Good morning, and welcome to the Vertex's Fourth Quarter and Full Year 2020 Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] With that, I would like to turn the call over to Ankit Hira, Investor Relations. Thank you, sir. Please begin.

Thank you. Good morning, everyone, and thank you for joining us for Vertex's financial results conference call for the fourth quarter and full year ending December 31, 2020. On the call today, we have Vertex's CEO; David DeStefano; and CFO, John Schwab. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company and therefore, are forward-looking statements. Our actual results may differ materially from our projections, due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliations between non-GAAP financial information to the GAAP financial information is provided in the press release. This conference call will be available for replay via webcast through Vertex's Investor Relations website at ir.vertexinc.com. David will begin with an overview of Vertex followed by our fourth quarter and full year highlights. John will then take you through a review of the financials before we proceed to Q&A. With that, I will now turn the call over to David.

Thanks, Ankit. And thanks everyone for joining us on the call today. This year was remarkable in many ways and we continue to see the pace of change in the global business, technology, and regulatory environments, creating entirely new complexities and challenges in managing indirect tax. We believe our solutions will play an essential role as companies adapt their business models to support revenue growth through e-commerce platforms and marketplaces, drive resiliency in their global supply chain, and accelerate their move to the cloud. We are very pleased with our fourth quarter results as we close out the year. We continue to deliver strong fiscal year performance, which reflects the durability of our business, the strength of our customer and partner relationships, and our focus on driving sustainable profitable growth. We grew our total revenues by 16.5% for the full year to $374.7 million, and our adjusted EBITDA was up 15.5% year-over-year. We ended 2020 with annual recurring revenue per customer of over $78,000, up from $65,000 at the end of 2019. Our performance was driven by the outstanding efforts of our Vertex team and partners around the world whose dedication and focus to our customers during these extraordinary times was on full display every day. We are pleased with the continued growth of our cloud business. For the full year, we grew our cloud revenues by 65% over 2019. And in Q4, we saw cloud revenue growth of 70%, compared to 54% in Q3. We believe the pandemic may have accelerated the migration of customers' infrastructure and applications to the cloud, leading to increased adoption of our cloud solutions among our existing customers. Among our new logos, the vast majority of wins were cloud deals, especially in the middle market where tax complexity continues to increase. Going forward, as…

Thank you, David, and thanks everyone for your time. Today, I'm going to discuss our fourth quarter and full year 2020 results and then we'll wrap up with comments on our capital structure and provide our first quarter and full year guidance. Total fourth quarter revenues grew 15.7% year-over-year to reach $99.5 million. Subscription revenues grew 15.1% year-over-year to $83.9 million. These revenues were benefited by annual transaction-based subscription adjustments, accounting for approximately $1.5 million of additional revenue. Our services revenue increased 19% over the same period last year to $15.6 million due to a significant number of year-end implementation and upgrade projects. Total revenues for 2020 were $374.7 million, up 16.5% from 2019. Our annual recurring revenue, or ARR, grew to $316.4 million as of the end of 2020. This represents a 13.6% year-over-year growth. As David mentioned, we continue to see strong growth in our cloud-based solutions among both existing customers and new customers. For the fourth quarter, cloud revenue grew 70%, which is up from 54% in the third quarter of 2020. We ended the full year 2020 with our cloud revenues growing 65% over the full year of 2019. Going forward, as our cloud base crosses $100 million in revenue in 2021, we are targeting a more normalized growth rate of approximately 35% for the year. We continue to lead cloud-first on all our new opportunities and believe that the shift to cloud presents a unique opportunity for the company to drive additional revenues and ARR growth. We believe our hybrid approach to serving both cloud and on-premise customer needs gives us a differentiated competitive advantage going forward as we pursue our addressable market globally. Our net revenue retention rate, or NRR, was 106% as of the end of 2020, demonstrating our customers' continued commitment to…

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question is come from the line of Brad Reback with Stifel. Please proceed with your questions.

Hey, guys. How are you?

Great, Brad. How about yourself?

Very good. Very good. Maybe starting from a high level. Competitively, has anything changed out there?

No, Brad. We continue – first and foremost, to compete against the in-house system that's good enough until it's no longer good enough between regulatory change or technology changes that are driving it. We see Thompson Reuters primarily in the global market as our primary competitor. We go for enterprise deals and as we go into the middle market, we see both Thompson and Avalara. And then overseas, we continue to see Sovos as a formidable competitor.

Great. And then switching gears on ARR, you obviously this year was somewhat impacted by COVID in your commentary on customers pushing out to 2021 and 2022. How should we think about when that growth rate reaccelerates?

Yes, this is John. I'll take that Brad. I think – we think about growth kind of steadily building throughout the year, as we ramp up our sales and marketing efforts like we talked about in the Q4 and we start to gain traction there. And so we think that will start to happen a little more heavily towards the back end of the year as that traction comes into play as well as the new products that hit the market that David talked about. So I would see that a little bit more weighted towards the back of the year – back half of the year for sure.

Great. Thanks very much.

You bet.

Thank you, Brad.

Thank you. Our next questions come from the line of Daniel Jester with Citigroup. Please proceed with your questions.

Great, thanks. Good morning, everyone. So I just wanted to circle back to something that was said in the prepared remarks, I think David you talked about that you noticed some acceleration in digital transformation impacting you in 2020, but then John talked about sort of some enterprise delays. So could you just piece out exactly kind of what you're seeing maybe small, mid-sized business versus enterprise and how COVID has impacted that and how you see the recovery trajectory going throughout this year? Thanks.

Sure, I'll take the start and then John you can jump in. And thank you Dan for the question. I think where we saw acceleration in the mid-market as more companies are adopting workforce and Salesforce – Workday and Salesforce as operating systems, we saw great opportunity where that complexity of the regulatory environment and their new technologies are creating demand for us. I think that's also where our value prop showed up and why we're able to drive the ARR in our new logos significantly in cloud across the business. Obviously some of the larger enterprise organizations, we did see kind of – we had a lot of conversations in why we did see good progress, two things of note there, I think one, we saw deals where the large Oracle or SAP implementation may be got put on hold and we have to deal with that and that'll – they will survive with good enough until 2021 or 2022. And then additionally, it's important to remember, we have a hybrid approach and so we continue to see large on-premise deals being sold. And so that's good for us in the long-term because when they are ready to migrate to the cloud, we're doing great on those migrations when they happen, but we have to recognize that our hybrid approach gives the customer the opportunity to choose what's best for them and we think that's still a differentiated part of our strategy.

Thanks. And then just on the 2021 revenue guidance. John, I think you mentioned that the framework was consistent with the IPO, but that certainly economy is a lot different than six to nine months ago and there's a lot more sort of green shoots as we think about how the year progresses. So maybe philosophically, how did you think about approaching the guidance for the full year and what are your sort of expectations from a sort of macro perspective? Thanks.

Yes. Dan that's a good question. I think as we think about sort of how things are going to play out. As I mentioned, when we talked about ARR. The ARR is going to build itself throughout the year, and as you know, as we recognize revenue ratably over the period, it takes a little bit longer for it to kind of pull itself into the – to pull itself into our revenue stream. So that's sort of how I think about sort of the tracking of it and the tracking of revenue. Yes, we certainly do see opportunity out there and we're certainly capitalizing on that as well as building our sales force to further capitalize on it, but I think over time that'll continue to work itself into 2021 towards the back end and again the revenue follows. And keep in mind, we did have a real nice Q4, we did see a lot of activity in Q4, although we were benefited in the fourth quarter by about $1.5 million of transaction-based sort of true-ups from a volume standpoint. So when you kind of compare it on a sequential basis, there's a little bit of that took place in there as well. Thank you. Thanks very much for the question.

Thank you.

Thank you. Our next questions come from the line of Brad Sills with Bank of America Securities. Please proceed with your questions.

Great. Hey, guys. Thanks for taking my question. Wanted to ask about the cloud, it – you had good results this year 65% growth in cloud ARR. I think you're forecasting a deceleration there to 35%, was the pandemic a accelerant, if you will, for cloud deployments, in other words, with work remote it's easier to deploy in the cloud versus on-prem. And if so is that tailwind in the business perhaps over and is that implied in the guidance or is there something else going on with the deceleration in cloud ARR outlook? Thank you.

I'll start and then John please jump in. I think, fundamentally, it's not going to be over $100 million base or 35% plus growth was, we felt a more normalized just top-of-the-tree is the answer. But I think it's important to remember, Brad, we lead everything cloud-first in our sales and we see pretty consistently the overwhelming majority of our new logos are all cloud deals. The – as our customers are expanding on omnichannel and continue – existing customers continue to grow allow us to grow our footprint within their base, those are largely cloud deals. So we see it as three different tranches, it's the new logos largely cloud overwhelmingly cloud the upsells and the new sales to existing customers. I'd say a majority of those are. And then existing customers that are still slow to migrate. I think we saw a little bit of acceleration there but nothing material that we would suggest we've got a new trajectory for 2021 around existing customers migrating off of their on-premise solution.

Yes. And just to add to that a little bit, Brad, what I would say, as David and I both mentioned, the growth was about 65% on a year-over-year basis for the full year. Some of that is impacted by a couple of things, we did have a monster Q4 2019 in terms of our cloud sales and it was really just an absolute banner blow out quarter, so we certainly are dealing with a tough comp quarter. And then secondly, keep in mind, we did close on the Systax acquisition in January of 2020, so that's also in those numbers sort of pulling that. So when you look at sort of a little bit of the pullback, that pullback has a couple of things going against the acquisition certainly notably being a decent sized piece of that. So I just thought I'd point that out as well.

Great. Thanks so much guys. And then one more, if I may please, just on some of the headwinds you noticed in the business this year with some of the deals delays, is that largely over and do you have visibility for those deals coming back here with the pandemic and reopening kind of happening gradually, what would you say there? And thank you so much.

Yes. I think at the beginning of the pandemic, it was all – IT shops were all hands on deck to get their entire workforces global. And obviously large multinational enterprises, that was a bigger challenge. We have had, I think the sales conversations are good going forward here in terms of, people are getting, as you say, more back to normal in terms of thinking about their IT roadmaps and we're really pleased with the Oracle OCI and SAP S/4 HANA migrations that are now starting to resume. Those are obviously longer – depending upon the size of the project, those can be six to 24 month implementations of which then we fit in at a certain slot. So it's really understanding where they are and their timing where we best fit into those projects.

Thanks so much guys.

Yes. Thank you, Brad.

[Operator Instructions] Our next questions come from the line of Pat Walravens with JMP Group. Please proceed with your questions.

Great, thank you. Congratulations you guys, I want to talk about Tellutax and then Sal Visca. So I guess Tellutax first, can you just go over again why you bought it. And so it's Eric and Christian, right, are they both joining Vertex?

Eric – yes Eric joined and Eric obviously has a steep history in the industry having architected in tax technology for years, and we really were pleased with some of the innovations when he'd gone out on his own about where he was taking the indirect solutions at that point of need for mobile and IoT level container where you can really shrink the footprint of an enterprise solution down into that container which we think will make it very attractive from a deployment perspective for our customers. So we saw a great value in what they were building and wanted to make sure we got that integrated into our products as quick as possible.

Okay. I'd say I messed up my questions. So there were two Erics, right, there's Eric Rudd and Eric Christian. Okay, are they both joining or is it just Eric Christian?

No. Just the technology, Eric. Eric Christian.

Okay. And his role is going to be what?

He's working in our innovation group, driving the implementation as a Lead Architect around driving the integration of that product into our product stack.

Okay, great. And then at the same time, you have Sal Visca coming in. So I'm sure you talked to a Brazilian candidates, why did you pick this one and what do you – what are you going to tell him his top priority is coming this…

Yes. Sal has an extraordinary background and experience that – he spent the last 10 years in e-commerce, which is really critical to the front office space that we see as great growth opportunity where complexity is accelerating. So he brings that. He used to be the CTO of Business Objects, so he has played in the data and BI space, which I think there's opportunity there for us given the large data sets that we touch and interact with regularly. And then he spent some time in enterprise software, so you certainly understands our – through his experience at SAP, our ERP and back office footprint and the need to be at scale for the type of enterprise customers. So Sal brings just a great wealth of innovation and experience to our team, and we just couldn't be any more excited to have him joined.

Great. And what would you say the top priority is for him coming in here?

Sal is focused across everything I just said. He's accelerating our expansion in our e-commerce platform area. He's accelerating our product roadmap. He's got some nice innovation about how we can accelerate certain deliveries of products. And he's also very much focused on some of the inorganic things like Tellutax and Systax and other things we're looking at, given his background in M&A about how we can accelerate that. So those are probably his top three priorities.

Okay, perfect. Thank you.

Thank you, Pat.

Thank you. Our next questions come from the line of Chris Merwin with Goldman Sachs. Please proceed with your questions.

Okay. Thanks very much for taking my question. I wanted to ask about that net retention. I know that dipped slightly in the quarter, I imagine that's the impact I guess of lingering effects from the pandemic. As we move into 2021 here, just curious how we should be thinking about the trajectory of that metric, I know cross-sell is a very important focus, if you will, with the breadth of product suite that you have. So just curious any comment you could share about the trajectory of that metric? Thank you.

Yes, Chris. Thanks very much for the question and a very good one at that. I think you're right, as we looked at sort of the decrease, a little bit of a drop here that we saw in the fourth quarter from an NRR standpoint, it's really driven by two things, really it's the cross-sell migrations and the additional volume we get with existing customers. So they were the two pieces that fell probably similarly each side kind of taking that down a little bit. As we think about kind of where we are from that standpoint and how this will kind of impact going forward. As I mentioned, since this has largely driven by ARR activity, we'll start to see some of that ARR pick itself up in the back half of the year and as that picks itself back up, we'll start to see improvements in this area, but it'll moderate kind of where it is now maybe down a little bit, but then start to move itself back as we get more volume coming in through ARR. But again, we feel pretty good about it. Again, our customer base is very strong, it's very durable they continue to continue to buy additional entitlements and additional enhancements to the products that they have and so we feel pretty good about it as we move through. And again as we continue to migrate certain customers across the map from on-prem to the cloud, there's opportunity there as well.

Great. And maybe just a follow-up on that last point around migrations. I think you said that in the prepared remarks, gross retention was around 91% and there was some impact to that number from cloud migration. So basically expect you're obviously keeping the customers and migrating them to cloud, just want to make sure I understand the puts and takes around how migration would impact your gross retention rate?

Yes, Chris. Great point. As we measure and we monitor sort of our GRR to NRR that walk that I've walked many people through. When customers move out of one solution into another solution, it shows initially getting to GRR that they have left that solution, so that shows as a loss. And then when they comes back in as a new sale, it shows and it adds into the NRR. So it's a decrease for the GRR and it's included in the increase in the final NRR number. However, it shows it going down when you get to the GRR calculation, that's about 300 basis points and because of the conversion that movement there, that movement certainly impacts GRR initially and as people look at it and say, 'hey, how can you guys be at 91% with such stickiness and such enterprise software', it's really – it's being impacted because of that move. On an overall basis, if you did it on a customer basis, I think we tell a bit of a different story certainly as that movement takes place. Does that make – does that clear that up a little bit?

Definitely. Thanks very much.

Great.

Thank you. Our next questions come from the line of Stan Zlotsky with Morgan Stanley. Please proceed with your questions.

Perfect. Thank you so much guys and thank you for taking my questions. Maybe just following up on Chris' question before. On the cloud migrations, right, how are you thinking about it into 2021 and how much does that play into the 35% guidance that you have for cloud subscription revenue growth in the year? And then I have a quick follow-up.

Yes, I guess – you want to start – okay I'll just start, Stan as we built and we model this out, we didn't take any significant changes and assumptions from cloud migration, because again, as David had mentioned in some of his remarks, we're not really pushing customers and accelerating customers to move over to the cloud. If the opportunity presents itself, we're certainly going and talking to them about that, but there is no forced migration that's taking place. And so, our anticipation for a cloud migrate – for migration to the cloud from on-prem is really consistent with sort of how it's been the level that it's been in the past. So we're not anticipating any big jump there in terms of kind of how that activity plays.

Just on a bigger base now. So it's for sure we try to be a little more thoughtful about what would be a good cloud growth rate and feel like we should be able do 35% plus.

Okay, perfect. And then, so this is a little bit nuanced, but if we do the math of taking the – your average revenue per customer that you disclose and divide that into the ending ARR, it looks like the customer count has been declining for last three quarters, is that just a function of maybe some churn at the low end, is there something going on with the calculation that we need to be mindful of? Just anything you can help us with that'll be great. Thank you.

Yes. I think Stan as you hit, there's nothing going on with the calculation. I think a lot of it really has more to do with the churn at the lower end. A lot of smaller, smaller type customers. There is a little bit more churn there perhaps than at the higher end, but I think that's what you're seeing. We're doing some levels of consolidation as we think about that can impact it slightly, but I wouldn't tell you that our number of customers is really is dropping precipitously at all. It really more has to do with some of the churn at the low end, because again as David talked about, we continue to see a rise in the average ARR per customer.

Got it. Thank you so much.

Thank you.

Thank you, Stan.

Thank you. Our next questions come from the line of Bhavan Suri with William Blair. Please proceed with your questions.

Hey, guys. Thanks for taking my question and congrats on that cloud growth, the growth was those pretty solid there. I wanted to touch a little bit on sort of a more strategic question here, which is you've seen a bunch of consolidation or at least you're starting to see a bunch of consolidation in that office of the CFO space whether its compliance and tax, whether it's ARAP and tax, whether it's treasury and tax. How do you guys think about your role there and sort of maybe help us again, I know you can't give us an exact product roadmap, but how do you think the company start to address that consolidation at broader space in say the next three to five years?

So, very good question, Bhavan. And it is an evolving world for sure. I think it's important to note that a big part of our element is also in the IT function. We play very heavily because of the line item invasiveness of our product, it's very much. So, at the income tax level, you're seeing more of that consolidation in the indirect tax space, that consolidation plays out a little differently because we're often a part. Regulatory and compliance is often a different part of the organization than the CFO. That said, I think because of the strength of our partnerships with the big – the global big four and other big alliance firms as well as the technology partners. I mean the deep integration we have with them, it positions us well as those conversations continue to evolve. And I would also tie it back to some of the conversations that was asked previously about Sal Visca joining us. I think we see an opportunity for Sal to bring some nice innovation there and expanding our product suite that will help us in that space.

Thanks David. And then maybe one for John, may have two parts. John so quickly on the NDRR, which is 106% typically you guys had about a 5% price increase annually. So maybe help me bridge that and I think it might just be the churn that plays into it, but help me understand that do you see any pressure on that 5% price increase this year, did you give any concessions, did you wave a little bit of it, how should we think about that? And then the second part is, is there any way to quantify the tailwind from the things you're seeing at Oracle and SAP HANA like because that going to – it was obviously a headwind this year, but we can think over like not even next year but over 24 months, does that provide 200, 300 basis points, I mean how should we think about that? Thank you.

Yes. No. Thank you for the question. Let me take the first one first. As it relates to sort of the NRR and you think about the 106% and you said hey you have about a 5% price increase. Keep in mind as we build that that 5% price increase really has to start with GRR number, it starts with the 91% and it builds itself up. So we have not seen any impact from a pricing standpoint, our ability to pass price increases along to our customers. It's very consistent with where we were last year, as I look at the numbers. And so there's really been no impact there in terms of how that's gone. So we feel pretty good about the product that we deliver, the tax content that gets delivered, our customers continue to buy more and to get that and because of that they continue to invest in our product. So again price increases unaffected by anything. And again the walk just again to the point that I made earlier, it's a little bit lower from a cross-sell migration as well as additional volumes that are going through, again as people – as volume may have slowed for certain of our customers. So not a real big change there from a price increase standpoint, really in the other two pieces that drove it. So that's sort of how that walk goes. I guess from the other standpoint, kind of the tailwinds that you talked about. Yes, again as I mentioned in my remarks, we did see a little bit of a pullback from those big enterprise customers. Listen, I think, we don't see – as we look out, we think those opportunities are still certainly there and as those movements in that migration and that activity takes place that – as they migrate their systems to other things that should provide opportunity for us to be in the game and certainly driving additional revenue as those things come to be.

Great. That's very helpful gentlemen. Thank you.

Thank you, Bhavan.

Thank you. Our next questions come from the line of Samad Samana with Jefferies. Please proceed with your questions.

Hey, guys. This is Jordan Bret on for Samad. Thanks for taking my question and congrats on a strong quarter. So I just wanted to follow up on Pat's question, last year you acquired Systax and now this year Tellutax, could you just remind us of your strategy around M&A?

Jordan, appreciate you joining the call. We continue to see opportunity to expand and it was key part of our decision. Going public was to have more resources to make acquisitions. As we expand globally, I think there's a lot of opportunity to add content and select technology niche and tuck-in acquisitions that will support the end-to-end suite that we continue to fill out. As complexity continues to show up in the tax department, they are now looking for cross-border customs and duties and other types of capabilities going forward. And so we're consciously engaging in the market around those opportunities.

Great. Thank you.

Sure.

Thank you. Our next questions come from the line of Josh Reilly with Needham & Company. Please proceed with your question.

Hey there guys. Thanks for taking my question. So if we look at the ARR growth over the last several quarters and now you're subscription revenue guidance for Q1 in the year. I'm just trying to understand the delta there, it seems a little bit wider than what one would expect, is it primarily conservatism around the macro environment right now or how should we think about the puts and takes there?

Yes, I mean a couple of things, Josh. Thanks for the question. Again, we feel pretty – we feel good about what we've seen from a marketplace in terms of the activity that's out there. The ARR growth is good. As we think about sort of the quarter and we think about the growth in the quarter. And as it translates into guidance a couple of things. First, keep in mind services does take a little bit of a dip in the first quarter, we have real strong – we had a real strong Q4 from a services standpoint with customers trying to get some year-end implementations in up and running. So that was really good for us, again on the backside of that it sort of drops a little bit from a total revenue standpoint. From an invoicing standpoint, when we take a look at 2020, we had a real nice year and there were some anomalies, a little bit in Q4, as I had mentioned, some of that transaction-based pricing true-ups that happened in the fourth quarter, not giant but certainly impacting as we move forward. So we continue to see momentum from a revenue standpoint, it continues to grow, but again some of the activity and a little bit of the slowness and some of that push out that I talked about in my remarks that we saw in 2020 sort of manifest itself in revenue sort of as it rolls into 2021, that's how I would summarize it.

Okay, got it. And then just a follow-up. So which go to market technology partners had been strongest in driving new business during kind of the COVID era, is it – ERP obviously took a hit maybe at the high end but in the mid-market ERP, is that more of a driver and then point of sale procurement just trying to understand what the drivers are there? And then do you any – expect any shift in those technology partners driving business in the post COVID macro?

I certainly think we're seeing good momentum in Salesforce and Workday and sort of the emerging as you say mid-market players. Also at the enterprise level, we play with both of them very well at the enterprise level. So I think that space, Acumatica all have been drivers of – and Microsoft would be our primary drivers in the mid-market, the relationship we have at Avanade and some of the additional gold partners that we've added in the Microsoft space have played well to be drivers. Certainly, going forward, the procurement and e-commerce space is where we see great opportunity for expanding relationships and integrations and that is something we're actively – some of the partnerships we added in 2020, in Q4, we're specific to that space.

Got it. Thanks guys.

Happy to Josh.

Thank you. There are no further questions at this time. I would like to turn the call back over to David DeStefano for any closing comments.

Thank you. In closing, I think we're well positioned to continue the momentum in our business heading into 2021. I'm confident in our ability to capitalize on the significant growth opportunities ahead, while delivering significant value to our customers, partners and shareholder. I'd also like to thank the entire Vertex team for their tremendous efforts and commitment in what was truly an unprecedented year. Thank you again for your interest in Vertex and for joining our call today. We hope you and your families stay safe and healthy, and we look forward to reconnecting soon.

Thank you. This does conclude today's teleconference, and thank you for your participation. You may disconnect your lines at this time. Have a great day.