Vertex, Inc. — Form 10-Q summary
Reporting period: First quarter ended March 31, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Vertex provides indirect-tax software subscriptions and related services.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $98.2 | $89.2 |
| Software subscription revenue | $83.3 | $75.8 |
| Services revenue | $15.0 | $13.5 |
| Gross profit / gross margin | $61.3 / 62.5% | $49.8 / 55.7% |
| Operating income (loss) / margin | $2.1 / 2.2% | $(28.2) / (31.8)% |
| Net income (loss) | $2.3 | $(29.1) |
| Adjusted EBITDA / margin (non-GAAP) | $18.2 / 18.5% | $15.3 / 17.1% |
| Cash used in operating activities | $(3.0) | $(6.4) |
| Free cash flow / margin (non-GAAP) | $(11.4) / (11.6)% | $(15.8) / (17.7)% |
At March 31, cash and cash equivalents were $277.7; total assets were $558.3, total liabilities $331.8, and stockholders’ equity $226.6. Deferred revenue was $218.1. Vertex had no outstanding bank debt and had a $100 million revolving credit line available, subject to its agreement and covenants. Lease liabilities totaled approximately $31.9. First-quarter cash and cash equivalents declined $25.4 from year-end; cash, cash equivalents and restricted cash declined $25.8 to $286.4.
Changes versus the prior-year quarter
- Revenue rose 10.1%. Subscription revenue increased 9.9%; services revenue increased 10.9%.
- Annual recurring revenue increased 12.6% to $320.1 million. Management attributed the $35.9 million increase to $14.7 million of growth from existing customers and $21.2 million from new customers.
- Net revenue retention declined to 105% from 109%. Management cited slower expansion sales amid customer remote-work priorities and COVID-19-related economic uncertainty.
- GAAP profitability improved substantially, with net income of $2.3 million versus a $29.1 million loss. The comparison was strongly affected by stock-based compensation: expense fell to $6.5 million from $34.9 million, including unusually high 2020 SAR-related expense.
- GAAP gross margin improved to 62.5%, while non-GAAP gross margin decreased to 69.7% from 70.6%. Adjusted EBITDA increased 18.9% to $18.2 million.
- Operating cash use narrowed, but free cash flow remained negative. Management notes that first-quarter cash flows are typically lower because of annual bonuses and other variable compensation payments.
Outlook, commentary, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management expects continued investment in cloud infrastructure, research and development, sales and marketing, and personnel; associated costs are expected to rise in absolute dollars.
- COVID-19 had not caused significant reductions in sales, revenue or collections through March 31, 2021, according to management. However, uncertainty could delay new-customer billings, expansion projects and collections, and constrain customer technology spending.
- Vertex acquired Tellutax on January 25 for $6.1 million in cash, plus estimated contingent consideration of $2.2 million tied to revenue targets. The preliminary purchase allocation included $4.7 million of goodwill and $3.6 million of developed technology.
- After quarter-end, on May 12, Vertex acquired Taxamo for approximately $200 million in cash. The filing says the accounting was preliminary and does not provide post-acquisition cash or pro forma liquidity figures.
- Vertex adopted lease accounting guidance on January 1, recognizing operating lease assets and liabilities; the company reported an immaterial impact on quarterly income and cash flows. Adoption increased opening retained earnings by $0.5 million, net of tax.
- Disclosure controls and procedures were deemed ineffective as of March 31 because of a previously identified material weakness in user-access governance and segregation of duties for financially significant systems. Remediation was underway but not yet considered complete. Management said additional review procedures supported fair presentation of the financial statements.
- Other risks include customer renewals and expansion, cybersecurity and data privacy, service interruptions, tax-law changes and determinations, international and currency exposure, and the ability to integrate acquisitions. The company reported no known legal proceeding expected to have a material adverse effect and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Post-Taxamo cash, remaining liquidity and funding plans, given the approximately $200 million cash purchase after quarter-end.
- Progress in remediating the material weakness and whether controls are tested and operating effectively.
- Whether ARR growth and customer expansion recover, particularly given NRR’s decline to 105%.
- Cash conversion and recurring free cash flow, accounting for seasonal first-quarter compensation payments and ongoing investment needs.
- Final purchase accounting and contingent-payment exposure for Tellutax, and acquisition accounting and integration outcomes for Taxamo.
- The extent to which reported profitability trends persist when the prior-year period’s exceptionally high stock-based compensation is considered.