Summary
Vertex reported preliminary third quarter results alongside a leadership change on October 21, 2025. Revenue was $192.1 million, up 12.7% from the prior-year quarter, and $553.7 million year to date, up 13.4%. Gross profit was $121.3 million in the quarter, up 9.8%, and $355.5 million year to date, up 15.1%. Software subscriptions and services both grew. Management credited cross-selling to existing customers, expanded use, and price increases, with services helped by returns processing volume tied to customer growth and regulatory changes. The profit lines moved the other way. Operating income was $4.3 million in the quarter, down 11.8%, and $4.9 million year to date, down 54.6%. Net income was $4.0 million in the quarter, down 44.0%, and $14.2 million year to date, down 5.7%. Higher spending on research and development, selling and marketing, and general and administrative functions drove the decline.
Margins compressed in the quarter. Gross margin was 63.1%, down 1.7 percentage points from the prior-year quarter, even though year-to-date gross margin was 64.2%, up 0.9 percentage points. Operating margin was 2.2% in the quarter, down 0.6 percentage points, and 0.9% year to date, down 1.3 percentage points. Adjusted EBITDA, a non-GAAP measure, was $43.5 million in the quarter against $38.6 million a year earlier, and $119.1 million year to date against $113.9 million. Adjusted EBITDA margin was 22.6% in the quarter compared with 22.7%, and 21.5% year to date compared with 23.3%. Vertex tied that pressure to strategic investments in information technology infrastructure, business process re-engineering, and work tied to its 2024 acquisitions. The mix and the spending levels are the two things to watch from here.
Cash generation improved in the quarter. Operating cash flow was $62.5 million, up 50.9%, while year-to-date operating cash flow was $123.3 million, flat against the prior-year period. Free cash flow, a non-GAAP measure, was $30.2 million in the quarter compared with $18.4 million, and free cash flow margin was 15.7% compared with 10.8%. Year to date, free cash flow was $37.5 million compared with $59.8 million, and margin was 6.8% compared with 12.2%. The timing of cash collections and payments lifted the quarter, partly offset by more spending on property and equipment and capitalized software. Deferred revenue was $339.0 million, up 11.4% from the prior-year quarter, which reflects subscription work billed but not yet recognized.
Annual recurring revenue was $648.2 million at September 30, 2025, up 12.4% from a year earlier. Vertex attributed $37.1 million of that gain to expansion within existing customers and $34.3 million to new customers. Cloud-based subscriptions produced 56% of software subscription revenue in the quarter, up from 49%, while on-premise slipped to 44% from 51%. The migration is intentional, and management expects it to continue, but it shifts revenue recognition timing and carries its own cost structure.
Leadership is turning over. David DeStefano will retire as president and chief executive officer effective November 10, 2025, after a 26-year tenure, and Christopher Young will take the roles and join the board. DeStefano will stay on as non-executive chairperson. Young spent his recent years at Microsoft as executive vice president of business development and previously ran McAfee. The board will have nine directors, seven of them independent. On October 30, 2025, the board authorized a stock repurchase program of up to $150.0 million of Class A common stock. Management offered no formal guidance for the fourth quarter or the full fiscal year, and it noted that the quarter's numbers are preliminary and subject to completion of its financial closing procedures. A pending legal claim and the earn-out revaluations on the ecosio acquisition remain items to track in the next filing.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2025 | Q2 FY2025 | QoQ | Q3 FY2024 | YoY |
|---|---|---|---|---|---|
| Revenue | $192.1M | $184.6M | +4.1% | $170.4M | +12.7% |
| Gross profit | $121.3M | $121.2M | +0.1% | $110.5M | +9.8% |
| Gross margin | 63.1% | 65.7% | -2.5 pp | 64.8% | -1.7 pp |
| Research & development | $19.9M | $20.6M | -3.2% | $15.6M | +27.6% |
| Sales & marketing | $47.4M | $48.5M | -2.2% | $42.1M | +12.5% |
| General & administrative | $44.6M | $43.4M | +2.8% | $41.5M | +7.5% |
| Total operating expenses | $117.0M | $125.1M | -6.5% | $105.6M | +10.8% |
| Operating income (loss) | $4.3M | -$3.9M | +211.8% | $4.9M | -11.8% |
| Operating margin | 2.3% | -2.1% | +4.3 pp | 2.9% | -0.6 pp |
| Net income (loss) | $4.0M | -$961.0K | +520.9% | $7.2M | -44.0% |
| Net margin | 2.1% | -0.5% | +2.6 pp | 4.2% | -2.1 pp |
| Net retention rate | 107.0% | 108.0% | -1.0 pp | 111.0% | -4.0 pp |
Risks
Net revenue retention rate decreased to 107% at September 30, 2025 from 111% a year earlier. MD&A attributes the decline largely to slower customer annual growth keeping them within current usage bands and delayed deal activity for some large multinational customers due to the macroeconomic environment.
Operating income decreased 54.6% year to date to $4.9 million and operating margin fell to 0.9% from 2.2%, while third-quarter net income decreased 44.0%. The pressure reflects growth in R&D, selling and marketing, and G&A expenses plus acquisition earn-out fair value adjustments.
Other operating expense, net was $10.1 million year to date compared with $0.4 million of other operating income in the prior-year period, driven by $8.1 million of legal costs for a pending legal claim. Third-quarter other operating expense, net also increased to $2.7 million from $1.2 million, and transaction costs include legal expenses tied to claims against a competitor.
R&D expenses rose 30.4% year to date and 27.6% in the quarter, reflecting investments in AI-based Smart Categorization and other AI internal tools. MD&A states there is no guarantee these solutions will be accepted by the market, which could increase costs or impair capitalized development costs with no future revenue benefit.
CEO David DeStefano will retire as an executive officer effective November 10, 2025, and Christopher Young was appointed CEO, President and a Class III director. An executive leadership transition may disrupt strategy execution or customer relationships.
Fair value changes of the ecosio acquisition contingent earn-outs were $(16.4) million year to date, with Cash and Stock Earn-outs revalued quarterly through the earn-out periods. These quarterly adjustments add volatility to reported operating results.
SaaS KPIs
All quarters →Adjusted EBITDA Margin
Free Cash Flow Margin
Direct customers
Summary, forecast, risks and KPIs are extracted from Vertex, Inc.'s SEC filings for Q3 FY2025 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 6, 2026.