like I said, as we're maturing our compliance and e-invoicing business, that should be added. That's additive to our growth rate. As we unlock new opportunity with AI, that will -- again, that's further out, but that will become additive to our growth rate.

Again, as the global compliance environment shifts, particularly in and around indirect tax, and we believe all of that can be a good augmentation to our growth rate. In some ways, what we're doing is really just talking about the growth rate that we've been experiencing. So it's not a change in strategy. It just -- it is what we're seeing in the market right now while we're maturing these new businesses.

My focus has been, though, to make sure that we get -- we grow as fast as we can in our core. We augment these new businesses so they can become meaningful contributors to our growth. But we also need to be more efficient in how we're spending money, and we need to be able to invest more in these new growth areas. And so this is a big piece of why we needed to make some changes to our cost structure, number one, to show that we can drive incremental value for our investors, but number two, so we can invest in some of these growth areas and go faster than we've been going based on kind of what the growth rates we were seeing towards the end of last year into the beginning of this year.

That's helpful. And then on -- John, on the back half of the year, I just want to -- like mathematically, if the cloud business will accelerate relative to the first half, since you delivered a top line of 11% in Q1 you're guiding for, let's say, high single-digit Q2. We should see that top line accelerate in the back half of the year, even though the guidance for the year doesn't necessarily imply that. So do you still feel pretty confident about that?

We mean we do. I mean we feel good about the 25% full year growth rate. We think it's there. We have it in our line of sight. And again, a lot of it is driven, Andrew, by the fact that the e-invoicing opportunity, the mandates are coming on for France in the middle of the year. We've got Belgium for the full year. France is coming on, and we're selling into the Germany opportunity in addition to other client opportunities that are out there across the world.

So there's a lot of activity really focused on the e-invoicing space and driving that. And plus the additional opportunity we'll get from continuing to leverage our business, reduce attrition, manage all that stuff, as Chris was talking about, that's going to drive -- just generally drive the rest of our business along with it.

There are no more questions at this time. I'd now like to turn the call back over to Joe Crivelli for closing remarks.

Thanks, everybody, for joining us this morning. As always, if you have follow-up questions or if you'd like to schedule more time with the team, you can reach out to me at [email protected]. With that, we'll adjourn. Thanks for joining us, and have a great rest of your day.

Let's get started here. So thanks, everyone, for being here this morning. My name is Chris Quintero. I am the office of the CFO software analyst here at Morgan Stanley. And really excited to be joined by the Vertex team here today. We've got Chris Young, President and CEO; and John Schwab, CFO. Thanks for joining, guys.

Thanks for having us, Chris.

Awesome. So before we get into the good stuff, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So maybe to kick things off, guys, let's -- for investors who are maybe not as familiar with the Vertex story, give us a quick overview of the company, the business, what are some of your key products and who are some of your core customers?

Sounds good. So Vertex is a global provider of transaction compliance and indirect tax solutions. We work with customers across the Fortune 1000. We have over 60% of the Fortune 1000 that are customers of ours and a number of the largest companies in Europe as well comprise our customer base. The company is about 47 years old. So we've been in -- we were founded as an indirect tax company, but we've expanded our portfolio to include indirect tax, a number of compliance solutions, e-invoicing, which are mandates that are happening around the globe right now, where customers have to transmit their transactions to the government as a way to get out in front of audit and compliance requirements. So we're a global company today, and we're headquartered out of King of Prussia, Pennsylvania, which is outside of Philadelphia, but operate around the globe.

Yes. And Vertex has reinvented itself multiple times throughout the entire life cycle of the company.

Indeed.

We'll get into the AI transformation in a little bit. But Chris, you recently just joined as new CEO in October. You had an extensive career at Microsoft, McAfee, a bunch of other companies. Now that you've had a few months to kind of assess what's been going on at Vertex, curious what are your top 2 to 3 priorities for 2026? And where do you see the greatest opportunity to accelerate the business?

Well, like you said, Chris, I've been at Vertex now just about over 100 days. So I've kind of gotten through my first 100 days here at the company. And before that, as you mentioned, I have 30-plus years in the technology industry, a decent chunk of that in the cybersecurity landscape. Most recently, I've spent some time at Microsoft for about 4.5 years there as well. And as I've come into Vertex, there are a couple of key things that I think are really important for us. One is we have a very strong core business where we're serving our compliance and tax needs for, like I said, the Fortune 1000 being the stronghold of our customer base.

But increasingly, as I mentioned a bit earlier, there are a series of mandates happening globally. Europe is in a cycle for this right now. Belgium just recently came out with an e-invoicing mandate. France is coming out with an e-invoicing mandate in September of this year, Germany to follow that. So while it's quite common in places like Latin American countries, a certain number of Asian countries, increasingly now in European countries, there's a governmental requirement that when a transaction happens on behalf of a company that they send the invoice to the government and they get a return on that.

The way -- the reason for that is it allows the government to have forward information about the tax liability for any company before a filing happens at the end of a filing period. And the reason that is important is because these mandates are starting to happen now in Europe, that's created an opportunity for us in a new category of our business, but one that relates very directly to what we do in value-added tax calculation. Increasingly, our customers not only are going to want to get the -- are going to want to have the invoices transmitted, but they're going to want to then be able to reconcile that with the value-added tax calculations that come out of our core product, particularly for companies that are operating in places like Europe, Latin America, parts of Asia and others.

That e-invoicing mandate does not exist here in the U.S. yet. But certainly, we believe that some form of that will come to the U.S. at some point as tax legislation continues to evolve and as a number of the authorities look for opportunity. The second -- the third priority is really for us is to pivot to AI. And I know that's going to be a major theme of the conference. I know those are some of the questions that are on everybody's mind.

And for me, that really means 2 key areas for us. Area #1 is what we're doing internally with the company. We have -- since I've joined, we've now got a series of core initiatives that we're using to completely change how we operate in several parts of our business, whether it's how we develop software, how we service our customers, how we go through a sales process, marketing, et cetera. We're changing the way the company operates using generative AI. And that's going to be an ongoing process for us, really -- and I really believe that we've got an opportunity to operate the company quite differently as we adopt our own set of AI tools and AI agents internally.

That's the part one. Part 2 is there's a huge opportunity that I see for us to bring more AI capabilities to our customer base. Now while our products operate, I think, in a place where they're very well embedded into the customers' infrastructure, what we have seen -- what we see is that there's a series of activities that go on in a tax department that exist in and around tax determination or in and around e-invoicing, the transmission of invoices between and among companies and governments. That could be as simple as returns filing, which today is a manual process. In fact, a lot of companies actually outsource that process to companies like Vertex to the big 4 and other accounting firms and the like.

There's a lot of manual work that goes into close processes, audit preparedness, even some of the upfront work that happens in determining or I should say, in categorizing products in order to go into a tax determination engine. All of that is a set of just manual tasks that a number of tax departments have to execute on their own, and we see those as opportunities for us to bring AI capabilities to our customers, which will save them time. It will make them more efficient in their tax departments.

And one of the examples of a product that we've got that I talked about on the earnings call is something called smart categorization. Smart categorization is really using AI agents to go after that process of really classifying and categorizing products or SKUs and before they become set up as rules in the tax determination engine and ultimately are calculated. And if you think about it this way, in a retail environment, that -- for a retailer, every time you change a SKU, a price component and offer an ingredient in the product, a supplier for a product, any time you make a change like that, that could actually have downstream implications for how that product ultimately gets categorized and ultimately how the tax for that product gets calculated in the engine.

And so what we've done is for that classification process, we've built a set of AI agents that will do that on behalf of the user or do that in conjunction with the users. And that's something that particularly for retailers that have a high volume of product and a high volume of changes in their environment, we're basically helping them streamline a lot of the process that they have and reduce some of the people time that's required and going through that process. And that's just the first of what we believe are a number of different AI capabilities that we'll bring to market to help our customers reduce their overall time spent on these processes, reduce their overall need for their humans to focus on those kinds of tasks.

Yes. Since you brought it up, SmartCat, really interesting product. What's the opportunity to expand outside of retail? You've first kind of gone into retail as that first vertical to sell that product into. How do you think about expanding it outside of retail as well as the monetization potential? How do you think about the pricing and packaging of that?

So that is a stand-alone product. And when I think about AI in our products, I tend to think about it in 2 different categories. Category 1 is we're building a lot of AI into our products themselves. So we have a Copilot that exists in our core product. But the way I think about something like that is it enhances the experience of the product that many customers already have. It's going to make it easier to use. If they have questions, if they want to dive deeper in a topic. The AI is just going to make that whole experience easier, smarter, better for the customer. And that's -- but I consider that part of the core product experience they already have.

But the second category is really net new products that we'll sell to our customers or net new capabilities that we'll bring to our customers that we'll charge for that really help them remove some of the time and effort that they have in their current processes. And smart categorization is in that particular category, so to speak, no pun intended there. And the reason -- and smart categorization, returns filing would fall in that kind of a category. These are products that are separate but related to what we do in the determination engine itself. And so retail is the first vertical, largely because of the volume of products and changes that happen in a retail environment. But we're expanding that to other verticals.

Medical devices is another vertical where you've got -- you potentially have very large lists of products where the taxability of those products is very complex. Think about it in medical products, there's the interplay with the insurance companies and what gets paid for and what's taxable and what's not taxable, very complex in that world. So the categorization part of that is very important for our customers who sit in that category. And then we believe that will just extend into a variety of product categories. Certainly, organizations that have large numbers or high volumes of changes are ones that are more likely to use that kind of a product first. And -- but we believe there's opportunity -- a lot of opportunity in retail to start with and health care becomes another one that we see real opportunity in.

Yes. So clearly, a lot of focus from you on product innovation, bringing new products to your customers. How do you think about informing your product road map? Is Vertex Copilot kind of seeing what customers are really doing in the product? What really informs that product road map for you?

So the most important thing, like I have people right now. We've got customer user groups going on right now. So we do spend a lot of time with our customers trying to understand how they use the product, how we can make it better for them. And that's our direct engagement with our customers is really important. But as you point out, as our customers use more of our tools, as they use our SaaS products, as they use our AI products like our Copilot, the way they interact with those products are telling us a lot about where they have challenges, where they're seeing benefit in the product. And it does point to -- I will tell you, even when we look at some of what our customers are saying -- are asking or prompting in our Copilot, a lot of it actually goes back to smart categorization.

They start with how do I think about this particular product and how should I ultimately start to think about the rules categorization for that particular product. And so that is a good example of a place where we will learn a lot more about how our customers use our products, where they see opportunity, where they see value, where they might want to call us for a support case because those are going to be also the kinds of questions that our customers will ask to the AI tools that we make available in the product. But nothing substitute for direct engagement with the customers, really seeing how they use our products, whether that's in a hands-on kind of a lab style event or whether that's really just kind of sitting down with them and kind of working through some of this.

Because of the relationships that we have with a number of our large customers who've been with us for a long time, we have customers who are codeveloping products with us. In fact, I talked to a customer last week and he said, look, we've been a customer of yours for over 20 years. and even some of the product that you've built out, we've helped kind of codevelop that with you over time. There's so much -- one of the things I've really learned as I've come on board is there's so much interpretation that goes into the way in which rules get built into our tax engine that our customers really -- and because tax legislation is always changing, because of the way that legislation impacts a given organization, we're kind of constantly working with our customers to figure out, okay, is this a new rule? Or is this literally a new set of capabilities, for example, that needs to get built into the product?

And that's the kind of relationship that we've had with many of our longest-standing customers over the years. And it's really helped us evolve the product, and we continue to kind of like -- that's a place I'm really leaning into because I just have a lot of passion for how our products get built.

Let's address the investor concern. Obviously, a lot of concern about the terminal value of a lot of software businesses today, risk of displacement from AI start-ups, large language models. So from the Vertex perspective, what's your competitive moat? What makes you really defensible here against those threats?

So Chris, one of the reasons I came here, and I've said this to you before, like one of the reasons I came here is I see a huge opportunity for us to bring more AI capabilities to our customers. And I believe we're coming at that from a real interesting position of strength. As I've talked to our customers, the things that they would say to me, if I was to put together a word cloud, it would include words like trusted, accurate, auditable, reliable, like our customers, they can't get their taxes wrong. If you get -- for anyone who's ever -- I don't know if anybody here has ever worked in a tax department, but this is the kind of thing if you get your taxes wrong, you're now in disputes with governments, potentially in lawsuits, you're getting audited.

Not only are there penalties involved, but you're -- now you've got people that are pulled off their day jobs because they're working to respond to these issues. So tax is just something that you really can't get wrong. It has to be right all the time. And it's not just what comes out in terms of the calculated tax that gets paid. There's got to be an entire process of auditability of how you got to the decision to calculate the tax the way you did in the first place. That starts with how you categorize a product, how you interpret a rule, how you actually create the rule in the engine and ultimately the calculation that comes out of that.

And so when we talk about what Vertex brings to our customers, the first thing I would say is that the content that we -- the content effort that we put in that ultimately manifests itself as rules in our engines, a lot of that is the content is not available online. So we estimate that around 70% of what goes into a tax engine as a rule ultimately is not what's available online. A lot of that is because of localities that exist out there. There's a lot of federal information. There's a lot of information at the state level. That's a lot simpler.

But like when you get down into the tens of thousands of local jurisdictions, that's not just cities, it's -- or even municipalities, there are specific tax districts, counties. So it's -- when you start to get into that level of complexity, oftentimes, even legislation that gets posted online is not done so in a timely manner. And there's an entire process that we have to go through to turn that into a rule that ultimately gets built into the engine before it gets calculated. And so it's not as simple as saying, let me just go read what's online, and I could turn that into a rule and have it be a calculation that comes out the other side. So much of what we do there is proprietary.

The second thing I would say is we're deeply embedded in our customers' infrastructure. We're embedded in the ERP systems, integrated with point-of-sale systems. Oftentimes, companies will use us. The customer I referenced a moment ago, they use us in 30 countries around the world. We integrate in multiple ERP systems. A lot of the large companies that we serve very well, not only have multiple ERP instances, but they use different ERPs from different vendors. All of that complexity is something that we handle very, very well. And the third thing I would say is accuracy is key. Large language models are great.

As context windows get bigger, they can do more, but they are not based on deterministic outcomes. They're based on probabilistic outcomes. Our answer has to be right, 10 times out of 10, 1,000 times out of 1,000. We can't rely on probabilistic approaches to what we do. And that actually is not just, again, the calculation, but we have to be able to trace back through the entire process because it has to be auditable. And so those are the -- you put those different pieces together, and that's why I really would say Vertex has a strong foundation in what we do. Last thing I'll say, business model. We're not a seat-based model. We're based on company size or almost a consumption-based model, but it's really revenue band based in our business model. So we're not relying on companies to buy more seats from us. We really are just -- we grow with our customers as they grow.

Yes. So it's really about the accuracy, the compliance, the auditability, the fact that 70% of your rules, you can't find online. That requires curation from you all. Great. So let's shift over. Let's talk about growth. So 2025 was a little bit of a slower growth year for you all, 18% ARR growth went down to 11% in 2025. The main drag was really that existing customer growth. So maybe unpack for us what were the drivers on the gross retention side and the expansion side that led to that little bit lower growth rate.

Do you want to take that?

Yes. Maybe I'll start out. Again, just doing the walk, Chris, we lost about 1 point from our GRR. So a lot of that typically is around -- we have controllable and uncontrollable. The uncontrollable are bankruptcies, they're M&A activities, things that are kind of out of our hands. Then in the more -- and so that's somewhat uncontrollable. The controllable is more -- a lot of the churn we saw there was low dollar, small customer, that type of thing that we've had for a long period of time. So I think that's something that we are spending a lot of time digging into with Chris coming on, we spent a lot of time thinking about the reasons behind getting in front of what do we -- how are we going to attack the customers to make sure we can see these things in advance of them happening.

And so we're really focused on that because that's the beginning of the entire funnel of -- the funnel of our ARR growth algorithm that's out there. So that's one where we spent some time. We did have -- during the year, we also then moving into NRR, we lost about 1.5 points from additional entitlements. And that's just growth from existing customers. So growth, as Chris mentioned, we price based on revenue bands. The revenue band pricing as customers exceed those bands, we then charge them for their overages and then we renew them at a higher rate. And so we see that. When we saw the renewal cycle this year, we didn't see people crossing those bands as aggressively as they had in prior years.

And so that resulted in 2 things. One, we had a smaller amount of true-up revenue, which is that backwards-looking pay us for your past [indiscernible]. And then two, we didn't see the renewals -- we weren't renewing at higher tiers for our customers. This isn't saying they were using us less. It was just saying they weren't growing through the band. So that was about 1.5 points or so. We've been working with, again, another customer success opportunity there for us to spend time with the customers, understand what their renewal is looking like, how that's going to come to be. And so I think that's an area that, again, we're attacking with not only technology, but people.

And then second, a little bit in the cross-sell, upsell. We lost about 1.5 points there. And so the cross-sell, upsell is one, again, we -- about 70% of our new revenue opportunities come from existing customers. And so that's customers buying, if they're a sales tax customer, they'll buy a use tax or they'll buy returns or something along those lines. And so the motion there was just a bit slower. We did have a good -- a strong new logo year in terms of kind of that activity. And again, sometimes it just ebbs and flows between the 2 pieces.

But again, new logo activity was -- helped us offset a little bit of the impact we saw coming out of the cross-sell, upsell. But I think what we anticipate is that this year, thinking about the cross-sell opportunity, Chris had mentioned getting into the e-invoicing and e-invoicing is going to be big for us this year as additional mandates come on. We saw Belgium go live in January of '26. We know that France is coming live in September, and we have Germany in January of 2027. The sales motion around that activity is -- will be picking up as those deadlines approach, and we're going to then start to see more revenue as the volume because they're consumption-based as well, run through that. So a lot of activity expected for 2027 for sure -- or '26 for sure.

And what's the path to stabilizing and accelerating that net retention rate going forward? And what components are you really most confident in being able to turn around?

There's a couple of pieces that we're very focused on. One is the support experience. I talked about some of this on the call recently, improving the median time to remediate the issue, changing -- basically reducing the number of handoffs that happen when a customer calls in with an issue. There are some clear things that we can do in the support experience to improve that. That's always a factor in how customers think about working with us. The second one is reducing the amount of time it takes to implement the product. Whether we're the ones doing the implementation or whether we want to bring some of that to our partners, if we can shrink that amount of time, again, that leads to better satisfaction that keeps the customer happier.

John mentioned it earlier. We're also expanding our coverage with our customer success managers to cover our customers. When we've seen some of the analysis, when we have a customer success manager assigned to an account, their overall satisfaction is higher than when accounts don't have a customer success manager. We can do -- because we have -- because of our -- the size of our customer base, we can touch a lot of customers with a modest improvement in the number of people that we have in that part of the business. But there's also a lot we can do there with AI.

And so we can really expand a lot of how we help our customers because so much of it is about answering questions. It's about anticipating the problems that customers are going to have. It's about anticipating the questions that they're going to want to answer and giving that information to them in a way that's going to help them solve their problems quickly or giving that information to them in a way where they don't run into a problem in the first place. And we believe we can automate a lot of that with generative AI. I mean -- and that's something that I think is a real near-term opportunity for us.

And then we can also augment the people, the men and women who are our best people who are helping our customers, again, with the hardest problems, those are the ones that we can really scale them a lot better by just bringing more information to their fingertips so they can just move more quickly through the process. So those are some things that we're doing in the very near term, -- in the longer term, as I mentioned, there's more that we can do on the product. There's more that we can do on the product with AI tools as an example. And there's simply more that we can do on the product just to simplify the experience, easier to use, easier to implement, easier to support.

Every company is like kind of constantly on that journey of making their product better, easier to use, more valuable to the customer. We're on that same journey. Just even in the time I've gotten here, some of the new capabilities that we're bringing to the market, we're very excited about that. Certificate management, which is a big part of what our customers rely on for their overall tax rule set, that's a major product enhancement that we made in 2025, and that's something that our customers are getting the benefit of now in 2026, and we'll continue to build on some of that as we go forward.

Let's flip over to the new logo side. That was really strong last year, up 20%. What's really driving that growth, that durability? And how durable is it really going forward?

New logo was, for me, a really -- it's my first quarter of seeing some of the new logo growth and actually the new logos that we brought on board. What I think is notable about our new logo growth is, number one, we're winning brand name customers. Some of those customers are customers that are graduating from solutions that were simpler than ours because their tax needs have gotten more complex over time. Some of those are customers that were doing it using a homegrown set of solutions. Maybe they were using spreadsheets or other forms of calculation methodology.

And now they decided they needed to have something like Vertex to automate the process that they were using before. And some of it is really the growth of our kind of existing small customer base that become bigger customers for us over time. And what I was encouraged with the new logo growth for us is that a lot of new logos are people that have gone through an RFP process. They've compared us to other solutions in the market. They're not somebody who maybe has been with us for a long time, and it's just easier to stay with you.

They've been a customer of yours for a while. These are customers who've gone through a selection process. They've decided to choose Vertex. And again, we had some really great marquee logos that we brought into the business last year. I shared some examples of that on the call. But these are wins that I think tell me -- they tell me a lot about the competitiveness of the product in the market. It's not just that we've been with these customers for a long time. It's that new customers that are looking to solve real problems are coming to us because they see us as the best way to do that.

Yes. So we've coined this term the ERP super cycle to talk about the different migrations that are going to be happening over the next few years from SAPs, on-premise installed base over to the cloud. 2024 was a great year for that. 2025, a little bit slower. I think you guys called that out, too. What does the pipeline look like for some of those cloud migrations going forward?

We continue to grow in our SAP ecosystem. We continue to grow in our Oracle ecosystem. We are beneficiaries when our customers migrate to the cloud. And in fact, the day we finished up some earnings calls, I was able to go over to a user group here locally and talk to some customers who are in the process of an ECC migration to S/4 and are looking at using Vertex as part of that. They're going to implement us as part of that transition. So we see a healthy movement there. I think what is probably different than where the company was a year ago is the expectations for how fast that cycle would go were, I think, higher or broader than what we ultimately saw in the marketplace.

But what we are seeing is strong win rates when there's an RFP process. We continue to see growth in that ecosystem. We're very well networked with the SAP sales force with their product teams. We're in their partner programs. And so we work very closely with them. We work very closely with our partners who are implementers of the ERP systems, whether that's the big 4 SI partners, et cetera, and other firms that specialize in that particular category. So we're very well networked in the partner community as well as directly with SAP. What we're seeing is customers are moving, but they're going to move at their own pace. And the tax engine decision or tax engine migration decision that comes along with an ERP transition, it's part of the process, and we continue to see a steady flow there, but we're not seeing something that's an anomaly in the market either.

Yes. So you all held your first Analyst Day last year. You put out some ambitious medium-term growth targets. How do you reconcile getting to that -- those targets versus the 2026 guidance, which is only about 10%, 11% versus the -- I think 2028 guidance calls for high teens growth rate. How do we get there?

So this has come up, and I mentioned this when asked on the call. What I would say is we feel very good about our profitability goals. I feel very good about our cloud growth goals in the long run. I do think overall growth is something that is going to moderate relative to what we've seen in -- or what we shared in the Investor Day last year. As I mentioned, I'm still 100 days in. So there's more work that we need to do to think about what our longer-term plan is going to look like, and that's something I'm digging in with John and the team on. We'll have more to say about that as time passes.

Awesome. Let's touch a little bit on e-invoicing. You brought it up a little bit earlier. How do you expect this market to play out? It's a brand-new market because of these new regulations? How do you think about the adoption curve of some of these customers over time?

We've seen a healthy movement in the market right now. And there's 2 different ways to think about e-invoicing and its impact in our customer environment. John mentioned this earlier. A big part of our bet on e-invoicing is about selling that into our installed base. Many of our customers are global multinational organizations. They use us in many countries. They have e-invoicing mandates. Even if they are based in the U.S., they have e-invoicing mandates that they've got to meet if they're doing business in other parts of the world. A big part of what we're doing is working with those customers to meet their e-invoicing and really, more importantly, their broader set of compliance needs.

What our tax experts would tell you is that e-invoicing is really just a very basic foundational mechanism that governments are starting to use. But it's really -- it's part of a broader shift towards more of a continuous audit compliance posture that companies have to keep up with. So it's not as simple as just saying, I'm transmitting an invoice and I'm done. You've got to then understand what does my compliance posture look like across countries? How do I marry that up with legislation? When I do my tax filings, how do I make sure that I'm able to reconcile what I file with what those governments have. So there's a broader compliance mandate here, particularly for the larger organizations that we serve well.

And that -- last year, one of the product improvements that we made was to really integrate our e-invoicing solution with our VAT compliance capabilities so that you've got a true compliance platform that we can bring to our customers. So that's one motion. That's more of a cross-sell, upsell motion into our installed base. The second motion is there's just a bunch of companies that have to comply with the e-invoicing mandate, and we can sell directly into that opportunity as well. What I also like about that is that's a new way for us to acquire new customers for whom we may ultimately be able to solve their tax determination needs as well. So there's a cross-sell [indiscernible]. That new customer acquisition creates an opportunity for us to cross-sell, upsell later.

What's the customer behavior you're seeing so far with some of those early e-invoicing customers? Is it they start off with like 1 or 2 countries and then expand from there? Do they join in all a bunch of countries at the same time? How does that kind of behavior look like?

Mostly what we see is there is a reactive move to get compliant in the countries where you need to be compliant. In fact, as I've talked to a number of our large customers who are already doing e-invoicing in a lot of places, right? If they're doing business in Mexico, for example, or lots of parts of Latin America, they already have an e-invoicing solution there. Italy has had an e-invoicing solution mandate for a number of years. So they may already have solutions for countries like that. A lot of what's happened, however, is companies, even the large companies have moved to add e-invoicing capabilities in the countries where they need to meet the mandate.

But what they're ultimately looking for now is to say, how do I think about a global platform for this? How do I think about a global supplier for this? Because it's no longer I just need to do this for a few countries in Latin America. I need to now do it all of Latin America. I got to do it in all of Europe. I got to think about what's going to happen in Asia. I got to think about what could come online in the United States. And that really opens up the conversation around being a global provider for our customers. And that's -- we can enter in and help them at a tactical level, meet a country mandate. But we also, as Vertex, where our strength is, is to be able to also come in and say, we can help you on a global level as well.

Yes. Before I open it up for Q&A here, I wanted to go to margins. You mentioned a little bit, feeling really comfortable -- really confident in getting that margin target. What are the key areas you're really looking to drive that leverage from on the EBITDA margin front?

To some extent, for us, efficient growth in the future helps drive margin improvement for us. So that's number one. But when I look across our business, there's opportunity for us to just continue to get more efficient, more productive. I mentioned earlier that one of the aspects of AI that I'm excited about for Vertex is we can use AI ourselves to be more productive, to do more across our business, to change how we serve customers. So much of what people don't talk about as much with AI that I think is really important is that when you implement AI capabilities in your process and your operations, it makes you a more nimble, more agile company, right? You can move resources, you can meet demand in different ways.

That's a huge benefit, particularly in a world where you've got to move fast, you've got to adapt to market changes, market factors, market conditions. You want to be able -- like in our world, we want to be able to adapt when companies have different things that they need to do in different countries around the world. We don't want to kind of be -- we don't want to be pinned down by where our operations exist or how we've always traditionally done things. And by adding more AI-oriented capabilities to our platform, we not only get more productive, and that should translate into just better efficiency, better outcomes in our overall profitability results as we kind of look out over the years, but also it will just make us more agile, more nimble in how we meet the market demand.

Awesome. Any questions from the audience here? We got one over here.

Wondering, you talked about the AI opportunity on the top line and driving new products. I was wondering if you could talk a little bit about what you see as the TAM there compared to what you're currently selling to your customers. And at the same time, also talk about any accelerations in software development or internal organizations that allow you to attack that TAM and accelerate revenue growth using AI internally as well.

Yes. So when we think about the market opportunity for AI for us, a lot of it comes in the spend that customers have in outsourcing certain processes in their tax departments as well as just their overall labor expenses in those departments. So that's at least as much as our current TAM just in the product category where we play. So that kind of expands what we do there. So we see that as a pretty significant opportunity. But as one of the things that we're doing today is really working through exactly which parts of our customers' operations chain do we think are more or less likely to sort of lend themselves well to AI, kind of the way we want to think about it is in phases.

In the fullness of time, we'll be able to do more. But one of the things we're being very careful about is making sure that we understand where do we go first, what happens next, what happens after that and really trying to think about our TAM opportunity in that way, more about the job, like really being clear about what are the jobs to be done and how do we actually help with those jobs to be done as we think about what our TAM opportunity looks like. And so there's more work that we're doing in that place, but the pool is kind of as I characterized it.

The second thing I would say in our world, just even when we look at our own software development processes, I was on a thread with my engineering team this morning where we were looking at a specific release that we've got. And in some cases, we're seeing at least a 44% improvement in our [ Sprint ] velocity by using some of the AI tools that we've got. And I would say we still -- we're still early in our journey. And so there's a lot of opportunity for us to continue to improve there to do more. The folks that are -- the teams that are using it well are pretty excited and they see real -- again, 44% is a significant velocity improvement certainly for us.

Awesome. I think we can end it there. Chris, John, thank you so much.

Thank you.

Thanks, Chris. Thank you.

Good day, and welcome to the Vertex Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Joe Crivelli, Vice President, Investor Relations. Please go ahead.

Hello, and thanks for joining us to discuss Vertex's fourth quarter results. Chris Young, 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 Chris.

Welcome, everyone, and thank you for joining us. It's great to join you on my first earnings conference call as President and CEO of Vertex. Our financial results for the fourth quarter came in as expected. Revenue was $194.7 million, in line with our guidance for the quarter, while adjusted EBITDA exceeded the high end of our guidance at $42.5 million.

For the full year, Vertex delivered double-digit revenue growth along with solid profitability. Since this is my first time speaking to our investors and analysts, I wanted to cover a few topics. First, why I'm excited to join Vertex at this point in the company's history. Second, I'll give you a perspective from my conversations with customers, partners and employees over the past 3 months. And third, my view on how we can accelerate our revenue growth. Then I'll share some exciting new business wins from the fourth quarter.

Many investors have asked what attracted me to come to Vertex. So I'll start there. First, I was drawn to Vertex's incredible blue-chip customer base, which includes over 60% of the Fortune 500 around the world, leading enterprises trust Vertex to stay compliant with ever-changing indirect tax requirements. Our customers described to me that Vertex is trusted, reliable, flexible and have the deepest domain expertise in the industry.

Likewise, our partner ecosystem is built on strong, long-standing relationships with the key technology and implementation partners that serve this customer base. These partners consistently recognize Vertex as the leading provider of indirect tax solutions for the enterprise. At the same time, both groups want to see us move faster and drive more innovation, and meeting that mandate will be job 1 for us in the near term.

Second, Vertex has a long-standing track record of revenue growth, profitability and positive cash flow across economic cycles as well as clear growth vectors for the future. Our core expansion is steady, and our land and expand motion is proven. We have a new high-growth business in compliance and invoicing, which exceeded our expectations in its first year and has meaningful catalysts on the horizon.

Third, I believe Vertex has an incredible opportunity to transform our business and help our customers transform theirs through artificial intelligence. This aligns well with my career experience, particularly my most recent role at Microsoft. There, I spent considerable time building partnerships with, and in several cases, investing in companies driving AI innovation. And I did that while working closely with many of my Microsoft teammates who are developing their own AI technologies.

Turning to our near-term priorities. While our full year growth was healthy and respectable, in 2025, we saw lower entitlement growth, a moderation of new upsell and cross-sell revenue and slightly higher customer attrition. This impacted our retention metrics, which John will discuss shortly.

In looking at customer attrition, business and market factors such as M&A and bankruptcy was the single largest driver of 2025 attrition, and this is largely uncontrollable by Vertex. It's also important to note that attrition continues to be concentrated in smaller accounts. The average annual revenue per customer for lost accounts in 2025 was under $50,000, far below our overall average revenue of $138,000 per customer.

Finally, I'll note that competitive losses are a modest component of attrition, and Vertex continues to win far more ARR from competition than we lose to our competition. That said, we are taking several actions to mitigate controllable attrition, by expanding customer success coverage to a broader cohort of customers and leveraging AI tools to better serve our customer.

Our AI copilot in the product will help customers address more questions without needing to call us for help. We also -- we have also implemented analytics to predict potential customer attrition so that we can engage them more proactively, including personal phone calls for me to address their concerns.

I'm also confident that our new product offerings, including e-invoicing and smart categorization will help us accelerate cross-sell and upsell revenue in 2026, and we are already seeing measurable traction with both. On a positive note, revenue from new logos remained healthy and was up 20% in 2025. This included both competitive takeaways and customers who previously used homegrown solutions and switch to Vertex. It is essential that we continue to seize this opportunity.

Now let's talk more about AI. Vertex is well positioned to help tax departments improve their workflows with artificial intelligence. Indirect tax compliance is ruled dense, it's data heavy, and it's highly repetitive. It's the type of work that lends itself well to AI transformation, and we are starting from a 4 to 5 position as Vertex software is embedded in the workflows of our customers.

In addition, our customers place a premium on tax accuracy, something they've trusted Vertex with for years. And I'll add that our revenue-based pricing model insulates us from the concerns investors have around SaaS companies with seat-based licensing models.

As I shared earlier, I see significant and unique opportunity for us to capitalize on these trends. And that's 1 of the reasons I joined Vertex. In 2025, Vertex made significant investments in AI products, tools and functionality. This included the launch of our smart categorization offering, which is squarely in the wheelhouse of AI adoption. It reduces the manual work, tax departments undertake every day to ensure their product SKUs are mapped to the correct tax rates across all jurisdictions.

During the early adoption phase, we secured several marquee 6-figure wins in the retail industry. To address this growing opportunity, we are broadening functionality and smart categorization to cover our full retail customer base. We will expand smart categorization to additional industries where the offering has applicability.

In addition, in 2025, we expanded the capabilities of Vertex Copilot. Copilot in turn helps us better understand the tasks and features customers are interacting with Copilot about, providing us with insights into areas that are causing friction in the use of our solutions. This can help us enhance our products, develop new AI features and inform future product development.

Finally, we continue to leverage our partnership with Kintsugi. On last quarter's call, we highlighted Kintsugi powered by Vertex, which enables SMBs to automate key compliance functions while providing real-time dashboards for jurisdictional liability and exposure tracking. Then in December, Kintsugi and Vertex partnered with cpa.com to launch an AI-driven solution to help accounting firms deliver automated, accurate and scalable sales tax compliance for their clients. This then helps our partners and the accounting industry unlock new advisory revenue opportunities. While all of this is a good start, we can do much more with AI, and I see a large opportunity on this front. It's my personal goal to transform Vertex into an AI-first business, both in how we work internally and through the new capabilities we deliver to our customer. I will have more to share on this transformation in the near future.

With that, let's review some examples of how companies are depending on Vertex to stay in compliance with indirect tax. First, wins within our installed base. It's not uncommon for enterprise customers to use Vertex in one area of the business and a competitor in another. In many cases, over time, these customers will reevaluate their tax software footprint and standardize on Vertex. As an example, a customer in the metals and mining industry dramatically expanded its relationship with Vertex in the fourth quarter. This customer had used Vertex's returns filing managed service for years, even though it was using a competitor for tax calculation. However, during an SAP S/4HANA transformation, the company made the decision to standardize on Vertex. As a result, this is now a fulsome mid-6-figure relationship, including sales and use tax calculation as well as exemption certificate manager, SAP plus Tools, SAP Accelerator and other Vertex offerings.

In the fourth quarter, we also won in-store point-of-sale tax calculation for a global quick service food and beverage retailer. This long-standing Vertex customer historically used us for tax calculation for its mobile app and gift card businesses, but a homegrown solution at the point of sale. They switched to Vertex during a redesign of their point-of-sale system, leading to high 6 figures of new revenue. In the Oracle ecosystem, we increased our business with a relatively new customer in the computer products manufacturing industry.

Earlier this year, the customer spun out from its parent company and selected Vertex for use tax calculation. In the fourth quarter, they completed the transition and added sales tax calculation leading to 6 figures of new annual revenue for Vertex. Turning to new logos. We landed 1 of our largest new logos ever in Europe with a leading health care provider. Revenue for this new customer will be well into the 7 figures. This deal was catalyzed by a global SAP S/4HANA transformation led by our partners, EY and DMA. It included value-added tax calculation across the customer's global footprint as well as sales and use tax in the United States. The customer will also be using our end-to-end VAT compliance offering to file returns in 30 countries around the globe.

Also in conjunction with an SAP S/4HANA transformation, a major North American power utility selected Vertex as its first ever indirect tax provider. This enterprise customer with revenue of nearly $10 billion was previously using manual solutions for use tax calculation. In addition to use tax calculation, this mid-6-figure deal, which was referred to us by our partner, Accenture, also included SAP Plus Tools, Vertex consulting and other ancillary products and services. This deal validates the greenfield opportunity for Vertex with large companies that are still using homegrown solutions for indirect tax.

In the Oracle ecosystem, a software provider in the payment space selected Vertex to displace an entrenched competitor. We were differentiated by our ability to support the customers' massive scale and volume of transactions as well as our referenceability across the Oracle ecosystem. This led to low-6-figures of new revenue for Vertex.

Now turning to e-invoicing. In our first full year in the business, we've seen strong traction with both existing customers and new logos, accelerating demand around upcoming mandates, especially Belgium, which launched its e-invoicing mandate in January, and significant product differentiation for our end-to-end offering, which includes e-invoicing as well as that calculation and compliance in a single unified platform. We continue to believe our platform is unique in the marketplace and gives us a competitive advantage.

Now let me give you some color on the types of e-invoicing deals we won during the fourth quarter. Wins with existing customers included of global payments companies that selected Vertex for e-invoicing mandates in Belgium, Poland and France, a consumer products company that selected Vertex for mandates in Germany, Belgium and Poland, and a consumer electronics company also selected Vertex for mandates in Italy, Belgium, Poland and Denmark.

Note that all of these examples are long-standing scaled customer and the e-invoice and cross-sell increased our ARR with these customers on average by over 20%. This should give investors a sense of the upsell opportunity that e-invoicing represents within the installed base. New e-invoicing logos include a 14-country win with a German buildings product company. E-invoicing and value-added calculation for Belgium, France and Germany with a North American energy products company; and a deal for Belgium, Germany, France and the U.K. and Ireland with a North American healthcare products company. All these new logos were in the mid- to high 5-figure range. And while this is lower than our overall average revenue per customer, these initial engagements gave us a launching pad for our proven land and expand sales motion, not just with additional e-invoicing countries, but for the full suite of Vertex tax compliance solutions.

So to summarize, Vertex had a solid fourth quarter. 2025 reveal some challenges, but I am confident that we have a cohesive plan to restore accelerating growth in the business. Our AI opportunity is in focus, and our first offering smart categorization is making a real difference for enterprise customers while driving revenue, and we have a growing opportunity in global compliance as e-invoicing mandates continue to proliferate around the globe.

All in, I believe I'm joining Vertex at an extremely opportune time. With that, I'll turn the call over to John to discuss the financials in detail. John?

Thanks, Chris, and good morning, everyone. I'll now review our results in detail and provide financial guidance for the first quarter and full year of 2026. In the fourth quarter, revenue was $194.7 million, up 9.1% compared to last year's fourth quarter and in line with our guidance.

For the full year, total revenue was $748.4 million, up 12.2% from 2024. In the fourth quarter, our subscription revenue increased 8.9% year-over-year to $166.2 million. For the full year, subscription revenue was $639.7 million, up 12.8% year-over-year.

I want to provide additional details and clarity around the impact of true-up revenue on our revenue growth. True-up revenue is the payment that is owed to Vertex when a customer overruns its contracted entitlements. It is recognized as revenue in quarter and the payment of a true-up typically coincides with the corresponding increase in entitlements.

As a reminder, we historically have realized $1 million to $2 million of true-up revenue in the first 3 quarters of the year and $2 million to $4 million in the fourth quarter. In the third and fourth quarter of 2024, we called out elevated true-up amounts relative to expectation. However, in 2025, as we had mentioned, this did not recur and renewing customers were generally within the usage limits of their contracted entitlement amounts.

As a result, true-up revenue in 2025 was approximately $10 million lower than 2024. This alone reduced our 2025 full year revenue growth rate by just under 2 percentage points. Lower true-up revenue in the fourth quarter reduced the year-over-year revenue growth rate by approximately 4 percentage point, and the impact on subscription revenue was approximately 2 percentage points for the year and 5 percentage points for the fourth quarter.

Turning now to services revenue. Our services revenue in the fourth quarter grew 10.2% over last year's fourth quarter to $28.5 million. Full year services revenue was $108.8 million, up 9.2% year-over-year. Our cloud revenue was $94.6 million in the fourth quarter, up 23% from last year's fourth quarter. Note that the decrease in quarterly cloud revenue growth was due to the lapping of the Acosio acquisition and the elimination of the inorganic contribution to the growth rate.

For the full year, cloud revenue was $352.9 million, up 27.9% year-over-year and generally in line with our guidance of 28% and growth for the year. Annual recurring revenue, or ARR, was $671 million at quarter end, up 11.3% year-over-year.

At year-end, net revenue retention, or NRR, was 105% and gross revenue retention, or GRR, was 94% within our targeted range of 94% to 96%. Average annual revenue per customer or AARPC, was $137,867, up 12.4%, and our scaled customer growth in the quarter was 12%. For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP results in this morning's earnings press release.

Our gross profit for the fourth quarter was $147.4 million and gross margin was 75.7%. This compares with gross profit of $133.9 million and a 75% gross margin in the same period last year. Our gross margin on subscription software was 82.7%, compared to 81.4% in last year's fourth quarter and in the third quarter of 2025. And gross margin on services revenue was 34.9%, compared to 37.6% in last year's fourth quarter and 28.8% in the third quarter of 2025. This reflects lower Acosio margins driven by increased consulting investments to support our revenue growth. In the fourth quarter, research and development expense was $19.9 million compared to $17.3 million last year.

For the full year, R&D was $71.3 million compared to $56.4 million last year. With capitalized software spend included, R&D spend was $42.8 million for the fourth quarter and $159.8 million for the full year, which represented 22% of revenue for the fourth quarter and 21.4% of revenue for the full year.

The increase in R&D spending was a result of the 2025 investments in Acosio and AI that Chris had detailed earlier. Our selling and marketing expense was $48.7 million or 25% of total revenues, an increase of $5 million and approximately 11.4% from the prior year period. For the year, our selling and marketing expense was $178.6 million, up 15.3% from last year.

The increase in selling and marketing expense in the fourth quarter was due to costs from our Vertex Exchange Conference, which was held in October. And general and administrative expense was $36.2 million, up $2 million from last year.

For the full year, general and administrative expense was $149.3 million compared to $128.2 million last year. Adjusted EBITDA was $42.5 million, an increase of $4.4 million or 11.6% year-over-year, and full year adjusted EBITDA was $161.5 million, representing an increase of $9.6 million, or 6.3% over 2024, both were approximately $500,000 above the high end of our guidance. This represents adjusted EBITDA margins of 21.8% for the fourth quarter and 21.6% for the full year.

Our fourth quarter free cash flow was $10.1 million, and for the full year, free cash flow was $47.6 million. This was a bit lower than expected as the fourth quarter is usually our strongest free cash flow quarter. While collections were lower than typical for the fourth quarter, I will note that the first week of January, we realized approximately $7 million of cash collections in excess of what we've seen in the previous years.

In the fourth quarter, we repurchased approximately $10 million of our shares in the open market under our stock buyback authorization at an average price of $20 per share. We have approximately $140 million remaining under our authorization. We ended the fourth quarter with over $314 million of unrestricted cash and cash equivalents and $300 million of unused availability under our line of credit.

Now turning to guidance. For the full year of 2026, we expect revenues of $823.5 million to $831.5 million. Cloud revenue growth of 25% and adjusted EBITDA of $188 million to $192 million, reflecting a margin of 23% at the midpoint. For the first quarter of 2026, we expect revenues of $193.5 million to $196.5 million and adjusted EBITDA of $40.5 million to $43.5 million, reflecting a margin of 21.5% at the midpoint.

Chris will now make some closing comments before we open up for Q&A. Chris?

Thank you, John. And before we take your questions, I want to thank all of our Vertex employees around the world for their unwavering dedication to serving our customers in 2025. Their commitment to our mission to accelerate global commerce with a global compliance platform strengthened by AI, it's evident in everything they do. They exemplify the strong culture that defines and I'm truly proud to join this team and honored to be able to lead it.

Earlier this year, I introduced our employees to my foundational tenants to make 2026 and beyond a success for our company and for our investors, and I'll share them with you now.

First, we play to win. That mindset raises our bar on product quality, customer outcomes and how we show up from 1 another. We put the customer at the center of everything we do. We are constantly asking how well what I'm doing today, help a customer succeed. We earn trust through outcomes. We achieved results with speed, agility and integrity. We'll move faster, adapt quickly and never compromise on doing things the right way for teammates, customers and partners. We will innovate boldly without fear, progress demands, smart risk, and we'll try new approaches, learn fast and keep pushing the boundaries, especially where AI can remove friction and unlock value.

And finally, we will communicate with candor and transparency. We'll speak plainly about what's working and what isn't and help each other improve. That's how I've operated through my career, and that's the ethos that I'm committed to bringing to Vertex. On that foundation, I'm confident that we will continue to win in the market, accelerate growth and capitalize on our market position as the leading provider of indirect tax solutions for the enterprise.

And with that, operator, please open the call for questions.

[Operator Instructions] Our first question comes from Andrew DeGasperi from BNP Paribas.

Christopher, can you -- I know you've been there only a few weeks. So maybe this is a little unfair to ask, but maybe elaborate a little more in terms of what you said were the losses to competitors at the lower end of the market. Was there -- was this like a price-driven change? Or -- and I assume this is not AI related. Is that correct? .

That is correct. And thank you for the question. You can call me, Chris, no problem on here. I appreciate it. In reference to that -- to those remarks, what I was talking about is our overall attrition. As you saw from some of the numbers, attrition was higher in 2025 than we've experienced in the past. And some of the drivers of that were, number one, M&A and bankruptcies, which we've talked about on prior earnings calls that, that was up this year, and that was a significant factor in this. But the second one is that we saw our highest amount of churn in our smaller customers, those that would have had ARR of under $50,000 per year, and that compares to an average ARR per customer of $138,000 per year. So it was concentrated in smaller customers.

Some of those went to competition, but when we look at our head-to-head performance to competition -- with competition, we're winning more ARR from our competitors, and we're losing 2 competitors.

That's helpful. And I guess in terms of -- maybe as a follow-up to John, in terms of the confidence that you have in achieving the guidance for next year? I know this year, you've had a lot sort of variables to play with. How confident are you on the growth for 10% to 11% next year? And what sources of upside or surprises do you think could be in store for you? Is it e-invoicing, is it the AI product? -- that could potentially do better?

Yes. Thanks, Andrew, for the question. In terms of our guidance philosophy, it hasn't changed. Again, we took a very thoughtful approach to setting where we set it. We feel very good about it. And we took into consideration a lot of the activity and the things that we saw developed during 2025, and into it as we said it. And so listen, our plan is to get back to that beat and raise cadence that we've had for a number of years, and we want to make sure that we wanted to make sure that we took everything into consideration and set it at the right levels to do that. So we feel good about that. And listen, when I think about 2026, clearly, we think there is good opportunity there for activity around the e-invoicing, which is many of the mandates are coming live at the back half of the year. And so that is certainly one of the growth vectors that we see out there that we're chasing after. And I think Chris talked a little bit about Smart Cat and the activity there. I mean that's a nice product. It's got a lot -- it got some traction with some very big customers. And I think that's an exciting an exciting tool out there, and it's going to be interesting to see how that plays out over time. .

The next question comes from Chris Quintero from Morgan Stanley.

Chris, it's great to meet you. My first question is for you. So you have a really interesting background and set of experiences at Microsoft, McAfee, Cisco, curious what parallels you can draw from your time at each one of these and what you think will be particularly helpful from those experiences here [indiscernible].

Yes. It's -- thanks for the question, Chris, and I appreciate it. And when I look at our company and I look at our business, there's a couple of parallels that stand out for me. The first one, I'll go to my most recent. Obviously, I spent a lot of time on Microsoft. A lot of the time there was when degenerative AI first, I think, really kind of started to change what we were seeing in the industry. including what we were doing with Open AI. And I -- you could see that there was going to be a real opportunity for companies to transform themselves using AI, both what they do internally and in the technology industry, what we would deliver to our customers.

And so I spent actually a lot of last year really looking at what I think would be the industries where there was opportunity to transform, and this was one category that I thought because of where we sit, because of the kind of work that happens in finance and accounting departments, that given the position we sit in, we can offer them AI capabilities that would really take a lot of the task work off of their plate. And that's something that we think is a huge opportunity. That's why I spent some time talking about what we're doing with smart categorization. You could look at returns processing as another category, whether it's heavily manual, and we believe there's opportunities like that to help our customers just automate what they do using generative AI, which will save them time, it will save them cost and improve their overall experience.

If I kind of go back from there, I think Vertex does have some similarities to what I saw in the cyber landscape. Cyber is one of those categories that you constantly are refreshing your content One of the things that makes cyber companies great is they understand the threat landscape and it's ever changing. And in our business, the compliance landscape is ever changing. There's constantly new tax rules, there's new compliance mandates. That's what we're seeing in the invoicing space.

We -- and I think one of the things that customers have told me about Vertex, which gives me a lot of confidence in what we're doing and our position in the market is that they really trust our content work. They purchased from us because they see us as delivering the best content in the industry. And they recognize that it's ever changing and as they look at -- they look to Vertex to stay on top of it. I had 1 customer tell me in specific. He said, "I'm able to run a lean tax department because I rely heavily on Vertex to deliver both the accuracy of your calculations, but the updates of your content that keep us up to date on what we've got to comply with across our different jurisdictions where we operate.

That's a probe context. And then I also wanted to ask about the net retention rates. Obviously, that came down a bit. and make sense on the commentary you all gave, but curious about your expectations around where that should be on a kind of more medium-term normalized basis? And how long you think it can take to get back there?

We're -- obviously, we're very focused on improving our net retention rates, and there's a tremendous amount of effort that's going in right now to both introduce our newer product offerings like compliance and invoicing to our existing customer base. And that -- every customer that I've talked to, this is either something they are actively doing or it's certainly on their radar screen, whether it's U.S. customers that are doing business in other countries with those mandates or whether it's customers in Europe or in Latin America that obviously have those mandates in their home countries and other countries where they're doing business.

So we see that as an opportunity to grow to help our customers grow spend with us and they're looking for us to help consolidate some of the work that they're doing in that category. We believe AI, it's earlier still than where we are with compliance and the invoicing, but we see AI as an opportunity there. We've introduced other additional products in our portfolio, services we're offering around returns processing, certificate -- exemption certificate management is another category where we've brought some new product to market just last year. So we see opportunities for growth with our customers, and we're really trying to lean heavily into new products that we can bring to them. And then as I said on the call, where we're also trying to engage customers more directly to prevent attrition.

And some of that's about just understanding their needs, being proactive about that. even to the point where as we identify customers who are at risk, I'm getting on the phone with them myself and talking to them and making sure that we understand what their needs are, so we can better serve them going forward. And in some cases, I've seen some examples where we've been able to turn a situation that might have been challenged into one where we're able to do more with those customers. And that's what I'm shooting for here with our team.

The next question comes from Joshua Reilly from Needham.

All right. Great. Congrats, Chris, on joining the company here. As we think about the pipeline for 2026, it seems like the biggest swing factor for accelerating ARR growth is still winning those SAP ECC customers given the size of those potential deals and volume of customers? Is that how you're thinking about things as well and how is that pipeline shaping up today?

We're that were part of that migration that customers are doing with SAP to ECC to S/4HANA. We -- the way I would characterize it is, I think, some of the expectations that were there a year ago are -- we didn't realize it the way -- I think the way it was expected a year ago. But we do continue to see sort of a steady I would say, a steady growth of these opportunities, and we're winning our same win rates on each one of these opportunities as they come up. But I think a couple of things that we're seeing. One is it's taking customers longer. I think you've seen some of that in the broader markets getting in the market space. And we're also seeing that it's not necessarily like -- the timing is a little harder to predict when the tax engine decision will happen in their overall migration process. But -- we're -- we have a very close partnership with SAP. We worked very closely with their teams. We also obviously worked very closely with big -- a lot of our SIs and the big 4 accounting firms that work very closely in this space.

They always propose us as the core enterprise solution for this because of the work that -- and the value that we're able to bring to customers. And so we feel good about this pipeline. We feel good about our win rates. But I think just want to be balanced about how we're going to see that business flow over the course of the next couple of years.

Understood. What does it look like in terms of the expanding customer service or customer success to a wider group of customers in terms of do you need to hire more people? Can you give us a sense of what are the thresholds to get this expanded service and how quickly that's going to be implemented?

It's actually one of the -- it's actually, Josh, one of the biggest focus areas for me with AI is our customer success and customer support. I think we could do both. Like we will add people in some targeted places. But more importantly, this is an area where we have an opportunity to make our team members more efficient so they can actually spend more time with customers and less time filling out paperwork on the back end or hunting for information, understanding because as you can imagine, every interaction with a customer requires them to get information and understand what's happening in the customer's environment. .

We believe we can -- we're going to automate all of that with AI, and that will allow our customer success team to spend more time being proactive with customers. We can help cover more accounts. In some accounts, we believe we can help cover just even directly with AI. There are a lot of customers who just want to get answers to the questions that they have or just want us to be able to surface ways in which they can get more value out of the product, and we're doing that through some of the AI tools that are built directly into the product itself.

So this is a -- this is an area where AI will play a larger and larger role for us. The goal is really to just drive more customer satisfaction, drive higher touch. And that is something customers are asking for. They the reason they rely on Vertex is that we solve in many cases, complex problems for them. And so at times, they need us to help sort through that complexity with them. And we'll do that with great people like the ones that we have on the team today, and we'll do that by augmenting those people with AI as well as bringing AI directly to the customer.

The next question comes from Daniel Jester from BMO Capital Markets. .

So, Chris, maybe to sort of pull a little bit more on the AI thread you commented in your prepared remarks about the need to innovate faster. And I suspect -- I love your perspective on how you can do that. And maybe as a follow-up to that, what's the philosophy around inorganic opportunities, tuck-ins on the technology side to help along that journey?

Look, I think that we just -- every company can move faster in this regard. So I'll just say that at the top. And I think we have done some good work, as I mentioned, I like what we've done with smart categorization. I like the copilot that we have in our product, but I'm working with our teams and our focus is on just speeding up everything that we're doing, bringing AI to our product portfolio in more places. For example, we have opportunities, not only to help our customers with categorizing SKUs and making sure we're mapping that to appropriate tax rules, but also helping our customers manage high volumes of tax content, helping our customers with returns filing.

As I mentioned, there's a series of processes that go on in and around everything that we deliver through tax calculation or determination. And this is where I believe we can move more quickly to deliver AI. Much of it is in our road map for this year, but as I tell our teams, our customers don't want it. They want it now. They don't want it in 6 months from now or a year from now. So we're shifting our priority in that direction, and a lot of it is in response to helping our customers get more value from what we do.

And as it relates to inorganic, we will -- we continue to be active in the market through partnerships like the d we have with Kintsugi, and we're looking at opportunities to add capability to our portfolio. And so you'll see us be active where we think that makes sense for the business. But we are looking at all ways in which we can deliver more value to customers, all ways in which we can bring more AI innovation into the company. And we're doing it, I just want to be clear about this, we're doing it both internal to the company itself as well as through our product portfolio.

That's great perspective. And then John, maybe on free cash flow and cash generation. I appreciate the comments that you made in the prepared remarks. Any other color that you would be willing to share about how we should be thinking about the trajectory of cash generation this year?

Yes. Thanks, Dan, for the question. When I think about 2026 and sort of cash flow generation, again, I think, as you saw, we did make some pretty significant investments in 2025. You saw our R&D spend as a percent of revenue in the fourth quarter, jump up to that 22%, again, reflecting our need to lean into product opportunities that are out there. And so that activity was certainly relevant in the fourth quarter, but as I think about '26, I expect that we'll see continued improvement in free cash flow and conversion because of some of those spend initiatives that we've talked about, they will they will be very relevant in the first half of the year. They should start to tail off towards the back end, and we'll see some nice pull-through from both a profitability standpoint as well as from a cash flow standpoint. .

The next question comes from Adam Hotchkiss from Goldman Sachs.

Chris, it's good to speak with you in a public forum. A bit of an offshoot to Dan's question. I think there's a lot being made of this idea that the deterministic nature of tax calc lends itself well to broader-based AI agent intermediation. And I'd love for you to just address what, in your mind, a competitor looking to do something like this would have to do to be taken seriously by an enterprise customer that you currently serve and maybe how you're positioning the company in light of that?

Thanks for the question, Adam. And yes, I think number one, as you said, the deterministic nature of tax calculation is a fortification in and of itself against AI, which is more of a probabilistic approach to the answers that they generate. And so that's number one. And the customers would tell you tell me, we have to be accurate to the penny. And so there's no room for hallucination.

There's no room for approximation. You have to be accurate. So I think look, in the fullness of time, and that could be over a long period, there's a lot that can be done, and I think that there's a lot that will change. But I see it more as an opportunity for us rather than a detriment. Other parts of what we do that are, I think, very much very much in the proprietary nature of our business is all the work that we do around tax content. It's around the rules that we work with our customers to build into their determination engines.

Much of that is proprietary. It's not as simple as doing a web search and there's a tremendous amount of expertise that goes into it. It's not dissimilar, for example. Obviously, there's a lot going on out there in the market in terms of using tools to develop code. And there's been a lot of talk about by coding as an example. But the reality is by coding is a heck of a lot harder than it is for an experienced engineer to pick up a coating tool and get it to help that person become a lot more productive. And in this case, our expertise and tax is something that I think we can use to leverage the power of and it would take a lot longer for an inexperienced person to somehow figure out how to use that to do what we do with the kind of expertise that we have in-house to the company.

Along with that, we're deeply embedded in our customers' infrastructure, deeply integrated with the ERP. Those are not insignificant points of integration. We integrate with point-of-sale systems, we integrate with payroll systems, HR systems, CRM tools. So the integration points in and of themselves are also quite complex in many organizations. And so there's -- all that being said, I think we are -- we sit in a very strong position in the long, long run, anything can happen, but I also believe that we're more well positioned to benefit from AI and to bring AI-related capabilities to our customers then I worry about AI disintermediating us in any sort of a reasonable time frame.

Okay. Great. That's really insightful. I appreciate that. And then, John, when you think about the decel from sort of the 17% to 18% ARR growth you were doing in '23, '24 to the 11% we're at now, how would you sort of stack order what has contributed most of that 600 to 700 basis points of decel across things like entitlements, cross-sell, upsell, attrition, market momentum in cloud ERP. Just any way you think about that breakdown and how you plan on addressing that as we go forward would be really helpful.

Yes, just maybe walking through the breakdown of the different components that drive it. I think we talked a little bit about churn turns down a point or so in that time frame. Again, you've seen entitlement -- you've seen that's one that gets to GRR and working through the NRR calculation. NRR, we've seen entitlements contributing 1.5 points or so to that flow, which, again, we talked a little bit about that and talking about how that. We've seen that kind of ebb and flow and many times that's been really related to specific factors in the business. And so -- that is something that we do anticipate that we ought to see get back to a more normalized rate over time. .

And then again, there's been a little -- there's been some softness in the cross-sell and upsell and those migration activity that takes place. And so, again, all of the different factors are contributing in there. I think 1 of the real strong bright spots that we've seen is that new sales opportunity. New sales grew significantly in 2025. And so I think that was a very strong point for us. But again, there has been a little bit of push as we've talked about throughout the year around that additional entitlements being a big piece of that.

And again, some factors within our control some -- many of those factors are not in our control. And then the cross-sell upsell has been a bit softer, been a little bit softer over time. And I think Chris talked about the ways that we're developing new products to really address customer needs and ensuring we're taking the customer-first approach into addressing them on our product map as we move forward.

The next question comes from Brett Huff from Stephens Inc.

And Chris, I'll echo the welcome, looking forward to working with you, and John and Joe, nice to speak with you also. One more question on AI relative to the entitlements question. Some of the folks we've been talking with, given the AI disintermediation sort of hair on fire hysteria. I want to ask the explicit question. Have you seen any AI tech budget crowding out that might have driven the entitlement slowdown or some of the ARR slowdown you guys have seen? I know it's probably hard to define -- to discern that, but I wanted to ask that question explicitly.

We have not seen that explicitly in our -- in the activity that's going on in the field. In fact, we have customers in the AI space ourselves that are doing business with us, which is a good testament to how they see the strength of our solution. But it's hard to characterize where all the budget is going, but we have not seen that in our particular business as of yet.

Okay. That's super helpful. And then on the invoicing, we're really excited about that opportunity and think the rate to win for you all is great. but know that you were working on sort of getting to more countries as quickly as possible with the tech that you guys bought, just knowing there's the mandates coming down the pipe, so that people are starting to make decisions. Can you give us an update on that? And are we getting to the critical mass relative to the mandate timing that were set up to be well positioned to win some of those deals?

We are, Brett. We're in 39 countries now. That was a big push that the company made over the last -- the back half of last year. I would say, and it's been a big push for us going into and through 2026. The Acosio team has been executing really, really well in this regard as well as has the rest of the Vertex team. Now, we've now got a combined compliance and e-invoicing offering, which allows us to take -- basically connect our customers that calculation with e-invoicing because you think about this, it's an end-to-end compliance solution that our customers, particularly the large companies ultimately want. But on the ground, we just had a mandate from Belgium, which we're in market, able to serve. We'll be ready for France as it comes up, ready for Germany as it comes up. And we've been marching down the path of making sure that we've got coverage for all the major countries where we sell and where our customers are focused.

The next question comes from Patrick Walravens from Citizen JMP Securities.

And, Chris, let me add my congratulations. We're all really excited when we saw that you were taking this role. So this is sort of the onetime gasp of question, I think. But the stock's gone from $56 to $15 in a year, right? And investors just want to understand, I think, what we're wrong. And you coming in from the outside, having had these 3 months gives you a really unique perspective on it? First after recovery is acknowledging the problem, right? So you touched on a number of things. You touched on the pace of innovation, down market churn, SAP didn't come in as expected. But what did you figure -- what was the root cause what was the biggest thing. If you look at the Sridar, when he came into Snowflake, I think he determined that the product velocity just wasn't there under prior administration. But in this case, what do you think the root cause was?

Here's -- first of all, Patrick, thanks for the question. And I definitely know that none of our investors want to see that kind of activity. And obviously, my goal is to actually turn it around in the opposite direction from where it's been. There's a few things. One are some of the factors we talked about on the call. Entitlement growth did slow. We had a big entitlement year in 2024. That came back down in 2025, and that was a factor in our own growth. We did see more attrition in 2025 than we had seen in previous years. And that's -- I think some of that is due to growth in smaller customers that we didn't serve as well as we could, which is why we're expanding some of our focus there with our customer success teams to make sure that we're we're solving their problems and that we're proactive about making them successful.

That's something that's not unique in the SaaS business for many of our peers and others out there in the market landscape. And so we're taking a more proactive approach, particularly around that cohort. And then I do think that there is more need for us to move faster on our product innovation as well. It's a little -- it's congruent with what I spoke about on the call, which is our customers want to see us move more quickly. Like as proud as I am of the work that we've done around AI. As I also mentioned, there's so much more that we could be doing. And we're not at a point yet where we're generating meaningful revenue from that part of our business, and that's a place where we just got to move more quickly, and pivot our product portfolio more in that direction to give more value to our customers. And so that's a big piece of what I'm focused on.

I think the opportunity -- I mean I know the opportunity is there. That's 1 of the reasons why I wanted to come to Vertex. But there's definitely a speed element for us that we have to improve. A lot of that is about our product delivering value from our product portfolio it's a place where I'm very focused personally with our teams because I think this is something that if we can do it well, if we can move more quickly here, and you see some signs of that in terms of what we've done with e-invoicing and compliance. But even there, the teams and I are pushing very hard to go faster to meet more of our customers' needs more quickly than we have in the past.

The next question comes from Alex Sklar from Raymond James.

This is actually John Mason on for Alex. Chris, I realize you talked about it quite a bit on the call here in the prepared remarks and the Q&A. But I wanted to ask on AI. Have you seen customers adopt specific budgets targeted towards AI investments -- and any color you can share on how you're benefiting from those budgets with smart categorization? Or if it's acted as a spark around your product road map? Just anything you can touch on there are tapping into those AI budgets.

I'm asking -- thanks, Alex, for that question. I'm asking that question every customer conversation I have is do you have a mandate? Do you have a specific budget? Is there something that's coming down from the CEO or the CFO, CIO, where they're expecting you to do certain things. And I will tell you the answers are kind of all over the map. Some organizations are front foot forward on this. Others aren't quite sure where they need to be. What I will say is everybody is open to getting more value, but I will say I haven't seen, like there's not across-the-board mandate to do more with AI.

However, what I am hearing from customers is that they want -- if they can show value with AI, they believe they're able to get budget for it. And that's something that we'll want to -- we're going to be leaning into a lot harder because we think that's where our opportunity exists.

Okay. Great. That was helpful color there. And then I realize it's been touched on, but John, NRR has moderated some given the entitlement headwinds that you've called out and things like that. But given that dynamic and maybe the mixed macro backdrop here moving forward, can you talk about what exit rates really embedded in your outlook? And I realize it's been relatively consistent. But how should we think about pricing as a growth level?

Yes. No, thanks for the question, John. I appreciate it. In terms of NRR, you're right. I mean it has -- we have seen that moderate a bit over the last couple of years. And when I think about sort of where the exit rate is, we do think there ought to -- we should be able to grow through our implications of the guidance that we've delivered. There should be some growth in that coming out. We don't expect to snap ourselves back to kind of where we started the year. But I think we do think that there is opportunity to grow that and see some nice activity and good movement over time. And we've tried to build what we've seen in the market in 2025 and into the budget and then with kind of what our -- what the pipelines look like and how the environment feels? I think that's been built in nicely. .

And in terms of pricing, I think pricing has continued to be a big part of the algorithm. It's something that we always are very mindful of because again, delivering value to our customers and having -- and making sure that they understand that the value that we're delivering allows us to be very front foot leaning on the pricing toggle. So that's just an area that we continue to rely on, again, and we need to continue to deliver value to make that a continued large part of the algorithm.

Ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the conference back over to Joe Crivelli for any closing remarks.

Thanks, everybody, for joining us today. Apologies to the folks in the queue that we didn't get to. We'll certainly get to you in the follow-up calls. If anyone else has follow-up questions or would like to schedule more time with the team, please reach out to me at [email protected], and have a great rest of your day. We look forward to speaking with you in the coming weeks.

Ladies and gentlemen, the conference is now over. Thank you for attending today's presentation. You may now disconnect your lines. Goodbye.

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 customer base and discontinuation of legacy product usage by customers who have migrated to our new cloud solutions.

In Q3, we experienced an unusual impact in these areas. Certain enterprise customers, including Big Lots, Party City and JOANN Fabrics, canceled licenses due to bankruptcy. This impacted retention metrics by approximately $2 million. Additionally, we had 3 large customers who had previously migrated to our new cloud platform, complete their own internal legacy ERP migrations faster than previously anticipated, which enabled them to downsize that portion of their subscription fees with us. This impacted NRR by another $2-plus million. Beyond these anomalies, management was encouraged by the progress achieved across several of our ongoing growth initiatives. On e-invoicing, ecosio had a strong quarter and contributed revenue of $4.1 million.

This is an increase of approximately 30% from their run rate in last year's third quarter when we acquired the company. We have landed over 100 customers since declaring general availability in late March, all fit nicely into our expected land and expand experience. Additionally, we are seeing success with our integrated product strategy, which includes both e-invoicing and value-added tax compliance in one platform with full end-to-end documentation and audit support. In the third quarter, we continue to see an influx of new customers driven by upcoming e-invoice mandates, including Belgium, France and Germany, which we expect to accelerate as those actual deadlines approach. Ongoing cloud migrations with ERP vendors, including our partners, SAP and Oracle remain solid with pipeline build improvements appearing.

And the expense control initiatives we discussed last quarter are driving improving earnings leverage as demonstrated by our strong adjusted EBITDA and free cash flow results this quarter. This quarter's progress on our long-term growth initiatives validates we still have significant greenfield opportunity with enterprise customers that are currently using legacy homegrown or manual solutions for indirect tax compliance and are migrating to the cloud. We continue to believe we have approximately 3x opportunity with our existing installed base, which we will penetrate by expanding usage throughout their organizations or by cross-selling additional products, and we have major tailwinds in front of us from the upcoming e-invoicing mandates in major countries like Belgium, France and Germany.

Demonstrating our confidence in Vertex's long-term growth opportunity, today, we announced that the Board of Directors has authorized the repurchase of up to $150 million of Vertex shares in the open market. Coupled with our progress on several growth areas, I'm excited with the number of AI initiatives the team advanced in the quarter. We are executing on 3 fronts to commercialize AI, which are focused on enabling new logo wins and wallet expansion with existing customers, driving enhanced customer retention through targeted ecosystem interoperability and participating in new segments ripe for disruption.

We are seeing ongoing traction with our smart categorization offering. And last week at our annual customer conference, we highlighted several new agentic capabilities on our cloud platform. These are focused on workflow capabilities and data management. The customer conference was our largest yet with strong attendance from alliance and tech partners highlighting the energy around our customer segment and market opportunity. And the AI sessions were clearly the most oversubscribed sessions by attendees. Additionally, at Exchange, we shared some of the transformational work we are doing, including our pioneering of the first-ever agent-to-agent tax configuration capability for Microsoft Dynamics 365 finance and supply chain. This is another step forward in creating a differentiated experience for Microsoft customers, bringing enterprise innovation to the mid-market.

In October, we also launched Kintsugi powered by Vertex, which enables SMBs to automate key compliance functions while providing real-time dashboards for jurisdictional liability and exposure tracking. Powered by the Vertex tax engine, it delivers the same trusted accuracy and global content that enterprises rely on. In an AI-native experience built for agility and scale, this is just the first of many such new products and new initiatives that we expect to launch in partnership with Kintsugi. Exchange was also a clear reminder of the stark difference in tax compliance precision requirements between the enterprise customer and the SMB segment where good enough is sufficient. These complex global multinational enterprises remain very cautious about how AI is being considered in their departments due to inherent limitations.

Several points were clear from our discussions there. Enterprise customers know that our solutions operate in speed and on a scale they must have to support their business embedded in the workflow of the critical order-to-cash process. Our implementations are complex. It's not uncommon for Vertex to be connected to multiple instances of SAP, an instance of Oracle in another division, a legacy ERP solution in still another as well as multiple billing and CRM solutions. And we are providing tax answers across that architecture with no latency and enterprise-level accuracy. These enterprise customers cannot afford for a single customer to experience transaction delays as an AI engine spins through scenarios to deliver a tax answer.

They rely on the accuracy Vertex provides in every transaction. Enterprise customers are audited constantly by taxing authorities and cannot afford any risk that a probabilistic AI-driven outcome subject to hallucinations delivers an inaccurate tax answer, and they need accountable traceability for tax positions they take in their compliance. In addition, we estimate that as many as 70% of the tax rules in our content database are not easily mined by AI-driven web scraping. In the United States, below the level of state and county, tax rules for municipalities and tax overlay districts are hard to curate, sometimes embedded in meeting minutes that are not easily sourced on the Internet.

And in some districts, finding the latest tax rules requires a person-to-person phone call, and all of this requires human judgment and professional curation to codify into the tax content database. In addition, these tax rules are constantly changing at a historic pace, and this is likely to get worse with reduction in federal funding to states as a result of the recently approved tax legislation. I'll now highlight a few business wins. We saw improved momentum in the SAP ecosystem this quarter, driven by ECC to S/4HANA conversions. These transitions created meaningful opportunities for Vertex to expand our footprint with existing customers and win new logos.

In the third quarter, we partnered with an existing specialty retail customer on a major ECC to S/4HANA transformation. As part of this initiative, the customer advanced their plan to standardize on Vertex, transitioning additional tax functions from a competitor to our cloud platform. This expansion resulted in mid-6 figure of new revenue and reinforces our role as a strategic partner in their modernization journey. Another long-standing customer in the manufacturing industry launched a company-wide transformation project this year, including a migration from ECC to S/4HANA. As part of their transformation, the customer added VAT calculation across its operating regions and added several SAP tools, resulting in mid-6 figures of new revenue for Vertex.

This is an example of how our business grows during migration. In addition to receiving a significant like-for-like increase, many customers use this as an opportunity to license additional capabilities. An existing customer that is a leading North American energy services company expanded with Vertex to cover 2 companies it recently acquired. This customer, which is currently operating on a legacy Oracle ERP solution, selected our private cloud solution and will eventually migrate its entire infrastructure to the cloud as part of an Oracle Cloud transformation. This customer expansion drove low 6 figures of new revenue.

While our AI-based smart categorization product is still in limited availability, we added a major grocery store chain to our customer base for this new product. The customer staff was struggling with the labor-intensive nature of tax categorization in its delivery business and is excited about the ability to automate this process. This cross-sell resulted in 6 figures of new revenue for Vertex. This gives you an idea of the magnitude of sales opportunities with this AI-driven application. At present, we are focusing on the retail industry, hence, the new business win. But over time, we will expand our capabilities to cover other industries. A leading aerospace and defense contractor recently selected Vertex as its preferred indirect tax solution for one of its consumer-facing subsidiaries, fully displacing a competitor across its global operations, including Brazil and India.

This competitive win underscores the strength of Vertex' tax content coverage in complex jurisdictions and is expected to generate mid-6-figure annual revenue. In addition, a global pharmaceutical company selected Vertex as its first external indirect tax provider to support its S/4HANA transformation. This new logo win was driven by Vertex' proven global tax coverage, deep expertise in the pharmaceutical industry and ability to manage complex requirements. This new business win, which was brought to us by our partner, EY, will also drive mid-6 figures of new revenue for Vertex. During a cloud transformation initiative, a global marketing services company replaced an incumbent competitor with Vertex, citing concerns about scalability and infrastructure flexibility.

The customer valued Vertex's agnostic deployment model, which aligned with the CIO's preference for private cloud and option the competitor did not support. This strategic win sourced through our partner, Grant Thornton, represents a 6-figure new business opportunity. Finally, during the quarter, we won an e-invoicing opportunity with a global real estate investment trust, which is preparing for upcoming mandates in Belgium, France and Germany. We will also cover Italy and Spain for this customer. Of note, this customer was driving mid-6 figures of revenue for Vertex prior to this new business win, e-invoicing will drive high 5 figures of new revenue.

Before I turn the call to John, let me address my succession that we announced in October. I approached the Board of Directors in early 2025 and told them of my plan to retire after 26 years at Vertex. However, I did not set a specific time line as we wanted to make sure we had the right candidate in place. We launched a comprehensive search process led by renowned management recruiting firm, Spencer Stuart, and considered both internal and external candidates. Ultimately, we found an exceptional new CEO in Chris Young, who will officially join the company next week. Our search surfaced outstanding candidates from top companies around the world, but Chris stood out as the clear choice. His strategic vision, experience in our ecosystem through his prior role as Executive Vice President of Business Development at Microsoft and deep familiarity with global enterprises all point to his ability to drive growth and value creation.

What truly sets Chris apart, however, is his commitment to fostering a positive performance-driven culture, grounded in respect for people, a quality that aligns closely with our values and leadership philosophy. In addition, Chris was at the vanguard of Microsoft's push into AI and helped shape Microsoft's investment agenda in artificial intelligence and other frontier technologies. His forward-thinking perspective in that regard will be extremely valuable to Vertex and our shareholders. As for me, I'm not going anywhere. I'm merely transitioning. I will stay on as Nonexecutive Chairperson of the Board, where I will bring all my energy in the months ahead to support Chris and his transition. John will now take you through the financials.

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 million for the quarter, which represents 21.2% of revenue. Selling and marketing expense was $43.4 million or 22.6% of total revenues, an increase of $5 million and approximately 12.9% from the prior year period. And general and administrative expense was $38.4 million, up $2.6 million from last year.

Adjusted EBITDA was $43.5 million, up 12.7% compared to 38.6% for the same period last year and exceeding our quarterly guidance. This represents an adjusted EBITDA margin of 22.6%. As a reminder, adjusted EBITDA margins are being impacted in 2025 by accelerated investments to support the 2 acquisitions we made in 2024 related to e-invoicing and artificial intelligence. On the former, we are investing in ecosio, which we acquired in August 2024 to accelerate country coverage and broaden our go-to-market infrastructure. This represents an investment of approximately $16 million to $20 million in 2025. On the latter, we're investing $10 million to $12 million this year to productize our smart categorization product and adopt AI technologies in other areas of the business. In the third quarter, operating cash flow was $62.5 million and free cash flow was $30.2 million.

We ended the third quarter with over $313.5 million in unrestricted cash and equivalents and $300 million of unused availability under our line of credit. As David mentioned, the Board has authorized a share repurchase of up to $150 million. Now turning to guidance. Reflecting the factors mentioned earlier, including customer bankruptcies and faster-than-expected legacy platform migrations, we now expect fourth quarter revenues of $192 million to $196 million. And for the fourth quarter, we expect adjusted EBITDA of $40 million to $42 million, reflecting an adjusted EBITDA margin of 21.1% at the midpoint. For the full year of 2025, we now expect revenues of $745.7 million to $749.7 million, Cloud revenue growth of 28% and adjusted EBITDA of $159 million to $161 million, reflecting a margin of 21.4% at the midpoint. David will now make some closing comments before we open up for Q&A. David?

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 [email protected]. 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.