Vertex (VERX) Q3 2025: Cloud Revenue Jumps 29.6% Amid SAP and E-Invoicing Tailwinds
Vertex delivered strong cloud-driven growth in Q3, offset by customer-specific headwinds and a second consecutive guidance reduction. Strategic investments in e-invoicing and AI are gaining traction, while SAP migration and regulatory mandates set up a multi-year growth runway. Leadership transition and a $150 million buyback reinforce long-term confidence, but entitlement softness and customer churn require close monitoring into 2026.
Summary
- Cloud Acceleration Outpaces Legacy Drag: Cloud momentum and e-invoicing uptake counterbalance churn and entitlement softness.
- Operational Leverage Emerges: Automation and expense discipline drive record EBITDA and strong free cash flow.
- 2026 Growth Set by SAP and E-Invoicing Mandates: Regulatory deadlines and migration cycles underpin next year’s growth inflection.
Performance Analysis
Vertex’s Q3 results underscore a business in transition, with cloud revenue up 29.6% and total revenue rising 12.7% year over year, in line with guidance. Subscription revenue grew at a similar pace, while services revenue kept pace, showing resilience in core recurring streams. Adjusted EBITDA reached a record, as automation and cost controls offset headwinds from customer churn and entitlement contraction.
However, net revenue retention slipped to 107%, down one point sequentially, reflecting the impact of three large enterprise bankruptcies (Big Lots, Party City, Joann Fabrics) and accelerated customer migrations to Vertex’s cloud platform. Gross revenue retention held strong at 95%, within the best-in-class range, but the company’s second consecutive guidance cut signals persistent friction in expanding wallet share from existing customers.
- Cloud Revenue Mix Shift: Cloud now comprises nearly 57% of business, shifting the revenue base toward higher-growth, higher-margin segments.
- Entitlement and True-Up Slowdown: Lower-than-normal growth from customer entitlements and true-up activity muted net expansion.
- Expense Discipline Drives Margin: Automation and cost initiatives delivered record EBITDA and $30.2 million in free cash flow.
While headline growth remains solid, the company’s ability to convert pipeline and expand within its install base is being tested by macro and customer-specific challenges.
Executive Commentary
"The strength of our strategy was evident in our strong cloud revenue growth, the increased margin leverage driven by automation initiatives, and strong cash flow performance. We also saw accelerating traction in e-invoicing and improved SAP activity. However, offsetting this was the persistence of lower than typical growth from existing customer entitlements, as previously discussed in our second quarter earnings call."
David DiStefano, President and CEO
"Adjusted EBITDA was a record $43.5 million exceeding the high end of our guidance by $2.5 million... The lower margin was due to investments in automation that are expected to drive higher margins into the future."
John Schwab, Chief Financial Officer
Strategic Positioning
1. Cloud and E-Invoicing as Growth Engines
Vertex’s cloud platform and e-invoicing solutions are now the primary growth levers. The Ecosio, e-invoicing business, contributed $4.1 million in Q3, up 30% YoY. Over 100 new e-invoicing customers have been landed since general availability in March, with mandates in Belgium, France, and Germany expected to drive further acceleration. Cloud migrations with SAP and Oracle remain robust, and the company sees a “3x” opportunity within its existing install base through cross-sell and expanded usage.
2. AI and Product Innovation
AI initiatives are progressing on three fronts: new logo wins, wallet expansion, and retention through ecosystem interoperability. Smart categorization, AI-driven tax classification, is gaining early traction, especially in retail, with plans to expand into new verticals. The launch of Kintsugi Powered by Vertex, SMB compliance automation, opens a new segment with an AI-native experience, leveraging Vertex’s core tax engine.
3. SAP Migration and Regulatory Tailwinds
The SAP S4 HANA migration cycle is a multi-year catalyst, with 2026 and beyond expected to see an acceleration as regulatory deadlines approach. Vertex’s deep integration and “partner-first” strategy with SAP and the Big Four accounting firms position it to capture this wave. The company’s differentiated capabilities in complex, multinational environments are a key competitive advantage.
4. Operational Leverage and Capital Allocation
Expense discipline and automation are delivering tangible margin gains, with adjusted EBITDA margin at 22.6%. A $150 million buyback authorization demonstrates board confidence and provides downside support. Investment in Ecosio and AI remains a near-term margin headwind but is expected to inflect by mid-2026.
5. Leadership Transition and Continuity
Incoming CEO Chris Young, former Microsoft EVP, brings deep ecosystem experience and AI expertise. Outgoing CEO DiStefano will remain as non-executive chair, ensuring continuity as Vertex navigates the next phase of platform and international expansion.
Key Considerations
Vertex’s Q3 encapsulates the tension between near-term execution challenges and long-term strategic opportunity. Investors should weigh the following:
- Cloud and E-Invoicing Momentum: Cloud revenue and e-invoicing adoption are outpacing legacy drag, positioning Vertex for multi-year growth as regulatory mandates take effect.
- Customer Churn and Entitlement Headwinds: Bankruptcies and accelerated migrations impacted retention, exposing the sensitivity of expansion metrics to macro and customer-specific events.
- SAP and Regulatory Pipeline Visibility: SAP S4 HANA migration and e-invoicing deadlines in Europe provide a visible, high-value pipeline into 2026 and beyond.
- Margin Leverage and Investment Cycle: EBITDA margin is expanding as automation and expense controls take hold, but ongoing investments in AI and e-invoicing will pressure near-term profitability.
- Leadership and Capital Allocation: The CEO transition and buyback authorization signal confidence, but execution risk remains as the company navigates leadership change and integrates recent acquisitions.
Risks
Vertex faces risks from continued customer-specific churn, entitlement growth softness, and the timing of SAP and e-invoicing adoption. Two consecutive guidance cuts raise questions about pipeline visibility and forecasting discipline. Execution on AI and e-invoicing investments, as well as integration of Ecosio, remain critical to sustaining margin and growth targets. Competitive intensity, especially in Europe, and macroeconomic volatility could further challenge expansion and retention rates.
Forward Outlook
For Q4 2025, Vertex guided to:
- Revenue of $192 to $196 million
- Adjusted EBITDA of $40 to $42 million (21.1% margin at midpoint)
For full-year 2025, management expects:
- Revenue of $745.7 to $749.7 million
- Cloud revenue growth of 28%
- Adjusted EBITDA of $159 to $161 million (21.4% margin at midpoint)
Management highlighted:
- SAP migration and e-invoicing mandates as primary growth drivers into 2026.
- Expense discipline and investment in automation and AI as levers for future margin expansion.
Takeaways
Vertex is executing a strategic pivot toward cloud, regulatory-driven growth, and AI-powered automation, but is contending with near-term friction from customer churn and entitlement contraction.
- Cloud and e-invoicing are now the principal engines of growth, providing resilience and visibility as legacy revenue streams mature.
- Operational leverage is emerging, with automation and cost control offsetting investment drag from new product initiatives.
- The 2026 setup is compelling, but investors should monitor retention trends, pipeline conversion, and execution on AI and Ecosio integration as key indicators of sustained momentum.
Conclusion
Vertex’s Q3 demonstrates the company’s ability to generate robust cloud growth and margin expansion despite customer-specific headwinds. Strategic investments in e-invoicing, AI, and SAP partnerships are building a durable pipeline, but the path to long-term targets will require consistent execution, improved retention, and successful leadership transition.
Industry Read-Through
Vertex’s results highlight the accelerating shift toward cloud-native tax compliance and automation, driven by regulatory mandates and ERP migration cycles. Broader enterprise adoption of AI is tempered by requirements for traceability and auditability, suggesting “human-in-the-loop” models will dominate in regulated functions. European e-invoicing mandates are set to drive a wave of adoption, benefiting vendors with deep content coverage and integration capabilities. Competitors in tax, compliance, and ERP adjacencies should anticipate a multi-year cycle of platform consolidation and cross-sell expansion, especially as large enterprises modernize core finance and supply chain infrastructure.