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Good day, and welcome to the Vertex Inc. Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [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 third quarter financial results. I'm Joe Crivelli, Vice President, Investor Relations. David DeStefano, our President and CEO; and John Schwab, our CFO are with us also today. During this call, we may make forward-looking statements about expected future results. Actual financial results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. In our remarks today, we will also refer to non-GAAP financial metrics. A reconciliation of these metrics to GAAP is provided in today's press release. The call is being recorded and will be available for replay on our Investor Relations Web site. I'll now turn the call over to David.

Welcome, everyone, and thank you for joining us. In the third quarter of 2024, Vertex delivered very strong financial results, while advancing our long-term strategic and financial priorities. From a financial standpoint, we delivered strong revenue growth, adjusted EBITDA and free cash flow, and we were GAAP earnings positive for the fourth quarter in a row. In addition, we achieved a significant strategic goal in late August when we completed our announced acquisition of ecosio, a fast growing EDI and e-invoicing company based in Austria. We are very excited to have ecosio as part of the Vertex family. We believe our combined solution will be a springboard for sustained growth in international markets where value-added tax is the main source of indirect tax revenue for governments. Our combined Vertex e-invoicing solution is powered by our global tax content and built on our data platform. This allows our customers to effectively manage the entire indirect tax workflow from tax determination and compliance to planning and audit defense through a single platform. This creates tremendous value for our Vertex community. At a customer event in Germany in September, we previewed our offering with 40 key customers and prospects as well as representatives from our partner ecosystem. The excitement was clear with one of our largest customers telling us we have changed the competitive landscape. This was then topped by the experience I had at our annual customer conference last week, at this event, we enjoyed record customer and partner attendance. We previewed several exciting new AI capabilities, including our recently released Copilot and our soon-to-be released smart categorization offering. We also highlighted ways we are enhancing our support offerings based on customer input and unveiled significant enhancements to our global partner enablement program. The strong relationships we maintain drives our ongoing success and we never forget that our customers' total experience matters. That shows up at customer events throughout the year. I left both events extremely energized and convinced that we have the right strategy to help our enterprise customers and prospects tackle the compliance challenges of today and tomorrow. Now turning to the financials. Revenue was $170.4 million in the second quarter, up 17.5% year-over-year. Software subscription growth was 20.6% and cloud revenue growth was 29.9%. This includes a $1 million revenue contribution from ecosio. John will discuss the organic financial results in a moment. The earnings power of our financial model is demonstrated by adjusted EBITDA of $38.6 million in the third quarter, which represents an adjusted EBITDA margin of 22.7%. Adjusted EBITDA margin has expanded in every single quarter since we completed our multiyear growth investment program in mid-2023. Demonstrating the quality of our earnings, free cash flow was $18.4 million in the third quarter. In addition, GAAP net income was $7.2 million or $0.04 per diluted share. I'll now share some additional key performance indicators. Note that these figures are only and do not include the impact of Systax or ecosio, which John will cover in a moment. NRR was 111%, which is up from 110% in the second quarter and equal to 111% in last year's third quarter. GRR was 95% in the third quarter, which maintains our targeted best-in-class range of 94% to 96%. Annual recurring revenue was $563 million, up 16.1% from last year's third quarter. Cloud revenue growth was 28.5% in line with our stated target for the year. Scaled customer count, which represents customers delivering annual revenue over $100,000, grew 13% year-over-year and average revenue per customer was $131,400, up 16.6% from $112,690 in last year's third quarter. My leadership team and I are laser-focused on executing our strategy as we believe we have room to continue to grow revenue, further improve profitability and free cash flow and build on our market-leading customer metrics. This is because we are in a unique segment of the software market. Indirect taxes are incredibly complex. For example, we now maintain over 1 billion effective rates and rules in our differentiated tax content database. This content fuels all our solutions. Indirect taxes impact every single transaction and every single company in every jurisdiction around the world and yet so many enterprises are still calculating and reporting indirect taxes based on legacy internally developed software and systems that were built decades ago. For these companies, things like ERP conversions, mergers and acquisitions and audit pressure from taxing authorities caused their legacy systems to be inadequate to support their increasingly complex and sophisticated business. This, in turn, makes switching to an expert provider like Vertex an absolute necessity. In addition, we have two multiyear tailwinds coming our way that will accelerate the migration from homegrown to our cloud solutions. The first of these has received a lot of attention from Wall Street lately, the coming super cycle of ERP conversions that is partly driven by legacy ERP systems that will be end of life by leaders in the space. And the second is the reason we bought ecosio last quarter, the coming wave of e-invoicing regulations that will make countries with VAT regimes for indirect tax fertile hunting ground for Vertex's global indirect tax platform. Net-net, we believe the opportunities that are in front of us are sizable and will fuel revenue growth and profitability for years to come. I'll now highlight some notable wins in the quarter. It was an exciting quarter on the new business front with new logos. So I'll start there. We landed a very high-profile new logo deal with a major electric vehicle manufacturer. This new scaled customer moved to Vertex from a competitive solution that didn't support their business effectively. This customer's operating environment is unique in that they use a custom homegrown ERP system in turn this introduces a level of complexity and customization that gives Vertex a major edge over competitors. The result was nearly seven figures of new recurring revenue for Vertex across a comprehensive solution set including sales, use and VAT tax calculation, sales tax returns, address cleansing and exemption certificate management. As an example of a company that's switched from a homegrown solution in the third quarter, we won a mid six-figure new contract with one of the largest fast food restaurant chains in the world. This company decided to move to a vended solution due to an Oracle cloud transformation. We had several exciting wins in Europe during the quarter as well. Our integrated Vertex ecosio solution won the day for an e-invoicing opportunity with a SaaS software company based in Germany. This customer wanted to get ahead of the upcoming E-invoicing mandate in Germany and conducted an RFP and evaluated several competitors in the space. While this was a modest five-figure new business win it evidenced the strength of our e-invoicing solution as we prevailed over several of the most formidable competitors in the space. We won a six-figure new logo deal for VAT calculation and compliance with a leading Swiss agricultural company. This customer previously used a homegrown tax calculation solution, but the level of complexity of their business as well as an upgrade to their commodities trading platform move them to look at vended solutions, Vertex prevailed with a global solution, including capabilities for Brazil. And we won a six-figure deal with an international materials manufacturer based in Austria, this company is planning for an SAP S/4HANA migration in 2025. This company selected Vertex in part due to Systax as they have extensive operations in Brazil. In addition, we had a strong referral from of our top accounting partners. Now turning to wins with existing customers. One of the largest technology companies in the world expanded its entitlements with Vertex in the third quarter. This led to an annual entitlement increase across a comprehensive solution, including sales, use and value-add attacks, communications, tax content, retail tools and SAP accelerators. This was the largest entitlement ever done in our 46-year history, and increased well into the seven figures that was necessitated by the growth of our customers' business. A cloud transformation project led a global pharmaceutical company to expand its relationship with Vertex. The company purchased additional entitlements for the areas of the business that we did not previously serve across a very comprehensive solution that includes calculation for sales, use and VAT tax as well as Vertex us tools, SAP Accelerator, exemption certificate manager address cleansing and other add-ons. The net result was a high six figures of new revenue for Vertex, nearly doubling our cloud business with this long-standing customer. An international industrial manufacturer expanded with Vertex to consolidate systems and become more efficient. The company, which had grown through acquisition was using Vertex for sales tax calculation and compliance in certain segments of this business as well as competitors and manual processes in others. By standardizing on Vertex, the company can improve accuracy and efficiency. As a result, we now provide the customer with a comprehensive solution set including tax mapping tools, address cleansing and exemption certificate management alongside the original sales tax calc and compliance solution. The last two customer expansions are very notable because they demonstrate the reality that when we land a new logo, it's very unlikely that the company is implementing our solutions across all the operating units of its business. Whether they only have challenges in one part of the business initially or they subsequently make acquisitions, there are always opportunities to expand our software footprint as we prove out our capabilities and earn their confidence. This is an essential element of our long-term success. I really appreciate how excited investors are about the upcoming transition in the SAP ecosystem from ECC to S/4HANA could mean for Vertex. In the third quarter, an existing customer that is a global manufacturers of semiconductor equipment, executed an enterprise-wide transformation. As part of this process, they expanded their use of Vertex O Series globally to support VAT compliance obligations that previously have been managed natively within their ERP. And while I don't think this example is necessarily typical of what we will see across our customer base for this customer, the transition led mid-six figures of new revenue. A more than ten-fold year-over-year increase across increased entitlements for sales tax, the addition of consumer use tax and the licensing of a cross-section of SAP tools. And finally, I will highlight that one of the world's largest equipment rental companies expanded with Vertex in conjunction with a company-wide cloud transformation project. The customer moved from a legacy on-prem offering to our O Series cloud offering and selected us for best-of-breed leasing, sales tax and consumers use tax capabilities. This resulted in mid-six figures of new revenue for Vertex, a four-fold year-over-year increase with this customer. In closing, it was a great quarter for Vertex with strong financial results positive momentum on the new business new business front with both and existing customers. Our business is executing as we expected. And best of all, we have plenty of runway to continue to drive revenue growth and earnings leverage. John will now take you through the financials. John?

Thanks, David, and good morning, everyone. I'll now review our third quarter financial results and provide guidance for the fourth quarter full year of 2024. In the third quarter, revenue was $170.4 million up 17.5% year-over-year. Ecosio contributed $1 million of revenue during the quarter after it was acquired at the end of August. Accordingly, on an organic basis, revenue was $169.4 million and revenue growth was 16.8%, exceeding the high end of our revenue guidance for the quarter. True up revenue, which represents a catch-up payment typically billed as part of the renewal process when customers exceed their entitlements was about $2 million higher than expected in the third quarter. This is a benefit to having large and growing customers that are seeing value from our software and true-up revenue positively impacts ARR growth when the renewal process is completed. Subscription revenue increased 20.6% period-over-period to $146.3 million. Services revenue grew 1.8% to $24.2 million. The slower services revenue growth this quarter reflects the impact of our previously discussed effort to direct more implementation opportunities to our channel partners who are an important referral source for new software opportunities. In essence, we are trading near-term implementation services revenue for longer-term recurring software revenue. Cloud revenue was $71 million in the third quarter, up 29.9% from last year's third quarter and ahead of our guidance for the year. ecosio added about 1 point to cloud revenue growth. Annual recurring revenue, or ARR, was $576.8 million at quarter end. ecosio added $8.1 million to ARR and Systax added $5.9 million. Excluding these amounts, organic ARR was at 16.1%. Net revenue retention, or NRR, was 111% up 1 point sequentially and equal to last year's third quarter. Our 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, for Vertex standalone was $132,422, up 17.5% from last year's third quarter. Including the impact of ecosio and Systax, AARPC was $118,800. For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to our GAAP results in this morning's earnings press release. Gross profit for the third quarter was $126.2 million, and gross margin was 74%. This compares with gross profit of $103.4 million and a 71.3% gross margin in the same period last year. Gross margin on subscription software revenue was 80.5% compared to 78.3% in last year's third quarter and 80.4% in the second quarter of 2024. And gross margin on services revenue was 35% compared to 35.3% in last year's third quarter and 36.8% in the second quarter of 2024. Turning now to operating expenses. In the third quarter, research and development expense was $12.9 million compared to $15.4 million last year. With capitalized software spend included, R&D spend was $30.1 million in the third quarter, which represents 17.7% of revenue. Selling and marketing expense was $38.5 million or 22.6% of total revenues, an increase $7.5 million and approximately 24.1% from the prior year period. And our general and administrative expense was $35.8 million, up $4.9 million from last year. This was about $5 million higher than both the second quarter of 2024 and the year ago quarter due to timing of expenses that shifted from the first half to the second half of 2024. Adjusted EBITDA was $38.6 million, an increase of $12 million or 45.1% year-over-year and exceeding the high end of our quarterly guidance by $3.6 million. In the third quarter, operating cash flow was $41.4 million and free cash flow was $18.4 million. We believe that we can continue to deliver strong positive free cash flow on an ongoing basis. I'll note that the fourth quarter is historically our strongest free cash flow quarter of the year. On a trailing 12-month basis, we have generated $88.7 million of free cash flow for an EBITDA to free cash flow conversion rate of 60.8%. We believe over the long-term, we can increase this to 65% to 70%. Our trailing 12-month free cash flow margin was 13.8%, the highest level since the fourth quarter of quarter of 2020. We ended the third with over $279 million of unrestricted cash and cash equivalents and investment securities totaled $7.5 million. For additional liquidity, we also have $300 million of unused availability under our recently amended line of credit. Now, turning to guidance, all of which now includes our expectations for ecosio. For the fourth quarter of 2024, we expect total revenue in the range of $175 million to $178 million, which would represent 13.9% year-over-year growth at the midpoint. Ecosio is expected to contribute approximately $3 million to the fourth quarter revenue and services revenue growth is expected be flat in the fourth quarter, reflecting our strategy of directing additional services opportunities to our implementation partners. And adjusted EBITDA is expected to be in the range of $33 million to $37 million, which would represent a year-over-year increase of approximately $3 million at the midpoint. This results in full year 2021 guidance of total revenue in the range of $663.3 million to $666.3 million, representing annual revenue growth of 16.1% at the midpoint. And adjusted EBITDA in the range of $146.8 million to $150.8 million, representing a year-over-year increase of $48 million at the midpoint and a full year adjusted EBITDA margin of 22.4%. And full year cloud revenue growth is expected to be 28%. To assist you in forward modeling, ecosios' 12-month revenue for 2025 is expected to be approximately $16 million. In addition, Ecosio is expected to be dilutive through adjusted EBITDA by approximately $3 million to $4 million per quarter through 2025. David will now make some closing comments, before we open up for Q&A. David?

Thanks, John. I continue to be very pleased with the performance of the entire Vertex team. 2024 has been a tough year for many SaaS companies, but Vertex continues to execute on our opportunity and deliver extremely strong financial results. I love where Vertex is positioned right now. We believe we are the undisputed market leader in the enterprise sector. We are proud to serve large sophisticated companies that expand, make acquisitions, enter new markets and ultimately grow their business with us. We maintain long-standing trusted relationships with the best technology providers, implementers and accounting and consulting firms in the business. We provide a world-class customer experience, so that we retain these customers year after year. This is reflected in our best-in-class gross revenue retention. Our recent HDI certification and TrustRadius recognition further reaffirm our commitment to continuously enhancing the quality of support provided. And we have a financial model that delivers mid to high teens revenue growth year in and year out, along with strong profitability and free cash flow. Most importantly, we have multiple tailwinds in our business that we believe will propel us to new heights in the coming years. If you haven't already done so, please mark your calendars for our upcoming Investor Day on March 19, 2025, in Center City, Philadelphia. During the event, we will provide an update on our long-term financial targets, as well as a deep dive on our strategic plan. I'm also excited to give investors exposure to other members of the Vertex leadership team, a group of experts that I'm extremely proud of and who are the ones piloting this business to the great financial results you've seen since we went public in 2020. With that, operator, please open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joshua Reilly with Needham. Please go ahead.

All right. Thanks for taking my questions and nice execution here in the quarter. There's been a lot of talk, obviously, about the super cycle of ERP migration projects. Is there any way you can characterize the current set of projects driving your business today versus a few years ago? And is that what you're seeing that there is an acceleration of these migration projects -- or do you even see more of an acceleration in leads coming in 2025?

Yeah, Josh, thanks for the question. I think as we raised our guidance in the second half of the year, it was because we had visibility to good activity for both Q3 and Q4. If you go back to Q2 call, a lot of it was driven by activity we're seeing in both Oracle, OCI and SAP's migration programs. I will say that that continues to be a source of our success. I also believe that the regulatory pressures that we're seeing around the world are continuing to drive demand for us. So I think both of those will continue to play out in 2025.

Got it. And then just on the e-invoicing opportunity, is there any country specifically in 2025 that are going to be -- we should be aware of that are going to be enacting a mandate? And does that create a sense of urgency for you either in terms of the integration process or from a sales perspective getting out there in specific countries in Europe? Thank you.

Yeah. I'm thrilled with our partnership that we had started months before the acquisition that we actually launched our solutions. So we are integrated from a go-to-market activity already. We have a solution that we're actively selling. So from that perspective, I think we're well-prepared for all the mandates. Those countries move, Josh, on a regular basis. France and Germany are both in the queue, and it's something we're going to be watching coming out of -- as we get into 2025 in terms of the adoption, then going to -- both those countries going forward with mandates that they have in place. But our go-to-market activity is full force here as we're starting in Q1 of 2025.

Thank you.

The next question comes from Steve Enders with Citi. Please go ahead.

Great. Thanks for taking the questions this morning. I guess, I want to follow-up on, kind of, the SAP ecosystem question. I understand that cycle is coming or kind of tight here. But some like last quarter, maybe it was a little bit slower than expected and just would be great to get your view on how you expect that migration cycle to play out from here and how you're thinking about that becoming a contributor to net new moving forward?

Yeah. Sure, Steve. Thank you for the question. It did -- you're right, we did highlight in the first half of the year, it did play out a little slower. I think we see if you read some of the third-party reports like Gartner and others, they all talk about current adoption or migrations have moved a little a little slower than some of the vendors expected. So I think that's going to create more of a backwards fill of demand as we move forward in 2025 and 2026. Remember, the midsized companies can move quicker on this. The large enterprises sometimes take a little longer. So they'll start earlier, but there's fewer of them. And I think that's kind of what we've seen as we look at our demand cycle. So it's been solid, but it's why I'm encouraged that we have runway to grow here in '25 and beyond, because that's still going to play out with more activity, I would assume as we move forward. I mean it's a little different. There's a little more urgency or a little more likelihood in the U.S. from perspective of the adoption of sales tax engines. And we're seeing that very clearly. In Europe, it's slightly different from that perspective. There are more mature market for that -- for the determination engines.

Got you. Okay. That's helpful context around that. And then, I want to ask on the partner ecosystem, and I guess, beyond SAP and Oracle. Just kind of what are you seeing with those other partnerships that you've been focusing on broadening out and …

Yeah.

… kind of be giving an update there?

Yeah. Sorry, I did mean interrupt you there, Steve. The Microsoft and Workday activity, Shopify would be the three, I'd highlight on some really nice work with all three of them seeing good activity. The Microsoft team has been phenomenal to work with, and we've really seen some interesting things there and then and Workday stepped up in some nice ways as well. So I think activity across all those remain solid. Our team is really focused on execution, making sure we're delivering quality solutions and have the right go-to-market motion with their teams.

Okay. Perfect. Thanks for taking my questions.

Yeah. Sure.

The next question comes from Chris Quintero with Morgan Stanley. Please go ahead.

Hey David, Hey John, congrats on another standout quarter here. I wanted to follow-up on that whole ERP discussion. It's really interesting to see you kind of call that out here. So I wanted to ask really kind of about the timing? So when these migrations happen and your expectation around that, how long does that typically take before someone like a Vertex and get brought into those big transformational projects?

Yeah, Chris, that's a really good nuance question about our space. Obviously, when a business is making a decision to migrate to one of the larger, more modern cloud platforms, Tax is not at the forefront of that. So it's going to be several quarters following a decision by company to actually say, hey, we want to go live. We're going to start a migration process. They're going to organize. They're consulting partners and all. And they're going to start with some of the largest parts of the business and how they need to move through that cycle. Tax is going to come in well before they go live, because you have to prove out your invoice can work in every country you're doing business. So it's a mission-critical part of the implementation. So it does get brought in, but it's typically going to lag few quarters, probably two quarters from when the customer starts the process. And those projects can be -- for the large enterprises, they are like maybe a three-year go life cycle. The good news is we get full contract value once they've adopted Vertex. Even if they haven't gone live with the new solution, because they're getting full value by testing it along the way to prove out the invoices will be valid in those new jurisdictions when they go live with system. So it actually works quite well from that perspective. But you're always going to see a slight delay.

Got it. Yeah. No, that makes a ton of sense, really, really helpful color there. And then, I wanted to touch on a bit on AI, I know you made the Ryan Tech acquisition in June and you just launched a copilot offering at your conference. So I was wondering, what are some of those early use cases you're really targeting the technology for? And what are maybe some key ROI examples that customers are finding or you expect them to find by docking this technology?

Yeah. I think from a smart categorization perspective, for an indirect tax department, one of the hardest projects they have to deal with is the constant mapping of products to tax categories as jurisdictions are changing rules. Their companies are launching new products and again, in the enterprise market, the SKUs can be the millions for some of these larger enterprises. And they're always having to stay current to make sure they're going to be taxed effectively in every jurisdiction. So the ROI on creating a smart categorization tool that will help enable the customer to stay current and minimize future audit risk is going to be -- is compelling. And I think that's the one where we've done -- we've worked real hard with customers to be our design partners. Customers and partners are actually part of our design process and we're doing that to build trust in the solution, because if you think about it, AI is a probabilistic technology and tax needs a deterministic answer. And so the importance of bringing them in as design partners is to build that confidence that the solution we're bringing is going to be validated by the market. And I think we're getting some really good feedback there. Going deeper, I think as we start to think about the data that we touch. AI will be a compelling tool to bring data insights off of our data fabric and the data layer that we have on our cloud platform to help customers get more insights about their tax efficiency as well as their overall business with some of the transactional data that we get the benefit of touching.

Awesome. Super helpful, David. Thank you.

The next question comes from Alex Sklar with Raymond James. Please go ahead.

Great. Thank you. I had a two-part question first on the invoicing opportunity across your installed base. David, maybe can you just help frame what percentage of your customers are going to be impacted by the current and some of those near-term rules? Any sense for how many of those haven't really purchased any invoicing solution today where it's really greenfield for you? Versus maybe having to rip out another solution? Thanks.

Yeah, sure. So the good news is we work with multinationals, which means they're doing business in lots of countries -- there's over 50 countries that are currently deploying or have a mandate around e-invoicing. So it's going to impact most of our customers. Obviously, it varies by where they choose to do business where their operations are. As the larger economies of the world, highlighting France and Germany is to start to adopt that, it will impact more of our customers. So in those jurisdictions that are just adopting it's a greenfield because the company hasn't had to deal with that. For the mandates that are already in place, take Brazil, which has been around for years, our customers have been solving that problem at a local level. What's changed in the conversation is customers now want a global solution. So instead of having provider in Brazil and Argentina and a different provider in Hungary and a-third in Malaysia, they're saying, you know what, we want an enterprise provider that can handle all the jurisdictions for doing business and what we've decided is not only do we want to bring that to market with our acquisition of ecosio, but to pair it with our VAT compliance solution. So it's a seamless end-to-end capability set is really the value prop that we see. So while there may be some disruption of a local provider like in Brazil, where we're replacing a Brazil-only solution, giving the customer much more value in that process. So it's a -- it's a pretty straightforward conversation we think, for us.

Okay. Great color. And then, John, maybe just on ecosio follow-up for you. Just on the contribution, you called out the $8 million of ARR and the $16 million of next 12-month revenue. Is the implication there that you think ARR is kind of growth we should think about as kind of north of 100%? Or is there a big services component there? Or there's kind of a volume component that maybe isn't captured in ARR? Just any color on that bridge. Thanks.

Thanks for the question. Yeah, ecosio does have a services component of their business with the implementation and other activity that goes on with some of the work that they do, not only in e-invoicing, but in some of the EDI products that they have. So that is a little bit of the disparity between sort of the revenue amount and the ARR amount. So that's kind of standard, and that's been in their business. So nothing unusual there. But no, we expect very good things from ecosio going forward.

Okay. Great. Thank you.

Thanks.

The next question comes from Daniel Jester with BMO Capital Markets. Please go ahead.

Great. Good morning, everyone. Thanks for taking the question. It was great to hear about the new logo win that you highlighted or some of them. As I think about the growth algorithm going forward with sort of the things that you mentioned around e-invoicing and sort of the ERP super cycle, how should we be thinking about the mix of new logo growth versus growth in your current customer base?

Yeah. I appreciate the question, Dan. So I think on e-invoicing, obviously, we have the good fortune from 40-plus years in being in business of working with the largest enterprises in the world. They're going to have the largest invoicing volume in the world. So job one is to make sure we are making sure we're delivering high value to existing customers where we can expand wallet share. And again, that's a significant opportunity for us. So from the e-invoicing side, that is clearly one of our priorities. It will no doubt, and we already have seen it help us land some new logos, but it's important to us that we serve our customers with that capability. The super cycle that you highlight is certainly a bigger opportunity to expand logos as well as some of the expansion we're doing with Microsoft and Shopify and Workday. We're already seeing some nice new logo wins in that space. So that's how I would kind of look at it from that perspective.

Great. Thank you. And then, John, maybe to you, impressive margin expansion over the last couple of quarters. As we think about 2025, I know you're probably not going to give us guidance today, but any sort of comments you would make about the trajectory of the margin profile of the business as we go into next year? Thank you.

Yeah. Thanks for the question, Dan. Yeah, listen, we feel good about the expansion we've seen since we kind of ended -- or kind of came to the end of the big growth activity that we went on from the IPO and that ended about mid last year, we have seen real nice margin expansion, and we feel very good about it. I think we did make some investments here in the third quarter that we called out at the second quarter, and we plan to make some additional investments in the fourth quarter as we wrap it up. When I think about next year, you're right, Dan, not planning to give out guidance here. The one thing that I will call out though is we feel good about sort of what we've seen and the growth that we've seen in margin. But the acquisition of ecosio does bring a little bit of a pullback from an adjusted EBITDA standpoint. I detailed that in my call. So that's the only thing that I would call out there that I would think about that would be any different than kind of that's out of the ordinary from our normal operating business. But thanks for the question.

Great. Thank you very much.

The next question comes from Samad Samana with Jefferies. Please go ahead.

Hey. Good morning. Thank you for taking my questions. So David and John, you guys are obviously experts and have done this for a long time. We've had a big election cycle year globally, not just in the US. Obviously, we capped it last night here. I'm just curious if you could remind us what you've seen in past post-election cycles, whatever regulatory change comes, I'm sure there's always change, but how quickly that reverberates and maybe what impact that's had on your business historically and how that's changed maybe decision-making time lines? Does it tend to create any type of air pocket, does it accelerate decision-making? Just remind us what you've experienced in past cycles.

Yes. I appreciate that question, Samad. And certainly it is timely given this morning's news. Obviously, a federal election in the United States is not as impactful to Vertex. It may affect the macro economy, but it doesn't affect the tax legislation that we have to deal with. We have 10,000 state and local jurisdictions that are really driving the market opportunity that we have in the U.S. So we don't see a huge tailwind or diversion, if you would. It's more what's happening at the state and local level. As we all know, the states are running -- struggling for revenue in an uneven economy. And indirect tax is the primary source of revenue of corporate revenue for them. So where we -- what we see in terms of the urgency and response on that side, the beauty is our content database is so vast, but when rule and regulatory changes, it's usually about our tax research team, which has proven adept to quickly modify some of the rules and content in our tax research database to adapt to those new rules. So it's not really a technology change that we have to react to. It's a content change. And our team has proven and certainly now leveraging more advanced technologies like we are increasingly adept at processing those with speed and urgency. So I feel very well positioned here. And then I think, again, think globally as we look at elections and as they've shifted, it's still fundamentally around the global debt challenges that many jurisdictions are facing and how they're turning to VAT and now e-invoicing as the primary sources of opportunities to close some of those financial gaps, and so that all is a tailwind of opportunity for us.

Great. And then, John, maybe on ecosio, I know you've gotten several questions on it already, but just -- when you think about that, what you're assuming for 2025 is the base case, can you maybe help us understand how much of that is assuming revenue synergies in the first year, is that largely assuming that ecosio runs at its current run rate and that you'll get more synergies or acceleration in year two? Maybe just help us understand the progression of ecosio and what you're assuming in that initial guidance.

Yes. In the initial guidance, that assumes that ecosio's running at its normal pace with what it has. It assumes very little synergy activity going on from the work that we'll be doing with them together. So we'll see how that plays out. But again, they have some real nice growth aspirations there in their business, and we're excited about that. But that's how we think about it. Again, we think the opportunity, as David more fully described really is out there, and it really plays out late into next year and into the following years with the mandates coming and companies really looking for that end-to-end solution that we can offer.

Great. Appreciate it. Thanks guys.

Thanks, Samad.

The next question comes from Jake Roberge with William Blair. Please go ahead.

Yes. Thanks for taking my questions. And congrats on the great quarter. Yes, I just wanted to follow up on the ecosio deal as well. I know there are a few geographies that ecosio cover from an invoicing perspective today. So just kind of moving forward, I'd be curious how you're thinking of the building versus buying in that space to kind of get the fully covered solution.

Yes, Jake, I appreciate that question. That's really what part of the investment that John was referring to that we're going to be putting into the business over the next couple of years is really about making sure we build out the content for coverage. Remember, that's content -- regulatory content is our core business leveraging technology to deliver. But it's what we do really well, and we've been doing for years. And so we see the gap there, and we understand the gap there that exists between what they currently cover and where we need to cover, and our focus will be on making sure they have the investment they need to get the countries coverage in areas where they don't currently have it, but that's a content issue. It's not really something that we need to go buy so I don't see another necessarily an acquisition to achieve that as much as it's just applying our expertise in content development and the great ecosio team together to deliver on those extra countries.

Okay. Very helpful. And then to hear that you're starting to see some good momentum behind the SAP opportunity. Is there any sense of how much SAP migrations are actually impacting the model today from the new logos you're landing? Like, is that that already having a meaningful impact on new logo growth or new logos still largely being driven by kind of how you've historically landed the new logos. Just trying to see if we're starting to see that migration ramp up more…

Yes. It's a really fair question, and I wish I had a good -- I really appreciate the question. And I wish I had a simple rule but to give you and say we've kind of proven that out. Obviously, the announced migration started only a year ago, it's or June of 2023 in terms of the end-of-life announcement. So I think we're still in the earlier days of it to give you a good quantifiable. We're certainly seeing uplift in momentum. I don't -- it's hard for me to reconcile that right now because I just don't know if I can give you enough data that I could stand behind. I'd like to make sure we've got enough data to support that. But the pipeline is certainly being influenced by it. But the regulatory environment has been very dynamic of a record changes in 2024 in sales tax rates, and that has created a demand opportunity for us as well. So that's why I'm just being a little cautious in my answer there. But there's no doubt it's playing out to our favor.

Yes, makes a lot of sense. Well thank you for taking the questions and congrats on the results.

Yes. Great. Thank you. We’re really pleased.

Yes. Nothing to call out on the Pagero unwind. That sort of all flushed itself through us back in the second quarter -- first or second quarter. So I don't think anything there. And really from an AARPC standpoint, again, as you think about some of the new customers and some of the new ads we put in with both Systax and with ecosio. Typically, they're coming on at a little bit of a smaller revenue size than our traditional customer. And so that does have a little bit of an impact in bringing that down a touch. But good call out, Rob. Thank you for the question.

Very helpful. Thanks guys. Appreciate it.

The next question comes from Adam Hotchkiss with Goldman Sachs. Please go ahead.

Great. Thanks so much for taking the question. David, I guess just to take a step back, I know you talked a lot about tax complexity and breakage of more manual systems as a driver of businesses to vended tax solutions I'm just curious, we talk a lot about e-invoicing and the ERP upgrade cycle, but could you just maybe flesh out any other notable accelerative tax complexity catalysts that you're watching? Or is it really just about the steady drumbeat of tax complexity increases we've talked about for a number of years.

Yes. I mean, it really is the latter. It's just this -- again, it's the primary source of corporate revenue for governments. And these governments are struggling for where they're going to get revenue to make their budget. So it's not politically savvy using given more election process to raise rates, let's just say, from eight to nine or whatever state needs to do to increase its revenue. So they come up with more dynamic rules like bag fees and delivery fees in Minnesota and Colorado, and other states that are creating real jurisdictional execution pressure for a business that says, "Wait a minute, this is just too complex for us to keep up with this pace and that drives the change. The follow-up to that is the audit pressure that is also happening as these regulatory changes, companies are finding out they thought they were as accurate as they needed to be, and they weren't. And that will then trigger a CFO or something saying, hey, wait a minute, the reserves we're setting up for settlements is unacceptable. We're tying up working capital. Let's go – let's get a vended solution we have confidence in. And so that's really been the thing that there's no unique jurisdiction we're watching. I think the big regulatory trend you hit on is the e-invoicing. That's a new dynamic completely.

Okay. Great. That's really helpful. And then could you just give us a deeper sense of how much what you offer in e-invoicing is actually impacting traditional indirect tax RFPs that you're in. We've seen across the space, this focus on unified software platform. So I'm just wondering whether your RFPs are impacted if a company is going after an indirect tax solution, how much am I asking and really diligent in what you have in the invoicing space versus those two things being separate?

Yes. Now that we're bringing our value prop into the market, I think it's creating -- it's really interesting when I was in Germany, I highlighted the 40-plus customers and partners we met with in that session. And it was really interesting customers were starting to make connections across the entire platform of seeing the value of an upstream determination engine in VAT and how that supports the accuracy that you'll have on your invoice to then do your e-invoicing that you have to -- that you're required to do now and then have an all flow across that single solution your VAT compliance. And that value prop was really resonating wonderfully with a number of customers and prospects we were talking about. But I think it's a new phenomenon because the regulatory environment in e-invoicing is accelerating. And so companies are starting to wake up to, hey, this is a different world. And as the bigger economies are adopting it, it's becoming even more dynamic for them. And I think that's why we've timed this I believe, and I'm optimistic we need to execute, but we've timed it very well.

Thanks so much. Really helpful, David.

The next question comes from Brad Reback with Stifel. Please go ahead.

Great. Thanks very much. John, if I'm doing my math right, it seems like, I'll call it, core sustainable or repeatable Vertex grew about 18% on a subscription basis, which is a nice uptick sequentially. Should we think about this as the new go-forward or continued variability around that level?

Yes Brad, good question. I wouldn't say we're ready to start kind of putting that as sort of the bar of things to advance from here. But I think we have seen good performance as of late. We've seen some nice opportunity that's out there. Again, I think you said poor operating, because you probably excluded some of the some of the true-up activity that we saw in this quarter. I think that's the fair thing to do. What I would say is, again, you've seen our guidance for the fourth quarter. Again, we did have a real strong fourth quarter last year, so it's a little bit of a tougher comp there. But we feel good about sort of the momentum that we've seen in the business and how we've been able to grow. And that ARR growth that you've seen in the business, being very solidly and consistently in there around that 16 certainly this past quarter, we feel good about that. I wouldn't say I'm ready to start raising the bar up to that high -- the very high-teens that you're talking of.

That's great. And then, David, circling back to an earlier question around, sort of the growth algorithm and customer count. If I also do the kind of core Vertex over the last couple of quarters taking out ecosio and Systax, I get a fairly flat number, and I understand there's a transition going on in the base. Do you think that we see in the coming quarters or years of meaningful acceleration there? Or should we think about really ARPC being the predominant driver of subscription as that transition happens in that installed base to bigger customers? Thanks.

Brad, scaled customer growth is the number one priority for us, just being really direct on that. That's what we focus, because those are the customers that pay the bills today and they will buy more from us in the future. There is still some noise at the very bottom end of our market, that legacy cloud strategy that we talked about that's long since been set aside. I am excited about the opportunities we're growing in Microsoft, NetSuite, Workday, Salesforce and now e-invoicing to bring us into new logos. I don't think we're giving guidance on any of that just yet. But there's no doubt, that's part of the strategy is to focus and broaden our tentacles into the right ecosystems that we can also expand new logos as well as continuing to drive scaled customer growth. That remains the priority though.

And I'm sorry if I missed it. What was the scaled customer growth in the quarter?

13%.

Perfect. Thank you.

Thanks Brad.

The next question comes from Brad Sills with Bank of America. Please go ahead.

Hey. This is Natalie Howe on for Brad. So I wanted to talk a little bit about your cross-selling deals. You mentioned some pretty big wins there. And if I remember correctly, back in 2Q, you mentioned you anticipate seeing that activity pickup in the second half of the year. I guess I wanted to see how that was tracking with your expectations and if you see any sort of change in that rate for the rest of the year?

Natalie, we appreciate the question. Yes, it did track consistent with what we thought we had good visibility activity that was coming. Not unusual in our space, the enterprise space that the tax departments get budget that's more available to them in the second half of the year. So, it was a little slower. We called that out, honestly, in the first half of the year, but had good visibility to that budget spend that was going to accelerate and I think it's been baked into our guidance that we see that continuing solidly here in Q4.

Okay. Got it. That’s all for me. Thank you.

The next question comes from Patrick Walravens with Citizens JMP Securities. Please go ahead.

Great. Thank you. And let me add my congratulations. So David, I have 2 questions around Ecosio. So number one is, how does -- and I think you did touch on this briefly, but a little deeper. How having a solution for European e-invoicing drive demand for your core tax engine in Europe? And then the second one is, can you touch a little bit on the data opportunity that Ecosia opens up for Vertex around continuous transaction processing?

Sure. Thank you, Pat, for the question and the comment on the quarter. So yes, so what e-invoicing is, you're sending out invoice data, which is kind of like if you think about it, this almost makes it like a mini tax return. You're sending the government tax information at the point of the transaction. Normally, you didn't do that -- you didn't send them any tax information until the end of the quarter or the end of the month depending upon the filing process. And so now, the customers are starting to realize, I want to have more confidence in the accuracy of what I put on that invoice as the taxability that I'm going to owe because the governments are going to see it sooner than I'm used to. So, because that comes from master data, which is controlled upstream in the business where the tax department doesn't have as much influence, the determination engine gives them a way to have more confidence in that tax ability because they're leveraging then our content and our tax assessment on the invoice itself. And that's where I think we're seeing some interesting value prop conversations coming from, number one. Number two, relative to the data question, I think it's we're just going to be touching that much more data. And one of the things we've been focused on our cloud platform is expanding our data layer to support the end-to-end process. What we have learned is that if tax departments have accuracy and transparency to their data throughout the end-to-end workflow, it's the best place for them to ensure the accuracy and compliance that they need. And that's what really excites me about we're doing in the e-invoicing is going to fuel the quality of that data transparency to give us a new value prop to talk about to our customers.

Great. Thank you.

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

Thank you, everyone, for joining us today. As always, if you have follow-up questions or would like to schedule additional time with the team, please reach out to me at investors.vertex.com -- vertexinc.com. Have a great rest of your day.