Greetings and welcome to the Vertex, Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to, Ankit Hira with Vertex Investor Relations. Thank you, You may begin.

Thank you. Good morning, everyone and thank you for joining us for Vertex's financial results conference call for the second quarter ending June 30, 2021. 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. With that, I'll now turn the call over to David.

Thanks, Ankit and thank you all for joining us today. It was just over a year ago that we began our journey as a public company. Today, I'm pleased to share our results for the second quarter of 2021, which exceeded our guidance, total revenues of 15% year-over-year. Our strategy to connect businesses and governments seamlessly across the fabric of global commerce with end to end tax automation has never been more critical. It's a strategy that is resonating more and more of our global customers, prospects and partners. Our accelerating growth in Q2 reflects the unwavering focus of the entire global Vertex team on executing our strategy. As we invest in delivering new products organically and through acquisitions like Cispax [ph], Tellutax and Taxamo, while extending our go to market and ecosystem strength. Our cloud revenues grew 59.5% year-over-year, coming from both new logos and existing customers. Consistent with previous quarters, we continue to see an overwhelming majority of the new logos choose our cloud products for flexibility, scale and integration to the world's major business application. And current customers are continuing to add our cloud products as part of their hybrid strategy, as well as migrating fully to the cloud and expanding their transaction volumes globally. Enterprise and mid-market businesses alike continue to choose Vertex as they expand their business models, drive global omni channel strategy and continue their digital transformations. We believe our unified platform, multi cloud strategy and deep partnerships are a powerful combination that allows us to serve an expanding addressable market and grow with our customers. This was proven once again in the quarter with multiple six and seven figure deals and overall average annual recurring revenue per customer of over $80,500. At the end of the day, though, it's about delivering great customer…

Thank you, David and good morning, everyone. Today I'm going to discuss our second quarter of 2021 financial results and provide an update on our third quarter and full year 2021 guidance. Our total second quarter revenues grew 15% year-over-year to $104.9 million, exceeding the upper end of our quarterly guidance by $4.9 million. Our subscription revenues expanded 15.9% year-over-year to $89.6 million. Our second quarter subscription revenues were benefited by an annual tier based subscription amendment contributing approximately $2.1 million in additional revenue in the second quarter. Our services revenue grew at 9.8% year-over-year to $15.3 million. Our annual recurring revenue or ARR grew to $336.2 million at June 30 2021, representing approximately 14.1% growth year-over-year. Excluding the impact of the Taxamo the ARR increased over the first quarter of 2021. Our net revenue retention rate or NRR was 106% at quarter end, growing from 105% in the first quarter of 2021 demonstrating our customers ongoing commitment to our software and solutions. For purposes of clarification NRR only includes those customers that were with us at the beginning of the measurement period, which does not include Taxamo. Our gross revenue retention rate or GRR was 94.3% at quarter end which excludes the internal migrations by customers to our cloud solutions, which were approximately 4%. This is consistent with prior performance, which is average between 94% and 95%. At June 30, we had approximately 4175 customers demonstrating organic growth as well as the impact from the Taxamo acquisition. We continue to see strong growth in our cloud based solutions among both existing and new customers. In the second quarter of 2021, cloud based revenues were $32.1 million representing 59.5% growth year-over-year. This amount reflects $2.1 million from the tier base subscription amendment previously note. Excluding that amount cloud revenue growth…

[Operator Instructions] Our first question is from Pat Walravens with JMP securities. Please proceed.

Great, thank you. And congratulations on the reacceleration in the business. Hey, David, can I just go really big picture to start us out, which is you had five quarters where the business is decelerating. And now you have this really nice reacceleration. And during the period of the acceleration, one of the things that you were pointing to was, hey, if people aren't implementing ERP, that is a headwind for us. How has that environment changed?

Thanks for the feedback and the question. You know, we've clearly seen a shift in our pipeline activity with Workday, SAP and Oracle, as their businesses have begun to ramp back up. And we are seeing, we have good visibility is what's coming in the second half of the year as well. So that's clearly changed. For the favor and I would also just acknowledge, you know, our progress both in the middle market and in the e-commerce space, both continue to progress well.

And then, can I ask just one more, which is, when you look at the competitive environment, sort of the demand levels overall, domestically versus internationally, how are they different?

I think it's a more mature tax technology market in the US, they're more comfortable with third party bolt on solutions. Historically, the communities in Europe in particular, have been Reliant more on SAP native functionality, again, for the midsize and larger enterprises that we serve. And I think that has shifted as a result to some of the regulatory change. And that's the momentum we're seeing and the opportunities. But that's been it's a maturity issue, I think, really, with the comfortness of third party bolt-on versus trying to get by with native functionality and workarounds.

Alright, great. Thanks very much. And congratulations again.

Our next question is from Samad Samana with Jefferies. Please proceed.

Good morning, thanks for taking my questions and nice to see the strong results. So maybe, John, just a couple of clarifying questions, the ARR contribution from Taxamo in the quarter. Could you either give us what that was or maybe what the organic ending ARR dollar amount was?

Yes, we don't we weren't going to break out the ARR by customers. I think we did in our guidance for last year, we did say that they were going to be about a $0.5 million worth of revenue Samad. It's in that zone in terms of, from an ARR standpoint. I think as I mentioned, we were positive, you know, we were positive from an ARR growth standpoint, including them. So it's under $5 million in that zone.

Okay, that's very helpful. Yes, absolutely. And then just as I think about the cloud guidance for above 40%. I just wanted to make sure I get clarification, is that organic cloud growth for 2021. Or does that include the contribution from Taxamo in 2021?

That's organic. It will have, there will be cloud, included in our cloud revenue will be the results of Taxamo. But that number organic will be above 40% and with it will still be above 40%.

Okay, great. And then maybe zooming out, David the examples this on the call today were very helpful in thinking about deal activity picking up, it certainly sounds like you're more confident in the back half. I'm curious, just as far as when you think about the pipeline, is it more? Is there a type of customer? Or is there a type of vertical that you're seeing more strengthen, just maybe help us understand the pipeline composition that's giving you kind of that added competence looking into the back half of the year?

Yes, Samad I appreciate the question. You know, complexity remains the primary segment driver, more than anything, we're just see continual regulatory, and system complexity being our strongest play into the market. And it happens across pretty much all the verticals. I'm very excited about the leasing opportunity. That's a very complex area that that we just enhanced our capabilities in. But it applies to retail, it applies to manufacturing. It's really about complexity. That is the tipping point. And we continue to see that being the primary buying driver.

Great, thank you so much for taking my questions.

Our next question is from Joshua Reilly with Needham and company, please proceed.

Hey, guys, congrats on the strong quarter. And thanks for taking my questions. If you look at the triggers for customers making a change on indirect tax here, how would you kind of rate the importance of ERP versus making a change in your procurement or billing system over the last couple years? Has there been any change in what's driving customers to make a change on their tax platform?

What was interesting? It's great question. And what's interesting about that, Josh, is, a lot of times, if we're already in the customer, let's just say with their ERP, we were in there for years, and now they just make an upgrade to their procurement system. They've adopted Koopas [ph] in the example, or they bought, they're now going to go omni channel. And so we're adding our footprint there, it's much more about the adoption is much more driven by a change that will break and in house system that they were using, or where the native functionalities no longer be going to be good enough more so than they have to do a big cloud lift and shift or a big lift and shift in their ERP. That will be a buying driver that does happen. But it's more just we're already in the space and they're looking to expand their footprint is typically the driver that we're going to we're going to grow off of.

Okay, great. And then sales and marketing ramp pretty significantly here in Q2, how much of that is related to the Taxamo acquisition in the model here? I'm assuming that the small portion of it versus organic investments increasing here and then how should we think about the growth in sales headcount for the rest of the year? Thanks, guys.

Yes, I'll take that, Josh, I guess for the first part, in terms of kind of where the spend is, the spend is really the majority of that is organic spend really focused on the mid-market and the growth in the opportunity we see there. I think that's where our initiatives have been really focused. And that's where we've been driving towards. So that's where the majority of that comes from. And I think in terms of kind of your personnel standpoint, we continue to grow in the sales and marketing group, I don't have a number in terms of the number of ads that we had in the last quarter. So but again, we continue to add personnel there because again, the opportunities in front of us and we want to make sure we attack the attack it while it's there.

Our next question is from Brad Reback with Stifel. Please proceed.

Great, thanks very much. Can you guys go a little deeper on this tier base pricing? What drove that? What the likelihood of that is repeating next year?

Yes, this is John, I'll take that Brad. We did have, we have one customer that exceeded its transaction volume thresholds. And it's somewhat of a unique contract. And the contract requires an amendment based on their tier structure. And then again, it resulted in additional revenue for the previous subscription period, and then it resets them on a go forward basis. It is a bit of a one off thing. I know we had something an unrelated matter in the fourth quarter of last year. But it's something that just had to do with the volume increase. And again, more of a unique bespoke contract we have with one of our larger customers.

Got it. And then maybe just thinking a bit longer term on the cloud business obviously a good sequence, while good uptake and the growth rate from 35 to 40 going forward, but we think longer term, how should we think about the sustainability of what the organic growth rate is in that business. Thanks.

Well, that's where everything we sell all of our new products are built cloud. All of our efforts in with the sales teams are to sell cloud first. So I would you know, that will be the primary driver of all of our growth going forward.

Okay, thank you.

Our next question is from by Bhavan Suri with William Blair. Please proceed.

Hey guys, it's Matt [ph] on for Bhavan. Thanks for taking the questions. You know, good to see the expanded VAT tax capabilities, you know, like to maybe double click on the international opportunity more broadly, get your updated thoughts on kind of the roadmap and where you go from here and your thoughts on how Vertex is positioned in those markets versus the domestic landscape?

Sure. Thanks, Matt. Appreciate the question. So clearly continuing to bring new products, new content is a primary focus outside the US, as well as expanding our sales and marketing footprint. We have been targeting in Europe because of some of the landmark legislation, some of our strong partner and ecosystem presence over there. And so that's, that's clearly a footprint. Latin America, we've really focused on content where some of the regulatory environments there are far more complex. And so we continue invest there. And now as we're seeing with the Taxamo acquisition, and this marketplace legislation, it will pull us into other jurisdictions. I mentioned, opportunity that we closed in Taiwan, I think we're going to see more and more opportunities globally, as the legislation continues to drive change around the world.

That's helpful. And then maybe just one more on the partner front, we'd love to get in maybe just some updated thoughts on at this point, what portion of revenue, what portion of the business is influenced by partners, and then specifically looking at kind of pieces of the partner channel that include economic relationships with bars, and maybe SI, specifically how progress is going there, in terms of expanding those relationships as well.

I'll pick the beginning of that, specifically on partners and partners are an essential part of our relationship. If you think about complex businesses, midsize and large enterprises, anytime they're making a large technology purchase, they're going to typically run a process, often with an RFP. And so that's going to be run by a partner in the process. And so we work very closely with the largest tax technology practices with the top 10 accounting firms. We work very closely with the SI committees a broader SI community in the mid-market. And they continue to be a large influencer in all of our deals. From a go to market activity. They're a critical element of our success. I think on the economic side, we continue to expand our relationships. John, if you want to build on?

Yes, I think we're expanding our relationships down into the SI community. And some of those have a bit more of a, there's some sharing that goes on down there, the bigger relationship at the higher end with the big four. And the large accounting firms typically do not result in an exchange of cash or monetary things between the two, between us and them. So but again, I think as we move down, and again, that strategy to move down into that mid-market space, as we get more involved with some of those partners down there, the relationships are a bit different and will result in additional commissions, if you will, being paid.

Right, that's helpful. Thanks again.

Our next question is from Brad Sills with Bank of America Securities, please proceed.

Oh, great. Hey, guys, thanks for taking my question here. One of the ask, just a follow up to your comments earlier on investments in insights and analytics. What are those investments? Where do you see the opportunity? Is this something where you see an analytics layer embedded into the core application? Or do you see an opportunity for a potential up sell to an add on or premium addition? If you will, you know, as you monetize, analytics.

It's more of a new offering. Brad, it's certainly something you know, if you think of the line item invasiveness that we have in our business with what indirect taxes, we touched every line item of every transaction that happens. And so the data that we are able to touch is significant and provide great insight both to the tax department and to the broader business in terms of the way you dimensionalized and so we see a lot of opportunity to expand there.

That's great. Thanks so much. And in the past, I know you've mentioned fairly low penetration in the install bases big opportunity to expand within the existing accounts and these larger global organizations. Can you remind us kind of where you are with just expansion and what is the catalyst here for accelerated potential accelerated expansion is just simply as these firms departmentally upgrade ERPs, they add Vertex, digital transformation cloud, those are a few key catalysts, any just color on the key drivers of the expansion opportunity and where that could go from here. Thank you.

Yes, we continue to invest in our CSM capacity in practice to kind of continue to deliberate and enhance customer experience as well as critical as our product development roadmap and the volume of products we're bringing to market. So that really gives more opportunity to go to that customer base highlighting the analytics product as an example and provide more value and further entrench ourselves across your organization. Additionally, as you noted, there's great opportunity as we continue to work with the parent company to work with their divisions as they make acquisitions and continue to grow their businesses to then provide our solution and extend it down into their divisions. And so it's really a three dimensional approach, I think it's expansion of our own CSM capacity and capability, it's continuing to further the number of products we bring to market to support them. And then lastly, continuing to follow them where they go through their acquisitions and their growth strategy. So as they're upgrading systems, we continue to be the additional add on its procurement, its e-commerce, its omni channel as they continue to digitally transform their businesses.

Great, thanks so much.

Our next question is from Stan Zlotsky with Morgan Stanley. Please proceed.

Yabanida [ph] for Stan. Congratulations on the quarter. You please elaborate on what the 2.11 time that was to subscription revenue, and Q2. And I also have one additional question.

Sure that we had one customer that exceeded the transaction volume thresholds. And you know, it was a unique contract, as I mentioned earlier, and the contract required a quick an amendment based on the new tier structure, and it resulted in when we put them into that it resulted in additional revenue from the previous subscription period, and then reset them. So they can start at the right level on a go forward basis. So it really is something that couldn't have been anticipated entirely. And so we had to manage it through in the current quarter. I wanted to just call that out and make sure people had seen that that was impacting our positively the results for the results for the subscription revenues.

Thank you. And then sort of on [indiscernible]; Q2 revenue was up by $5.3 million. But full year guidance increasing by $3.5 million, and taking up cloud growth guided by $4 million, so can you elaborate on why the conservative approach looking at the second half of the year?

Yes. I mean, there's a couple of pieces again, we do have the one-time sort of unique revenue thing in the current quarter. But then I think as we look through the rest of the year, we feel good about everything that we've been seeing in the market. As mentioned, we did take down a little bit of our expectations around some of the Taxamo contribution, but we feel very positive about it's just more of a timing thing. And then again, getting the product more fully integrated with our product. And so I think that was a piece they were the kind of the two pieces that are there that I would say are the bigger drivers, when you look at sort of what that guidance looks like. But we feel we feel very good about the performance of the business. And again, I think it really reflects the strength and the good things that are happening in the metrics that were reported out.

Great. Thanks so much.

We have reached the end of our question and answer session. I would now like to turn the call over to David DeStefano for closing remarks.

Thank you. 2021 continues to be an exciting year for Vertex, our markets and our customers that we serve. Momentum continues to build across all market segments and our cloud portfolio. Our strategy has committed to deliver new products, expand our partner ecosystem, accelerate, go to market investments and make strategic acquisitions. We're innovating across every aspect of our business and differentiating to our technologies, robust content, trusted partnerships, and exceptional customer experience. This mix will allow us to drive long term sustainable growth and lead the markets we serve. I'm proud of the continued progress we are making in the tremendous efforts of the Vertex team to enable our customers to transact comply and grow with confidence. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.