Prepared remarks
Good morning, and welcome to the Vertex Second Quarter 2026 Earnings Call. As a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Joe Crivelli, Vice President of Investor Relations, for introductory remarks.
Hello, and thanks for joining us to discuss Vertex's second quarter results. Chris Young, our President and CEO; and John Schwab, our CFO, are with us today. As noted on Slide 2, during this call, we may make forward-looking statements about expected future results. Actual results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Our remarks today will also include references to non-GAAP metrics. A reconciliation of these metrics to GAAP is also provided in today's press release. This call is being recorded and will be available for replay on our Investor Relations website. And I'll now turn the call over to Chris.
Welcome, everyone, and thank you for joining us. Our second quarter results demonstrate two key points. First, the durability of the Vertex business. Revenue grew 10.5% year-over-year to $204 million at the high end of our guidance range. Second, we are beginning to translate greater operating focus and cost discipline into meaningful earnings leverage. Adjusted EBITDA increased 33% to $51 million, above our guidance range and adjusted EBITDA margin expanded by more than four percentage points year-over-year to 25%. The second quarter provides tangible evidence that the actions we are taking to sharpen our priorities, improve our execution and operate more efficiently are producing results. That said, we still have work to do on growth. Expansion within the installed base and new logo performance are not yet at the level we expect, in part because cloud conversions have been slower than expected this year. Our customer metrics remain stable. Gross revenue retention was 95% and net revenue retention was 105% for the second consecutive quarter. The message in those numbers is straightforward. Our customer base remains durable, and our solutions remain deeply embedded in mission-critical workflows. At the same time, we need to improve expansion, cross-sell and the way we manage customer migrations. Those are important priorities for the second half. E-invoicing was one of the strongest areas of execution in the quarter. Momentum increased during the quarter across all geographic regions, supported by the approaching French mandate, upcoming German mandate and by customers taking a broader view of global compliance. This matters strategically. Global compliance is moving closer to the transaction itself. Customers increasingly need to determine the right tax outcome, execute the transaction in accordance with local regulations and report it to the relevant authorities and then finally maintain the evidence required to defend it. Vertex is well positioned to help our customers manage that entire life cycle from decision to defense. That is the broader opportunity we are pursuing across tax determination, e-invoicing, reporting, returns and compliance. Now as I mentioned, e-invoicing was one of the strongest areas of execution in the quarter. The business continues to perform well in advance of upcoming mandates with very strong growth in both ARR and revenue that's materially above the overall corporate growth rate. Importantly, we continue to see both new e-invoicing revenue and the number of our e-invoicing wins ramping considerably as we move throughout the year and towards the implementation dates for the upcoming French and German mandates. I'm pleased that we won several six-figure enterprise e-invoicing deals in the second quarter, including a mid-six-figure win for an existing customer driven by mandates in just two countries, France and Finland. France was an important catalyst in the second quarter, and Germany and other country requirements will create additional demand over time. We are aligning our country road map to demonstrated customer demand and working to integrate our capabilities across Vertex, ecosio and Brinta. Q2 represented meaningful progress, but we are focused on consistent execution in this business to grow it into a material contributor to our overall growth. Now let me turn to AI. I've been clear that becoming AI-first has two dimensions for Vertex. The first is changing how we operate. We are using AI to improve the speed, quality and economics of work across engineering, customer support, tax research, IT and our managed services operations. The second is changing what we deliver to customers. Over time, we believe AI can make tax and compliance more proactive, more explainable and increasingly automated. We are making measurable progress on the first dimension. And while we are building capabilities required for the second, AI-attributable revenue is not yet material to Vertex. At this stage, the most relevant evidence is whether AI is improving how quickly we build, how efficiently we onboard customers and how effectively we are solving real customer problems. Across the company, active use of core AI tools has increased to 89%, up from 68% in January. Adoption is important, but it's only the starting point. In engineering, AI is now embedded across the development life cycle. Across the majority of our teams, our internal measurements indicate a 34% improvement in engineering efficiency with pull request merge rates increasing 30% from our January baseline. We are also applying AI to specific customer delivery bottlenecks. AI-supported generation of e-invoicing business rules has reduced onboarding time by approximately 50% in the applicable workflow. Separately, our country expansion agent has enabled the team to onboard approximately 3,500 rules across more than 50 formats, about 70% faster than the prior process. The next step is to translate these capabilities into customer-facing product value. In our product, we see a steady increase in adoption of our Vertex Intelligence embedded AI, which helps customers with everything from answering a basic question on tax treatment to translating a full set of tax updates into tax rules. More broadly, we are developing an AI-first connected tax platform that's designed to help customers move from reactive product-by-product work towards more proactive compliance workflows. Some elements of that platform are still in development and our immediate goal is to validate them with customers, move the right capabilities into production and establish clear commercial models. Early customer adoption of Smart Categorization has been encouraging with strong usage patterns helping validate the value proposition while providing important feedback that shaped our understanding of how customers will deploy the solution. Those learnings are informing our go-to-market efforts, and we're starting to see a pipeline of opportunities develop as additional customers evaluate the technology. Over time, we expect to measure our AI progress through customer adoption, customer outcomes and revenue, but we are not fully there yet. The operating improvements we are seeing give us greater confidence that AI will become both a meaningful productivity driver and an important source of product differentiation for Vertex. The customer activity in the quarter reinforces the durability of our core business and the opportunity to expand it. Across both existing customers and new logos, we saw three consistent buying patterns. Customers are expanding their use of Vertex as their transaction volumes and global complexity increase. They are standardizing on Vertex as part of broader SAP, Oracle and Microsoft Cloud transformations. And in competitive situations, they are choosing Vertex when they need the content, scale, integration and control required to manage complex tax and compliance environments. Let me give you some examples. First, we expanded our footprint with a leading mobility and delivery technology company. The customer continues to grow and broaden its operations, leading to significantly higher volumes. This entitlement expansion resulted in mid-six figures of additional revenue for Vertex. Second, we secured a high six-figure expansion with a consumer packaged goods company as part of its SAP cloud transformation. This win extended our relationship across multiple geographies and tax types, while also leveraging our best-in-class SAP software and Vertex Consulting. And third, we won a competitive displacement opportunity in the Oracle ecosystem with a major quick service restaurant operator. The customer was using Vertex in one area of its business while using a competitor elsewhere. The customer chose to standardize on Vertex to modernize and simplify its existing technology environment, resulting in a mid-six-figure expansion that includes multiple Vertex solutions and services. These are different customers in different industries, but the strategic pattern is the same. Business growth creates more volume and complexity, ERP modernization creates an opportunity to simplify and standardize and increasing compliance requirements make the breadth and reliability of the underlying tax platform more important. We saw the same demand drivers in our new logo activity. During the quarter, we won new customers that were replacing internally developed processes, moving through SAP cloud migrations and responding to increased transaction volume. Those wins across the Microsoft, Oracle and SAP ecosystems included both focused initial deployments and broader platform engagements. The first example is a low six-figure win with a telecommunications infrastructure leader. This is an example of an enterprise customer that outgrew a manual solution and needed to automate its indirect tax processes. The second example is a low six-figure win with a global management and technology consulting firm. The customer was moving through an SAP cloud migration and selected Vertex for North America Sales Tax, Consumer Use Tax, SAP Accelerator and our Consulting services. The third example is a high six-figure win with a building products distributor. In this case, transaction volume growth was the catalyst and the customer selected a broad set of Vertex capabilities. We consistently demonstrate through our execution that we can enter through a specific tax or compliance requirement and then establish the foundation for a broader relationship over time. That land and expand opportunity is important. Our Q2 retention metrics demonstrate the durability of the installed base, but our expansion performance is not currently where we want it to be. Improving the way we convert successful initial deployments into broader customer relationships is one of our clearest growth opportunities. Now before turning the call over to John, I'd like to spend a moment on a topic that's important to me. One of our top priorities since my joining Vertex has been strengthening our leadership team with executives who have successfully scaled enterprise software businesses through periods of transformation and growth. Allison Cerra joined as Chief Marketing Officer to sharpen our market positioning and brand and demand generation capabilities. Aneel Jaeel joined as our Chief Operations Officer to drive greater operational discipline, technology modernization and AI-enabled transformation across the company. In June, Chatelle Lynch joined as Chief People Officer to strengthen talent, organizational effectiveness and accountability as we move through this period of significant change. And today, we are pleased to announce that Bala Chandran has joined Vertex as Chief Product and Technology Officer, adding significant experience in product innovation, cloud modernization and AI leadership at a critical point in our evolution. These leaders bring the experience and leadership capacity to improve our execution going forward. We have a durable customer base, an important position in global tax and compliance, improving operating leverage and meaningful opportunities in e-invoicing and AI. We also have work to do to accelerate our growth, improve our expansion and turn our product vision into measurable customer and commercial outcomes. I believe we now have a stronger leadership team and a clearer operating agenda to do that work with greater focus and urgency. Now I'll turn the call over to John to discuss the financials in detail.
Thanks, Chris, and good afternoon, everyone. As Chris noted in his remarks, the second quarter results demonstrated stability in the business across revenue growth and customer metrics. In addition, we saw good results from our value creation plan announced in April, which drove significant earnings leverage in the second quarter. On Slide 13, our total revenue was $204 million, up 10.5% year-over-year and at the high end of our guidance for the quarter. Our subscription software revenue was up 10.7% and services revenue was up 9.4%. Our annual recurring revenue was up 10.5%, in line with expectations. And our Cloud revenue was up 17.9%, bringing the year-to-date Cloud revenue growth to 19.3%. Turning to customer metrics on Slide 14. Our gross revenue retention was 95% and net revenue retention remained stable at 105% compared to the prior quarter. Our average annual revenue per direct customer was $142,997 in the second quarter, up 9.2% year-over-year. Our scaled customer growth was 8% in the second quarter, while overall customer count was up on both a year-over-year and a sequential basis. Now turning to profitability on Slide 15, where you can see the impact of the value creation plan beginning to take effect. Overall, non-GAAP gross margins increased 15 basis points year-over-year. This was driven by higher margins in the software business, as you can see on the slide. Adjusted EBITDA was $51 million, up 33% from last year's second quarter for an adjusted EBITDA margin of 25%. As noted on last quarter's call, we expect to see steady progression towards a high 20s adjusted EBITDA margin between now and the end of 2027. Our free cash flow was a positive $2.7 million but was impacted in the second quarter by costs associated with the value creation plan, including severance and consulting fees. Free cash flow was $13.2 million on a pro forma basis for a free cash flow margin of 6.5%. In addition, the second quarter pro forma free cash flow represents a free cash flow to adjusted EBITDA conversion rate of 26%. Likewise, we expect to see a steady upward march of this number over the next six quarters as the impact of the value creation program takes root, and we expect to exit the fourth quarter of 2027 with a conversion rate of approximately 70%. To give investors another view of the earnings and cash flow potential of the business, on Slide 16, you see adjusted EBITDA less capital expenditures over the past six quarters. Here, you can clearly see the earnings leverage in the business as quarterly adjusted EBITDA has increased 37% or $14 million during that time frame. Capital expenditures reflect investments we are making in the business in both our compliance business as well as in our Artificial Intelligence, both in our internal systems and product development. As you can see on the far right column, adjusted EBITDA less capital expenditures has more than doubled during this time frame. As I noted earlier, we expect that the value creation program will unlock even more earnings and free cash flow potential over the coming quarters. Turning to guidance. Given the performance of the business in the second quarter and the ongoing impact of the cost actions, we expect third quarter revenue of $208 million to $211 million and third quarter adjusted EBITDA of $55 million to $57 million. For full year guidance, we are narrowing the revenue range to $825 million to $830 million, and we're increasing the full year adjusted EBITDA guide to $206 million to $210 million from $202 million to $208 million previously. We now expect Cloud revenue growth to be 18% for the full year. Before I wrap up, I'll note that in the quarter, we repurchased $26.5 million worth of shares in the second quarter at an average price of $13.17. Since the $150 million buyback program was launched in November, we have bought back a total of $56.6 million of shares at an average price of $14.55 and have $93.4 million remaining under our authorization. With that, I'll turn the call back to Chris for closing comments. Chris?
Thanks, John. Let me close with three points. First, Q2 demonstrated the durability and earnings potential of the Vertex business. Revenue was at the high end of our guidance, adjusted EBITDA exceeded our expectations and customer retention remained stable. Second, we are seeing tangible progress from the actions we have taken to improve our operating model. We are executing with greater focus and discipline, expanding margins and creating additional capacity to invest in the areas that can strengthen our growth over time. And third, AI is improving the speed and efficiency of selected engineering and customer delivery workflows while we continue building customer-facing capabilities. Our next objective is clear: translate those operating gains and product investments into measurable customer adoption and over time, commercial value. We entered the second half with a stronger cost structure, ramping productivity, improving momentum in compliance and e-invoicing and a leadership team built to execute the next phase of our transformation. With that, we'll now take your questions.
Questions and answers
Our first question will come from Christopher Quintero with Morgan Stanley.
I wanted to ask. It was really great to hear about all the internal AI work you have been doing. From a customer perspective, tax accountants have typically been more risk averse and slower moving, so from the Vertex perspective, what are you doing to help your customers feel more comfortable adopting the AI technologies and solutions you're developing?
Chris, thanks for the question. One of the most important things we've had to do, and we've learned a lot of this with Smart Categorization, is send people in, almost in a forward-deployed engineering model, which you hear a lot about in the AI world, to work with our customers to help them. What we've learned is that with Smart Categorization you're not only offering customers a tool, you are changing the way they work. They have a series of processes built up around how they categorize products. Sometimes different people from different groups and functional areas are involved. I shared before an example where a customer's marketing team was involved in some of the categorization because a lot of the upfront SKU generation for product starts in that part of the business. Then finance and accounting get involved later when you're actually getting down to tax determination and reporting decisions. So we've had to work with a number of customers to help them think through not only the tool itself and how well it categorizes a product, but also the change in the operational model around it. How do you think about that? How do you staff for that? We're seeing that in other conversations as well. That has positives, but it also, in some ways, takes more time. One positive is I'm seeing opportunities for us to send engineers to work with customers to solve upstream product problems that were different than ones we anticipated in the past, places where they might have had frustration with our products. I think actually through AI we can build bridges into the determination experience and improve our overall posture with the customer as well as create opportunities to sell them something additional. On the downside, which I know you've talked about, in some cases it takes a little longer for them to make a decision. But as I talk to customers, the message is clear: they're getting messages from their CFOs and CIOs, and usually those come from the CEO, and they want to move in this direction and adopt more tools. When I look at Vertex Intelligence, our equivalent of a Copilot adoption where it's a general AI capability in our product, we're seeing steady month-over-month and quarter-over-quarter increases in engagement. We're tracking monthly active users and daily active users, so we're seeing it. So, long answer to your question: a lot of engagement there. And we're hard at work making sure we ship more AI capabilities to our customers over the next few months and quarters at Vertex.
Got it. That's helpful, Chris. And then just as a quick follow-up on the Cloud revenue guide. You guys talked about slower Cloud migration. So just curious maybe what you guys are seeing in terms of the drivers behind those slower Cloud migrations?
Yes. First of all, Chris, thanks for the question. When we put together the Cloud guidance, we felt good about where we stood at the time. We did anticipate a higher level of Cloud conversions in both our installed base and our new logo activity. In the first half we didn't really see that happen, and that pattern continued into the second quarter. So we reassessed our view on where the guidance needed to be. That said, there is an overall elongation in the time people take to decide on technology moves into other areas. Wherever it will require capital and further deployment, people are taking a thoughtful view of how fast to move. That impacted our business and the amount of conversion. From our standpoint, this is really a conversion timing issue, not a revenue issue. It's taking revenue that is not currently in subscription or on-prem and moving it into the cloud; it's essentially a left pocket to right pocket shift from an overall revenue standpoint. I want to make sure we call that out. As you know, we continue to support our customers in their deployments, whether on-prem or in the cloud, whatever meets their needs best. We will continue to work to improve cloud conversion expansion as well as new logo execution.
One thing I'll just add there, Chris, because I know this question has come up: we're seeing more customers with mixed environments. They have some cloud, and as I talk to more customers I'm finding many examples where they have some element of the Vertex cloud deployed alongside legacy Vertex on-prem deployments. Often my first question is, why haven't you moved it all to the cloud? I hear a mix of answers — IT constraints, prioritization, and so on. I share that to give you a bit more color around what we're hearing from customers. They continue to say they really like Vertex and are consolidating more on Vertex, but it may take time to get there. We are, to some extent, impacted by what happens with ERP migrations, because Vertex migrations often occur later in that journey. We're managing through a mix of these factors. As John said, the most important point is that these are not lost customers; they are simply taking longer than we initially expected or planned to migrate their Vertex deployments to the cloud.
Your next question will come from Jared Levine with TD Cowen.
I was hoping to start here in terms of the demand environment. Can you talk about how that progressed over the quarter and what you're kind of seeing so far into 3Q here?
We've seen a fairly stable demand environment. Looking back at the pipeline at the beginning of the quarter and earlier in the year as we moved into Q3, there has been a good mix of cross-sell and upsell opportunities within our installed base, which is an important part of our revenue model, as well as new logo wins. I will point out, as John mentioned, that we've seen some elongation in sales cycles. In some cases we expected a deal to close one month but it closed the next because customers had to go through procurement. For example, a new logo seven-figure deal we expected to close in June closed in July, so it did not fall into this past quarter. So we're seeing some of that, which is different than we had expected. But at an overall demand and pipeline level there's a lot of activity. We're seeing substantial new activity related to e-invoicing mandates; that part of the business is still a smaller base for us, but we're very pleased with the activity. The seven-figure deal I mentioned came in in July and is net new business, much of which is around more traditional tax determination.
Got it. Great. And then so far year-to-date, you have outperformed your two quarterly revenue guidance, but did affirm the annual revenue guidance here. Anything to call out in terms of guidance philosophy or visibility in terms of that approach here to affirm that guide midpoint?
Yes. I would say our first-half performance was good. We felt very positive about that, and it gives us confidence in achieving our full-year outlook. We had some strong factors in the first half, including better management of churn that we had discussed last year and earlier this year. But we wanted to balance that first-half upside with a more measured view of the second half, including the growth rate in the third quarter and some continued variability in revenue timing that Chris mentioned, such as the elongation that is occurring, as well as mix and some longer deal cycles. We wanted to be thoughtful about everything we’re seeing in the environment and to make sure we put together guidance that places us in a range that gives good visibility into achieving results in the back half. So that’s the overall view, and it ties back to the first part of your question about the environment and how things are feeling, which we made sure to bake into the guidance.
And that said, we raised our guidance on EBITDA for the year, which is something we're very proud of. And obviously, we're working hard to bring in as much business as we can see out there for the back half.
Your next question will come from William Fitzsimmons with Piper Sandler.
Chris and John, I think it was clear that it sounds like the delta in the full year cloud revenue growth guide was more of a near-term blip than a, call it, a structural challenge. And just to double-click on this, based on what you both are saying, is it fair to say that some customers are maybe prioritizing other AI projects internally, which is maybe pushing out some of the blocking and tackling around the on-prem cloud migrations? And if so, when do you expect that to maybe fade or reverse? I know it's hard to say in real time, but I guess what's the catalyst to that kind of moving back to the pace you initially expected?
I think there are several components of our cloud revenue, Bill. First, we expect cloud revenue growth to accelerate because of our e-invoicing business. As invoices actually start flowing through, the French mandate will take effect in September at the end of this quarter, and the Germany mandate is coming at the beginning of next year. Even before those mandates, we expect to see an improvement in invoice volumes. E-invoicing had good activity this quarter and will ramp, which we expect to be a positive for overall cloud revenue growth through the back half of this year and into 2027. Second, on cloud migrations, it’s hard for us to get a precise read on the trade-offs customers are making, such as how they may be shifting timing among IT projects. We tend to speak more to tax people than IT people, generally, so we see deals taking customers a little longer. Across the IT franchise, many organizations are reevaluating where and how they spend money and allocate resources. Despite that, we expect a continued move to the cloud. In conversations with customers, I increasingly see partial franchises already in the cloud and a real desire to move more workloads there. We need to do more to give customers incentives to move to the cloud. Delivering new features and AI capabilities creates momentum and encourages customers to transition. When we first launched many of our AI capabilities, they were focused on our cloud franchise; we have started to broaden availability to on-prem customers so they can begin using more of our AI tools, which I see as a carrot to make cloud migration more attractive. We have a lot of focus on this area and have just hired a new leader for our product and engineering team who most recently ran a large part of the healthcare business at Oracle. He understands regulated industries and has experience moving customer bases from traditional methods to cloud capabilities, so I feel very good about our ability to get customers migrated. Of course, customers must work through their internal planning and budgeting cycles, but we are doing everything we can to give them incentives on the Vertex side to move to the cloud.
Perfect. I appreciate the color. And if I could sneak in a second one. It's now been a couple of months since you acquired Brinta that gave you an AI-native footprint in Latin America, arguably one of the more complex environments for real-time compliance globally. How has the integration progressed relative to your initial expectations?
I would say the Brinta team has done very well; it's been great to have them on the team. They have strong customer relationships. We see more opportunity in the region than we did before Brinta became part of Vertex. Overall, it's going really well. As you know, integrating companies from different places always brings challenges and takes longer than you want. We're trying to move at a pace that preserves the best of what Brinta brings to Vertex while getting them integrated without breaking what they've done really well. That will take a little time. We're pleased with what they've done and with the new business opportunities they're bringing to us. They've partnered very well with teams across Vertex, and I'm encouraged by some of the new business opportunities we see in Latin America because of it. It's on a small base. Primarily, we started our journey with Brinta because they helped us close country-level gaps in our ability to meet mandates in Latin American countries. What's been really positive is the broader market opportunity we're opening up now that they're part of Vertex, and that's an important opportunity for us.
Our next question will come from Samad Samana with Jefferies.
I guess, first, just to follow up on the guidance. John, do we now consider the guidance to be derisked on the cloud side? Should we extrapolate that the conversion activity you are seeing in the first half of 2026 is probably the new normal? So, in consideration of the 2026 guidance, would you say you feel extremely confident or is that still at risk? And should we use this conversion activity as the template as we think beyond the 2026 outlook for cloud as well? I have one follow-up.
Yes. From a cloud standpoint, Samad, I think we're calling what we see. What we're seeing there is a lower conversion ratio. That conversion activity isn't happening at the pace we thought. This is what we're seeing, and this is what's built in for the rest of the year. Again, I'm not sure I can sit here and call it, and I think we'll see it show up in the numbers, but that's how I'm thinking about it as it plays through. We wanted to make sure we took that into account and that everybody felt good about where we ended and why we ended there. From an overall guidance perspective, I think as we look at the back half, there's still a decent amount of pipeline, as Chris said. We are seeing some activity in the back half of the year around elongation of deals and other things. So I wouldn't say we set this up as a risk-free plan by any stretch. There's always risk in everything that we do, and there are a lot of deals that have to get closed to make the numbers. I certainly wouldn't say it's risk-free. What we wanted to do was take into consideration what we saw in the first half as well as the pipeline and activities we're seeing now, and roll that through, and that's what we came out with. That's the best I can tell you. Hopefully that was helpful, and I'm happy to take a follow-up if you have one.
Yes, that was helpful context. I appreciate that. And maybe just to get better context around the quarter: scaled customer growth is still in the high single digits but decelerated quarter over quarter. Is there anything one-time we should be aware of, or is whatever is impacting cloud conversions also affecting new scaled logo growth? Please help us understand what drove that slowdown?
Yes. I think, Samad, first, it's only one quarter, so we're at this point watching it closely. As I mentioned earlier, we did see some deals move between quarters. The one deal I mentioned that slipped out was a seven-figure deal for us; it was a June deal that ended up coming in July, so that would affect that percentage as an example. Certainly one we're very happy to close. So we are seeing some movement there. Scaled customers come to us in a variety of ways: we have net new logos and growth with existing customers. We expect to see some of our e-invoicing customers, particularly as we ramp on these mandates, move from smaller customers to more scaled customers. We don't see any trend that would suggest we're going to move down on this metric. We expect continued good growth in this metric, but we didn't see it this quarter, and we certainly want to see it improve going forward. We'll stay on top of it and keep reporting it; it's something we pay attention to.
Your next question will come from Steven Enders with Citi.
I guess I want to ask on just the e-invoicing dynamics that you're seeing? And how is that maybe playing out versus how you're expecting those deals to kind of come through for the year? And how are you kind of thinking about when, like the bulk of customers will start to adopt and maybe move from a single country to expand and adopt more of a full platform opportunity over the next couple of years here?
I would tell you, Steve, that what we saw in the first quarter was lower than we would have wanted in terms of multiple countries. We saw the activity we expected in Q2, with customers starting to not only do the French mandate but also add a second country. I mentioned one example on the call, with France and Finland driving adoption. We are now seeing customers start in one country like Poland and then add a second. When we think about the growth potential in our e-invoicing business as we move through this quarter into the fourth quarter and into 2027, that’s where more growth will come from. We expect growth to come from people moving to meet the mandates that are out there, France being the big one right now, Germany coming, and Spain next year. Amidst all that, we expect some of our larger customers to say, now that I’m doing one or two countries with you, as you deliver on that let me add a third or a fourth, which becomes a growth opportunity for us. We’re just beginning to see that behavior in our customer base, with meaningful growth opportunities across more than one country. Ultimately that leads to the outcome we want, where customers decide to consolidate everything with us. Maybe they made a decision in Mexico four or five years ago and now want to circle back. That’s an expectation we have as we look forward. As we plan for 2027, we’ll need to take that into account. This year has been about focusing on selling, delivering, and operating well. Next year, we’ll turn our attention to how we really scale this beyond what we’re doing today.
Okay. No, that's great to hear. And then maybe attaching that to the numbers a little bit. And I think we're still talking about revenue acceleration into Q4. It looks like ARR is still decelerating a little bit. Just how should we think about the timing between when these things start to impact ARR and we start to see the acceleration on that metric and then give us confidence on the revenue side going into Q4?
I mean I think you'll see that start to play out here in the third quarter, again, because ARR is going to lead the revenue. And so that's going to start as adoption for the French mandates gets moving. There's more activity there. Again, we started to see activity in the second quarter. We're going to see a bit more of it now as we're getting closer and closer to the date. And as that occurs, we're going to start to see that show up in ARR. And then naturally, then that's going to turn into revenue soon thereafter. And again, it will start kind of working itself in ratably over the year because that's typically how people are buying and how they're thinking about it from an overall usage standpoint. So that's how to kind of think about it, and that's kind of the path that we have. And so we'll start to see it this quarter and then again, revenue inflects a bit more next quarter, the fourth quarter that is.
Your next question will come from Brett Huff with Stephens.
Two questions from me. First one is a little bit of a follow-up on the e-invoicing. The original thesis, if I recall correctly, was definitely a lot of cross-sell into our big customers who should be using you all for e-invoicing, but also there was some new logo stuff that you had built in. Now that we're a little further down the pipe on that, is that all kind of coming out like you saw like new versus cross-sell, et cetera, leaving aside the adoption part.
We are seeing that, Brett, which is great. In Q2 we saw growth in the overall number of customers at Vertex, largely driven by the e-invoicing business. Many of those customers come in at a smaller ARR per customer than our traditional tax determination customers, so we saw customer growth overall and much of that is attributable to e-invoicing. We also saw some of our, I would say, early six-figure to multi-six-figure cross-sell opportunities into our installed base related to the e-invoicing mandate. So we saw a good mix of both outcomes we want. From where I sit, Brett, I want to see more of those, particularly the latter example, where we're driving more multi-six-figure cross-sell opportunities into our installed base. But the activity in Q2 and what I expect to carry into Q3 in the back half of this year gives me good confidence that those two aspects of our thesis are happening. We're growing our overall customer base, winning net new logos in this space, particularly in Europe, and we are also driving cross-sell and upsell into the Vertex installed base, particularly for e-invoicing.
That's helpful. And one quick follow-up, again, still kind of a big picture one. Another angle on the AI question. Early on, when you and I were talking with clients, you set up the expectation that, look, this is a build year. Next year, we'll start to see some metrics or revenue or whatever. And I think that's still obviously going to happen. As we get into the fourth quarter, we're getting a little more into the brass tacks on things like that. What are the metrics that we should be looking for measurable or anecdotal to give us a sense that you're building that muscle and getting those products getting ready to go GA?
One, Brett, we've got, for example, our Vertex Exchange event coming up in the fourth quarter of this year. My expectation is that we'll be able to say a lot more about our product road map and strategy and even introduce some new capabilities at that event. So that's certainly a big milestone for us. We've got to have the product on the truck if we want our team to be able to sell it and bring it to customers. This is a virtual truck. It's an autonomous truck actually is the way to think about it since it's AI related. But we need our AI capabilities out there available to customers as we go into 2027. And I feel really good about the progress we're making there. As I mentioned briefly on the call, really building out a connected platform that's got a tremendous amount of AI capability with it. That's all in progress. But you said it well at the beginning, Brett, this is more of a build year with the expectation that we have those capabilities exiting the year, and we've got more for our teams to be able to sell to customers going into 2027. If we can pull in, if we can obviously go faster than our expected time lines, maybe we're starting to sell more in 2026, but we're really more focused on this being a 2027 event.
Your next question will come from Joshua Reilly with Needham.
I wanted to get the latest update on the SAP, ERP, ECC transition outlook and what you're seeing in terms of capacity for these conversions in the next two years versus what's currently being done by consultants. And if enterprise buyers are simply buying the 2030 extended maintenance instead of making the migration right now, and did that have any impact on the lowered cloud revenue guidance?
We haven't had any real change in the activity we're seeing. Looking at our ecosystem, we had a good set of wins across the board with SAP, Oracle, and Microsoft. We haven't seen a material shift in the velocity of migrations, but migrations are continuing to happen. I wouldn't say the velocity has shifted, and that's why you're seeing a reasonably steady progression in our numbers. We're not seeing any material change in how these migrations are occurring; they're just happening and we're continuing to move along with them. Those expectations are built into how we're laying out our guidance for the quarter and the year.
Got it. That's helpful. And then just one quick follow-up. On the NRR outlook, what are the puts and takes maybe we should be considering for the second half of the year here? You've got the e-invoicing volumes kind of kicking in as a tailwind. Is there any change that you're seeing in terms of mid-market customer churn maybe that's kind of burning off there that could also be a bit of a tailwind? Or anything else we should be considering?
Thanks for the question, Josh. In terms of the NRR componentry, I think you picked the real tailwind, which is some of the e-invoicing opportunities that Chris talked about and the opportunity to sell that into the existing customer base. There will certainly be something there, something we can do that we're excited about that's going to happen. In terms of churn and where things are, as I said earlier, I think we felt good about the progress we've made in those accounts, whether they're middle market or even some of the larger ones from last year. I think it was the third and fourth quarter where we had some significant changes in the churn numbers compared with the past. So we feel good about the types of things we've done to improve that. Again, we feel like we're making good progress, and perhaps there could be a little bit of upside as things play out. But again, I just want to say we don't guide to it. We feel good about the work we've done through the first half, and we expect to continue that into the second half. So again, that will fall where it does, but we're pleased with what we've shown.
Your next question will come from Rob Oliver with Baird.
Chris, first one for you. The six-figure opportunity with one of your core customers on just two geographies has to be pretty tantalizing when you think about the kind of global opportunity around e-invoicing. So I'm just wondering, as you've now been in the seat now for a few quarters, as you're talking to those customers, how are they thinking about e-invoicing? Are they thinking about it the way you talked about it in response to an earlier question, like we expect more consolidation. Did they want to consolidate that? Or is it still kind of viewed as maybe a fragmented market by region? And then I had a quick follow-up for John.
Rob, thanks for the question. In reality, the catalyst to buy is still based on mandate — that's still the number one reason customers are making decisions. That being said, as the number of mandates increases and therefore the number of countries these customers have to cover increases, they're reaching a point where there's a lot of sprawl and complexity. For some companies that's fine because, depending on how they're structured, each regional or country-level finance department runs reasonably autonomously, and those companies are not necessarily thinking about consolidation. But there is also a large cohort of companies that operate at a global level, and those are the ones starting to talk to us about how, even in places where they've already made decisions, they want to be able to consolidate on Vertex. There's a tremendous amount of information for them and also a lot of risk — if they don't do this properly, if some countries don't operate at the same level as others, they open themselves up to regulatory risk and audits. So there is a real driver for some companies we're talking to. I don't necessarily think this will drive the same buying behavior as mandates, where you just have to be compliant, but we are seeing consolidation as an increasing lever in our conversations. We're still early, so many customers say, "Show me you can deliver; once we get through that, then we can start talking about adding another country." In places where customers have already added more than one country, several have done that with us: prove it in one place, then add the next, then add the next, and that opens up more opportunities. We think that thesis is strong and it's a good opportunity for us going forward. As we plan into 2027, we have to take that into account. This year has been focused on getting it sold, getting it delivered, and making sure we can operate well. Next year, we will start to turn our attention more to how we really scale this beyond what we're doing today.
Great. Really helpful. Thanks, Chris. John, for you, just going back to the change in the cloud growth, obviously a pretty meaningful change. I know in response to an earlier question you said you're calling them as you see them today. Relative to the new 18% target, how should we think about the roll-in of the e-invoicing mandates and the impact of that? That's going to be all cloud and clearly important to making that number in the back half of the year. In light of Chris's comment about trying to win those mandates, can you help us get comfortable on how you were able to project some of that?
Thanks. I appreciate the question, Rob. I think as Chris talked about, we do have visibility, the activity in the back half of the year around e-invoicing and what the mandate is going to drive. And so we factored that into kind of the activity we're seeing in the back half. Again, keeping in mind that a lot of the activity that we're going to get in Q3 and Q4 as those things are just getting up and going is not going to be at its full potential when it's fully out there and moving. Again, as Chris talked about, there's obviously the land and expand that you see. But even still as companies are just kind of coming on to the platforms and whether that's September or a little bit later, we're seeing a bit of delays in terms of how customers are behaving towards bringing things up and getting them moving. The mandates are going to be effective, but I think there is a little bit of latitude there, but we are seeing a big press even still as we sit here in August of customers that are wanting to make sure that they're ready on time. So we're going to get less of an impact in revenue from that in the third and the fourth quarter perhaps because of the volume that's really going to kick through, and that's really more of a fourth quarter thing. So we took that into consideration when we built out the revenue forecast. That's embedded in there certainly. And again, offset by some of the headwinds that we saw around cloud conversion from our existing customers that are on-prem moving to cloud and then some of the new logo activity.
Your final question will come from Andrew DeGasperi with BNP Paribas.
I just wanted to touch on one of the comments you made earlier in the prepared remarks, Chris, in terms of the competitive displacement with an existing customer that was using a competitor. I think it was a quick-serve restaurant example. And I just wanted to maybe understand like how many of those customers do you have that are potentially using multiple solutions for tax compliance? And do you see a potential move in either direction in terms of ideally to Vertex, consolidating to Vertex on that front? And should we see more of that in the next few quarters?
It's hard to put a percentage on it, Andrew, because some of it is driven by factors that change dynamically. M&A activity determines a lot of it. For example, one company using Vertex may acquire another company and then end up using Vertex plus another solution. It can go the other way as well, and it's constantly changing. So I'd say there's always a persistent portion of our customers that have multiple solutions. Often they have a lead solution, but a business unit or smaller group may use a secondary solution. When I talk to customers on a steady cadence, it's not uncommon to encounter Vertex customers who are also using someone else. I just spoke with a customer last week, an advertising agency that merged with another relatively large agency; that's a consolidation opportunity for us, but they were using a mixture of ERP and other third-party tools. That's a good example of M&A creating opportunities. We'll always see a mix: some Vertex-only shops and some Vertex shops with third-party tools. In some cases the situation reverses over time. So it's reasonably common, though not pervasive, and it's usually not the customer's preference to remain with multiple solutions.
Got it. And then, John, I had a question. I know in the past, we talked about entitlements in terms of how you kind of expected a certain number to ramp up over time. Just curious to know, has that changed in terms of your expectations relative to last quarter? I know you talked about deal slippage or something like that, but I'm just curious to know like within your existing customer base, are we seeing any improvement there?
Maybe slightly, Andrew, nothing I would call worthy enough to call out as a big driver of opportunity in the quarter. But it was something; it's certainly something we were focused on last year. I started to see a little bit of stability in it over the last couple of quarters, and I saw the same this quarter. So I'd say it feels a little bit better than it has in the past, but I'm not, again, ready to stand up and say we're past that. I think there's still some time to go there. But again, our customers are going to continue to build and drive their businesses, and that presents opportunity for us. We're about a year out from when we started talking about this last year, and I think time will tell over the next couple of quarters. If we start to see that change, we'll certainly call it out.
There are no more questions at this time. I'd now like to turn the call back over to Joe Crivelli for closing remarks.
This is John Schwab, but thanks, everybody, for joining us today. If you have any follow-up questions or want to schedule some additional time with the team, please reach out to Joe at investors@vertexinc.com. Thanks a lot, and have a great day.