Vertex, Inc. (VERX) Q2 2023 Earnings Call Transcript

Greetings. Welcome to Vertex's Second Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. At this time, all participants are in listen-only mode. At this time I'll now turn the conference over to Joe Crivelli, Vice President of Investor Relations. Mr. Crivelli you may now begin.

Hello, and thanks for joining us to discuss Vertex's second quarter financial results. I'm Joe Crivelli, Vice President of Investor Relations. David DeStefano, Vertex's President and CEO; and John Schwab our CFO, are joining me on the call today. As a reminder, during this call, we may make forward-looking statements about expected future results. Our actual financial results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Please note that our remarks today will also include references to non-GAAP financial measures. A reconciliation of these non-GAAP metrics to GAAP is also provided in today's press release. This conference call is being recorded and will be available for replay via webcast on our Investor Relations website. I'll now turn the call over to David.

Thanks, Joe. Welcome everyone and thank you for joining us. Our team continues to execute our strategy with excellence resulting in strong second quarter financial results and furthering our competitive differentiation. I'm very excited about where we are as a company. We've made growth investments over the past three years to accelerate go-to-market success, deliver new products and advance our capabilities through acquisitions and organizational modernization. We're seeing a return from these investments starting to take hold. The second quarter demonstrated our anticipated steady progression of increased revenue growth and margin improvement. We added $21 million of recurring revenue in the second quarter alone, the highest we've reported as a public company, driving a 17.5% increase year-over-year in ARR. GRR remained consistent at 96%, while NRR climbed to 111%, which represents another record high for Vertex. Average annual revenue per customer continues to grow quarter-by-quarter and ended over $109,000 in Q2, up 16% year-over-year. Total revenue was $139.7 million, exceeding the high end of our financial guidance for the second quarter, and adjusted EBITDA was $22 million at the high end of our guidance. John will provide an update on our full year guidance in a moment. Also this quarter, because of our scaled customer count, those customers with annual revenues greater than $100,000 accelerated to 15% year-over-year. This reflects our ongoing success in the vastly unpenetrated enterprise market. These are the most dynamic companies in the world spanning every industry. They are the heart of global commerce growth, and the durability of their performance is evident even in challenging economic conditions. These scaled customer wins position us for future NRR growth and enhance profitability with the proven land and expand efforts of our market-leading customer success teams. A combination of new logo wins along with major existing customer expansion deals contributed to our strong second quarter performance and reflects the sustained growth of the lifetime value of our customer base. We have a vision to accelerate global commerce. To achieve this, we are building our solutions into all the major platforms powering global commerce backed by trusted partner relationships that help differentiate us in deals and deliver extended value to our customers. Again this quarter, we saw how our partnerships are paying significant dividends. We continue to build on the 25-plus year partnership with SAP to extend the value we provide to our joint customers. Vertex has the most complete indirect tax solution in the SAP ecosystem especially when combined with the unique capabilities of our SAP certified Chain Flow Accelerator and the uniquely strong customer referenceability we enjoy, as the leader in the enterprise market. I've also previously shared how we are driving an entirely new sales motion designed for growth, to better support our joint customers in our go-to-market efforts. I'm incredibly proud to announce that Vertex O Series is now an SAP endorsed app for the North America region. This enables even greater collaboration between our respective sales and marketing teams, to accomplish our collective revenue goals. Accordingly, we are seeing accelerating momentum in the SAP ecosystem. We had several high-profile wins in the second quarter, including a leading global semiconductor manufacturer, and a major manufacturer of private label food products. Both customers engaged Vertex to support tax transformation, as part of their S/4HANA migration initiative. We also helped one of the world's largest manufacturers of branded food products automate their manual processes around use tax, to ensure they were not overpaying suppliers and creating audit risk. In each case, an SAP platform transition drove mid-six figures of annual recurring revenue for Vertex, demonstrating the magnitude of this opportunity. We expect this will continue to be a new business driver for Vertex in the coming years, as thousands of customers still on ECC, a platform that SAP has announced they will stop supporting in 2027, migrate to S/4HANA. In the second quarter, we also won a high six-figure deal from a leading medical diagnostics company. Following a company merger, they engaged in a global S/4 migration initiative to consolidate systems and selected Vertex Cloud for tax automation, as part of this process. This was a highly collaborative process with the SAP team, to provide the best joint solution for the customer. Our Chain Flow Accelerator and Data Visualization tools, which enhance the company's tax compliance in Europe, were key to their decision as well as our ability to link multiple systems to a single tax system on a global scale. We're seeing the value of our focused and collaborative approach extend across our entire partner ecosystem, as companies leverage our connected solutions as part of their tax transformation efforts. As an example, in the second quarter, one of our longtime Oracle customers implemented a cloud-first strategy to support their business growth. Because of the trusted relationship we have earned over the years, they chose to continue their journey with us and transition to our cloud solution. This deal reflects not only how we can seamlessly transition with our customers when they are ready to move to the cloud, but also the importance of our differentiated customer experience. We also significantly expanded our relationship with a major marketplace for tickets to live events. The company's global growth drove their need to move to the cloud and modernize their indirect tax solution. In conjunction with our partners at Oracle, this OCI cloud deployment resulted in seven figures of new revenue for Vertex. We're also driving customer value with Workday, where we are enabling seamless indirect tax management for our joint customers in the cloud. Their sales team brought us into the conversation with a West Coast health care provider, to modernize their manual tax processes. Thanks to the strong connections we have built with Workday, we won this six-figure new logo deal, to automate consumer use tax. We also won a new local deal with one of the largest waste management companies in the U.S. This customer was looking to improve their business processes by consolidating their homegrown and disparate billing system on one platform that could work harmoniously with Workday. Their trusted adviser and implementer is a key partner for Vertex and brought us into this competitive evaluation process. In addition, our ability to effectively manage exemption certificates and support real-time jurisdiction classification with our lat-long locator ultimately set us apart from the competition. Tax complexity increases as businesses diversify their offerings, expand into new regions or grow their customer base. For us, this can mean new opportunities within our existing customer base either through our new offerings or by increasing use of their existing solution as transaction volumes grow. In the second quarter, one of our largest customers, a global food and beverage retailer, signed a contract expansion that included a seven-figure increase due to the high sales volume and user growth. Adoption of their mobile app is rapidly growing along with a number of items in each order. With this, they needed to support the variety of locations where mobile orders are taking place. The high performance and reliability they've experienced with Vertex Cloud solutions are the hallmarks of why they trust us with their thriving business. While I enjoy highlighting how we are selling new offerings through upsells, cross-sells, and new logos, the increased use of our solutions by existing customers represents another pervasive benefit of being the leading provider of indirect tax solutions to the largest companies in the world. Last quarter we discussed our leadership in the food delivery industry. We expanded our relationship with one of the major players in this space in the second quarter. This new three-year deal augments usage for marketplace support and drove six figures of additional annual revenue for Vertex. Our Edge offering was a significant differentiator as the customer's business model is mobile requiring pinpoint accurate tax calculation from any location. We believe we're still in the early days of advancing various and diverse business solutions for our Edge offering across multiple industries. Edge deployment enables greater flexibility and scalability regardless of where transactions occur. We also continually invest in our database to drive expansion into key growth markets. As of the end of Q2, our robust tax content database covers over 840 million effective rates and rules. With the rise in mobile commerce, more of our customers are subject to telecommunications taxes. As a result, we are seeing the investment we've made in telecommunications content drive significant new business opportunities. As an example, in the second quarter, we won an eight-figure multi-year contract from one of the big three U.S.-based telecom leaders. This major contract was driven by key Vertex differentiators including our communications tax content as well as our Edge product to support the company's nationwide retail presence. I'm also thrilled to highlight that in the second quarter, one of the world's leading providers of cloud software and infrastructure selected Vertex to support their growing telecommunications business. This upsell to an existing customer relationship will drive mid-six figures of additional annual revenue for Vertex. Turning to the international market, we won a six-figure deal with a mid-market gaming company based in Singapore who was looking for a long-term partner to support their growth in the U.S. The company owns one of the fastest-growing free-to-play RPG video games with numerous avenues for in-game purchases. Getting the tax right was incredibly important to them to create the best user experience for their gamers. Initially, they contracted with us to manage their returns filing in the states. This quarter we expanded our footprint with a five-year deal that includes our cloud solution for tax determination to create a smooth process end-to-end. As you can imagine, reducing latency and ensuring uptime are top of mind in their business. We're also able to earn the business of a European manufacturer of aviation products when they acquired a U.S. company that runs Vertex. As a result of this acquisition, we were able to win the parent company's EU business driving six figures of additional revenue. Before I close, I'd like to take a moment to share my perspective on artificial intelligence and why we are excited to leverage it even further as we incorporate AI technologies into our offerings. At Vertex, we see the adoption of advancements in AI as unambiguously strategic building on our long history of technology innovation. Over the past few years, we have seen that AI has the power and potential to augment our most valuable resource, our tax technology experts, and revolutionize how we approach indirect tax software by combining human expertise with AI capabilities we can optimize workflows and elevate the user experience. We've accelerated our investments in AI to realize and advance our commercial strategy. Our R&D investment is focused initially on streamlining content management, delivering actionable insights, and enhancing the customer experience using AI-powered copilots. Our products interact with many types of data. As a result, we can use AI to correlate data, identify patterns, and offer deeper insights for our customers. We can also leverage AI to automate parts of the tax content curation process, while maintaining a control framework to ensure the accuracy, precision, speed, and format our customers need for taxable transactions. In its current state, AI is a probabilistic technology which gives an answer that is close or good enough which is often acceptable for recommendation engines. But in the enterprise market we serve where an incorrect tax answer can lead to massive penalties, a deterministic answer is required. Our solutions combine multiple technologies to take advantage of both probabilistic and deterministic technologies. These pair with the appropriate use cases to work with our tax technologies and customers to increase productivity, improve user experience, and empower decision intelligence. By applying emerging AI technologies in thoughtful ways, we can drive enhanced productivity, usability, and value for our customers. We'll have more to share as these investments evolve. John will now take you through the financials.

Thanks, David, and good morning everyone. Today, I'm going to review our second quarter financial results and provide guidance for the third quarter and full year 2023. Total second quarter revenues grew 17.1% year-over-year to $139.7 million, exceeding the upper end of our quarterly guidance by approximately $2.7 million. Our subscription revenues increased 16.6% period-over-period to $117.8 million and services revenues grew 20.2% to $21.9 million. Annual recurring revenue or ARR was $467.7 million at quarter end, up 17.5% year-over-year. Our net revenue retention or NRR increased to 111% up from 110% for the first quarter of 2023 and the prior year. And our gross revenue retention or GRR was 96% at quarter end, consistent with prior quarters and within our historical range of 94% to 96%. Our average annual revenue per customer or AARPC continues to steadily increase and was $109,170 in the second quarter, up from $104,370 in the first quarter of 2023. Note that AARPC is based on the direct customer count, which is disclosed in our earnings press release that was issued this morning. Our cloud revenue was $51.2 million in the second quarter, up 27.3% from last year. For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. Gross profit for the second quarter was $99.1 million and gross margin was 70.9%. This compares with gross profit of $84.3 million and a 70.7% gross margin in the same period last year. Gross margin on subscription software revenue was 78.4% compared to 76.9% in last year's second quarter and 78.4% in the first quarter of 2023. Gross margin on services revenue was 30.5% compared to 36% in last year's second quarter. Turning to expenses. In the second quarter, research and development expense was $11.9 million compared to $9.8 million last year. With capitalized software spend included, R&D spend was $24.9 million for the second quarter, which represents 17.8% of revenue as compared to 16.6% of revenue in the prior year period. Our selling and marketing expense was $31.8 million or 22.7% of total revenues, an increase of $3.2 million and approximately 11.3% from the prior year period. The year-over-year increase was a result of the expansion of our go-to-market and customer success organizations in the second half of 2022. Selling and marketing expense growth has since moderated as we reached the end of our heavy investment period. Our general and administrative expense was $33.3 million or 23.8% of total revenues, an increase of $5 million from the prior year period. The increase is due to the infrastructure investments we are making to support our long-term growth. G&A expense was also up $4 million sequentially. Our ERP monetization went live in the second quarter and was the major driver of the sequential increase. As this investment is now mostly complete, we expect G&A expense growth to moderate going forward. Adjusted EBITDA was $22 million in the second quarter of 2023, an increase of $4.2 million year-over-year and in line with the upper end of our quarterly guidance. While both operating and free cash flow were negative in the second quarter, this was largely due to the ERP modernization project, which caused a slight delay in the timing of billing and collection activity of certain customer accounts. This billing delay has been corrected and I'm very confident that the cash collections will normalize in the coming months. We continue to expect free cash flow to be positive for the full year. Demonstrating this, we have already seen significantly higher than usual cash collections in July. We ended the second quarter with over $41.9 million in unrestricted cash and equivalents and total bank debt was $48 million. Our investment securities totaled $11.2 million. For additional liquidity, we also have $200 million of unused availability under our line of credit. Turning now to guidance. In the third quarter of 2023, we expect total revenue in the range of $141 million to $143 million, which would represent 13% year-over-year growth at the midpoint and adjusted EBITDA in the range of $24 million to $26 million, which would represent year-over-year increase of approximately $7.2 million at the midpoint. The strong first half financial results set Vertex up well to outperform our initial expectations for full year 2023. Accordingly, we are increasing our full year guidance as follows. We now expect total revenues for the year in the range of $556 million to $562 million which represents 14% full year growth at the midpoint, up from 12.5% growth at the midpoint in our prior guidance. We are also increasing our full year adjusted EBITDA outlook to a range of $93 million to $97 million, up from $92 million to $96 million. Our new guidance represents a year-over-year increase of $16 million at the midpoint. We continue to expect cloud revenue growth of approximately 27% for the full year.

Thanks, John. I'm extremely proud of the entire Vertex team. Collectively, they are driving this business to grow, profit, and build shareholder value. I want to acknowledge and thank them all. Every employee throughout our organization worked extremely hard over the past few years to strengthen our company for the long haul and to build on our 40-year track record of success. From the outset of our journey, I expected us to achieve new heights. Our revenue acceleration and strong profitability in Q2 show me that we are where we expected to be and have good visibility to continue executing on our strategy. Our growth investments are paying off. Our market leadership position is strengthening and we are confident in our ability to sustain increasingly profitable growth. Net-net we believe we are well positioned to continue our current trajectory for the foreseeable future. Our increased guidance for the balance of the year reflects that. With that, we will take your questions. Operator, please go ahead.

Thank you. Our first question is from Joshua Reilly with Needham & Company. Please proceed with your question.

All right. Thanks for taking my question. Nice job on the quarter here. Can you just explain how the mix of leads has shifted somewhat with more deals coming from Salesforce Workday and Microsoft Dynamics versus historically primarily Oracle and SAP? And does this shift have any impact on your forecasting or visibility to demand? And has it overall increased your level of net new leads with a bit stronger growth here? Thanks.

Thanks, Josh. Overall, we have seen an increase in our number of leads. However, our efforts with SAP and Oracle remain strong. I consider this to be an important part of our strategy. We have been deliberate in targeting ecosystems smaller than SAP and Oracle, and we are seeing good progress in that area. It is quite interesting that the size of deals we are securing from these newer ecosystems is still contributing to an increase in our average annual revenue per customer. This highlights the market's appreciation for our ability to address complexity.

Got it. And then the adjusted EBITDA margin guidance was left unchanged. Even with maybe the slight beat in the quarter, I guess, you would say or the higher end of guidance. And I think investors are expecting some growing operating leverage going forward. How are you thinking about investments versus profitability maybe here in the second half and as we go into 2024?

Our EBITDA margin has progressed positively in the first two quarters and is projected to see a significant increase in Q3 and Q4. We are continuing to leverage our operations as we advance through the latter part of the year. This expectation was part of our initial plan, and we have now adjusted our outlook upwards. Since we are ahead of our revenue forecast, we are being cautious with our investments while also capitalizing on market opportunities. AI plays a vital role in our decision-making at this stage, and we are recognizing promising avenues to pursue. As we have consistently stated, our margins are expected to rise as the year progresses, and we anticipate this trend will carry on through the rest of 2023 and into 2024.

Great. Thanks, guys.

Thank you. Our next question is coming from the line of Chris Quintero with Morgan Stanley. Please proceed with your question.

Hey, guys. Congrats on the strong results here. We've been hearing from system integrators and other enterprise software companies that we're seeing a bit of a deceleration in new implementation work around large transformational yields, but it seems like that is not affecting you as much. Is there anything you would attribute your ability to put up these strong results despite that kind of broader backdrop? And then I have a follow-up for John.

Sure. Chris, it's important to recognize that several factors contribute to our business opportunities. First, changes in a company's operating business model can create demand, regardless of their systems. This might involve shifts in their revenue model, acquisitions, or entering new markets, all of which can put pressure on a tax department. Second, the current regulatory landscape is quite intense, as governments seek new revenue sources, which also creates opportunities for us to add value, independent of any system changes. Lastly, we do see demand stemming from system changes as well. That's why we continue to achieve strong results, as we have a diverse range of factors driving demand for our business.

Got it. Very clear. John, you raised the full year total revenue guidance but kept the cloud revenue the same. Should we interpret that as you expecting better performance with on-prem and services compared to cloud, or are you confident in better performance across the board?

I think what we observed in the first half was a very strong performance, particularly from on-prem. We wanted to ensure that this was taken into account in the guidance we provided. We feel optimistic about the prospects for the second half of the year regarding cloud, with a 27% growth being quite robust. Our services are also in excellent condition, and we believe there are opportunities for additional services throughout the year, both in the MSO area and with consulting implementations.

Excellent. Thank you.

Thanks, Chris.

Thank you. Our next question is coming from the line of Adam Hotchkiss with Goldman Sachs. Please proceed with your question.

Great. Good morning and thanks for taking the question. I guess to start David, would just be great to get an update on how things are going in Europe. I know that things have been improving for you there from a partner and a referenceability perspective and you mentioned some things on the call. I would just be curious if you saw that momentum accelerate this quarter as part of the strength in the quarter.

Yes. No, I wouldn't say it accelerated. We haven't seen any material degradation, but I would not say it's accelerated. I really like the pipeline of SAP activity that we're building. If again you think about it SAP has got 30,000 or 40,000 customers we only have 1,800 or so of those. So as they continue to march to the migration plans that they're driving, we continue to see more opportunities than we ever historically saw because of the new motions we have with SAP. I wouldn't say it's accelerated, but I'm confident that we continue to see good activity in the space and opportunities for continued growth.

Got it. That's really helpful. And then I would just be curious what kind of demand you're seeing some of your earlier product cycle stories like Chain Flow Accelerator and Edge. How those are evolving just expectations?

Yes, Edge has proven to be a significant differentiator. I'll begin by discussing Edge. The shift in infrastructure towards the Edge has been a crucial strategic goal for our team, which we initiated a couple of years ago. We're still in the early stages of gaining traction there, which I find very promising because the ways customers are looking to implement these solutions are continually changing. This indicates that we're venturing into various industries and areas that the team had not anticipated, as customers creatively utilize this technology, and that is quite exciting to me. Chain Flow stands out as the only certified SAP offering available, certified by SAP compared to our competitors, which gives us a strong advantage in that sector. Conversations with SAP sales representatives reveal that they recognize this as a valuable enhancement to the customer experience, resulting in new opportunities for us. Both offerings are positioned well. As I mentioned previously, having references is crucial. When these early adopters experience satisfaction over a year or two, they become powerful references, fueling a cycle of opportunity for us. I believe we are following a traditional pattern where we see that uptick beginning. This should provide us with a favorable momentum as we engage with our existing customer base and explore future opportunities.

Got it. Really helpful. Thanks David.

Thank you. Our next question is coming from the line of Daniel Jester with BMO Capital Markets. Please proceed with your question.

Hey good morning. Thanks for taking my question. David maybe just a comment on the competitive environment. You had a lot of big wins that you mentioned in your prepared remarks were those competitive takeaways? And maybe just overall how are you seeing the competitive environment at the moment? Thank you.

Yes, I believe there may have been one or two competitive takeaways, but the majority were new accounts. We continue to see significant untapped opportunities. As I've mentioned, the installations of Oracle and SAP provide us with a great chance to deepen our presence in our core market. The competitive landscape seems to be focused heavily on price, indicating that the value of our offerings is distinct, and competitors are forced to compete primarily on price despite already being lower than us. Our customers continue to choose us because they appreciate the complexities we address for them. In the upmarket, Thomson is our main competitor, while in the mid-market we often see Avalara entering that space, with Sovos being a key competitor internationally.

Great. And then John I appreciate the color on the operating cash in the quarter and some of the issues there. As I think about the seasonality for the back half, are you going to get some catch-up as some of those billing issues gets done? And maybe you can just give us a little bit more color about the trajectory of cash generation for the remainder of the year? Thank you.

Thank you for the question, Dan. You're correct. Typically, the latter half of the year is our strongest period, with Q4 being our top cash generation quarter, and we expect that to continue. As I noted in my earlier remarks, we saw an increase in cash receipts in July, which aligns with our expectations following a slower cash month in June. We are catching up now, and I anticipate that we will certainly be back on track very soon. This will contribute to the momentum as we move into the fourth quarter, which has historically been our strongest. We feel confident about how this will develop, as it seems to follow the same patterns we have observed in the past.

Okay. Thank you very much.

Thanks.

Thank you. Our next question is coming from the line of Matt Stotler with William Blair. Please proceed with your question.

Yeah. Hey there. Thank you for taking my questions. I think first off, let's double-click on some of the commentary you've given around SAP and maybe Oracle as well. I'll just double click on how you're expanding those relationships, right? David, I think you mentioned some new sales motions with SAP you could dig into that a little bit more and then extrapolate that to how you expect it opens up more of the substantial installed bases with those two partners?

We continue to expand our efforts with SAP in various ways. We've discussed our unique product offerings, which are a result of both acquisitions and our own development. Now, we have a differentiated product line that we're integrating with their sales teams, where they are incentivized to introduce us to opportunities. We have achieved endorsed app status, which will enhance our collaboration with their sales and marketing teams, providing us greater access to their customers. We're strategically engaging with SAP on multiple levels. Additionally, it's interesting to note that some of the largest system integrators, like IBM, who previously did not partner with us, are now working with us on significant transformations. This has also expanded our network of system integrator partners who are now recommending us in opportunities, contributing to customer value and success. I'm very pleased with how our team is leveraging this opportunity. Regarding Oracle, we have a strong relationship with them as they are a long-time trusted partner who has provided us access to both their cloud and application teams. We are engaging with both sides to explore customer opportunities and present a joint value proposition. Customers have reported positive experiences regarding the performance of our products on the OCI platform, which has been advantageous in competitive scenarios.

Very helpful. Thank you. And then, as a follow-up on NRR, I see that tick up again to 111%, I think a new high right? Would you want to just walk through what the drivers are there and where you think that metric can go from here?

Yeah. I'll start with overall and then John, can hit the specifics. I think, we continue to focus on our customer success function. And I think that's really where we're seeing the uptick of growth in terms of we continue to build new products. We have a very clear strategy. We build new products we have the best customers in the world. We need to be able to bring those products to the customer base successfully, educate them on what we have, and be there when there's opportunities to add value. And we're seeing a good motion that continues to evolve as the maturity of that function and the investments we've made over the last couple of years to build that out, is playing out. We also saw some very nice entitlement expansions in the quarter which again I think speaks to the largest customers in the world, this is the heart of global commerce. They're continuing to drive their businesses forward. And that usage on our – expanding usage on existing products continues to be the backbone of our growth. As for the specifics of the breakdown I'll let John highlight that.

I think it really starts with the stability we've seen in the Gross Renewal Rate, which has been around 96% for the past several quarters. That's a solid figure. As David mentioned, it heavily relies on our customer success teams staying proactive about the needs of our ordered customers. When we consider the growth drivers that contribute to our Net Renewal Rate, there are three main components. It's primarily driven by cross-selling and migration activities with our existing customers as they explore additional products we offer, along with the new entitlements David mentioned. Lastly, we also see price increases contributing to this growth. We observed positive movement in each of these areas over the last quarter, which gives us confidence in the opportunities ahead. Furthermore, this is our first instance of reaching 111, and we take great pride in that accomplishment. This success is a result of considerable hard work at the outset, coupled with a strong product offering and favorable market adoption.

Great. Thank you, again.

Thank you. Our next question is coming from the line of Andrew DeGasperi with Berenberg. Please proceed with your question.

Thanks for my question. First on the guidance for the full year, I mean based on the Q3 that you're laying out, it sounds like you're guiding for an implied growth of 11% in total revenue for Q4. I mean, given your recent history in Q4, you tend to really come in strongly and given your comments on the free cash flow being strong in that quarter. Is there any way that this is really just conservatism on your part for that number? And then I have a follow-up. Thanks.

Yes, Andrew, thanks for the question. Again, I think, as we saw, we had posted some very good results for the first half. As we've set guidance, we continue to be very thoughtful about how we think about what the future looks like, we feel like the business drivers are strong, but we're always mindful of kind of some of the stuff deeper into the year. We just want to make sure that we have confidence in the level that's there. So, we try to be thoughtful as we set that guidance and look at what that could be. Again, we did bring up some of that guidance in the back. And again on an overall basis, we're increasing the amount of revenue growth from our initial guidance that we set. But again, we just always want to be very thoughtful about what the back half looks like.

On the cash flow side, I know that the ERP modernization will enhance cash collection. I expect billings growth to exceed what we saw in Q2. However, I'm curious about the additional benefits beyond general and administrative expenses that we might see in the model. For instance, will the intensity of capital expenditures decrease or slow down? Are there any other highlights you can share?

Yes, I think that's a great point, Andrew. When we consider the ERP modernization, the costs associated with it are accounted for in the free cash flow. As we approach the completion of this process, we expect to see more of that cash flow contributing to our bottom line. Additionally, the established rhythm we've developed over the years with our previous system will improve our visibility into future client needs, facilitate timely billing, and ensure accuracy. We are confident that this system will enhance our throughput from the sales stage to billing and collection, benefitting the entire organization. However, it's important to note that a significant portion of the costs will be associated with general and administrative expenses.

Great. Thank you.

Sure.

Thank you. Our next question is coming from Alex Sklar with Raymond James. Please proceed with your question.

Thank you. Dave, I wanted to start with the eight-figure telecom provider when you talked about in the quarter. Can you just elaborate a little bit more on how you got pulled into that opportunity? What were they using before booking with you? And maybe what catalyst was for them to kind of switch what they've been doing previously? Thanks.

Yes. These were existing customers with whom we were deepening our relationship. After acquiring various systems, they had several diverse capabilities, some of which we hadn't accessed before. Typically, when we engage with a customer, the initial trigger is often a specific pain point. However, there are usually other areas of their business that we don't initially get to serve. This is part of our strategy to establish and expand our presence. As they consider changes in their systems or encounter challenges in their operations, we step in to help. Two key factors in this situation were our Edge computing solution and our continued investment in telecommunications content. They faced challenges with the quality and accuracy of their in-house capabilities, and transitioning to our Edge solution provided them the confidence they needed. Additionally, we reached a level of efficiency in coverage with our telecommunications content that excited them as they ventured into a new area of their business. These two elements are significant drivers that allow us to enhance our offerings and create more opportunities with our existing customers.

That's great color. Thank you. And then, John, maybe one for you. As you start to lap kind of the faster investment period started last year, can you just talk about the growth in ramp sales and if you've seen any in terms of the number of reps that are obtaining quota versus prior quarters? Thanks.

Yes, we made significant investments in sales and marketing to create opportunities both in the US and Europe, and we're beginning to see some benefits from that. In the US, our investments were targeted at specific channels, particularly with some larger systems, to ensure that we are effectively reaching the market for these opportunities. While I don't have specific productivity metrics to report, we are starting to see positive results from these investments. We feel optimistic as we continue to develop and nurture newer relationships, and we are starting to identify opportunities in the second tier of ERP groups, as David mentioned earlier.

All right. Thank you both for the color.

Thank you.

Thank you. Our next question is coming from the line of Steve Enders with Citi. Please proceed with your question.

Okay. Great. Thanks for taking the questions this morning. I guess I just want to ask first on the strong ARR side. I mean pretty impressive growth there. How are you feeling about the broader demand environment and the pipeline for the rest of the year? And I guess were any larger deal kind of pulled in, or anything maybe surprised you to the upside in the quarter as well?

I don't think anything surprised us for the quarter. I think we had coming out of Q1, we had pretty good visibility to the quarter and the team did a nice job of executing it on plan. We do have good visibility to our forecasting for the rest of the year. And I think that's why we've been comfortable to raise guidance. Because we enjoy very diverse drivers of opportunity and we've been successful in expanding some of those relationships we’ve been talking about it Microsoft or SAP, etc. I think those are really good balances to some of the uncertainties that the economy still continues to present for some. And I think that's why we feel confident as we do with our numbers.

Okay, that's helpful context. John, could you clarify the impact on billings and cash flow for the quarter? What was the actual impact in the second quarter, and how should we expect that to affect the third quarter?

Yes. Again, what I would tell you is again as I saw the results come through our cash collections were a little bit soft were a bit in the month of June. Again, I've seen that then to show back up in July. I still think we've got a little room to go from a cash collection standpoint. So I don't really have a magnitude number to kind of to pass around. So I think but I do feel like again as I mentioned in my prepared remarks the billing delay is resolved. That's done. We're right on target. The cash collections are starting to come in and have been coming in as we saw in July. I anticipate that to continue as we continue to again make for some of that billing that was delayed and we'll start to see that show up. And again, a big piece of some of the driver as we move forward through the back half from a free cash flow standpoint is really going to be around the lack of spend with the implementation fees and everything else that is now largely part of our operating system. So, I don't have a full magnitude number for you but I think you can see on a six-month to six-month basis we're about $10 million behind from where we were about a year ago. And so I anticipate to see certainly hopefully bridging that and making up some pretty good progress on that through the back half of the year.

Okay. Perfect. Thanks for taking the questions.

You bet.

Thank you. Our next question is coming from the line of Patrick Walravens with JMP Securities. Please proceed with your questions.

Great. Thank you. And congratulations. It's great to see. So last quarter I remember you guys told us that January was a little slow and then you made it up in March. What was the linearity like in Q2?

It was better. I think it was definitely better than we had seen. Certainly, Q1 was a little bit of an anomaly for our business. We definitely saw more alignment there across the quarter. We typically as a business do a little better the last month of every quarter that it's not hugely different but it is always a little bit better at the end of the quarter. And I think this quarter was no different. But there was no anomalies like it was in Q1.

Great. And then on the whole AI front David let me ask it this way. What questions have you sort of been exploring internally in terms of how AI may impact your business? What have been the things you've been trying to get the answer to before you determine your strategy?

Yes, we are very engaged in this area, and I appreciate your question. We're examining both our internal productivity and the customer experience. I believe AI will be a crucial element of our customer experience moving forward. On the commercial side, we are focused on how it can enhance the value we provide to our existing customers and potentially help us enter new markets. The team is developing some intriguing initiatives that are creating valuable opportunities, particularly as we enhance internal productivity. Given the large volume of data we manage, we are exploring ways to be more effective and how to utilize our technologies for the highest value tasks to improve customer experience. We have been employing machine learning for years, and this represents the next evolution in technology for productivity, which will ultimately enhance our bottom line. It's important to note that maintaining the quality of our content is a fundamental aspect of our brand. Accuracy is critical; we cannot afford to be just approximately right. Our customers rely on us for the precision we offer, and I am vigilant about ensuring we do not rush into anything that could compromise the brand and trust we have built over 45 years.

Great. Thank you.

Thank you. Our next question is coming from the line of Brad Reback with Stifel. Please proceed with your question.

Great. Thanks very much. John just a tactical question. The cost of services was up pretty substantially quarter-over-quarter. Were there any one-time items in there?

Yes, thank you for the question, Brad. The cost of services has increased. We believe there is an opportunity developing on the backend, and we need to ensure we hire additional staff to manage these costs moving forward. We have added some headcount to prepare for what we anticipate is coming. However, it is still early, and there has been some delay in achieving the full productivity and utilization we expect. This was a significant factor influencing those costs. I believe this team will soon pick up the pace, and we expect to see a rebound.

Great. And then David, as we think about the cost savings that you'll generate from the new ERP system and the other investments you've made. How do you think about what is to drop to the bottom line versus what gets reinvested in the business? And maybe asking it slightly differently. Do you think there's a step function up in margins in the near term, or is it sort of moderate increase in the margin profile for the next couple of years?

Yes, that's a good question. In the latter half of this year, we're projecting an increase in EBITDA margin from 15 to 17.5 and up to 19 in Q4. We're planning for an increase in leverage, and I expect our EBITDA margin will show solid performance as we head into 2024. Our investments in sales, customer success, and content have positioned us to increase our profitability. We're seeing an acceleration in opportunities, and I won't pass on those to boost the bottom line. I will always invest in sales, marketing, and R&D when those opportunities arise. We are outperforming in revenue due to more opportunities than anticipated. However, there will be a natural progression in our business. We are already anticipating significant margin improvement in our forecast for the latter half of the year, and I expect that trend to continue.

Great. Thanks very much.

Thank you. There are no additional questions at this time. So I'd like to pass the floor back over to management for any additional concluding remarks.

All right. Thanks everybody for joining us today. As always, if you have follow-up questions, please reach out to me at [email protected] and have a great rest of your day.

Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation, and you may disconnect your lines at this time.