Vertex's Q3 2025 Earnings Call: Contradictions Emerge on E-Invoicing Adoption, SAP ERP Migration Timing, and Entitlement Growth Headwinds

Date of Call: None provided

Financials Results

• Revenue: $192.1M, up 12.7% year-over-year
• Gross Margin: 73.9%, compared with 74% in the same period last year

Guidance:

• Q4 2025 revenue expected to be $192M-$196M; adjusted EBITDA $40M-$42M (≈21.1% margin at midpoint).
• Full-year 2025 revenue expected $745.7M-$749.7M; cloud revenue growth ~28%; adjusted EBITDA $159M-$161M (≈21.4% margin at midpoint).
• Board authorized share repurchase program up to $150M.

Business Commentary:

* Revenue and Growth Metrics: - Vertex reported revenue of $192.1 million for Q3, up 12.7% year-over-year. - Subscription revenue grew 12.7%, and cloud revenue increased by 29.6%. - The growth was driven by strong cloud revenue performance and increased margin leverage from automation initiatives.

• Adjusted EBITDA and Earnings:
• Adjusted EBITDA for the third quarter was a record $43.5 million, exceeding the high end of their guidance by $2.5 million.
• This represented an EBITDA margin of 22.6%.

• The increase was due to the strength of the company's strategy in core areas and better-than-expected operational performance.

• Customer Retention and Migration Challenges:

• Gross revenue retention (GRR) remained at 95%, within their targeted best-in-class range of 94-96%, while net revenue retention (NRR) decreased to 107%.
• The decrease in NRR was impacted by the bankruptcy of large enterprise customers and faster-than-expected migration to their cloud platform.

• Management attributed the challenges to a few large customers completing their own internal legacy ERP migrations faster than anticipated.

• Acquisition and Investment Strategy:

• The company invested $16 million-$20 million in 2025 to accelerate country coverage and broaden go-to-market infrastructure for its e-invoicing acquisition, ACOSIO.
• Investments also included $10 million-$12 million for productizing Smart Categorization and AI technologies.

• These investments are aimed at supporting strategic growth initiatives and enhancing customer retention.

• AI and Strategic Partnerships:

• Vertex highlighted progress in AI initiatives, including the launch of Kinsugi powered by Vertex, aiming to automate key compliance functions for SMBs.
• New partnerships were formed with companies like Brenta to expand e-invoicing coverage in key Latin American geographies.
• These strategic moves are aimed at enhancing Vertex's market presence and driving future growth.

Sentiment Analysis:

Overall Tone: Positive

• Revenue +12.7% YOY to $192.1M; cloud revenue +29.6%; record adjusted EBITDA $43.5M (22.6% margin); free cash flow $30.2M; ARR +12.4% to $648.2M; board authorized $150M buyback — management emphasizes long-term cloud, e-invoicing and AI opportunities.

Q&A:

• Question from Joshua Raley (Needham): How do you expect the SAP ERP cycle to play out and what caused improved deal flow this quarter? Also, were the two faster-than-expected customer migrations built into prior guidance?
  Response: Industry capacity ramping for S/4HANA; pipeline solid and SAP wins improved this quarter; two large customers migrated to Vertex cloud and shut down legacy systems faster than they had forecast, causing earlier-than-expected revenue timing impacts that were not fully baked into prior guidance.

• Question from Chris Guntero (Morgan Stanley): Has your guidance philosophy changed after two guide reductions and how should we think about entitlement growth affecting NRR?
  Response: Guidance philosophy unchanged; Q3 impact driven by bankruptcies, faster migrations and timing of deal closes; entitlement/expansion visibility remains limited and is being monitored to better assess customer growth cohorts.

• Question from Alex Kowlar (Raymond James): Why the Europe leadership change and how are you thinking about Europe into 2026? Also, are the recent headwinds (true-ups, bankruptcies, migrations) one-time or structural?
  Response: Leadership change was timing and an up-level to support growing e-invoicing/ACOSIO complexity; Europe remains a priority and ready for upcoming mandates; headwinds viewed as largely anomalous clustering rather than structural, with invoicing and SAP migrations expected to accelerate into 2026.

• Question from Adam Hodges (Goldman Sachs): What aspects of AI resonated most with customers at the conference and how fast can Smart Categorization expand beyond retail? Also, are e-invoicing and AI investments tracking to your margin inflection plan?
  Response: Customers favored AI solutions with human-in-the-loop traceability and agent-to-agent integrations (e.g., Dynamics) for enterprise auditability; Smart Categorization will scale from retail into other verticals quarter-by-quarter as data is ingested; Acosio and AI investments are on track and expected to be largely behind by mid-next year enabling margin leverage.

• Question from Jake Rohberg (William Blair): How does your e-invoicing product compare on country coverage and readiness for France/Germany?
  Response: Focused on primary economies; confident and ready for Belgium, France and Germany timelines; continuing to expand coverage (e.g., Brenta partnership for Latin markets) and invest through mid-2026 to be competitive in those regions.

• Question from Brett Huff (Stephens): How should we think about entitlement declines rolling forward and any timing/bolus effects? Any anecdotal change in SAP migration tone?
  Response: Entitlement softness is gradual and driven by customer-specific activity and macro; no discrete timing to expect—it should normalize over renewals; SAP migration activity appears poised to accelerate into 2026 based on partner/backlog feedback.

• Question from Steve Enders (CITI): Were there deal timing issues in Q3 that affected revenue recognition, and is ACOSIO tracking to prior revenue expectations?
  Response: Deals largely closed later in September than anticipated, shifting some revenue timing; ACOSIO is tracking to plan with line of sight to the previously discussed revenue contribution, with Belgium deadline driving near-term visibility.

• Question from Andrew DeGasperie (BNP Paribas): Given e-invoicing, SAP migrations and easier comps, should the business accelerate top-line next year?
  Response: Management expects significant revenue growth in 2026 driven by e-invoicing mandates and SAP migrations, though formal guidance will be provided at the February call.

• Question from Patrick Val Raven (Citizens): Are you maintaining the 2028 targets (20%+ subscription growth, 30%+ cloud growth) and how do bankruptcies factor in given filings were earlier?
  Response: Management remains confident in long-term targets and cloud-first strategy; bankruptcies can reduce revenue but Chapter 11 does not necessarily end licenses immediately, so impacts vary and were factored as anomalies rather than a change to long-term guidance.

• Question from Rob Oliver (BADE): Where does Vertex stand on marketplace/up-market opportunities (Shopify, SAP Hybris, Salesforce) and how are you accounting for entitlements in guidance?
  Response: Vertex is actively partnering with marketplaces (Shopify example) and launched Kinsugi to address SMB/marketplace segments; entitlements and true-ups were incorporated into prior revisions and remain monitored when setting guidance.

• Question from Samantha (Jefferies): What are your largest vertical concentrations and should we be concerned about retail bankruptcies? Also, given management transition and headwinds, why keep long-term targets?
  Response: Manufacturing is largest vertical followed by retail; no material additional retail exposures identified; management believes demand drivers (e-invoicing, SAP migrations, cloud) still support prior long-term targets and will reassess timing, but sees no reason to change targets now.

Contradiction Point 1

E-invoicing Adoption and Impact on Revenue

It involves differing perspectives on the adoption rate of e-invoicing and its impact on revenue, which are critical for understanding the company's growth trajectory and strategic direction.

Did the guidance philosophy change after consecutive guidance cuts, and how do entitlement growth headwinds affect net retention rates? - Chris Guntero (Morgan Stanley)

2025Q3: In e-invoicing, we now have an installed base of 22 direct government mandates in 16 countries, and we're seeing acceleration in demand for e-invoicing solutions. - David DeStefano(CEO)

What are early insights into e-invoicing adoption rates? - George Michael Kurosawa (Citi)

2025Q2: The value of our end-to-end offering is well-received, and a classic land-and-expand model is evident. Current demand cycles range from 3 to 6 months. - David DeStefano(CEO)

Contradiction Point 2

SAP ERP Migration Timing and Impact on Revenue

It involves differing expectations regarding the timing and impact of SAP ERP migrations on revenue, which are crucial for understanding the company's growth strategy and revenue projections.

What are your latest thoughts on the SAP ERP cycle and the industry's ability to manage migrations? - Joshua Raley (Needham)

2025Q3: Since the beginning of the year, we have seen 26 customers go through the migration process and 22 more have initiated the process. - David DeStefano(CEO)

Given SAP's highlighted sector weaknesses, how does that align with your visibility into the SAP channel? - Robert Cooney Oliver (Baird)

2025Q2: We are seeing some softness in the U.S., which is affecting our ERP migration sales. - David DeStefano(CEO)

Contradiction Point 3

Entitlement Growth Headwinds and Their Impact on Net Retention Rates

It involves the company's responsiveness to entitlement growth headwinds and their impact on net retention rates, which are crucial factors affecting the company's financial performance and investor expectations.

Has the guidance philosophy changed due to repeated guidance cuts, and how do entitlement growth headwinds affect net retention rates? - Chris Guntero (Morgan Stanley)

2025Q3: The company is working to better understand customer growth rates and revenue band dynamics to improve forecast accuracy. - John Schwab(CFO)

Have your views on net retention rates changed? Are there areas where you may be too conservative? - Michael Nathanson (MoffettNathanson)

2025Q1: We continue to expect that net retention rates will be flat year-on-year in Q1 and improve over the course of the year. - John Schwab(CFO)

Contradiction Point 4

AI and E-Invoicing Investment Progress

It pertains to the company's investment progress in AI and e-invoicing, which are strategic initiatives for growth and competitiveness.

What is the customer interest in AI, and what investments are being made in AI and e-invoicing? - Adam Hodges (Goldman Sachs)

2025Q3: AI interest is high, especially in agent-to-agent interactions. The human-in-the-loop approach is crucial for enterprise requirements. Investments in e-invoicing and AI are on track, with expected leverage and realization by mid-2026. - David DeStefano (President and CEO), John Schwab(CFO)

Have there been any changes in your view on net retention rates? Are there areas where you could be too conservative? - Michael Nathanson (MoffettNathanson)

2025Q1: We expect to have investments in AI and corporate invoicing completed by the middle of 2016. We expect then to begin to capture results in the second half of 2016. - John Schwab(CFO)

Contradiction Point 5

SAP ERP Migration Timeline and Capacity

It involves the timeline and capacity constraints for SAP ERP migrations, which are critical for understanding the company's revenue and growth drivers.

What are your latest thoughts on the SAP ERP cycle and the industry's capacity to manage migrations, and can you elaborate on the two customer migrations to homegrown solutions? - Joshua Raley(Needham)

2025Q3: Industry-wise, partners have been preparing for migrations, though SAP keeps reinforcing its 2027 deadline. The pipeline has remained solid, with efficiency issues rather than capacity constraints. - David DeStefano(CEO)

What is the current enthusiasm for ERP migrations involving Oracle and SAP, and what pipeline developments are you seeing, particularly regarding global concerns? - Rob Oliver(Baird)

2024Q4: The pipeline is increasing, and the recent SAP announcement extends tailwinds by allowing customers to stay on ECC until 2033. We are optimistic about the future as these migrations continue. - David DeStefano(CEO)