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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Greetings. Welcome to the Vertex Second Quarter 2020 Results Conference Call. [Operator Instructions]. Please note this conference is being recorded. At this time, I'll turn the conference over to Ankit Hira with Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us for Vertex's Financial Results Conference Call for the Second Quarter, ending June 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 second 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.
Thank you, Ankit, and welcome to our first earnings call as a public company. It was great to meet many of you during the course of our IPO roadshow in July, and we look forward to getting to know all of you better as we go forward. First, let me acknowledge all of our 1,100 employees on delivering a great quarter. I'm incredibly proud of our team and how quickly they were able to adapt in these unprecedented times, while maintaining their focus on serving our customers. And then to see the pride and excitement as we became a public company, nearly the entire team was able to participate virtually and celebrate this special milestone in our history.
It was such a validation for the type of unique culture we have, which I'm grateful to lead. As some of you may be new to our story, I'd like to spend a few minutes to take you through a brief overview of who we are, what we do, and the growing market opportunity we see in front of us. Please note that this overview will make today's call longer than what we're typically -- going forward. I'll then provide an overview of our recent progress and performance and then turn the call over to John for a financial review of the quarter, followed by our expectations for full-year 2020.
About Vertex, we've been recognized leader of tax technology for over 40 years. Our mission is to deliver comprehensive tax solutions that enable global businesses to transact, comply and grow with confidence. Today, our software enables tax determination, compliance and reporting, tax data management and document management with powerful prebuilt integrations to core business applications, powering global commerce.
Our software is fueled by over 300 million data-driven effective tax rules and supports indirect tax compliance in more than 19,000 jurisdictions worldwide. We pioneered the first indirect tax software over 40 years ago, and since then have built innovative tax software, a marquee customer base and a trusted brand.
Our solutions can be deployed in the cloud, on-premise or both. This has helped us create a long-standing customer base of over 4,000 customers, including some of the most complex and discerning multinational enterprises around the globe. Our history and experience with complex tax challenges are difficult to replicate.
Our culture of innovation, the name brand recognition of our customer base and the mission-critical nature of our software for tax departments provides the leverage to our sales and marketing teams enables us to successfully attract new customers. Our brand and solutions are trusted by customers as well as tax audit and advisory community, which has made us a sought-after thought leader in the industry.
Today, our customers include the majority of the Fortune 500 as well as the majority of the top 10 companies by revenue in multiple industries such as retail, technology and manufacturing, in addition to leading marketplaces. As these companies expand geographically, pursue omnichannel business models, their tax determination and compliance requirements increase and become more complex.
Our trusted brand and strong relationships with our customers enable us to capitalize on these sustainable organic growth opportunities. Our partner ecosystem is a distinct strength to support both software development and our sales and marketing activities. We integrate with technology partners that span ERP, CRM, procurement, billing, POS and e-commerce platforms.
The majority of our integrations are designed, tested and supported by us. However, we also support partner developed integrations as part of a rigorous certification program. To give you an example of the importance of these relationships, we've been partners with SAP for over 20 years. Our teams are embedded at a deep technical level, and we conduct joint road map development activities.
In addition, we collaborate with many major tax, accounting and consulting firms, which not only complement our global tax and technology expertise, but also help us identify new growth opportunities. Many of these firms have built significant practices around our solutions, which greatly extends our reach.
Our customers rely on us for comprehensive indirect tax management solutions that improve efficiency, mitigate audit and reputation risk and enable them to expand their business, while ensuring they are meeting their indirect tax obligations in the jurisdictions in which they do business.
While we are proud of our accomplishments to date, we recognize there is still more to do to truly unlock our full potential. We have a terrific opportunity in front of us. We believe the total addressable market for solutions that enable global commerce and compliance is robust, global and growing. We estimated our addressable market among global enterprises and other businesses with greater than $1 million annual sales to be over $7 billion in the United States. We believe this potentially understates our total addressable market because it does not include businesses domiciled outside of the United States.
Now our growth strategy. In fact, the rapid change is taking place in today's global business, technology and regulatory environments are having a compounding effect on the complexity of indirect tax management, giving us a significant growth opportunity, and our recent performance speaks to the trust our customers have in us to help them continue to transact, comply and grow with confidence, even in a challenging global environment.
As companies expand their business models, enter new geographies and extend their distribution channels, they widen the aperture of indirect tax obligations. Additionally, as they expand their core offerings to incorporate new digital products and services, they are increasingly impacted by new regulations and being pursued by jurisdictions. For example, in the United States, nearly 40 states have enacted marketplace facilitator regulations, requiring online marketplaces to collect and remit taxes for first and third-party sales on their websites. This complexity demands intelligent solutions that enables businesses to satisfy tax obligations and support growth opportunities. We believe today's global commerce environment provides a sustainable growth opportunities for our business, specifically in 5 key areas.
First is expanding customer revenues. As we have throughout our history, we will continue to invest in new solutions to support the ongoing retention and expansion of revenue from our existing customers. Second is acquire new customers. We will continue to invest in our sales and marketing teams in order to capture this demand coming from the growth drivers, I mentioned earlier, to acquire new customers. Third is to broaden and deepen our partner ecosystem. We believe expanding our strategic alliances with emerging participants who are fueling global commerce, such as payment and digital commerce platforms, will create new value for our customers and new sources of revenue. Fourth is to extend our global footprint. We have significant opportunity to expand internationally, and we expect to continue to invest in our software and solutions outside of the U.S., most notably, in Latin America and Europe. Finally, we will sustain 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.
Overall, we're excited about this forward-looking roadmap that serves our growth strategy, delivers differentiated value to our customers and partners and enables us to extend our leadership in the markets we serve. With that as a backdrop, I'd like to turn now to this quarter's performance and strategic progress.
Overall, we are pleased with our strong second quarter performance driven by revenue growth of 16.5% and ARR growth of 16.4% versus the prior period. We've also been able to effectively balance our commitment to growth and innovation with profitability by delivering adjusted net income growth of 47.7% to $18.9 million and adjusted EBITDA margin of 23.6%, an increase of 380 basis points over the second quarter of 2019.
Some performance highlights. Overall, ARR growth came from a number of areas. New customer acquisition, including a number of what I'll call new economy companies, providing digital goods and online delivery services as well as more traditional companies, enabling their e-commerce and omni-channel strategies. We saw a solid revenue expansion of existing customer revenues, which showed up in our net revenue retention of 108% comparable to Q2 2019, primarily driven by cross-sell and upsell.
I'd like to highlight a sale we had in Q2 that reflects our land-and-expand motion and our customers' movement to cloud. This is also why it is so beneficial to work with the largest companies in the world. In Q2, we closed a new sale with a customer, we have been working with since 2006. This customer is a global retailer operating in over 15,000 retail locations around the world. Over the years, as its global supply chain operations grew, indirect tax complexity increased for them in purchasing, manufacturing and distribution.
By working closely with them, as they grew, they continued to purchase several new solutions from us, beyond their initial sales tax license, including VAT and consumer use tax and our data management offering. More recently, the company has strategically expanded its business through a new mobile offering to expand its sales channel.
Vertex Cloud was selected to determine and apply sales tax as part of the mobile ordering and payment process via their app. In Q2, we completed a 7-figure deal that supports their rollout and expanded use of Vertex Cloud. By working with these large dynamic companies, we have a great opportunity to continue to expand our footprint of solutions, as they grow through changes in their business model, technology infrastructure or M&A, through a highly efficient land-and-expand model.
And we have learned over 40 years that this ongoing pattern of constant change continues across our diverse customer base and drives our NRR. We also saw strong a services performance in Q2, specifically in our implementation services, where we see both new implementations and existing customer upgrades and cloud migrations performing well. We continue to invest in our go-to-market expansion and integrations to meet the needs of companies looking to automate indirect tax in their e-commerce and procurement applications as well as ERP and billing systems.
In Q2, we launched our new e-commerce integration with OroCommerce, and we expanded our procurement integration with SAP Ariba. On the go-to-market side, we secured a relationship with Avanade to support growth in the Microsoft ecosystem. And finally, we are named a 2020 Top Workplace by Philadelphia Inquirer for the sixth year in a row. This award is a testament to our employees who are making their mark and embodying our values in service to our customers and fellow employees every day.
In closing, we are well positioned to capture the significant growth opportunities ahead by expanding revenues from existing customers, acquiring new customers, broadening and deepening our partner ecosystem and extending our global footprint. Our recent IPO was a significant milestone for us. Although, we are very proud of all we have achieved so far, we acknowledge that this is just the next step forward in serving our customers, employees and shareholders with distinction.
Thank you for the time and continued support. I'll now turn the call 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 second quarter 2020 results and then our full-year guidance. Total second quarter revenue grew 16.5% year-over-year to reach $91.3 million. Subscription revenues grew at 14.9% year-over-year to $77.3 million. And our annual recurring revenue, or ARR, grew to $294.6 million. This represents a 16.4% growth year-over-year. Services revenue grew to $14 million or 25.7%, driven by the implementation related services, associated with our growth in subscription revenues from new and existing customers. We continue to see strong growth in our cloud-based solutions among both existing and new customers.
Our cloud revenue grew by over 60% in the second quarter of 2020 over 2019. We continue to believe that the shift to cloud represents a unique opportunity for the company to drive additional revenues and ARR growth. Sales to existing customers made up 72% of our software sales in the second quarter of 2020, and new logos made up 28% of new sales and is a continued area of focus for the company.
Our net revenue retention rate, as David mentioned, was 108%, demonstrating our customers' commitment to our software and solutions. Our gross revenue retention rate in the quarter was 91%, which is consistent with many of the 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 to our GAAP results in the earnings press release that was issued just before this call.
On an overall basis, gross profit was $65.4 million in Q2, representing a 71.7% gross margin. This compares with gross profit of $55.6 million and a 70.9% gross margin in the same period last year. We are pleased with our gross margin improvement of 80 basis points. From a subscription software standpoint, our gross margin increased to 78.8% from 77.3% in the prior year, driven by continued leveraging of our cloud infrastructure.
Our margin in our services business decreased to 32% from 32.5% in the prior year. We continue to see strong demand and productivity levels for our services from implementation of new software as well as existing customer projects. Research and development expense was $9.4 million or 10.4% of revenues, an increase of 140 basis points year-over-year, reflecting the increased spend on new solutions to address end-to-end data analysis and compliance needs.
Sales and marketing expense was $16.2 million in the second quarter or 17.8% of total revenue, a decrease of 390 basis points year-over-year, which was primarily driven by a reduction in travel and marketing events due to the COVID-19 restrictions. In the second quarter, general and administrative expenses was $18.1 million or 19.9% of revenue versus 20% of revenue in the second quarter of 2019. The increases were driven by higher levels of information technology infrastructure, process reengineering and other initiatives to drive future operating leverage. GAAP net loss was $29.1 million compared to a GAAP net income of $7.1 million for the same period last year. GAAP net loss per basic and diluted Class A and Class B share was a negative $0.24 compared to a GAAP net income per basic and diluted Class A and Class B share of $0.06 for the same period last year.
Non-GAAP net income was $18.9 million compared to a non-GAAP net income of $12.8 million in the same period last year. Non-GAAP net income per diluted Class A and Class B share was $0.16 and $0.15, respectively compared to non-GAAP net income per diluted Class A and Class B share of $0.11 and $0.10, respectively, for the same periods last year. Adjusted EBITDA of $21.5 million is up 38.4% year-over-year and adjusted EBITDA margin of 23.6%, an increase of 380 basis points year-over-year.
Our most significant non-GAAP charges relate to stock-based compensation. Given that the initial public offering occurred in the third quarter, we will continue to have ongoing charges related to the stock-based compensation instruments that we will report to the public.
Turning for a minute to our capital structure. Looking at our balance sheet and cash flow statement, we finished the quarter with approximately $47.3 million in cash and cash equivalents. In the third quarter, we completed our initial public offering by selling 24.3 million shares at an IPO price of $19 per share, raising proceeds net of underwriting fees of $423 million, which is used primarily to repay our $175 million term loan and offering expenses.
We generated $18.7 million in free cash flow for the quarter, which is an increase from $14.7 million in 2019. Now turning to our guidance for the third quarter of 2020. Total revenue, we expect to be in the range of $89 million to $91 million, representing annual growth of 8% to 10.4%. Adjusted EBITDA in the range of $17.5 million to $18.5 million, representing a decrease of 10.7% to 5.6%.
Turning now to guidance for the full year of 2020. We expect total revenue in the range of $362 million to $365 million, representing annual growth of 12.6% to 13.5%, and adjusted EBITDA in the range of $73 million to $75 million, representing annual growth of 7.5% to 10.5%. Additional modeling details underlying our outlook are as follows: share count. We currently have 120,417,000 shares of Class B outstanding. At the time of the IPO, we issued 25,749,000 shares of Class A, and we currently have common stock equivalents of 12,934,000 stock equivalents at a weighted average exercise price of $2.41 per share. Our effective tax rate is expected to be 25%.
Overall, we're pleased with the progress we have made on our strategic initiatives and performance of the business. And with that, we're now happy to open the call for questions. Operator, will you please open the line for Q&A?
[Operator Instructions]. And our first question is from the line of Samad Samana with Jefferies.
Congrats on the first quarter as a public company. Maybe first, starting off on the new logo acquisition, that was a really healthy rate despite what's a challenging macro environment. I was wondering, if maybe, you can talk about what's driving new customers? And if there's any new or different complexities in the current environment that's driving new customer acquisition? And then just I have a follow-up to that.
Sure, Samad. Thanks. Good morning, and thanks for joining us today. Great to connect with you again. We saw a fairly typical response to our efforts in the field with new logos. Our deep tax content really is a differentiator for us, and it enables us to reach into many diverse industries, our strong vertical strength really gives us the ability to go where the market activity is. So I think the quarter really reflected that we saw a great uplift in e-commerce and retail, and we continue to do well there as companies are pursuing their omnichannel strategy. But we did well in manufacturing and many of the other areas of technology that we focus on.
Great. And then maybe just as I think about the post-IPO focuses in terms of investing, how should we think about maybe the top priorities over the next 3 to 6 months, whether it's the sales, go-to-market strategy or R&D? Where is the company investing new dollars to sustain what was a much better growth profile than I think many expected in this environment?
Yes. Thank you. We continue to balance our investment. Innovation is so important to continue to bring new offerings to market. We've got a number of products, I'm very excited about that we've teed up for the end of this year and into 2021 as it relates to our expansion internationally. And we continue to drive our channel relationships and integrations as we move into the middle market where the complexity is accelerating because of the fundamental drivers that we've talked about around business complexity, technological complexity and regulatory complexity, and that's really opening up the value prop for Vertex in the middle market. So we'll be expanding our investment in the go-to-market space to support our middle market opportunities.
Great. I apologize for the third question. John, if I could just squeeze one in for you. As we think about 3Q guidance, any qualitative or quantitative thoughts around what type of retention assumptions are being made just from 2Q to 3Q?
Yes. Again, thanks, Samad. I appreciate the question. Yes, I think as we think about our Q3 guidance, what we did see is a fairly consistent sort of fairly consistent kind of path from Q1 to Q2 in terms of what our GRR and NRR was in retention. And so we do not anticipate a significant change fluctuation, either up or down from what we saw in the second quarter.
Next question comes from the line of Brad Sills with Bank of America.
I wanted to ask about some of the efforts in expanding the partner ecosystem. You mentioned some certification. If you could just remind us kind of where you are with that effort? And maybe any new partners signed on during the quarter that you're excited about?
Yes. Thank you, Brad. Good to connect with you. That part of our strategy remains an important area of growth for us. We see that as a clearly an accelerating growth vector. We've done some things and secured that exclusive relationship with Cpa.com, and that provides a great access to a new channel for us, sort of a one-to-many strategy that we believe can be successful. Additionally, I'm very excited about the Avanade relationship, which was a new one in Q2, which is the Accenture-Microsoft partnership. As we continue to accelerate integrations in the Microsoft space, I think that go-to-market channel will continue to -- will be a new area for growth for us going forward.
That's great. That's great. And with regard to international expansion, LATAM, Europe, any update on kind of where you are there from a product standpoint and a go-to-market, that would be helpful, please.
Sure. Brad. So we did make the acquisition earlier this year, down in Brazil, which I think will continue to enhance our content suite, covering the most complex jurisdiction in the world from an indirect tax perspective. Additionally, in Europe, we've got a number of offerings that are coming to market here at the end of 2020 and into 2021, that I think, are really aligned well to the regulatory environment that's changing over there. And with a significant technology refresh that'll have to be happening around the HANA platform, where SAP is the dominant player over there. I think those are well positioned to help us, as we move into 2021 and beyond in Europe.
Our next question is from the line of Chris Merwin with Goldman Sachs.
Congrats to you all on a great first quarter of execution. I wanted to ask about the cross-sell motion. Is there anything you might be able to highlight for us with new modules being sold across indirect tax or other areas like document management or tax data management? And then also, how should we be thinking about what the high end of ARR per customer can look like as you get more fully sold out in some of your larger customers?
Sure. Good to connect with you, Chris. And I'm happy to talk about the cross-sell motion. I think we saw a fairly consistent behavior in the quarter. We enjoy a very strong relationship in the advisory community. And so even in the current pandemic between our direct access and long-standing relationships with a lot of customers that allow us to have the type of conversations where we can talk about where their business is headed, where their technology infrastructure is going and how we can support that. We're able to partner very effectively with the advisory community to help us make sure we're staying connected to the activities of our customers. And those proved to be fairly successful in the quarter. I would say that consistent behavior across sales tax, consumers use tax and VAT was experienced throughout the quarter.
Yes. And from an ARR per customer standpoint, we continue to see growth in that area. We see that moving along in the second quarter, we were up over $70,000 per customer, which is trending, again, continuing to trend north, showing that strong NRR flow through into the size of the customer. So that continues to proceed upward, and the anticipation is that with additional products and other things that may offer additional upside.
Great. And then maybe one quick follow-up. I was wondering, if you could talk a bit about the broader demand environment here, as we recover from COVID? Anything you can share about length of sales cycles, close rates and just maybe adding some context for us about how those have improved since March.
Yes. I'll start for a little bit and then maybe David can give some color to kind of what the motion is looking like these days. But what I would say is, as we came out of the first quarter anyway, the visibility was very -- it was very unclear. And I think as we saw the second quarter progress, we started to kind of improve the visibility, and we felt comfortable that things that we initially thought might be pushed out into Q4 and maybe even beyond, started coming back and those names started to pop up again. I think as people got comfortable that kind of this work-from-home environment wasn't a couple of week or a month type of thing. It was going to be something that was going to have a little more longevity. I think everybody got back to it and started pursuing the projects and things that have been on their task list to get done for the year. And so we did see some of that come back.
And we feel pretty good about how that improved throughout the quarter. We'll continue to see how this kind of shapes up into the third quarter as we're a couple of months in. But again, I think we feel that there is some improving visibility as we've kind of marched down even into the third quarter here.
[Operator Instructions]. The next question is from the line of Stan Zlotsky with Morgan Stanley.
Congratulations on your first quarter as a public company. A couple of questions from my end. Maybe just following up on the macro discussion you guys just -- you mentioned. Some of the deals that were initially you thought were going to be happening as a Q4, Q3 type of phenomenon. Was there anything meaningful as far as pull forward into Q2 that closed, that we should be mindful of?
No. There wasn't any particular one or two things, Stan, that really came through that would kind of impact what Q3 would look like. I think as you can see from our guidance, we still believe that there's ample demand out there, and there will be through the rest of the year. But there wasn't anything that artificially bumped us up for the second quarter.
Okay. Awesome. I wanted to dig into the cloud migration story. How are you guys thinking about it? You had 60% growth of cloud revenue, slight decel versus what we saw last year and in Q1. But just overall, how are customers thinking about moving to the cloud in the current environment?
Yes, great question. Great question, Stan. I will say that it's important to remember, we always lead cloud-first in every discussion we have with our customers and our new prospects that we're bringing in. Overwhelming majority of our new logos are cloud. Clearly, that is where they lead first. We remain committed to our hybrid strategy, though, so existing customers who are on the journey. Typically, what we'll see is in the cross-sell, where we're selling them a new module. Oftentimes, they will look to cloud because we're leading cloud first, they will look to see if they can begin to move that portion of their business into the cloud. It's a slower migration from -- if you're an on-premise customer, depends where the CIO is in their journey with their infrastructure road map, whether they're ready to make that leap.
And so we sort of see it in that progression. New logos, predominantly cloud. The upsell, we lead cloud, and we see good movement there from a cross-sell to an existing customer. And then where possible the full migration of the organization to cloud.
Got it. Got it. And then maybe just one quick one for John. John, cash collections in the quarter were much stronger than we expected. What drove the strength, if there is anything to call out?
Yes. Again, I would go back, Stan, and probably look and think about -- again, as we got through the end of the first quarter, there was some uncertainty, and we did see a little bit of pullback. In the second quarter, we started to get some of that back. And again, as we got some of that back, focused on our ability to collect cash from our customers and ensure that we were staying in front of things as renewals were coming up, we were getting on front of that. So a much more proactive approach, and I think that paid benefits. But again, I think, again, the timing at the end of the first quarter, we've created a lot of uncertainty and people sort of froze. I think we saw a little bit of catch-up in Q2.
The next question is from the line of Brad Reback with Stifel.
David, you guys are in a pretty unique position, given the amount of transactional data you see on a daily basis, especially through the cloud. Aside from your e-commerce customers, can you give us a sense of how volumes have trended over the course of 3Q, just for an overall economic health check?
Yes. Sure, Brad. Thanks. I appreciate the question. I think, we saw a really good balance. It was interesting. I think like a lot of us, we expected to see certain concerns in certain pockets. We do not have any dominant customer concentration, which gives us a lot of durability and sustainability of our model. And we saw good volume across many sectors as customers pivoted their omnichannel strategy in different areas to try to move ahead. So in retail and technology, those were sectors that continue to perform very well.
The next question is from the line of Pat Walravens with JMP Group.
Congratulations on your first quarter, guys. So since it is the first one out, if you don't mind, I'm going to ask a couple of questions on things that I think people are interested in. So first of all, on the cloud business, and I know you don't break out specifically, but can you give investors some idea of what the margin profile is like for that business, and how you expect that to trend over time?
Yes. I think as we disclosed in the release, in my prepared remarks, again, we do disclose the margin of the overall business. The cloud business, we don't break the cloud out specifically. But the cloud margin is one that continues to make progress, and we continue to advance the ball in terms of what that margin percentage has been. So that has been rising. We haven't broken out that specifically between cloud and on-prem at this point and we have seen the improvement in the margins, and you saw that come through on an overall basis, but really, the driver there was our ability to leverage infrastructure in cloud.
Yes. And then just so people understand, what's the additional cost on the cloud? Kind of what do you do for the hosting?
Well, again, the large piece of it is some of the hosting that goes on and keeping the security and everything else in there that needs to be there to maintain data security with our customers' information. So I think, that's one of the big things there. There are some costs to maintain and ensure the connectivity continues to remain there and the redundancy that needs to be there. I think there are a couple of the big ones. So again, mainly focused on IT related activities.
Okay, great. So that's one area. Then I think the other big area of people want to understand is just sort of what is the -- we're obviously in the tough environment now, but stepping away from this environment in the normalized environment, what is the growth profile of this business? So if you look at your ARR over the last four quarters, it went 19%, 19%, 17%, 16.5%, right? So just what are you targeting in a normal environment? How should people think about the growth profile of this business?
Yes. I think, as we think about the growth profile and as we think about growth of the company, we've talked about our ARR growth over time. As David mentioned, we're going to be making additional investments in the sales and marketing and the go-to-market channels. And so we're looking to increase that over periods of time, but it's something that doesn't occur immediately. It takes some time to grow, build out that infrastructure. And so we like seeing those kind of mid- to upper teens ARR growth that's there. We think there's opportunity to grow that further. We would like to consider ourselves somebody that can get ourselves close to that 20% kind of regular way growth. We think we have the ability to do that. But again, it's going to take some additional investment and some additional time to get us there, but that's where we're targeting over a longer term, Pat.
Yes, Pat, I would just build on that and say, I think, as the market complexity continues to accelerate, both outside the U.S. and in the lesser, smaller $100 million to $500 million companies that we historically couldn't deliver a significant value to. I see those as opportunities to build on to pay off John's point about how we move from the historical to acceleration.
The next question comes from the line of Bhavan Suri with William Blair.
David, John, and let me echo my congrats, a really solid job, as a start to public company. I guess, I wanted to touch quickly on the international opportunity a little bit here. Obviously, the tax complexity in Latin America, Brazil is a great example, really, really complex. And so to see the value there. But when you think about Europe and some of the, I guess, VAT relative, simply to say, the U.S. or Brazil, how do you view the competitive environment out there and your ability to kind of grow that business? You're obviously investing, would love to get a sense of the competitive environment in an environment where maybe it doesn't feel as complex as the U.S. or LATAM.
It's a great question, Bhavan. Good to connect with you. I think what's happened in Latin America, quite frankly, in Brazil, you highlighted, it's a little bit of a precursor of what's starting to happen over in Europe. So e-invoice is an example, part of the end-to-end suite of tax that has started to accelerate in Europe. We've seen the advent of digital taxes and marketplace taxes that are now accelerating in Europe.
So I think the simplicity of the VAT environment that existed for years is starting to be disrupted. You're starting to see different countries, applying different approaches to address their debt crisis through taxation, indirect tax VAT. And that complexity is where we think it's going to -- the good enough solution is going to begin to break down, and that's why we're trying to get in front of that with some of the new offers we're bringing to the market and expanding our go-to-market footprint in Europe.
Got you. Got you. That's very helpful. And then really quickly. Just you touched on sort of this high-teens growth rate as a normalized growth rate. I'd love to get a little more color on sort of how that breaks down. So you sort of got price increases, maybe highlight, just remind us of what those price increases are each year. I mean, you've got a nice net dollar retention rate, let's just say, close to low double digits, and the rest will be made up with new customers and sort of how is the breakout between upsell and cross-sell, just some bridge of how we get to that high teens, given those various pieces would be really helpful.
Yes. No, that's great question. Appreciate it. And again, I think, as we think about sort of where we go, you're right, there's 3 real main pieces of growth that are taking us from our gross revenue retention to our net revenue retention. And the 3 pieces are made of the items that you mentioned. First is really the cross-sell, the migrations and the upsells that exist. And that's about 50% of the growth that really comes from. When you think about what that bridge looks like. That's going to give you about 50% of that growth. And then if you think about the other 2 pieces, one will be the additional entitlement.
So as customers run more volume through the systems that we offer, that additional volume will result in additional revenue for us, as we move forward. So that's good. And then equally balancing that out is the price increases. On an annual basis, we offer -- we have price increases on software. It averages around five or so percent per year. So that is something that's important to keep in mind.
And remember, guys, we have customers as there's some migration that goes on, there continues to be an upsell for us that we get when customers move from on-prem to the cloud. And then, I guess, finally, I guess, as you get out of NRR and look into ARR, you're always going to have those new logos that come in. And as David talked about, we had some nice new logo growth in the quarter. And it's an area of focus for us to continue to ensure that we're advancing the ball in that regard.
Our next question is from the line of Daniel Jester with Citi.
Yes. So just sticking to the international piece. Can you just talk about how important you think acquisitions are going to be in terms of fueling your international growth? You maybe had one in Brazil. Maybe if you can just speak to that specifically? And then maybe more broadly, your acquisition philosophy? That would be helpful.
Thank you, Dan. Good to connect with you. I think, as we think about our growth opportunities right now, we've historically grown very organically by building products and adding value in a very thoughtful way to deliver value to the customers. What we see now is, again, because of the acceleration of change that's happening outside the U.S. that drove our behavior, down in Brazil. And I think we're looking at the same opportunities over in Europe and elsewhere, where we think we could begin to expand our footprint in inorganic ways to complement the fundamentals we've already put in place. And so I think it's going to be a nice balance between that, which we already have delivered, the products we have in the pipeline.
As I mentioned, we've got some nice offerings. We think, we're bringing to market here at the end of 2020 and into 2021 to support the European market. And then looking at and being aware of several opportunities that may exist in -- to support some of the end-to-end requirements for the VAT space in Europe and Latin America. So it will be a conscious part of what we do going forward.
Great. And then just a quick follow-up on the online marketplace opportunity. I think you've talked about in the past about having pretty good penetration at the very high end of the marketplaces. Where do you see that going over time? And are there specific initiatives you're trying to enact to expand your presence in online marketplaces?
Yes. Sure, Dan. We've been fortunate to have some long-standing relationships with the largest marketplaces that really dominate the space. And those we consider a key part of our one-to-many strategy, where we're able to access a plethora of small customers that we otherwise wouldn't find value in serving, by serving the marketplace and really dealing with the new marketplace facilitator regime that's being put in place and being adopted by over 40 states and over in Europe, there's additional rules being applied to marketplaces about how they're going to have to deal with both calc and compliance. And so I think those are our opportunities for a new growth vector for Vertex because as these regulations are really being absorbed and advanced, we think there can be opportunities as the revenue volume accelerates through marketplaces, to really drive some of our license offerings.
At this time, we've reached the end of our question-and-answer session. And I'll turn the call over to David DeStefano for closing remarks.
Thank you. In summary, really pleased with the quarter's performance and excited for the opportunities ahead. Our recent IPO was a significant milestone for the company, and we recognize, though, it's just another step forward as part of a longer journey. We have a great company, and we'll continue to be focused on maximizing shareholder value. As always, I'd like to thank my Vertex colleagues for their exceptional efforts and our clients for their strong partnerships and our extraordinary partners that we collaborate with and work seamlessly with to deliver value to the market. Thank you for your interest in Vertex and for joining us on the call today.
Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.