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Good day, and welcome to the Vertex Inc. Second Quarter 2025 Earnings Call. Please note that today's event is being recorded. I would now like to turn the conference over to Joe Crivelli, Vice President, Investor Relations. Please go ahead.
Hello, and thanks for joining us to discuss Vertex's Second Quarter Results. David De Stefano, our President and CEO; and John Schwab, our CFO, are also with us today. 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. I'll now turn the call over to David.
Welcome, everyone, and thank you for joining us. In the second quarter, we delivered results that were in line with our guidance and investor expectations. However, as the quarter progressed, for the first time, we saw macroeconomic factors that have been noted in the software industry in 2025 and impact our customers and begin to affect their activity with us. We took action to mitigate this, but it necessitated a reduction in our full year guidance. We will discuss all of this in today's call. For the second quarter, revenue was $184.6 million, up 14.6% year-over-year. Subscription revenue grew 15.7% and cloud revenue growth increased to 29.9%. Adjusted EBITDA rose to $38.4 million, representing an EBITDA margin of 20.8%. In addition, annual recurring revenue, or ARR, grew 16.1% to $636.6 million. Average annual revenue per customer for Vertex stand-alone increased 12.7% year-over-year to $142,600.
Growth in scaled customer count was 16%. As a reminder, this number represents our customers with annual revenues greater than $100,000 and demonstrates our ongoing success in the underpenetrated enterprise market. Gross revenue retention or GRR, remained at 95% in the second quarter within our targeted best-in-class range of 94% to 96%. Finally, net revenue retention, or NRR, decreased to 108%, down 1 point from the first quarter. We attribute the decrease to two main factors: lower growth of additional entitlements as our customers' annual growth has slowed, keeping them within current bands of usage and recent regulatory changes in Brazil created a compliance confusion for customers, which resulted in delayed deal activity for some of our large multinational customers. More broadly, in addition to the macro impacting our customers' growth rate, we have seen a slowdown in ERP migrations, thus elongating our deal cycles.
This is consistent with what publicly traded ERP providers noted in their quarterly earnings reports. This has the downstream impact of also pushing out pipeline build. We attribute this to the overall macro environment as our enterprise customers are being more cautious about software spend. As a result of this, we recognize the need to take immediate actions to control expenses and deliver on adjusted EBITDA margins. These included leveraging efficiency from internal technology investments and reducing planned headcount growth, which will give us better expense trajectory as we look into 2026 and beyond. John will discuss how all of this impacts our guidance in his remarks. The short-term environment does not impact our confidence in the long-term growth expectations we shared at Investor Day earlier this year. This is because our business has multiple significant tailwinds, many of which are still ahead of us.
First, the ongoing cloud ERP upgrade cycle. This has been stubbornly slow in 2025, as I mentioned earlier. However, deadlines for conversion are looming over the next 2.5 years, and we fully expect this motion to accelerate over this time frame. Second, governments all over the world are looking for new ways to generate revenue to meet their obligations and reduced federal funding in the recently passed U.S. tax bill will further pressure state and local budgets. In our 2025 midyear U.S. rates and rules report, we noted that the U.S. saw a 24% increase in sales tax rate changes and new rates compared to the same period last year. This, in turn, creates complexity and increases demand for our solutions. In Europe, the regulatory mandates for VAT and e-invoicing are accelerating, and this is expanding now to parts of Asia Pacific and Latin America. In Brazil, tax reforms underway are making companies completely revisit their existing compliance and technology road maps.
We believe even more changes are likely as inflation, global trade disruptions, and federal tax policy around tariffs compound to create both opportunity and uncertainty. This is the hallmark of what we do best, make sense of that complexity for global companies at scale. Additionally, our win rates in the enterprise market remained consistently strong, and several of these delayed deals have now already closed in the third quarter. This confirms our experience that the strong underlying demand and customer commitment that we've worked hard to earn remains solidly in place despite deal timing being impacted by larger forces. The durability of our customer base remains outstanding. Churn was lower on a dollar basis in the second quarter compared to both the first quarter and the same period last year. This demonstrates strong product stickiness and high customer satisfaction, providing a robust foundation for future growth.
In addition, our team secured some key new logo wins in the Oracle and SAP ecosystems as well as several e-invoicing successes that mitigated some of the second quarter headwinds. In context with these long-term growth drivers, let me share some highlights from the second quarter, particularly around Europe, e-invoicing and the investments we've made in our global platform. We had good momentum in Europe, which was in part driven by accelerating growth at Ecosio, where annual recurring revenue reached $10.8 million, a 33% increase from the prior quarter. We are seeing strong deal flow driven by the upcoming launch of e-invoicing in Belgium, which is mandating the use of e-invoicing beginning on January 1, 2026. The acceleration in demand due to the Belgian e-invoicing launch bodes well as the two largest economies in the EU are still on the horizon, with brands set to begin mandating e-invoicing beginning in September 2026, in Germany beginning January 1, 2027.
Our growth thesis in e-invoicing is unfolding as anticipated. Customers who adopted our solution earlier this year are already returning to license additional country coverage. Early indications suggest that e-invoicing is shaping up to be a classic land and expand motion, mirroring the trajectory of our core indirect tax business and supporting sustained NRR growth. Our e-invoicing solution has also been recognized by industry experts. In July, Gartner included Vertex in its research study, developing a global invoice and compliance strategy supporting global e-invoice and compliance efforts. From a product standpoint, we continue to build the global compliance platform of the future, combining thoughtful AI and automated workflows, tightly embedded in our ecosystems and powered by our content and data. It's a strategy that's resonating with our customers and partners around the world. Our Kintsugi investment is accelerating our second half AI roadmap supporting new product functionality, increased efficiency, and a greater customer experience.
This relationship has also generated opportunities to support their focus on the good enough requirements of the SMB market. Also on the AI front, we are working with several AI and cloud hyperscaler providers and ecosystem partners on using Vertex's agentic AI agents natively within their application workflows. These agents work within the ecosystem and leverage the services of our Vertex Cloud platform to orchestrate more advanced capabilities. These Vertex value-added AI agents can be seamlessly enabled within the marketplaces of the enterprise application providers and embed it within the financial and compliance workflows, enabling a new level of customer value and stickiness. As an example, in the Microsoft Azure ecosystem, we built strong relationships at the executive, technical, and go-to-market levels. Coupled with new AI innovations, this will continue to enable us to expand our mid-market opportunity even further.
In addition, we launched CoPilot within our platform, giving customers in-platform knowledge and product documentation with a single click. Feedback has been great, and adoption continues to grow. I'll now highlight a few new business wins. Among our installed base customers, we are seeing a growing trend towards globalizing their tax operations, driving both more usage of our solutions and expanding our footprint. For example, in the second quarter, a leading European truck manufacturer, which has been a Vertex customer since 2009, expanded its relationship with Vertex during an SAP ECC to S/4 migration. The customer, which had previously licensed Vertex only for its U.S. operations, expanded its entitlement and licensed additional Vertex tools. This led to mid-six figures of additional annual revenue and nearly doubled our annual volume from this long-standing customer. In addition, a major automobile manufacturer migrated to the cloud with Vertex as part of its SAP ECC to S/4 HANA cloud transformation journey.
The customer also expanded its entitlement so we could consolidate additional operations into its Vertex contract as part of the project. The result was seven figures of additional annual revenue with this long-standing customer. Also during the quarter, one of our first e-invoicing customers committed to expand country coverage with Vertex. This customer started with Vertex in four countries and after a successful launch has now expanded to several additional countries, driving nearly $100,000 of new annual revenue. As I noted earlier, we're especially excited that this is an early proof point that e-invoicing will be an ongoing land-and-expand motion for Vertex. The new customers we acquired in the early stages will provide a strong foundation for significant future revenue opportunities. A leading global aerospace and defense manufacturer selected Vertex for e-invoicing, as I noted earlier, this was driven by the upcoming Belgian mandate, which will kick off in January.
However, we expect additional e-invoicing opportunities with this long-standing customer. Turning to new logos. We won a customer in the food delivery industry after an intensely competitive bake-off with an incumbent competitor. The customer was unhappy with the competitor's per transaction-based pricing, which led to extremely high costs for this high-volume business. Vertex's revenue-based pricing model provided them with the predictability, consistency, and stability of costs. This competitive takeaway included sales and value-added tax calculation as well as several Vertex tools. The customer also signed on to be one of our early adopters for smart categorization. This six-figure deal, which was in the Shopify ecosystem, was facilitated by our partner, KPMG. In Europe, we won a new mid-six-figure customer in the gaming industry when an Oracle Cloud transformation led them to explore third-party indirect tax solutions.
This new customer relationship included VAT, consumer use tax, and sales tax calculation as well as address cleansing. A manufacturer of popular collectible toys switched to Vertex as part of a global Microsoft D365 cloud transformation. The result was mid-six figures of new annual revenue. A customer was previously using a competitor in the U.S. and native ERP tax solutions in Europe but was getting incorrect tax answers due to a flawed integration. In addition, the competitor's support to resolve these issues was unsatisfactory. The implementation, which was led by our partner, DMA, included an e-commerce component with connectivity to the company's instance of BigCommerce for online sales. Our global tax content coverage was also a significant differentiator as the customer had aggressive international expansion plans. Finally, a major public utility selected Vertex to displace an incumbent competitor as part of an Oracle cloud transformation.
This three-year mid-six-figure deal included sales and consumer use tax calculation on Oracle Cloud along with the exemption certificate manager and other tools. Vertex Consulting was also engaged by our partner, PwC, to assist with the implementation. Throughout our five years as a public company, we've built a reputation for under-promising and over-delivering. The second quarter fell below that standard, and we take that seriously. We're taking clear focused steps in the short term to ensure we're executing at the level we expect of ourselves and that of our investors, while also remaining steadfastly focused on the long term and the great market opportunity we have in front of us. John will now take us through the financials.
Thanks, David, and good morning, everyone. I'll now review our second quarter financial results and provide guidance for the third quarter and full year 2025. In the second quarter, revenue was $184.6 million, up 14.6% year-over-year. Ecosio contributed $3.4 million of revenue during the quarter. Accordingly, on an organic basis, revenue was $181.2 million, and revenue growth was 12.4%, in line with expectations for the quarter. Subscription revenue increased 15.7% period-over-period to $157.8 million. Our services revenue grew 8.3% to $26.7 million. And cloud revenue was $86.2 million in the second quarter, up 29.9% from last year's second quarter and ahead of our guidance for the year. Ecosio added about four points to cloud revenue growth. Annual recurring revenue, or ARR, was $636.6 million at quarter end. Ecosio added $10.8 million to ARR, up from $8.1 million in the first quarter. Approximately $600,000 of this increase was due to favorable foreign currency translation adjustments.
Excluding Ecosio, organic ARR was 14.1%. Net revenue retention, or NRR, was 108% compared to 110% at last year's second quarter and 109% from the first quarter of 2025. As David noted, the decrease in NRR was attributable to lower deal activity from some of our large multinationals and a decline in additional entitlements in the enterprise market due to regulatory and tariff-driven economic uncertainty. Gross revenue retention or GRR, remained at 95% at quarter end, within our targeted range of 94% to 96%. Average annual revenue per customer or AARPC for Vertex stand-alone was $142,584, up 12.7% from last year's second quarter. Including the impact of Ecosio, AARPC was $130,934. Note that in the third quarter, we will lap the acquisition of Ecosio. So metrics such as ARR and average annual revenue per customer will be consistent on a year-over-year basis. Now for the remainder of the income statement discussion, I will be referring to non-GAAP metrics.
These non-GAAP metrics are reconciled to GAAP results in this morning's earnings press release. Gross profit for the second quarter was $140.1 million, and gross margin was 75.9%. This compares with gross profit of $118.8 million and 73.7% gross margin in the same period last year. Gross margin on subscription software was 83.2% compared to 80.4% in last year's second quarter and 82.6% in the first quarter of 2025. The gross margin on services revenue was 33.1% compared to 36.8% in last year's second quarter and 31.1% in the first quarter of 2025. Now turning to expenses. In the second quarter, research and development expense was $18.1 million compared to $12.7 million last year. With capitalized software spend included, R&D spend was $38.9 million for the second quarter, which represents 21.1% of revenue. Selling and marketing expense was $44.6 million or 24.2% of total revenues, an increase of $7.6 million and approximately 20.6% from the prior year period.
General and administrative expenses were $38.1 million, up $7.4 million from last year. Adjusted EBITDA was $38.4 million, roughly flat with the year-ago quarter and in line with the midpoint of our quarterly guidance. In the second quarter, our operating cash flow was $46 million, and as anticipated, free cash flow was positive at $19.6 million. We ended the second quarter with over $284.4 million of unrestricted cash and cash equivalents. And for additional liquidity, we also have a $300 million of unused availability under our line of credit. Now turning to guidance. For the third quarter of 2025, we expect revenues of $190 million to $193 million and adjusted EBITDA of $38 million to $40 million. For the full year, we now expect revenues of $750 million to $754 million, cloud revenue growth of 28%, and adjusted EBITDA of $156 million to $160 million. This guidance reflects the following: first, the previously mentioned slowdown on ERP conversions, which has an impact on deal conversion and pipeline build and lower entitlements as well as true-up revenue as our customers are largely remaining within their usage bands. David will now make some closing comments before we open up for Q&A.
Thanks, John. To wrap things up, while we had a solid performance in the second quarter across several metrics, there were some areas that did not meet our expectations. The tailwinds that fuel our demand opportunity, including the proliferation of e-invoicing mandates globally and cloud migrations being driven by the ERP providers, remain in place. But with the continued uncertainty in the macro environment, I believe we have taken prudent steps while not underserving our long-term value proposition and market opportunity. With that, we will take your questions.
分析師問答
Today's first question comes from Chris Quintero with Morgan Stanley.
I wanted to ask on the guide. First, the cloud guide that stayed in place. So I'm curious, is the macro impact that you're calling out here more on the on-prem and services side? Just help us marry kind of the lower total revenue guide versus the maintained cloud revenue guide.
Yes, Chris, thank you for the call. I appreciate it. I think as I think about the guide and the adjustment down, I kind of break it into a couple of different pieces. The largest driver is really coming from entitlements, which is our customers' usage of activity. We typically don't have a tremendous line of sight into that 60-ish days or so. So as those renewals are happening, we're starting to see what the uptick is going to be, and then to the extent that there's a true up, what that's going to look like. As Q2 developed, we started to see that activity was lower than it's been in the past, especially in the larger additional entitlements; those big six-figure type of deals, the volume was much lower than we had seen. The good news is we haven't seen pullbacks or any changes going the other way, but just the magnitude of those additional entitlements are certainly lower than we've seen in prior quarters, and again, that's part of the driver for our NRR dropping from 109 back to 108.
When you take that into consideration, then you also take into consideration true-ups, which aren't typically a giant piece of our revenue but can be significant, and they have a 100% revenue impact in the quarter in which they occur. We certainly pulled that back a little bit as we thought through that. The last piece really has to do with the elongation of some of those sales cycles. That's sort of how I box out each of those different pieces. We feel good and confident with the guidance that we've set and our ability to achieve it.
Got it. And then I want to follow up on the e-invoicing momentum that you're seeing, really encouraging to see. But just as you've seen those early customers come back to you and add additional country coverage. Like what are some of those early learnings that you're seeing in terms of the adoption rate for that product so far?
Yes, I'll take this one. So Chris, I think it's a couple of factors. One, the value of our end-to-end offering is really differentiating us and playing well in the market, meaning that we've got the front end of that termination engine, the middle point, the invoicing transmission and then the VAT compliance all on the platform. I think that's really being validated as point number one. I think point number two is that this is a classic land and expand model. As we prove out to the customer that we can deliver on this, they come back and say, right now we want to expand it because they're all focused on getting a single global provider as the proliferation of these invoicing requirements are expanding and getting more complex. They're really looking for a single provider on a single platform, and that's playing right into our strategy. I'm really pleased with the early pipeline deal cycles, which are typically running three to six months depending upon how big the customer wants to start. If you recall, we went live with the product in general availability at the very end of the first quarter. We're just through our first three-month cycle and already seeing really nice build. I think that should continue as we expand our country coverage.
And the next question is from Steve Enders with Citi.
This is George Kurosawa on for Steve. I wanted to circle back to the targets you laid out at your recent Investor Day. Given what you've seen and what's implied in the guidance here, it looks like you're looking at a bit of a deceleration through the end of the year. Does that change at all how you are thinking about that kind of longer-term accelerating growth outlook?
Yes, George, it's a super fair question, and we spent a lot of time thinking about that. When we looked at it, we actually looked at the transactional volume that's happening in e-invoicing and the type of regulatory tailwinds that we're seeing actually accelerate in that area as a key driver number one. Number two, as we continue to expand with SAP and Microsoft in some of the ecosystems with some of the work we're doing, we continue to see that cloud migration being a persistent driver for them, which means the tailwind has to continue for us because it's so disruptive to a tax department. We really paused and examined whether we should change anything, and those tailwinds are so solidly in place right now. There was no compelling reason to think that the company isn't going to resume its growth. This franchise has been around for 45 years. We've been through economic blips, but the steady durability of our customer base and the continued growth both in new logos and recurring and cross-functional sales as our customers continue to grow has not changed. The fundamental model is just rock solid, and that's why we felt really confident in sustaining our current position.
Okay. Great. That's really helpful. And then, in the prepared remarks, you alluded to maybe some changes in your hiring plans for the year. I'd love a little more detail there. What are you expecting to change? And how should we think about the model impacts?
Yes. I think we've looked at that and said, we've been gaining leverage from internal investments we've made. We've disclosed to investors over the past several years, looking at internal leverage about where we can drive more efficiency in the business and gain scale to ultimately drive margins. We prioritized some of those as we saw some of the short-term transactional challenges that John described in our performance. Leaning into that, we started to assess what we need in future headcount. Most of the pullback is in areas that are not strategic to the core strategy that I focused on in terms of how we advance our #1 priority around invoicing and how we continue to optimize against Microsoft, Oracle, and SAP. It's more in other areas of the business that are less impacted by those strategies.
The next question is from Joshua Reilly with Needham.
All right. Great. Maybe just starting out, can we get some more color on how the quarter progressed and what happened post-Q1 as that print was pretty strong, and it seemed like the pipeline was pretty strong for the balance of the year. Was it really just the end of June where the weakness started to come into play? Or help us understand how the linearity of the quarter progressed?
Yes. In terms of how the quarter progressed, what I would say is when I think about Q1 and the activity, we had a nice good Q1. As Q2 started to develop, we started to see a little bit of softness as we got through May. April seemed strong. As we got through May, we started to see some softness, but we didn't think it was significant enough. We wanted to monitor and manage it. As we got through May and into June, that's when we started to see a bit of that elongation, a little bit of that push out. Again, very similar to how the additional entitlements and that activity that I described earlier sort of played out during the period. So it really manifested itself towards the back end of the quarter. That's why we paused and made sure that we understood some of the big drivers that were building in the business.
Got it. That's helpful. And then you kind of alluded to a little bit slower activity in the SAP ECC base. If I interpreted the signal there correctly, what do you think is going on there? And why haven't the trajectory of those deals accelerated this year like maybe we would have expected?
Yes. I mean, as best we can tell, it's given the uncertainty in the macro environment in general. Companies are judging when they want to embark on this march to make the cloud transformation and they're looking at where to prioritize their investment. Obviously, AI elsewhere inside of those organizations is a priority investment for many companies. In general, they're saying if we can defer this a little longer, hopefully, get through some of the tariff uncertainty and the macro challenges, they will be able to absorb that expense model. That's the basic feedback we're hearing. We don't have direct visibility into those, but that seems to be the theme we're hearing. It's just pushing out the timing of those creating a little bit of that bubble that it's going to come in the back end of the process, which is really going to be 2026 and 2027.
Our next question is from Adam Hotchkiss with Goldman Sachs.
David, I'd be curious how you think about the deals that did get pushed from Q2 into Q3. I think you mentioned you closed some quarter-to-date. Is there any way you can sort of quantify for us what percent of those deals that were pushed have been closed or you have a sort of near-term lens on when those might be closed versus folks that have sort of delayed indefinitely due to those conditions?
Yes, Adam, I don't think 'delayed indefinitely' would be a correct characterization because they're still going through their migrations. They're still going to address the issue of tax. It's just a question of the pacing of the ERP adoption and whether they're, you know, we've had the conversation before about the integration process; we get brought in about the midpoint of a new cloud offering onboarding. If they're pushing the early periods where they're slowing their process, then it's pushing our process out as well. I don't have visibility to the exact number of deals closed, but I'm comfortable that they are closing. I think it's just a timing issue again in terms of taking it to where the customers' migration process is.
Okay. Great. That's really helpful. And then, John, just on guidance philosophy and maybe how that's evolved on this print relative to how you've looked at things previously, in particular related to things like entitlements and true-ups. Would you say you're taking a particularly conservative view on the second half of the year around entitlements and true-ups relative to what you've done historically? Or is this something that's just purely reflecting what happened in the second quarter?
Yes. Adam, what I would say is we took into consideration what we saw develop in the second quarter and how it developed, and the types of customers that came from that and built that in. I wouldn't say that we have changed our philosophy. They were the levers that we kind of pulled on to make the changes that we did, but I wouldn't say that we have changed our philosophy on how we think about it. I think we just saw that magnitude start to come down in terms of those true-ups. Again, they are the ones that have a big impact on the revenue line items. With the additional entitlements, the same thing. I think we're just reevaluating based on what we're seeing and trying to be thoughtful about how we think about that going forward. We've always had a conservative philosophy around guidance and have tried to ensure we have good visibility there. As we saw a little bit of that visibility get hazy in the second quarter, we want to adjust it accordingly.
The next question is from Rob Oliver with Baird.
First one is on just the SAP comments that SAP called out on their call, some weakness in public sector, which I know is not an end market for you guys, as well as in North American industrial and manufacturing. So David, you mentioned somewhat limited visibility into exactly where those deals are for you guys and when you're brought in. But to the extent that perhaps you've gotten color from your CRM, your sales folks as to where that weakness was so we can match that up with some of the other companies that we follow that are calling out strength within the SAP channel. And then I had a quick follow-up.
Yes, Rob, as we've talked, the driver for us in tax is around a disruption to the tax department, which is what a migration is. So it's not a nice-to-have solution; it's a must-have when you're going through a migration. We've seen that process elongate. I don't have any great visibility that I can add color in terms of how far out. The softness is largely focused, I think, in the U.S., where there have been reports of some of that slowdown that you noted. Given that's our larger market, I think it's impacting us more. We've actually had strong European quarters, but that's a smaller part of our business still, and so I think that's kind of where we're seeing it the most.
Okay. Helpful. Appreciate it. And then, John, just a quick follow-up for you, maybe a two-parter here. One, is just maybe a corollary to Adam's question earlier about guidance philosophy, going back to the Analyst Day. Obviously, SAP is an important part of the story as are ERP migrations broadly for you guys. Given the absence of visibility and getting tripped up here very early after the Analyst Day, how that might impact how you think about or the contribution from SAP in any given year and how you guide to that? And then is there any potential impact? Or how do we think about the margin trajectory into next year? Is the accelerated investment cycle kind of needed to be pushed out a little bit?
Okay. I appreciate the questions, Rob. A couple of good questions there. The first, in terms of our view trajectory of SAP and as we think about longer-term, I don't think as David described earlier in one of the earlier questions, I don't think there's a change in our view on end markets and our ability to drive growth into the future, and we feel good about that. We obviously are taking all the factors into consideration as we think about guidance and our plan and how the business is developing over time. I don’t think there’s anything that occurred this quarter that would change how we're looking at either the longer-term plan or the way that we're evaluating different contributors into our longer-term growth. In terms of margins, again, I think as David mentioned, we took some actions to ensure that we've got a good cost structure in place, prioritizing some of those investment areas to ensure we're getting after e-invoicing, getting the country coverage that we need, and continuing to build out for those goals because that's a driver of our success moving forward. We continue to focus on those important things.
Our next question is from Andrew DeGasperi with BNP Paribas.
I just want to follow up on Rob's question to clarify that the leverage you anticipate in the second half of next year remains unchanged even as these investments are being deferred. I also have another question.
Yes, we haven't provided any guidance for 2026 yet. The fundamentals of our strategy remain unchanged; while quarterly performance is important, we recognize that the long-term strategic opportunities we're pursuing are substantial. We need to be careful about what we choose to scale back. I will focus on where we can generate leverage from our existing internal investments to enhance margin opportunities and support our long-term strategic initiatives. However, expanding our invoicing capability is currently critical, and we believe it is a strategically vital objective we must achieve. This will position us well for the long-term stability we've maintained for 45 years, which is why we will not back off from this effort.
Great, that's helpful. I wanted to follow up on the compliance confusion you mentioned earlier regarding customers in Brazil. Could you elaborate on that and explain how significant it was compared to the other factors that influenced the lower guidance?
Yes, the impact was about half a point in MRR. That translates to a similar impact on NRR. The main issue is that Brazil has introduced new VAT requirements with two different sets currently in place. They are transitioning from the legacy system to the new one over ten years, which is causing confusion for customers regarding the application of old versus new regulations. This has understandably led to frustration among customers in that region. However, we see this confusion as a complexity that will ultimately benefit us, and we have several initiatives underway in Brazil to address it. I am quite pleased with our positioning and our ability to deliver value. In the short term, customer deal flow has slowed as they navigate their compliance needs. Overall, this increased regulatory complexity presents opportunities for us in the long run.
And our next question is from Brent Bracelin with Piper Sandler.
I wanted to go back to the on-prem license versus cloud discussion. Very clear entitlements and true-ups are more variable here. That's the drag in the second half. My question here is around the longer-term trend. Why would you see on-prem license maybe start to be a bit of a drag, especially if we start to see a more acceleration to cloud ERP? I know you're agnostic. It's the smart thing to do but curious if you see any sort of early signs that some of these migrations might become a longer-term drag in license, but potentially accelerate to cloud.
Yes, I want to make sure I'm understanding your question. I think fundamentally when customers migrate from on-prem to the cloud, we typically get a 30% to 40% increase dollar-for-dollar for the same license. So it's not a drag when existing customers who are on-prem move to the cloud; it's actually an upsell opportunity for us. I think because everything we’re doing is cloud-first, probably 90% to 95% of all of our new logos and platform expansion is continuing to drive all of our activity to the cloud and our platform. I see that being the accelerant for our future growth, not the drag. The migrations will happen. It will actually start to eliminate over time the true-ups because it'll become a smaller percentage of our total revenue.
Got it. Very clear. So it's the true-ups that might be impacted; entitlements will continue in that cloud mix shift. Helpful. And then just last one here on e-invoicing in Europe specifically. If I think about the momentum there over 30% sequential growth, it is very small. Belgium is very small. But France and Germany are 10x larger GDP areas. I'm curious to hear are there different competitors in each country in the EU that you have to fight against, and then from a timing standpoint, when would you start to see France, if that doesn't happen until September 2026 in Germany and 2027, when would you start to see some of those deals light up?
Yes, two good questions. As global providers, there are hundreds of local providers in every country, but the mid and enterprise market is looking for a single provider that can do business in all the jurisdictions that they operate; for example, if I’m doing business in thirty countries, I want a provider that can handle my e-invoicing across those countries. That's critical to our strategy that we are one of the very few that can do that. It changes the plan if the customer is only looking for a point solution, making it a harder sale. It may not be one that we pursue as it can be akin to selling into the SMB market in the U.S. sales tax. It won't be a high-value opportunity. But the customer who says, 'I need to solve for Belgium now, but I'm going to solve for twelve other countries in the next two years' is exactly our target market. The number of competitors shrinks down to Sovos and Thomson; they are our primary competitors with similar capabilities in most of our RFPs we're seeing. France and Germany should start to show more activity as we get through the back half of this year and in France, because of the looming deadline, and then much more into 2026, which is consistent with what we've said. Hence, the urgency we have to continue investing in invoicing to ensure we are well-positioned as customers make global decisions on who their providers will be.
The next question is from Alex Sklar with Raymond James.
David, in your prepared remarks, you talked about some of the expected state and local budget pressures from reduced federal funding. You've been operating for 40-plus years. What have you seen in prior cycles when state budgets are tightened in terms of accelerating rate and complexity changes and then more importantly, how that correlates to buying Vertex?
Yes. The new tax bill that was passed by the federal government changed Medicaid and food stamp funding to states. It is mission-critical for their citizenship that they have to address. Indirect tax is the most predictable form of revenue for a government. We've seen consistently in the past when governments are in search of revenue, they turn to transaction tax. They do it somewhat through rates, they do it more through rules. Rates are helpful but hard for local politicians to get reelected if they just keep raising the sales tax rates. They come up with more complexity in the rules; they'll add a sugar tax or new beverage tax, which again increases compliance pain for prospects, creating demand opportunities for us. That's what we have seen in the past, and I don't see any reason why that's not going to continue again due to the predictability of the revenue and the need to fund the gaps from the new tax bill.
Okay. Great color there. And I have another one on the e-invoicing to add to the bunch. But in terms of the partner channel, you've got a mature partner channel for your core solutions. How does that look on the e-invoicing opportunity? How has enablement been there? How much of e-invoicing deals are partner influenced versus the rest of your business?
Yes, we've made a very important decision to work through the same partner channel we've built our brand with for years. We are working closely with all of the alliance partners, leveraging them. We're enabling them and training them in how they can implement our invoicing solution and then bring more value around it for their practices. It's a key part of our go-to-market strategy, and they are active in most of the transactions we've secured right now. We expect that to continue because tax is such a critical part of the decision process, and the big four will be players in that space. We see this as a natural extension to continue leveraging those relationships, which opens up the entire end-to-end platform further for them in terms of how they can work across our platform with their customer base. This is a good point of entry that allows them to demonstrate other areas where they can add value in the process.
And our next question is from Patrick Walravens with Citizens JMP Securities.
Great. So at the Analyst Day in March, you guys guided to 2028 revenue growth in the high teens subscription, 20% plus and cloud 30% plus. Are you standing by those targets?
Yes, as I said earlier, Pat, I appreciate cloud is going to remain the primary focus of everything we sell. It's going to continue to be a material growth driver, and everything around e-invoicing and the classic land and expand model will drive both NRR and continued cloud revenue. Fundamentally, that hasn't changed. All the activity that has slowed in the ERP cloud migration hasn’t materialized like we thought it would, and it’s still going to play out. We're still incredibly well positioned around leveraging that and we continue to expand our relationship inside areas like Microsoft, where we’re now on the Microsoft commercial marketplace, giving us a broader footprint inside of the Microsoft ecosystem. I definitely feel those targets are not something we should back off on at this point.
Yes, I appreciate the question, Pat. It's something we'll certainly consider and give thought to and something that we'll update people on as needed, but it's something we'll continue to pay attention to and monitor the stock and consider that along with other uses of our capital as we evaluate our model.
The next question is from Jake Roberge with William Blair.
Yes. I understand things have been a little bit slower on the migration front, but curious what you're actually hearing from SAP and your other partners on when those headwinds start to abate? Is it all just a macro timing dynamic, or are you seeing SAP kind of extended deadlines have any impact on when customers might look to go online with your platform?
I haven't seen any initial indications of that. You need special approvals and you have to make certain investments to even secure that extension. We haven't seen any shifts in their public announcements about their intent to move that forward at the current deadlines. It's not the only driver of cloud migration; it's occurring across the ecosystem and in our Oracle opportunities. It's a big driver for some of the Oracle wins we had in the quarter. I don't see that fundamentally changing, and I haven't seen any change in the deadline.
Okay. That's helpful. And then I know most of the impact to the guide was related to migration activity in true-ups, but just wanted to double-click on how that initial ramp for invoicing has been and just how win rates for that solution might compare to kind of the core platform. I know it's a much earlier solution, but just curious what you're seeing early days on that front.
Yes. I think I’m seeing the things I thought I would see in terms of the strategic value of our differentiation, playing really well and competitively. The winning rates are significantly higher compared to the core platform. As the customer confirms that we can deliver on this, they're returning to us when they see the growing need for additional country coverage. We want to make sure that's not a competitive differentiator that we cannot compete on.
And this concludes our question-and-answer session. I would now like to turn the conference back over to Joe Crivelli for any closing remarks.
Thanks, everybody, for joining us today. If you have any follow-up questions or would like to schedule additional timing with the team, please send me an e-mail at investors@vertexinc.com. Have a great rest of your day, and we look forward to speaking to you in the coming weeks.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.