Vertex, Inc. (VERX) Earnings Call Transcript & Summary

Yes. I mean we're going to want to continue to make sure we're keeping up with the investment. It's a very important piece of it. And again, because we create more opportunity with the leverage that we're getting, there are areas where we can invest and create additional capacity. I think we demonstrated that with from an M&A perspective with the Brent acquisition and the Ecosio acquisition. So we're going to continue to make investments where we see that, that makes sense that they're going to generate the highest return that's out there.

So Chris, you mentioned this sort of in your introduction, but you described the opportunity is moving from tax determination to decision to defense. What does Vertex need to own across that life cycle? And maybe tell us a little bit more about that.

We already own many of the key pieces of that. The determination piece. We are increasingly in the e-invoicing piece, which is that real-time compliance move that has -- that reporting that has to happen -- we do offer tools for filing. We do that in North America. We have that for our global customers. We have an outsourced service in that category as well. That's a place where I think we can do a lot more with I think filing is something that's a heavily manually intensive process today. It's a process that can be automated. And that's something that we're very focused on as we look ahead is to make that a much more automated process, a much more scalable process and move that from where customers do it themselves, they need to use a tool to do it to something that just is an automated process for them. It's just driven by an AI agent. They just -- they tell it, here's how many places we got to file here's the format -- it determines the format. It pulls the data directly from the tax engine produces the filing on behalf of the customer. We do that today in the form of an outsourced service as well. That's an option for customers. that's a place where we think we can drive a lot more AI opportunity for us. And I will tell you, that is a -- that's a place where in our business, we're really seeing the leverage we can get from AI, not just from a product -- like not just from a dollar savings perspective, but productivity in the form of our ability to cover more use cases for the customer. So tax filing is a lot -- for most people who've not in this world, I didn't come from the world, but it's a lot more -- it's far more complex than it sounds. Like people think tax they think, "Oh, yes, you filed some form with the government and you're done. The reality is there are thousands of filing formats that you have to deliver depending upon what kind of business you're in. Like if you just pick 1 like fuel taxes economy. Like that could literally require thousands of different filings that have to happen all across jurisdictions around the U.S. as an example, and then even more when you go outside the U.S. Each 1 of those filings is a different format. It requires certain information. You actually have to apply tax expertise to know how to do a filing ultimately. So you don't just apply tax expertise in the original calculation or in the categorization. It's applied all the way downstream, all the way through the audit process ultimately. And that's a place where we're seeing AI expand our ability to produce more output for the customer to file more places, to do it more quickly, to do it more efficiently. And that's 1 of my goals for Vertex is not just to be able to do things in a less expensive way but to expand the jurisdictions we can cover, expand the types of businesses and product types we can cover, services types we can cover to move more nimbly. Like look, we're seeing it around the country, just in this country already, states and localities are now trying to look to inevitably, as federal subsidies into the states go away. States turn to taxes to be able to service their constituents. And a lot of states are now under pressure to keep income tax at a growth at a minimum. So what do they do if they can't grow income tax they go to sales and use tax. That's how they collect receipts. That's how they fund what they do. That means they're going to tax more products, more solutions -- they're going to try to do it in more interesting ways because it's something that people don't see in their everyday lives. As clearly, like when you get a paycheck, you know how much you gave the government when you get your income tax removed from your paycheck. But it's harder to know like if I'm paying a little bit of tax on this service and paying tax on this product and paying tax for this thing or that thing, that all creates a ton of complexity, that's all complexity that it flows through to our customers complexity that we manage on their behalf. And it's 1 of the reasons why this becomes something that's more useful for our customers going forward rather than less.

Yes. I think there's a lot of fair points in there. And I have some more questions on e-invoicing that we're definitely going to get to. But as you were explaining some of these different complexities and how manual the process is and all the different regulations and requirements that go into it, I would be remiss if I didn't ask you how that sort of contributes to Vertex's moat in this world now with frontier models coming in. What's sort of your view on the moat of the business and how that complexity factors into that?

So we have an incredible franchise with our customers today. But AI is going to be involved. But there's not a world where AI isn't a factor in everything because my world view is AI will be a factor in every facet of our lives, no matter what happens going forward. So that on the table, that being said, we help our customers in nearly 20,000 jurisdictions in the U.S. and then many, many more thousand jurisdictions outside the U.S. That requires us to be able to do everything from the state level all the way down to unincorporated municipal areas. And that's something that requires oftentimes preexisting expertise for example, we're often talking to local authorities where we'll explain to them why something that they've done is actually wrong or inconsistent with a rule or a piece of legislation that they might have had before. And we'll help them reconcile that so that the tax -- it actually works well for them and works well for the businesses that are doing business in their specific jurisdiction. A lot of times, tax rules don't get published right away. The simplest way to say it is sales and use tax in the U.S. is not as simple as a rate card gets posted everywhere where you got to pay tax. We oftentimes, tax is interpreted. And 1 of the best analogies I ever heard when I first got to know Vertex was a bottle of water is a great example. This same bottle of water, let's say you're in New York Penn Station. If you buy it in a vending machine, it might be taxed 1 way, but if you go into a restaurant in the same place and somebody opens the water for you and pour it into a glass is taxed differently. It's very hard to determine the nuances on that just by reading what's written on a website as an example. And so that's a place where having the expertise being able to do the identification of where the changes are being made, what they're in how to interpret the way certain rules are written or legislation is written is really, really important. And that's 1 of the aspects of expertise that we bring -- and that expertise exists all the way up and down that decision to defense life cycle, all the way from how do I categorize the product in the first place to how do I calculate the tax how do I report it to a government if I'm in the same outside of the U.S. now, I'm setting an invoice. The invoice format is based on tax expertise to how I file to ultimately how I defend my decision in an audit context. So each 1 of those aspects requires a lot of expertise, and I think that gives us a really, really solid foundation. All that being said, we're incorporating everything AI in everything that we do so that we can amplify the expertise of our people. And the long run AI will do more but we really believe we can provide even more value to our customers and make it a part of what we deliver as opposed to have something -- have it be something that's solely taking part of what we do today.

So sort of on that point, tax requires deterministic outcomes. It's right AI is a probalistic technology. Where should an agent be allowed to act autonomously? And where should it never be making the final decision?

So 1 of the important points of what we do and which is why I believe our franchise is very durable is we have really 2 core deterministic control points in that whole decision to defense life cycle. One is the calculation engine. And that's got to be right hundred times out of 100, 1,000 out of 1,000. And so that's a deterministic engine. Today, we calculate billions of transactions. We do it autonomously customers around the world trusted. I don't see that changing anytime soon. And there's really no benefit to changing that if you're a customer because that's what you rely on, it works today. It's very efficient in many ways. The other 1 is the invoicing. That's a many-to-many transaction model. It requires you to have certain formats that you send information to the government. You receive information back. You do that on behalf of many companies around the world, and that's yet another deterministic network-based model that I believe is durable irrespective of what happens on the AI around it. It's -- but at the manual processes that go on around the engines and the e-invoicing platform are places where AI will start to increasingly be used to help with pulling together documents to intent interpret certain information to -- for example, we use AI in our product today, a customer can ask it, why did you calculate the tax on this good in this transaction in a certain way. it makes it a lot easier. Those are the kinds of questions people would literally call us into our support desk to get an answer to that question. And increasingly, the goal is to be able to have a lot of that information available to the customer where they're using the product. So it's making our products easier to use, which improves overall customer satisfaction. But where you'll let an AI maybe take on part of the manual effort, like let's say, that spreadsheet work that I described earlier, ultimately, we think there's going to be a model. In fact, we're building something that we call our AI Trust Center, which will allow our customers to govern how much they let AI do in different processes and let the AI graduate itself into certain tiers of trust -- where you go from an AI is just a question-and-answer engine like a copilot, all the way up to where you let it run autonomously based on a set of parameters or rules that you set. And then there's a whole series of maturity levels in between that where you can govern and then you can even roll back based on the behavior of the model itself. Because where you run into issues is you don't want the AI to start interpreting anything in your franchise the way you would want people to do it because ultimately, then when you've got to defend yourself in an audit, if it's not auditable, and if it's not explainable, somebody ultimately is going to be on the hope for that. By the way, that's not a terrible rule for anyone to have. Increasingly, it's a rule that we're trying to use internally ourselves, like people use AI today, for example, to do analysis to present an argument to write up something on a topic -- and my only rule for everybody is like you can use AI, but you need to be able to stand behind every word in every sentence, and every calculation in every table that you give me. As long as you can do that, you can use AI all you want.

I think that's a fair model. Maybe to make that a little bit broader implemented. I do want to switch gears a little bit back to e-invoicing. There's a couple of important things that I wanted to ask you on that. But you mentioned France earlier -- maybe just talk a little about how are things going now that, that mandate launched, I think it was September 1.

So we did go live on September 1. The industry went live on September 1. We're flowing transactions now in France -- as expected, there's a ramp there. I think there's obviously, not every transaction that happened in France on September 1 was e-invoice. I don't think the whole industry got there. But we've seen a steady progression and we've seen a steady ramp ever since that day. I will tell you though, here's a good example of where the -- being on top of the content matters, the week before France went live, they actually changed some of the formats. -- interesting. Yes. So like this is -- when I talk about this being a dynamic business where it's constantly changing, that's a good example. Like -- and this is just a reporting format. changed the week before. We were able to get it all done. We were ready for September 1. But that's -- to me, that's just another example of the dynamism that's going on in this market, and it's 1 of the reasons why you have to stay on top of a lot of the changes. But so far, so good on France. We're continuing to focus on ramping our customers through the rest of the month and into the back half of the year. There are still people signing up today who are going to be signing up for France. And we're obviously working quickly to get them up and running as quickly as possible. And -- but we've got Germany coming up in January, which is the next big country to come online.

So obviously, mandates can be really the key catalyst to land that first customer. But what moves you from 1 to 3 to 4 different countries on the invoicing and sort of turns invoicing into more of a platform decision.

So mandates are the catalyst that gets us up and running. There are a couple of different ways in which we become the full platform for our customer across all the countries where they're going to do work. One is, hey, we've done some consolidation. Brent was an acquisition we did a couple of months ago. That brought several countries in Latin America into the -- sort of into the franchise with e-invoicing. We've seen already in their existing installed base of growth. We've already started to cross-sell and upsell to some of those countries into our installed base. For a while, Vertex has had customers, large customers of ours. That said, when you can cover my countries, I want to use you. But before we had country coverage, the answer was simply if we can't cover it, if you can't cover it, we're just going to go elsewhere. And so that's what customers did in cases like Mexico has been requiring e-invoicing for 10 years. So for our customers who are invoicing in Mexico, they weren't using us. Now our customers can use us. And so we're now having those conversations about consolidating that e-invoicing business with us because we can cover that, and that's what we bring with Binta. What's great about Brenta too is they had a really, really, really interesting way in which they were able to serve some of the more scalable businesses, like a lot of the ridesharing businesses in Latin America, which are some of the faster growth in the delivery businesses in Latin America, which are some of the faster growth business platforms that we're seeing coming out of that -- those economies right now, Brent has been 1 of the platforms of choice for them you now bring in the Vertex determination, the maturity that we've got, and we think we have a real opportunity to grow that franchise as well. And then we're just steadily adding countries organically in addition to what we brought on with Printi. So India, the UAE, those are all countries that are that we've started to bring online, and we'll do more to service our customers. And so we believe that while the mandate has been the catalyst for the business, as we start to do more countries with certain customers then the conversation becomes easy. It's like, okay, we do calculation with you. You're doing determination calculation with us. You're doing some e-invoicing with us. Let's just do all of it. So that means your entire data set is on Vertex, and that's where we're headed as we kind of get through the rest of this year into 2027 and beyond.

Great. So we're coming up on time. So I'd like to just finish with a high-level question. And John, please feel free to jump in here as well. But in your view, what is the most misunderstood part of the Vertex investment case?

Well, I guess, 1 of the first things I would say is we've gone through the last 6 months, there's been a lot of change. And I think over that 6 months, I think people have gotten over the fact that we do have a moat that's out there that's viable, that's there. They've seen some stabilization in our stabilization in our business. We grew back our gross revenue retention. We've seen nice solid growth the last couple of quarters out of the business. And I think people are really looking for the inflection point. What's going to drive the inflection from taking us from kind of 10% to 12% into that 12% to 14%. And when is that going to come? And I think Chris talked about it a lot of the pieces there. e-invoicing being 1 of them. It's really a nice driver of the business. Again, in the little bit of a midterm kind of longer-term basis is really AI, and the AI opportunity that's there. So I think -- it's really -- I think people are getting comfortable with where the business sits right now. They're getting comfortable about what's in front of us, but it's up to us to demonstrate the execution of the things that Chris talked about today.

Great. We are all at time. Chris and John, thank you so much for joining me on stage today.

Thank you.

Thanks, Chase.