Vertex, Inc. Class A Common Stock 2026 Q2 Earnings Call

Hello, thanks for joining us to discuss Vertex's second quarter results. Chris Young, our President and Chief Executive Officer, John Schwab, our CFO, are with us today. As noted on slide two, 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. Our second quarter results demonstrate two 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 four percentage points year-over-year to 25%. This 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, report it to the relevant authorities, 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're pursuing across tax determination, e-invoicing, reporting, returns, and compliance. 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 six-figure enterprise e-invoicing deals in the second quarter, including a mid six-figure win for an existing customer driven by mandates in just two 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 roadmap to demonstrated customer demand and working to integrate our capabilities across Vertex, Ecosio, and Brinta. Q2 represented meaningful progress, we are focused on consistent execution in this business to grow it into a material contributor to our overall growth. Let me turn to AI. I've been clear that becoming AI first has two 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, 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 three 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. 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-six figures of additional revenue for Vertex.

Second, we secured a high six-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. 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-six-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 crossed the Microsoft, Oracle, and SAP ecosystems and included both focused initial deployments and broader platform engagements. The first example is a low six-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 six-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 six-figure win with a building products distributor.

In this case, transaction volume growth was the catalyst, 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 install base, 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. 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. 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.