Vertex, Inc. (VERX) Q2 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to the Vertex First (sic) [ Second ] Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Joe Crivelli, Vice President of Investor Relations, for introductory remarks.

Hello, and thanks for joining us to discuss Vertex' second quarter results. Chris Young, our President and CEO; and John Schwab, our CFO, are with us today. As noted on Slide 2, during this call, we may make forward-looking statements about expected future results. Actual results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Our remarks today will also include references to non-GAAP metrics. A reconciliation of these metrics to GAAP is also provided in today's press release. This call is being recorded and will be available for replay on our Investor Relations website. And I'll now turn the call over to Chris.

Welcome, everyone, and thank you for joining us. Our second quarter results demonstrate 2 key points. First, the durability of the Vertex business. Revenue grew 10.5% year-over-year to $204 million at the high end of our guidance range. Second, we are beginning to translate greater operating focus and cost discipline into meaningful earnings leverage. Adjusted EBITDA increased 33% to $51 million, above our guidance range and adjusted EBITDA margin expanded by more than 4 percentage points year-over-year to 25%. The second quarter provides tangible evidence that the actions we are taking to sharpen our priorities, improve our execution and operate more efficiently are producing results. That said, we still have work to do on growth. Expansion within the installed base and new logo performance are not yet at the level we expect, in part because cloud conversions have been slower than expected this year. Our customer metrics remain stable. Gross revenue retention was 95% and net revenue retention was 105% for the second consecutive quarter. The message in those numbers is straightforward. Our customer base remains durable, and our solutions remain deeply embedded in mission-critical workflows. At the same time, we need to improve expansion, cross-sell and the way we manage customer migrations. Those are important priorities for the second half. E-invoicing was one of the strongest areas of execution in the quarter. Momentum increased during the quarter across all geographic regions, supported by the approaching French mandate, upcoming German mandate and by customers taking a broader view of global compliance. This matters strategically. Global compliance is moving closer to the transaction itself. Customers increasingly need to determine the right tax outcome, execute the transaction in accordance with local regulations and report it to the relevant authorities and then finally maintain the evidence required to defend it. Vertex is well positioned to help our customers manage that entire life cycle from decision to defense. That is the broader opportunity we are pursuing across tax determination, e-invoicing, reporting, returns and compliance. Now as I mentioned, e-invoicing was one of the strongest areas of execution in the quarter. The business continues to perform well in advance of upcoming mandates with very strong growth in both ARR and revenue that's materially above the overall corporate growth rate. Importantly, we continue to see both new e-invoicing revenue and the number of our e-invoicing wins ramping considerably as we move throughout the year and towards the implementation dates for the upcoming French and German mandates. I'm pleased that we won several 6-figure enterprise e-invoicing deals in the second quarter, including a mid-6-figure win for an existing customer driven by mandates in just 2 countries, France and Finland. France was an important catalyst in the second quarter, and Germany and other country requirements will create additional demand over time. We are aligning our country road map to demonstrated customer demand and working to integrate our capabilities across Vertex, ecosio and Brinta. Q2 represented meaningful progress, but we are focused on consistent execution in this business to grow it into a material contributor to our overall growth. Now let me turn to AI. I've been clear that becoming AI-first has 2 dimensions for Vertex. The first is changing how we operate. We are using AI to improve the speed, quality and economics of work across engineering, customer support, tax research, IT and our managed services operations. The second is changing what we deliver to customers. Over time, we believe AI can make tax and compliance more proactive, more explainable and increasingly automated. We are making measurable progress on the first dimension. And while we are building capabilities required for the second, AI-attributable revenue is not yet material to Vertex. At this stage, the most relevant evidence is whether AI is improving how quickly we build, how efficiently we onboard customers and how effectively we are solving real customer problems. Across the company, active use of core AI tools has increased to 89%, up from 68% in January. Adoption is important, but it's only the starting point. In engineering, AI is now embedded across the development life cycle. Across the majority of our teams, our internal measurements indicate a 34% improvement in engineering efficiency with pull request merge rates increasing 30% from our January baseline. We are also applying AI to specific customer delivery bottlenecks. AI-supported generation of e-invoicing business rules has reduced onboarding time by approximately 50% in the applicable workflow. Separately, our country expansion agent has enabled the team to onboard approximately 3,500 rules across more than 50 formats, about 70% faster than the prior process. The next step is to translate these capabilities into customer-facing product value. In our product, we see a steady increase in adoption of our Vertex Intelligence embedded AI, which helps customers with everything from answering a basic question on tax treatment to translating a full set of tax updates into tax rules. More broadly, we are developing an AI-first connected tax platform that's designed to help customers move from reactive product-by-product work towards more proactive compliance workflows. Some elements of that platform are still in development and our immediate goal is to validate them with customers, move the right capabilities into production and establish clear commercial models. Early customer adoption of Smart Categorization has been encouraging with strong usage patterns helping validate the value proposition while providing important feedback that shaped our understanding of how customers will deploy the solution. Those learnings are informing our go-to-market efforts, and we're starting to see a pipeline of opportunities develop as additional customers evaluate the technology. Over time, we expect to measure our AI progress through customer adoption, customer outcomes and revenue, but we are not fully there yet. The operating improvements we are seeing give us greater confidence that AI will become both a meaningful productivity driver and an important source of product differentiation for Vertex. The customer activity in the quarter reinforces the durability of our core business and the opportunity to expand it. Across both existing customers and new logos, we saw 3 consistent buying patterns. Customers are expanding their use of Vertex as their transaction volumes and global complexity increase. They are standardizing on Vertex as part of broader SAP, Oracle and Microsoft Cloud transformations. And in competitive situations, they are choosing Vertex when they need the content, scale, integration and control required to manage complex tax and compliance environments. Let me give you some examples. First, we expanded our footprint with a leading mobility and delivery technology company. The customer continues to grow and broaden its operations, leading to significantly higher volumes. This entitlement expansion resulted in mid-6 figures of additional revenue for Vertex. Second, we secured a high 6-figure expansion with a consumer packaged goods company as part of its SAP cloud transformation. This win extended our relationship across multiple geographies and tax types, while also leveraging our best-in-class SAP software and Vertex Consulting. And third, we won a competitive displacement opportunity in the Oracle ecosystem with a major quick service restaurant operator. The customer was using Vertex in one area of its business while using a competitor elsewhere. The customer chose to standardize on Vertex to modernize and simplify its existing technology environment, resulting in a mid-6-figure expansion that includes multiple Vertex solutions and services. These are different customers in different industries, but the strategic pattern is the same. Business growth creates more volume and complexity, ERP modernization creates an opportunity to simplify and standardize and increasing compliance requirements make the breadth and reliability of the underlying tax platform more important. We saw the same demand drivers in our new logo activity. During the quarter, we won new customers that were replacing internally developed processes, moving through SAP cloud migrations and responding to increased transaction volume. Those wins across the Microsoft, Oracle and SAP ecosystems and included both focused initial deployments and broader platform engagements. The first example is a low 6-figure win with a telecommunications infrastructure leader. This is an example of an enterprise customer that outgrew a manual solution and needed to automate its indirect tax processes. The second example is a low 6-figure win with a global management and technology consulting firm. The customer was moving through an SAP cloud migration and selected Vertex for North America Sales Tax, Consumer Use Tax, SAP Accelerator and our Consulting services. The third example is a high 6-figure win with a building products distributor. In this case, transaction volume growth was the catalyst and the customer selected a broad set of Vertex capabilities. We consistently demonstrate through our execution that we can enter through a specific tax or compliance requirement and then establish the foundation for a broader relationship over time. That land and expand opportunity is important. Our Q2 retention metrics demonstrate the durability of the installed base, but our expansion performance is not currently where we want it to be. Improving the way we convert successful initial deployments into broader customer relationships is one of our clearest growth opportunities. Now before turning the call over to John, I'd like to spend a moment on a topic that's important to me. One of our top priorities since me joining Vertex has been strengthening our leadership team with executives who have successfully scaled enterprise software businesses through periods of transformation and growth. Allison Cerra joined as Chief Marketing Officer to sharpen our market positioning and brand and demand generation capabilities. Aneel Jaeel joined as our Chief Operations Officer to drive greater operational discipline, technology modernization and AI-enabled transformation across the company. In June, Chatelle Lynch joined as Chief People Officer to strengthen talent, organizational effectiveness and accountability as we move through this period of significant change. And today, we are pleased to announce that Bala Chandran has joined Vertex as Chief Product and Technology Officer, adding significant experience in product innovation, cloud modernization and AI leadership at a critical point in our evolution. These leaders bring the experience and leadership capacity to improve our execution going forward. We have a durable customer base, an important position in global tax and compliance, improving operating leverage and meaningful opportunities in e-invoicing and AI. We also have work to do to accelerate our growth, improve our expansion and turn our product vision into measurable customer and commercial outcomes. I believe we now have a stronger leadership team and a clearer operating agenda to do that work with greater focus and urgency. Now I'll turn the call over to John to discuss the financials in detail.

Thanks, Chris, and good afternoon, everyone. As Chris noted in his remarks, the second quarter results demonstrated stability in the business across revenue growth and customer metrics. In addition, we saw good results from our value creation plan announced in April, which drove significant earnings leverage in the second quarter. On Slide 13, our total revenue was $204 million, up 10.5% year-over-year and at the high end of our guidance for the quarter. Our subscription software revenue was up 10.7% and services revenue was up 9.4%. Our annual recurring revenue was up 10.5%, in line with expectations. And our Cloud revenue was up 17.9%, bringing the year-to-date Cloud revenue growth to 19.3%. Turning to customer metrics on Slide 14. Our gross revenue retention was 95% and net revenue retention remained stable at 105% compared to the prior quarter. Our average annual revenue per direct customer was $142,997 in the first (sic) [ second ] quarter, up 9.2% year-over-year. Our scaled customer growth was 8% in the second quarter, while overall customer count was up on both a year-over-year and a sequential basis. Now turning to profitability on Slide 15, where you can see the impact of the value creation plan beginning to take effect. Overall, non-GAAP gross margins increased 15 basis points year-over-year. This was driven by higher margins in the software business, as you can see on the slide. Adjusted EBITDA was $51 million, up 33% from last year's second quarter for an adjusted EBITDA margin of 25%. As noted on last quarter's call, we expect to see steady progression towards a high 20s adjusted EBITDA margin between now and the end of 2027. Our free cash flow was a positive $2.7 million but was impacted in the second quarter by costs associated with the value creation plan, including severance and consulting fees. Free cash flow was $13.2 million on a pro forma basis for a free cash flow margin of 6.5%. In addition, the second quarter pro forma free cash flow represents a free cash flow to adjusted EBITDA conversion rate of 26%. Likewise, we expect to see a steady upward march of this number over the next 6 quarters as the impact of the value creation program takes root, and we expect to exit the fourth quarter of 2027 with a conversion rate of approximately 70%. To give investors another view of the earnings and cash flow potential of the business, on Slide 16, you see adjusted EBITDA less capital expenditures over the past 6 quarters. Here, you can clearly see the earnings leverage in the business as quarterly adjusted EBITDA has increased 37% or $14 million during that time frame. Capital expenditures reflect investments we are making in the business in both our compliance business as well as in our Artificial Intelligence, both in our internal systems and product development. As you can see on the far right column, adjusted EBITDA less capital expenditures has more than doubled during this time frame. As I noted earlier, we expect that the value creation program will unlock even more earnings and free cash flow potential over the coming quarters. Turning to guidance. Given the performance of the business in the second quarter and the ongoing impact of the cost actions, we expect third quarter revenue of $208 million to $211 million and third quarter adjusted EBITDA of $55 million to $57 million. For full year guidance, we are narrowing the revenue range to $825 million to $830 million, and we're increasing the full year adjusted EBITDA guide to $206 million to $210 million from $202 million to $208 million previously. We now expect Cloud revenue growth to be 18% for the full year. Before I wrap up, I'll note that in the quarter, we repurchased $26.5 million worth of shares in the second quarter at an average price of $13.17. Since the $150 million buyback program was launched in November, we have bought back a total of $56.6 million of shares at an average price of $14.55 and have $93.4 million remaining under our authorization. With that, I'll turn the call back to Chris for closing comments. Chris?

Thanks, John. Let me close with 3 points. First, Q2 demonstrated the durability and earnings potential of the Vertex business. Revenue was at the high end of our guidance, adjusted EBITDA exceeded our expectations and customer retention remained stable. Second, we are seeing tangible progress from the actions we have taken to improve our operating model. We are executing with greater focus and discipline, expanding margins and creating additional capacity to invest in the areas that can strengthen our growth over time. And third, AI is improving the speed and efficiency of selected engineering and customer delivery workflows while we continue building customer-facing capabilities. Our next objective is clear: translate those operating gains and product investments into measurable customer adoption and over time, commercial value. We entered the second half with a stronger cost structure, ramping productivity, improving momentum in compliance and e-invoicing and a leadership team built to execute the next phase of our transformation. With that, we'll now take your questions.

[Operator Instructions] Our first question will come from Christopher Quintero with Morgan Stanley.

I wanted to ask -- it was really great to hear about all the internal AI work that you all have been doing and working on. But from a customer perspective, just curious, typically, tax accountants have been a bit more risk averse and a bit slower moving. So curious from the Vertex perspective, what are you doing to enable your customers to be even more comfortable about adopting some of these AI technologies and solutions you're developing?

Chris, thanks for the question. One of the most important things we've had to do and we've learned a lot of this with Smart Categorization is we've really had to send people in -- almost in a forward deployed engineering model, which you hear a lot about in the AI world, to work with our customers to help them because what we -- look, one of the biggest learnings, I think I talked about this a little bit on the last call, but with Smart Categorization is you're not only offering your customers a tool, but you're changing the way they work. They've had a series of processes built up around how they categorize products. Sometimes there's different people from different groups, different functional areas in the company involved. And I think I've shared in the past an example of one of our customers with their marketing team was actually involved in some of the categorization because a lot of the upfront SKU generation for product starts there in that part of the business. And then obviously, finance and accounting gets involved later when you're actually getting down to a tax determination and reporting decision around that. And so we've had to work with a number of our customers to help them think through not only here's the tool and how well does it actually categorize a product, but then what's the change in operational model around that? How do you think about that? How do you staff for that? And we're seeing that in other conversations we're having. Now that has positives. It also just, in some ways, takes more time. One of the positives is I'm seeing opportunities for us to send engineers in to work with customers to solve upstream product problems that were different than ones that we've anticipated in the past, places where they might have had frustration, for example, with our products I think actually through AI, we can build bridges into the determination experience and actually improve our overall posture with our customer as well as the opportunity to sell them something additional. On the downside, which is something I know you've talked about is, in some cases, it takes a little bit longer to get them to make the decision. But as I'm talking to customers, the message is clear. They're getting messages from their CFOs, their CIOs. Obviously, those come from the CEO usually. And they are wanting to move in this direction. They are wanting to adopt more tools. When I look at just some of our Vertex Intelligence, our equivalent of a Copilot adoption where it's just a general AI capability in our product, we're seeing steady month-over-month, quarter-over-quarter increases in engagement with that tool, we're tracking monthly active users, daily active users. So we're seeing it. So long answer to your question, a lot of engagement there. And then obviously, we're hard at work on making sure that we're going to ship more AI capabilities to our customers as we get through the next few months and quarters of Vertex.

Got it. That's helpful, Chris. And then just as a quick follow-up on the Cloud revenue guide. You guys talked about slower Cloud migration. So just curious maybe what you guys are seeing in terms of the drivers behind those slower Cloud migrations?

Yes. I guess, first of all, Chris, thanks for the question. When we put together the Cloud guidance, we felt good about kind of where we stood at the time. I think we did anticipate a higher level of Cloud conversions taking place -- and both in our installed base as well as in the new logo activity. And so in the first half, we didn't really see that happen and that pattern continued -- and that continued into the second quarter. So we reassessed our view on kind of where the guidance needed to be. That said, I think there's just an overall kind of elongation of people making decisions to make technology moves into other areas. Wherever it's going to require capital and further deployment, et cetera, I think people are really pushing and taking a thoughtful view of exactly how fast to move. And that impacted our business and the amount of conversion. I think when we think about it from our standpoint, it's -- from our standpoint, this is really a conversion timing issue. It's not a revenue issue. It's taking revenue that is not currently in subscription or on-prem and moving it into the cloud. And it's really a left pocket into the right pocket from an overall revenue standpoint. So I want to make sure that we call that out. And as you know, we continue to support our customers just -- in their deployments, whether they're on-prem or in the cloud, whatever meets their needs best. And we're going to continue to work to improve the cloud -- their cloud conversion expansion as well as new logo execution.

One thing I'll just add there, Chris, because I know this question is something that's come up is that there's -- we're seeing more -- again, more customers that have mixed environments. They have some cloud. As I talk to more customers, I'm finding more and more examples of customers that might have some element of the Vertex estate cloud deployed, they have more -- they have legacy Vertex deployments as well. Oftentimes, when I'm talking to them, one of my first questions is, why haven't you moved it all to the cloud? And I get a mixture of answers. There's IT, there's prioritization. So I just -- I give -- I share that with you to just give you a bit more color around what we're seeing and hearing from customers. It continues to be, hey, we really like Vertex. We're consolidating more on Vertex, but it may take us some time to get there. We still, as you know, are, to some extent, a recipient of what happens in the ERP migrations as well. So we end up being impacted by that. So as ERP migrations go to some extent, later on in that journey, the Vertex migrations happen as well. So we're managing through a mix of that. But as John said, the best -- the most important point here that we want to make sure everybody understands is these are not lost customers. These are just customers who are taking longer than we initially built out and expected and are planning than they would to get to migrating the cloud on the Vertex deployment.

Your next question will come from Jared Levine with TD Cowen.

I was hoping to start here in terms of the demand environment. Can you talk about how that progressed over the quarter and what you're kind of seeing so far into 3Q here?

We've seen a pretty stable demand environment as I kind of look back out over where do we see the pipeline at the beginning of the quarter? What was it like in the first part of the year coming and going into Q3? I would tell you, we've seen a good mixture of cross-sell, upsell opportunity in our base, which, as you know, is an important part of our revenue model. We've seen new logo wins. I will point out that and John mentioned this a moment ago, I do think it's important. We have seen some elongation in sales cycles. We've seen some situations where customers, we were expecting a deal to close in 1 month and then closing in the next month because they had to go through procurement cycles. We did have a new logo 7-figure deal that we were expecting to close in June that immediately came in, in July, but we didn't get it in for this past quarter, as an example. So we are seeing some of that where -- which is different than again as we expected. But at an overall demand level, pipeline level, there's a lot of activity out there. We're seeing a tremendous amount of new activity in and around our e-invoicing mandates and that part of our business. Obviously, that remains off a smaller base for us, but we're very pleased with that activity. And the 7-figure deal I just mentioned a minute ago, which has now come in, in the month of July. That's net new business. A lot of that's around more traditional tax determination.

Got it. Great. And then so far year-to-date, you have outperformed your 2 quarterly revenue guidance, but did affirm the annual revenue guidance here. Anything to call out in terms of guidance philosophy or visibility in terms of that approach here to affirm that guide midpoint?

Yes. I mean what I would say is that our first half performance was good. We felt very good about that, and it gives us confidence in achieving our full year outlook, certainly. We had some good things that hit in the first half of the year, strong management of churn that we had talked about a lot last year and the early part of this year. And so -- but we wanted to make sure that we really balance some of that first side -- that first half upside with a more measured view of the second half, including the growth rate -- as you can see, the growth rate in the third quarter, as well as some of the continued variability in the revenue timing that Chris was talking about in terms of kind of the elongation that's going on as well as mix and some of those longer deal cycles. And so I think we just wanted to be thoughtful about all the things that we're seeing in the environment and to make sure that we kind of thoughtfully put together guidance that put us in a range that, again, that gives us good visibility into the achievement in the back half. So that's kind of the overall. And I think it really has to do with the first part of your question, which just was like what's the environment like and how are things feeling. And so we want to make sure we bake that all in. That's kind of how it came out.

Yes. And that said, we raised our guidance on EBITDA for the year, which is something we're very proud of. And obviously, we're working hard to bring in as much business as we can see out there for the back half.

Your next question will come from Billy Fitzsimmons with Piper Sandler.

Chris and John, I think it was clear that it sounds like the delta in the full year cloud revenue growth guide was more of a near-term blip than a, call it, a structural challenge. And just to double-click on this, based on what you both are saying, is it fair to say that some customers are maybe prioritizing other AI projects internally, which is maybe pushing out some of the blocking and tackling around the on-prem cloud migrations? And if so, when do you expect that to maybe fade or reverse? I know it's hard to say in real time, but I guess what's the catalyst to that kind of moving back to the pace you initially expected?

I think -- so there's several components of our cloud revenue, Bill. I think a couple of things. One, we do expect cloud revenue growth to see some acceleration based on our e-invoicing business. And as we get through actual invoices flowing through, French mandate is one that we'll see in September here, so at the end of this quarter. Obviously, we've got the Germany one coming up at the beginning of the year. And pre that mandate, we expect some improvement there in the number of invoices. So e-invoicing will be another -- and we had some good activity this quarter. So e-invoicing is one that will ramp. That's cloud revenue. So we expect that to be a positive in our overall cloud revenue growth rate going through the back half of this year and into 2027. So that's number one. Number two, on cloud migrations, it's hard for us to get a good read on what trade-offs are being made. So why -- where are they trading off timing, for example, in their overall set of IT projects. As you know, to some degree, we probably speak a little bit more to tax people than we do to IT people, generally speaking. But what we -- what I can say is, there's -- it is taking customers a little longer on deals. My sense is like across the IT franchise, a lot of different organizations are taking a look at where are they spending money, how are they spending money, where are they spending their resources. And so we do expect everything I'm hearing and what we expect to see is a continued move to the cloud. Like every -- again, just if I give you -- if I harken back to some of the examples I shared a moment ago, like whenever I'm talking to customers, more and more I'm discovering partial franchises in the cloud, a real desire to move more to the cloud. Part of what we need to do, this is where we still have work to do more as we go through the back half of this year and into next year is we're trying to give them more incentive to move to the cloud. More of our -- delivering more new features, more AI capabilities, that all creates a forward motion and a forward incentive for our customers who want to move more to the cloud. We started -- I think I may have mentioned this, when we first launched a number of our AI capabilities, many of them were really more focused on our cloud franchise. We started to broaden the availability of that to our on-prem customer base so that they can start to use more of our AI tools. I consider that a [ carrot ] to make it more attractive to customers wanting to move to the cloud. So this is something that we've got a lot of focus on. I will also point out a comment I made on the call. We've just brought in a new leader for our product and engineering team. He comes to us most recently, ran a large part of the business in the health care space at Oracle. So not only does he understand regulated industries, but as you know, really has spent a lot of time on how they bring their customer base forward from more traditional methods to cloud-based capabilities. And so I'm really -- I feel very good about our ability to get our customers migrated. And obviously, we'll have to work through their own internal planning and budgeting cycles, but doing everything we can to give them incentive on the Vertex side to move there.

Perfect. I appreciate the color. And if I could sneak in a second one. It's now been a couple of months since you acquired Brinta that gave you an AI-native footprint in Latin America, arguably one of the more complex environments for real-time compliance globally. How has the integration progressed relative to your initial expectations?

I would say the Brinta team has done -- I mean it's been great to have them on the team. They have some really great customer relationships. We see more opportunity even in region than I would say we saw before Brinta became part of Vertex. So I would say, overall, it's going really well. As you know, integrating any different companies that come from different places, there's always -- there's always challenges. It always takes longer than you want. And we're trying to make sure that we bring this along at a pace where we keep the best of what Brinta brings to Vertex, but we also want to make sure that we don't -- we also want to get them to integration, but we also want to make sure we don't break what they've done really well. And so that's going to take us a little bit of time. But we're pleased with what they've done. We're pleased with the new business opportunities that they're bringing to us. They've come in and partnered really well with different teams across other parts of Vertex. And like I said, I'm even encouraged by some of the new business opportunities we see in Latin America because of it. So it's on a really small base. Primarily, we were -- we started our journey with Brinta because they helped us close some of the country-level gaps in our ability to meet a number of the mandates in Latin American countries. But I think what's been really positive is we're seeing a broader market opportunity environment that we're opening up because they're now part of Vertex. And so I think that's a really important opportunity for us.

Our next question will come from Samad Samana with Jefferies.

I guess, first, just to follow-up on the guidance. John, is this -- do we now consider the guidance to be derisked on the cloud side? Is it -- should we extrapolate that the conversion activity you guys are seeing in the first half of '26 is probably the new normal? So both kind of in consideration of the 2026 guidance, would you say that you feel extremely confident or is that derisked? And then again, should we kind of use this as the conversion activity template as we think beyond the '26 outlook for cloud as well? And then I have one follow-up.

Yes. From a cloud standpoint, Samad, I think we're calling what we see. What we're seeing there is a lower conversion ratio. And that conversion ratio -- just that conversion activity isn't happening at the pace that we thought. And so I mean, this is what we're seeing, and this is what's built in for the rest of the year. And again, I'm not sure I can sit here and call it, and I think we'll see it show up in the numbers, but that's how I'm thinking about it as it plays through. So that's what we wanted to make sure that we took into account and make sure everybody got -- felt good about where we ended and why we ended there. From an overall guidance perspective, I think as we look at the back half, there's still a decent amount of pipeline, as Chris said. And again, we are seeing -- there is some activity in the back half of the year around elongation of deals and other things. So I wouldn't say we didn't just set this up and say, all right, this is a risk-free plan by any stretch. There's always risk in everything that we do, and there's always a lot of deals that have to get closed to make the numbers. So I wouldn't necessarily -- I certainly wouldn't say that. But I think what we wanted to make sure is we took into consideration what we saw in the first half as well as kind of the pipeline for the activities that we're seeing now and sort of roll that through, and that's what we came out with. So that's the best I can tell you. Hopefully, that was helpful, but happy to take a follow-up if you have one.

Yes, that was helpful context. I appreciate that. And then maybe just on the -- just maybe again to get some better context around the quarter. If I think about the scaled customer growth, it's still growing high single digits, but it did decel quarter-over-quarter. Is there anything onetime in nature there that we should be aware of? Or is that maybe -- is the same thing that's impacting cloud conversions maybe impacting new scaled logo growth? Just help us understand what drove that slowdown?

Yes. I think, Samad, I think that, one, it's 1 quarter. So we're -- at this point, we're watching it closely. As I mentioned earlier, we did see some deals move between quarters. The one deal that I mentioned that slipped out is a 7-figure deal for us. It was a June deal and ended up coming in July. So that would factor into that percentage as an example. Certainly one we're very happy to close. So we are seeing some movement there. But we get scaled customers come to us in a variety of different ways. We have obviously net new logos. We have growth with existing customers. Again, some of we expect to see our e-invoicing customers, particularly as we start to ramp on these mandates, they are likely to move from smaller customers to more scaled. And so we think there's -- we don't see any trend here that would suggest we're going to trend down on this metric. We expect that we should continue to have good growth in this metric, but we didn't see it this quarter, and we certainly want to see it better as we look forward. And we'll keep -- we'll stay on top of it. Obviously, we'll keep reporting it. So it's certainly something that we pay attention to.

Your next question will come from Steve Enders with Citi.

I guess I want to ask on just the e-invoicing dynamics that you're seeing? And how is that maybe playing out versus how you're expecting those deals to kind of come through for the year? And how are you kind of thinking about when, I guess, the -- when like the bulk of customers will start to adopt and maybe move from a single country to expand and adopt more of a full platform opportunity over the next couple of years here?

So we saw our first examples. So I would tell you, Steve, and what we saw in the first quarter was lower than we would have wanted in terms of multiple countries and that sort of thing. We saw the activity we expected to see in Q2. We saw customers that were starting to not only just do the French mandate, but would add a second country as part of that. I think I mentioned one of the examples in the call, I mentioned France and Finland being the driver. We are now starting to see customers that would start in one country like Poland and then add a second. And so like when we think about the growth potential in our e-invoicing business as we get through this quarter into the fourth quarter, even beginning and going into 2027, that's where some more of the growth will come from. We're expecting the growth to come from is people that are going to move to do the mandate, meet the mandates that are out there, like France being the big one right now, Germany coming. There's Spain next year, which is another one. But amidst all that, the expectation is that we're going to have some of our more -- our larger customers that start to say, okay, now that I'm doing one country with you or a second country with you, as we deliver on that, let me add a third, let me add a fourth, and this becomes a growth opportunity for us. And so we're just starting to see that behavior in our customer base where you're seeing meaningful growth opportunities across more than one country. And then ultimately, that leads us into the motion that we want to get from this where customers start to say, great, I just want to consolidate everything with you. Like I -- maybe I made a decision in Mexico like 4 years ago, 5 years ago, now let's circle back. And that's an expectation that we have as we get into back half of really Q4 and probably '27 is where we expect to have more of those kinds of opportunities. And that's really what this business represents for us in terms of potential.

Okay. No, that's great to hear. And then maybe attaching that to the numbers a little bit. And I think we're still talking about revenue acceleration into Q4. It looks like ARR is still decelerating a little bit. Just how should we think about the timing between when these things start to impact ARR and we start to see the acceleration on that metric and then give us confidence on the revenue side going into Q4?

Yes. I mean I think you'll see that start to play out here in the third quarter, again, because ARR is going to lead the revenue. And so that's going to start as adoption for the French mandates gets moving. There's more activity there. Again, we started to see activity in the second quarter. We're going to see a bit more of it now as we're getting closer and closer to the date. And as that occurs, we're going to start to see that show up in ARR. And then naturally, then that's going to turn into revenue soon thereafter. And again, it will start kind of working itself in ratably over the year because that's typically how people are buying and how they're thinking about it from an overall usage standpoint. So that's how to kind of think about it, and that's kind of the path that we have. And so we'll start to see it this quarter and then again, revenue inflects a bit more next quarter, the fourth quarter that is.

Your next question will come from Brett Huff with Stephens.

Two questions from me. First one is a little bit of a follow-up on the e-invoicing. The original thesis, if I recall correctly, was definitely a lot of cross-sell into our big customers who should be using you all for e-invoicing, but also there was some new logo stuff that you had built in. Now that we're a little further down the pipe on that, is that all kind of coming out like you saw like new versus cross-sell, et cetera, leaving aside the adoption part.

We are seeing that, Brett, which is great. So both in Q2, we saw a growth in the overall number of customers at Vertex. And a lot of that growth is largely driven by the performance in the e-invoicing business. A lot of those customers come in at a smaller sort of ARR per customer number than our traditional tax determination customers. So we saw customer growth overall, which is good. And a lot of that we can attribute to what we saw in e-invoicing. But we also saw some of our -- I would say, some of our early 6-figure -- multi-6-figure cross-sell opportunities into our installed base for the e-invoicing mandate. So we saw a good mixture of both of what we want to see. Now look, from where I sit, Brett, I want to see more of those, particularly the latter example, where we're driving more multi 6-figure cross-sell opportunities into our installed base. But the activity that we saw in Q2 and what I expect to carry into Q3 in the back half of this year gives me good confidence that those 2 aspects of our thesis are happening. We're growing our overall customer base, selling to net new logos in this space, particularly in Europe. And then secondly, we are also driving cross-sell, upsell into the Vertex installed base, particularly for e-invoicing.

That's helpful. And one quick follow-up, again, still kind of a big picture one. Another angle on the AI question. Early on, when you and I were talking with clients, you set up the expectation that, look, this is a build year. Next year, we'll start to see some metrics or revenue or whatever. And I think that's still obviously going to happen. As we get into the fourth quarter, we're getting a little more into the brass tacks on things like that. What are the metrics that we should be looking for measurable or anecdotal to give us a sense that you're building that muscle and getting those products getting ready to go GA?

One, Brett, we've got -- for example, we have got our Vertex Exchange event coming up in the fourth quarter of this year. My expectation is that we'll be able to say a lot more about our product road map and strategy and even introduce some new capabilities at that -- in and around that event. So that's certainly a big milestone for us. We've got to have the product -- the way I like to think about it is like we have to have the product on the truck if we want our team to be able to sell it and bring it to customers. This is a virtual truck. It's an autonomous truck actually is the way to think about it since it's AI related. But we need our AI capabilities out there available to customers as we go into 2027. And I feel really good about the progress we're making there. As I mentioned briefly on the call, really building out a connected platform that's got a tremendous amount of AI capability with it. That's all in progress. But you said it well at the beginning, Brett, this is more of a build year with the expectation that we have those capabilities exiting the year, and we've got more for our teams to be able to sell to customers going into 2027. If we can pull in, if we can obviously go faster than our expected time lines, maybe we're starting to sell more in 2026, but we're really more focused on this being a 2027 event.

Your next question will come from Joshua Reilly with Needham.

I wanted to get the latest update on the SAP, ERP, ECC transition outlook and what you're seeing in terms of capacity for these conversions in the next 2 years versus what's currently being done by consultants. And if enterprise buyers are simply buying the 2030 extended maintenance instead of making the migration right now, and did that have any impact on the lowered cloud revenue guidance?

Yes. So we haven't had any real change in the activity that we're seeing. We had good -- we look at our ecosystem, we had a good set of wins across the board, whether it's SAP, Oracle, Microsoft wins across the board. I would tell you we haven't seen a material shift in the velocity of migrations, but we do continue to see migrations. We continue to see them happen. I think -- I wouldn't say the velocity though has shifted. And so that's why I think you're seeing a little -- you're seeing a reasonably steady progression in our numbers as well. Like we're not seeing any material change in the way these migrations are happening one way or the other. It's just they're happening. We're continuing to move along with them. And so that kind of -- those expectations are built into how we're laying out our guidance for the quarter and for the year.

Got it. That's helpful. And then just one quick follow-up. On the NRR outlook, what are the puts and takes maybe we should be considering for the second half of the year here? You've got the e-invoicing volumes kind of kicking in as a tailwind. Is there any change that you're seeing in terms of mid-market customer churn maybe that's kind of burning off there that could also be a bit of a tailwind? Or anything else we should be considering?

Yes. Thanks for the question, Josh. In terms of kind of the NRR componentry, again, I think you picked the real kind of tailwind, again, is some of the e-invoicing opportunities that Chris talked about and the opportunity to sell that into the existing customer base. There will certainly be something there something we can -- that we're excited about that's going to go on. There -- in terms of churn and kind of where things are, as I said earlier, I think we felt good about kind of some of the progress we've made in those accounts, whether they're middle market or even some of the larger ones from last year. I think it was the third and fourth quarter where we had some significant changes into the churn numbers that we had seen in the past. And so we feel good about the types of things we've done to improve that. And again, we feel like we're making good progress. And so perhaps there could be a little bit of upside as things play out. But again, I just -- we don't guide to it. And I would just say that we feel good about the work we've done through the first half, and we expect to continue that into the second half. So again, that will -- it will fall where it does, but we're pleased with what we've shown.

Your next question will come from Rob Oliver with Baird.

Chris, first one for you. The 6-figure opportunity with one of your core customers on just 2 geographies has to be pretty tantalizing when you think about the kind of global opportunity around e-invoicing. So I'm just wondering, as you've now been in the seat now for a few quarters, as you're talking to those customers, how are they thinking about e-invoicing? Are they thinking about it the way you talked about it in response to an earlier question, like we expect more consolidation. Did they want to consolidate that? Or is it still kind of viewed as maybe a fragmented market by region? And then I had a quick follow-up for John.

Rob, thanks for the question. In reality, the catalyst to buy is still based on mandate, right? That's still the #1 reason customers are making decisions. That being said, as the number of mandates increase and therefore, the number of countries that these customers have to cover increases, they're getting to a point where there's a lot of sprawl and complexity. And some companies, that's fine because those companies, like depending upon how a company is structured, they may actually be structured in a way where every regional or country-level finance department runs reasonably autonomously. And those are the companies that are not necessarily thinking about how do they consolidate. That being said, there's also a quite large cohort of companies that exist that operate at a global level. And so they are the ones that are starting to talk to us about, okay, how -- like even if where we've made decisions, we do want to be able to consolidate on Vertex because look, there's a lot of -- a tremendous amount of information for them. There's also a lot of risk, right? If they don't do this properly, if they've got some countries that don't work at the same level as other countries, they open themselves up for different regulatory risk to be audited, et cetera. And so there is a real driver for -- again, for some -- for a number of companies that we're talking to. And so while I don't necessarily think that we're going to have the same buying behavior driven by that as we do by the mandate where you just have to be compliant, that we are seeing that as an increasing lever in the conversations that we're having. And look, we're still early. So a lot of customers, they're saying, "Hey, look, show me you can deliver -- once we get through that, then we can start to talk about adding another country and adding another country. And look at the places where we've got customers that have already added more than one country, several of them have done that with us. They said, okay, prove it in one place. We've proved it then they add the next one. We proved that they add the next one. And then I think then it just kind of open up for us into more opportunities. So we think that thesis is strong. We think it's a good opportunity for us as we look forward. Part of our planning as we look into 2027, we're going to have to really take a step back and take that into account. This year has been more about just really focusing on getting it sold, getting it delivered, making sure we can operate well. Next year, we start to turn our attention more to how do we really scale this thing beyond what we're doing today.

Great. Really helpful. Thanks, Chris. John, for you, just going back to the change in the cloud growth, obviously, pretty meaningful change. And I know in response to an earlier question, you did say that, hey, you're calling them as you see them kind of today. I guess another way to ask would be relative to the new 18% target, how should we think about kind of that -- the roll-in of the e-invoicing mandates and the impact on that? Because that's going to be all cloud. And clearly, that's going to be important to making that number in the back half of the year. So in light of sort of Chris' comment about, hey, we're trying to win those mandates. In terms of visibility, just help us get comfortable on how you were able to project some of that.

Yes. Thanks. I appreciate the call -- the question, Rob. I think as Chris talked about, we do have visibility, the activity in the back half of the year around e-invoicing and what the mandate is going to drive. And so we factored that into kind of the activity we're seeing in the back half. Again, keeping in mind that a lot of the activity that we're going to get in Q3 and Q4 as those things are just getting up and going is not going to be at its full potential when it's fully out there and moving. Again, as Chris talked about, there's obviously the land and expand that you see. But even still as companies are just kind of coming on to the platforms and whether that's September or a little bit later, we're seeing a little bit of delays in terms of how customers are behaving towards bringing things up and getting them moving. The mandates are going to be effective, but I think there is a little bit of latitude there, but we are seeing a big press even still as we sit here in August of customers that are wanting to make sure that they're ready on time. So we're going to get less of an impact in revenue from that in the third and the fourth quarter perhaps because of the volume that's really going to kick through, and that's really more of a fourth quarter thing. So we took that into consideration when we built out the revenue forecast. That's embedded in there certainly. And again, offset by some of the headwinds that we saw around cloud conversion from our existing customers that are on-prem moving to cloud and then some of the new logo activity.

Great. Thanks, John. Appreciate it, Chris. We've noticed Allison's impact already in terms of your presence and the changing in the branding and stuff like that, creating a broader attack zone for you guys. So I just wanted to call that out as well, some great hires for you guys.

Your final question will come from Andrew DeGasperi with BNP Paribas.

I just wanted to touch on one of the comments you made earlier in the prepared remarks, Chris, in terms of the competitive displacement with an existing customer that was using a competitor. I think it was a quick-serve restaurant example. And I just wanted to maybe understand like how many of those customers do you have that are potentially using multiple solutions for tax compliance? And do you see a potential move in either direction in terms of ideally to Vertex, consolidating to Vertex on that front? And should we see more of that in the next few quarters?

It's hard to put a percentage on it, Andrew, because some of it is driven -- some of it happens in a dynamic way. Like M&A determines a lot of that, for example, you may have one company that's using Vertex and then they acquire another company. Now they're using Vertex plus somebody else. It could go the other direction. And that's kind of constantly changing and happening. So what I would say is there's always a persistent percentage like of our customers that have multiple solutions. Oftentimes, they have a lead solution, but they might have a business unit or a smaller group that's using a secondary solution. But I will say it's not uncommon when I'm out there talking to customers, and I have a steady cadence of these customers I'm talking to, it's not uncommon to run into customers who are Vertex customers, but they're using somebody else or they -- I'll talk to -- I just talked to a company the other day, a customer the last week, she told me, they're an advertising agency. They were merged with another relatively large one, and that's a consolidation opportunity for us, but they were using a mixture of the ERP, they were using some other third-party tools. And that's just a good example of M&A creating that opportunity for us. And that's where we're always going to see some mixture of Vertex-only shops, but other Vertex shops that have third-party tools there. And also where we ultimately end up in some of these places that happens in the reverse as well. So it's reasonably common not pervasive and usually not the desired -- it's never the desire to stay with the people I talk to.

Got it. And then, John, I had a question. I know in the past, we talked about entitlements in terms of how you kind of expected a certain number to ramp up over time. Just curious to know, has that changed in terms of your expectations relative to last quarter? I know you talked about deal slippage or something like that, but I'm just curious to know like within your existing customer base, are we seeing any improvement there?

Yes. Maybe slightly, Andrew, nothing that I would call -- that was worthy enough to call out as a big driver of opportunity in the quarter. But it was -- it was something -- it's certainly something we were focused on last year. I started to see a little bit of stability in it over the last couple of quarters, and I saw the same this quarter. So I'd say it feels a little bit better than it has in the past, but I'm not -- again, not ready to kind of stand up and say we're past that. I think there's still some time to go there. But again, our customers are going to continue to build their businesses and drive their businesses and that presents opportunity for us. So we're about a year out from when we started talking about this last year. And I think time will tell here over the next couple of quarters if we start to see that change, we'll certainly call it out.

There are no more questions at this time. I'd now like to turn the call back over to Joe Crivelli for closing remarks.

This is John Schwab, but thanks, everybody, for joining us today. If you have any follow-up questions or want to schedule some additional time with the team, please reach out to Joe at investors@vertexinc.com. Thanks a lot, and have a great day.