Vertex Inc (VERX) 2020 Q3 法說會逐字稿

Good morning, and welcome to Vertex's Third Quarter 2020 Conference Call. As a reminder, today's call is being recorded, and your participation implies consent to such recording. (Operator Instructions) With that, I would like to turn the call over to Ankit Hira, Investor Relations. Thank you, sir. You may begin, please.

Thank you. Good morning, everyone, and thank you for joining us for Vertex's financial results conference call for the third quarter ending September 30, 2020. On the call today, we have Vertex CEO, David DeStefano; and CFO, John Schwab.

Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings.

Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release. This conference call will be available for replay via webcast through Vertex's Investor Relations website at ir.vertexinc.com.

David will begin with an overview of Vertex followed by our third quarter highlights. John will then take you through a review of the financials before we proceed to Q&A.

With that, I'll now turn the call over to David.

Thanks, Ankit, and welcome, everyone. Thank you for joining us today. I'm pleased to share that we delivered strong third quarter performance across all of our key metrics, which I think is a testament to the resilience of our business and our ability to drive sustainable growth and profitability. And I'm so proud of how our teams have maintained their focus on delivering results and supporting our customers in these challenging times.

We saw a double-digit year-over-year top line growth with accelerated cloud adoption among both new and existing customers, which reflects the strength of our hybrid approach to meet complex customers where they are in their IT road map. And when they're ready, they know Vertex has the cloud solution that will serve their complexity. Our operational discipline led to year-over-year improvements in several bottom line metrics, which John will speak to in a moment.

From a macro perspective, it's clear that digital transformation is accelerating for many companies as they are adapting their business models and operations to a new normal. And our momentum reflects the increased scale and complexity of our customers' tax operations in supporting these initiatives.

Our strong financial results underscore the value that Vertex brings to our customers every day and their confidence in our solutions to help them meet the challenges ahead. Throughout this unique and challenging year, we have maintained our investments in key areas, such as sales and marketing, customer success and our partner ecosystem.

We believe our strong results validate these investments and fueled our growth. We also believe the macroeconomic drivers continue to create systemic opportunity here in the U.S. and abroad, which aligns to our strategy. I also want to add that despite economic uncertainties, we continue to accelerate R&D investments into Q4 and beyond while still delivering strong financial performance, positioning us to capitalize on growth opportunities now and what we foresee in the future as the economy improves and indirect tax plays a central role in the recovery for jurisdictions globally.

Now I'd like to share some notable highlights from the quarter. First, we continue to expand existing customer revenues. We had a number of our existing customers accelerating omnichannel strategies and expanding their investments with us to manage tax complexities as they extend their business models across multiple regions and business applications.

This quarter, we expanded our relationship with one of the world's largest home improvement companies, who have been leveraging our solutions for e-commerce and now have expanded the use of our solutions for their retail stores and to manage consumers use tax in their purchasing operations. We believe as omnichannel accelerates in some of the world's biggest brick-and-mortar companies, we will continue to be the leader in supporting their off-line and online operations. We're also helping a global retailer expand its mobile applications for customer order and payment across thousands of stores in dozens of countries.

Next, I'd like to highlight how digital transformation is also bringing a whole new set of customers to us. Many of the fastest-growing new economy companies in food delivery, logistics, leasing, education and entertainment services are realizing as their businesses grow exponentially that they need enterprise-grade tax automation.

Another example is where we leverage our long-standing partnership with Oracle to bring first-to-market cloud-to-cloud integration with Oracle ERP Cloud and deliver our solutions on Oracle Cloud infrastructure. This is helping a large grocery chain to enable store-to-door delivery as part of its digital transformation. They're also implementing our solutions to enhance their procurement processes and specifically, to tackle the complexities of consumers use tax.

Third, we continue to expand our partner ecosystem. We're seeing many of the platform and infrastructure providers, who are supporting digital transformation in payments, cloud services and communication infrastructure, adopting our solutions to support and enable their growing customer base.

This quarter, we introduced new integration supporting OroCommerce, one of the leading B2B e-commerce platforms, add new integrations with SAP Concur for expense and invoice management. In the mid-market, we announced certified integration with Acumatica, a leading cloud ERP provider in that segment, further expanding the opportunity to acquire new customers through our channel partnerships and direct sales efforts. And we expanded our relationship with the accounting firm BDO, to provide services to members of their BDO Alliance USA program. A nationwide association of independently owned local and regional accounting, consulting and service firms. This builds upon the approach we started with our exclusive Cpa.com relationship, enabling their member firms to leverage our solutions.

In addition, we continue to expand our global footprint. As expected, VAT in Europe continues to get more complex and the pace of change increasing. We're seeing new opportunities emerge there. For example, a luxury auto company who is building connected car experiences through mobile applications is leveraging our solutions to automate compliance for those digital services.

Also, the regulatory environment continues to grow in complexity, and we have responded, delivering new and expanded tax content to increase coverage in Brazil, which is one of the most complex tax environments. Our work there is enabling one of the largest companies in the world to expand into additional states in Brazil. In addition, we continue to support tax changes related to VAT, COVID-19 around the world. And in North America, we significantly enhanced content for the leasing, retail and food and beverage industries.

Finally, I'm thrilled we are sustaining our investments in new product innovation. With the pace of change in commerce and compliance, we believe it is important to continue innovating and extending the functionality and breadth of our software and solutions.

We completed a very interesting proof-of-concept with one of the world's largest marketplaces this quarter, involving machine learning and tax categorization to enable them to quickly onboard new merchants. Now the teams are working to bring that to commercial availability, both for our enterprise and marketplace customers.

We believe our leadership in global enterprise tax automation positions us well to continue to capitalize on the demand resulting from business, regulatory and technology transformations, especially as the global economy continues to rely on indirect taxation as a major source of revenue. We realize there are economic, geopolitical and social uncertainties ahead, but I believe that we are well positioned to serve our customers and partners in the months to come.

I'm also incredibly proud of how all 1,100 Vertex employees have showed up over these past months, demonstrating great resilience in adapting to a whole new work environment without missing a beat in supporting our customers, partners and communities. In fact, this week, we hosted our first-ever virtual customer conference, which is our annual event where we bring customers, partners and prospects together to connect on regulatory trends, technology innovation and best practices to help them maximize the value of their Vertex investments.

One of the benefits of being virtual this year is being able to reach 2 to 3x bigger audience than we would in a physical destination. We saw tremendous interest with nearly 2,000 customers and partners in attendance, and well over half of them were first-time attendees and new customers. The conversations we're having with them continues to affirm our strategies and the value we're delivering to them every day. Exchange also enables us to expand those customer relationships and provide enterprise-grade, end-to-end capabilities to address the growing tax complexities in their business.

I'll now turn it over to John to discuss our financial results for the quarter and guidance for the year.

Thank you, David, and good morning, everyone. Today, I'm going to discuss our third quarter 2020 results and then provide Q4 and full year guidance.

Total third quarter revenue grew at 14.8% year-over-year to reach $94.6 million. Subscription revenues grew 12.3% year-over-year to $79.8 million. Our annual recurring revenue, or ARR, grew to $306.5 million. This represents a 15.4% growth year-over-year. Our services revenue grew to $14.8 million or 30.1%, driven by implementation-related services associated with the growth in our subscription revenues for new and existing customers.

We continue to see strong growth in our cloud-based solutions among both our existing customers as well as new customers. Cloud sales grew by 39% in the third quarter of 2020 over the third quarter of 2019. We continue to believe that the shift to cloud presents a unique opportunity for the company to drive additional revenues and ARR growth.

Our sales to existing customers made up 73% of software sales in the third quarter of 2020, while new logos made up 27% of the new sales, and it continues to be an area of continued focus for the company. Our net revenue retention rate is 108%, which demonstrates our customers' continued commitment to our software and solutions. Our gross revenue retention remained at 91%, which is consistent with prior periods.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and per share results are on a non-GAAP basis and are reconciled in our GAAP results in the earnings press release that was issued last evening.

On an overall basis, our gross profit was $67.5 million in the third quarter, representing a 71.4% gross margin. This compares with gross profit of $59 million and a 71.6% gross margin in the same period last year. The 20 basis point change reflects to our investment in our tax research as well as customer service areas.

From a subscription software standpoint, our gross margins were 78.1% as compared with 79.1% in the prior year. This difference was driven by continued investment in our cloud infrastructure as well as our customer support functions.

Our margin in our services business increased to 35.4% from 24.6% in the prior year. We continue to see strong demand and productivity levels for these -- for services from implementation of new software solutions as well as existing customer projects.

Research and development expense was $10.1 million or 10.7% of revenues, an increase of 200 basis points year-over-year, reflecting the increased spend on new solutions to address our customers' end-to-end data analysis and compliance needs. Sales and marketing expense was $16.5 million in the third quarter or 17.4% of total revenue, a decrease of 150 basis points year-over-year, which was primarily driven by a reduction in travel and marketing expenses due to the COVID-19 restrictions.

Our third quarter general and administrative expense was $18.4 million or 19.5% of revenue versus 20.2% of revenue in the third quarter at 2019. The increases were driven by higher levels of information technology infrastructure, process reengineering and other initiatives that drive future operating leverage.

GAAP net loss was $21 million compared to GAAP net income of $11.9 million for the same period last year. GAAP net loss per basic and diluted Class A and Class B share was $0.15 compared to GAAP net income per basic and diluted Class A and Class B share of $0.10 for the same period last year.

Non-GAAP net income was $21.6 million compared to non-GAAP net income of $16.9 million for the same period last year. Non-GAAP net income per diluted Class A and Class B share was $0.15, respectively, compared to non-GAAP net income per diluted Class A and Class B share of $0.14, respectively, for the same period last year.

Adjusted EBITDA of $22.5 million was up 14.7% year-over-year, while adjusted EBITDA margin of 23.8% was consistent with the same period last year. The most significant non-GAAP charges continue to relate to our stock-based compensation.

Turning to our balance sheet and cash flow statement. We finished the quarter with approximately $270 million of cash and cash equivalents, reflecting the completion of our initial public offering, where we sold 24.3 million shares at an IPO price of $19 per share, raising proceeds net of underwriting fees of $423 million, which was primarily used to repay our $175 million term loan and offering expenses. We generated $15.8 million in free cash flow for the quarter from -- an increase from $3.7 million in 2019.

Turning now to guidance for the fourth quarter of 2020. We expect total revenue in the range of $93 million to $95 million, representing annual growth of 8% to 10.4% and adjusted EBITDA in the range of $18.5 million to $19.5 million representing an increase of 8% to 13.8%.

Turning now to guidance for the full year of 2020. We expect total revenue in the range of $368 million to $370 million, representing annual growth of 14.5% to 15.1% and adjusted EBITDA in a range of $78 million to $79 million, representing annual growth of 14.9% to 16.3%.

Additional modeling details underlying our outlook are as follows: at September 30, 2020, we had 120,417,000 shares of our Class B stock outstanding and 25,688,000 shares of Class A outstanding; we had 12,312,000 common stock equivalents outstanding with a weighted average exercise price of $2.45 per share. Our effective tax rate is expected to be 25%.

Overall, we're pleased with the progress that we made on our strategic initiatives and our performance of the business.

And with that, we're now happy to open it up for questions. Operator, will you please open up the line for Q&A.?

(Operator Instructions)

Our first question comes from Brad Sills with Bank of America.

I wanted to ask about the cloud. It sounds like you saw some real nice results there this quarter. What are conversations with customers regarding the cloud? Where are they in the tax department and kind of migrating more of their operations and returns and filings to the cloud?

Yes. No. So the conversation typically starts in the tax department because we'll see the tax leaders looking to get control of their infrastructure, so they can continue to progress with our updates and continue enhancements we make to the product. But ultimately, it resides in the IT team because, ultimately, IT has -- it has to be aligned to their road map and where they are in their own corporate strategy about moving to the cloud.

So certainly, COVID has accelerated those conversations. And we're seeing more and more people want to have that dialogue with us, both preponderance of our new logos that we win as well as existing customers as they continue to look through that journey with additional adds they make in offerings or with their existing solutions they already have that they're ready to migrate from.

That's great. And then on international, you mentioned some strength in Brazil with content. Could you remind us where you are with regard to international content and sales and marketing investment in other regions, please?

Yes, sure. So we made the acquisition investment down into Systax earlier this year, which has allowed us to expand our content base in Brazil dramatically. Additionally, we'll be bringing forward some of the products that the Systax team had to -- for the Brazilian market. We're going to be able to expand that to our multinational. So we're looking to now start working with their sales teams to coordinate how to bring our U.S. multinationals down into the Brazil market where we can offer like the AP validation invoice product that Systax has, and we're very excited about.

We continue to expand all of our content globally, though. Between the COVID changes as well as our customers' ongoing needs in Europe and elsewhere, we continue to add content all the time.

Our next question comes from Samad Samana with Jefferies.

It's good to see the strong results. Maybe, David, first for you. As we think about ARR, the growth is tracking better than we expected. And now that we're in the middle of November, I know that you guys aren't guiding for 2021, but can you maybe at least anecdotally or high level discuss the level of confidence you have kind of halfway through the fourth quarter and as we look out to 2021, especially with how strong the ARR growth has stayed?

Samad. The truth is we've started to gain a little more visibility into our pipeline. I think when we came out in July, we were mindful of where we were in the pandemic as we built our forecast. And thus far in the rest of Q2, Q3 and now as we look forward into Q4, we continue to see positive signs in the pipeline that are encouraging.

We also are though mindful, obviously, with the recent lockdowns that are occurring in Europe and some of the -- certainly, some of the commentary that's happening here in the U.S., we still need to be thoughtful about where that is in terms of where it's going to lead in 2021. What I will say is regardless, the fundamentals of indirect tax and how it will lead many jurisdictions out of this current crisis suggests we need to continue to accelerate our investments. And we're doing that across all of our product lines as well as in our opportunities abroad. Expanding both sales and marketing capacity and increasing our R&D investment because we believe as we come out of this in 2021 at some point, the opportunity around indirect tax will only increase.

Great. And then a question we got a lot this quarter and frankly, we get it pretty frequently, in general, is around the competitive environment, especially in light of some M&A in the indirect tax space. And I'm just curious if you could maybe give us your view on how Vertex is still differentiated even with some changes in the competitive environment? And maybe how your content differentiates you from some of your competitors?

Sure, Samad. So it starts with the fact that our #1 competitor is the in-house solution that we're replacing. That's really what we focus on all the time is -- and another thing those opportunities where somebody's good enough in-house solution is no longer sufficient, and our sales team and partner teams can go in and add value. And that's the fundamental.

When we look at those opportunities then moving forward, we typically see a couple of things. We're able to differentiate on our brand, our brand being the large reference base that we enjoy that's so important to the tax buyer, the skill experience our team brings both in the partner and sales area in terms of working through a complex sale, which requires working with the IT team as well as the tax team. Then you move forward. The partner integrations we enjoy for complex organizations. We've worked for years to have really deep integrations and the IP we've embedded there. And then underlying all that is that content database, as you say. And over 40 years, we've accumulated that large content database that really gives us the deepest jurisdictional penetration and product suite to win going forward. And so that's really how we win. It's the combination of all that.

And then lastly, I would just add the hybrid approach still matters greatly. While we lead cloud first in everything we do, we still, for large enterprises, will sell elements of the solution on-premise. And having that capability to meet the IT team where they're at still remains an important differentiator at the enterprise market.

Great. And John, just a quick housekeeping one for you. What was cloud as a percentage of new booked deals in the quarter?

Yes. In terms of new deals, cloud was about -- just over 60%. It's consistent with how it was the last -- in the last quarter.

Great. And congrats on the solid quarter.

You bet. Thanks very much, Samad.

Our next question comes from Brad Reback with Stifel.

David, as you look at the sales and marketing line and the efficiencies that you'll definitely be left with as we come out of COVID in '21 and beyond. How do you think about the percent of that, that gets reinvested into the business to accelerate growth versus what gets left behind to follow the bottom line?

Yes, sure. So I think to start with, there's more opportunity to expand, and we intend to around our sales capacity, both into the channel to support our mid-market strategy as well as overseas in both Europe and over time in Latin America. So we definitely want to continue to put some of those dollars as you -- as those efficiencies that you're noting, into new capacity to expand our footprint.

But then additionally, the excess that you note, we're looking to expand really in R&D. I think there's great opportunity to enhance product for Europe, which is where our focus is. We've got a number of products that we'll be bringing out at the end of this year and into 2021 that I'm very encouraged by.

And then lastly, innovation. We continue to look at codesign and copartner innovation with our customers. We've done some interesting things recently with a POC, proof-of-concept around some machine learning in tax categorization that I think could lead to some exciting developments in the future. So we continue to -- R&D continues to be a big element of where that -- those dollars will go.

Our next question comes from Pat Walravens with JMP Group.

And let me add my congratulations, guys. Can you remind us at what rate investors should think about this business transitioning to the cloud? And I definitely hear you about how these big enterprises still sometimes need on-premise solutions. But just over how many years is this going to play out? And then maybe also a reminder for investors about how the economic work in a cloud deal versus an on-premise deal?

So I'll take the first part of that and let John take the second part about the economics, Pat. And good to connect with you.

So I think we think about it in 3 distinct tranches. The first tranche is new logos. Because we lead cloud first, our new logos typically come in around 85% to 90% cloud. And I think that's reflective of where we're bring -- what we're bringing to market there and the receptivity of our cloud offering.

I think our -- they our -- in our NRR base, you're looking at existing customers who're expanding their footprint with us, and we'll see existing customers. Again, because we lead cloud first, we're trying to pull them along into the cloud with our new units. So let's say, they bought consumers use tax from us a few years ago, and now they want to expand into VAT or they want to add sales tax. We'll lead cloud first, and sometimes we'll be able to move that new unit into the cloud with them even though they may retain their existing unit on-premise or it could be an omnichannel strategy, where we've got in the stores, the brick-and-mortar operation were on-premise. But then as they go into the -- with their e-commerce strategy, we're supporting that with our cloud or mobile offering.

So it really -- and then the last piece is, how are you moving those existing customers that are just 100% on-premise moving them to the cloud. And that's probably the slowest. So it sort of breaks out is that 85% to 90% in the new logos. It's probably in the 50% for the existing companies expanding their footprint and then a much lower percentage still that are just starting that journey of moving their existing services from us on-premise into the cloud.

Yes. I think, Pat, just to follow-up on that, to your point around sort of the economics around that shift and what that looks like. The example that we've given, I think, as you think about on-prem and year 1 billings for them. In an example, let's assume that a year 1 on-prem billing for a sales tax application is $100,000. When that comes around from renewal at the beginning -- in year 2, we're going to build them roughly 50% of that first year -- of first year billing. So that's what your renewal revenue is going to be. And it's going to be that every year thereafter, subject to our price increases.

As we think about cloud, we think about cloud a little bit differently. We think typically, that comes in roughly at about $70,000 per year. But it starts at $70,000 in year 1, and it's $70,000 every year thereafter straight across the page, also subject to those same pricing.

As those come -- to your point, as those existing companies that are currently now -- have been on-prem for a period of time decide to move over.

We see the opportunity for a shift and an increase in ARR from that existing product that they -- they're buying from us, but also we do the opportunity that -- there could be opportunities to sell more product into that suite that's there. So we view it as kind of a twofold opportunity there as that shift happens.

(Operator Instructions)

Our next question comes from Chris Merwin with Goldman Sachs.

Okay. I think you all called out 73% of new sales from existing customers, 27% from new logos. I know on the one hand, you're very much focused on driving expansion within your large enterprise customers. And then on the other hand, I think you're also investing to drive new logo growth, particularly down market. So is this the right mix of new business going forward in terms of the split between new logos and expansion? Or do you see that changing in the future?

Chris. I think as we continue to expand channel relationships, whether it be like one we expanded with BDO this past quarter or adding Acumatica in as a new certified integration, those all increase the addressable space that we can get into in new logos. And so that -- like, for instance, that exclusive relationship we enjoy with Cpa.com, continues to expand, and that relationship gets us access to more new logos. And I would expect that to continue over time.

And certainly, as the complexity environment that's out there now between business, regulatory and technology continues to accelerate, the demand opportunities are increasing. And so I think that will continue to make our value prop at the upper end of that middle market where we can distinguish our value prop greater and therefore, continue to increase the -- the opportunity to increase new logos in that space.

Okay. Great. And maybe just a follow-up. I was just wondering if you could talk a bit about the pipeline. It seems like, obviously, COVID's accelerating digital transformation efforts broadly across lots of large enterprises. And for your customers, are you finding that they're looking to bundle tax automation solutions within bigger projects in the office of the CFO like an ERP transformation? Are they really looking at this category more on a stand-alone basis and prioritizing it as they go through their spending priorities or system migration to the cloud?

Yes. It really happens in both ways. I mean, we see certainly new ERP adoption or like a cloud procurement system like Coupa, where -- which we enjoy a great relationship with or SAP Ariba, they're adding in just the procurement system in the cloud. And therefore, their in-house solution will no longer work with what they've been doing. And so we'll see growth there.

And then obviously, there are larger transformations that are going on from the office of CFO, where there's moving HANA S/4 for Oracle cloud infrastructure or whatever, and those will create new opportunities. Additionally, our new -- our relationships with people like Workday and Acumatica continue to create transition opportunities for us as well. So we see it really across the board in either a niche unit where a business might be -- a business leader might be driving a new e-commerce or omnichannel strategy, and that will just create a point opportunity for us with our cloud or it's a broad wholesale change within the CFO -- the office of CFO.

Our next question comes from Stan Zlotsky with Morgan Stanley.

From my end, I wanted to just clarify something. John, I believe you mentioned that your cloud growth was 39%. Is the right apples-to-apples comparison the 60% plus that we saw in Q2?

No, no. I think what you want to look at is -- that was the growth over the prior year. So you saw that 50-plus percent growth in Q2. It's very similar in Q3 in terms of the amount of cloud that's out there. That 39% was our increase from the same quarter last year to where we are today. That's not -- that's the growth that we've seen from cloud.

Stan, if I could just build on that, what I would tell you is if you think about it in total new sales, in 2018, cloud probably represented about 40% or so. In 2000 -- the end of 2019, we saw cloud become the leader in our new sales, it just crossed over 50%. And now this year, we're seeing cloud and new sales be about a little over 60%. So we're seeing a natural progression of our new sales moving into the cloud. I think what John said, he was just referring to the year -- the quarter-over-quarter comparison from a year ago.

I'm sorry. Maybe just one more. So the 39% growth this year that you just mentioned in Q3, that's a year-on-year number? Or is that a quarter-on-quarter number?

Year-over-year. Same quarter last year.

And then 60% in Q2 was a year-on-year or quarter-on-quarter?

The 60% is just how much of the new sales that came in, in the third quarter were cloud-based.

Got it. Understood.

Sorry for the confusion, Stan, but thank you for asking.

Got it. That makes a lot more sense. And then maybe just a slightly more high-level question. Could you remind us of your relationship with Oracle and how you guys are working with their ERP infrastructure to support joint customers?

Yes. So we're proud to say we've been an Oracle partner for like 35 years. We are the OEM provider of their payroll, and we've been a cloud sales tax partner with them since the mid- or early '90s. And they selected us for the first cloud-to-cloud integration with their -- running on their OCI platform, and we're now in the market jointly marketing that, and their sales teams are actually leading the way in that process. And we're seeing nice revenue progression there.

Our next question comes from Bhavan Suri with William Blair.

And let me echo my congrats, it's a solid start there. I just wanted to touch really quickly, maybe, David, for you. On the overall back office, accounting finance software provider, it seem sort of these guys all expand and there's a ton of work in sort of the office of the CFO, the control, the treasury, tax, et cetera. As you think about the convergence that's starting to happen there, how do you guys think about sort of the expansion? Because there's obviously lots of room to grow, but you've got sort of half of the Fortune 500 customers, et cetera. How do you think about potentially broadening into maybe other areas of treasury, compliance, governance, horizontally? I love to understand how you guys think about sort of a 5-year plan around that space.

Yes. And you're right, there's opportunity to grow, first of all, within our existing customers. We continue to expand our footprint because a lot of times, we've sold a Fortune 500 company. It's Just one element of their business. They're often made up of many divisions, many diverse operations. And we may have 1/3 of their business or half of their business, but we continue to expand our footprint. That with just in our core indirect tax area.

And then as you know, there are obvious indirect -- there are obvious adjacencies to what we look at when we think about the indirect tax end-to-end process and what goes beyond that. And certainly, our rules engine gives us a natural progression for where we might want to expand our footprint over time. And those are things we actively look at.

Great. I'll wait for product announcements over time then. And then -- and I guess, let's touch a little more tactically. So you've talked about partnerships and the partnerships with guys like the accounting firms and the systems integrators, those are sort of symbiotic partnerships. They might bring deals, you might bring deals. But are the partnerships with guys like SAP and Oracle, are there any compensation metrics? Are salespeople there compensated for bringing in Vertex? How should we think about the ones where there's actually monetization capabilities for salespeople to bring in Vertex that are not Vertex-direct salespeople. Hopefully, that was clear. I'm not sure if I made that...

I think -- if I think I understand your question, the new opportunity we're excited about with Oracle in their OCI platform is a -- that their sales teams are being connected directly to the Vertex sales that they generate. So there's a direct economic benefit for them. I don't obviously have the particulars on what it is, but I do know they are rewarded for bringing in, creating this partnership success.

We don't have the same direct relationship with the SAP sales team currently. But we enjoy, obviously, a long-standing relationship with them. We've done -- we actively roadmap with their teams in Waldorf and here in the U.S. around their product development, and where we're bringing our product to make sure we're aligned. It's one of the reasons why we were the first cloud provider SAP went to when they looked at the HANA platform for the same reason.

Our next question comes from Daniel Jester with Citi.

On the services revenue line, you called out in the prepared remarks sort of strong growth there. We've seen strong growth there for several quarters now. So as I think about sort of how -- I guess, first of all, what's driving that growth? And then secondly, if that's being driven by implementation, how should we be thinking about sort of this outsized growth in implementation revenue, translating over time to improving sort of software subscription revenue?

So Dan, I think start with, our services has 2 important components. One component is our outsourcing practice, where we have a lot of customers who send their returns to us. And we actually manage and process the returns and remit all the dollars out to the different jurisdictions. And that's a growing business. And certainly, COVID has accelerated that growth because I think tax departments are looking for, and companies are looking for what can they move outside their organization. So we continue to see good services growth there.

And then in addition, as you know, we have our implementation services. And I think even in the current environment, what we've seen is customers are benefiting from the fact that our teams are able to do their servicing remote and in some cases, because they are now working remote, our customers are working remote, they're actually leveraging our services team to help fill in some of the gaps for them. So I think it continues to be a strong growth driver.

But you really have to think about it as 2 distinct practices within our services revenue bundle. The one is almost -- almost -- you can almost say a recurring revenue, which is our managed services, which is under contract, and we enjoy nice ongoing growth from and then, as you know, the more implementation side.

Got you. And then just a high-level one. In terms of just new business, obviously, the third quarter, you highlighted certainly improvement there. I guess compared to where you thought you'd be like a year ago pre-COVID, where are you on that new business trajectory? Are we back to kind of pre-COVID levels? Or are we not quite there yet?

Yes. It's a hard thing to predict it's obviously, COVID has been a wildcard in the equation. I think overall, I'm pleased with the revenue traction we continue to get across the channel in the mid-market as well as what we're doing in our enterprise space.

I think I'd like to have been a little further in Europe, but they obviously had a little, I think, a little more of an extreme lockdown. But it really hasn't slowed us down from accelerating investments. So I think that's the other piece of it.

I think we're getting to where we want to be with our R&D spend with the acceleration here that we're planning here in the third and fourth quarter and what will be in 2021. To really position us for what I think is just these fundamental drivers of business complexity, technology complexity and regulatory complexity, which are all compounding to make indirect tax a growth opportunity for us for the future.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to David DeStefano for closing comments. .

Thank you. In summary, I'm really proud of the Vertex team for their solid execution across the company, which is reflected in our strong third quarter financial performance. We continue to see significant growth ahead as the rapid changes taking place in today's global business, technology and regulatory environments are having that compounding effect I just spoke about and really creating opportunities in direct tax management. We remain focused on helping our customers continue to transact, comply and grow with confidence even in this uncertain macroeconomic environment.

Thank you again for your interest in Vertex and for joining us on the call today. We hope you and your families stay safe and healthy during this time, and we look forward to connecting again soon.

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