Vertex, Inc. Q2 FY2026 earnings

Vertex closed the second quarter of fiscal 2026 with revenue of $204.0 million, up 10.5% from the prior-year quarter, and revenue for the first six months of the year reached $400.6 million, up 10.8%. Software subscriptions brought in $174.8 million, up 10.7%, and cloud revenue reached $101.7 million, up 17.9%. Gross profit grew 8.3% to $131.3 million for the quarter and 9.4% to $256.2 million for the first half, but gross margin narrowed to 64.4%, down 1.3 percentage points from the prior-year quarter.

The margin squeeze came from cost of software subscriptions, where a $5.2 million increase in depreciation and amortization of capitalized software and acquired intangibles, along with higher personnel and infrastructure costs, outpaced the top line. GAAP operating results stayed modest. The quarter's loss from operations was $4.4 million, wider than the $3.9 million loss in the prior-year quarter, and the year-to-date loss from operations was $15.0 million, a swing from income of $0.6 million in the first half of 2025. Net income for the quarter was $9.0 million, a swing to a profit from a net loss in the prior-year quarter, while net income of $6.5 million for the six months fell 35.8% from $10.2 million. A large income tax benefit, tied to valuation allowance movements on deferred tax assets in the U.S. and certain foreign jurisdictions, did much of the work below the operating line.

Non-GAAP results carry the quarter. Non-GAAP operating income was $44.3 million, up from $32.2 million a year earlier, and adjusted EBITDA was $51.0 million, up from $38.4 million, which lifted the adjusted EBITDA margin to 25.0% from 20.8%. Non-GAAP net income was $33.3 million, or $0.20 per diluted share, against $0.15 a year earlier. Management credits the Value Creation Plan and a $3.5 million decrease in non-GAAP general and administrative expense for much of that leverage.

Cash was the soft spot. Operating cash flow for the quarter was $30.9 million, down 32.8% from $46.0 million a year earlier, although operating cash flow for the first six months was $68.9 million, up 13.3%. Free cash flow, which deducts purchases of property and equipment and capitalized software additions, fell to $2.7 million in the quarter from $19.6 million, and the free cash flow margin dropped to 1.3% from 10.6%. Management attributes the quarterly decline to the timing of cash payments. Deferred revenue was $386.9 million, up 11.4% from a year earlier.

Customer metrics were mixed. Annual recurring revenue was $703.4 million, up 10.5%. Average annual revenue per direct customer increased from a year earlier, and the direct customer count rose to 4,919 from 4,862. Net revenue retention slipped to 105% from 108%, which management links to slower growth in customer entitlements that keeps accounts inside existing usage bands, and to delayed deal activity among some large multinational customers. Gross revenue retention held at 95%.

Guidance for the third quarter of 2026 calls for $208.0 million to $211.0 million of revenue and $55.0 million to $57.0 million of adjusted EBITDA. For the full fiscal year 2026, the outlook is $825.0 million to $830.0 million of revenue, cloud revenue growth of 18%, and $206.0 million to $210.0 million of adjusted EBITDA. The CFO said the first-half results gave the company confidence to narrow the full-year revenue range while raising the adjusted EBITDA outlook, and he expects expanding profitability and stronger cash generation in the third and fourth quarters.

The restructuring behind those numbers carries its own costs. The Value Creation Plan approved in April 2026 removed roughly 170 employees and cut third-party spend. Vertex recorded $1.7 million of plan-related severance in the quarter and $7.9 million in the first half, along with $6.3 million of plan execution costs in the quarter and $8.8 million in the first half, and all related cash payments are expected during 2026. Transaction costs of $7.4 million in the quarter also include legal spend on the company's pending claim against a competitor, a matter that could stay a drag on reported results.

Other items worth watching include the Brinta acquisition, completed in March 2026 for $22.1 million net of cash acquired, which added Latin American e-invoicing coverage and brought $1.3 million of compensation expense tied to additional cash consideration in the quarter. Cash and cash equivalents stood at $230.5 million at June 30, 2026, the $300.0 million line of credit was undrawn, and $345.0 million of 0.750% convertible notes mature in May 2029. Vertex repurchased 3,383,744 Class A shares for $46.5 million during the first half and has $93.4 million remaining under its authorization.