Vertex, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Vertex provides indirect-tax software subscriptions, cloud and on-premise solutions, and related services.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $119.3m | $104.9m | $234.3m | $203.2m |
| GAAP gross profit / margin | $71.1m / 59.6% | $67.6m / 64.3% | $141.3m / 60.3% | $128.9m / 63.4% |
| Operating income (loss) | $(4.3)m | $(1.5)m | $(3.8)m | $0.7m |
| Net income (loss) | $(5.5)m | $0.8m | $(5.9)m | $3.1m |
| Adjusted EBITDA (non-GAAP) | $17.8m | $19.2m | $36.9m | $37.4m |
| Adjusted EBITDA margin (non-GAAP) | 14.9% | 18.3% | 15.8% | 18.4% |
Q2 subscription revenue grew 12.8% to $101.1m; services revenue grew 18.6% to $18.2m. Cloud subscriptions were 40% of subscription revenue, versus 36% a year earlier. For the first half, cloud was 40%, versus 34%. ARR was $398.1m at June 30, up 18.4% year over year; net revenue retention was 110% and gross revenue retention was 96%.
Revenue growth was driven mainly by expansion among existing customers, alongside new customers and increased managed-services volumes. GAAP gross margin declined as subscription costs rose faster than revenue, including higher cloud infrastructure and personnel costs and increased depreciation and amortization. Selling and marketing and general and administrative expenses also increased. Q2 adjusted EBITDA and margin declined year over year as the company invested in sales and marketing and infrastructure.
Cash flow, liquidity and debt
- Six-month operating cash flow was $14.6m, down from $26.5m. Capital expenditures were $27.8m and capitalized software additions were $5.9m, producing negative free cash flow of $19.2m, versus positive $5.5m in the prior-year period. Q2 operating cash flow was $12.0m; Q2 free cash flow was negative $5.0m.
- At June 30, unrestricted cash and cash equivalents were $85.6m; available-for-sale securities with maturities beyond three months were $6.9m. An additional $19.9m was held for customers and restricted for customer tax remittances.
- Vertex had $49.5m of term-loan debt outstanding and no borrowings on its $200m revolving credit line. The amended facility totals $250m, matures in March 2027, and the term loan carried a 2.63% SOFR-based rate at quarter-end. The company reported covenant compliance.
- Current assets were $224.3m and current liabilities $368.9m; current liabilities include $243.8m of deferred revenue. Management said cash resources and the credit line should cover operating and capital needs for at least 12 months.
Material changes, outlook and risks
- Revenue rose 13.7% in Q2 and 15.3% for the first half, but GAAP net results shifted from income to losses. First-half operating cash flow fell, and free cash flow turned negative amid higher infrastructure investment.
- In March 2022, Vertex amended its credit agreement, adding a $50m term loan and increasing the revolving commitment from $100m to $200m. It also extended the revolver maturity to 2027.
- Vertex changed on-premise software pricing effective January 1, 2022 so initial-year and renewal prices are consistent; legacy material rights continue to be recognized over their estimated benefit period.
- Management provided no specific forward revenue or earnings guidance in the supplied filing text. It expects to continue investing in cloud capacity, software development, sales and marketing, and internal systems. It reported no significant COVID-19-related sales, revenue or collection reductions through June 30.
- Risks include weaker economic conditions, inflation, customer contraction or non-renewal, execution and cost risks in cloud expansion and product development, cybersecurity and service-provider disruptions, variable-rate debt, foreign-exchange movements, and possible higher taxes if research-cost capitalization rules are not deferred or repealed.
- Vertex is pursuing litigation against Avalara alleging unfair competition, interference with contractual relations and trade-secret misappropriation. Vertex seeks injunctive relief and damages; the outcome is uncertain. Management reported no other known legal proceedings expected to have a material adverse effect.
- Unusual items include $11.8m of Q2 other comprehensive loss, primarily reflecting currency translation, and final LCR-Dixon purchase-accounting adjustments that reduced goodwill. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether recurring revenue and retention metrics continue to grow, particularly as cloud subscriptions gain share.
- Whether gross margin and free cash flow recover as infrastructure investment and cloud-related depreciation increase.
- How cash conversion, receivables, deferred revenue and customer funds obligations evolve, and whether the reported liquidity remains adequate.
- Debt terms, covenant headroom and sensitivity to interest rates; the filing estimates a 100-basis-point rate increase would add about $0.5m in annual interest expense.
- The status and potential financial impact of the Avalara litigation, acquisition-related consideration and tax-law changes affecting research expenditures.
Amounts are in U.S. dollars; figures may not sum due to rounding. Adjusted EBITDA, free cash flow and related margins are non-GAAP measures and should be considered alongside GAAP results.