Vertex, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Vertex provides indirect-tax software subscriptions and related services. Financial statements are unaudited; amounts below are in U.S. dollars. Unless stated otherwise, figures are in millions.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $145.0 | $126.2 | $417.5 | $360.5 |
| Gross profit / margin | $88.2 / 60.8% | $75.6 / 59.9% | $255.0 / 61.1% | $216.8 / 60.2% |
| Operating loss | $(2.0) | $(0.9) | $(15.0) | $(4.7) |
| Net loss | $(3.4) | $(1.1) | $(28.4) | $(7.0) |
| Adjusted EBITDA and margin (non-GAAP) | $26.6 / 18.4% | $20.7 / 16.4% | $68.8 / 16.5% | $57.6 / 16.0% |
- Revenue grew 14.9% in Q3 and 15.8% for the nine-month period. Subscription revenue rose 14.0% and 15.0%, respectively; services revenue rose 19.5% and 20.4%.
- Cloud subscriptions were 45% of software-subscription revenue in Q3 (41% a year earlier), and 44% for the nine months (40% a year earlier). Management attributed growth primarily to existing-customer cross-selling and expanded usage, with price increases also contributing.
- GAAP operating expenses grew faster than revenue for the nine months, particularly research and development (up 49.6%) and general and administrative (up 20.5%). Management cited product development, infrastructure, process-improvement and public-company investments. Stock-based compensation rose to $26.2 million from $14.4 million for the nine-month period.
- Income-tax expense was $13.3 million for the nine months, versus $1.2 million in 2022, despite a pretax loss. Management cited state and foreign tax effects, compensation deduction limits, stock-award tax effects and valuation allowances on certain foreign deferred tax assets.
- Nine-month operating cash flow was $26.7 million versus $23.6 million. Capital spending was substantial: property and equipment additions were $35.4 million and capitalized software additions were $14.1 million. Free cash flow, a company-defined non-GAAP measure, was negative $22.7 million versus negative $20.2 million. Q3 free cash flow was positive $9.1 million versus negative $1.1 million.
- At September 30, cash and cash equivalents were $49.5 million; funds held for customers of $31.6 million are restricted for tax remittances. Available-for-sale investments were $8.3 million. Cash, cash equivalents and restricted cash totaled $81.1 million, down $25.6 million from the start of the year.
- Total debt, net of financing costs, was $47.4 million, including a $50 million term loan less current principal and financing costs. The $200 million revolving credit facility had no borrowings. Management said existing cash and the credit line should fund operations and capital needs for at least 12 months. Borrowing rates are variable; the filing estimates a 100-basis-point rate increase would add about $0.5 million of annual interest expense.
- Current assets were $238.1 million and current liabilities $433.1 million. Current liabilities include substantial deferred revenue and customer-fund obligations; customer funds are not commingled with operating cash.
Business metrics and changes
- ARR was $484.9 million at September 30, up 17.8% year over year. The filing attributes $46.3 million of growth to existing customers and $27.1 million to new customers. NRR was 111% (109% in 2022); GRR was 96% in both periods. Customer count was 4,303 and average annual revenue per customer was approximately $112,690.
- GAAP net losses widened year over year, while gross margin and Adjusted EBITDA margin improved. The company’s non-GAAP adjustments exclude items including stock compensation, amortization, severance and acquisition contingent consideration; these measures are not substitutes for GAAP results.
- Vertex disclosed immaterial corrections to prior-period presentation of cloud-computing implementation costs, reclassifying amounts from property and equipment to other assets and changing certain cash-flow classifications. The filing says the affected prior financial statements were not materially misstated; revised comparative cash-flow figures are presented.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or cash-flow guidance. Management expects continued growth in cloud deployment and says it plans ongoing investment in research and development, infrastructure, personnel and sales capabilities; it also warns these costs may rise and new solutions may not gain market acceptance.
- Key stated risks include customer acquisition and renewals, sustaining growth and profitability, product development and competition, international operations and foreign exchange, cybersecurity and data privacy, third-party and IT disruptions, tax-law changes and customer tax-payment processes, and access to capital. Forward-looking statements are not guarantees, and actual results may differ materially.
- Vertex’s trade-secret and unfair-competition lawsuit against Avalara remained pending, with jurisdictional discovery underway. The company seeks injunctive relief and damages; outcome and financial impact are uncertain. Management said it knew of no other legal matters expected to have a material adverse effect.
- The company recorded $1.3 million of Tellutax contingent-consideration fair-value expense for the nine months; the related liability was $4.7 million at quarter-end. The company also held forward contracts covering approximately 67% of its Brazilian-real exposure related to Systax purchase commitments.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether ARR growth, NRR and GRR are translating into durable recognized revenue, renewals and cash collections.
- Drivers of the widening GAAP net loss, especially higher R&D and administrative spending, stock-based compensation and the elevated nine-month tax expense.
- Capital expenditure and capitalization trends, and whether free cash flow can improve while the business continues investing.
- Liquidity after distinguishing operating cash from restricted customer funds, and the terms and variable-rate exposure of the term loan and revolving facility.
- The implications of the prior-period classification corrections, the Avalara litigation, acquisition-related commitments and contingent consideration.