Executive Summary / Key Takeaways

• Resilient Enterprise Leader: Vertex, Inc. (NASDAQ:VERX) stands as a resilient leader in enterprise indirect tax technology, leveraging its 47-year heritage to capitalize on increasing global compliance complexity and the ongoing wave of ERP cloud migrations.
• Mixed Recent Performance: Q3 2025 saw revenue grow 12.7% to $192.1 million and Adjusted EBITDA reach a record $43.5 million. However, Net Revenue Retention (NRR) decreased to 107% due to lower customer entitlement growth, enterprise bankruptcies, and accelerated legacy platform migrations.
• Accelerated Strategic Investments: The company is significantly increasing investments in 2025, allocating $16 million-$20 million to e-invoicing for expanded country coverage and go-to-market capabilities, and $10 million-$12 million in R&D for AI-based Smart Categorization and other new product initiatives.
• Confident Long-Term Outlook: Despite short-term macroeconomic headwinds and a revised 2025 guidance (revenue $745.7 million-$749.7 million, Adjusted EBITDA $159 million-$161 million), management remains confident in achieving long-term growth targets, anticipating acceleration from ERP migrations and e-invoicing mandates in 2026 and beyond, reinforced by a $150 million share repurchase program.
• Differentiated Competitive Moats: Vertex maintains strong competitive advantages through its deep enterprise system integrations, an extensive tax content database of over 1 billion rates and rules, and a highly trusted partner ecosystem.

Enterprise Tax Dominance Amidst Evolving Complexity

Vertex, Inc. is a leading global provider of indirect tax solutions, boasting a 47-year heritage in delivering trusted tax technology to enterprises worldwide. Headquartered in King of Prussia, Pennsylvania, the company's core business revolves around tax determination, compliance, and analytics for major indirect taxes, including sales and consumer use, value-added tax (VAT), and payroll. Serving a majority of the Fortune 500, Vertex's overarching strategy is to capitalize on the inherent complexity of global commerce and compliance, driven by a cloud-first approach and a robust partner ecosystem.

The company's foundational strengths are rooted in its proven resilience, having consistently grown revenue over several decades, even during severe recessionary periods. This durability stems from taxing authorities intensifying audit and enforcement actions in volatile economic times, which invariably drives demand for automated, accurate tax solutions. Vertex's deep enterprise integrations, its extensive tax content database of over 1 billion rates and rules across more than 20,000 tax jurisdictions, and its trusted relationships with major ERP vendors like SAP , Oracle , and Microsoft (MSFT), alongside leading accounting firms, form formidable competitive moats.

The industry landscape is characterized by increasing global compliance complexity. For instance, the U.S. saw a 24% increase in sales tax rate changes and new rates in the first half of 2025 alone, coupled with significant growth in U.S. district-level tax activity. Internationally, the proliferation of e-invoicing mandates across Europe, Latin America, and Asia Pacific, along with ongoing cloud ERP upgrade cycles, represent substantial market drivers. These trends underscore the mission-critical nature of Vertex's solutions, positioning the company at the intersection of commerce and compliance.

Technological Edge: Precision, Scale, and AI-Driven Innovation

Vertex's core differentiated technology is its enterprise tax engine, designed for highly accurate tax determination and compliance. This engine seamlessly integrates with disparate enterprise systems—including ERP, CRM, billing, point-of-sale, and e-commerce platforms—within the critical order-to-cash process. This capability is vital for multinational corporations that often operate with multiple instances of various ERPs and other financial systems.

The tangible benefits of Vertex's technology are quantifiable and strategic. Its applications operate at enterprise scale and speed, evidenced by processing over 1 billion transactions in its cloud environment during a single Black Friday weekend, ensuring high performance without latency. This level of performance is non-negotiable for large enterprises. Furthermore, Vertex provides enterprise-level accuracy and accountable traceability for tax positions, which is essential for audit defense. This contrasts sharply with probabilistic AI-driven outcomes that may lack the necessary audit trail for regulatory scrutiny. The company's extensive tax content database is a significant differentiator, incorporating hard-to-curate rules from municipalities and tax overlay districts that are often not easily mined by AI-driven web scraping; an estimated 70% of tax rules in its database are not easily sourced digitally, requiring human judgment and professional curation. Vertex also offers an agnostic deployment model, supporting on-premise, cloud, or hybrid solutions, allowing customers to transition at their own pace, a strategy proven effective in customer retention.

Vertex is aggressively pursuing innovation through significant R&D initiatives and new technological developments. Its e-invoicing solution, integrated through the August 2024 acquisition of ecosio GmbH, combines VAT compliance and e-invoicing on a single platform. This offers inherent data sharing capabilities, enabling customers to proactively manage mandates and reconcile real-time continuous transaction controls with periodic VAT returns, identifying errors upfront.

In the realm of Artificial Intelligence, Vertex is executing on three fronts: enabling new logo wins, expanding wallet share with existing customers, and enhancing customer retention through ecosystem interoperability and new market segments. The company is seeing traction with its AI-based Smart Categorization product, currently in limited availability, which automates labor-intensive tax categorization. A major grocery store chain has already adopted this solution, generating a six-figure new revenue stream. Vertex is also developing new agentic AI capabilities on its cloud platform, focusing on workflow and data management. Notably, it is pioneering the first-ever agent-to-agent tax configuration capability for Microsoft Dynamics 365 finance and supply chain, extending enterprise innovation to the mid-market. In October 2025, Vertex launched "Kintsugi powered by Vertex," a solution for small and mid-sized businesses (SMBs) that automates sales tax compliance with real-time dashboards, leveraging the Vertex tax engine in an AI-native experience. This initiative stems from Vertex's $15 million equity investment in Kintsugi AI, Inc., which includes an IP sharing agreement to accelerate Vertex's AI roadmap.

For investors, these technological differentiators and R&D investments are critical. They fortify Vertex's competitive moat by ensuring unparalleled accuracy, scalability, and adaptability to the dynamic global tax landscape. This focus drives customer stickiness, opens avenues for cross-sell opportunities (e.g., Smart Categorization), and positions Vertex to capture new market segments (e.g., SMBs via Kintsugi) while expanding wallet share with its existing enterprise clientele. The emphasis on a "human-in-the-loop" AI approach for enterprise customers ensures the trust and compliance required in this mission-critical domain, allowing Vertex to command premium value for its offerings.

Financial Performance and Operational Dynamics

Vertex's financial performance in the third quarter of 2025 demonstrated continued growth amidst evolving market conditions. Total revenues for Q3 2025 reached $192.1 million, marking a 12.7% increase year-over-year. For the nine months ended September 30, 2025, total revenues were $553.7 million, up 13.4% from the prior year. Software subscriptions, the company's primary revenue driver, grew 12.7% year-over-year to $164.8 million in Q3 2025, and 14.2% to $473.4 million for the nine-month period. Cloud subscriptions, a key strategic focus, continued their robust expansion, growing 29.6% year-over-year to $92.0 million in Q3 2025, now constituting 56% of total software subscription revenue. This marks the first time cloud revenue has exceeded on-premise revenue, aligning with Vertex's strategic intent. Services revenue also saw growth, increasing 12.8% to $27.3 million in Q3 2025.

Annual Recurring Revenue (ARR) stood at $648.2 million at the end of Q3 2025, reflecting a 12.4% year-over-year increase. Average Annual Revenue Per Customer (AARPC) also grew 12.4% to $133,484. The ecosio acquisition contributed $4.1 million to Q3 2025 revenue, representing a 30% increase from its Q3 2024 run rate.

Profitability metrics highlight the company's operational efficiency. Adjusted EBITDA for Q3 2025 reached a record $43.5 million, exceeding the high end of guidance by $2.5 million and representing an Adjusted EBITDA margin of 22.6%. For the nine months ended September 30, 2025, Adjusted EBITDA was $119.1 million. The gross margin on subscription software remained strong at 81.4% in Q3 2025. While the gross margin on services decreased to 28.8% in Q3 2025, management attributed this to strategic investments in automation aimed at driving higher future margins. On a trailing twelve-month (TTM) basis, Vertex reported a Gross Profit Margin of 64.55% and an EBITDA Margin of 10.18%. The company's TTM Net Income was -$52.73 million, though Q3 2025 saw a positive net income of $4.04 million.

Liquidity and cash flow remain robust. As of September 30, 2025, Vertex held $313.5 million in unrestricted cash and equivalents and had $300 million of unused availability under its line of credit. Net cash provided by operating activities for the nine months ended September 30, 2025, was $123.3 million, with free cash flow for Q3 2025 at a strong $30.2 million. The company's total debt, net of the current portion, primarily from convertible senior notes due 2029, was $336.9 million. Demonstrating confidence in its long-term prospects, the Board of Directors authorized a $150 million stock repurchase program on October 30, 2025.

Despite these strengths, Vertex faced several headwinds in 2025. Net Revenue Retention (NRR) decreased to 107% in Q3 2025, down from 109% in Q1 2025. This was primarily due to lower-than-typical growth from existing customer entitlements, as customers' annual growth slowed, keeping them within current usage bands. Additionally, the bankruptcy of three large enterprise customers (Big Lots (BIG), Party City (PRTY), and JOANN Fabrics (JOAN)) impacted retention by approximately $2 million. Accelerated legacy ERP migrations by three other large customers also led to a downsizing of subscription fees, impacting NRR by over $2 million. A broader slowdown in ERP migrations and delayed deal activity for large multinational customers, partly due to regulatory changes in Brazil and general macroeconomic caution on software spend, further contributed to these challenges. In response, management has implemented expense control measures, leveraging internal technology investments and reducing planned headcount growth to improve the expense trajectory for 2026 and beyond.

Competitive Positioning and Strategic Responses

Vertex operates in a highly competitive tax technology market, where its leadership in the enterprise segment is a key differentiator. The company's solutions are considered "not optional" for businesses grappling with indirect tax compliance, positioning it as a provider of mission-critical, regulatory-focused software rather than a discretionary SaaS offering. This inherent demand minimizes the impact of external macroeconomic fluctuations on its core business.

Vertex's competitive advantages, or moats, are multifaceted:

• Integration Expertise: The ability to seamlessly connect its tax engine with diverse enterprise systems from SAP , Oracle , and Microsoft Dynamics to a single cloud platform without friction is a significant competitive edge.
• Scale and Speed: Vertex's applications are built to operate at enterprise scale and speed, handling billions of transactions, a capability essential for multinational corporations.
• Extensive Tax Content: Its proprietary database of over 1 billion rates and rules across more than 20,000 tax jurisdictions, including hard-to-curate local rules, provides a depth of coverage unmatched by many competitors.
• Trusted Relationships: Deep-seated relationships with major ERP vendors, Big Four accounting firms, and system integrators, many of whom have built multi-million dollar practices around Vertex integrations, create a powerful referral and implementation network.
• Reference Accounts: An unparalleled stable of long-standing enterprise customers who champion Vertex's solutions further solidifies its market position.

In the competitive landscape, Vertex primarily contends with players like Avalara (AVLR), Thomson Reuters (TRI), and SAP . Against Avalara, Vertex differentiates itself with comprehensive, industry-specific solutions tailored for complex enterprise environments, emphasizing deeper integration and tailored services over Avalara's more streamlined, broader market approach. This often translates to stronger customer loyalty in highly complex sectors. Compared to Thomson Reuters, Vertex's specialized tax technology offers greater agility in tax-specific workflows and faster adaptation to regulatory changes, contrasting with Thomson Reuters' broader, more diversified suite of legal and financial tools. Against SAP, Vertex provides focused tax solutions that are often simpler and more cost-effective to deploy for tax-specific needs than SAP's integrated ERP suites with embedded tax modules. Vertex's expertise in tax data management allows it to adapt more quickly to evolving tax regulations.

Vertex routinely wins the majority of enterprise deals, often at a price point two to three times higher than competitors, with management reporting "no change whatsoever in the competitive dynamics in terms of win rate." The company's agnostic deployment model has also created displacement opportunities, as competitors attempting to force customers into cloud migrations have seen those customers switch to Vertex. In the emerging e-invoicing market, Vertex differentiates itself by integrating VAT compliance and e-invoicing on a single platform, offering an end-to-end solution that many point-solution competitors lack.

Strategic partnerships are central to Vertex's go-to-market strategy. The company integrates with a wide array of technology partners and actively collaborates with accounting firms. The SAP pipeline, for instance, is up more than 20% year-over-year, with referral deals from SAP sales representatives also increasing over 20% in 2024, highlighting the strength of these relationships.

Outlook and Guidance

Vertex's management has provided a revised outlook for the full year 2025, reflecting both strategic investments and recent market headwinds. For the full year 2025, the company now expects total revenues in the range of $745.7 million to $749.7 million, with cloud revenue growth projected at 28%. Adjusted EBITDA is anticipated to be between $159 million and $161 million, representing a margin of 21.4% at the midpoint. For the fourth quarter of 2025, revenue is guided to be $192 million to $196 million, with Adjusted EBITDA between $40 million and $42 million.

This guidance incorporates significant strategic investments. Vertex is accelerating its e-invoicing investments to approximately $16 million-$20 million for 2025, an increase of $4 million from original guidance, to expand worldwide country coverage and go-to-market capabilities. Additionally, $10 million-$12 million is being invested in R&D for AI-based Smart Categorization and other emerging technologies. These investments are expected to largely conclude by mid-2026, after which management anticipates seeing "leverage and some of that realization start to show itself up." Excluding these accelerated investments and the dilutive impact of the ecosio acquisition, Vertex's standalone Adjusted EBITDA margin for 2025 would approximate over 25%, indicating strong underlying operational leverage.

Management remains confident in the long-term growth trajectory, including previously stated targets of 20%+ subscription growth and 30%+ cloud growth by 2028. This confidence is underpinned by the expected acceleration of cloud ERP upgrade cycles, particularly SAP (SAP) S/4HANA and Oracle (ORCL) Cloud, as looming deadlines approach. The proliferation of e-invoicing mandates globally, especially in Belgium (January 2026), France (September 2026), and Germany (January 2027), is expected to be a significant revenue accelerant in 2026. The "land and expand" motion observed with early e-invoicing customers further supports this outlook. Furthermore, the appointment of Christopher Young as the new CEO, effective November 10, 2025, brings strategic vision and AI expertise to lead the company's next phase of growth, with outgoing CEO David DeStefano transitioning to Nonexecutive Chairperson of the Board. The recently authorized $150 million share repurchase program underscores the Board's confidence in Vertex's long-term value proposition.

Conclusion

Vertex, Inc. stands as a deeply entrenched and resilient leader in the enterprise indirect tax technology sector, strategically positioned to capitalize on the escalating complexity of global compliance and the pervasive shift to cloud-based ERP systems. While the company has encountered short-term headwinds in 2025, including a slowdown in customer entitlement growth and specific anomalous events, its core investment thesis remains robust. Vertex's enduring competitive advantages, anchored by its precision-driven technology, unparalleled content database, and extensive partner ecosystem, enable it to command premium value and maintain strong win rates in a mission-critical market.

The company's proactive and accelerated investments in e-invoicing and AI-driven solutions, such as Smart Categorization and the Kintsugi partnership, are pivotal to its future growth. These technological advancements, coupled with the anticipated acceleration of ERP cloud migrations and the impending e-invoicing mandates in major global economies, are expected to drive significant revenue growth and margin expansion from 2026 onwards. Despite the near-term challenges, Vertex's strategic focus on innovation, operational efficiency, and a partner-first approach, reinforced by a substantial share repurchase program and new leadership, positions it for sustained long-term value creation in the dynamic landscape of global tax compliance.