Vertex, Inc. (VERX) Q1 2022 Earnings Call Transcript

Greetings, and welcome to Vertex, Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. And I'd like to turn the conference over to your host, Ankit Hira, with Investor Relations at Vertex. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for Vertex's financial results conference call for the first quarter ending March 31, 2022. On the call today, we have Vertex 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, may include forward-looking statements related to the expected future results for our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties in forward-looking statements are subject to and 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 reconciliation between non-GAAP financial information to 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. Welcome, everyone. 2022 has started off incredibly well at Vertex with solid growth and positive progression across many dimensions of our business, resulting in total revenues of $115 million, up 17% year-over-year. Our teams continue to execute well and drive momentum in the markets we serve, accelerating ARR growth to 18.9% in the first quarter while maintaining strong EBITDA margins of 16.6%. We're seeing strong adoption persist from both new and existing customers. Our NRR grew to 110% this quarter, which speaks to the efficacy of our increased go-to-market investments and our ability to build trusted lasting relationships through a differentiated customer experience. These are cornerstones of our sustained success. Our first quarter results also demonstrate the progression of our cloud revenues and the expansion of our installed base, whether that is through regional expansion, product cross-sell, sustained platform migrations, and increased transaction volumes. Cloud revenues continue to increase as a percent of total software subscription revenues from both new and existing customers. In Q1, 96% of our new logos were cloud. Overall, cloud now represents approximately 40% of total subscription revenues. Overall, I'm excited about our strong performance out of the gate and how well it sets us up for the remainder of the year. First, our core enterprise segment remains healthy and continues to widen. These are the most dynamic companies in the world spanning every industry. They are at the heart of global commerce growth, and their performance durability is proven even in the most challenging of economic conditions. Second, we consistently leverage our market-leading position by providing a mission-critical service in a large and growing global market. And now we are replicating our formula for enterprise market success into Europe by combining strong partnerships, fit-for-purpose solutions, and customer referenceability. We are extending the power of our platform by delivering enhanced capabilities and expanding the breadth of our tax content. The market is responding well to our accelerated investments. Throughout the quarter, we experienced strong interest in our new edge and exemption management solutions, and we've made huge investments in our content database, expanding our differentiation. In fact, since our IPO, we have doubled the size and scale of our content database from $350 million in effective rate and rules to over $700 million today. This includes expanded verticals as well as global support and expansion in areas like Europe and Brazil. Our content now supports tax determination in 195 countries around the world. The strategic investments we have made over the past 18 months are allowing us to extend both our addressable market and the value we can deliver to our customers. With the acquisition of LCR-Dixon, we have the most complete and differentiated tax automation solution for SAP. Again, this quarter, we saw how this acquisition is paying off by helping to increase our win rates and revenues tied to SAP deals. We have a vision to accelerate global commerce. To achieve this, it will take a community of talented and aligned partners who come together as a seamless network focused on customer experience. And it's why we're building our solutions into all the major platforms, powering global commerce backed by the largest community network of tax technology experts and partners. In the first quarter, we continued to see momentum and energy building in our go-to-market motions, thanks to our focused approach with key partners. We continue to see tremendous market opportunity, and we believe Vertex is in a unique position to connect business and government seamlessly across the entire fabric of global commerce. Our first quarter results underscore the durability of our business, the strength of our customer and partner relationships, as well as our ability to deliver sustainable, profitable growth. I am thrilled with how our strategy is coming together as cross-border transactions and real-time compliance become more of a course of business, the adoption rates of multi-cloud strategies are on the rise for complex organizations, and the convergence of payments and tax is accelerating, which will expand our addressable market even further. All of this takes scale, a proven track record, and an end-to-end platform. We are delivering intelligent automation with end-to-end capabilities, content, and insights to enable trusted transactions and confident decisions. I'd now like to provide a closer look at the progress we're making in these areas and share a few examples from the quarter. In our last call, I announced the release of O Series Edge. This next-generation solution moves tax content and applications to the edge of the cloud and beyond. Our solution enables a frictionless customer experience regardless of where and when a transaction occurs. Already in the quarter, Vertex Edge is creating a buzz with companies looking for next-generation solutions to support business growth. In fact, our first win emerged out of a conversation in an industry forum where a current customer recommended us and our solutions to a prospect. The result of a seven-figure net new logo win with one of the largest healthcare retailers in the U.S. This Fortune 25 company was reimagining their in-store technology infrastructure. They saw value in moving away from their homegrown system to our tax engine and edge solution to ensure accurate tax calculation as well as up-to-date rates and rules. I think this deal reflects the incredible growth potential that still exists with enterprise and Fortune 500 companies. Many still maintain manual processes, which up until now have been good enough, but with increasing complexity gives us additional white space to further penetrate this highly valued area of our addressable market. I'm also proud of this win because it exemplifies why we put so much emphasis on delivering an exceptional customer experience. We know it sets us apart. Moreover, it's not easy to replicate. These relationships and this level of trust are not built overnight and must be earned continually. It requires people who understand tax and technology and care enough to make it work in our customers' environment. This is what the talented Vertex team brings to the table each and every day. When it comes to tax compliance, complexity is rapidly emerging from multiple angles for our customers. Not only are they having to keep up with changing regulations but also as companies undergo business and digital transformations that are continuing with complex IT systems, and that's why tax technology is growing in value and demand. The ability to address tax automation across multi-cloud and multi-tax type environments is where Vertex excels and is showing up in new logo and customer expansion deals. We saw this in Q1 with a global data analytics and technology company. Our ability to support multi-system integration, multi-region, and multi-tax type requirements will enable one source of truth for their business across North America, EMEA, and Asia Pac. Key to this win was our cross-application capability connecting their Salesforce and Workday solutions to one central tax engine. We also enjoyed a great competitive takeaway with one of our existing customers. With a heavy M&A strategy, the Company was managing 10 entities across multiple ERPs and because of the various acquisitions, they were running three competitive tax solutions along with ours. It was our ability to support multi-system environments that made the decision to standardize with Vertex Easy. This savvy enterprise software provider truly understands tax complexity and saw Vertex as the best solution to support their business growth because, in fact, we are the gold standard of the enterprise market. Enterprise customers also greatly value our vertical expertise to support the complex tax nuances specific to their industries. Looking at key verticals across the S&P 500, we have a dominant position in the manufacturing sector broadly, as well as technology, retail, and wholesale. We also furthered our leadership in our leasing and telecom verticals in the first quarter with a handful of key wins. The depth of our tax content, the expertise of our teams, and our end-to-end tax automation capabilities were a powerful combination for these customers. We had a large Q1 win in oil and gas, where we significantly expanded our content database. Beyond the content, what stands out for me in this deal is a tight collaboration with the SAP go-to-market team and our alliance partner. By working in concert with their sales team, we're able to unlock increased value for our customers. This is just one example of how we are taking our partner ecosystem to the next level. Let me now pivot to our ecosystem growth. We've expanded our global footprint with Oracle Cloud infrastructure to provide increased support to meet data requirements outside of the U.S. As a result, we're seeing increased interest and solid growth with both Oracle and NetSuite. I've highlighted some of the work we are doing with SAP. I'm also proud to share that we were recognized as an SAP Pinnacle Award finalist for being one of the top three ISV partners in terms of driving revenue and opportunities through the SAP store. In Q1, our retail solution was approved as a solution for the SAP industry cloud for retail and has been added to the SAP store listings. Combining our ecosystem-specific offerings with the continued adoption of both OCI and S/4HANA platform has created sustained opportunity for us to grow our addressable market within their ecosystem. And now through closer alignment with their sales teams, we are able to provide increased value for customers. We continue to invest in expanding our mid-market share as tax complexity is not limited to the largest organizations. As mid-market companies increase their digital presence, complexity comes with it. Our solutions are helping companies of all sizes access new markets and reduce the friction between commerce and compliance. These companies are turning to Vertex to ensure a single platform for tax calculation that tightly connects into a multitude of systems, from front-office applications like billing and CRM to back-office ERP and procurement systems as well as e-commerce platforms. Another area I'm excited to highlight is the performance we experienced in Europe this quarter. The strength of our capabilities with SAP and the depth of our global content enabled a six-figure deal with a European chemical leader looking to streamline their tax process. Our cloud solution, coupled with the SAP accelerator and the LCR tools, gave this new customer the confidence to automate tax calculation. The beauty for us in competitive deals like this one is that no one comes close to the breadth of our solutions for businesses running on SAP. We've been making disciplined investments to propel our growth in Europe and through digital commerce platforms, and we continue to build momentum around our acquired Taxamo solutions with digital natives and e-commerce companies in rapidly growing sectors like gaming, fitness, and education. Just as we are focused on building strong and lasting relationships with our customers and partners, we are also focused as an organization on strengthening our communities. This support is more important than ever as we continue to face the global humanitarian crisis in Ukraine. The people of Ukraine are demonstrating incredible courage, and our hearts go out to all who are affected. The Vertex team stands united with the global community in protecting our fundamental human rights. It is core to who we are and what we value, guided by a deep respect for all people. As I close out my comments today, I cannot be prouder of the contributions of our global Vertex team. We remain laser-focused on our strategy. We continue to accelerate our go-to-market motions and bring product enhancements to market with speed and scale. We never lose sight of the importance of delivering exceptional value to our customers and continuously innovating for the future. We are on course for another strong year, and I'm incredibly encouraged by the opportunity we see for continued growth. Now I'd like to hand the call over to John for a look at this exciting quarter by the numbers.

Thank you, David, and good morning, everyone. Today, I'm going to review our first quarter 2022 financial results and provide second quarter 2022 and full year 2022 guidance. Total first quarter revenues grew 17% year-over-year to reach $115 million, exceeding the upper end of our quarterly guidance by $1.5 million. Our subscription revenues increased 16.6% period-over-period to $97.1 million. Services revenues grew 19.4% period-over-period to $17.9 million. Our annual recurring revenues, or ARR, grew to $380.6 million at March 31, 2022, representing approximately 18.9% growth over the comparable 2021 period. Excluding the acquisitions of Taxamo and LCR-Dixon that were made during 2021, our ARR grew at 17.1%, which is an increase from 15.1% that we reported in the fourth quarter of 2021. Our net revenue retention rate, or NRR, was 110% at March 31, 2022, growing from 105% for the comparable 2021 period and from 108% in the fourth quarter of 2021, 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. So these amounts do not include the Taxamo or LCR-Dixon results. Our gross revenue retention rate, or GRR, was 95.6% at quarter end, which excludes internal migrations by customers to our cloud solutions, which were approximately 3%. This is consistent with our prior performance, which has averaged between 94% and 95%. In addition to the ARR growth, as mentioned above, our returns processing managed services business generated recurring services revenue of over $6 million in the first quarter of 2022, as compared to $4.9 million for the comparable prior year period. This service is a competitive differentiator and is a significant component of recurring revenue, which is not included in our ARR. At March 31, we had 4,242 customers, reflecting a 30-customer decline, mostly at the lower end of the market. We view this as noise that we are not concerned with relative to the success of our strategy. Keep in mind that our GRR continues to grow and our ARPC has grown from $86,700 at December 31 to $89,700 at March 31, 2022. With the success of our one-to-many strategy where we utilize channel partners to sell and service smaller customers, beginning in the second quarter, we plan to include those customers in our total customer count. These customers will have a similar profile to those that we have lost at the lower end. We expect that this change will increase our total customers by more than 200. We continue to see strong year-over-year growth in our cloud-based solutions among both existing and new customers. Period-over-period revenues from cloud-based solutions grew to $38.3 million, an increase of 42%. Excluding acquisitions, cloud growth was 38% year-over-year. In 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 this morning. On an overall basis, gross profit for the first quarter was $80.7 million, representing a 70.2% gross margin. This compares with gross profit of $68.4 million and a 69.7% gross margin in the same period last year. From a subscription software standpoint, our gross margin was 76.6% as compared to 77%. Gross margin on services revenues increased to 35.3% from 28.1% due to increased utilization. Our first quarter research and development spend, which includes our capitalized software development costs and cloud-based customer solutions, was $19.8 million, representing 17.2% of revenues. This reflects ongoing substantial investments in our cloud solutions, integration of acquired technologies, and ongoing expansion of connectors and APIs to continue the integration of Vertex's capabilities into customer software platforms. This spend reflects increases in development personnel through a more efficient and balanced use of our global development team, positioning us well for R&D growth and capacity as well as capability. First quarter selling and marketing expense was $25.6 million, or 22.3% of total revenues, an increase of $6.9 million and approximately 36.5% from the prior year period. This increase is due to ongoing funding of expanded go-to-market activities to drive future revenue growth. We intend to continue to make additional investments in sales and marketing capacity to drive this growth. First quarter general and administrative expenses were $26.2 million, or 22.8% of total revenues, an increase of $5.6 million from the prior year period. This increase is primarily driven by planned strategic investments in our information technology infrastructure, business process reengineering, integration costs, and other initiatives to drive future operating leverage. Adjusted EBITDA was $19.1 million for the first quarter of 2022, an increase of $1 million over the prior year comparable period, and it exceeded the upper end of our quarterly guidance by $2.1 million, primarily due to our revenue performance and spend initiatives that shifted into the second quarter. Adjusted EBITDA margin for the first quarter of 2022 was 16.6%, a 187 basis point decrease versus the prior year comparable period, primarily due to our investments in go-to-market activities and strategic investments to drive our operating leverage. During the first quarter of 2022, we consumed $14.2 million in free cash flow, reflecting our ongoing investments in research and development and infrastructure modernization initiatives to support future revenue growth and operating leverage. First quarter free cash flow represents a decrease of $2.8 million from the comparable prior year period as a result of our increased investments in these areas. Historically, our cash flows in the first quarter are lower than the remaining calendar quarters as they are heavily influenced by variable compensation payments. Turning to our liquidity, we ended the first quarter with over $97.3 million in unrestricted cash and cash equivalents and $50 million in indebtedness. As previously discussed, we amended our $100 million credit facility in March with a new five-year $250 million facility, consisting of a $50 million term loan and a $200 million line of credit. We expect to utilize the facility primarily to fund working capital, capital expenditures, permitted acquisitions, and general corporate purposes. Turning now to guidance. For the second quarter of 2022, we currently expect total revenues in the range of $116 million to $117.5 million, representing growth of 11% to 12% from the second quarter of 2021. Adjusted EBITDA in the range of $16 million to $18 million, representing a decrease of $1.2 million to $3.2 million from the second quarter of 2021. For the full year 2022, the Company continues to expect total revenue in the range of $479 million to $483 million, representing annual growth of 13% to 14% from the full year of 2021 and adjusted EBITDA in the range of $72 million to $75 million, reflecting our ongoing investments in acquisition integration as well as continued spend in research and development and selling and marketing expense to pursue opportunities for growth. We continue to anticipate that cloud revenue for 2022 will grow by 33% over 2021. As a reminder, in the second quarter of 2021, we recorded cloud-based revenues of $2.1 million from a tier-based subscription amendment to a cloud customer that we have highlighted at the time. We do not anticipate a similar adjustment in 2022. We are very pleased with the solid fundamentals of our business, which delivered strong quarterly performance in revenues and EBITDA, and fueled strong first quarter ARR, NRR, and GRR performance. And with that, we'll open the call up for questions.

We have a first question from Matt Stotler with William Blair.

I wanted to begin by discussing the overall business environment, which is currently influenced by various factors such as rising inflation concerns, geopolitical issues in Europe, and tight labor markets. However, the results for Q1 were clearly positive, showing acceleration in key metrics, an increase in net revenue retention, and strong gross revenue retention. I would appreciate your observations and thoughts on these macro factors, anything you are noticing in the market, and your perspective on how these might affect us moving forward.

Thank you for the question, Matt. I appreciate the comments on the quarter. I think as of this point in time, we are not experiencing any slowdown in pipeline activity. I think the complexities that are the tailwinds of our industry continue to drive demand, and it's not getting any easier for them because businesses are in a continual search for more growth, and the regulators are desperate to find ways to collect their money. So, we're certainly seeing some audit pressure pick up in certain areas, which is, again, good for us because it ultimately fuels demand. And there's still a steady margin of good activity as companies like SAP and Oracle have reported around their activity on the cloud. That is certainly fueling some of the differentiated relationships we enjoy, and they are driving some of our continued pipeline views.

Got it. That's helpful. And then maybe one on cloud growth. Obviously, we continue to see some pretty robust growth in that segment of the business. Any update on the contribution that you're seeing there from kind of new versus existing on-premise customers migrating over? Obviously, it sounds like it's a great engine for bringing in new customers. We'd love some thoughts on the installed base migration path going forward as well.

Matt, one of the things we're finding is, and that's part of the strategy about bringing out new products is the more we start to surround our existing customers with new cloud-based solutions like our Edge solution that we launched at the beginning of the year, it will drive more migration opportunities for us. So I think as we continue to bring out new products that are all cloud-first and what we're building, it will continue to pull the customer base along. We haven't seen any fundamental shift in that trajectory that we've been talking about. But part of our strategy with what we're bringing forward is to pull them into that space moving forward as the year and years progress.

We have the next question from the line of Joshua Reilly with Needham.

Nice job on the quarter here. I know Europe is a small business for you guys currently, but you've been expanding your presence in the region there. Have you seen any divergence between demand in that region versus the United States since the Ukraine conflict has begun? And are you still adding sales heads at the same pace of last quarter in that region?

Josh, we are still adding go-to-market activity. And really what's driving it is a couple of things. One, the acquisition we made in Taxamo is giving us a differentiated conversation opportunity there, and we're certainly seeing that as we continue to integrate that product into our broader suite. And the second is the relationships we've been talking about with SAP. Because of where we are in the SAP online store and how we're working now in parallel with their sales reps to do account planning, that is driving demand opportunities for us more so than any of the offset that might be because of some of the political or economic uncertainty at this point in time. So we continue to want to bring more capacity to market on the go-to-market side because we're seeing a good uptick in activity. Again, SAP, being the dominant platform of large enterprises, aligns perfectly with our strategy. I'm still bullish on what we're trying to accomplish there.

And then you touched on it a bit on the increasing enforcement for the marketplace rules that were put into effect last July. But can you just give us an update on how much more enforcement are you seeing? Is it beginning to drive incremental customer interest?

It absolutely is, yes. So I think enforcement is still at a fairly quiet level, candidly. But I think the recognition that the enforcement is coming has clearly surfaced in the dialogues we're having, and we're seeing a different nature of exploration of the merged Vertex-Taxamo assets than we were in the past.

We have the next question from the line of Andrew DeGasperi with Berenberg.

First, regarding the customer count, you mentioned a loss of 30. Could you elaborate on that? I would have thought it would have impacted the gross retention rate, but it didn't. Also, could you provide an idea of what the typical contract size is for these customers? Additionally, you mentioned about 200 new customers anticipated in the next quarter. Should we consider these as potential risks for churn, or are you just trying to gauge the activity in that pipeline?

Yes, Andrew, thanks for the question. This is John. I'll start with that, and David, maybe you can add to it. I think as we thought about the customer activity, what we've seen and what we continue to see is some noise there. Again, we had a 30-customer decrease, but it's at the very, very low end of the market. Again, customers that aren't necessarily very profitable in terms of that perspective. Again, at a very small end that we've had for a period of time. So you're not seeing any degradation in any of our GRR, our ARPC, or anything else because, again, because of the size of the customers that we're losing. Again, what we're gaining is excessive of the things that we're losing, and we're talking under $10,000 annual customers again that really aren't our target market. So what we've done is put in place that one-to-many strategy that we've talked about a number of months ago to really find others who can help us sell and service at that lower end. They will be handling not only the initial customer contact but follow-up contacts to assist with that to give them the care that they need to grow their businesses. And so that's our approach at that level. And so that's what's going to help us kind of move through. Again, it's largely a very similar client to those that are turned off, but we have a different approach to being able to better manage them.

Got it. When considering the enterprise contribution, has SAP and OCI experienced growth compared to Q4? Additionally, is the contribution from the new relationship with SAP significant? Have you observed a clear material increase in activity from that pipeline?

Yes. No, absolutely. The SAP, you combine the investment in new products like the chain flow accelerator that we brought to market in our global compliance product. And then you add in the SAP relationship that we form with their sales teams and the LCR-Dixon acquisition. When you look at the triumvirate of those three things, we are definitely seeing a differentiated conversation with the SAP community that has us very excited because we know where we are within the SAP online store in terms of our success there. We are able to continue to drive more customer value through the products and the relationships with the sales reps. So yes, we're definitely in a very different place with SAP, which is partially the reason addressing the other question that was asked by Josh around Europe. We continue to see that given the primary platform that they are, why it is supporting our enterprise strategy.

We have the next question from the line of Samad Samana with Jefferies.

John, subscription revenue was quite strong in the first quarter. I'm curious whether that was primarily due to seasonal strength and price increases or a result of new bookings discussed in the fourth quarter. Can you help me understand the $4 million quarter-over-quarter increase compared to last year, which was relatively flat from December to March, and how we should consider seasonality for the rest of the year?

Thank you for your question, Samad. When we look at the growth in Q1, there are a few factors to consider. We had a strong Q4, and that momentum carried into the first quarter. Typically, Q4 is our best quarter for sales and bookings, and it tends to slow down in Q1 before we build momentum throughout the year. We expect that trend to continue. As you know, we are investing in sales and marketing efforts to enhance our opportunities, as David mentioned. We hope to maintain this growth and even see greater results as the year progresses. However, I wouldn’t attribute much of this growth to significant price increases. We have regular price adjustments due to our long-standing business practices. The changes from 2021 to 2022 have not been drastically different in this regard, as many price adjustments are determined at the end or mid-year of the previous period. Therefore, I don’t anticipate that contributing any more than it has in the past. I hope this clarifies things.

Definitely. And then maybe just stepping back in terms of the investment initiatives. And I don't not sure if I heard it correctly, but it sounded like maybe some of the spend may have slipped out of 1Q into 2Q. Just what was maybe the reason behind that? Is it just the hiring environment? Is it within a certain part of the Company's OpEx structure? What are you guys thinking as far as spending initiatives that went into 2Q instead of 1Q? And how should we think about kind of where that was, whether it's sales and marketing or R&D?

Samad, it was largely hiring-driven. We certainly have been aggressive in the market with capacity additions, both in R&D and sales and marketing, and continue to be. And you're right, it is a tighter labor market, and we do have a little bit of what we had planned that didn't come in quite as soon. And then we had a couple of projects where we intentionally just looked at all the different moving parts of activity, and we slowed down a little bit, and those are now just from an overall prioritization falling more into Q2 and beyond. So those expenses will catch up.

We have the next question from Patrick Walravens with JMP.

Great. This is Joey Marincek on for Pat. Just following up on that last question. I mean, how are you feeling about sort of your ability to attract or retain talent in this environment? And then I have a follow-up.

Yes, I believe there are two key factors working in our favor. First, on the R&D side, some of the technology we are increasingly utilizing is generating excitement among professionals in the R&D community, helping us attract the talent we need. Second, in sales and marketing, our unique relationships allow us to engage effectively with various communities, both in our industry and in related software sales, discussing our distinctive go-to-market strategy as they seek new customers, particularly due to partnerships with companies like Oracle and SAP. Overall, these discussions are beneficial for us. However, as you know, it remains a competitive labor market for finding the quality talent we desire. Still, in conversations, we can share compelling stories from both the R&D and sales and marketing perspectives that aid us in securing the talent we seek.

That's really helpful. And then just on the continued investments in the mid-market, how are you feeling about your overall progress there? And then can you remind us of sort of your expansion strategy in that segment?

Yes. The mid-market currently represents 20% of our customers, and we plan to further expand in this area. We've seen positive developments with companies like Salesforce and Workday, which has encouraged us to increase our investments in sales, marketing, and channels. In Europe, our primary strategy focuses on enterprise accounts, though we will also address the mid-market, particularly as SAP's presence extends to that level. We intend to align our approach with the SAP roadmap for the mid-market in Europe.

We have the next question from the line of Brad Reback with Stifel.

David, as we think about the acceleration in investment in the business on the OpEx side, should we be thinking that success would be a return to 20% ARR growth or something different than that?

I think we have been consistent. With the investments we are making in sales and marketing, customer success management, R&D, and our content databases, we plan to continue focusing on those areas. We believe the sustainable growth rate of the company should remain in the 20% range, with margins expected to recover. As our cloud service expands and we leverage more of our content investments, we anticipate that gross margins will improve, which will ultimately drive the EBITDA margin as well.

That's great. And then, John, on the IT investments, when should we expect to start seeing leverage and operational efficiencies from those.

We will keep investing in those areas. It will take some time to see those investments reflected in our numbers and events. We're still in the investment phase, and the realization phase will likely follow in about 12 months, with improvements continuing to develop as we enhance our efforts.

We have the next question from Daniel Jester with BMO.

Just on the guidance. Obviously, the first quarter came in above plan, and the commentary around demand seems pretty good. But you left the full year revenue guidance unchanged. Can you help us think about sort of what's going on in the back half of the year? Or are you just being conservative given the macro?

Yes, Dan, thanks for the question. I'll start with this. But I think you're right. We had a real nice quarter. We're pleased with the results that we have, and we still think there's a very good opportunity in the business. But consistent with what we did last year, the first quarter is good. We want to make sure that we've got a real good view on kind of how things are developing and how things are moving. We think it makes sense to wait until the second quarter to evaluate whether we need to move that. I mean, again, we had a real nice feat in Q1, a couple of percentage points was terrific. But again, we want to be thoughtful, conservative, and mindful of some of the economic uncertainty that's in the economy now before we start moving things and changing them around.

Okay. Great. And then I appreciate the context on the edge solution and the win in the quarter. Can you just remind us what is the catalyst that's going to get customers to come to that product? And how different is it going to be relative to the more traditional Vertex offering? Is it going to be around sort of omnichannel refresh? Or how do we think about sort of the catalyst to vary and get people to engage you on that one?

Yes. The business landscape is becoming more complex as companies seek growth by facilitating transactions through mobile devices like cell phones, iPads, or sensors. Regulators are also ensuring that taxes can be applied at this level. Consequently, we have adapted our O Series capabilities to focus on these specific needs. This tailored approach significantly benefits the retail sector, which commonly uses such formats. We've noticed a resurgence in in-store activity as e-commerce growth slows down, which is likely to drive demand. Furthermore, we observe that some businesses outside of retail are also interested in endpoint solutions across their operations. The complexity of business models and the push for accurate transaction-based taxation are key factors driving demand for these solutions.

We have the next question from the line of Patrick Walravens with JMP.

David, I just wanted to drill down more. So on SAP, three things. Number one, what other options do people have for tax calculations there running SAP? Number two, how does this SAP store work? And then number three, I mean, I'm hearing the same thing about people moving to S/4HANA, especially big companies, but it is kind of counterintuitive, right, given the macro. So why is this happening now when there's so much uncertainty?

Yes. Historically, the manual or in-house solutions for sales and use tax or VAT, such as SAP's native VAT functionality, have sufficed. However, the current demand is driven by the increasing complexity of regulations and business models, which those solutions can no longer adequately address. This has allowed us to collaborate with their sales team to provide unique value to customers, marking a shift in our approach. Similar to other Oracle relationships, there's a transition from their previous solutions to seeking a third-party option. The online store provides us with direct access to SAP's customer base, enabling them to engage with our product in a distinctive manner. Our status within the SAP online store empowers their sales team to promote our solutions effectively, fueling demand and pipeline activity. Regarding the S/4 migration, I cannot comment on the specific demand drivers as we do not partner with them post-decision. Nevertheless, we observe strong activity and fruitful discussions, which align with the ongoing trend of cloud migration. Many companies are progressing in this transition. The largest enterprises are equipped to navigate current economic challenges better than smaller firms, which tend to be more cautious. It’s worth noting that during the pandemic, larger organizations faced a slowdown in their IT activities as they prioritized operational sustainability. Now that they can operate remotely, they are resuming their investment strategies, which is beneficial for our continued growth.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to David DeStefano for closing remarks. Over to you, sir.

Thank you, everybody, for joining our call today. I look forward to coming back in summer to share more about the advancements we are already making. Take care.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.