Summary

  • Vertex reported US$51.015 million of adjusted EBITDA in Q2 2026, up from US$38.369 million, and widened the corresponding margin from 20.8% to 25.0%. GAAP operations still lost US$4.4 million.
  • Operating cash fell to US$30.896 million from US$46.003 million. After US$23.171 million of property and equipment additions and US$4.992 million of capitalised software, free cash flow was US$2.733 million, down 86%; its margin fell from 10.6% to 1.3%.
  • The quarter is a conversion test, not a verdict. First-half free cash flow still rose to US$10.392 million from US$7.337 million, and management expects stronger cash in Q3 and Q4. The evidence needed is an operating-cash recovery that does not depend on starving cloud infrastructure or software development.

A margin can widen while cash narrows because the two measures do not stand at the same point in the operating system. Vertex demonstrated the distance in its June quarter. Revenue rose 10.5% to US$203.970 million. Adjusted EBITDA increased by nearly a third to US$51.015 million, and its margin expanded 4.2 percentage points to 25.0%. Free cash flow, however, was US$2.733 million. Its margin was 1.3%.

Neither number needs to be dismissed. Adjusted EBITDA removes specified expenses to show a version of operating performance before depreciation, amortisation, stock compensation, severance, transaction costs and other adjustments. Free cash flow starts with the cash actually produced by operations, then deducts property, equipment and capitalised-software additions. One is an adjusted earnings perimeter. The other is a cash remainder after a defined set of investments.

The analytical task is to cross the bridge between them. For Vertex, that bridge is especially important because the company is simultaneously increasing cloud revenue, spending on technology and process change, and pursuing a Value Creation Plan intended to deliver future cash savings.

The cash outlet was smaller before investment was deducted

Operating cash was US$30.896 million, down US$15.107 million from the prior-year quarter. Vertex then spent US$23.171 million on property and equipment and capitalised US$4.992 million of software additions. Those two deductions total US$28.163 million. What remained was the reported US$2.733 million of free cash flow.

The year-on-year decline in free cash flow was US$16.854 million, or about 86%, from US$19.587 million. The investment line alone did not create the whole decline. Property and equipment additions increased only US$1.659 million; capitalised software was almost flat. The larger movement came before those deductions, in the US$15.107 million fall in operating cash.

That distinction prevents a convenient but inaccurate explanation. It would be wrong to say free cash flow collapsed simply because Vertex suddenly doubled investment. It did not. The existing investment burden met a weaker quarterly operating-cash inflow. A business can carry that combination when the investment supports durable growth and working-capital timing reverses; it cannot treat the adjusted margin as proof that the cash question is already solved.

Growth gives the spending a commercial context

Vertex is not investing against a shrinking subscription base. Software-subscription revenue rose 10.7% to US$174.8 million. Cloud revenue increased 17.9% to US$101.7 million. Annual recurring revenue reached US$703.4 million, up 10.5%.

Customer metrics show where some of that growth is coming from. Direct customer count rose by 57 to 4,919. Average annual revenue per direct customer increased US$12,063 to US$142,997, about 9.2%. Gross revenue retention remained 95%. Net revenue retention fell from 108% to 105%, while holding at the same level as the March quarter.

The definitions matter. NRR includes expansion from migrations, added products, contractual price changes and usage-based changes, as well as losses from departures and contraction. GRR excludes expansion. A stable 95% GRR alongside 105% NRR says the existing base still produced net expansion, but the expansion cushion was smaller than a year earlier. Higher average revenue per customer can reflect successful migration and cross-sell; it does not by itself reveal the price, volume or product contribution.

This creates a useful condition for the cash investment. If equipment and capitalised software support faster cloud growth, compliance mandates and higher customer value, they are part of the product engine rather than leakage. The proof must arrive in retention, efficient deployment, gross profit and operating cash over time.

Adjusted EBITDA leaves a large reconciliation behind

The difference between adjusted EBITDA and GAAP operating performance was not a rounding issue. Vertex recorded a US$4.4 million GAAP operating loss and US$44.3 million of non-GAAP operating income. Adjusted EBITDA was US$51.015 million.

Its reconciliation added back several real accounting expenses. Depreciation and amortisation included US$6.720 million for property and equipment, US$21.882 million for capitalised software and acquired intangible assets in subscription cost, US$0.522 million in selling and marketing, and US$1.358 million for cloud-computing implementation costs. Stock-based compensation was US$13.762 million. Severance was US$2.689 million. Transaction costs were US$7.375 million. Other adjustments moved in both directions.

Some items are non-cash in the quarter; others represent cash paid in another period or costs management treats as outside normal comparison. That makes the metric useful for a defined question and incomplete for another. Amortisation does not consume current-quarter cash, but the software or acquisition behind it once required capital. Severance may be episodic, but restructuring has a cash cost before savings arrive. Stock compensation does not leave the bank account immediately, but it can dilute ownership.

The company also reported US$9.043 million of GAAP net income, compared with a prior-year loss. That result included a US$13.142 million income-tax benefit. By subtraction, pre-tax income was negative. Net income therefore should not be used as evidence that operating cash conversion improved in the quarter.

The Value Creation Plan has a before-and-after problem

Vertex’s plan is designed to make the organisation more efficient while preserving investment in selected growth areas. Q2 figures still sit in the “before” and “during” stages. The quarter included US$6.250 million of execution costs associated with the plan and US$1.713 million of related severance within the disclosed adjustments.

Management previously said the cost actions could reduce annualised cash spending by roughly US$60 million to US$70 million beginning in 2027. That is a target, not a saving already delivered. It also creates a control question. The company must distinguish costs removed because processes become more efficient from costs merely shifted into capitalised software, outside adjusted measures or into later periods.

The strongest version of the plan would make operating cash rise while cloud revenue, customer value and the product development cadence remain healthy. The weakest would manufacture a cleaner adjusted margin by cutting current expense while maintenance, implementation or compliance content deteriorates. Indirect-tax software is not a static catalogue. Jurisdictional rules change, e-invoicing mandates spread, integrations need upkeep and audit evidence must remain reliable.

One quarter is not the full cash record

The first-half comparison supplies the necessary counterweight. Six-month free cash flow rose to US$10.392 million from US$7.337 million, and margin improved to 2.6% from 2.0%. Operating cash for the half increased to US$68.871 million from US$60.808 million. Investment additions were also higher, leaving a modest but real year-to-date improvement.

Quarterly working capital and payment timing can move operating cash sharply. The Q2 result is therefore not proof that Vertex’s cash economics structurally worsened. Nor can the first-half improvement make a 1.3% quarterly margin irrelevant. Together they say the conversion is uneven and that the second-half promise can be tested soon.

For Q3, Vertex guides to US$208 million–US$211 million of revenue and US$55 million–US$57 million of adjusted EBITDA. The full-year ranges are US$825 million–US$830 million of revenue and US$206 million–US$210 million of adjusted EBITDA, with cloud growth expected at 18%. Management says cash generation should strengthen in Q3 and Q4.

The receipt investors need is not another adjusted margin alone. It is an operating-cash improvement after restructuring payments and working-capital movements, followed by free cash flow that remains stronger after the business funds the equipment and software required to meet its cloud and compliance commitments.

Investment cannot be judged only by the cash it consumes

Capitalised software is particularly important in this test. Capitalising qualifying development expenditure keeps it out of current expense and places it on the balance sheet, where it is amortised later. Free cash flow deducts the current addition, while adjusted EBITDA excludes much of the later amortisation. The same product investment can therefore sit outside both headline measures at different times.

That is not an accounting defect. It is why readers need the reconciliation. A company that capitalises software must show that the resulting asset earns its keep through product relevance, retention, expansion and cash. A company that stops investing merely to maximise short-term FCF may improve the cash remainder while weakening the engine that produces future subscriptions.

Vertex’s quarter places the decision cleanly. The 25.0% adjusted EBITDA margin says operating leverage is visible within management’s chosen perimeter. The 1.3% FCF margin says little of that result remained after the cash cycle and continuing investment. The first-half numbers say the quarterly gap may narrow. The next two quarters will show whether the Value Creation Plan connects these three statements into one economic outcome.

Sources