Vertex, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021; financial statements are unaudited. Vertex provides indirect-tax software subscriptions and related services. Unless noted, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $110.7 | $94.6 | $313.9 | $275.1 |
| Software subscription revenue | $92.3 | $79.8 | $265.2 | $232.8 |
| Services revenue | $18.4 | $14.8 | $48.7 | $42.3 |
| Gross profit / GAAP gross margin | $66.8 / 60.3% | $46.6 / 49.3% | $195.6 / 62.3% | $145.9 / 53.1% |
| Operating loss | $(3.6) | $(50.0) | $(2.9) | $(107.3) |
| Net loss | $(3.9) | $(21.0) | $(0.9) | $(79.2) |
| Adjusted EBITDA (non-GAAP) | $21.4 | $22.5 | $58.7 | $59.3 |
| Adjusted EBITDA margin (non-GAAP) | 19.3% | 23.8% | 18.7% | 21.6% |
- Revenue grew 17.0% in Q3 and 14.1% year to date. Cloud subscriptions accounted for 36% of software subscription revenue in Q3, versus 29% a year earlier; on-premise subscriptions remained the larger share.
- Improved GAAP losses largely reflect substantially lower stock-based compensation than in 2020, when stock appreciation rights and related awards generated unusually high expense. Adjusted EBITDA was slightly lower year over year, and its margin contracted.
- For the nine months, operating cash flow was $52.7 million, capital expenditures were $23.9 million, and capitalized software additions were $7.9 million. Reported free cash flow, a company-defined non-GAAP measure, was $20.9 million versus $18.7 million.
- At September 30, cash and cash equivalents were $47.5 million; another $27.9 million was held for customers and restricted to customer tax-remittance obligations. Current assets were $166.7 million and current liabilities $345.7 million; deferred revenue is a significant component of current liabilities.
- Vertex had no bank debt outstanding and a $100 million revolving credit facility available, maturing in March 2025. Total assets were $645.8 million, liabilities $421.6 million, and stockholders’ equity $224.2 million.
Material changes versus the prior comparable period
- Q3 subscription revenue increased 15.7%, led by growth from existing customers; services revenue rose 24.4%. For the nine months, subscription and services revenue rose 13.9% and 15.3%, respectively.
- GAAP gross margin increased, but adjusted EBITDA margin fell as Vertex invested in sales and marketing, research and development, and operations. Excluding stock-based compensation, several operating expense categories increased year over year.
- Annual recurring revenue (ARR) reached $352.9 million, up 15.1% year over year. Net revenue retention was 106%, down from 108%, which management attributed mainly to slower expansion sales to existing customers amid COVID-related project delays and economic uncertainty.
- Cash and cash equivalents fell from $303.1 million at December 31, 2020 to $47.5 million, primarily reflecting acquisition spending. Nine-month investing cash outflow was $283.2 million, including $251.4 million of net cash used for business acquisitions.
Outlook, commentary, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the filing. Management said existing cash resources and the credit line should be sufficient for operating and capital needs for at least 12 months.
- Vertex acquired Taxamo, a cloud-based e-commerce tax and payment automation provider, for a preliminary purchase price of $200.7 million; it paid $10.0 million in August to acquire the remaining 5% interest. It acquired LCR-Dixon, an SAP tax-solutions provider, for a preliminary $98.7 million, including $40.0 million of deferred installments. Tellutax was also acquired for $8.3 million including estimated contingent consideration.
- Acquisition accounting remains preliminary for Taxamo and LCR-Dixon. Goodwill was $274.9 million at quarter-end, including $164.4 million for Taxamo and $97.8 million for LCR-Dixon. Management cautioned that valuation estimates and useful lives may change during the measurement period.
- Management reported no significant COVID-related reduction in sales, revenue, or collections through September 30, but warned that the pandemic could delay new-customer billings, slow expansion by existing customers, and delay collections. Other stated risks include customer renewals and upgrades, competition, cybersecurity and data privacy, service disruptions, tax-law changes, international operations, and acquisition integration.
- Disclosure controls and procedures were deemed ineffective as of September 30 because of a previously identified material weakness in user-access governance and segregation of duties for financially significant systems and journal entries. Management said remediation was underway and that additional analyses and procedures supported fair presentation of the interim financial statements.
- The filing reported no legal proceedings believed likely to have a material adverse effect and no material changes to the risk factors in the 2020 Form 10-K. Operating offices remained closed through September 30 due to COVID-19.
Important facts for investors to verify
- Whether acquisition integration, preliminary purchase-price allocations, and acquired goodwill produce expected growth and synergies without impairments or unexpected expense.
- Whether ARR growth and customer expansion sustain, particularly given NRR’s decline to 106% and continued reliance on renewals.
- Underlying profitability and cash generation after considering stock-based compensation, acquisition costs, capital spending, and the company’s non-GAAP adjustments.
- Progress and testing of remediation for the material weakness, and whether disclosure controls are subsequently determined effective.
- Cash needs and liquidity following substantial acquisition spending, including the scheduled LCR-Dixon deferred payments and customer funds restricted for remittances.