Greetings. Welcome to Vertex's Fourth Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. At this time, all participants are in listen-only mode. I will turn the conference over to Joe Crivelli, Vice President of Investor Relations. Mr. Crivelli, you may now begin.

Hello, and thanks for joining us to discuss Vertex's fourth quarter financial results. I'm Joe Crivelli, Vice President, Investor Relations. David DeStefano, our President and CEO; and John Schwab our CFO, are also with us today. During this call, we may make forward-looking statements about expected future results. Our actual financial results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Please note that our remarks today will also include references to non-GAAP financial measures. A reconciliation of these non-GAAP metrics to GAAP is also provided in today's press release. This conference call is being recorded and will be available for replay on our Investor Relations website. I'll now turn the call over to David.

Thanks, Joe. Welcome everyone and thank you for joining us. The fourth quarter was our strongest quarter of 2023, wrapping up a year of outstanding execution across all areas of the business. I'm extremely proud of the entire Vertex team. Our employees' focus and commitment underpin our market-leading solutions and customer value. This in turn enabled our strong performance this year. Revenue in the fourth quarter was $154.9 million, up 18.1% year-over-year. This exceeds the high end of our fourth quarter revenue guidance by $7.9 million. Our adjusted EBITDA was $32 million, up more than 50% compared to last year's fourth quarter. This represents an EBITDA margin of 20.7%, our highest EBITDA margin in over three years. In addition, this quarter ARR exceeded $500 million for the first time in our history, growing nearly 19% to $512.5 million. NRR was a record 113% up two full percentage points from the third quarter. Average annual revenue per customer increased 19% year-over-year to nearly $119,000. Growth in scaled customer count was 13% year-over-year. As a reminder, this number represents our customers with annual revenues greater than $100,000 and demonstrates our ongoing success in the underpenetrated enterprise market. GRR was 95% in the fourth quarter within our target best-in-class range of 94% to 96%. Our strong financial results in 2023 were not unexpected. We launched a strategic investment program in 2020 to pursue our vision to accelerate global commerce and fuel our growth to $1 billion in revenue and beyond. Since then, we have broadened our go-to-market team, we enhanced our longstanding partnerships with Oracle and SAP, while expanding into the Microsoft, NetSuite, Salesforce and Workday ecosystems. We accelerated the breadth and depth of our market-leading tax content database. We increased the pace of new product launches by investing in research and development…

Thanks, David, and good morning, everyone. I'll now review our results in detail and provide financial guidance for the first quarter and full year of 2024. In the fourth quarter, revenue was $154.9 million, up 18.1% compared to last year's fourth quarter and for the full year, total revenue was $572.4 million, up 16. 4% from 2022. As David mentioned, this exceeded the high end of both our fourth quarter and full-year revenue guidance by $7.9 million. Note that, in the fourth quarter, contract renewals with several major customers resulted in usage tier true-ups of approximately $3 million to $4 million. For comparison sake, last year's fourth quarter usage tier true-ups were in the $1 million to $2 million range. Subscription revenue in the fourth quarter increased 17.9% over last year's fourth quarter to $130.7 million. Full-year subscription revenue was $480.8 million, up 15.7% year-over-year. Services revenue in the Q4 grew 19.7% over last year's fourth quarter to $24.2 million. Full-year services revenue was $91.6 million up 20.2% year-over-year. Cloud revenue was $60.6 million, up 29.9% from last year's fourth quarter. Full-year cloud revenue was $214.6 million, up 27.1% year-over-year and exceeding our full-year guidance. The higher-than-expected full-year growth was in part due to the usage tier true-up revenue, which contributed about 0.5% point to the full-year cloud revenue growth rate. Annual recurring revenue or ARR was $512.5 million at the end of the year, representing 18.9% year-over-year growth. Net revenue retention or NRR, remains strong at 113%. This was up from 110% in the comparable 2022 period and up from 111% in the third quarter. Gross revenue retention, or GRR, was 95% at quarter end, within our targeted range of 94% to 96%. Average annual revenue per customer or AARPC, which is based on our direct customer count was…

Thanks, John. As I said at the top of the call, I'm very pleased with our execution in 2023. By any measure, it was a terrific year for Vertex. Vertex has always been a consistent, durable, profitable grower even back to our days as a privately held, family run business. But the growth investments we made from 2020 through mid-2023 have further energized the company from top-to-bottom. Accordingly, with continued strong execution, we see plenty of runway and opportunity to continue the standard of performance we set in 2023 in the years to come. With that, we will take your questions.

[Operator Instructions]. Our first question comes from Chris Quintero of Morgan Stanley. Please go ahead.

Congrats on the outstanding results here. Really, really impressive. You all are clearly seeing the benefits of this long investment cycle that you just concluded. Just taking a step back, as you look back on that journey and all of the areas that you invested in, from your perspective, what have been the key kind of one to two needle movers for you that have really made the most impact today?

Thanks, Chris. I would say that our investment in our partner ecosystem and alliances has really strengthened our growth vectors. When you couple that with the new products we brought to market around our customer success function, really enabling the customer success function to drive those new offerings and the products we acquired through acquisition. I would say, the combination of those two things has really fueled and been additive to our consistent growth story.

Got it. That's really helpful. And then really great to see that cloud growth guide of 28% for next year. What gives you the confidence in that guide and where do you expect to see more of the growth to come from? Is it more migrations from the on-prem version or just a testament to that really strong new logo growth that you're seeing?

I think the tailwinds of our business, if you think about the consistent regulatory pressure that our customers are facing, we had a record year in compliance changes last year, and you couple that with the ongoing digital transformations that are going on across the industry. Both of those two things I think are going to play out strongly in '24 and beyond. I think that really is where we're going to see, why we're so confident in our cloud growth. I don't see any fundamental shift in the migration process. I think that will continue to be a smaller part. Again, remember with our cross-sells, Chris, a lot of our cross-sells are customers who might have self-hosted software and now want to go to cloud software for the next offering. I think with that cross-sell motion and the NRR motion that we're enjoying, I think you'll see cloud growth there. I think that's really the drivers of that cloud success in 2024.

The next question comes from Matt Stotler of William Blair. Please go ahead.

Great. Thanks for taking my questions and great results guys. I wanted to follow-up on the commentary related to e-invoicing and Pagero. I think given the bidding war that perspired there, there's a view that Pagero was a very unique asset in addressing e-invoicing. But based on your comments, it makes it seem like even if the Pagero partnership doesn't work out, there's other potential partnerships or perhaps acquisition options out there. Is that correct? And any more detail you can provide on how you're thinking about addressing that opportunity longer-term?

Yes, Matt. Thank you. I definitely believe that, Pagero at the right price was an interesting asset for us, but the e-invoicing solution without the single portal combined with that compliance is not as high a value. Clearly, what makes it -- what's the differentiated value is our customer base combined with the way we've married up our VAT compliance solution and an e-invoice provider is really how we're going to differentiate in the market. I'm very comfortable and confident that, given the invoicing volume of our customer base, we have a lot of options about how we're going to solve for that other piece. Pagero at the right price was a wonderful asset, but it is clearly not the only game in town by any means.

Great. Just a follow-up on the e-invoicing. I wanted to also clarify the comments around the timeline for implementation of that regulation in some countries. It seems like perhaps, we're still a few years out from that opportunity becoming a more material driver, so you all have some time here to sort of formulate your strategy. Is that correct? Just wanted to confirm those comments.

Yes. There's certainly activity in the market now that's opportunity that we want to get after. We did it. But some of the bigger economies that are looking at it have pushed out their dates, which just again affords us the ability to be very strategic and disciplined in what we do, which is something we've always tried to do to drive long-term shareholder value. I see it playing out strongly again in this scenario.

Our next question comes from Steve Enders of Citi. Please go ahead.

Hi. Thanks for taking the questions. This is George on for Steve. Maybe just first to start, you guys laid out this investment plan that obviously reaping the rewards of that. When you think about the success that you're seeing, this acceleration of growth across a number of metrics. Does that bring you back to the drawing table to maybe reconsider a more aggressive reinvestment posture going to 2024?

George, thanks for the question. I will tell you that, we continue to invest heavily in our R&D function to bring new products to market. The investment strategy we embarked on over the last three years was really to build out a much more mature go-to-market approach across Europe, U.S., middle market, advancing our ecosystem profile, also that we had more tentacles into the market to deliver value as we brought either bought companies, acquired companies or added new products to our portfolio. I don't see any slowdown in the R&D function at all. We can be much more tactical now when we add in the go-to-market areas, because we've got the base and the quality of talent and team ready to execute on that. And so, I think that's really -- and then I would want to highlight the back-office efforts we've put in place around our ERP system really give us the scalable infrastructure to really drive margin over time through our G&A operations.

Super helpful. And then the record high NRR was great to see. Maybe you could just talk a little bit about, break that down a little bit, what's been resonating? Is there any CPI component to that? Is there any CPI component baked into '24 that might look a little different? Just kind of any help on breaking apart NRR.

There's basically, George, there's three components to what drives our NRR. About 50% of it comes from the cross-sells of new offerings into our install base. About 25% comes from selling more of an existing product to the customer. We call them entitlements, where they're going through revenue bands and we end up -- it costs them more. And then the last 25% comes from price increases. I think the execution in fourth quarter really reflects consistent performance across all three with a little bit of uptick in the cross-sell and entitlements area, but nothing unique in the price area. We're pretty disciplined in our price increases. That's really not fueling the bulk of this at this point.

The next question comes from Adam Hotchkiss of Goldman Sachs. Please go ahead.

Thanks for taking the questions. And David, you mentioned some of the new logo wins in Europe. I'm curious how you view the competitive environment there, given it seems there's a lot of interest across the Office of the CFO, to get involved with some of the new e-invoicing regulations. Are your go-to-market teams seeing any of this and RFPs companies looking to get ahead of this today? Or do you think there's going a little bit more of a reactionary type of focus from companies in Europe given some of the delays in regulation? Appreciate it.

Thank you, Adam, for the question. The beauty and the benefit of and the pain of working in the indirect tax space is unless there is true pain, there is not advanced budget for it. One of the things we've learned over the years is, you want to have the right solution just in time to solve the problem, but getting there too soon doesn't always generate additional revenue because there's not a lot of discretionary spend. I think we see that consistently playing out here and that's why I feel like we can be very strategic with our decision-making as we move forward here. Our Europe team has done a great job of building a very strong customer reference base, which is essential in the indirect tax community. Certainly, with some of the offerings we brought forward like Chain Flow Accelerator, which is really differentiated in the SAP space. And if you think about again, one of our larger ecosystems along with Oracle is SAP and we're enjoying some really nice positioning inside of the SAP customer environment right now. I still feel like we're very well-positioned in that space.

Great. That's really helpful color. And then John on margins, just curious if there's anything you're contemplating this year from an incremental investment perspective, given the evolving, e-invoicing environment around, Pagero or those considerations would be beyond this year?

Yes. I think from a margin perspective, again, we talked a little bit about where we stand and kind of what we feel about the future. I don't anticipate anything significant coming that's not already contemplated in our guidance. I think we feel good about the increases we have made here in R&D and kind of bringing things together and I think we feel like we're going to stay that path and continue to work with the partners that we've kind of been talking to certainly from an e-invoicing standpoint. But we've got real good momentum and traction regarding some of the R&D efforts and some of the other areas for additional new products and things going forward. I don't anticipate a big wholesale change in terms of how we're thinking about investment to get after additional spend.

The next question comes from Samad Samana of Jefferies. Please go ahead.

Hi. Good morning. Thanks for taking my questions and congrats on the great numbers. First one, maybe John for you, if I just look, you guys have seen growth get much, much stronger, but OpEx has been very, very limited in terms of expansion since December of 2022. Should we think about the company being kind of at the right level of OpEx? How should we think about maybe that's going forward? I know you've given margin guidance, but just philosophically help us to understand if we're at the right place in terms of headcount and maybe where expenses should trend? And then I have a follow-up for you, David.

Yes. Thanks, Samad, for the question. I think, as we've talked about it before, a significant amount of our investments took place in the years leading up to 2023. Middle of the year of 2023, we did see an inflection point we felt with the go live of the ERP system in a number of the other areas really getting to the level that we had anticipated when we undertook the journey. I feel very good about where that is. I think we will continue to expand from a headcount standpoint, because again, there's growth opportunities and things that are out there that we'll get after. But we do anticipate and as you would see from our guidance, getting leverage out of our cost infrastructure. Again, we've talked about G&A, we've talked about some level of selling and marketing expense seeing that there. We're always being opportunistic from an R&D standpoint. We feel good about where we are now from a headcount standpoint, from an expense standpoint, but there is some level of growth built into it. But again, you'll start to see that leverage really come through now that those big investment dollars are past us.

Great. And then David, just on the partnership side, especially the big ones like SAP and Oracle, how are you seeing the joint go-to-market efforts there? Is it doing as you expected? Is it doing better-than-expected? And maybe how should we think about how partnerships will contribute to the strong 2024 cloud revenue growth?

Yes. Thank you, Samad. We continue to see really solid performance across the base there. I think you really have to marry it well with the alliance community, because it's the combination of the two that is really differentiated for us and supports the strong win rate we have. I think the pipeline of activity as we look forward, a lot of what the team accomplished in 2023 didn't even benefit from some of the ECC migration efforts that we think are going to play out in '24, '25 and '26. And so, I think the team has done a good job of positioning us inside of those ecosystems. And our conscious effort now to slow down our services growth to really reward our partner ecosystem further, I think is really aligned with what we want to envision growing this business as we go forward here.

Great. Appreciate you taking my questions. Thank you.

The next question comes from Alex Sklar of Raymond James. Please go ahead.

Thank you. David, you've talked about high teens growth and targeting upwards of kind of 20% growth in some of the recent quarters, you just delivered on 19% ARR growth. Has anything changed in terms of your belief on the organic opportunity ahead for Vertex?

Thanks, Alex. No, I see the -- I still see -- again, you have to look at the tailwinds, I really look at what are the macro events that are driving opportunities to us. And I think business model changes and mergers and acquisitions at the enterprise space continue to play out, the regulatory environment is only getting more complex and painful. And again, we're competing largely against in-house systems that ultimately need to be replaced. And so, I think when you take those two and add in ongoing digital transformations and ERP upgrades, the strength of what we've envisioned happening and what we embarked on over three years ago in our investment strategy is really playing out quite nicely. And I don't see that changing in the near term at all.

Okay. Great color there. And maybe one for you, John. Just in terms of guidance philosophy and how we should look at the 2024 outlook, I think in past years, you've spoken to not being kind of a huge embedded beat-and-raise cadence until you get later into the year. I'm just curious if anything changed in terms of how you approach the guidance this year.

It's a great question. No, I appreciate it very much, Alex. I think we are very consistent and thoughtful about our guidance methodology. And I think we expect that we'll continue with that same as we move forward. I think we feel it's -- it's done us well to kind of be thoughtful and conservative about how we set that. And then the way that we approach it is not anticipated to change.

Thank you, Alex.

Next question comes from Daniel Jester of BMO Capital Markets. Please go ahead.

Good morning, and thanks for taking my question. David, you gave us a little bit of update about your efforts around AI in the prepared remarks. I'd love if you could expand on the areas of opportunity in '24? And how are your customer conversations progressing along those lines?

Yes. So, thanks for the question, Dan. We continue to be really disciplined in our investment here. We've made a conscious effort to look at ways to improve productivity and drive more efficiency in our business and we're seeing some really good sprouts of opportunity. I think on the customer front, it's probably in the long run, more exciting because, obviously, I think we can drive more revenue from the business. One of the things our customers have always valued in our brand is around trust and it's trust that we can be more accurate than they can do on their own. And so, the conversations and the reason we're inviting our customers into the dialogue early in the process is to make sure they retain that confidence. And so, we set up a number of design programs and labs to sort of engage them in that journey to make sure we're meeting their expectations and not undermining trust in the process.

Great. That's great color. And then maybe one for you, John. If I look at deferred revenue on the balance sheet, in 2021 and 2022, that was kind of growing in the teens. But kind of exiting the year, we've kind of slipped to growth sort of in the mid-single digits. So, is there anything that we should be thinking about with regards to deferred revenue and the visibility you have on the growth algorithm for '24?

Yes. Thanks for the question, Dan. No, there's nothing that's changed with respect to our visibility or how we think about the business in terms of kind of our confidence and ability to read into deferred revenue and what's on the horizon. I would tell you that with the change back in 2021, we did change how we do some of our pricing for on-prem software. That's become a much smaller piece, but over time, that's come down. And so that's why you see a little bit of a change relating to the deferred revenue over time. So that migration was expected to take place and has. But no, from an overall standpoint, our ability to see into the future with our customers, the contract length and the way that that's manifesting itself in deferred revenue has been virtually unchanged.

Great. Thank you, very much.

Thanks, Dan.

The next question comes from Pat Walravens of Citizens JMP Securities. Please go ahead.

Great and let me add my congratulations on the Q4 results, fabulous. So, David, and part of this comes from questions I've gotten from investors. But prior to Pagero, I would not have expected Vertex to be willing to pay nearly $600 million for an asset and to partner with someone like Silver Lake to get the financing. So how should we think about Vertex's future appetite for M&A? How big a transaction are you willing to do? And should you maybe have more cash on the balance sheet to provide more flexibility around those kinds of things in the future?

Thanks, Pat. I think one of the things I enjoy with our Board is willing to do what's necessary to support the long-term strategy of the company and the confidence they have in management to execute on that. And I think what happened over the last three years is the company has continued to perform better than expected, beating our own budget and guidance expectations. We've completed that investment cycle. And the Board was supportive that there was an opportunity. And then at the right price, we would do what was necessary to make it happen. And so, I don't think that philosophy will change at all given the strength of our execution and the strength of the organization's performance. If the right opportunity presents itself and it serves our customers' long-term needs, our Board will support doing what's necessary to make it happen. What that is, the world will be informed as we go forward, but rest assured, there's strong confidence across from the board down through management on that.

Great. And I think everyone does appreciate how you stay disciplined on that.

Thank you.

[Operator Instructions]. Our next question comes from Brad Reback of Stifel. Please go ahead.

Great. Thanks, very much. Gentlemen, can you remind us with the true-ups how that impacts ARR both in the quarter and going forward?

Yes. Thanks for the question, Brad. The true-ups. The way that it works is the true-up is really periods that have passed. So, it's a direct impact to revenue for the prior overages that took place. But what's typically happening at the same time, Brad, is those same customers are renewing for a new contract going forward. And typically, that's coming in at a higher tier. So, you are getting -- you are getting benefit from that customer renewing at a higher tier. So, it's very similar to the amount that goes backwards, but ARR is the forward look. And so, the forward look typically has an increase in it when you come out of a customer entitlement upgrade like that.

Great. And then as the cloud business gets bigger and bigger, can you also remind us sort of what the impact is on gross margin longer term? Thanks.

Yes, that's a great question, Brad. Thank you. Now over time, what we have seen is that customers are moving. There is a migration toward the cloud. We have mentioned that our cloud revenue and our cloud margins, if you will, were a little bit lower than our on-prem margins. But a lot of that had to do with some of the leverage that we got. And as more uptake in the multi-tenant cloud starts to take place, we are seeing those margins increase. So, we feel very good about that. We feel that the margins, again, with the volume that we're getting that the margins will find themselves just under where the on-prem margins were, obviously, there's a cost there to host and keep the cloud costs going. But we feel very good that those margins will be able to kind of stay in that range of where they are right now.

Awesome. Thanks, very much.

Thank you, Brad.

Thanks, Brad.

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Crivelli for any closing remarks.

Thanks, everybody, for joining us today. If you have any follow-up questions or if you'd like to schedule additional time with the team, please send me an e-mail at investors.vertex.com -- I'm sorry, investors@vertexinc.com. Have a great rest of your day, and we look forward to speaking with you in the coming weeks.

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