All right. Good afternoon, everyone. We're reaching near the conclusion of our Wells Fargo TMT conference here. I'm Michael Berg, a mid-cap software analyst here at Wells Fargo. I'm pleased to be hosting both David DeStefano, the CEO of Vertex, as well as John Schwab, the CFO. David and John, thank you so much for being here today. Very pleased to have you hosting.
It's great. Thank you. It's been a great event so far.
I think it's a good place to start for maybe those in the audience who are unfamiliar with the Vertex story is just give a quick overview of what Vertex is, what the technology does, and maybe the, you know, key aspects of the Vertex story.
Sure. At its simplest point, all forms of commerce are taxed in transaction tax. Transaction tax or consumption-based tax, meaning sales tax, use tax, VAT. So if you can imagine, every time a company generates a bill, they have to tax assess, do we have to charge one of those taxes in this jurisdiction? In the United States alone, there's over 10,000 jurisdictions that they have to apply that to, and then there's countries around the world. And so it's a constant challenge for companies to stay up with that complexity.
What Vertex does is we integrate into billing systems, ERP systems, order-to-cash systems, etc., procurement systems, and we provide the content, the tax content, through our technology such that we know what the item is you're selling, we know what the jurisdictional rules are, and so the company knows that they can determine tax and, using our software, can actually file their taxes in a compliant way. We do that for the largest companies in the world, and we have, you know, a footprint with companies all over the world.
Great. No, that's a great background to start. So maybe taking a little bit of a left turn here, you know, there's been some tax-related news recently, or we'll call it headlines, in the form of potential tariffs coming through in the new administration. I know that's not necessarily directly impacting your business, but maybe you could talk us through how tariffs would potentially impact the Vertex business and where you guys could fit into the ecosystem there.
Yeah. So from a, the good news is, from our perspective, federal elections don't in the U.S. directly affect our business, meaning we are ruled by what we're impacted by what happens at a state, a local, a county level, and that complexity, again, is what drives demand for our software. At the federal level, when we hear things like tariffs, what we saw in 2016 as the tariffs were starting to be applied, it started to change supply chains. So while we don't deal directly with tariff compliance, that's more of a customs and duties issue, the reality is a lot of companies changed their global supply chain, and in changing their supply chain, it meant that they had VAT compliance challenges maybe in four or five countries that now became six or seven different ones.
And so that disruption of their business model created a potential challenge in the tax department that created new demand for us.
So, speaking of new demand and incremental complexities and challenges, I think it brings up a good topic of just simply what drives the demand for incremental adoption of Vertex for the new customers. You talk about, you know, you focus on the largest enterprises in the world, but what makes someone, you know, say like, "Hey, I need a new tax accounting software"?
Fair question. So, the good news is the largest competitor we face is actually in-house solutions that sophisticated corporations and their IT teams have built for their business, and they all work great until one of three things disrupts them. The first driver of demand will be something changes in their business model. They are making acquisitions, they're expanding into new jurisdictions, maybe they're selling now through omnichannel, and that, from a tax department perspective, all creates new compliance challenges, new operating challenges that could lead to, let's go to a vended solution. The second thing will be the regulatory environment. So if you imagine the local governments, federal governments around the world, where VAT is, you know, charged, every time there's a need to raise revenue, indirect tax is the largest form of corporate tax paid. So it is the primary source of revenue for these governments.
So as we see state budgets and, federal budgets outside the U.S. all incurring debt to support their citizens, they're turning to indirect tax to change the rules and regulations. In the U.S. alone, we had the greatest number of sales and use tax changes we've had in the last 10 years in 2024. So it's a constant source of how do they get revenue. Every time they change the regulations, it's regulatory pressure on the business, which could cause a tax department to say, "We need to get a third-party solution in to solve this." And then the last way would be something about their infrastructure.
We're adopting a Coupa procurement system, or we're going from an SAP ECC system to SAP HANA, some form of technology change, again, where the in-house solution they've designed and has been working is no longer able to support what they need, and they will go to a third party.
So you mentioned a few things there I think are useful to double-click on, both in terms of regulation changes as well as technology changes. Let's, I think starting on the regulatory front, you made an acquisition of Ecosio, I believe it was last quarter, to do e-invoicing. Maybe you could just talk us through what e-invoicing is, why you bought the Ecosio solution, and what the opportunity set is, ahead of you guys.
Sure, so e-invoicing, at its core, if you imagine how the digitization of society is happening, meaning companies everywhere are just trying to digitize what they do, the elimination of a paper invoice is a very common thing. So B2B transactions are now being much more done much more frequently on a digital basis. Governments have been looking at that and realizing that, "Wait a minute, if we insert ourselves as part of that transaction and say to the seller, 'When you create the invoice, we want you to send us a copy,' at the end of the period, whether it be a month or a quarter, they have accumulated all of your invoices.
They can then compare it against your tax filing and say, "Did you pay us the right amount of tax?" So it has created a new regulatory pressure, where the invoice has actually become like a mini tax return. And so the importance of getting tax accurate when you create the invoice and then being able to transmit it to the government, companies are not allowed to transmit it directly. So e-invoicing is a mandated regulation that companies have to use third parties to provide. So from our perspective, it creates an opportunity to be the solution provider in the point of that transaction. When we think about it to our customer base, as I said earlier, we work with the largest companies in the world. By way of example, over 60% of the Fortune 500 use us.
And so if you think about it, our customers have the largest invoice volume in the world because they're the biggest companies in the world. And so the goal now is to bring this solution to market that we acquired last quarter, which we did bring to market September 30th, and we're now in what we call early adopter phase. And as we begin to do that, we see the opportunity to be the provider for all that invoicing volume. And there's over 50 countries around the world that are now mandating e-invoicing and more are adopting it, like France and Germany are coming in 2025 and 2026. So bigger economies are going to be adopting this, which just creates a greenfield of new opportunity for Vertex.
So speaking of greenfield, it really does sound like a pretty immense opportunity. Maybe you could help us frame what the size is of Ecosio today and how big e-invoicing can be for the Vertex business, you know, in the near term, medium term, long term?
Yeah. So, Ecosio is a $12 million a year business. It's small. We knew that. They cover about 25 of the 50, 27 of the 50-plus countries that are requiring it. So one of the key things we'll be doing in 2025 is building out country coverage for the rest of the jurisdictions so that, again, we can handle global multinationals wherever there's an e-invoicing requirement. But they have a really strong platform built in the cloud from inception on both AWS and Google. So we love the scalability and redundancy of the capabilities. And now it's about just adding more country coverage, which, from our perspective, is something Vertex has done really well for years, you know, covering more jurisdictions in the regulatory environment.
In terms of the opportunity, you know, I think the way we're trying to look at it is, or what we're going to see is, in the short term, I think you'll see us, it won't move the needle much in 2025, and the reason why is because A, we just launched our solution, and in tax, you always have to prove out your capabilities before you get mainstream adoption, so we're going to use 2025 to sort of get in the market, build a branded solution, get referenceability. Again, an enormously important part of tax software adoption is referenceability, so getting that referenceability to then expand, and I think when we time it, if I believe we've timed it right, so that, as companies are starting to tell us they want a global provider for this capability, we will have that solution.
So I really see this accelerating our ARR as we start to think about 2026 and beyond. Two things are going to happen. One, we're going to get more companies that are already in our portfolio that have large invoice volume adopting it. And two, more countries are going to start to adopt this regulation. So it has sort of its own natural tailwind where the big companies are going to need it, and they're going to need it for more countries, which just means should be a continued growth story for a while.
I mean, that sounds pretty incredibly exciting, and I think just turning to the other side of the adoption curve in terms of the technology changes you mentioned, SAP and the transition to S/4HANA. That seems to be a pretty significant technology trend that's happening across the largest enterprises in the world. Maybe just talk us through what's happening and why that, why Vertex stands to benefit from that and the magnitude of benefit and the timeline you should see those benefits play out in the model.
Yeah. So what's really exciting for us is Vertex is probably the leading provider of tax technology into the SAP ecosystem. We have the most diverse product set. We have certified solutions by SAP, which is extremely important, and we've got incredible referenceability of different types of companies that use SAP. So we really stand in a good position to compete for those opportunities. And then additionally, the SAP sales reps are now getting quota relief when they refer us into an opportunity. So we see that we're actually finding out about opportunities sooner. ECC has about 10,000 customers. SAP has about 10,000 ECC users they're looking to migrate.
And so we see that as companies over between they announced it in June of last year till end of life of 2027, we will see, and we have seen, a slow but steady acceleration of companies that are starting to make the decision to commit to HANA and then go on that journey. It typically is. I use a baseball metaphor, if that's okay, where we typically are invited into the opportunity about the fourth inning of a migration. So companies will start their migration. There's all sorts of planning that has to be done.
They start getting organized, and then the CFOs will be like, "We need to start thinking about our order to cash process, and how are we going to be able to generate invoices in all those jurisdictions?" And that's when they'll decide, "Do we want to go with a third-party solution or not?" And so I, I think we're in the very early innings of that process, because only the biggest companies have rushed ahead to try to do this. I think more of SAP's ECC base will start really in the back half of 2025 and then really much more in 2026 and 2027.
That all makes plenty of sense. And I think turning the clock backwards a little bit, you are at the tail end or completion of an intensive three-year investment cycle. You did some M&A across AI, which we'll get to in a second, and e-invoicing. Maybe just take us through what those investments were, how they're setting you up for what sounds like a pretty attractive series of growth levers in 2025, 2026, and beyond. And what are some of the key areas of investment now for the next few years?
So when we went public in 2020, 40-year family business, great brand and track record, but we actually had underserved our customer base in that we were paying out significant dividends to our family shareholders. And it was now time to, A, make some acquisitions, as you note, and also to grow our organic capabilities, go to market, customer success, focused on expanding into the channel sales, indirect sales, and then expanding into Europe. And so that was all a big lift from 2020 to 2023. Additionally, we needed a new ERP system, which we completed in May of last year to help control and drive down G&A costs. And we wanted more products in the market so that we could cross-sell more to the best customers in the world. And so it was a pretty big lift for three years.
We consciously tried to telegraph that, you know, Adjusted EBITDA was going to fall from the 20s down into the teens, and it did. But we finished in May of 2023. We said at that point, "You'll now start to see, A, as a result of the investment in sales and marketing, you'll now start to see a steady revenue growth across our business. You'll see AARPC, meaning our average revenue per customer, as we sell more to our install base, start to grow." And you have seen those. Then additionally, what we said was the leverage we're going to get as a result of those individuals who can now cover quota, as well as driving G&A out of the business, you're going to start to see margin and cash flow increase.
If you look at our quarter-to-quarter performance between middle of 2023 through the quarter we just filed, you'll see that's been a pretty steady trend where cash flow is now rapidly following Adjusted EBITDA, and Adjusted EBITDA margins have moved back into the low 20s. You know, our long-term guidance when we started on this five-year journey was to get to the mid-20s, and we're right on plan to do that.
So making a lot of progress across a number of fronts. I mentioned AI, so I think we can circle back to that. You did an acquisition of, I believe it's called Ryan, LLC to buy, an AI tool. So maybe just talk us through what that is, the nature of that acquisition, and just how you think about AI in the context of, of your product. I mean, tax inherently seems like a very logical use case for AI.
Yeah. AI definitely has a great role in our business. I'm really excited about this acquisition we made. We're looking at AI, and I'll give three quick use cases. One, obviously, like every company, we're looking at can we use it to write our software so we can easily either increase our throughput or decrease our costs to create new products. That's pretty much all software companies. Where it applies in our business is we've got a content database of over a billion rules, which is the combination of all the jurisdictions as well as all the different product SKUs that we cover. There's always a thirst for more content from our customers. They want more verticals. They want deeper coverage.
And so, using Generative AI, we're starting to find ways that we can create that content either faster or more efficiently such that we can expand into new offerings. We can expand into new jurisdictions, or we can expand wallet share to an existing customer. The important thing to remember, though, about Generative AI is it is a probabilistic technology, meaning it's probably right. If you're a tax person, you want a deterministic answer. Am I putting a one or a zero in the box? Because that's all that matters if I'm going to get audited. So what we've learned by working with our customers as design partners is generative AI can take us, if you've used a football metaphor, it can take them to the five-yard line.
But we've kept them, given them the controls with the solutions we're building to take it the final expert in the loop, final mile, or across the goal line to make the decision of, "I'm comfortable with what the generative AI solution determined." And I didn't have to do all that lead work, but I still have the validation before I put it into the software or put it on my tax return. And that's really critical. So we're using that in our tax research function. And then the last piece we're applying from the Ryan acquisition is around tax mapping for categorization. So if you imagine you're a company that has 100,000 product SKUs, you are constantly trying to assess in every jurisdiction you're doing business, is the product categorized properly for what the rules require?
So a can of soda could be just considered a carbonated beverage in LA, but it could be considered a sugary beverage, which is taxed differently in the city of Philadelphia. And so you need to know how those are all viewed in every jurisdiction. And so what the generative AI tool is doing for us is we are building a categorization capability that will reduce the amount of time that tax departments spend on this one phase of the end-to-end life cycle where they have to go through and literally manually look at all of their product SKUs and assess, are they taxed right for the current rules in that jurisdiction? And obviously, these big companies aren't sitting still. They're constantly adding new products, which means that the tax department is always chasing, are we categorizing all our products right? So we're seeing great response.
I was just at our customer conference with over a thousand customers and partners in New Orleans, and we talked through what we're building and the way we're doing it, and we're doing it with our customers as design partners. The feedback is exactly what we hope for, which is you're building it the right way. You're keeping us in the loop, meaning they will still have the final say in the categorization, but we are accelerating their time to determine that. And that will be of real value.
So you mentioned a really interesting point in the human in the loop piece. And I think the natural follow-up to the AI capabilities is the flip side, which is the competitive landscape. And it seems like the natural thought process would be, "Oh, why can't just someone else use generative AI to copy, you know, your content engine, the tax code and everything?" Because it's, you know, there are laws that are out there publicly. How? What's the Vertex response to that and as to why your moat remains safe in this world of generative AI?
Yeah. Well, I'd say there's two things. At its core, relative to the content, it's the expert in the loop. And that's where we've built our brand for, for 45 years now, is being the expert in the loop and making sure the accuracy is exactly what our customers want. Because remember, they are leaving their in-house solution to come to us. So trust is an enormous part of what we sell. And being able to show them how we are keeping our, you know, our finger in that process or giving that, that finger to them to make the final decision gives them the confidence that the technology works. And it isn't replacing the core of what we do. So that's point one. But the bigger point around that is the content database, while super valuable to us, is only one part of our moat.
It is what's essential to our success is the fact that we, A, we integrate with all the various platforms, and we can create; we're actually one of the only ones in the industry that can create a single solution, integration across all the different platforms that a company runs its business on. And that's a big thing to a tax department. The second thing I would say is referenceability. I highlighted it earlier, but we have the best referenceability in the world across every vertical. And most decisions that are made to leave an in-house solution ultimately boil down to who else do you do business with in my industry? That's as complex as I am. And we have that. And then I would add like the Big Four, who have all built the biggest tax technology practices around implementing our software.
So again, those are all considerations that are made that actually create a moat around what it would take to compete with us in the enterprise space.
So I want to circle back to staying on the product thing, but I want to circle back to, you're talking about the origins of the company, you know, been a family business for 30, 40 years. Legacy on-premise is where you came up and you're cloudifying the product. Maybe just talk us through where you are in the journey of transitioning from on-prem to cloud, how that works from a customer perspective, and, you know, when we can think of that journey potentially being completed.
Yeah. Okay. Wonderful question, Michael. So we're about 50/50 right now, John. I think about 50% of our revenue is cloud-based and 50% is still on-prem. From a new logo perspective, about 90%-95% of all of our new logos are adopting our cloud solution. About half of our existing customers who have been with us for years and are using on-premise, when they buy a new module, remember the core of our business is a land and expand model, meaning we get in, we may have sold you sales tax two or three years ago, and then you need us for VAT, and then you need us for use tax. And so you need us for other parts of your business.
As they're buying new modules, a lot of, about 50% of the time, our existing on-prem customers are adopting the cloud for the new module they're buying. We're seeing that happen. Then about 2%-4% of our core on-prem infrastructure is just moving to the cloud as they go through their migration. When we talked about ECC to HANA, as a company is making that larger ecosystem or technology decision, that's really when we see the core moving. We don't see it like, it's not something you can just incentivize. You can't just say, "If I cut your costs, will you move?" Because they're making a much larger infrastructure decision about what they run their order-to-cash business on and what they want to plug that into. That's really what drives the core migration. It's been steady, 2%-4% annualized a year.
I think that's going to continue. I think it'll take a number of years. The good news is when they migrate, it's typically a like-for-like 30%-40% increase in value to us. If they were paying us $100, they're going to be paying us $130 or $140 the next year when they go to our cloud solution. There's a nice inherent uplift that's waiting for us as those companies move to the cloud.
So maybe, John, one for you. When we think about this move to cloud, talk about a 30%-40% uplift, what's the uplift look like on this expand motion, you know, from initial purchase to, you know, someone who's been around for five or 10 years moving from on-prem to cloud and a number of products? Like how do you do that LTV position?
Yeah. Pardon me. So, you know, when our customers come in, they come in to solve a problem that they have, and we work with them. So it's really hard to determine exactly what the next thing they're going to get, because it all depends on where they start, what the problem is. But we do see a real nice progression when we think about sort of our GRR to, you know, NRR walk. You know, when we think about that going from 95 up to the 111 that we reported last quarter, a lot of that comes through, you know, companies coming in and then buying more modules. About 50% of that bridge from 95- 111 is companies buying additional modules, a sales tax customer buying use tax or VAT tax.
The next 25% comes from companies that are, as David said, landing and then further expanding. So using us in the Western division and then solving the problem on the East division, because that has now become a problem two years later. So boom, they move over. You know, it all depends on when the pain is occurring. But again, as you can see, a real nice lift is coming from the same, just more of the same product. And finally, the last piece of that progression is really just price increases. We have a regular way price increase that we do every year. We've been doing it for years and years, and that just sort of makes up that gap between, you know, that final 25% gap between those two.
Is there a way or a framework to think about the customer penetration for on-prem versus cloud customers, given the nature of buying incremental modules in the cloud? So if you're an on-prem, predominantly on-prem customer, is there a lot more upsell opportunity left versus someone in the cloud?
Just to clarify, there's not really a difference when we get a cloud adoption versus a historical on-prem adoption in terms of they, even in cloud, they're saying, "I'm just going to buy your sales tax solution on the cloud now. Later, I'll buy use tax or something else if I need it." But there's, we're not selling the whole portfolio in cloud, and we're only selling one in on-prem. It's, again, back to the issue of where their pain is. But what I'll tell you is, we have, with the investment in our customer success function, we have accelerated our average revenue per customer from 75- 130 since we went public. And the opportunity for an average-sized customer is about 3- 350.
We still have considerable wallet share for an average-sized customer that we just believe we could sell more products, cover more of their divisions with the same product to ultimately get them all of their revenue. Because remember, we charge based on revenue. Big company A may have $5 billion of revenue. We may be only serving $1 billion of it right now, because that's the division that had the problem. We still have an opportunity to sell them more to their other divisions.
There's clearly plenty of revenue. You've mentioned, I mean, almost 3X of where the average customer is. Turning to the NRR equation, I mean, how would you think of a steady-state NRR, given you are a more compliance-oriented business, given that, you know, there are just pretty structural drivers of incremental or even net new adoption? Is there a way to think about maybe a steady-state NRR as part of the longer-term growth algorithm?
Yeah, we don't typically guide into the, you know, NRR, ARR, and GRR. Again, GRR has been very consistent for us in that, you know, that 94%-96% is what we call out. You know, the 111% we feel pretty good at. We've been, you know, when we went public, we were at about 105%-106%. We've kind of increased that over time. It's been as high as 113%. It has moved around. I think as we think forward and we think about the opportunities that are coming, as David described, you know, the SAP opportunity, you know, we view that more as a new logo opportunity that could really help us out. So that will not impact that. But when you think about the impact of things coming through, Ecosio and e-invoicing, that e-invoicing, initially, we're going to try to leverage our existing customer base.
I mean, again, as David said, they're some of the largest companies in the world with the most invoice volume. And if we can use that product, if we can use the Ecosio product for our customer base, we'll get great leverage out of that. That'll initially show up, you know, as in that 50% bucket, that extra module activity. But as we expand and as they expand their use of us for additional countries, et cetera, we'll see that, we'll see the shift of that come out of that 50% bucket and move into that additional entitlement bucket, which was more of the same product. Because they're not going to give us all of their countries at one time. We'll get them over time. And as we get them over time, that'll fit into that other bucket that's out there.
But really, again, I don't necessarily have a—we don't have a long-term target. I think, as David said, the investments we've made in the go-to-market teams and really being in touch with the customer have really expanded that NRR, and we're excited about that, but don't have a longer-term guidance there. But again, we think that with the existing customers, you know, with the existing customers, the room to run, and having the active customer success team, there's a lot of opportunity there.
It's exciting to hear about all the opportunity. We're almost turning the calendar to 2025 now. I know you haven't formally guided for the year, but maybe as we look into 2025, what are some puts and takes or a framework in terms of thinking about both top-line growth algorithm as well as potential margin progression from here?
Yeah, I'll take the top line. You can take the bottom line. I think from the top-line perspective, I think, you know, knock on wood, the economic turmoil that's kind of been around for the last couple of years, uncertainty seems to be a little better. And, you know, interest rates are coming down. And so from a macro perspective, I think that we're in a good position. Certainly, IT budgets, all the things we're hearing are solid, and being reinforced. I think with things like OCI, Oracle, adoption, SAP, HANA migrations, I think there's, we feel comfortable that the top-line growth that we've envisioned getting to that mid-teens growth with our software business is we're right on plan. And I think that's going to continue. I think we guided this year to a 28% cloud growth in 2024.
You know, I would expect we will have a solid cloud growth, you know, in 2025 as we think about it. So I see that side of the business from the top line being, we're going in with, you know, a more optimistic look at things than anything else. Because of the sales, I think e-invoicing in 2025 will be muted. I think, again, we'll be focused on getting, in terms of its add to ARR. We're going to, we may get a lot of wins, but there'll be more in the back half of the year as we start to think and we build out our proven track record, the country coverage, the things I talked about earlier. And then it will really be a driver in 2026 and beyond. But I'll let John speak to margins.
Yeah. From an Adjusted EBITDA perspective, we had a nice 2024. You saw margin expansion in each of the quarters as we went through the year. We feel very good about the results that we're going to end up the year with. When we think about 2025, there's a couple of things that kind of polluted a little bit. One would be the fact that we're going to be making some additional investment in Ecosio next year. We called out on the last earnings call that we'll be investing about $16 million of, you know, of a drag on EBITDA in the 2025 number. So I wanted to first call that out. But on an overall basis, if you pull that out and say, what's the core going to do?
The core is that we're going to see some, you know, some modest margin expansion as we expect that we would as we continue to leverage the base. So we will see that. But then what we'll add on top of that is that $16 million of additional kind of drag that's going to slow that down so we can make sure we get go-to-market right and really can get those countries filled out. So that's what I would say when you think about next year to kind of take those into consideration. So it'll be a little bit of investment activity, but also some expansion of the core.
So John, I want to double-click on the margin piece here because you are approaching your long-term targets you recently stated, already on both top and bottom line. How do you think about the long-term targets from an Adjusted EBITDA perspective? Is there a path forward to north of 30%, or would you take any incremental margin upside and reinvest it for, you know, future potential growth?
Yeah, I think, I think we're going to have to play that one out. You know, we're not ready to yet, you know, adjust any of the long-term guidance discussions that are out there. We do have an investor day for those that are interested on March 19th. Please feel free to attend or participate any way you can, which we will probably be laying out some additional, a little bit more color around what the longer-term growth algorithm looks like. But what I would say is this, as a private company, you know, we operated in the mid-20, you know, 25%, you know, Adjusted EBITDA margins in that range. You know, we're approaching that right now to your point. You know, we think there's room for expansion and ability to leverage some of that over time.
Again, we see G&A as an area of, you know, opportunity to make some additional, you know, get some additional leverage out of. You know, selling and marketing, I think it'll depend on opportunities that present itself. And R&D is one I always kind of leave sacred and a little bit off to the side because we want to make sure with, you know, with NRR of 111%, our customers have demonstrated that they will continue to buy product that we put in front of them. And if we can keep developing new products, they will buy that. We know where our permissions extend to, and we're very, you know, we're very thoughtful about the products that we're building and how they can be sold into that base.
So while I can't give you any real great guidance on what the long-term model is, I think there's a number of things that we feel like are, you know, that are helpful to allow us to get to a number north of that. I think we've tried to, since the time we've been public, be thoughtful about the guidance that we've given and tried to underpromise and overdeliver. And I don't want to, you know, we're not going to come off that track at this point.
So I wanted to close the loop a little bit on what you just alluded to there. And how can we think about, sorry, I lost my train of thought here, for your upcoming investments, you don't do anything around tariffs. You don't do things around income tax. But as you think about that R&D you were just alluding to, what are some potential areas outside of this indirect tax that you may invest into, whether it be organically or inorganically, or you can be still hyper-focused on the indirect tax opportunity set?
Yeah, for sure. Indirect tax is going to be the predominant areas we focus on. The generative AI we're talking about in product categorization is an example of expanding one element of the end-to-end requirements for indirect tax that we think by putting investment in, which we will be in 2025 and will be part of our R&D growth, is essential. I think there's other areas of indirect tax like audit support and data management that underlies the entire indirect tax process that we have underserved in terms of the value we could be delivering, and so there's still plenty of opportunities to bring more product to market and more capabilities in the indirect core.
You know, certainly beyond that, and those could be achieved mostly by organic investment, we will always be looking at, is there somebody providing a solution that's tangential, like the Ryan acquisition that we could convert into something very specific for our customer base? So we always are looking at inorganic opportunities. But the core of our DNA and the core of what we do has been to build because we see that as ultimately providing the best technology solution in a single cloud stack that actually makes it easier for the customer to consume. And ultimately, that delivers the best value.
Is there anything technical preventing it, preventing you guys from expanding beyond indirect tax, or is it just a completely different market at the end of the day?
I'm not sure I followed the question again.
Is there anything technically challenging to go beyond indirect tax to other areas of tax, or is it simply just the opportunity set remaining focused?
I would say the opportunity is number one, given the lack of penetration that still exists in our core with users. I mean, we're only, our TAM is probably only 20%-25% penetrated. So we still see incredible opportunity there. That being said, what we know is indirect tax doesn't succeed, doesn't naturally give you within the office of CFO unique permissions. Whereas if you were selling at a higher level, maybe AR, AP solutions, it might give you permissions to go into another form of the office of CFO. But if you're doing indirect tax, you're pretty much not seen as anything more than that. So to go into the CFO's office and say, "Hey, now we do AR, AP," I don't think we would have the credibility.
We've kind of learned the right way, I believe, to just stick to what we do well, be profit-driven growth, and just continue to build out the suite. The good news is with the regulatory market consistently changing, it creates the need for new products. It actually makes our life easier. It just, we can just do more in indirect tax because the regulators aren't sitting still. Like e-invoicing, great example. It didn't exist a couple of years ago, and now it's the hot thing for us.
That all makes sense. I mean, it sounds like a lot of exciting opportunities set ahead. We are about out of time here. So John, David, thank you so much. Really appreciate the time and you coming out here and being able to host.
Thank you. It was great, great conference, great event. Appreciate the time.
Thank you.