I think we can go ahead and get started. I thank you all for coming today. I have the pleasure of hosting Vertex CEO, Chris Young, and CFO, John Schwab. Chris and John, thank you both for being here with us today. We're going to touch on some more near-term dynamics, but first I'd like to start with a little bit more, maybe the longer-term, higher-level view of the business. Chris and John, when you look five years out, what do you want Vertex to become that it's not today?
Well, first of all, thanks for having us here. A couple of points I think that are really important. Vertex really exists to help our customers manage their tax and compliance across a full life cycle of activity. We've been calling that Decision-to-Defense because we've grown up as a tax calculation company. That's what Vertex was known for. We're 45 years old. But if you think about a customer's compliance requirement, it cuts across that entire life cycle from how you categorize a product, all the way through to how you calculate, prove compliance, file, pay, and then ultimately defend yourself if you find yourself in an audit. And that's a life cycle. It goes on continuously. What you learn at the end of that process needs to get filtered back into the upstream part of it.
Traditionally, we focused more on the front end, the calculation piece. With our entry into e-invoicing, we're now more across the compliance spectrum. But we think there's real opportunity for us to expand and really help our customers tackle a lot of the manual work that happens across that entire life cycle. Case in point, yesterday I was with a customer, very large, well-known retailer out of the western part of the country here, and they were describing to me, "Hey, we close our year in August, and guess what? We have a bunch of spreadsheets that we're using to close the year, close the quarter.
We're pulling data from you guys and a bunch of other places in order to pull all the numbers together." We believe the close process, the reconciliation process, the audit process, so many of these that we can help our customers just do faster, go more quickly by bringing more AI capability to that as part of the entire Decision-to-Defense life cycle. In five years' time, we want our customers to be able to look back at us and say, "We can close faster. We can do it with more confidence. We can do it with less reliance on third-party outsourcing and that sort of thing to get to the right answer." And that's really what Vertex should bring.
As you begin this next chapter for Vertex, where do you see the greatest opportunity to sharpen the company strategy or execution?
I think we have several opportunities. I think, first of all, the market opportunity is there. We have a very durable customer base. We have over 60% of the Fortune 500 work with Vertex already. We have a substantial share in large global manufacturers outside of the U.S. and large retailers outside of the U.S. We've seen substantial growth now from a small base, but it's really starting to materialize in our e-invoicing business. I've been talking a lot about this over the course of the last couple of months. That part of our business is now becoming more established as part of Vertex. We think the opportunities are all there. The pieces now that we're layering in are several fold. The first one is AI internally to how we work, getting more efficient, more effective.
We've talked about our value creation plan at Vertex, which is going to drive more expansion of our Cash EBITDA, which also will drive growth in our free cash flow numbers for the business. John showed a chart at the end of our earnings in the last cycle, where we showed the growth and what we're driving from an EBITDA less CapEx perspective in the business. So you can already see with the VCP, we're driving more growth on the bottom line. That's supported by what we're doing from an AI perspective. We've been able to bring down contractor counts. We're changing how we develop software. We're changing how we support our customers. We're changing how we implement. We're changing how we operate most of our processes inside the company using AI, and we're really in the middle of that.
As we exit 2026 going into 2027, operationally, we expect to see the full pull-through from that. That's on the internal side as it relates to our customer base. We've started to introduce a few revenue-generating products. We've got more coming in our pipeline. As we look out into 2027, we think AI, as I mentioned, going after some of those manual workflows that our customers have today offers us more opportunity as we look out in the future.
Yeah. A lot of really exciting pieces to that. Maybe on the flip side, though, when you think about this transformation, which part carries the greatest execution risk?
I think for us, we've got a lot of different pieces to the business that we need to make sure all come together well, so we can continue to drive growth. For example, we've had to do a few acquisitions to participate in the e-invoicing opportunity. We bought ecosio two years ago. We just recently acquired Brinta. They've become a good part of Vertex, but integrating all these pieces is something we're working through.
We have to make sure that we're ready for the mandates. Like, for example, the French mandate came online two weeks ago, September 1st. That's gone well so far, so we're pleased with where we are on that. We've got Germany coming, we've got Spain next year. Making sure that we're ready for each one of these is an important part of what we're doing. But so far, operationally, we've been able to hold up really well as these mandates are coming along, and we're seeing growth in the business as a result.
Yeah. You talked about your large customer base, really high retention. We'll talk a little bit more about e-invoicing as an opportunity, but what would you say are the largest opportunities for you to deepen those customer relationships within that large base and sort of drive stronger expansion?
E-invoicing is one of our biggest opportunities there because a lot of our growth over the years has been to expand the use of the tax engine across different parts of our customer's franchise. While some of those opportunities are still there, I will go back and reference the customer I was with yesterday. One of the conversations with that customer is to expand, even though they are a large Vertex customer, they are a seven-figure-a-year customer. Even with them, there is an opportunity to expand calculation in their franchise to other parts of their business. So there is still a durable growth opportunity, we believe, in the core part of our business. But where we see real growth, like more kind of near-term growth opportunities, is to be able to cross-sell, up-sell e-invoicing into our install base.
We started to see in the second quarter the first real signs of that, where some of our core Vertex customers who had been using us for determination were buying larger packages of e-invoicing for their franchise. That was for France. Even looking backwards across other economies like Belgium, Italy. Poland was another driver. Several of them are looking forward to Germany, and so we are starting to see some activity right now in the pipeline around Germany. Then we have got our eyes on Spain, which comes next year.
We believe as we go through 2027, as we have got an established footprint with these customers, if we are doing determination with them, if we have got a couple of their large economies, we can go back to them and cross-sell e-invoicing for other countries where maybe they have picked a local provider in the past, or picked a competitor of ours in the past. There is an opportunity for us to consolidate, so they have got one compliance player across that entire Decision-to-Defense life cycle. That is really the opportunity we see in front of us. While there is a net new customer opportunity there, cross-sell, up-sell is a major part of our thesis.
Can you talk a little bit more about the land and expand motion? Obviously, the e-invoicing mandates that you mentioned are a key catalyst for driving customers to look for new solutions. But if you could just tell us a little bit more about your land and expand strategy and maybe what products or use cases have the greatest impact there.
Our largest install base is determination today. Most of our customers start there. They have been using Vertex for determination. Usually, it is North American sales and use tax, sales or use tax, but it is usually both. That is the largest install base from which we work. Oftentimes, from there, we can expand into value-added tax, which is going to take us outside of the U.S. Exemption certificate management, that is a big part of the big complementary aspect to our business. Customers get exemption certificates for all kinds of reasons. The life cycle of those certificates have to be managed, got a product for that. From there, it is the opportunity to expand into e-invoicing, and that is where we are seeing the most work from our customers today. Customers will say, "Hey, we trust you. We use you for North American sales and use tax.
Hey, we know we are doing business in France," or, "We are doing business in the UAE," "We are doing business in Taiwan. We need to use you there." India is another big one right now for a number of our customers. They will say, "Hey, we already use you here. We want to use you for e-invoicing in this country." Usually, what will end up happening is we start in one country, we prove that out, then we add another country, then usually we add one or two more countries. We have seen a steady progression in the growth of the number of countries that we add with these installed base customers, and we think that is an important part of our expansion opportunity. As I mentioned, today, that has largely been a greenfield opportunity.
Greenfield in the sense that it is an existing Vertex customer who needs to comply with a mandate in a certain place. They put us in place for that. If in another country, they have already got another provider, the opportunity for us in the future, now that we are in that customer with e-invoicing in one place or multiple places, is to just consolidate the whole franchise with Vertex. That is how we see the land and expand model building out over the course of not just this calendar year, but 2027 and even beyond that.
Right. In light of this, you are making a lot of changes across product, marketing, go-to-market execution. What are some of the early indicators that you are seeing that tell you that these changes are gaining traction?
A couple of really important indicators for us. For example, we've now been able to reduce headcount pretty substantially and with a pretty substantial curve through the rest of this year on the number of people that we're using in product development. Yet we've maintained and even increased the throughput in terms of what we're delivering to the marketplace. I'm pleased to be able to see how we're leveraging AI to make sure that we're driving either the same or better output, but bringing costs down. That's largely been in the form of contractors, and we use a number of contractors in terms of the delivery of different aspects of our business. We've been able to reduce our reliance on contractors. You're seeing that show up in the expense lines for Vertex.
It's what's showing up in the Cash EBITDA numbers that we shared in the last earnings call. That's a really important leading indicator of the efficiency that we're able to drive on leveraging AI in parts of our business. That's part one. We're seeing a lot more focus on utilizing AI in other aspects of our business. Customer support is a big area for us. Implementation and professional services is another category. It's a heavily human-intensive part of our business. We believe we can shrink the time required to get customers live with our solutions and do the implementation process a lot more efficiently than we are now. That's all starting to show up in terms of our delivery numbers, our staffing numbers, across these different parts of our team. So that's internally.
As it relates to external, earlier this year, we launched our first commercial product, which was Smart Categorization. Gone to school on that one. We got that into several retailers. They're all using it in production. They're all revenue generating for us now. But we've learned a lot about implementing these kinds of tools in the context of the customer's business process. There's a lot of change management required, that's for certain. It does require a lot of FDE resource, and in a Vertex context, I would tell you FDE has a dual meaning for us and for our customers. It's not necessarily for ward deployed engineer, which is what you think about when you think about AI and FDEs. It's a forward deployed expert in our case.
Like in Smart Categorization, you actually need the tax expertise to be applied upstream to help customers make decisions around how to categorize product. Oftentimes we're bringing our tax experts into the mix as part of some of these implementation processes and using the new products and the new tools that are AI related. So it's been a learning experience for us as a company that's really graduating from being more focused on delivering tools to our customers, to these more solutions-oriented capabilities to our customers, like Smart Categorization.
We're really going to school on what that takes and what it's going to mean in terms of how we help our customers move from something they did manual, maybe it was ad hoc, not necessarily well-documented, cuts across different departments, to really giving them a true AI-driven process. That's something that's going to be repeatable and sustainable. We've seen some early success. We've learned a lot, prepared to bring that to a lot more of what we deliver to customers as we look out.
So, on the internal side of that, John, maybe a question for you. As margins move to the high 20s, how do you think about the balance between operating leverage and continued investment in some of these growth opportunities?
Yeah, I think as Chris mentioned, certainly we have seen leverage come out of the value creation plan, and that's been good. We talked about that the second quarter call. But I think what we're starting to see now is that what that opportunity creates, it's more investment opportunity for us as we go forward. Places where we can reinvest in products and really drive that throughput into the product base that's out there. So, we're going to continue to leverage in and make investments in AI, make investments in e-invoicing, make investments in the platform, and that's how we think about this as we move forward.
I think that's going to be one of the things that when we think about uses of capital as we move forward, that's certainly one where we can think about leveraging it into other opportunities like M&A, and I think that's part of the playbook as well. It's not just resting where we are right now. It's really looking forward and leveraging that cash as an opportunity to really invest back into the business.
To that point, you did just touch on this briefly, but on the free cash flow side, how do you think about that balance between investing in the e-invoicing, AI, strategic M&A, and returning capital to shareholders?
Yeah, we're going to want to continue to make sure we're keeping up with the investments. It's a very important piece of it. 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 from an M&A perspective with the Brinta acquisition and the ecosio acquisition. So we're going to continue to make investments where we see that that makes sense, that are going to generate the highest return that's out there.
Chris, you mentioned this in your introduction, but you describe the opportunity as 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 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 outsource service in that category as well. That's a place where I think we can do a lot more with AI. 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 tell it, "Here's how many places we got to file. Here's the format." It determines the formats. 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. I will tell you, that's a place where in our business, we're really seeing the leverage we can get from AI, not just from a dollar savings perspective, but productivity in the form of our ability to cover more use cases for the customer. Tax filing is a lot. For most people who have not in this world, I didn't come from the world, but it's far more complex than it sounds.
People think tax, they think, "Oh, yeah, you file some form with the government, 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. If you just pick one, like fuel taxes in the economy, 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 one 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.
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. That's one 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. 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. A lot of states are now under pressure to keep income tax growth at a minimum.
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, 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 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 flows through to our customers. It's complexity that we manage on their behalf. It's one of the reasons why this becomes something that's more useful for our customers going forward rather than less.
Yeah, 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 your view on the moat of the business and how that complexity factors into that?
We have an incredible franchise with our customers today. But AI is going to be involved. There's not a world where AI isn't a factor in everything. My worldview 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 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. Oftentimes, tax is interpreted, and one 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 N.Y. Penn Station. If you buy it in a vending machine, it might be taxed one way. If you go into a restaurant in the same place and somebody opens the water for you and pours it into a glass, it's taxed differently. It's very hard to determine the nuances on that just by reading what's written on a website, as an example. That's a place where having the expertise, being able to do the identification of where the changes are being made, how to interpret the way certain rules are written or legislation is written is really, really important, and that's one of the aspects of expertise that we bring. 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, to how do I report it to a government. As I say, I'm outside of the U.S. now, I'm sending an e-invoice. The e-invoice format is based on tax expertise to how I file, to ultimately how I defend my decision in an audit context. So each one 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 into everything that we do so that we can amplify the expertise of our people.
In 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 it be something that's solely taking part of what we do today.
Sort of on that point, tax requires deterministic outcomes.
That's right.
AI is a probabilistic technology. Where should an agent be allowed to act autonomously, and where should it never be making the final decision?
One of the important points of what we do, and which is why I believe our franchise is very durable, is we have really two core deterministic control points in that whole Decision-to-Defense lifecycle. One is the calculation engine, and that's got to be right 100 times out of 100, 1,000 out of 1,000. That's a deterministic engine. Today, we calculate billions of transactions. We do it autonomously. Customers around the world trust it. 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 one is the e-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. But 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 interpret certain information. For example, we use AI in our product today. A customer can ask it, "Why did you calculate the tax on this good and 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 as 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 hook 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. 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 you can use AI, but you need to be able to stand behind every word in every sentence, in 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 we need to make that a little bit broader implemented. I do want to switch gears a little bit back to e-invoicing.
Sure.
There's a couple important things that I wanted to ask you on that. You mentioned France earlier. Maybe just tell us a little about how are things going now that that mandate launched, I think it was September 1st.
Yep. So we did go live on September 1st. The industry went live on September 1st. 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 1st was e-invoiced. 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 being on top of the content matters. The week before France went live, they actually changed some of the formats.
Oh, interesting.
Yeah. When I talk about this being a dynamic business where it's constantly changing, that's a good example. This is just the reporting formats. Changed the week before. We were able to get it all done. We were ready for September 1st. To me, that's just another example of the dynamism that's going on in this market, and it's one of the reasons why you have to stay on top of a lot of the changes. 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. We're obviously working quickly to get them up and running as quickly as possible. 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 one to three to four different countries on e-invoicing and turns e-invoicing into more of a platform decision?
Mandates are the catalyst that gets us up and running. There are a couple 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. Brinta was an acquisition we did a couple of months ago that brought several countries in Latin America into the franchise with e-invoicing. We've seen already in their existing install base some growth. We've already started to cross-sell and up-sell to some of those countries into our install base. For a while, Vertex has had 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 you can't cover it, we're just going to go elsewhere." And so that's what customers did in cases.
Mexico's been requiring e-invoicing for 10 years. So for our customers who are e-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 Brinta. What's great about Brinta, too, is they had a really interesting way in which they were able to serve some of the more scalable businesses like a lot of the ride-sharing businesses in Latin America, the delivery businesses in Latin America, which are some of the faster growth business platforms that we're seeing coming out of those economies right now. Brinta has been one 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.
We're just steadily adding countries organically in addition to what we brought on with Brinta. India, the UAE, those are all countries that we've started to bring online and we'll do more to service our customers. 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. That means your entire data set is on Vertex. That's where we're headed as we get through the rest of this year into 2027 and beyond.
Great. We're coming up on time, so I'd like to just finish with a high-level question. I know, 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, one of the first things I would say is, we've gone through the last six 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 business. We grew back our gross revenue retention. We've seen nice, solid growth the last couple of quarters out of the business. I think people are really looking for the inflection point. What's going to drive inflection from taking us from 10%-12% into that 12%-14%, and when's that going to come? I think Chris talked about it a lot, a lot of the pieces there, e-invoicing being one 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. 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 out of time. Chris and John, thank you so much for joining me on stage today.
Greyson, thank you. Appreciate it.