Vertex, Inc. (VERX) Q3 2021 Earnings Call Transcript

Greetings. Welcome to the Vertex, Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to your host, Ankit Hira. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for Vertex's financial results conference call for the third quarter ending September 30, 2021. On the call today, we have Vertex's CEO, David DeStefano, and CFO, John Schwab. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company and therefore are forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliations between non-GAAP financial information to the GAAP financial information, is provided in the press release. This conference call will be available for replay via webcast through Vertex's Investor Relations website at ir.vertexinc.com. With that, I'll now turn the call over to David.

Thanks, Ankit, and thank you all for joining us today. We delivered a strong third quarter in both our top line and bottom line performance. Total revenue growth outperformed our guidance again this quarter and was up 17% year-over-year. Cloud revenues also grew over 45% year-over-year. The value we're bringing to the market is resonating now more than ever as companies continue to scale tax automation across their operations. Through the focused efforts of our global team, we delivered great execution across all areas of the business. We are seeing positive impact from our continued investments in R&D, go-to-market, and ecosystem expansion. I'd like to share some overall highlights from the quarter. First, we're seeing notable strength in our enterprise segment among both new logos and existing customers. Our win rate in this market remains substantial as the breadth and depth of our solutions help customers address the complexity of tax compliance brought on by the accelerating forces of digital transformation and e-commerce. Our ability to serve the largest companies on the planet has been a considerable growth lever for us throughout the pandemic and continues to drive growth opportunity as budgets for finance transformation gain momentum. Among our existing customers, we saw the expansion of wallet share with our enterprise customers through up-sells, cross-sells, and the addition of strategic products. And we continue to see a steady stream of customers migrating from hosting our solutions in their environments to our cloud platform. Also in Q3, we added a number of notable new logos with the help of our partners. Our extensive ecosystem of technology, accounting, and consulting partners is unmatched in our category and continues to get stronger. We continue to deliver the world's most trusted indirect tax technology solutions, which we do at a scale and complexity beyond any other vendor in the market. At the same time, we continue to make key acquisitions that position us for future growth. As I noted, we had continued growth in our cloud revenues in Q3. We're seeing more companies select our cloud products in the enterprise and mid-market, where our unified platform, multi-cloud strategy, and deep partnerships continue to differentiate us and drive strong win rates for our sales and partner teams. This was the case in Q3 with the multi-billion-dollar interactive entertainment company running on Workday. This company is experiencing rapid business growth with a continued rise in the popularity of online gaming. By the nature of their business, they are contending with a high volume of micro in-game purchases taking place all over the globe. This challenged their existing cloud solution and triggered a competitive takeaway. By moving to our cloud solution, they're now able to scale with confidence. Like so many other customer stories I shared with you, the depth of our IT and our integrations played a big role in this win. This highlights the strength of our integration and is indicative of other pipeline opportunities we see with Workday. We also continue to deepen our integrations in go-to-market motions with Microsoft and Salesforce ecosystem, as well as the major e-commerce providers. Today, we are firing on all cylinders with our SAP and Oracle partnerships, where we have incredibly strong relationships on business, technical, and go-to-market levels. With continued investment in these longstanding partnerships, we have even greater visibility and competence as our enterprise pipeline continues to grow. Looking across our notable wins for both SAP and Oracle for the quarter, the advocacy of our consulting and implementation partners is a consistent element in these deals. In September, we announced the acquisition of LCR-Dixon to expand our global tax automation portfolio for SAP. We are very happy to welcome industry thought-leaders Suzy Soo, Jeff Bleacher, and the extended LCR-Dixon team to Vertex. Our broader partner ecosystem, including big four consulting partners and accounting firms, recognizes the value of the deep knowledge in tax technology and the SAP ecosystem the LCR team brings to our organization. This acquisition is a natural extension of a partnership with LCR that has spanned nearly a decade and further strengthens our leadership in the SAP space. Let me give you an example of the power of our combined offerings as it relates to a recent opportunity with a Fortune 500 medical device manufacturer. The company was looking to automate tax end-to-end across multiple tax sites as part of their global SAP transformation. The seamless integration between our compliance solution, our chain flow accelerator for SAP, and our LCR-Dixon tool enabled the true end-to-end solution to support the company's growth and led to another great six-figure deal for us. In the quarter, we had another important milestone in the SAP ecosystem that will benefit our customers and partners. We achieved certification as built upon the SAP business technology platform for Brazil. After building the first cloud integration for S/4HANA cloud a few years ago, this new integration will allow us to further extend our solutions to customers who must contend with the high complexity of doing business in Brazil. Similarly to SAP, we continue to expand our partnership with Oracle through the Oracle Cloud Infrastructure, enabling us to extend our penetration to new logos within the Oracle customer base. This quarter, we had a notable competitive win with one of the nation's leading energy providers. Even as a Fortune 100 company, manual processes were still plugging the tax department. Partnering closely with Oracle and one of our big four alliances, we were able to support their business with an end-to-end solution. Our Oracle accelerator and seamless integration with OCI served as differentiators in the sales cycle to win this new logo. Digital transformation is gaining momentum in the back office ERP as evidenced by the key wins I've highlighted. But to truly achieve our vision to accelerate global commerce, our customers must couple solutions to support their front office transaction systems as well. Increasingly, they choose Vertex across their global operations for the ability to scale, deliver consistent tax results regardless of where transactions take place, and to enable a frictionless customer experience as they grow their omni-channel presence. We had an incredible opportunity this quarter to support one of our longstanding retail customers, a Fortune 20 company, as they undergo a large finance transformation project to modernize their point-of-sale experience. This customer was already using our solutions for use tax in their ERP and procurement systems. But for sales tax, they had been managing taxability across nearly 10,000 stores with a custom solution that required significant manual effort. This was a seven-figure deal that allowed us to expand our relationship across multiple tax sites and business systems. Globally, we continue to see increased demand for our solutions as digital commerce continues to proliferate, and companies are now able to reach any customer anywhere in the world at any time. This has created a truly global economy, bringing more and more businesses into new geographies and introducing the complexity of value-added tax and cross-border transactions. This quarter, we released our new cloud-based solution to automate and streamline VAT compliance, supporting complex legislation requirements in the EU, Spain, Hungary, and other parts of the world. We are already seeing traction with some notable wins this quarter, along with the momentum in both Europe and the U.S. with accounting firms who are looking to enable tax automation for their customer base. While we've made these significant investments in new cloud products, our tax content database continues to be a critical decision factor for our customers and a key part of our land and expand motion. Our global tax research team continues to expand our coverage, leveraging ML and AI technologies, offering new content at speed and scale across verticals and countries. Since our IPO last year, we have grown our content database to over 500 million data-driven effective transactions supporting indirect tax compliance. I'm so excited about the momentum we continue to see outside the U.S. Let me share a quick example of a global win that really stood out to me in the quarter. We were brought into a competitive sales cycle for an innovative new automotive business owned by one of the largest chemical manufacturers. Their new venture brings them into an entirely new industry, vehicle manufacturing. We were able to come in and demonstrate the value of our seamless integration to their SAP system, including our Chain Flow Accelerator product, which we had released earlier this year. The parent company manages 20 autonomous businesses. So as we deliver value to the startup, we also see the opportunity to leverage our proven growth model across the entire family of enterprises. I think this deal also highlights the strength of the Vertex brand. Companies of this caliber want to know that we've walked a mile in the shoes that they're stepping into. Building a brand of trust and integrity is an essential part of our leadership in the enterprise space. The fact that we have marquee customers willing to share their experience gives companies like this even greater confidence in choosing us as a long-term partner. Across Europe, we're seeing increased demand for our solutions across segments and use cases. Earlier this year, we acquired Taxamo to advance our strategy to automate compliance and commerce across the entire value chain across border transactions. As e-commerce continues to open new avenues for businesses to sell through the impact and complexity of taxes extending well beyond core ERP. In the global digital economy, transaction tax regulations are shifting to where customers are buying as opposed to where the suppliers are, further increasing the burden of compliance for businesses. This quarter, we saw increased traction with digital-native companies that are balancing this increased tax complexity with the need to support rapid business growth. This was the case in Q3 with a leading online learning platform and an internet hosting provider. In both cases, the strength of our end-to-end capabilities allowed us to support their global compliance requirements for multiple reasons. We also launched Taxamo Assure in Q3. This product allows a merchant to meet their obligations under the new EU VAT rules in the form of a turnkey pay-as-you-go solution. Taxamo Assure simplifies the entire process for merchants who are not equipped to handle remote seller obligations and prefer to focus on their core business. Marketplaces have also continued to be an exciting area of opportunity and growth for us. Since launching our integration with the Mirakl Marketplace Platform in Q2, we are seeing pipeline growth in both Europe and the U.S coming from existing customers and new logo demand for both B2C and B2B companies across multiple industries. As enforcement of EU VAT regulations ramps up, we expect this growth to accelerate. An example of this is a new customer we brought on this quarter that serves as the e-commerce engine for one of the largest grocery retail groups. The depth of our tax content for the food and beverage industry drove the selection of our retail POS and exemption certificate management solutions. Earlier, I highlighted our cloud revenue growth in the quarter. I'd like to hover on this growth driver for our business for just another moment. We continue to win with our cloud capabilities. In fact, 94% of our new logos in Q3 selected our cloud solutions to handle their enterprise-scale tax requirements. We continue to see increasing demand and preference for our solutions in the mid-market cloud opportunity as part of our one-to-many strategy. Let me highlight our expansion with Acumatica. I was excited to share that in September we received the Fulfilled by Acumatica certification. We are the first and only tax technology provider to achieve this certification. And with it, we are creating a frictionless experience for Acumatica customers as a fully VAR-driven network. These are some great highlights from the quarter, but as I look to the future and the growth opportunity in front of us, one thing is clear. We can never stand still. As a team, we passionately push ourselves to continually innovate for the future. We're investing heavily to expand our offerings with enhanced AI, machine learning, edge computing, and containerization, along with many other emerging technologies. While anchoring and building off of our powerful core, we continue to expand and evolve our end-to-end tax solutions with unrivaled tax content and the exceptional service our customers have come to expect from Vertex. As these calls continue to reinforce trusted relationships, we forge with our partners and customers remain a key element of our success and one we will focus on and continue to strengthen. Because we understand to power global commerce, it will take a community of talent tax professionals and partners to drive the speed and scale of innovation. As I shared today, we have considerable opportunity to continue to serve customers at every stage of their journey and grow our revenues with them. Not only does it take advanced technical capabilities and deep business integration, but also trusted partnerships with our customers. And this is why we are deeply committed to an exceptional customer experience and investing in customer success throughout Vertex. I'd like to share a few quick examples of how this showed up in the third quarter. We recently hosted our exchange conferences in both the U.S. and Europe, bringing a record number of customers, partners, and prospects together to engage on the future of indirect tax. The conversations we have with our customers and partners at these events affirm our strategies and the value we're delivering every day. The Vertex brand continues to reflect trust, integrity, and quality. And that is something I'm extremely proud of. This past quarter, I've also seen an increase in Vertex University enrollment. We now have over 30,000 learners who get training, certifications, and are part of a vibrant community of tax technologists. We believe we invest in their success. It further strengthens our brand and their advocacy of Vertex in the market. One area I don't get to highlight as often in these calls, but it's foundational to who we are as a company, is the strength of our values-driven, purpose-led culture. That purpose is to build trusted relationships at work, in business, and in our communities. Our global team just completed our third annual global week of service. Our employees participated on three continents to make a difference and give back to the communities where they work and live. It's because of these outstanding efforts from the Vertex team, both in and outside of the office, that we will continue to drive business growth and impact around the world. Thank you for your time today. Now, I'd like to turn it over to John for a more detailed look at our Q3 results.

Thank you, David, and good morning, everyone. Today, I'm going to review our third quarter of 2021 financial results and provide an update on the fourth quarter and full year 2021 guidance. Total third quarter revenues grew 17% year-over-year to reach $110.7 million, exceeding the upper end of our quarterly guidance by $4.7 million. Our subscription revenues expanded 15.7% year-over-year to $92.3 million. Our services revenue grew 24.4% year-over-year to $18.4 million. Our annual recurring revenues, or ARR, grew to $352.9 million at September 30, 2021, representing approximately 15.1% growth year-over-year. This amount includes approximately $1.9 million of ARR from the acquisition of LCR-Dixon that was completed in September of 2021. Excluding the acquisition of LCR-Dixon and Taxamo, our ARR grew at 13.2% year-over-year, which is an increase from 12.8% that we reported in the second quarter of 2021. Our net revenue retention rate or NRR was 106% at quarter-end, consistent with the second quarter, demonstrating our customers' ongoing commitment to our software and solutions. For purposes of clarification, NRR only includes those customers that were with us at the beginning of the measurement period, which does not include Taxamo or LCR-Dixon. Our gross revenue retention rate, or GRR, was 94.5% at quarter-end, which excludes internal migrations by customers to our cloud solutions, which were approximately 4%. This is consistent with prior performance, which averages between 94% and 95%. At September 30th, we had 4,258 customers demonstrating growth, as well as the impact from Taxamo and LCR-Dixon acquisitions. The September 30th number includes 72 net new customers from the LCR-Dixon acquisition. We continue to see strong growth in our cloud-based solutions among both existing and new customers. In the third quarter of 2021, cloud-based revenues were $33.3 million, representing 45.6% growth year-over-year. Excluding the impact of acquisitions, cloud growth was 41% for the third quarter. We anticipate that our full year 2021 organic cloud revenue growth will exceed 40%. And discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and per-share results are on a non-GAAP basis. All non-GAAP financial measures are detailed and reconciled to our GAAP results in the earnings press release that was issued earlier this morning. On an overall basis, gross profit for the third quarter was $78.9 million, representing a 71.3% gross margin. This compares with a gross profit of $67.5 million and a 71.4% gross margin for the same period last year. From a subscription software standpoint, our gross margin was 77.7% as compared to 78%, with a slight decline driven by continued investment in customer experience tax content and our cloud infrastructure. Gross margin on services revenues increased to 39.4% from 35.4% due to increased utilization in the third quarter. Our third quarter research and development spend, which includes our capitalized software development costs and cloud-based customer solutions, was $17.4 million, representing 15.7% of revenues. This reflects substantial investments in our cloud platform, our new cloud offerings, integration of acquired technologies, and ongoing expansion of connectors and APIs to continue the integration of Vertex's capabilities into customer software platforms. The third quarter selling and marketing expense was $23.1 million or 20.9% of total revenues, an increase of $6.7 million and approximately 350 basis points from the prior year period. This increase is due to the funding of additional go-to-market activities to drive future revenue growth. We intend to continue to make additional investments in sales and marketing capacity to drive future opportunities. The third quarter general and administrative expense was $24.9 million or 22.5% of total revenues, an increase of $6.5 million from the prior year period. This increase is primarily driven by planned strategic investments in information technology infrastructure, business process reengineering, integration costs, and other initiatives to drive future operating leverage. Adjusted EBITDA was $21.4 million, a decrease of $1.2 million on a year-over-year basis. Adjusted EBITDA exceeded the upper end of our quarterly guidance by $4.4 million due to some spend initiatives shifting into the fourth quarter. Adjusted EBITDA margin was 19.3% in the current quarter, a 450 basis point decrease versus the prior year due to investments in our go-to-market activities and new product development. Now, turning to liquidity and cash flows. We ended the quarter with $47.5 million in cash and cash equivalents. This reflects the use of cash on hand during the quarter for the LCR acquisition in September. During the third quarter of 2021, we generated $15.4 million in free cash flow. The third quarter free cash flow represents a decrease of $400,000 compared to the prior year. Turning now to guidance. For the fourth quarter of 2021, we currently expect total revenues in the range of $108 million to $110 million, representing growth of 8.5% to 10.6% from the fourth quarter of 2020; and adjusted EBITDA in the range of $15 million to $17 million, representing a decrease of $2.1 million to $4.1 million from the fourth quarter of 2020. For the full year 2021, the company currently expects total revenues in the range of $422 million to $424 million, representing annual growth of 12.6% to 13.2% from the full year of 2020; and adjusted EBITDA in the range of $74 million to $76 million, representing a decrease of $2.4 million to $4.4 million from the full year 2020, reflecting additional spend in research and development, as well as selling and marketing expenses to drive growth. These expectations regarding the expected guidance take into consideration the seasonal slowdown in our services business in the fourth quarter and assume a minor contribution from the LCR-Dixon acquisition to the revenue recognition rules. We are very pleased with the solid fundamentals of our business, which delivered strong quarterly performance with revenue, EBITDA, ARR, NRR, and cloud revenue during the third quarter, which resulted in our upwardly revised guidance. We continue to believe that the investment in our selling and marketing and product development is warranted, given the opportunities that are in front of us, and we will continue to invest in our business to drive growth. Overall, we're very pleased with the progress we've made in our strategic initiatives and with the performance of the business. And with that, we'll open it up for questions. Operator, can you please open the line for Q&A?

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Joshua Reilly with Needham & Co. You may proceed with your question.

Yeah. Thanks, guys. Nice job on the quarter. So, maybe starting out, when a customer migrates to the cloud, there's a pretty healthy uplift in terms of ARR I think it's like 40% to 50% upon conversion. If you look at the ARR growth year-to-date here, is there any color on how much has been a result of this uplift from conversions versus either cross-sell, up-sell to existing customers or net new customer growth?

Yeah. Josh, this is John. Regarding customer migration, when we calculate our GRR, we see that migrations average around 3% to 4%, and this has been fairly consistent over time. I don’t have an exact number for the increase, but we’ve mentioned that it can flow into the number between 20% to 40% at times. While it’s not tremendously significant, we are definitely excited about the conversions when they occur.

Okay. Great. And then maybe two quick model questions. Professional services gross margin in the quarter was above recent trends, anything to note there? And then, what are you assuming in Q4 guidance for LCR revenue? Thanks, guys.

Sure. Josh, I'll address those points. Regarding the increase in services margin, it is primarily driven by higher utilization in our services during this period. There has been significant activity that has positively impacted both utilization and margins. As for the LCR contribution in the fourth quarter, it is expected to be quite minor due to revenue recognition rules, amounting to a couple of hundred thousand dollars in product revenue, which is not substantial. This will gradually reflect in the next year as the situation develops. Moreover, the fourth quarter has historically been slower for services, resulting in a few hundred thousand dollars in that area as well, which aligns with our expectations.

Great. Thanks, guys.

Our next question comes from the line of Andrew DeGasperi with Berenberg. You may proceed with your question.

Thanks for taking my question. I guess, first on the LCR-Dixon acquisition. I mean, could you maybe elaborate a little bit, what does this do to your SAP relationship and what was the rationale behind the acquisition, you already had a partnership with them?

Thank you for the question, Andrew. SAP is one of our key partners, and LCR had specialized tools that we and other companies in the industry were using to compete for SAP deals. Acquiring these tools gives us exclusive access as we pursue new SAP opportunities in the future. Given the growth rate in our SAP pipeline, it was essential to ensure we maintain and strengthen our leading share in that area.

Got it. Regarding Acumatica, this appears to be an ERP solution targeted at very small businesses, with approximately 2,000 customers so far. I'm curious about your strategy for engaging with the lower end of the market; what does your typical customer look like at that level?

One of the key aspects of that strategy is that it’s a one-to-many approach for us. Acumatica will really drive this strategy, allowing us to achieve a sell-through motion that we currently lack. While we can continue to focus on our mid-market and enterprise market, we see unique opportunities where our cloud solution is favored by vendors like Acumatica. We are pleased to partner with them and let them lead the sales approach moving forward. As you mentioned, this will likely involve smaller revenue customers, probably under $25,000, which will flow through to us without the usual overhead associated with pursuing more complex clients.

Got it. Lastly, regarding the acquisition of Taxamo CR, is there any effect on margins or the investment cycles you plan to implement? I know you mentioned increased investments in sales and marketing. I'm curious about how this might reflect in the numbers in the near term.

From a numerical perspective, I believe we will continue our efforts, as we've been increasing our investment in sales and marketing. We plan to maintain our focus on driving growth in these areas, exploring additional tools, and developing new go-to-market strategies for products we can bundle with our current offerings. We're actively working on this. I don't anticipate a significant change resulting from the acquisition of LCR in the near future. Essentially, it's a continuation of the positive progress we've been achieving.

Great. Thank you.

Sure.

Our next question comes from the line of Samad Samana with Jefferies. You may proceed with your question.

Hi. This is Jordan Boretz on for Samad. Thanks for taking my question. David and John, congrats on the strong results. So, I wanted to touch on Taxamo for a minute. Last quarter, you adjusted expectations around Taxamo near-term revenue contribution as you accelerate its integration to Vertex. Can you give a quick update on how that integration is progressing?

Sure. Yeah. We're really pleased with the progress that we're making with the teams in terms of the e-commerce and marketplace elements of the integration that we talked about, as well as. As we noted in the quarter, we were able to release the Taxamo Assure product out into the market ahead of schedule, which I think is showing the progress we're making with the overall integration process. So, happy with the way things are moving there.

Awesome. Thank you. And then, just kind of pivoting a bit, many companies have called out the tougher hiring environment in the current and the prior quarter. So, in terms of your own sales and engineering departments, would you say hiring during the quarter was in line with expectations ahead or behind?

I'd say it was largely in line. There are certainly areas where it is more competitive, certainly from a talent perspective. I think as I've noted, the pandemic's been good for us in that it really opened up our talent aperture a lot broader than we've ever had before. And so, we've been able to find talent in unique places that historically might not have hired into. So that has actually helped us in certain ways in finding talent. But it's an obviously continual thing we focus on each and every day.

Great. Thanks for taking my questions.

Sure.

Our next question comes from the line of Bhavan Suri with William Blair. You may proceed with your question.

Good morning. This is Matt Stotler filling in for Bhavan. I have a couple of quick questions. First, ERP migrations and replacement processes have clearly been a major driver for the adoption of your solutions. You've mentioned that you're investing in acquisitions, which seems quite interesting. However, during last quarter, you noted a delay in ERP replacement cycles and how this is affecting your involvement in those discussions. Could you provide an update on the progress you're seeing in this area? Specifically, how have conversations and bookings been developing as we move through Q3 and approach the end of the year?

Sure, Matt. And thanks for the question. Clearly, the visibility we have and the confidence we have in our pipeline, given the work we've done with SAP and Oracle in UCI migrations that they're going through, both are giving us a strong belief that we continue to see progress and see the green shoots of growth that we've been talking about for a while. So, very pleased with the visibility we have, as well as even with Workday. I think those pipelines are all progressing nicely.

Got it. That's helpful. Regarding international, it is a significant and under-explored opportunity. We launched the VAT compliance solution this quarter. Can you provide an update on the conversations you are having, the interest in that product, any early traction, and its contribution? Additionally, I would like to hear about your investments aimed at driving further adoption and growth internationally.

One of the key advantages of our relationship with our customers is our collaboration with design partners to co-create our offerings. The cloud product we launched is a prime example, as it allowed us to identify market opportunities with our existing customers. We saw positive results after releasing the product, which contributed to our success this quarter and has helped us build a growing pipeline. I believe this strategy has been beneficial, and we look forward to the product's continued development in 2022. We have also discussed the potential opportunities arising from increasing legislation related to e-invoicing and real-time requirements, which we are actively pursuing in our research and development efforts, as well as other avenues, to leverage for future growth.

Got it. Thanks again.

Our next question comes from the line of Pat Walravens with JMP. You may proceed with your question.

Great. Thank you and congratulations guys. It's nice to see us. The pieces are starting to come in and the business accelerating. So, David first question for you is pretty big picture, as you look out to start to prep and build the foundation for next year, what are your top sort of two or three priorities?

I think doubling down, Pat, on our sales and marketing acceleration, investments we're making there and continuing to focus there, see opportunities because of the demand cycles. So, we want to make sure we're in front of. As well as, our product roadmap. We really made good progress this year in turning out new products. I'm excited for what's lined up for the early part of next year, and really keeping a focus on those two things our top priority for our success in 2022 and beyond.

Sure, my second question is about the interesting way you mentioned SAP, Oracle, and Workday in relation to the progress of your pipeline. I would love to hear your overall thoughts on each of these companies. For SAP, I assume the movement to S/4HANA is a factor, but I'm curious about your insights regarding each one and your position within that context, as I think it would be valuable for investors.

Sure. Definitely, in both the U.S. and Europe, they are the largest platform in Europe as well. We are seeing those opportunities and I would include Ariba in that. We have a strong relationship on the procurement side, and we continue to identify opportunities as both Coupa and Ariba advance in the market. Oracle has been excellent in collaborating around the OCI platform, and as they move forward, our relationships are expanding. We are gaining access to many new clients, which highlights how under-penetrated our customer base is compared to the Oracle and SAP customer bases. We continue to see good visibility into growing pipelines in both segments. With Workday, we highlighted a significant win. As customers progress with Workday, we are observing more progress due to the integration work we have done, and our win rate is improving.

All right. Great. Thanks very much.

Sure.

At this time, we will now open the line for additional questions.

Thanks, everyone. Looking ahead to the fourth quarter guidance, despite some conservatism, are there any other factors that might cause the business to decline sequentially? Historically, we've seen an increase of about $4 million to $5 million from Q3 to Q4 over the past three years.

Sure. I'll address that, Brad. Regarding our guidance, there are a couple of points to consider. First, for this upcoming fourth quarter, we expect some slowdown in our services segment, which I mentioned earlier. We anticipate experiencing a slight decrease in that area. Additionally, it's worth noting that in the same quarter last year, we had a $2 million positive impact from a volume increase with one of our customers, which allowed us to recognize that revenue. That factor is important when comparing Q4 results year over year. We do not expect a similar situation this quarter, so those are two significant points I wanted to highlight. Beyond that, I'm not aware of any major factors influencing the overall outlook that haven't already been discussed.

Great. Thanks very much.

Our next question comes from the line of Stan Zlotsky with Morgan Stanley. You may proceed with your question.

Thank you, everyone, and good morning. I have a general question. It seems like cloud ERP migrations are increasing this year. What trends are you noticing regarding the shift of ERP systems to the cloud, and how is this impacting your business? I have a follow-up after this.

Thank you for the question, Brad. We are indeed observing what the market is experiencing, which is providing us with a lot of confidence. Our cloud adoption and the new customer wins we are achieving, along with the growth of our new cloud revenue, demonstrate the ongoing acceptance and adoption of our cloud capabilities as customers decide to transition to the cloud. Everything is progressing well in that regard.

Got it. I have a few housekeeping items for John. Regarding the organic cloud growth of 41%, it seems like there is approximately $1 million from Taxamo included in that figure. I'd like to understand your thoughts on Taxamo's contribution throughout the year compared to the initial expectation of $9 million since there appears to be $500,000 in Q2 and $1 million in Q3. Does this imply that we can expect around $7.5 million in revenue from Taxamo for Q4? Additionally, the organic customer count increased by about 11 logos this quarter. Is there anything we should keep in mind when interpreting the Q3 results?

Sure. Regarding Taxamo, we saw about $1 million this quarter, and I expect some modest growth from that. However, it won't be near what you proposed earlier. As we mentioned last quarter, a delay will push some things into 2022, so I don't foresee significant growth beyond that $1 million. Regarding customer counts, we had an increase of about 11 net customers compared to the previous period, and we're quite pleased with that. While we do experience some churn at the lower end, the new customers we are bringing in are exceeding the annual recurring revenue we are losing from this churn.

Perfect. Thanks, guys.

Yeah. Terrific. Thanks, Stan.

At this point, we have reached the end of the question-and-answer session. And I'll turn the call back over to David DeStefano for closing remarks.

Thank you. I'm so proud of the continued progress we're making and the tremendous efforts of the Vertex team this quarter. Thank you for joining us today. I look forward to our next call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.