Vertex, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; figures are unaudited. Vertex provides indirect-tax software subscriptions and related services. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $104.9 | $91.3 | $203.2 | $180.5 |
| Gross profit / margin | $67.6 / 64.3% | $49.5 / 54.3% | $128.9 / 63.4% | $99.3 / 55.0% |
| Operating income (loss) | ($1.5) | ($29.0) | $0.7 | ($57.2) |
| Net income (loss) | $0.8 | ($29.1) | $3.1 | ($58.1) |
| Adjusted EBITDA / margin | $19.2 / 18.3% | $21.5 / 23.6% | $37.4 / 18.4% | $36.8 / 20.4% |
- Q2 revenue rose 15.0%; subscription revenue increased 15.9% and services revenue 9.8%. Six-month revenue grew 12.6%.
- Cloud subscriptions were 36% of software subscription revenue in Q2, up from 26% a year earlier. For the first half, the share rose to 34% from 26%.
- Q2 operating loss persisted despite positive net income, which included a $1.9 million income-tax benefit. First-half income-tax benefit was $2.6 million.
- Adjusted EBITDA is a company-defined non-GAAP measure. It fell in Q2 year over year, while first-half Adjusted EBITDA rose modestly; margins declined in both comparisons.
Cash, liquidity and capital
- At June 30, cash and cash equivalents were $101.6 million; funds held for customers were a separate $31.1 million restricted balance. Total cash, cash equivalents and restricted cash were $132.7 million.
- Six-month operating cash flow was $26.5 million, versus $20.8 million in 2020. Capital expenditures and capitalized software additions were $21.0 million, leaving reported free cash flow of $5.5 million, versus $2.9 million. Free cash flow is non-GAAP.
- Investing cash outflow was $214.6 million, mainly reflecting acquisitions. Cash, cash equivalents and restricted cash decreased $179.6 million during the half.
- There was no outstanding bank debt at quarter-end. The company had a $100 million revolving credit facility, undrawn, maturing in March 2025; it reported covenant compliance. Lease liabilities totaled $31.0 million.
- Current assets of $223.4 million were below current liabilities of $326.7 million. Current liabilities included $210.6 million of deferred revenue and $31.5 million of customer-funds obligations, which should be distinguished from conventional borrowings.
Changes, transactions and management commentary
- In May 2021, Vertex acquired 95% of Taxamo, a cloud-based tax and payment automation provider, for a preliminary purchase price of $200.7 million, including $190.2 million cash paid at closing. Purchase accounting remained preliminary; $201.6 million of goodwill was recorded, and identifiable intangible values were not yet estimated.
- Vertex also acquired Tellutax assets for $6.1 million cash, with estimated contingent consideration of $2.2 million. Goodwill and other intangible assets rose to $220.8 million, primarily due to acquisitions.
- Management attributed revenue growth principally to expansion among existing customers and continued cloud adoption. ARR reached $336.2 million, up 14.1%; net revenue retention was 106%, down from 108%. Taxamo contributed $3.9 million to ARR growth.
- Management said COVID-19 had not significantly reduced sales, revenue or collections through June 30, but uncertainty could delay new-customer billings, expansion sales and collections. The company said it expected available cash and its credit line to meet operating and capital needs for at least 12 months. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Q2 other operating expense included $4.5 million of Taxamo transaction costs. The sharp year-over-year decline in stock-based compensation—$6.3 million in Q2 2021 versus $41.7 million in Q2 2020—reflects, in part, unusually high prior-year SAR-related expense and complicates comparisons.
Risks, controls and contingencies
- Disclosure controls and procedures were deemed ineffective as of June 30, 2021 because of a previously identified material weakness in user-access governance and segregation of duties over financially significant systems and journal entries. Remediation was underway but not yet considered complete. Management reported that additional procedures supported fair presentation of the interim financial statements.
- Key stated risks include COVID-19 and economic uncertainty; customer renewal, expansion and collection trends; competition and product execution; cybersecurity, privacy and IT-service disruptions; international and foreign-currency exposure; and tax-law, tax-compliance and regulatory changes.
- The filing reports no legal proceedings believed by management to have a material adverse effect and no material changes to the risk factors in the 2020 Form 10-K.
Investor verification priorities
- Assess whether subscription growth, cloud mix, ARR growth and 106% net revenue retention can be sustained, particularly given the year-over-year NRR decline.
- Review acquisition integration and final Taxamo purchase accounting, including intangible-asset valuations, goodwill and the remaining 5% purchase option.
- Reconcile GAAP results with non-GAAP Adjusted EBITDA and free cash flow, including the effects of stock-based compensation, acquisition costs and investment spending.
- Track cash conversion and liquidity after the Taxamo cash payment, while separating restricted customer funds and deferred-revenue obligations from freely available cash.
- Monitor remediation and testing of the material weakness and any subsequent change in management’s controls assessment.