Greetings, and welcome to Vertex First Quarter 2024 Earnings Conference Call. Please note, this conference is being recorded. [Operator Instructions] And now I'll 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 first 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. 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. In our remarks today, we will also refer to non-GAAP financial metrics. A reconciliation of these metrics to GAAP is provided in today's press release. This 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. 2024 is off to a very good start, as shown in the first quarter results. Once again, we exceeded the high end of our financial guidance for revenue and adjusted EBITDA. Our consistently solid performance is the result of being crystal clear on where we are going as a company and then being laser-focused on executing our plans to get there. At Vertex, we have a bold vision to accelerate global commerce. To achieve this, we have built a consistent execution engine that continues to perform quarter after quarter. We deliver end-to-end capabilities for indirect tax to seamlessly connect systems, solutions and data. This unified approach empowers our customers to confidently navigate indirect tax complexities and manage their need for a continuous compliance process. We're able to support our customers throughout their entire digital transformation journey, wherever they run their business, locally, fully in the cloud or somewhere in between. We provide value-added services that help them efficiently integrate their indirect tax into their infrastructure and stay in compliance. And behind the scenes, we have a world-class team dedicated to our customer success at every touch point. This is what enables us to keep delivering differentiated value to our customers with great results for investors. Revenue traction remains strong. Total revenue was up 18.1% in the first quarter and software subscription growth was 18.8%. In addition, cloud revenue growth was 28.3%, which is slightly ahead of our target for the full year. Earnings leverage continues to build as expected. Adjusted EBITDA was $36.5 million or 23.3% of revenue. This is up 80% from last year's first quarter. I'll also note that we delivered positive free cash flow in the first quarter, which is typically our lowest quarter of the year…

Thanks, David, and good morning, everyone. I'll now review our first quarter financial results and provide guidance for the second quarter and full year of 2024. In the first quarter, revenue was $156.8 million, up 18.1% compared to last year's first quarter and exceeding the upper end of our quarterly guidance. Subscription revenue increased 18.8% period-over-period to $131.8 million. Our services revenue grew at 14.8% to $25 million. And cloud revenue was $61.8 million in the first quarter. This represents 28.3% year-over-year growth, which is slightly ahead of our guidance for the full year. Annual recurring revenue, or ARR, was $524.5 million at quarter end. This is up 17.5% year-over-year. Net revenue retention or NRR, remains strong at 112%, up 2 full percentage points compared to last year. Gross revenue retention or GRR was 95% at quarter end within our targeted range of 94% to 96%. And our average annual revenue per customer for AARPC, which is based on our direct customer account was $121,720 in the first quarter of 2024, up from $118,910 in the fourth quarter of 2023. For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. All of these non-GAAP metrics are reconciled to GAAP results in the earnings press release that was issued this morning. Gross profit for the first quarter was $113.7 million, and gross margin was 72.5%. This compares with gross profit of $95.3 million and a 71.8% gross margin in the same period last year. Gross margin on our subscription revenue was 78.6% compared to 78.4% in last year's first quarter and 76.8% in the fourth quarter of 2023. Gross margin on services revenue was 40.5% compared to 37.9% in last year's first quarter and 38.2% in the fourth quarter of 2023. Turning to operating expenses. In…

Thanks, John. I want to reiterate that I'm very pleased with our performance in the first quarter. Vertex went public in mid-2020, and we have now been a public company for 15 quarters. We are proud that during that time, our strong base of recurring revenue has enabled us to provide financial guidance that investors can depend on. The first quarter of 2024 was the 14th time we exceeded the high end of our revenue guidance and the 11th time we exceeded the high end of our adjusted EBITDA guidance, and this was achieved during a time when many other SaaS companies struggled. The growth investments we made from 2020 through 2023 are only helping us to build on that track record. Our customer success organization is now mature and driving great results with the expansion of existing customer accounts. Our broader and deeper go-to-market team, including our fully developed partner channel are finding new opportunities for us to add customers in the largely underpenetrated enterprise space. And the new products we launched over the past several years are gaining traction and differentiating Vertex when we compete for new business. With those investments behind us, job [ 1 ] is execution. And with the world-class team we have in place all throughout the organization, I'm confident we have our eye on the ball and can continue to deliver great results for shareholders again in 2024. With that, operator, please go ahead and open the call for questions.

[Operator Instructions] Our first question comes from Chris Quintero from Morgan Stanley.

Maybe for you, David, I wanted to ask about the pipeline conversion rates within the SAP channel. You mentioned that you haven't benefited yet from some of the ECC migration efforts that will occur over the next 3 years. And now you've got SAP recently with seemingly greater willingness to push those migrations through. So just curious what you're seeing with that large pipeline turning into close deals here?

Yes, sure, Chris. I think what we're seeing is, which is pretty typical for other migrations we've seen over the years. The largest companies go first because they've got the longest time line, that they're going to need to evolve their ERP infrastructure and smaller companies will continue to push for as long as they can delay before they'll go and then there'll be sort of a flood of activity. And we're really seeing that behavior play out.

And then for John, I wanted to ask about free cash flow conversion and how we should think about that for the rest of the year, given that Q1 is usually that low point that you mentioned? And then do you have any thoughts on like the long-term conversion rate and if there are any blockers for you to get there?

Thanks, Chris, for the question. Let me take the last one first. What we saw when we were -- before the investment cycle started as [ we were ] coming public, our cash flow conversion rate was about 65% to 70% from adjusted EBIT -- free cash flow of 60% to 75% of adjusted EBITDA. We expect that we'll certainly get back there over some time. We did have a very good quarter, as you pointed out, in terms of our free cash flow. We were a generator of free cash flow in the first quarter, which is the first time in the last 4 years that we've done that. So very good and very positive in terms of how that goes. We expect that, that will continue to ramp through the period. But it will still take us a couple of years to get to that kind of that 65%, 70% conversion rate. So again, we feel like we've made real good strides. The investment cycle is behind us. And as you can see from the results, the cash is going to start to come into the business very significantly.

Our next question comes from Daniel Jester from BMO Capital.

Maybe you called out that your typical process is to not raise the full year guidance or adjust the full year guidance at this point of the year. Maybe you can just kind of compare and contrast the pipeline and your visibility today to other periods, so we can get a sense of your confidence level in 2024?

Yes, I think the pipeline remains solid. I think the progress we're seeing in some of our other markets like Microsoft, other ERP focused -- Microsoft, Workday, NetSuite remains really positive with the rollout of our TCS solution and Microsoft. I'm seeing traction there that's very encouraging. And then again, the SAP and Oracle stuff is a very consistent way for us. We've got really nice differentiated solutions in the SAP space. Our win rates remain really strong there. And I think that's going to be a consistent one that gives us confidence as we look forward for the rest of the year.

And then you touched on this briefly in the prepared remarks [ that ] -- maybe you can expand a little bit more about how you're viewing in organic opportunities today? Maybe the landscape that you see, kind of areas that you're interested in? An update there would be great.

Yes, sure. We want to continue to be strategic in our thinking there and disciplined in our approach. Obviously, the new source of funding we've raised gives us additional flexibility to be sort of where we need to be, but we're not going to lose sight of being thoughtful with shareholder capital. Obviously, opportunistically in certain areas that we're focused on and our strategy like e-invoicing, we continue to watch for opportunities here. The good news is we've had a number of good acceleration and partnership discussions there. So I'm feeling very confident in our overall solution in that space with flexibility if the right opportunity comes forward.

And our next question comes from Joshua Reilly from Needham.

So you've come out with a number of new products over the last 12 to 18 months. I think it would be good to get an update on how much are these new products helping you with net new customer growth? Any anecdotes on competitive wins and the stronger NRR? How much year-over-year -- I think it was 2 points. How much can you attribute to that -- the product innovations versus just the normal course of business?

Yes. Sure, Josh. So Josh, the track record in new product rollout is pretty much proven out over time. We've been doing this for 45 years. And when we roll out new products, it all follows the same pattern. You typically need to get your early adopters. They need to go live with the product, you need to get reference ability and then you see sort of that tail. It takes a couple of years to do that, and we're seeing that progress. So the products we released a couple of years ago are starting to show more of an uptick. The ones we've released in the last 12 to 18 months are following that same pattern. So I think I'm encouraged by what the team has brought forward, like the Edge solution, some of the SAP tools and the SAP accelerator have really been nicely embraced by the market. As for the NRR growth, which we're really pleased because it's already put us in a good position forward -- as we go forward for the rest of the year relative to where we started NRR in 2023. I would say it's really a combination. It's a combination of some of the new offerings, and I do want to emphasize the customer success organization. We've really focused investment there, and we're seeing nice throughput from that team.

And then while we know you left the EBITDA guidance unchanged kind of per the normal kind of course of business for you guys after Q1, is there anything investors should be considering in terms of investments during the second half that need to be made for the balance of the year?

I think the continued focus is in the R&D space. We've talked about that. I'm really comfortable with how we wind up our go-to-market team relative to demand cycle. So I think we're well positioned there. And we're continuing to work through the implementation. We're on the other side of our ERP implementation, and we're continuing to drive leverage through our G&A as we go forward.

Our next question comes from Adam Hotchkiss from Goldman Sachs.

I guess, David, I'd be first curious to hear about the acceleration in revenue actually on the on-prem side. I think we all like to talk about cloud and the success there, but that channel was up for over 10% for the first time in a while. And I think we've been hearing that it's been a bit of a differentiator for you as competitors step back from on-prem. So I'm just wondering how you think about your continued support for customers that aren't yet ready to move to cloud and how that's driving more business and new relationships for you, if at all?

Sure. It's a good question there, Adam. I think few things. First of all, remember, we do lead cloud first in everything we do. All of our new logos -- over 90-plus percent of all of our new logos remain cloud. But in that cross-sell market, which oftentimes is some of our largest historical customers, we've enjoyed long LTV with -- about 50% of the time, they're going to expand wallet share with more on-prem. So we remain exceptionally committed to that. And I think the other thing that's really important to appreciate is, while we stay on-prem, the rally is most of that software is hosted in an individual cloud environment that the customer has, especially some of the largest customers. So we're very committed to support that. It is clearly a competitive differentiator. And as you may recall, we modified our pricing to align cloud and on-prem to be the same. So it's actually turned out to be very successful when we can deliver that in terms of our gross margin and overall profitability.

And then I'd be curious on the partner side. I know you've called out a number of large ones as drivers of success. But would you say there's any one or 2 that have really outperformed your expectations heading into the year that you're most excited about, future drivers of growth for you?

Obviously, we've highlighted a number of times the SAP and Oracle, but I'm really encouraged this year with the channel investments we made, how -- and the new offering we just rolled out around TCS inside and Microsoft. Some of our ecosystem relationships they are -- I think are going to pay up well. And we've also seen really nice traction across both Shopify and NetSuite. Shopify was a newer partnership for us, and we've seen some nice -- as their move upmarket is coincided well with the space that we lead in. It's really working well for us.

Our next question comes from Brad Reback from Stifel.

David, following up on that last comment on Shopify. Can you maybe remind us how you price on the e-commerce side specifically and just broadly given some of the weakness out there on consumer spending recently?

Yes, Brad, I'll start. And what I would say is pricing is consistent from an e-commerce side as it is with the rest of our business. Again, we base it on revenue bands, and we set that up in advance and bill in advance and recognize the revenue ratably. So that really hasn't changed. So we kind of set it with where we expect the customer is going to operate, and then we adjust from there.

And then on cloud specifically, the -- obviously, years off to a really good start there. But the absolute dollars that you need to add this year to get to the [ 28% ], somewhat higher than you've added historically. So maybe what informs the confidence on that [ 28% ]?

Yes. I think, again, everything we're leading with continues to be the focus. Cloud continues to be the focus, number 1. And 2, we brought out a number of new offerings, as you know, over the past several years, and the fact that they're all focused on the cloud just gives us more revenue opportunities to continue to drive cloud as our growth -- as a key part of our growth going forward. So absolutely no change in our guidance there. Pleased that it's increased over 2023 overall, and I don't see any reason to back off of that.

And our next question comes from Steve Enders from Citi.

I appreciate the comments on -- the update on e-invoicing and exploring some different opportunities potentially for the future. But maybe you could just talk about what kind of volumes you've seen so far from the Pagero partnership, and based on regulation timing when you kind of expect the bulk of opportunities to come about?

Yes. We don't go into specifics on it. I would say, in general, very comfortable with the way the performance of the relationship is working still. I still think that we're in the first or second inning of true e-invoice adoption because some of the larger economies in Europe haven't moved yet. And so we're -- I think we're in a very good position for what's coming and opportunities to accelerate that as we move forward here in '24 and more importantly, probably '25 is where you'll see the real, I think, uptick there as companies start making that global decision and move away from point solutions. And that's really what we're positioned for.

And then I think you made a comment about your own internal ERP migration now being in the rear view mirror. Was there any kind of catch-up in terms of cash collections or billings that impacted the quarter? And is it fair to say maybe any of those prior headwinds are now behind us?

Yes, this is John. I'll start by just saying, listen, I think we called that out in the fourth quarter. And again, we saw nice cash collections come in the first quarter, and we're continuing to see nice flow-through coming from there. So we feel that, that's in pretty good shape. It's getting better. We can always go to improve, and we're continuing to do so. I think we talked about trying to get a lot of that behind us by the end of the second quarter. And so we feel like we're very well positioned. Again, you can see from the results of some of the cash flows how that worked out. So we feel pretty good about that. We feel good about how we've been able to move that along.

And the next question comes from Brad Sills from Bank of America.

This is Natalie [indiscernible] on for Brad. I wanted to ask where you guys are investing in the business? And if there's any capabilities you guys are really focusing on in 2024 that will continue to drive strength in the cross-selling for the year?

Yes. There's a few areas that we continue to advance. Obviously, we're continuing to expand our compliance and reporting focus. We've highlighted our single cloud portal that's going to have both the e-invoicing all the way through to that compliance. I still think that's a critical part of what the market is looking for. AI, we've talked about this on a couple of past calls. We continue to see opportunity there. We're making some really nice progress. Our emerging tech team has done some really nice work in bringing that forward. And we're going to continue to be pretty disciplined in what we're doing there. So those are 2 areas I would highlight.

And our next question comes from Alex Sklar from Raymond James.

Dave, I just wanted to follow up on kind of the e-invoicing and broader international momentum you've talked. You talked about the nice marketplace win in the prepared remarks. Can you just kind of update us on the mix of your pipeline today coming from international opportunities relative to 1 year ago? And as you matured kind of that international go-to-market motion, I'm curious kind of the opportunity to accelerate that business going forward?

Yes. Obviously, international is a small part of our business, particularly in Europe, and we're very excited about what we're doing. In fact, we can -- next week, I'll be over in Europe for our EU customer conference and have a great turnout of customers and partners lined up for that session. So really excited about the momentum the team is building in that space, in particular, the number of prospects that are coming to it. So I think our brand continues to expand in Europe and it's giving us opportunity to grow that pipeline. Obviously, still working off of a small base, but it will be a growth vector for us for years to come. And as we continue to watch the e-invoicing space evolve around it, I think it will only accelerate.

Okay. Great color there. And then just maybe one more for you, Dave. Just in terms of the SAP migration catalyst, has anything changed in terms of when you're being brought into those discussions with the prepared remarks when -- maybe suggest that you're being brought in earlier in the cycle? I just want to see how prevalent that was across your pipeline?

Yes, that's a really exciting development for us, Alex. As we've talked about, we have a differentiated relationship than we've had with SAP in the past. We're working with their sales teams and really have appreciated the partnering that they're doing with us much earlier in the sales process to allow us to work with their reps who are actually getting [ quota ] relief. So there's a nice win-win for all in this process. And more importantly, we're able to deliver higher customer value. And so I think we're seeing -- we're going to see it in the win rates going forward, and that earlier visibility will allow us to further differentiate with all the SAP tools and accelerators that we've created over the past several years. It really positions us well.

[Operator Instructions] Our next question comes from Patrick Walravens from Citizens.

This is Austin Cole on for Pat Walravens. I'd love to get your take on where you guys see kind of at a high level where the greatest regulatory tailwinds are coming from in the U.S. and Europe, and then especially in fast-growing economies like Brazil and India, are there tax compliance products that are best positioned to satisfy each of those trends? And are there opportunities -- more opportunities to address those different trends in those different regions for Vertex?

Austin, last year was a record number of changes here in the U.S. So it obviously remains a fertile market for regulatory change. But I think the more seismic changes, as you know, are happening outside the U.S., and we've highlighted a little bit around e-invoicing being one. That in the digital age is an important legislation piece that's going forward in Europe right now, is an important vote coming up on May 14 around that. And all those things line up to be persistent and consistent regulatory changes. Governments look for new ways of seeking revenue. And so when we think about our product set, part of the reason we've been highlighting this -- importance of this cloud portal linking, e-invoicing all the way through to VAT compliance is in direct response to those regulatory tailwinds. I think over time, with Generative AI, data management is going to become increasingly important and data insights for businesses that are doing broad -- and that's fueling some of the next-generation investment that we're thinking about for products.

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

Thank you, 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@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 very much for attending today's presentation. You may now disconnect. Have a great day.