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VI

Vertex, Inc. (VERX)·Q3 2025 Earnings Summary

Executive Summary

  • Vertex delivered double-digit growth and record profitability metrics: revenue $192.1M (+12.7% YoY) and adjusted EBITDA $43.5M with a 22.6% margin; non-GAAP diluted EPS was $0.17, GAAP diluted EPS $0.02 .
  • Against Wall Street, Q3 revenue modestly beat consensus ($192.112M vs $191.772M*) and non-GAAP EPS beat ($0.17 vs $0.158*); management raised full-year adjusted EBITDA guidance to $159.1–$161.1M while trimming full-year revenue to $745.7–$749.7M .
  • Cloud revenue grew 29.6% YoY to $92.0M; ARR reached $648.2M (+12.4% YoY); NRR was 107%, GRR 95%, and AARPC rose to $133,484 .
  • Management announced a $150M share repurchase and CEO succession (Christopher Young, formerly Microsoft), positioning for AI-led product acceleration and capital returns .
  • Cash flow was strong with Q3 free cash flow of $30.2M; Q4 guidance calls for revenue $192–$196M and adjusted EBITDA $40–$42M, reflecting continued customer entitlement headwinds but improving profitability .

What Went Well and What Went Wrong

What Went Well

  • Cloud and subscription momentum: cloud revenue $92.0M (+29.6% YoY); subscription revenue $164.8M (+12.7% YoY), underscoring successful cloud migrations and product breadth .
  • Profitability leverage: adjusted EBITDA $43.5M (22.6% margin) exceeded guidance high-end; free cash flow $30.2M, benefiting from expense control and automation initiatives .
  • Strategic positioning and AI: CEO highlighted “very strong cash flow” and confidence in long-term opportunity driven by cloud migrations and tax complexity; the company showcased agentic capabilities and Smart Categorization AI, with oversubscribed AI sessions at its customer conference .

What Went Wrong

  • Existing-customer growth/entitlement headwinds continued: NRR slipped to 107% (from 108% in Q2 and 111% YoY) due to lower-than-historical growth from installed base .
  • Customer bankruptcies and accelerated ERP shutdowns pressured retention metrics: management called out Big Lots, Party City, and JOANN license cancellations ($2M impact) and faster legacy shutdowns ($2M+ impact) following migrations to Vertex’s cloud platform .
  • Services margin compression tied to automation investments: services gross margin fell vs prior periods, with management noting near-term investment to drive improved margins ahead (subscriptions margin remained strong) .

Financial Results

Core Metrics vs Prior Year and Prior Quarter

MetricQ3 2024Q2 2025Q3 2025
Revenue ($USD Millions)$170.435 $184.559 $192.112
GAAP Diluted EPS ($)$0.04 $(0.01) $0.02
Non-GAAP Diluted EPS ($)$0.16 $0.15 $0.17
Adjusted EBITDA ($USD Millions)$38.623 $38.369 $43.493
Adjusted EBITDA Margin (%)22.7% 20.8% 22.6%
Non-GAAP Gross Margin (%)74.0% 75.9% 73.9%

Segment Breakdown (Revenue)

Segment ($USD Millions)Q3 2024Q2 2025Q3 2025
Software Subscriptions$146.254 $157.844 $164.824
Services$24.181 $26.715 $27.288

KPIs and Customer Metrics

KPIQ3 2024Q2 2025Q3 2025
ARR ($USD Millions)—$636.6 $648.2
NRR (%)111% 108% 107%
GRR (%)95% 95% 95%
AARPC ($)$118,800 $130,934 $133,484
Direct Customers (Count)4,855 4,862 4,856
Indirect Customers (Count)448 504 516
Free Cash Flow ($USD Millions)$18.365 $19.587 $30.152

Versus Wall Street Consensus (Q3 2025)

MetricConsensusActual
Revenue ($USD Millions)191.772*$192.112
EPS (Primary, $)0.1577*$0.17 (Non-GAAP diluted EPS)

Values retrieved from S&P Global.*

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Millions)Q3 2025$190.0–$193.0 Actual $192.112 In-line
Adjusted EBITDA ($USD Millions)Q3 2025$38.0–$40.0 Actual $43.493 Raised vs guide
Revenue ($USD Millions)Q4 2025—$192.0–$196.0 New
Adjusted EBITDA ($USD Millions)Q4 2025—$40.0–$42.0 New
Revenue ($USD Millions)FY 2025$750.0–$754.0 $745.7–$749.7 Lowered
Adjusted EBITDA ($USD Millions)FY 2025$156.0–$160.0 $159.1–$161.1 Raised
Cloud Revenue Growth (%)FY 202528% 28% Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
AI initiatives and agentic capabilitiesStrategic AI investment (Kintsugi), optimism on AI products Smart Categorization early wins; agent-to-agent with Microsoft D365; human-in-the-loop emphasized for traceability Improving
E-invoicing mandates (Belgium, France, Germany)E-invoicing as secular driver ACOSIO run-rate up ~30%; >100 customers landed; mandates to accelerate activity into 2026 Improving
SAP S/4HANA migrationsPipeline solid but elongated decisions in Q2 Improved momentum; mid-six-figure wins; 2026 activity expected to accelerate Improving
Customer bankruptcies/retentionNot highlighted in Q1/Q2 press releasesRetail bankruptcies (Big Lots, Party City, JOANN) impacted ~$2M; faster legacy shutdowns ~$2M+ impact on NRR Deteriorating short term
Services strategy and marginsDe-emphasis/partner-first noted Services margin lower due to automation investments; expected to improve over time Near-term pressure, medium-term positive

Management Commentary

  • “Vertex delivered a solid third quarter with double-digit revenue growth and robust profitability, along with very strong cash flow.” — David DeStefano, President & CEO .
  • “Our fourth quarter revenue guidance…reflects lower than historical growth from existing customers. We are increasing full year Adjusted EBITDA guidance to reflect improved profitability.” — John Schwab, CFO .
  • “We are executing on three fronts to commercialize AI… Smart Categorization [and] agentic capabilities on our cloud platform… first-ever agent-to-agent tax configuration for Microsoft Dynamics 365.” — Prepared remarks .
  • “Board…authorized the repurchase of up to $150 million” to maximize long-term stockholder value .

Q&A Highlights

  • SAP migration cadence: Management expects acceleration in 2026; saw improved Q3 momentum and highlighted multiple mid-six-figure wins tied to ECC→S/4HANA transitions .
  • Retention and entitlements: NRR decline driven by retail bankruptcies and faster-than-expected legacy shutdowns post-cloud migration; entitlement growth expected to normalize over time .
  • E-invoicing readiness: ACOSIO revenue growth and pipeline with Belgium (near-term) and France/Germany (2026) expected to drive land-and-expand motion; additional coverage via Brenta in LatAm .
  • Margin outlook: Investments ($16–$20M in e-invoicing; $10–$12M in AI for 2025) remain on plan; margin leverage evidenced in Q3 and expected to improve into mid-2026 .
  • Competitive positioning: No change in win rates; partner-first strategy with Big Four/consulting firms reaffirmed .

Estimates Context

  • Q3 2025 revenue slightly beat Wall Street ($192.112M actual vs $191.772M* consensus) and non-GAAP EPS beat ($0.17 actual vs $0.1577* consensus), aided by expense control and automation .
  • Q4 2025 revenue guidance ($192–$196M) brackets consensus ($194.334M*), implying stable sequential trends despite entitlement headwinds .
  • FY 2025 revenue guidance ($745.7–$749.7M) sits around consensus ($748.124M*), while FY adjusted EBITDA guidance was raised, suggesting upward bias to profitability expectations .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Non-GAAP EPS and revenue beat consensus in Q3; profitability outperformed with adjusted EBITDA above the guidance range, signaling effective cost discipline amidst macro and installed-base headwinds .
  • Cloud growth (+29.6% YoY) and subscription expansion underpin the long-term thesis; ARR $648.2M and AARPC up sequentially reflect pricing/expansion resilience .
  • Near-term retention risk persists (NRR 107%) due to bankruptcies and entitlement moderation; management expects normalization over renewals and continued migration-driven cross-sell .
  • $150M buyback plus CEO succession (Microsoft pedigree) are potential stock catalysts, aligning capital returns with an AI-accelerated product roadmap .
  • Q4 guide (revenue $192–$196M, adj. EBITDA $40–$42M) suggests continued profitability leverage; watch services margin recovery as automation investments mature .
  • 2026 setup looks constructive: e-invoicing mandates (France/Germany) and SAP deadlines should boost demand; monitor ACOSIO adoption and SAP win rates as leading indicators .
  • For positioning: lean into secular cloud/e-invoicing drivers and AI-enabled products while discounting short-term entitlement variability; expect estimate revisions to lift profitability more than revenue near term .