Vertex, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Although the request references Q4, this is an annual filing; fourth-quarter figures are noted separately where available. Vertex provides enterprise indirect-tax software, content, and services. It completed its IPO in July 2020 and converted from an S corporation to a C corporation.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $374.7 million | $321.5 million |
| Gross profit / margin | $209.3 million / 55.9% | $211.1 million / 65.7% |
| Operating income (loss) | $(104.8) million | $31.9 million |
| Net income (loss) | $(78.9) million | $31.1 million |
| Adjusted EBITDA / margin | $78.4 million / 20.9% | $67.9 million / 21.1% |
| Cash from operations | $59.5 million | $92.5 million |
| Free cash flow / margin | $49.6 million / 13.2% | $54.9 million / 17.1% |
| Cash and cash equivalents at year-end | $303.1 million | $75.9 million |
| Total debt at year-end | $1.1 million, primarily capital leases | $51.5 million |
Revenue was 84.5% software subscriptions and 15.5% services. Deferred revenue was $222.3 million. Current assets were $402.7 million and current liabilities $292.0 million. The $1.1 million debt balance largely reflects capital leases; Vertex repaid its $175 million term loan using IPO proceeds and had no outstanding borrowings under its $100 million credit line at year-end.
Fourth-quarter 2020 revenue was $99.5 million versus $86.1 million in Q4 2019. Q4 net income was $0.2 million versus $4.7 million a year earlier.
Changes versus prior periods
- Annual revenue rose 16.5%, down from 18.0% growth in 2019. Subscription revenue increased 14.9%; services increased 26.2%.
- Annual recurring revenue (ARR) grew 13.6% to $316.4 million, versus 19.2% growth in 2019. Net revenue retention fell to 106% from 109%; management attributed the decline mainly to slower customer expansion amid COVID-related delays and uncertainty.
- Cloud subscriptions rose to 27.5% of software subscription revenue from 19.1% in 2019. Management expects continued migration to cloud; hosting costs could pressure gross margin.
- GAAP gross margin declined 9.8 percentage points. The filing attributes much of the unusually large expense increase and net loss to $147.9 million of stock-based compensation, primarily reflecting pre-IPO stock appreciation rights and related awards. Excluding specified items, non-GAAP gross margin was 71.1%, compared with 71.4% in 2019.
- Operating cash flow fell $33.0 million, including $22.9 million of cash payments related to converted stock appreciation rights. Free cash flow declined $5.3 million.
Outlook, commentary, and key risks
- No specific revenue, earnings, or cash-flow guidance is provided. Management expects continued investment in product development, cloud infrastructure, sales and marketing, international growth, and personnel; these investments may make profitability more difficult to achieve or maintain.
- Management said COVID-19 had minimal effect on 2020 revenue and collections, but noted delayed sales discussions and possible 2021 collection delays. It cautioned that prolonged customer revenue declines, non-renewals, or renewal concessions could affect revenue and cash flow.
- Vertex acquired a 60% controlling interest in Brazilian tax-software provider Systax in January 2020 and is committed to purchasing the remaining 40% in stages through 2024. The year-end purchase commitment liability was $9.8 million. In January 2021, it acquired Tellutax for $6.1 million.
- Management and the auditor identified a material weakness involving user access to financially significant systems and segregation of duties. Management was remediating it, but had not established that remediation was complete; disclosure controls were deemed ineffective at year-end. Management stated the audited financial statements fairly present the company’s results.
- Principal risks include customer retention and expansion, competition and partner dependence, software errors or outages, cybersecurity and data privacy, tax-law changes, international operations, and handling and remitting customer tax funds. Cash is concentrated at financial institutions, with balances exceeding FDIC insurance limits.
- Vertex is a controlled company with a dual-class share structure; Class B shares carry ten votes per share. It relies on certain Nasdaq governance exemptions. The company does not anticipate paying dividends in the foreseeable future.
Investor verification priorities
- Assess the recurring nature of the $147.9 million stock-compensation charge, remaining unrecognized award expense, and the basis for adjusted EBITDA and free cash flow.
- Track gross-margin recovery, cloud hosting costs, ARR growth, and net revenue retention following the 2020 slowdown in customer expansion.
- Review progress and testing evidence for remediation of the material weakness and improvement in disclosure controls.
- Verify the terms, performance-linked payments, and foreign-exchange exposure of the Systax purchase commitment, as well as the integration and purchase accounting for Tellutax.
- Monitor customer collections, renewal concessions, and the concentration and safeguarding of funds held for tax remittances.