Vertex, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing was signed March 16, 2022. The requested Q4 period is covered within this annual filing; Q4 figures below are unaudited.
Business context
Vertex provides indirect-tax software, tax content, and related services, primarily through subscriptions. It served 4,272 customers at year-end, including more than half of the Fortune 500, with tax support in over 130 countries. Subscription revenue is generally billed annually in advance and recognized over the subscription term.
Financial results and key metrics
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Total revenue | $425.5 million | $374.7 million | +13.6% |
| Software subscription revenue | $358.4 million | $316.8 million | +13.1% |
| Services revenue | $67.1 million | $57.9 million | +15.9% |
| Gross profit / margin | $263.7 million / 62.0% | $209.3 million / 55.9% | Margin +6.1 percentage points |
| Operating loss | $2.9 million | $104.8 million | Improved by $101.8 million |
| Net loss | $1.5 million | $75.1 million | Improved by $73.6 million |
| Adjusted EBITDA (non-GAAP) | $78.0 million; 18.3% margin | $78.4 million; 20.9% margin | Nearly flat; margin down 2.6 points |
| Cash from operating activities | $92.0 million | $59.5 million | +54.5% |
| Free cash flow (non-GAAP) | $46.9 million; 11.0% margin | $49.6 million; 13.2% margin | Down $2.7 million |
Cloud subscriptions were 35.4% of software subscription revenue, up from 27.5%. Annual recurring revenue (ARR) rose 17.0% to $370.2 million; net revenue retention was 108%, versus 106%. Average ARR per customer was approximately $86,700, versus $78,700.
In Q4 2021, revenue was $111.7 million, including $93.3 million of software subscriptions and $18.4 million of services. The quarter recorded a $0.6 million net loss, compared with $0.2 million net income in Q4 2020.
At December 31, 2021, unrestricted cash and cash equivalents were $73.3 million; customer funds held in restricted accounts were an additional $24.9 million and were matched by customer-funds obligations. Vertex had no outstanding bank debt and an undrawn $100 million credit line. Current liabilities included $19.8 million of deferred purchase consideration; a further $19.4 million was non-current. Deferred revenue was $249.0 million. Operating cash flow increased, while free cash flow declined amid investment in cloud solutions and internal systems.
Changes and unusual items
- Revenue growth came mainly from existing customers: subscription revenue increased $35.7 million from existing customers and $6.0 million from new customers. ARR growth also included acquisitions.
- Vertex acquired Taxamo, LCR-Dixon, and Tellutax in 2021. Investing cash outflow was $296.5 million, including $251.4 million for acquisitions, net of cash acquired. The acquisitions significantly increased goodwill and intangible assets.
- Stock-based compensation fell to $26.2 million from $147.9 million in 2020. The filing attributes much of the prior-year expense to stock appreciation rights and equity awards around the IPO; this large year-over-year change affects comparisons of GAAP expenses and losses.
- FY 2021 gross margin improved, but Adjusted EBITDA margin and free cash flow margin fell as Vertex invested in sales and marketing, infrastructure, and growth. Adjusted EBITDA excludes stock compensation, severance, transaction costs, and other specified items; it is not a GAAP measure.
- The company revised previously issued 2020 and 2021 interim figures to correct an immaterial $3.9 million deferred-tax presentation error. Management concluded the error was not material to prior statements.
Outlook, risks, and contingencies
No specific revenue, earnings, or cash-flow guidance is provided. Management expects continued investment in product development, sales and marketing, cloud capacity, and international expansion, and anticipates customers will continue migrating toward cloud solutions. It said COVID-19 had minimal effect on 2021 revenue and collections, but uncertainty could delay new sales, expansion projects, and collections in 2022; management did not expect such delays to materially affect the business.
Key risks include retaining and expanding customer subscriptions; competition and dependence on technology and referral partners; software, cloud-service, cybersecurity, and data-privacy failures; inaccurate tax determinations or delayed remittances; changes in tax laws; and acquisition integration and execution. Vertex also handles significant customer funds, held at financial institutions in amounts that may exceed insured limits.
In January 2022, Vertex sued Avalara alleging unfair competition, interference with contractual relations, and trade-secret misappropriation, seeking injunctive and monetary relief. Avalara filed a renewed motion to dismiss; the outcome is uncertain. Vertex reported no other litigation it believed would have a material adverse effect. A prior internal-control material weakness concerning system access and segregation of duties was reported as remediated; management assessed disclosure controls and internal control over financial reporting as effective at year-end. The independent auditor did not provide an internal-control attestation, consistent with the company’s emerging-growth-company exemption.
After year-end, on March 8, 2022, Vertex amended its credit facility to provide a $50 million term loan and a $200 million revolving line, with the revolving maturity extended to March 2027. The company said cash resources and the amended facility should meet capital needs for at least 12 months. Vertex does not anticipate paying dividends in the foreseeable future. Its dual-class structure and controlling stockholders limit other investors’ voting influence; Vertex has elected certain NASDAQ controlled-company governance exemptions.
Important facts for investors to verify
- Reconcile GAAP losses and cash generation with non-GAAP Adjusted EBITDA and free cash flow, including the effects of stock compensation and capitalized development spending.
- Assess whether ARR growth, 108% retention, and the rising cloud mix persist, and whether cloud growth can offset hosting costs and the transition from on-premise subscriptions.
- Review acquisition performance, integration progress, purchase-price estimates, and remaining deferred and contingent consideration.
- Monitor unrestricted liquidity separately from customer funds, scheduled acquisition payments, and the terms and availability of the amended credit facility.
- Follow the Avalara litigation, cybersecurity and service reliability, tax-remittance controls, and any further financial-statement revisions or internal-control findings.
- Consider the impact of the controlled-company structure, governance exemptions, and Class B voting rights on shareholder oversight.