Vertex's Cloud Growth Confidence and AI Monetization Timelines Don't Align in 2026 Earnings Calls

Date of Call: Aug 3, 2026

Financials Results

• Revenue: $204M, up 10.5% YOY, at high end of guidance
• Gross Margin: Non-GAAP gross margins increased 15 basis points YOY
• Operating Margin: Adjusted EBITDA margin expanded by more than four percentage points YOY to 25%

Guidance:

• Q3 revenue expected to be $208 to $211 million.
• Q3 adjusted EBITDA expected to be $55 to $57 million.
• Full year revenue guidance narrowed to $825 to $830 million.
• Full year adjusted EBITDA guidance increased to $206 to $210 million from $202 to $208 million previously.
• Full year cloud revenue growth expected to be 18%.

Business Commentary:

Revenue Growth and Durability:

• Vertex reported revenue of $204 million for Q2, up 10.5% year-over-year, reaching the high end of their guidance range.
• This growth demonstrates the durability of the Vertex business, supported by stable customer metrics and strong performance in areas like e-invoicing.

Earnings Leverage and Margin Expansion:

• The company's adjusted EBITDA increased 33% to $51 million, exceeding guidance, with a margin expansion of more than four percentage points to 25%.
• This improvement was driven by greater operating focus and cost discipline, as well as actions taken to sharpen priorities and improve execution.

E-Invoicing Momentum:

• E-invoicing showed strong execution with momentum increasing across all geographic regions, supported by upcoming mandates in France and Germany.
• The strength in e-invoicing is strategic, as Vertex is well-positioned to help customers manage the entire transaction lifecycle, driving both new and existing customer growth.

AI Integration and Productivity Gains:

• Internal AI tool usage increased to 89%, with a 34% improvement in engineering efficiency and a 30% increase in pull request merge rates.
• AI is being used to improve speed, quality, and economics across various departments, with a focus on translating these capabilities into customer-facing product value.

Cloud Revenue and Conversion Challenges:

• Cloud revenue grew 17.9%, but cloud conversions were slower than expected, impacting overall cloud revenue guidance.
• The delay in cloud conversions is attributed to customers taking longer to make decisions on technology moves, influenced by capital allocation and prioritization of other IT projects.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted 'durability of the Vertex business' with revenue growth at the high end of guidance and adjusted EBITDA exceeding expectations. They also noted 'tangible progress' from operational improvements, margin expansion, and strong e-invoicing momentum, stating 'we enter the second half with a stronger cost structure, ramping productivity, improving momentum and compliance in e-invoicing, and a leadership team built to execute.'

Q&A:

• Question from Chris Quintero (Morgan Stanley): What are you doing to enable customers to be more comfortable about adopting AI technologies?
  Response: Engaging customers directly with forward-deployed engineers to help them adapt to new workflows and change management, while seeing steady internal adoption and usage increases.

• Question from Chris Quintero (Morgan Stanley): What are the drivers behind slower cloud migrations?
  Response: Customers are taking longer to decide on cloud conversions due to IT prioritization and capital allocation, but this is a conversion timing issue, not a revenue loss.

• Question from Jared Levine (TD Cowen): How did the demand environment progress over the quarter and into 3Q?
  Response: Demand remained stable with a good mix of cross-sell, up-sell, and new logo opportunities, though some deals elongated due to procurement cycles.

• Question from Jared Levine (TD Cowen): Why did you affirm the annual revenue guide midpoint despite outperforming quarterly?
  Response: Balancing first-half upside with a measured view of second-half growth rate, deal timing variability, and pipeline dynamics to ensure thoughtful, achievable guidance.

• Question from Billy Fitzsimmons (Piper Sandler): Is the cloud revenue guide a near-term blip or a structural challenge? When might it reverse?
  Response: E-invoicing is expected to accelerate cloud revenue growth, while customer cloud migration timing is influenced by internal priorities, but overall movement to cloud is expected to continue with incentives like new AI features.

• Question from Billy Fitzsimmons (Piper Sandler): How is the Brinta integration progressing?
  Response: Integration is going well, bringing new business opportunities in Latin America and enhancing Vertex's capabilities, though it requires careful pacing to preserve Brinta's strengths.

• Question from Samad Samana (Jefferies): Is cloud guidance now de-risked, and should we use first-half conversion as the new normal?
  Response: Guidance reflects the lower conversion ratio seen, but the back half still has pipeline activity and risk; it's not risk-free, but considers current trends.

• Question from Samad Samana (Jefferies): What drove the slowdown in scaled customer growth?
  Response: Some deals moved between quarters (e.g., a seven-figure deal slipped from June to July), but no clear negative trend; growth is expected to continue.

• Question from Steve Enders (Citi): How are e-invoicing dynamics playing out versus expectations, and when will customers expand from single to multi-country adoption?
  Response: Activity met expectations in Q2, with customers starting to add multiple countries; growth from multi-country and full platform adoption is expected in Q4 and 2027.

• Question from Steve Enders (Citi): How should we think about e-invoicing impacting ARR and revenue timing?
  Response: ARR will lead revenue as e-invoicing adoption increases, with revenue inflecting more in Q4 as mandates take effect.

• Question from Brett Huff (Stevens): Is the e-invoicing mix of new vs. cross-sale coming out as expected?
  Response: Both new logo growth and cross-sell into the install base are happening, though more multi-six-figure cross-sell opportunities are desired.

• Question from Brett Huff (Stevens): What metrics should we watch for AI progress?
  Response: Product availability and roadmap announcements, like at the Vertex Exchange event in Q4, will indicate readiness; focus is on 2027 for commercialization.

• Question from Joshua O'Reilly (Needham): What is the SAP ERP ECC transition outlook, and did it impact cloud guidance?
  Response: No material change in migration velocity; activity remains steady across ecosystems, and this is factored into guidance.

• Question from Joshua O'Reilly (Needham): What are the puts and takes for NRR in the second half?
  Response: E-invoicing is a tailwind, and churn improvements from prior periods provide upside potential, but no guidance is given.

• Question from Rob Oliver (Baird): How are customers thinking about e-invoicing consolidation versus fragmentation?
  Response: Mandates are the primary driver, but as countries increase, consolidation becomes a secondary lever; scaling will be focused on in 2027.

• Question from Rob Oliver (Baird): How does e-invoicing impact the cloud growth target?
  Response: E-invoicing activity is factored into the back-half forecast, but revenue impact may be limited in Q3/Q4 due to volume timing, offsetting cloud conversion headwinds.

• Question from Andrew Gasperi (BNP Paribas): How common are customers using multiple tax compliance solutions, and can you displace competitors?
  Response: A persistent percentage of customers use multiple solutions, often due to M&A displacement opportunities exist but are not pervasive.

• Question from Andrew Gasperi (BNP Paribas): Have entitlement expectations changed, and is there improvement?
  Response: Slightly better stability in entitlements over recent quarters, but it remains an area of focus with no major driver yet.

Contradiction Point 1

Cloud Revenue Growth Acceleration and Confidence

Contradiction in the level of confidence and drivers for achieving annual cloud growth targets.

What were the key factors driving revenue growth during the quarter? - Jared Levine (TD Cowen)

2026Q2: The first-half performance provides confidence in achieving the full-year outlook... guidance was narrowed to reflect a balanced view of the second-half environment. - John Schwab(CFO)

Why was annual revenue guidance affirmed despite outperforming quarterly guidance? - Andrew DeGasperi (BNP Paribas) - Follow-up:

2026Q1: Confidence in the 25% cloud growth target is based on the ramp of e-invoicing... This will accelerate cloud growth in the back half of the year. - Chris Young(CEO)

Contradiction Point 2

AI Product Monetization Timeline

Contradiction on when AI capabilities will be broadly sold and monetized.

Brett Huff (Stevens) - Brett Huff (Stevens)

2026Q2: The Vertex Exchange event in Q4 2023 is a key milestone... The goal is for 2027 to be the year when AI capabilities are more broadly sold. - Chris Young(CEO)

"What key metrics should be monitored to assess AI product readiness and muscle building?" - Brett Huff / Patrick Walravens (Stephens / Citizens)

2026Q1: AI-Augmented Products (e.g., Smart Categorization)... These are ramping and will be a key part of the go-to-market effort in late 2026/2027. - Chris Young(CEO)

Contradiction Point 3

Drivers Behind Cloud Conversion Activity and Guidance

Contradiction on whether cloud conversion weakness is a timing issue or indicative of broader project prioritization.

Chris Quintero (Morgan Stanley) - Chris Quintero (Morgan Stanley)

2026Q2: Cloud conversion activity was lower in H1 than anticipated, impacting Q2 and continuing into Q2. This is a conversion timing issue, not a revenue loss... - John Schwab(CFO)

What factors are contributing to the slower cloud migration progress? - John Messina (Raymond James)

2025Q4: The deceleration is due to several factors: ... and softness in cross-sell/upsell. New logo growth was strong in 2025. The plan to address this includes new product development and a customer-first approach. - John Schwab(CFO)

Contradiction Point 4

Outlook for SAP Migration Velocity

Contradiction on whether the pace of SAP migrations has slowed or remained steady.

Joshua O'Reilly (Needham) - Joshua O'Reilly (Needham)

2026Q2: There has been no material shift in the velocity of SAP migrations. Migrations continue at a steady pace, and this is factored into guidance. - Chris Young(CEO)

What is the outlook for SAP ERP ECC transitions, particularly regarding customers opting for 2030 extended maintenance instead of earlier migration and its impact on cloud guidance? - Joshua Reilly (Needham & Company)

2025Q4: The SAP pipeline in 2025 was good, though the expected migration pace was slower than a year ago. - Chris Young(CEO)

Contradiction Point 5

Cloud Growth Guidance and Underlying Trends

Contradiction on the stability of cloud growth drivers and the company's confidence in its guidance.

Samad Samana (Jefferies) - Samad Samana (Jefferies)

2026Q2: The guidance reflects the lower conversion ratio observed. This is the activity being called out, and it's built into the H2 forecast. While there is still pipeline activity, the guidance is not risk-free; it is based on current observations and expected deal closures. - John Schwab(CFO)

Is the cloud guidance now de-risked, and should H1 conversion activity serve as a template for future cloud conversions? - Samad Samana (Jefferies LLC)

2025Q3: The fundamental demand drivers are still intact and expects progress towards the targets in 2026/2027. It is too early to change the long-term guidance... - John Schwab(CFO)