Vertex (VERX) Q4 2025 Earnings Call Transcript

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Date

Wednesday, Feb. 11, 2026 at 8:30 a.m. ET

Call participants

• President and Chief Executive Officer — Christopher Young
• Chief Financial Officer — John Schwab

Takeaways

• Total Revenue -- $194.7 million for the quarter, representing a 9.1% increase year over year and meeting company guidance.
• Full-Year Revenue -- $748.4 million, reflecting growth of 12.2% over 2024.
• Subscription Revenue -- $166.2 million for the quarter, up 8.9% year over year; full-year subscription revenue reached $639.7 million, increasing 12.8%.
• Cloud Revenue -- $94.6 million for the quarter, up 23% year over year; full-year cloud revenue totaled $352.9 million, with 27.9% annual growth, aligning with the 28% guidance.
• Services Revenue -- $28.5 million for the quarter, up 10.2% year over year; $108.8 million for the year, with 9.2% growth.
• ARR (Annual Recurring Revenue) -- $671 million at quarter end, up 11.3% year over year.
• Net Revenue Retention (NRR) -- 105% at year-end, consistent with company targets.
• Gross Revenue Retention (GRR) -- 94% at year-end, within the 94%-96% target range.
• Average Annual Revenue per Customer (AARPC) -- $137,867, an increase of 12.4% year over year.
• Scaled Customer Growth -- 12% for the quarter.
• Adjusted EBITDA -- $42.5 million for the quarter, up 11.6% year over year; $161.5 million for the year, increasing 6.3% over 2024, both exceeding the high end of guidance by approximately $500,000.
• Adjusted EBITDA Margin -- 21.8% for the quarter and 21.6% for the year.
• Free Cash Flow -- $10.1 million for the quarter; $47.6 million for the year, modestly below expectations for the seasonally strong fourth quarter.
• True-Up Revenue Impact -- $10 million lower than 2024, reducing full-year revenue growth by nearly two percentage points and fourth-quarter growth by approximately four percentage points.
• R&D Spend -- $19.9 million for the quarter; $71.3 million for the year; with capitalized software, total R&D spend was $42.8 million for the quarter and $159.8 million for the year (22% and 21.4% of revenue, respectively), primarily due to investments in Ecosio and AI.
• Customer Attrition -- Increased in 2025, with majority in small accounts (average annual revenue below $50,000), while competitive losses remained a minor component.
• New Logo Revenue -- Up 20% in 2025, encompassing competitive takeaways and migrations from homegrown solutions.
• E-invoicing Upsell -- Existing customer e-invoicing cross-sell generated over 20% average increases in ARR per account, with multiple multi-country wins during the quarter.
• Guidance -- 2026 revenue projected at $823.5 million to $831.5 million, cloud revenue growth of 25%, and adjusted EBITDA of $188 million to $192 million (23% margin at midpoint).
• Share Repurchase -- $10 million repurchased in the quarter at $20 per share; $140 million remains under authorization.
• Unrestricted Cash and Credit Availability -- $314 million in cash and $300 million undrawn line of credit at quarter end.
• AI Initiatives -- Launched smart categorization and enhanced Copilot features, resulting in marquee industry wins and improved customer experience analytics.
• Strategic Partnerships -- New cpa.com alliance for an AI-driven compliance solution and continued expansion of Kintsugi-powered offerings for SMBs.

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Risks

• John Schwab stated, "true-up revenue in 2025 was approximately $10 million lower than 2024," materially reducing revenue growth rates and impacting fourth-quarter and full-year results.
• Christopher Young disclosed, "in 2025, we saw lower entitlement growth, a moderation of new upsell and cross-sell revenue, and slightly higher customer attrition," which negatively affected retention metrics.
• Christopher Young said, "attrition continues to be concentrated in smaller accounts," indicating revenue leakage from the lower end of the customer base.
• John Schwab reported, "fourth-quarter free cash flow was $10.1 million, and for the full year, free cash flow was $47.6 million. This was a bit lower than expected, as the fourth quarter is usually our strongest free cash flow quarter."

Summary

Vertex (NASDAQ:VERX) reported double-digit annual revenue growth, and fourth-quarter revenue growth of 9.1% year over year, driven by healthy increases in subscription and cloud revenues. Management highlighted e-invoicing as a significant upsell catalyst, with recent mandates—particularly in Belgium—resulting in notable ARR gains for both existing accounts and new logos. The company emphasized its strategic transition to AI-first operations, referencing successful adoption of smart categorization and expanded CoPilot implementations, with leadership claiming measurable impact among enterprise customers. Increased R&D and customer success investments reflect a focus on innovative product development and retention, while new partnerships, including cpa.com and Kintsugi, aim to broaden market reach and functionality.

• Management underscored that "our revenue-based pricing model insulates us from the concerns investors have around SaaS companies with seat-based licensing models," positioning the company favorably compared to seat-based SaaS providers.
• "True-up revenue" was called out as a notable drag on year-over-year growth, and the company provided explicit numerical detail on its impact to reported financials.
• Christopher Young explicitly prioritized mitigating controllable attrition via expanded customer success initiatives and AI-enabled engagement analytics.
• Vertex’s pipeline in SAP S/4HANA migrations and acceleration of compliance mandates supports management’s projected 2026 guidance, with timing variability cited for decision cycles.

Industry glossary

• ARR (Annual Recurring Revenue): An annualized revenue metric representing the value of all active recurring contracts at a specific point in time, typically used in software and SaaS models.
• True-up Revenue: Revenue generated when a customer exceeds their contracted usage entitlements, resulting in incremental fees recognized in the quarter of overage.
• NRR (Net Revenue Retention): A measure of recurring revenue retained from existing customers over a specific period, including expansion, downgrades, and churn.
• GRR (Gross Revenue Retention): The percentage of recurring revenue retained from existing customers, excluding upgrades or expansion, over a defined period.
• AARPC (Average Annual Revenue per Customer): Total annual recurring revenue divided by the number of active customers, indicating average contract value.
• Smart Categorization: An AI-powered feature introduced by Vertex to automate accurate tax categorization of product SKUs for compliance across jurisdictions.
• SAP S/4HANA Migration: The process by which customers transition their enterprise resource planning platforms from SAP ECC to SAP S/4HANA, often triggering new tax engine software selection.

Full Conference Call Transcript

Christopher Young: Welcome everyone and thank you for joining us. It's great to join you on my first earnings conference call as President and CEO of Vertex. Our financial results for the fourth quarter came in as expected. Revenue was $194.7 million, in line with our guidance for the quarter, while adjusted EBITDA exceeded the high end of our guidance at $42.5 million. For the full year, Vertex delivered double-digit revenue growth along with solid profitability. Since this is my first time speaking to our investors and analysts, I wanted to cover a few topics. First, why I'm excited to join Vertex at this point in the company's history.

Second, I'll give you a perspective from my conversations with customers, partners, and employees over the past three months. And third, my view on how we can accelerate our revenue growth. Then I'll share some exciting new business wins from the fourth quarter. Many investors have asked me what attracted me to come to Vertex. But I'll start there. First, I was drawn to Vertex's incredible blue-chip customer base, which includes over 60% of the Fortune 500. Around the world, leading enterprises trust Vertex to stay compliant with ever-changing indirect tax requirements. Our customers described to me that Vertex is trusted, reliable, flexible, and has the deepest domain expertise in the industry.

Likewise, our partner ecosystem is built on strong, long-standing relationships with the key technology and implementation partners that serve this customer base. These partners consistently recognize Vertex as the leading provider of indirect tax solutions for the enterprise. At the same time, both groups want to see us move faster and drive more innovation. And meeting that mandate will be job one for us in the near term. Second, Vertex has a long-standing track record of revenue growth, profitability, and positive cash flow across economic cycles, as well as clear growth vectors for the future. Our core expansion is steady, and our land and expand motion is proven.

We have a new high-growth business in compliance and e-invoicing, which exceeded our expectations in its first year and has meaningful catalysts on the horizon. Third, I believe Vertex has an incredible opportunity to transform our business and help our customers transform theirs through artificial intelligence. This aligns well with my career experience, particularly my most recent role. There, I spent considerable time building partnerships with and, in several cases, investing in companies driving AI innovation. And I did that while working closely with many of my Microsoft teammates who are developing their own AI technologies. Turning to our near-term priorities.

While our full-year growth was healthy and respectable, in 2025, we saw lower entitlement growth, a moderation of new upsell and cross-sell revenue, and slightly higher customer attrition. This impacted our retention metrics, which John will discuss shortly. In looking at customer attrition, business and market factors such as M&A and bankruptcy were the single largest driver of 2025 attrition. And this is largely uncontrollable by Vertex. It's also important to note that attrition continues to be concentrated in smaller accounts. The average annual revenue per customer for lost accounts in 2025 was under $50,000, far below our overall average revenue of $138,000 per customer. Finally, I'll note that competitive losses are a modest component of attrition.

And Vertex continues to win far more ARR from competition than we lose to our competition. That said, we are taking several actions to mitigate controllable attrition by expanding customer success coverage to a broader cohort of customers and leveraging AI tools to better serve our customers. Our AI Copilot in the product will help customers address more questions without needing to call us for help. We have also implemented analytics to predict potential customer attrition so that we can engage them more proactively, including personal phone calls from me to address their concerns. I'm also confident that our new product offerings, including e-invoicing and smart categorization, will help us accelerate cross-sell and upsell revenue in 2026.

And we are already seeing measurable traction with both. On a positive note, revenue from new logos remained healthy and was up 20% in 2025. This included both competitive takeaways and customers who previously used homegrown solutions and switched to Vertex. It is essential that we continue to seize this opportunity. Now let's talk more about AI. Vertex is well-positioned to help tax departments improve their workflows with artificial intelligence. Indirect tax compliance is rule-dense, data-heavy, and highly repetitive. It's the type of work that lends itself well to AI transformation. And we are starting from a fortified position as Vertex software is embedded in the workflows of our customers.

In addition, our customers place a premium on tax accuracy, something they have trusted Vertex with for years. And I'll add that our revenue-based pricing model insulates us from the concerns investors have around SaaS companies with seat-based licensing models. As I shared earlier, I see significant and unique opportunity for us to capitalize on these trends. And that's one of the reasons I joined Vertex. In 2025, Vertex made significant investments in AI products, tools, and functionality. This included the launch of our smart categorization offering, which is squarely in the wheelhouse of AI adoption.

It reduces the manual work tax departments undertake every day to ensure their product SKUs are mapped to the correct tax rates across all jurisdictions. During the early adoption phase, we secured several marquee six-figure wins in the retail industry. To address this growing opportunity, we are broadening functionality in smart categorization to cover our full retail customer base. We will expand smart categorization to additional industries where the offering has applicability. In addition, in 2025, we expanded the capabilities of Vertex CoPilot. CoPilot, in turn, helps us understand the tasks and features customers are interacting with Copilot about, providing us with insights in the areas that are causing friction in the use of our solutions.

This can help us enhance our products, develop new AI features, and inform future product development. Finally, we continue to leverage our partnership with Kintsugi. On last quarter's call, we highlighted Kintsugi powered by Vertex, which enables SMBs to automate key compliance functions while providing real-time dashboards for jurisdictional liability and exposure tracking. Then in December, Kintsugi and Vertex partnered with cpa.com to launch an AI-driven solution to help accounting firms deliver automated, accurate, and scalable sales tax compliance for their clients. This then helps our partners in the accounting industry unlock new advisory revenue opportunities. While all this is a good start, we can do much more with AI. I see a large opportunity on this front.

It's my personal goal to transform Vertex into an AI-first business both in how we work internally and through the new capabilities we deliver to our customers. I will have more to share on this transformation in the near future. With that, let's review some examples of how companies are depending on Vertex to stay in compliance with indirect tax. First, wins within our installed base. It's not uncommon for enterprise customers to use Vertex in one area of the business and a competitor in another. In many cases, over time, these customers will reevaluate their tax software footprint and standardize on Vertex.

As an example, a customer in the metals and mining industry dramatically expanded its relationship with Vertex in the fourth quarter. This customer had used Vertex's returns filing managed service for years, even though it was using a competitor for tax calculation. However, during an SAP S/4HANA transformation, the company made the decision to standardize on Vertex. As a result, this is now a fulsome mid-six-figure relationship, including sales and use tax calculation as well as exemption certificate manager SAP Plus tools, SAP Accelerator, and other Vertex offerings. In the fourth quarter, we also won in-store point-of-sale tax calculation for a global quick-service food and beverage retailer.

This long-standing Vertex customer historically used us for tax calculation for its mobile app and gift card businesses, but a homegrown solution at the point of sale. They switched to Vertex during a redesign of their point-of-sale system, leading to high six figures of new revenue. In the Oracle ecosystem, we increased our business with a relatively new customer in the computer products manufacturing industry. Earlier this year, the customer spun out from its parent company and selected Vertex for use tax calculation. In the fourth quarter, they completed the transition and added sales tax calculation, leading to six figures of new annual revenue for Vertex.

Turning to new logos, we landed one of our largest new logos ever in Europe with a leading healthcare provider. Revenue for this new customer will be well into the seven figures. This deal was catalyzed by a global SAP S/4HANA transformation led by our partners and DMA. It included value-added tax calculation across the customer's global footprint, as well as sales and use tax in the United States. The customer will also be using our end-to-end compliance offering to file returns in 30 countries around the globe. Also in conjunction with an SAP S/4HANA transformation, a major North American power utility selected Vertex as its first-ever indirect tax provider.

This enterprise customer with revenue of nearly $10 billion was previously using manual solutions for use tax calculation. In addition to use tax calculation, this mid-six-figure deal, which is referred to us by our partner Accenture, also included SAP Plus tools, Vertex Consulting, and other ancillary products and services. This deal validates the greenfield opportunity for Vertex with large companies that are still using homegrown solutions for indirect tax. In the Oracle ecosystem, a software provider in the payment space selected Vertex to displace an entrenched competitor. We were differentiated by our ability to support the customer's massive scale and volume of transactions as well as our referenceability across the Oracle ecosystem.

This led to low six figures of new revenue for Vertex. Now turning to e-invoicing. In our first full year in the business, we've seen strong traction with both existing customers and new logos. Accelerating demand around upcoming mandates, especially Belgium, which launched its e-invoicing mandate in January, and significant product differentiation for our end-to-end offering, which includes e-invoicing, as well as VAT calculation and compliance in a single unified platform. We continue to believe our platform is unique in the marketplace and gives us a competitive advantage. Now let me give you some color on the types of e-invoicing deals we won during the fourth quarter.

Wins with existing customers included a global payments company that selected Vertex for e-invoicing mandates in Belgium, Poland, and France. A consumer products company that selected Vertex for mandates in Germany, Belgium, and Poland. And a consumer electronics company also selected Vertex for mandates in Italy, Belgium, Poland, and Denmark. Note that all of these examples are long-standing scale customers. And the e-invoicing cross-sell increased our ARR with these customers on average by over 20%. This should give investors a sense of the upsell opportunity that e-invoicing represents within the installed base. New e-invoicing logos include a 14-country win with a German building products company.

E-invoicing and value-added calculation for Belgium, France, and Germany with a North American energy products company. And a deal for Belgium, Germany, France, and the UK, and Ireland for the North American healthcare products company. All these new logos were in the mid to high five-figure range, and while this is lower than our overall average revenue per customer, these initial engagements gave us a launching pad for our proven land and expand sales motion. Not just with additional e-invoicing countries, but for the full suite of Vertex tax compliance solutions. So to summarize, Vertex had a solid fourth quarter.

2025 revealed some challenges, but I am confident that we have a cohesive plan to restore accelerating growth in the business. Our AI opportunity is in focus, and our first offering, smart categorization, is making a real difference for enterprise customers while driving revenue. And we have a growing opportunity in global compliance as e-invoicing mandates continue to proliferate around the globe. All in, I believe I'm joining Vertex at an extremely opportune time. With that, I'll turn the call over to John to discuss the financials in detail. John?

John Schwab: Thanks, Chris, and good morning, everyone. I'll now review our results in detail and provide financial guidance for the first quarter and full year of 2026. In the fourth quarter, revenue was $194.7 million, up 9.1% compared to last year's fourth quarter, and in line with our guidance. For the full year, revenue was $748.4 million, up 12.2% from 2024. In the fourth quarter, our subscription revenue increased 8.9% year over year to $166.2 million. For the full year, subscription revenue was $639.7 million, up 12.8% year over year. I want to provide additional details and clarity around the impact of true-up revenue on our revenue growth.

True-up revenue is the payment that is owed to Vertex when a customer overruns its contracted entitlements. It is recognized as revenue in the quarter, and the payment of a true-up typically coincides with the corresponding increase in ARR. As a reminder, we historically have realized $1 to $2 million of true-up revenue in the first three quarters of the year and $2 to $4 million in the fourth quarter. In 2024, we called out elevated true-up amounts relative to expectation. However, in 2025, as we had mentioned, this did not recur. And renewing customers were generally within the usage limits of their contracted entitlement amount. As a result, true-up revenue in 2025 was approximately $10 million lower than 2024.

This alone reduced our 2025 full-year revenue growth rate by just under two percentage points. Lower true-up revenue in the fourth quarter reduced the year-over-year revenue growth rate by approximately four percentage points. And the impact on subscription revenue was approximately two percentage points for the year and five percentage points for the fourth quarter. Turning now to services revenue. Our services revenue in the fourth quarter grew 10.2% over last year's fourth quarter to $28.5 million. Full-year services revenue was $108.8 million, up 9.2% year over year. Our cloud revenue was $94.6 million in the fourth quarter, up 23% from last year's fourth quarter.

Note that the decrease in quarterly cloud revenue growth was due to the lapping of the Ecosio acquisition and the elimination of the inorganic contribution to the growth rate. For the full year, cloud revenue was $352.9 million, up 27.9% year over year and generally in line with our guidance of 28% growth for the year. Annual recurring revenue or ARR was $671 million at quarter end, up 11.3% year over year. At year-end, net revenue retention or NRR was 105%, and gross revenue retention or GRR was 94%, within our targeted range of 94 to 96%. Average annual revenue per customer or AARPC was $137,867, up 12.4%. And our scaled customer growth in the quarter was 12%.

For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP results in this morning's earnings press release. Our gross profit for the fourth quarter was $140.4 million, and gross margin was 75.7%. This compares with gross profit of $133.9 million and a 75% gross margin in the same period last year. Our gross margin on subscription software was 82.7%, compared to 81.4% in last year's fourth quarter and in 2025. And gross margin on services revenue was 34.9% compared to 37.6% in last year's fourth quarter and 28.8% in 2025. This reflects lower Ecosio margins driven by increased consulting investments to support our revenue growth.

In the fourth quarter, research and development expense was $19.9 million compared to $17.3 million last year. For the full year, R&D was $71.3 million compared to $56.4 million last year. With capitalized software spend included, R&D spend was $42.8 million for the fourth quarter and $159.8 million for the full year, which represented 22% of revenue for the fourth quarter and 21.4% of revenue for the full year. The increase in R&D spending was a result of the 2025 investments in Ecosio and AI that Chris had detailed earlier. Our selling and marketing expense was $48.7 million or 25% of total revenues, an increase of $5 million and approximately 11.4% from the prior year period.

For the year, our selling and marketing expense was $178 million, up 15.3% from last year. The increase in selling and marketing expense in the fourth quarter was due to costs from our Vertex Exchange conference, which was held in October. And general and administrative expense was $36.2 million, up $2 million from last year. For the full year, general and administrative expense was $149.3 million compared to $128.2 million last year. Adjusted EBITDA was $42.5 million, an increase of $4.4 million or 11.6% year over year. And full-year adjusted EBITDA was $161.5 million, representing an increase of $9.6 million or 6.3% over 2024. Both were approximately $500,000 above the high end of our guidance.

This represents adjusted EBITDA margins of 21.8% for the fourth quarter and 21.6% for the full year. Our fourth-quarter free cash flow was $10.1 million, and for the full year, free cash flow was $47.6 million. This was a bit lower than expected, as the fourth quarter is usually our strongest free cash flow quarter. While collections were lower than typical for the fourth quarter, I will note that in January, we realized approximately $7 million of cash collections in excess of what we've seen in previous years. In the fourth quarter, we repurchased approximately $10 million of our shares in the open market under our stock buyback authorization at an average price of $20 per share.

We have approximately $140 million remaining under our authorization. We ended the fourth quarter with over $314 million of unrestricted cash and cash equivalents and $300 million of unused availability under our line of credit. Now turning to guidance. For the full year of 2026, we expect revenues of $823.5 million to $831.5 million, cloud revenue growth of 25%, and adjusted EBITDA of $188 million to $192 million, reflecting a margin of 23% at the midpoint. For the first quarter of 2026, we expect revenues of $193.5 million to $196.5 million and adjusted EBITDA of $40.5 million to $43.5 million, reflecting a margin of 21.5% at the midpoint.

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

Christopher Young: Thank you, John. Before we take your questions, I want to thank all of our Vertex employees around the world for their unwavering dedication to serving our customers in 2025. Their commitment to our mission to accelerate global commerce with a global compliance platform strengthened by AI is evident in everything they do. They exemplify the strong culture that defines Vertex, and I'm truly proud to join this team and honored to be able to lead it. Earlier this year, I introduced our employees to my foundational tenets to make 2026 and beyond a success for our company and for our investors, and I'll share them with you now. First, we play to win.

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

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

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question comes from Andrew DeGasperi from BNP Paribas. Please go ahead.

Andrew DeGasperi: Good morning. Thanks for taking my question. Christopher, I know you've been there only a few weeks, so maybe this is a little unfair to ask. But maybe elaborate a little more in terms of what you said were the losses to competitors at the lower end of the market. Was this like a price-driven change? And I assume this is not AI-related. Is that correct?

Christopher Young: That is correct. And thank you for the question. You can call me Chris. No problem on here. I appreciate it. In reference to those remarks, what I was talking about is our overall attrition. As you saw from some of the numbers, attrition was higher in 2025 than we've experienced in the past. And some of the drivers of that were, number one, M&A and bankruptcies, which we've talked about on prior earnings calls, that was up this year. And that was a significant factor in this.

But the second one is that we saw our highest amount of churn in our smaller customers, those that would have had ARR of under $50,000 per year, and that compares to an average ARR per customer of $138,000 per year. So it was concentrated in smaller customers. Some of those went to competition, but when we look at our head-to-head performance with competition, we're winning more ARR from our competitors than we're losing to competitors.

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

John Schwab: Yeah. Thanks, Andrew, for the question. In terms of our guidance philosophy, it hasn't changed. Again, you know, we took a very thoughtful approach to setting it where we set it. We feel very good about it. And, you know, we took into consideration a lot of the activity and the things that we saw develop during 2025 into it as we set it. And so listen, our plan is to get back to that, you know, beat and raise cadence that we've had for a number of years, and we want to make sure that we took everything into consideration and set it at the right levels to do that. So we feel good about that.

And listen, when I think about 2026, you know, clearly, we think there is good opportunity there for activity around the e-invoicing, which is, you know, many of the mandates are coming live at the back half of the year. And so that is certainly one of the growth vectors that we see out there that we're chasing after. And I think Chris talked a little bit about SmartCat and the activity there. I mean, that's a nice product. It's got some traction with some very big customers, and I think that's an exciting tool out there, and it's going to be interesting to see how that plays out over time.

Operator: Thank you. The next question comes from Christopher Quintero from Morgan Stanley. Please go ahead.

Christopher Quintero: Hey, guys. Chris, it's great to meet you. My first question is for you. So you have a really interesting background and set of experiences at Microsoft, McAfee, Cisco. Curious what parallels you can draw from your time at each one of these, and what you think will be particularly helpful from these experiences here as you lead Vertex.

Christopher Young: Yeah. Thanks for the question, Chris. I appreciate it. And, you know, when I look at our company and I look at our business, there's a couple of parallels that stand out for me. The first one, I'll go to my most recent. You know, obviously, I spent a lot of time at Microsoft. A lot of the time there was, you know, when generative AI first started to change what we were seeing in the industry, including what we were doing with OpenAI.

And, you know, you could see that there was going to be a real opportunity for companies to transform themselves using AI, both what they do internally and, in the technology industry, what we would deliver to our customers. And so I spent actually a lot of last year really looking at what I thought would be the industries where there was opportunity to transform.

And, you know, this was one category that I thought, you know, because of where we sit, because of the kinds of work that happens in finance and accounting departments, that, you know, given the position we sit in, we can offer them AI capabilities that really take a lot of the task work off of their plates. And that's something that we think is a huge opportunity. It's why, you know, I spent time talking about what we're doing with smart categorization. You could look at returns processing as another category where it's heavily manual.

And we believe there's opportunities like that to help our customers automate what they do using generative AI, which will save them time, save them cost, and improve their overall experience. If I kind of go back from there, you know, I think Vertex does have some similarities to what I saw in the cyber landscape. Cyber is one of those categories that you constantly are refreshing your content. One of the things that makes cyber companies great is they understand the threat landscape, and it's ever-changing. And in our business, the compliance landscape is ever-changing. There's constantly new tax rules. There's new compliance mandates. That's what we're seeing in the e-invoicing space.

And I think one of the things that have told me about Vertex, which gives me a lot of confidence in what we're doing and our position in the market, is that they really trust our content work. They purchase from us because they see us as delivering the best content in the industry. And they recognize that it's ever-changing and that they look to Vertex to stay on top of it. You know, I had one customer tell me in specific.

He said, I'm able to run a lean tax department because I rely heavily on Vertex to deliver both the accuracy of your calculations and the updates of your content where we operate that keep us up to date on what we've got to comply with across our different jurisdictions.

Christopher Quintero: And then I also wanted to ask about the net retention rates. Obviously, that came down a bit. And it makes sense in the commentary you all gave. Curious about your expectations around where that should be on a kind of more medium-term normalized basis and how long you think it can take to get back there?

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

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

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

Operator: The next question comes from Joshua Reilly from Needham. Please go ahead.

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

Christopher Young: Yeah. We had a good 2025 in our SAP pipeline, and I shared with you all some of the wins that were part of that migration that customers are doing with SAP from ECC to S/4HANA. The way I would characterize it is I think some of the expectations that were there a year ago, we didn't realize it the way it was expected a year ago. But we do continue to see sort of a steady growth of these opportunities. And we're winning our same win rates on each one of these opportunities as they come up. But I think a couple of things that we're seeing. One is it's taking customers longer.

I think you've seen some of that in the broader market space. And we're also seeing that it's not necessarily like the timing is a little harder to predict when the tax engine decision will happen in their overall migration process. But, you know, we have a very close partnership with SAP. We work very closely with their teams. We also obviously work very closely with a lot of our SIs and the big four accounting firms that work very closely in this space. They always propose us as the core enterprise solution for this because of the work and the value that we're able to bring to customers. And so, you know, we feel good about this pipeline.

We feel good about our win rates. But, you know, we just want to be balanced about how we're going to see that business flow over the course of the next couple of years.

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

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

We believe we're going to automate all of that with AI, and that will allow our customers to...Christopher Young: ...have a more seamless experience. By automating these processes, our team can focus on higher-value interactions with customers, addressing their needs more effectively and efficiently. This approach will enable us to expand our customer success coverage without necessarily having to scale our headcount proportionally. We are committed to leveraging AI to enhance our customer service capabilities and ensure that we are meeting the needs of our customers in a timely and effective manner. This is a key priority for us as we move forward.

Operator: Thank you. The next question comes from Brett Huff from Stephens Inc. Please go ahead.

Brett Huff: Thanks. Good morning, everyone. Chris, welcome to Vertex. I wanted to ask about the competitive landscape. Can you give us a sense of how you see Vertex positioned against your main competitors, and what differentiates Vertex in the market?

Christopher Young: Thanks for the question, Brett. I appreciate it. When I look at the competitive landscape, I see Vertex as being very well-positioned. We have a strong reputation for delivering high-quality, reliable solutions that our customers trust. Our deep domain expertise in indirect tax compliance is a significant differentiator for us. We are known for our ability to stay ahead of the ever-changing tax regulations and provide our customers with the most accurate and up-to-date content. Additionally, our strong partner ecosystem, which includes key technology and implementation partners, further enhances our competitive position. We are recognized as the leading provider of indirect tax solutions for the enterprise, and our customers value the flexibility and reliability of our solutions.

As we continue to innovate and expand our offerings, particularly in areas like AI and e-invoicing, we believe we will further strengthen our competitive advantage and continue to win in the market.

Operator: Thank you. The next question comes from Samad Samana from Jefferies. Please go ahead.

Samad Samana: Hi, Chris. Congrats on the new role. I wanted to ask about the AI initiatives you mentioned. Can you provide more detail on how you plan to integrate AI into Vertex's offerings and what impact you expect it to have on the business?

Christopher Young: Thanks, Samad. AI is a significant focus for us, and we see it as a transformative opportunity for Vertex. We are integrating AI into our offerings in several ways. First, we are using AI to enhance our existing products, such as smart categorization, which helps automate the manual work tax departments do to ensure product SKUs are mapped to the correct tax rates. This reduces the time and effort required by our customers and improves their overall experience. Second, we are leveraging AI to improve our internal processes, such as customer support and success, as I mentioned earlier. By automating routine tasks, we can free up our team to focus on higher-value interactions with customers.

Finally, we are exploring new AI-driven solutions that can provide additional value to our customers, such as predictive analytics and advanced data insights. We believe that AI will not only enhance our current offerings but also open up new opportunities for growth and innovation. We are committed to being an AI-first company and are excited about the potential impact it will have on our business and our customers.

Operator: Thank you. This concludes the question and answer session. I would like to turn the conference back over to Christopher Young for any closing remarks.

Christopher Young: Thank you, everyone, for joining us today and for your thoughtful questions. I am excited about the future of Vertex and the opportunities ahead of us. We are committed to driving innovation, delivering value to our customers, and achieving our growth objectives. I look forward to updating you on our progress in the coming quarters. Thank you again for your support and interest in Vertex. Have a great day.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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