Vertex Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 12 speakers on the call.

Operator

Greetings. Welcome to Vertex's First Quarter 2023 Earnings Conference Call. Please note this call is being recorded. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation.

Operator

At this time, time, I'll now turn the conference over to Joe Crivelli, Vice President, Investor Relations. Mr. Crivelli, you may now begin.

Speaker 1

Hello and thanks for joining us to discuss Vertex's financial results for the Q1 ended March 31, 2023. I'm Joe Crivelli, Vice President, Investor Relations David DeStefano, Vertex's President and CEO and John Schwab, our CFO are also on the call today. As a reminder, during this call, we may make forward looking statements related to expected future results. Our actual results may differ materially from our projections call due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission.

Speaker 1

Today's remarks will also include references to non GAAP financial measures. Additional information, including reconciliation between non GAAP financial information call, the GAAP financial information is provided in the 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.

Speaker 2

Thanks, Joe. Welcome everyone and thank you for joining us. 2023 is off to an exciting start. Through the focused efforts of our global team, we delivered great execution across all areas of the business. In the Q1, we saw widespread contribution of our revenue growth balanced across new logos and cross sells as well as software and services in spite of the uncertain macro environment.

Speaker 2

We also saw continued positive momentum in the metrics we use to track our success. Annual recurring revenue grew 17.3% in the quarter. GRR and NRR remained At consistently healthy levels of 96% and 110%, respectively, average annual revenue per customer conference call, the company's customer was 104,370 at the end of the Q1, up 16.4% year over year and the number of scaled customers For those generating over $100,000 of annual revenue grew 13%. This resulted in revenue of $132,800,000 and adjusted EBITDA of $20,200,000 We accomplished this while continuing to execute on our multiyear growth strategy with time, we are focused investments in R and D, go to market, customer success and corporate infrastructure. With these investments beginning to taper off, we are optimistic about the opportunity for earning leverage in the back half of twenty twenty three.

Speaker 2

Time, we still see opportunity and demand as companies continue tax transformation efforts in response to changes within their business and growing compliance requirements. Governments often look to indirect tax as a source of additional funding in challenging economic times. They lean into the enforcement of tax codes to replace lost revenue. As audit pressure builds, so does the need for companies to reevaluate How they calculate and remit taxes. And while they've been playing catch up with the accelerated pace of digital transformation, governments are now Putting new rules and legislation in place to ensure that cross border digital commerce is taxed fairly and this has Sweeping impact as most businesses today have an online presence.

Speaker 2

Growing revenue, doing business in new places And delivering a seamless omnichannel experience all add a layer of complexity that makes automation critical to managing compliance at scale for global enterprise. This in turn leads to demand for Vertex solutions. Our notable strength in the enterprise market was evident again this quarter. Our unified platform, multi cloud strategy and deep partnerships continue to drive strong win rates for our sales and partner teams. These same differentiators are also empowering mid market businesses as they expand their business models, drive global omnichannel strategies and continue their digital transformations.

Speaker 2

This quarter with our focused investment in building our go to market ecosystem with Microsoft, Workday and Salesforce, We saw nice traction with mid market customers and we continue to see a steady stream of customers expanding their usage of the existing solutions they license with us. Beyond the technical strength of our solutions, it's the trust and experiences we deliver that gives our customers the confidence to grow with us We don't talk a lot about our services business on these calls, I believe the steady growth that continues in both revenue and new business activity reflects how businesses continue to invest in their tax technology. We had a strong quarter in our services business and have a healthy backlog of SOWs that should enable continued growth in services revenue. Time, I'd like to share a few highlights that really reflect how pervasive tailwinds contributed to the strength of the quarter. An existing customer, one of the largest social networks in the world, significantly expanded its business with Vertex in the Q1.

Speaker 2

The customer manages an online marketplace where goods are bought, sold and traded. As part of this aspect of their business, they are seeing more and more products That are subject to sales and use tax liability. Accordingly, they tripled the revenue tier of their entitlements, resulting in 7 figures call, I will now turn the call over to VERTEX. This company is not alone in the challenge to manage the growing tax complexities of operating a marketplace. Vertex released a global research study in Q1 that revealed that 81% of responding businesses are taking advantage of marketplaces to attract new customers and sell into more countries.

Speaker 2

Both marketplace operators and sellers need to feel confident that their chosen platforms will enable them to meet growing compliance requirements while maintaining top performance. This was a driving factor in a 6 figure new customer win with another leading e commerce platform. We won this business due to our Edge product, our industry leading customer support and for more consistent and predictable pricing. Perhaps the biggest reason for selecting Vertex was that the downtime and performance of their existing solution was unacceptable In an industry that requires near perfect tough time. We also had a very exciting new logo win with 1 of the largest SaaS companies in the world, conference call, which also selected Vertex as their indirect tax platform in the Q1.

Speaker 2

The customer is experiencing significant Growth both organically and through acquisitions, which increases the number of source systems the tax department needs to pull data from for their clients. Our ability to effectively manage data across multiple systems and integration points into a single cloud solution allowed us to earn their business. Time, the 7 figure deal includes complex integrations with the customer CRM, ERP and accounts payable systems. The strength of our ecosystem also played a significant role in this competitive takeaway as we partnered with PwC and Accenture. This is a common scenario as most companies today are managing applications and workloads across fragmented environments.

Speaker 2

Our approach wins because we offer a single platform for all indirect tax types with interfaces to the multitude of systems our customers rely on each and every day. Time, I can't emphasize enough how important it is for a tax professional to have confidence and consistency in their tax outcomes across all their systems, Particularly as we see audit pressure intensify. 1 of the major food delivery companies Became a customer this quarter when audit pressure opened their eyes to the importance of tax calculation accuracy to support their fast growing business. This is a segment we have come to lead in the past few years. It's an industry where complexity range and in house solutions and manual process time, we are simply not enough for tax management.

Speaker 2

Sales tax for food delivery can be impacted by hundreds of esoteric factors such as location of the restaurant, Location of the end customer, how the food is prepared and even the ingredients in the food make it one of the most complex industries we serve. Time, our robust tax content database, which today covers more than $700,000,000 effective rates and rules, along with our geolocator capabilities It delivers pinpoint tax area ID assignment, gives our customers more precise tax calculation accuracy. And finally, let me share an example that highlights how we are winning in the middle market. A provider of industrial parts and accessories based in Europe selected Vertex in conjunction with an Oracle ERP Cloud Transformation. As this company grew, the complexity of their needs changed.

Speaker 2

They outgrew an incumbent competitor. Our ability to handle a complex ERP integration was an important winning factor for Vertex. Time, I am proud of the success our teams are having on the go to market front. The combination of our investments in expanding the go to market team As well as delivering new products and services has really helped to differentiate Vertex with customers and prospects. We are pleased with our progress in using intelligent To monitor for tax code changes and keep our tax content database up to date, we are also leveraging it within our solutions to help streamline workflows And ensure that our customers remain compliant with the various tax laws that impact their business.

Speaker 2

Our growing pipeline of organic and inorganic opportunities And ability to keep that momentum going on the sales front gives me confidence for the quarters ahead and in our overall strategic position in the market. Time, I will now hand the call to you to provide additional details on the quarterly results.

Speaker 3

Thanks, David, and good morning, everyone. Today, I'm going to review our Q1 financial results and provide guidance for the Q2 and full year of 2023. Total first quarter revenue grew at 15.5 time, we expect to be in the range of $32,800,000 reaching the upper end of our quarterly guidance. Our subscription revenues increased 14.3% period over period to $111,000,000 and average services revenues grew 21.8 percent to $21,700,000 Annual recurring revenue or ARR was $446,500,000 at quarter end. This is up 17.3% year over year and 14.3% on an annualized sequential basis.

Speaker 3

Net Revenue retention, or NRR, remains strong at 110% and was consistent on both a year over year and sequential basis. Gross revenue retention or GRR was 96% at quarter end consistent with our prior quarters and within our historical range of 94% to 96%. Time, these metrics continue to demonstrate the stickiness of our solutions as well as the strength of our customer relationships. Time, our returns processing managed services business generated recurring service revenues of $7,400,000 in the Q1 of 2023, up from $6,000,000 in the comparable prior year period. Our average annual revenue per customer or AARPC Continues to steadily increase and was at $104,370 in the first quarter, up from $100,500 in the Q4 2022.

Speaker 3

Note that AARPC is based on the direct customer count, which is disclosed in the earnings press release that was issued this morning. Cloud revenue was $48,200,000 in the Q1, up 26% from last year. And for the remainder of the income statement discussion, I will be referring to non GAAP metrics. Gross profit for the Q1 was $95,300,000 And gross margin was 71.8%. This compares with gross profit of $80,700,000 70.2% Gross margin in the same period last year.

Speaker 3

Gross margin on subscription software revenue was 78.4% compared to 70 time compared to 35.3% in last year's Q1 and 36.8% in the Q4 of 2022. Turning to operating expenses. In the Q1, research and development expense was $13,600,000 compared to $9,500,000 conference call last year. With capitalized software spend included, R and D was $23,800,000 for the Q1, call, which represents 17.9 percent of revenue as compared to 17.2% of revenue in the prior year period. This increase in R and D expense is driven by our ongoing investments in innovation and expansion of our solution capabilities.

Speaker 3

Selling and marketing expense was $32,100,000 or 24.2 percent of total revenues, an increase of $6,400,000 Approximately 25.1 percent from the prior year period. This increase was a result of the expansion of our go to market and customer General and administrative expense was $29,300,000 or 22.1 percent of total revenues, an increase of $3,100,000 from the prior year period. This increase is due to the infrastructure investments we are making to support the long term growth of the company. Adjusted EBITDA was $20,200,000 in the Q1 of 2023, an increase of $1,100,000 year over year. Time, we saw a positive year over year improvement in cash flow.

Speaker 3

Our operating cash flow was $6,800,000 in the 1st quarter, call, a $4,200,000 improvement compared to last year's Q1 and free cash flow was negative $10,600,000 in the 1st quarter, A $3,600,000 improvement from last year's Q1. Historically, our cash flow in the Q1 are seasonally lower call, the remaining calendar quarter is due to annual bonus payments, payroll taxes and sales and marketing expenses that are typically elevated at the start of the year. Time, we do expect free cash flow to be positive for the full year. As our period of accelerated growth investment subsides, call, we expect Vertex to return to historic levels of free cash flow generation. We ended the first quarter with over And investment securities totaled $11,500,000 For additional liquidity, we also have $200,000,000 of unused availability under our line of credit.

Speaker 3

Time, turning to guidance in the Q2 of 2023, we expect total revenue in the range of $135,000,000 to $137,000,000 Which would represent 14% year over year growth at the midpoint and adjusted EBITDA in the range of $21,000,000 to $22,000,000 which would represent an increase of 3 point $7,000,000 at the midpoint. And for the full year of 2023, we continue to expect total revenue in the range of $550,000,000 to 556,000,000 time, we are pleased to report that we are making progress in the quarter, representing annual revenue growth of 12.5 percent at the midpoint and adjusted EBITDA in the range of $92,000,000 to $96,000,000 Representing an increase of more than $15,000,000 at the midpoint. And we believe that cloud revenue will grow by approximately 27% in 2023. Time, we are very pleased with the strong Q1 performance and believe we are off to a very good start to achieve our financial goals in 2023. Time, David will now make a few closing comments before we open up for Q and A.

Speaker 3

David?

Speaker 2

Thanks, John. The year is off to an excellent start with our strong financial results in the Q1 and our outlook for the balance of the year is positive from both a revenue and earnings standpoint. Time, we remain on track with our growth investments and we expect to see earnings leverage in the second half of twenty twenty three. We've already seen some progress selling and marketing expenses leveled out in Q1. As we launch our new ERP system in Q2, spend associated with this project should also wind down.

Speaker 2

Call, we continue to deliver exceptional and differentiating value to our customers and we believe the winning formula we have put in place will continue to drive success With end to end solutions, the most complete and accurate content database in the industry, a scalable unified cloud platform across all major tax types, Seamless integration and consistent results across source systems and partners and in house experts who deliver rapid value in even the most complex environments. In closing, I'd like to thank our employees for their continued dedication to our mission, our customers and our partners. Your hard work makes all our success possible. With that, we will take your questions. Operator, please go ahead.

Operator

Thank you. We will now begin the question and answer Our first question comes from Matt Stottler with William Blair. Please go ahead.

Speaker 4

Hey, there. Good morning. Thank you for taking the questions. I just wanted to start on the indirect customer base. You saw some decent growth there in indirect customer count in the quarter, maybe just dig into where you're seeing that success in terms of adding customers through the channel ecosystem?

Speaker 4

And know if you could refresh us on the economics of revenue that comes from those indirect customers versus direct customers, that'd be helpful as well.

Speaker 5

Yes. Thanks, Matt. Appreciate the question. Yes, the indirect customers are again they're coming through partners that we're aligning with the help market some of the mid market and down market to the downsize customers. So they've been working with us over the Last number of years to pull that together work through us and again as it turns out we end up recording revenue that we sell to those individual partners and then The support and a lot of the activity behind that gets handled by the partners that we partner with.

Speaker 2

Got it. It's helpful. And then maybe on the international front, we'd love

Speaker 4

to just get an update on what you're seeing in terms of relative You mentioned some strong performance in Europe specifically last quarter. So how is that kind of pipeline shrink continued and how is e invoicing playing into that opportunity there for you guys?

Speaker 2

We are actually taking the call today from Europe. We did our European customer conference this week, record attendance, actually more than double last year's, Really pleased with the energy here. Partner ecosystem was really strongly represented across IBM, Big 4 time And number of local providers that really give us confidence in the pipeline activity we have. We continue to see, the position we've taken with the products we've added, The relationship with SAP and the referenceability of our customer base all being very strong supporters for our European opportunity. Time, really pleased quite frankly, from where we sit here in that.

Speaker 2

Going forward, I think we'll continue to see that momentum as we move through the year. Got it. Thanks again.

Operator

Our next question comes from Adam Hajkes with Goldman Sachs. Please go ahead.

Speaker 6

Great. Good morning and thanks for taking my questions. I guess 2 part question here to start. David, could you just give us a little more color on the progress you're meeting with the large technology partners, I know you called out the mid market. Could you give us a sense for how you're thinking about, I guess, 1, that first opportunity from a contribution perspective and then to your competitive positioning in the mid market?

Speaker 6

Thanks. Time,

Speaker 2

we are focused very much in the mid market on 3 ecosystems, primarily being Microsoft Salesforce time, we continue to see good partnering activity across both the big four and would say that sort of next tier of Both accounting players and systems integrators that are at that level. At the enterprise level, we've seen increasing interest and activity In working with Accenture and IBM on top of the big four, so I really feel like our positioning across both ecosystems from a partner perspective is as strong as it's been I'm giving us really nice competitive differentiation.

Speaker 6

Great. That's really helpful. And then I guess second, We'd love to hear how you guys are thinking about generative AI use cases and tax as you invest in technology areas like containers. Given the content database you have, it seems like an area you could leverage to improve workflow and usability. Just wondering if that's something you're thinking about?

Speaker 2

Absolutely factored into our R and D investment actually this quarter. We continue to look through our innovation team call, on a number of use cases for deploying that and how it can serve our customers from a commercial perspective. For a long time, we've already been using So we've been using it internally and now with some of the recent technology advances we are our innovation teams are exploring a number of things on the external side.

Speaker 6

Great. Really helpful. Thanks, David.

Operator

Our next question comes from Joshua Watriely with Needham. Please go ahead.

Speaker 7

Hey guys, thanks for taking my questions. Nice job on the quarter here. If you look at the managed service businesses, which you guys highlighted here in the prepared remarks, What do you think is driving that demand and growth? Is it the complexity or cost to manage internally? And is that actually benefiting you in an inflationary And then maybe you can just speak to what is the pipeline for these deals look like over the next year?

Speaker 2

Yes, I'll start here and then John you can pick up. I think, referenceability matters greatly in that business. Once again, it's a trust factor of who you're going to outsource it to. I think As we continue to grow the scale of our business, our customer success teams are able to go further with our customers about how they're handling it And we're seeing an uptake from existing customers on that service. I think the white glove service we give is part of the reason why we don't measure GRR in services, But our GRR there is 97% or so.

Speaker 2

We just don't lose customers in the area because we give them such high quality service. Call I do think part of the factor certainly is also customers are looking to drive efficiency with their tax department. And so if they can Shift some of these lower value things and focus on more high value things, taxes being drawn in to more strategic conversations, quite frankly, because of the How indirect tax is touching so much of the businesses growth these days from the different business models that have emerged. So we're seeing really good uptake, I I think because of that and that gives us a lot of confidence in the pipeline as we look out through the year.

Speaker 8

Got it. That's helpful.

Speaker 2

And then

Speaker 7

pivoting back to the Going back to the international business, one of the things we're hearing is that European countries are starting to enforce the marketplace laws that were enacted a few years ago, but they kind of Been in force for a period of time there. Is that what you're seeing as well? I guess now that you're actually in Europe and can you just speak to the incremental opportunities that can create for you guys? Thanks.

Speaker 2

We definitely are seeing a slight shift in activity in that area where the pain it's pain driven market and when they feel pain and they time, we're definitely seeing a shift in those dialogues. Our base in Europe is also very heavily focused as I mentioned on SAP and Kind of the work we've been doing in that space at the enterprise level. So I think both of those are drivers for us as we are growing here in Europe.

Operator

Our next question comes from Daniel Jester with BMO Capital Markets. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking my question. Maybe 1 to start with for John on gross margin, really strong improvement on the software side that builds off of last quarter's improvement as well. I I know you don't guide to it, but maybe how should we be thinking about the gross margin opportunity on the software side going forward? Time,

Speaker 5

I think you're right. We did have a nice momentum coming out of the Q4 based on those results And it drove into the Q1 as well. Again, as I said previously, I think in the last quarter, we don't anticipate this Perhaps be the next Mendoza line of kind of where things are going to go up from here, but we do we are seeing and do expect to see leverage come out of that line As we continue to grow our product and grow the opportunity there especially in the cloud area.

Speaker 9

Okay. And then David maybe just your latest thoughts time, on inorganic growth opportunities, how are you seeing the landscape, and anything you'd like to share there? Thank you.

Speaker 2

Yes. Obviously, Dan, in the current environment, we'll be really thoughtful about valuation in whether The sell side has come down to 20 they come off of 21 values and where they think, but we have seen a little bit of a shift in dialogue there with some opportunities that we're conference call, across different ends of the end to end process that we're trying to we can keep trying to fill out to support our customers. So I would say that there's more activity than there's been, but we're still being really thoughtful about valuation and making sure that the other side is Realistic given the current environment.

Speaker 9

Great. Thank you very much.

Operator

Our next question comes from Steve Enders with Citi. Please go ahead.

Speaker 8

Hi, great. Thanks for taking my questions this morning. I want to ask a little bit just Kind of what you're seeing out there in the marketplace and as we kind of think about the outlook Maintain for the year, I guess is there incremental conservatism that's being baked in there, maybe some kind of revenue shifting around As we think about kind of the 2Q outlook or just kind of any other details to maybe provide around that?

Speaker 5

Time, Steve, thanks for the note. I'll address guidance and maybe David can talk a little bit about environment and what we're seeing out there. But again, I think we ended with a real strong we had a very nice Q1, you saw strong metrics come across from ARR, NRR and GRR. And I think as you've seen over the last couple of years, we don't necessarily increase our guidance when we come out of the Q1 Given that it's just one quarter, we're kind of just through it, and it doesn't seem to really make a big trend unless we saw something very dramatic. So We've kept with the same philosophy that we've had for the last couple of years and we're going to reevaluate at the end of the second quarter and then give an update at that point.

Speaker 5

But Again, everything we saw in the Q1 was very strong and we feel like we're in pretty good shape. Yes.

Speaker 2

And Steve, I'll just build on that. I think the momentum in the ARR to a consistency we're seeing across decision making pretty well considering staying on plan. We're not seeing pushes Of note here and in the activity that we just experienced here in the EU with our customer comp, it just gives me a lot of confidence that the activity remains, Compliance needs are increasing, regulatory environment is not getting any better. It's only getting more complex when you add in now The growing demand around e invoicing and how customers are seeing more need for data controls, etcetera, I think that fits really well with our strategy.

Speaker 8

Okay, got you. No, that's helpful context there. And I guess just on the point on AR Being pretty strong in the quarter and I think seeing a bit of an acceleration there for 1Q, But maybe less upside here than last quarter, I guess, was it maybe more of a back end loaded quarter for On the deal execution side or how should we kind of think about the moving parts between the ARR upside and the software line here?

Speaker 2

Very well. That's exactly what how the quarter played out. I think we had a very robust December. Sometimes that kind of drains the pipeline just a little bit and so January came out a little bit slow, but the team consistently performing, fulfilled the pipeline that we saw, more of it closed in March. It really wasn't a change in decision making process.

Speaker 2

I think it was just Momentum coming off of a great Q4, took a little bit more of the month to celebrate the holidays than we would have liked, but they did great And really beat the expectations we had through March.

Speaker 8

Okay, perfect. Appreciate you taking the questions here.

Operator

Our next question comes from Andrew Gasparri with Berenberg, please go ahead.

Speaker 10

Thanks for taking my question. I guess first on the I just wanted to touch a little bit on the contract structure you have with your customers, in particular, is it transaction based and does it track general economic activity? Call, maybe could you lay out why that maybe you wouldn't see a slowdown at the time of renewal if things were to get worse from a macro perspective?

Speaker 2

Time, I would like

Speaker 8

to turn the call over

Speaker 2

to Eric.

Speaker 8

Terrific. Thanks for

Speaker 5

the question Andrew. Appreciate it. When we think about our revenue contracts, the revenue contracts are based on or our contracts are based on revenue bands. And so we set up banding up with our customers and as customers kind of outperform or underperform typically they fall within the band guidance that exists. To the extent that there's something significant that happens, we can then see some movement and then that's when we see some of the upside of additional entitlements.

Speaker 5

But Generally speaking, a increase or decrease in volume doesn't necessarily impact the revenue as it takes time, it's not on a dollar for dollar item per item basis that kind of adjust our revenue. What really matters is kind of going through So again we see that in the regular course of business and again we feel very good about how that has performed over time in up cycles as well as in down cycles Because again that banding gives us a little bit of cushion as if things slow down for our customers. I hope that's helpful.

Speaker 10

That's helpful. Thank you. And then, one question on net retention rate. I mean, it's been tracking at the high end of where you've landed since you've gone public. Just wondering how confident you are that you can kind of track at that level going forward.

Speaker 10

And if you can maybe elaborate a little bit how what's driving that upward, sort of this level going right now, is there any particular product? Is it a general transactional activity, again what you mentioned earlier, are you landing larger generally? Anything that you could provide would be helpful.

Speaker 2

Time, the business is very resilient, downtimes, uptimes, the GRR continues to be very strong. I think it's the nature of what we are, line item invasive software, mission critical to the customer experience. So once it's in, it doesn't usually change too often. And that's I think a strength of our business, I think you add to that with the customer success team that we've been funding and built out over the last 2 years, I think we're getting more time, we are very active with our customers in dialogue, making sure we are understanding where they may be facing challenges and addressing them more head on. And I think that just reinforces Our commitment to our customer base and I think that has shown up in some of the incremental move we've seen over the last 2 years from like a 94 to 96.

Speaker 2

There is a fundamental around M and A and other things that does hit our top line, that I don't think we'll ever get to 100%. But I'm really pleased with where we are and I think there's no reason that we're going to materially change from that. We did not see that in the 2000 eight-nine great recession, we didn't see any material shift in our GRR and I would I see no reason for that. I think if anything we're a better, stronger company in how we're delivering value to our

Operator

Our next question comes from Brad Sills with Bank of America. Please go ahead.

Speaker 11

Great. Thank you. Wanted to ask a question on just your observation here on customers' willingness to take on ERP upgrade projects time, given your position, integration with ERP and some of the partners you mentioned, have you noticed any kind of change given What's happening in the financials sector with tightening credit and wobbliness in the regional bank sector? Any observations just kind of generally in your business around customers' willingness to take on these projects, particularly in the financials vertical?

Speaker 5

Brad, this is John. I'll start with it. I think great question, really appreciate it. I think we haven't really seen a big change And sort of the momentum that's been out there, certainly within the U. S, the pipeline continues to be strong and we feel good about the names that we're seeing.

Speaker 5

We continue to see a pretty good balance across the different industry verticals that are there. And so I don't have any specific information on the financial services model. I'll just build on that by saying

Speaker 2

the great news for us is that not a lot of sales and use tax affects and or VAT affects the financial community. So we don't have a strong exposure to that risk factor because they're not usually dealing too much with transaction tax. So it really puts that at a minimal time, impact for us.

Speaker 11

Understood. Thank you for that guys. And then also a question if I may Your partnership with Salesforce, you seldom hear, you talk about partnerships with front office app spenders. Are you finding that the digital tax Transformation initiatives are starting to come into more of the front office type project. Thank you.

Speaker 2

For sure. And we're really excited at the level of visibility we now have within Salesforce and the partnership We've evolved there. There are more and more activity is happening transaction based activity is happening time, in CRM systems and so that just is another source system that has to deal with and it was never built and designed with tax in mind. So it creates call, more challenges for the tax department to link to and also get the information we want. And so we've been working very well with the sales force team to call, not only build out our connector and build our story with them, but also now in a go to market motion that's starting to show good ROI.

Operator

Our next question comes from Alex Sklar with time, Raymond James, please go ahead.

Speaker 11

Hi, thanks for taking my question. This is John on for Alex. I just want to start with one on pricing dynamics. Can Can you talk about how pricing is contributing to the growth outlook in 2023? And should we expect that to be a lever you pull more than you have historically moving forward?

Speaker 5

Yes, I'll take this. John, thanks for the question. I appreciate it. Generally pricing has been something with annual price increase is something we do every year with existing customers and typically we've talked about that take rate has been about 4% across the board kind of by the time you get down By the time you work that through customers that have caps and certain of them that have other dynamics within their contracts, we did have an increase To what our standard increase had been over the prior year. And so we see that as a minor impact.

Speaker 5

We see that going up In a modest amount for 2023 in terms of the impact that's going to have to our revenues, but it was something that we felt that we had to do to address the inflation that we see in our business and The cost increases that we're dealing with. So we did pass on a higher increase generally to our customers. And I think as we think about that going forward and using that as a tool, I We'll need to evaluate the environment that exists and determine what we're going to do going forward. I think the key thing is for us is we've always had the opportunity to increase price and we want to make sure We're not taking advantage of an opportunity that we have with our customers because we really feel the opportunity is in selling the next product that's out there and getting some more cross sell time, we're very mindful of that.

Speaker 11

Thanks. It was great color there. And then maybe just a follow-up here. John, can you give some additional color on the EBITDA to free cash flow bridge for 2023? I know we have some moving parts of the ERP implementation.

Speaker 1

Any other moving parts for

Speaker 11

this call out there versus 2022? Thank you.

Speaker 5

Thanks for the question. Again from a free cash flow standpoint again As we talked a little bit about it at the end of the year, we do expect obviously for 2024 to 2023 to have a positive cash flow As we did in 2022, it is being impacted by some of the ERP build. And again, you rightly pointed that out. And again, it will continue to be impacted by any development costs that are out there. Nothing abnormal though in terms of kind of what time, outlook looks there.

Speaker 5

So again, we expect to see that start to increase throughout 2023. And again, we should move that move the needle even much more significantly as we get into 2020

Operator

This concludes our question and answer session. I would like to turn the conference back over to Joe Corvado for any closing remarks.

Speaker 1

Thanks everybody for joining us today. If you have follow-up questions or if you'd like to schedule more time with the team, please reach out to me at irvertex inc.com. Thanks and have a great day.

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Earnings Conference Call
Data I/O Q1 2023
00:00 / 00:00
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