VERX - NASDAQ

Good day, and welcome to the Vertex, Inc. First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Joe Crivelli, Investor Relations from Vertex. Please go ahead.

Hello, and thanks for joining us to discuss Vertex’s first quarter financial 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 financial measures. A reconciliation of these non-GAAP 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. Vertex executed well in the first quarter, getting 2025 off to a strong start. The consistency of our business, which we highlighted during our Investor Day in March, continued as expected. In addition, last week we announced an equity investment in Kintsugi, a fast-growing startup focused on applying AI technology to indirect tax in the small business sector. I’ll discuss this in a moment. In the first quarter, revenue was $177.1 million, up 12.9% year-over-year. Subscription revenue grew 14.4% and cloud revenue growth was strong at 29.6% in the first quarter. And adjusted EBITDA was $37.8 million, representing an EBITDA margin of 21.3%. This was above the high-end of our guidance range for the quarter and sets us up well for 2025. In addition, annual recurring revenue, or ARR, grew 17.9% to $618.5 million. Net recurring revenue, or NRR, remained strong at 109%. We continue to expect NRR to increase in 2025 and rebound above 110% by the end of the year. Average annual revenue per customer for Vertex standalone increased 16% year-over-year to $141,000. Growth in scaled customer count was 15% year-over-year. As a reminder, this number represents our customers with annual revenues greater than $100,000 and demonstrates our ongoing success in the underpenetrated enterprise market. Finally, gross recurring revenue, or GRR, was 95% in the first quarter within our targeted best-in-class range of 94% to 96%. As investors know, the proliferation of e-invoicing mandates globally is expected to be a significant tailwind in our business in the coming years. We believe this can be best addressed by providing a single solution which combines VAT compliance and e-invoicing through a single user experience. This is a game changer for companies exposed to the burgeoning e-invoicing mandates. We are pleased that our joint e-invoicing solution with ecosio achieved general availability in mid-March, enabling us to accelerate our sales pursuits. We see a growing pipeline for this offering in several major catalysts on the horizon, including the launch of e-invoicing in the two largest economies in Europe, France in late 2026, and Germany which is adopting a phased approach that is expected to be fully implemented in early 2027. In addition, this week is our European Customer Conference and we expect e-invoicing to be a major topic of discussion with the customers in attendance. I’ll now share a few key new business wins from the quarter starting with existing customers. A fast-growing specialty retailer increased its business with Vertex to support business growth as well as a company-wide cloud migration. The company increased its entitlements while also adding our Edge product and SAP Accelerator and other tools. This doubled our revenue with this customer into the low-7 figures. In the Oracle ecosystem, a customer in the higher education sector reevaluated its indirect tax technology to improve risk management and reduce operational costs. The company was previously using Vertex for tax return filings in addition to two additional competitors for various aspects of its business. This customer standardized on Vertex resulting in low-6 figures of new revenue and transforming this longstanding relationship into a scaled customer. In the Microsoft ecosystem, a manufacturer of defense and law enforcement products expanded its entitlements with Vertex to support its growth in global markets, while also adding premium support and Shopify connectors. Revenue from the scaled customers now up more than 160% over the past 12 months to the mid-6 figures. A longstanding U.S. customer in the toy manufacturing industry added Vertex for its EU headquarters operation, which was previously using native ERP functionality for indirect tax. The customer standardized on Vertex for sales and use and VAT calculation as part of a global SAP S/4HANA transformation. This led to nearly 7 figures of new revenue for Vertex. Turning to new logo wins, investors are often surprised by the size and scale of companies that are still using homegrown solutions to process indirect tax. In the first quarter, one of the world’s largest processors of electronic payments selected Vertex as part of an RFP for its first ever vended indirect tax solution. This was propelled by a company mandate to reduce risk across its business. This 7-figure deal included sales and use and VAT calculation, as well as our edge solution and other indirect tools. In the lodging industry, we gained a new customer when they outgrew one of our major competitors. The customer, which is on a cloud transformation journey with Oracle, was referred to Vertex to our partner PwC. This mid-6 figure initial relationship includes sales, use and VAT compliance. Our Oracle accelerators were a major differentiator for Vertex. Also in the Oracle ecosystem, a major real estate investment trust specializing in data centers chose Vertex for sales, use and VAT calculation and compliance. This comprehensive global contract will deliver high-6 figures of recurring revenue for Vertex. Our telecommunication tax content was a significant differentiator in winning this business. A major building materials company selected Vertex for indirect tax in conjunction with an acquisition and an SAP S/4HANA transition. This 6-figure new logo win, which was a competitive takeaway, included sales and use tax calculation, as well as LCR-Dixon Tools, the SAP Accelerator, Address Cleansing, and Certificate Center. Now, let’s discuss Kintsugi. Kintsugi is an AI native startup focused on automating sales tax compliance for small- and mid-sized businesses. Throughout the due diligence process, we got to know the company’s founders and were impressed by what they’ve built. Using AI, Kintsugi automates the entire sales tax compliance lifecycle for small business in new and creative ways, including tax calculation, filing and compliance across multiple jurisdictions. We think this technology could be a game changer in the SMB market. Our investment gives us a front row seat as Kintsugi executes its game plan. Let me highlight three examples of the differences between how an AI solution works for SMBs, but falls short in its viability for complex enterprise customers. One, enterprise for customers require the ability to write significant numbers of custom rules that are unique to their business and these would interfere with AI functionality. Two, a significant number of jurisdictions below the state level do not publish rate and regulations and these must be manually gathered and interpreted before codifying them into our algorithms. AI’s requirement for digital consumption is not effective here. Three, on top of tax regulations, indirect tax teams must also determine and comply with various fees around the world, from plastic bag fees to environmental fees, which are not published digitally. For the small business market, where audit risk is low and good enough compliance is the focus, we believe an AI-driven solution like Kintsugi’s can work very well, given the more straightforward requirements of SMBs. We do see opportunities to apply elements of Kintsugi’s technology to our business. That’s why we included an IP sharing agreement and commercial partnership in our investment, which will enable us to explore ways we can apply their technology to our market opportunity while expediting and enhancing our AI roadmap. In summary, it was a good quarter with results in line with our expectations. We continue to see a strong market for indirect tax technology and no change in buyer behavior, and we are optimistic about the balance of 2025. As highlighted at Investor Day, Vertex is a resilient business. Over the past several decades, our revenue has never decreased from 1 year to the next, even during severe recessionary periods. This is because in volatile economic times, taxing authorities lean into audit and enforcement to replace revenue that is lost due to lack of economic growth. In turn, audit and enforcement actions highlight the need for companies that are using homegrown solutions to adopt a more automated solution that can scale like Vertex. Another benefit our customers enjoy is the confidence that comes from using Vertex solutions. When a taxing authority audits one of our customers, they have a full audit trail to defend their compliance results. More importantly, they have the ability to find errors before they submit them, helping our customers head off an audit right from the start. And while audit and enforcement is one of the persistent tailwinds we’ve seen throughout our 47-year history serving the enterprise sector with our indirect tax solutions. It’s just one of several. The ongoing cloud migration cycle which is driven by ERP providers cloud initiatives is expected to fuel growth for the next several years. As noted at Investor Day, we see this as a major opportunity. We believe we are extremely well positioned to benefit as enterprises that are using homegrown tax solutions migrate to the cloud and their homegrown solutions which are often based on legacy code are unable to function in the new modern infrastructure. Another persistent tailwind is business change resulting from mergers and acquisitions expanding into new geographies or opening up new business channels like omnichannel sales. Anytime there is change, there’s added complexity for our customers to manage. As everyone has seen the volatility in the macroeconomic environment is unprecedented. However, I am pleased with our first quarter results and our market opportunity. We have not seen elongated sales cycles or deal slippage at this point. Our pipeline continues to grow and that is something we will continue to monitor carefully as the year develops and companies and regulators adapt to the changing environment. John will now take us through the financials for Q1. John?

Thanks, David, and good morning, everyone. I will now review our first quarter financial results and provide guidance for the second quarter and full year of 2025. In the first quarter, revenue was $177.1 million, up 12.9% year-over-year. ecosio contributed $3.3 million of revenue during the quarter. Accordingly, on an organic basis, revenue was $173.8 million and revenue growth was 10.8% in line with expectations for the quarter. Subscription revenue increased 14.4% period over period to $150.8 million. Services revenue grew 5.4% to $26.3 million. Our cloud revenue was $80.2 million, up 29.6% from last year’s first quarter and ahead of our guidance for the full year. ecosio added about 3.5 points to cloud revenue growth. Our annual recurring revenue, or ARR, was $618.5 million at quarter end. ecosio added $8.1 million to ARR and Systax added $6.6 million. Excluding these amounts, organic ARR growth was 15.1%. Note that in the second quarter, we will lap the completion of the Systax acquisition and, accordingly, the Systax contribution will be included in our organic revenue growth going forward. In the third quarter, we will lap the ecosio acquisition. Net revenue retention, or NRR, was 109% compared to 112% in last year’s first quarter and 109% from the fourth quarter of 2024. 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 $140,943, up 14.1% from last year’s first quarter. Including the impact of ecosio and Systax, AARPC was $126,534. For the remainder of the income statement, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP results in this morning’s earnings press release. Gross profit for the first quarter was $132.8 million, and gross margin was 75%. This compares with gross profit of $113.7 million and 72.5% gross margin in the same period last year. Gross margin on subscription software revenue was 82.6% compared to 78.6% in last year’s first quarter and 81.4% in the fourth quarter of 2024. And gross margin on our services was 31.1% compared to 40.5% in last year’s first quarter and 37.6% in the fourth quarter of 2024. The decrease was driven by higher compensation expense in our MSO business, as well as the inclusion of the ecosio services which have lower margins. Turning to operating expenses. In the first quarter, research and development expense was $16.5 million compared to $13.5 million last year. With capitalized software spend included, R&D spend was $37.3 million for the first quarter, which represents 21.1% of revenue. Selling and marketing expense was $41.8 million or 23.6% of total revenues, an increase of $6.1 million and approximately 17.2% from the prior period. And general and administrative expense was $36.6 million, up $9 million from last year. Our adjusted EBITDA was $37.2 million, an increase of $500,000 or 1.3% year-over-year and above the high end of our quarterly guidance. This favorable result was in part impacted by approximately $1 million to $2 million of expenses that were expected in the first quarter, but will be realized in the second quarter. In the first quarter, our operating cash flow was $14.8 million and free cash flow was a negative $12.3 million in line with our seasonal cash flow patterns due to annual bonus payments that fall in March, higher payroll taxes that start at beginning of the year and marketing expenses related to our sales kickoff. In addition, the accelerated investments we mentioned on last quarter’s call also impacted the first quarter cash flow. We ended the first quarter with over $270.4 million of unrestricted cash and cash equivalents. For additional liquidity, we also have $300 million of unused availability under our line of credit. And, now, turning to guidance. For the second quarter of 2025, we expect total revenue in the range of $182 million to $187 million, which would represent 14.5% year-over-year growth at the midpoint. An adjusted EBITDA is expected to be in the range of $35.5 million to $39.5 million, a slight decrease year-over-year at the midpoint. The second quarter EBITDA range also reflects the accelerated AI investments and e-invoicing investments that were made and the $1.2 million mentioned earlier that were expected in Q1, but will be incurred in the second quarter. Our full year 2025 guidance remains unchanged. As it has been our custom not to adjust full year guidance after one quarter of results, we continue to expect total revenue in the range of $760 million to $768 million, representing annual growth of 14.6% at the midpoint. And adjusted EBITDA in the range of $161 million to $165 million, representing a year-over-year increase of $11 million at the midpoint, and full year adjusted EBITDA margin of 21%. And full year cloud revenue growth is expected to be 28%. David will now make some closing comments before we open up for Q&A. David?

Thanks, John. In conclusion, it was a solid first quarter with financial results that were in line with our expectations for the quarter, and strong progress on our long-term strategic initiatives, including e-invoicing and AI. Our view is that the market opportunity remains strong, and the tailwinds that we expect to deliver consistent growth and profitability in the coming years are firmly in place. I also want to reiterate that we have seen no signs of a change to buyer behavior or any indication of a slowdown in indirect tax momentum from our vantage point. Accordingly, we continue to expect financial momentum to build throughout the balance of 2025 as our financial guidance reflects. With that, we will take your questions.

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

Yeah, Thanks for taking my questions. It seems that you’ve been highlighting more recently some larger customers who had homegrown solutions who are converting to a packaged software solution like Vertex. Can you just give us a sense, is there anything going on in terms of product or feedback from those customers? Why now is the time to be migrating to a packaged software solution?

Yeah, Josh, that’s a very good question. I think that two things are happening. I think, one, as e-invoicing is a growing problem for global organizations, they’re starting to adopt a mindset of I need to be more future ready for the constant change that’s coming at me. And the point solution spreadsheet and manual efforts that they’ve been living on are getting harder and harder to sustain given the pace of regulatory change. There were hundreds of e-invoicing changes within approved systems already last year. I mean, the governments are continuing to change the rules as they look for more revenue. And so, I think, that’s one big driver. And then, I think, the other one is the continued audit pressure that customers are feeling. When they combine those two, I think they’re just starting to wake up to this solvent at point solution basis is just not sustainable. And so, we’re seeing to have different conversations. And then, I would add to the fact that now that we have e-invoicing, we really have a great complete end-to-end suite from determination through to audit support all the way including e-invoicing and compliance. And, I think, when you look at all that together, it just gives customers real pause to say, how long can I stay where I’m at?

Got it. That’s helpful. And then the direct customers did decline sequentially. Can you help us understand, is there just some more low-end customers with like really low ARPUs that are coming out of the model there? Thank you.

Yeah. Josh, thanks for the question. You hit right on it. I think what we’ve seen and we’ve seen in the past and we continue to see this quarter was some of the lower end customers sort of migrating away from us. Again, if you take a look at our GRR continues to remain rock solid that 95%. Our big focus is really on the scaled customers and you can see we had a really good quarter from a scaled customer perspective growing at about 15%. So that’s really our main focus. There’ll be some noise here with some the direct fallout at the low end, but I think again our focus is really on those scaled customers. But thank you very much for the question.

Thanks, guys.

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

Hey, David. Hey, John. Thanks for taking the questions here. I want to hit on the macro and what you’re seeing out there. Really great to hear that there’s no change in the buyer behavior. But just curious like what from your perspective, why you think you’re not seeing that macro volatility show up in the model? And is the kind of conversation at all having any type of impact on kind of indirect tax type of priorities for organizations given the volatility out there?

Chris, I think it’s a couple of reasons. I think one is we just continue to track well to the SAP activity that SAP reports as an example. So, I think, one thing that we’re just continuing to see that tax is moving as I noted in the previous question with e-invoicing now rising as a new mandate, it’s just rising higher in the strategic discussions that customers are having as they’re moving to the cloud of how are we going to stay ahead of this. And so, I think, that’s reason number one. I think that reason number two is, we had a nice diverse set of wins across the ecosystems that we highlighted this quarter. And, I think, our continued investment in channel and particularly with Microsoft and the work we’re doing with Azure and the TCS solution we bought for Dynamics, that we built for Dynamics, all is supporting the diversity of growth for us that I think continues to help in our pipeline build.

Got it. That’s helpful, David. And then, I want to follow-up on Kintsugi, really interesting deal there. But I’m curious, where is that kind of technology from your perspective the most applicable within the Vertex tax business? I know you all have some SMB customers as well as the indirect channel. So just curious how applicable that can be to your business in what areas?

Yeah, Chris, we’re looking at it from two dimensions, both commercial, which we have commercial discussions with them as part of the investment we made and then the IP. On the commercial side, I mean, things like what John was highlighting at the low-end where we see attrition from time to time even though it doesn’t impact GRR. They’d be in a really nice landing area that we’ll actually be able to participate in that going forward. And so, we’re going to work on that with them for some of those customers that are really in their sweet spot. I think the other thing is in some of the marketplaces and all that we get to work commercially, the marketplace that we’re serving is the large client, but there’s a lot of much smaller companies that sell into that marketplace that we may now have a pass through solution to bring to market. Kintsugi has done an amazing job inside of the Shopify ecosystem at the real low-end of the market. They’re taking share from competitors in the SMB space in there. I think it could be a nice marriage of the two from that perspective. I think, on the IP side, we’re certainly going to be looking at some of the things they’ve done on putting AI across the workflow. That’s an area we’re investing in with our AI. And, I think, they’ve got some thinking that they’ve developed as it flows across the end-to-end workflow that we’re intrigued by. So, those are like the early parts of diligence that have us really excited. And the team is just phenomenal there. Some of the smartest people I’ve had a chance to work with in the AI space.

Excellent. Thanks, guys.

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

Great. Thanks so much for taking my question. David, we’ve seen some of your competitors talk about tariff-related products. Could you just remind us what your solutions are on the tariff side? Is this a dedicated product you guys offer? Or is this functionality within your broader platform? And have the tariff conversations impacted your pipeline in a positive way at all given what you’re able to do in the tax side? Thanks so much.

Yeah. I appreciate it, Adam. I think the tariff is more of an income tax related thing directly. So it’s not an offering we focus on just being an indirect tax provider. There’s no immediate economic opportunity for us on that. What’s happening to us and where the conversations are really going is more around as customers’ rethink supply chains. They’re having to deal with maybe new e-invoice mandates and new that compliance regimes that they didn’t previously have to comply with. So they may have had a very mature supply chain that was stable and they had compliance perfected across the 4 or 5 countries that they were pulling their supplies from. And, now, they’re going to maybe 6 or 7 new countries given the diversity that they’re trying to navigate through the tariff war. And that has led to discussions more about e-invoicing and VVC. So that’s more where it shows up as an indirect complement to our opportunity as opposed to we have a tariff solution and we can help you manage that directly, because it’s really much more of an income tax driven requirement.

No, that completely makes sense. I appreciate the clarification and detail. And then your consolidated ecosio product, one general availability, how has that gone versus your expectations? And then maybe re-highlight for folks what technically is different with the new GA product versus what ecosio’s product was prior to that? Thanks so much.

Yeah. Sure. So just answering in reverse order there, ecosio prior was just the CTC compliance and the EDI. They have a really strong EDI foundation, which is actually essential because it gives them the incredible scalability of transaction processing that our large customers are going to require. We went live general availability at near the end of March. And what excites me there is the team is already being able to go out and start generating. We’ve had a number of – we’ve picked up a number of really talented people who have joined our firm since we launched our solution that were part of other e-invoicing providers, and they’ve come because they love our customer base and the story we can tell by merging and the differentiation is by merging the VVC solution with the e-invoicing. So VVC is our VAT compliance with our – the ecosio e-invoicing. You now have a seamless process that goes from real time filing, continuous transaction controls to periodic transaction controls or the VAT return that you file at the end of the period. And the ability to reconcile, one of the hardest challenges customers have currently is I use somebody for my e-invoicing, I have to then take that information and reconcile with what I file in my VAT return and that’s complex and it leads to errors and you identify problems after the fact. By putting them together, the customer can actually see where there’s problems upfront. So that’s a big advantage for us. Also the fact that we built connectors into our long-term ERP partners and allowing us to reach into the ERP system, because of the deep integration knowledge we have about how to integrate into SAP that we’ve built for years with our determination engine. We’re able to leverage that to touch the invoice attributes that we need in the various jurisdictions. So, I think, those are the two very large differentiators right now we’re seeing in the market. I’m very encouraged by the team that’s joined us in the pipeline we’re starting to build.

Okay. Thanks so much, David.

Sure. Thanks, Adam.

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

Hey, thanks for taking the questions. This is George Cruz on for Steve. Maybe just first to start on the SAP ecosystem, big focus for the business highlighted a lot at the Investor Day. If could talk about how deal volumes came in, in the quarter within that ecosystem and how you guys are feeling about pipeline for the rest of the year?

Sure, George. I’m happy to connect with you. Right now, as I said, I think we really see us tracking well to SAP’s activity. They had a very solid quarter of performance. I think we saw good pipeline growth as a result of that. We continue to expand our efforts with the SAP sales teams in Europe and in the U.S., and that is continuing to navigate nicely. And I’d be remiss if I didn’t highlight the deep relationships we enjoy with the ecosystem partners that are doing the implementations of the big four and others. There are critical reference point in the process. And so, the combination of the three is all working well. I haven’t seen any lack of constructiveness if you would to the way that’s built quarter-over-quarter.

Okay. That’s great color. And then maybe kind of a modeling question here on the delta between sub-revenue versus ARR, sub-revenue, a little bit of a deceleration down sequentially versus ARR actually accelerating a bit. Maybe if you could just help us, is there anything maybe timing related of when deals went live or true up revenue or anything else we should kind of keep in mind there?

Yeah. Thanks for the question, George. There was really nothing in this quarter’s revenue that was out of the norm. Again, we continue to see, obviously, ARR being the leading indicator of revenue as we move forward. But there weren’t any significant true ups in the quarter above our normal level that we typically see that I would call out. So, there was nothing really driving anything anomalous driving any of the change there in the numbers you pointed out.

Okay. Thanks for taking the questions.

Sure.

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

Yeah. Thanks for taking the questions. Could you talk about how the competitive environment in e-invoicing compares in contrasts to maybe your core indirect tax market? And has there been any impacted deals as a result of ecosio not having as broad of country coverage as others in the market or does it already have kind of the sufficient coverage for the deals that are coming up today?

Yeah, Jake, really good question. So, I think, it starts with most providers in the market are just e-invoicing. They don’t have VAT compliance as core to the DNA of their company. So, they’re an e-invoicing organization. The company we did try to buy that we walked away from, all they did was e-invoicing. They didn’t have that compliance as an example and they certainly haven’t merged the two together the way we have. So that’s one big differentiator. A lot of point solutions that just do the e-invoicing, but they don’t do both and they certainly don’t do together in a reconciled approach. So, I think that’s point number one. I think point number two is, the interest in it and the approach to the e-invoicing is really around, I want to say this best, competition is really looking at how do I factor this into being ready for across the board compliance. So the countries that we have are all the current countries that they’re most concerned about. As we alluded in the Investor Day, they’re typically going to start with just a few countries, they’re going to adopt 3 or 4 and then they’re going to roll up, because it’s a complex process to go. So nobody’s going to say, hey, I need all 50 countries right up front. We’ve got the major economies. We’ve got France and Germany in line as they’re coming on in 2026 and 2027. So, we’re well-positioned to handle the big economies and that’s not going to be a reason we’re not going to compete in this market.

Okay. That’s really helpful. And then just from a macro perspective, you all obviously have more of a consumption oriented model based on the transactions that are rolling through your platform. It sounds like deal flow and pipeline have been really steady thus far, but is there any way to think about kind of the potential impact to your model if transactions were to start to slow?

So, maybe just a point of clarity on that, Jake. So, I think, we are revenue priced for our core transaction processing engine Vertex O Series as we describe it in the market. That’s based on revenue bands and the bands are pretty wide and it doesn’t typically experience anything in a downturn that would cause us. The bands are wide enough that even if a customer were to slow down by 10% of their total revenue, it’s probably not going to fall out of the band that would be a revenue. The only area that we are pure transaction pricing is actually in this new area of e-invoicing. And so, obviously, we’re new to the game there and we haven’t seen the input. The good news is, the customers we’re going to work within that space are the largest companies in the world, which means they have the most invoices.

Okay. That’s really helpful. Thanks for taking the questions.

Yeah.

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

Hi, good morning. This is Kyle Aberasturi on for Dan Jester. Thanks for taking my question. Can you discuss what you’re seeing in terms of new logo growth? Anything in terms of the composition of enterprise versus mid-market would be helpful.

Yeah. We saw in the quarter a solid diversity of growth across in new logos across all of the key ecosystems that we’re targeting. I would say by nature the SAP ones tend to be our scaled customers coming out of the blocks largely the same for Oracle. What’s been interesting for us is we’ve had some nice wins in Microsoft of late that we’ve highlighted that have actually been scaled customers coming out of the block. But I would say in the Microsoft Dynamics ecosystem that’s where we’re going to probably see less of the scaled customers coming out of the block. Now, all that means is typically, remember, our motion is the land and expand motion, which means there are customers that may only need an $80,000 determination engine to start, but then as they continue to evolve and grow, they will grow into a scale customer by buying more of our products over time. And I would say, still the preponderance of our wins are in the enterprise market that typical $500 million and above type market and then less or so in the mid-market.

Great. And then it looks like a fairly strong quarter for software gross margin. Anything specific to call out there and how we should think about this rate going forward? Thank you.

Yeah. Nothing specific to call out in terms of any drivers that were in there that are kind of one time in nature or anything. But, I think, we had strong performance. We continue to see leverage in the business. Again, I’m a little bit cautious with respect to whether that’s going to continue throughout the rest of the year. So, I feel like we have achieved the results we would expect to see. We are seeing good synergy amongst a lot of the activity that’s there. But, I wouldn’t say anything to start moving everything, changing everything to that higher rate on a go forward basis for the longest terms.

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

Great. Thank you. David, I want to follow-up on that nice new customer success. New logos are making up a bigger piece of ARR growth in the last couple of quarters. What are you seeing in terms of win rates on those new opportunities versus maybe 1 to 2 years ago? And then any change in the mix of those new logo bookings that are coming from a vended indirect tax kind of takeaway versus kind of the manual or native ERP usage previously? Thanks.

Sure, Alex. So, I think, in terms of the second question around competitive, I think, we’ve consistently seen as businesses continue to grow in complexity that tends to be the biggest opportunity for us to have takeaways from a competitor. I think the other thing that we’ve been gaining some traction in is the investment we’ve made in customer success and customer support. Enterprise customers are so complex and they are needy. I mean, I make no bones about it. They require a lot of attention, but we’ve done a lot to get certifications around the quality of our support. And, I think, if somebody stubs their toe competitively and how they’re supporting a customer, we’ve been able to step in. And there are points where the customer just reads a tolerance level, they’re like they’re going to move on. And we’ve seen a few of our wins when they’re looking at a broader solution problem set where they’re saying, you know what, it’s time to just leave the current vendor we’re working with and move on to a new one. I think the new logo win rates, what I would say there is holding consistent in core ecosystems that we compete in. Again, I really attribute a lot to the advisory community that really we’ve worked hard to enable and invest in and they continue to support us. I think what I’m encouraged by is the investments we’ve made in Azure and in AI and in TCS, which is Tax Calculation Services for the Dynamics community. Microsoft has responded very well to that and the Microsoft community is, and I think we’re building a nice brand in that space that is working to our favor in some of our new logo wins.

Okay. Great. Thanks for the color there. And, John, maybe a follow-up for you. The implied license revenue looks down like a bit more sequentially. Anything change in terms of migration activity this quarter versus prior quarters? And what’s kind of the migration activity embedded in the outlook for 2025? Thanks.

Yeah. No real change in the migration activity on a current quarter basis. Again, we’ve talked about that being that 2% to 4% roughly of our entire customer base on an annual basis. We haven’t seen a change in that. We didn’t see any differential in the second quarter. And even as we look out for the rest of the year, we don’t see a big change coming from that. Again, we continue to see nice growth, but again, we don’t see any big changes coming out of the migration activity. I think as you heard David say, the SAP ecosystem and the other ecosystems that we work with are certainly continuing to perform well and we’re seeing good pipeline there. So nothing to call out specifically.

All right. great. Thank you both.

You bet.

Thank you. The next question comes from Will Jellison with D.A. Davidson. Please go ahead.

Great. Good morning and thank you for taking my questions. The first one, David, for you. This is the second consecutive quarter now where we’ve seen incremental capital committed to AI related investments in the business. I’m curious to get a refresh perspective on whether that’s been catalyzed by things you’ve seen in a competitive environment or positive feedback that’s given you encouragement to step on the gas or anything else that you’ve seen?

Yeah, really good question, because it’s super strategic to our future. I would say the bulk of our AI strategy is heavily tied to the feedback we get from our customers and partners about the opportunities they see. The core to our strategy has been to create a unified data structure underneath the end to end workflow of tax such that customers would have confidence in the DAX data that they could apply AI to AI is only as you know, we all know AI is only great if it’s on data that you have confidence in. And so, having some of the purpose built capabilities that we’re now bringing to market around like smart categorization that feed into our data model tied to our tax content, again, where the customers have enormous confidence in the data. They’re able to start talking to us about use cases and partners are looking at it, saying, we can develop use case together where we can deploy AI. And just a point of clarity on your opening comment, the $10 million to $12 million that John highlighted as investment is not just in the quarter, it’s actually just spread throughout the year. It’s not just a single quarter. John highlighted it, but I don’t want to confuse you when we put all that to work in the first quarter. That’s spread throughout. The new investment in Kintsugi is an exciting one really driven by some innovation they’re doing and, again, some of the commercial opportunities I highlighted earlier on the call here around what we think we can do with that team. They’re just a really great team and they can fit well around some of the edges of our base where we don’t – where there’s no obvious solution that we’ve ended up with a customer that I think the Kintsugi team is going to be able to come in and do some nice things.

Great. Thank you. And then as a follow-up to that, as you went through the first quarter of deploying that incremental 10 to 12 across the whole year. Any early learnings or pieces of positive feedback that are worth sharing from those investments thus far?

We had a number of design partners lean in and, say, they want to be a part of it. Obviously, customers are pushing us to go faster in terms of teach the model from my categories of – so, we started in some of the most complex ones around retail and grocery, which are some of the most complex things from an indirect tax perspective. But, we’ve got – I’m here in Prague right now at our EU customer conference and some of the largest heavy equipment manufacturers in the world here in the European community are like, when are you going to get to our side of the equation and get to some other lines and categories of products that you could help us classify. So, I think, more it’s a question of how fast can you train the model in a way that we’re going to have confidence is part of the key feedback. We’re just being really thoughtful, because nobody wants to get tax wrong. And so, we really need to make sure the customers have confidence in the results we’re producing with it. So we’re trying to balance. But the feedback has been, sounds great guys, go faster. That’s candidly been the feedback because categorization is one of the hardest things they deal with and it’s a never ending chase to stay current with their product categorizations, their products as they continue to grow. So that’s probably the biggest one I would highlight is positive feedback.

Great. Thank you, David.

Yeah.

Thank you. The next question comes from Rob Oliver with Baird. Please go ahead.

Great. Thanks. Good morning. David, when you look at that Kintsugi strategic investment, you called out the presence that these guys have in relationship with Shopify. And I know that’s something that came up also at the Analyst Day you guys had, which was great. Just asking about as Shopify clearly is moving upmarket, the state of the relationships with Vertex there. So, maybe just stepping back a little bit, can you talk about how you see Kintsugi influencing that relationship? You called out SMB currently, but there’s is there an opportunity for to move up market towards what for you guys would be scaled customers? And how should we think about that potentially strengthening or solidifying the relationship with Shopify? Thanks.

Yeah, very good question. And, obviously, there’s two very distinct markets. Shopify is an incredible community and they continue to do phenomenal in the SMB space and Kintsugi on their own as accelerated there. We enjoy a great relationship with Shopify. And I think this will strengthen it because we can serve them in a broader way or not that we don’t own Kintsugi by any stretch, but we can help further Kintsugi’s efforts inside of the Shopify ecosystem. Shopify’s move up market has been very beneficial to us, because we’ve landed some very large accounts, accounts that really just can’t be served by AI alone as I had highlighted some of the challenges and the requirements that AI enterprise customers require. So, I actually, think it’s a wonderful complement to the conversation for us to have with Shopify. Obviously, the investment is new, but our relationship with Shopify is solid and I look forward to as we continue to work with the Kintsugi team bringing a message to Shopify of how we can continue to support their growth.

Okay. Super helpful. And then I had a quick follow-up. I guess one of the benefits of going late in the queue is I got a lot of good questions asked. I got a chance to look at some of your previous scripts just to match some things up here with what you guys just said. And you called out Oracle a lot more, David, on today’s call than you had previously, and I wondered if that was intentional. I know you guys have been saying that, hey, well, we are prepared across many ecosystems. But it did seem like you certainly called out Oracle a little bit more right now. So I was wondering if that is correct and if you can touch on that a little bit. Thank you, guys.

Yeah. We enjoyed a great relationship with Oracle. I didn’t call them out of the net. Quarter-to-quarter, we have unique wins. They may be takeaways from competitors or good stories to demonstrate the breadth and depth of our capabilities in the win story. In this quarter, we were fortunate to have a number of wins in the Oracle community. I am thrilled that we have a new go-to-market relationship with Oracle. They formed an incredible program and we are a top tier ISV partner within. It’s a multi-tier program. We’re at their top tier for ISVs of working with SIs, ISVs and the Oracle team together to better serve and bring customer value. I think it’s transformative in the industry. It doesn’t exist. I don’t know if that program existing anywhere else and I’m really excited about that. But the wins of this quarter were really just driven by historical pipeline that we’ve been working on that happened to fall into Q1 with Oracle.

Great. Thanks very much.

Yeah.

Thank you. The next question comes from Andrew DeGasperi with BNP Paribas. Please go ahead.

Thanks. I guess one question I wanted to ask you is you brought up supply chains may be changing, and I just wanted to follow-up and see if this is actual conversation you’re having with customers after deciding to go with your platform to reflect that change in the environment today?

Yeah. No, Andrew, to be crystal clear, it’s conversations we are having, it has not led to immediate jumps to our platform. It’s more with existing customers who are now thinking about it or new logos who are trying to understand an opportunity we may be looking at and saying here’s our value prop and we’re starting here. A lot of companies are still taking a wait and see attitude on their shifting their supply chain. It’s more about they want to understand how we’ll help them adapt to it. I started the call talking about being future ready and, I think, more and more customers are starting to think about, I need to be future ready for the dynamism whether it be tariffs that drive me to change my supply chain or all the regulatory change that keeps coming at them. And so that’s really it. I wouldn’t say yet it is a direct driver of our current performance, because it hasn’t shown up yet. The tariff battle is still too new and our sales cycles are a little longer than the tariff battle has been ongoing.

That’s helpful. And then maybe to follow-up, I think, I’ve asked this question to you in the past and I just wondered if you can maybe give us a big picture view of like your end market exposure. And maybe just to follow-up with that as well as more on the marketplaces specifically, have you seen even though you’re saying you’re not seeing any sales elongation, any impacts yet from macro. Just wondering, is that something you’re focused on in terms of what could happen?

Andrew, obviously, we’re monitoring the pipeline carefully. We talk to sales on a very regular basis, John and I. But, fundamentally, the tax is a wonderful horizontal. It applies to heavy machinery, it applies to marketplaces, it applies to retail, it applies to oil and gas, it applies to basically every vertical you can describe indirect tax applies, because it is the most dependable source of revenue for governments around the world. So, the good news is we don’t have a concentration. We may have a concentration of SAP customers or Oracle customers, but we do not have a concentration of this vertical is overwhelming in our space that causes me concern.

Got it. Thank you so much.

Yeah. Sure.

Thank you. The next question comes from Patrick Walravens from Citizens Bank. Please go ahead.

Oh, great. Thank you. Big picture here. Can you just remind us why we’re going to see a reacceleration this year? So 13% growth this quarter, midpoint would be 14% next quarter, and then my model goes 15%, 17% to get to your annual. So, can you just remind us what’s driving that acceleration?

Yeah. I think it’s the continual migration to the cloud that we’re seeing driven by SAP and Oracle that we just like in last year, the second half of last year, we rebounded nicely from a slower Q2 and saw solid performance and, again, visibility to that pipeline, Patrick, that encouraged us. And again, I thought SAP had a great first quarter they announced and, again, our activity in the SAP community kind of parallels that continued pipeline build. So, I think, that’s reason number one. I think then reason number two is we’re continuing to drive with our new offerings more cross sell into the market. And so, I think, we expect cross sell NRR to jump back up to 110 by the end of the year. And I think that will be driven by some of those new capabilities we brought to market. I’m over here in Europe right now and had a number of conversations with customers about some of the new capabilities. And you can just see there, they’re encouraged by we’ve taken their feedback, we’ve designed and tweaked new offerings to expand wallet share within and they’re still ready to address those concerns. And so, I think, those are the two primary drivers that why we continue to see pipeline build and why we expect our revenue to continue to matriculate through the back of the year. Again, not rushing anything from our e-invoicing. We still think e-invoicing will be a slower build in 2025 and it will really be an accelerant of revenue in 2026 when we’ve onboarded enough. So, there’ll be more of an ARR help this year and a revenue help next year.

Great. Thank you.

Yeah. Sure.

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

Thanks, everybody, for joining us today. As always, if you have any follow-up questions or would 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.