Executive Summary / Key Takeaways

• Vertex, Inc. is a leading provider of indirect tax solutions for large enterprises, benefiting from the inherent complexity and constant change in global tax regulations and the increasing need for automation.
• The company is strategically positioned to capitalize on major market tailwinds, including the ongoing ERP cloud migration cycles (SAP S/4HANA, Oracle Cloud), the proliferation of global e-invoicing mandates, and the integration of AI into tax processes.
• Recent performance highlights include solid Q1 2025 revenue growth of 12.9%, strong cloud subscription growth of 29.6%, and an adjusted EBITDA beat, demonstrating the earnings power of its model following prior investment cycles.
• Significant strategic investments in 2024-2025, particularly the acquisition of e-invoicing specialist ecosio and AI capabilities, are aimed at enhancing its comprehensive platform, expanding international reach, and driving future growth, though impacting near-term EBITDA margins.
• Management maintains confidence in building financial momentum throughout 2025, projecting full-year revenue growth of 14.6% and an NRR rebound above 110%, supported by pipeline visibility and expected execution on strategic initiatives.

The Bedrock of Complexity: Vertex's Enduring Market Position

Vertex, Inc. operates at the critical intersection of commerce and compliance, providing essential indirect tax solutions to some of the world's largest and most complex businesses. With a history spanning over 45 years, the company has built its foundation on addressing the intricate and ever-changing landscape of global tax regulations – a challenge that is only intensifying. Unlike many software sectors, indirect tax compliance is not discretionary; it is a fundamental requirement for businesses operating across jurisdictions. This inherent need for accuracy and adherence provides a durable market opportunity, largely insulated from broader macroeconomic volatility, as taxing authorities often increase audit and enforcement activities during uncertain times to shore up revenue.

The company's core business revolves around providing software subscriptions for tax calculation, compliance, and analytics. This includes both traditional on-premise licenses and, increasingly, cloud-based solutions. Revenue is also generated through services, such as implementation, support, and managed services like tax return preparation. Vertex's focus on the enterprise market, serving a majority of the Fortune 500, means it deals with businesses facing the highest levels of complexity due to scale, geographic reach, and diverse business models (e.g., omnichannel, M&A).

In this specialized market, Vertex competes with a mix of players. Direct competitors include large, diversified information service providers like Thomson Reuters (TRI) and Wolters Kluwer (WTKWY), as well as more focused tax automation specialists like Avalara (AVLR). Thomson Reuters and Wolters Kluwer offer broad suites, leveraging extensive data resources and established networks, particularly with accounting firms. Thomson Reuters, for example, reported Q1 2025 revenue growth around 7-8%, while Wolters Kluwer saw growth around 6-7%. Avalara, with a strong focus on cloud and e-commerce, has demonstrated faster growth, reporting Q1 2025 revenue growth of 18%. Vertex, while often commanding a premium price point (noted as two to three times higher than some competitors), emphasizes its deep enterprise expertise, robust technology, and high-quality customer support, which contributes to its strong gross revenue retention (GRR) consistently in the 94%-96% range. Indirect competition comes from businesses relying on manual processes, spreadsheets, or native ERP functionality – solutions that become increasingly untenable as complexity grows.

Technological Moats and Strategic Evolution

Vertex's competitive moat is significantly underpinned by its differentiated technology and strategic investments in innovation. At its core is a vast and continuously updated tax content database, currently maintaining over 1 billion effective rates and rules supporting indirect tax compliance across more than 20,000 tax jurisdictions worldwide. This comprehensive content is critical for accuracy and fuels all of Vertex's solutions. The company's scalable cloud platform is engineered to handle the immense transaction volumes of enterprise customers, demonstrated by processing over 1 billion transactions in its cloud environment on Black Friday weekend. Its deep integrations with major ERP systems (SAP , Oracle (ORCL), Microsoft Dynamics (MSFT), Workday (WDAY), NetSuite, Shopify (SHOP)) are also a key differentiator, enabling seamless tax determination and compliance within core financial workflows.

Recent strategic moves highlight Vertex's commitment to extending its technological leadership and addressing emerging market needs. The acquisition of ecosio GmbH in August 2024 was a pivotal step to address the burgeoning global e-invoicing mandates. By integrating ecosio's scalable cloud platform with Vertex's existing VAT compliance and O Series tax determination engines, Vertex offers a single, comprehensive solution for end-to-end indirect tax reporting and continuous transaction control (CTC). This combined offering allows customers to manage the entire workflow seamlessly, from real-time filing to periodic VAT returns, enabling them to identify errors proactively rather than after the fact – a significant advantage over point solutions. The joint solution achieved general availability in mid-March 2025 and is already seeing a growing pipeline, particularly ahead of major mandates in France (late 2026) and Germany (early 2027). Ecosio is expected to contribute approximately $16 million in revenue in its first full year under Vertex.

Vertex is also making significant strides in integrating Artificial Intelligence (AI) into its offerings. Following the acquisition of tax-specific AI capabilities in June 2024 and a strategic minority investment in Kintsugi AI in April 2025 ($15 million for 10% ownership, including IP sharing), Vertex is accelerating its AI roadmap. Key initiatives include the commercialization of an AI-based Smart Categorization product, aimed at automating the complex and time-consuming process of mapping product SKUs to tax categories. This is a major pain point for enterprises with millions of SKUs and constantly changing regulations. The stated goal is to leverage AI to improve efficiency and accuracy in this area. Vertex is also exploring the application of Agentic AI and leveraging Kintsugi's technology to enhance its data management capabilities and bring data insights off its cloud platform, helping customers gain better visibility into tax efficiency. These AI initiatives are backed by a planned $10 million to $12 million of incremental R&D investment in 2025, separate from the Kintsugi investment.

Performance Reflecting Strategy and Investment

Vertex's financial performance in the first quarter of 2025 reflects the impact of its strategic focus areas and ongoing investments. Total revenue grew 12.9% year-over-year to $177.1 million. Software subscriptions, the core recurring revenue stream, increased by a robust 14.4% to $150.8 million. Cloud subscriptions continued to be a significant growth driver, increasing 29.6% year-over-year to $80.2 million, now representing 53% of total software subscription revenue, up from 47% in the prior year period. This shift towards cloud aligns with the company's strategic intent and is fueled by the ERP migration tailwind. Services revenue grew 5.4% to $26.3 million, primarily driven by recurring managed services, although the company is intentionally steering more implementation work to channel partners to foster long-term software revenue opportunities.

Gross profit increased 18.0% to $113.0 million, resulting in a GAAP gross margin of 63.8%, up from 61.1% in Q1 2024. This margin expansion, particularly in software subscriptions (GAAP gross margin ~70.6% in Q1 2025 vs ~65.8% in Q1 2024), indicates increasing operational leverage as cloud adoption grows and infrastructure investments yield efficiencies.

Operating expenses saw significant increases in Q1 2025, reflecting planned strategic investments. Research and development expenses rose 24.0% to $20.9 million, driven by increased personnel costs for new solutions, connector expansion, and AI initiatives. Selling and marketing expenses increased 18.9% to $48.2 million, reflecting investments in sales capacity, partner programs, and brand awareness. General and administrative expenses saw the largest percentage increase, rising 26.7% to $45.0 million, primarily due to planned strategic investments in IT infrastructure, business process re-engineering, and resources supporting growth and acquisitions. Depreciation and amortization also increased 17.5% to $5.9 million due to infrastructure and technology purchases. A significant item impacting operating expenses was a $14.7 million change in the fair value of acquisition contingent earn-outs related to the ecosio acquisition, driven by adjustments to both cash and stock earn-out valuations. Other operating expense, net included $2.4 million in legal costs related to a pending claim against a competitor.

Despite increased operating expenses, income from operations improved significantly to $4.5 million in Q1 2025, compared to $1.6 million in Q1 2024. Net income for the quarter was $11.1 million, a substantial increase from $2.7 million in the prior year period, benefiting from a $5.1 million income tax benefit. Adjusted EBITDA, a key non-GAAP metric, was $37.2 million in Q1 2025, a 1.3% increase over Q1 2024, resulting in an adjusted EBITDA margin of 21.0%. While the margin decreased slightly from 23.4% in Q1 2024, this reflects the planned impact of accelerated strategic investments in e-invoicing and AI, as noted by management.

Liquidity remains strong, with $270.4 million in unrestricted cash and cash equivalents as of March 31, 2025, and access to a $300 million revolving credit facility with no outstanding borrowings. Operating cash flow in Q1 2025 was $14.8 million, down from $24.6 million in Q1 2024, primarily due to timing differences in cash payments for accrued expenses and compensation, and increased prepaid expenses, partially offset by strong deferred revenue growth. Free cash flow, defined as operating cash flow less capital expenditures, was negative $12.3 million in Q1 2025, a decrease of $16.8 million from Q1 2024, driven by the lower operating cash flow and additional investments in property, equipment, and capitalized software. The free cash flow margin was 6.9% in Q1 2025, compared to 2.9% in Q1 2024. (Note: The provided text states free cash flow decreased by $16.8 million but the margin decreased to 6.9% from 2.9%; the latter indicates an increase in margin, suggesting a potential discrepancy in the source text regarding the dollar change).

Outlook and Risks

Management expressed confidence in the outlook for the remainder of 2025, anticipating building financial momentum. For the second quarter of 2025, Vertex guided for total revenue between $182 million and $187 million, representing 14.5% year-over-year growth at the midpoint, and adjusted EBITDA between $35.5 million and $39.5 million. The full-year 2025 guidance remains unchanged, projecting total revenue of $760 million to $768 million (14.6% growth at midpoint) and adjusted EBITDA of $161 million to $165 million ($11 million increase at midpoint), with a full-year adjusted EBITDA margin of 21%. Cloud revenue growth is expected to remain strong at 28% for the full year.

This outlook is supported by management's view that the market opportunity remains strong, with no signs of elongated sales cycles or deal slippage observed in Q1 2025. The pipeline continues to grow, particularly within the key ERP ecosystems like SAP (SAP), where pipeline activity was noted as more than 20% higher than the prior year. Management expects Net Revenue Retention (NRR) to rebound above 110% by the end of 2025, indicating continued success in expanding revenue from existing customers through cross-sell and upsell, driven by new product capabilities and increased usage.

However, the outlook is subject to various risks. Macroeconomic volatility, while not currently impacting buyer behavior, remains a factor to monitor. Competitive pressures from both direct and indirect rivals persist. The rapid pace of technological change, particularly in AI, requires continuous investment and successful product development. Integrating acquired businesses like ecosio and successfully realizing anticipated synergies is crucial. Risks related to changes in tax laws and regulations, cybersecurity threats, and potential liabilities from errors or system failures are inherent to the business. The company is also involved in a legal proceeding against a competitor alleging unfair competition and trade secret misappropriation, which could result in legal costs or other impacts.

Conclusion

Vertex is a well-established leader in the mission-critical indirect tax automation market, serving large enterprises with complex needs. The company's long history, deep regulatory content expertise, scalable technology platform, and strong relationships with ERP vendors and consulting partners form a solid competitive moat. While Q1 2025 results showed the impact of accelerated strategic investments aimed at capitalizing on significant market tailwinds – the shift to cloud ERP, the rise of global e-invoicing, and the integration of AI – these investments are designed to fuel future growth and extend its market leadership.

Despite a slight dip in near-term adjusted EBITDA margin due to these investments, the underlying business demonstrates strong earnings power and cash flow generation potential as prior investment cycles mature. The outlook for building momentum throughout 2025, driven by pipeline strength and expected NRR expansion, suggests that Vertex is well-positioned to convert these strategic initiatives into durable, profitable growth. For investors, Vertex offers exposure to a resilient market segment with structural growth drivers, underpinned by a company actively enhancing its technological edge and expanding its addressable market, making it a compelling consideration in the tax technology space.