Vertex, Inc. — Q3 2022 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022; filed November 9, 2022. Unaudited results are for Vertex, a provider of indirect-tax software subscriptions and related services. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $126.2m (+14.0%) | $110.7m | $360.5m (+14.8%) | $313.9m |
| Gross profit / margin | $75.6m / 59.9% | $66.8m / 60.3% | $216.8m / 60.2% | $195.6m / 62.3% |
| Operating loss | $(0.9)m | $(3.6)m | $(4.7)m | $(2.9)m |
| Net loss | $(1.1)m | $(3.9)m | $(7.0)m | $(0.9)m |
| Adjusted EBITDA (non-GAAP) | $20.7m; 16.4% margin | $21.4m; 19.3% | $57.6m; 16.0% | $58.7m; 18.7% |
| Operating cash flow | $18.5m | $26.2m | $33.0m | $52.7m |
| Free cash flow (non-GAAP) | $(1.1)m | $15.4m | $(20.2)m | $20.9m |
Q3 subscription revenue grew 15.3% to $106.4m; services revenue rose 7.7% to $19.9m. For the first nine months, subscription revenue increased 14.9% and services 14.7%. Cloud subscriptions were 41% of subscription revenue in Q3, versus 36% a year earlier; year-to-date they were 40%, versus 35%.
Revenue growth was primarily attributed to expansion among existing customers, including greater use and cross-selling, with price increases also contributing. The company reported $411.5m of ARR at September 30, up 16.6% year over year; net revenue retention was 109% versus 106%, and gross revenue retention was 96% versus 94%. Customer count was 4,230, compared with 4,258, while average annual revenue per customer increased to approximately $97,300 from $82,900.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $72.4m; funds held for customers were a separate $23.8m. Available-for-sale investments totaled $14.6m at fair value, including $6.1m classified as current on the balance sheet.
- Total assets were $677.3m and stockholders’ equity was $214.0m at September 30, 2022. Deferred revenue totaled $253.7m, predominantly current.
- Vertex had $49.2m of term-loan borrowings outstanding and no borrowings on its $200m revolving credit line. The term loan was issued under a March 2022 credit amendment; its stated rate was 4.13% at quarter-end. The facility matures in March 2027, and the company reported compliance with its covenants.
- Management said cash resources and the revolving facility should fund operations and capital requirements for at least 12 months.
Changes, outlook, and risks
- Margin and cash generation: Gross margin fell year over year, particularly for the nine-month period, as subscription costs rose faster than subscription revenue, including higher personnel, infrastructure, and depreciation and amortization costs. Adjusted EBITDA and its margin also declined. Nine-month free cash flow shifted from positive $20.9m to negative $20.2m, reflecting lower operating cash flow and greater investment in property, equipment, and software.
- Investment and expenses: Selling and marketing expense rose 26.9% year to date, alongside expanded sales, partner, and brand spending. Research and development expense declined 8.9%, primarily because more development costs were capitalized. Capitalized software development and internal-use software investment increased.
- Financing and unusual items: The March credit amendment added a $50m term loan and expanded the revolver from $100m to $200m. Q3 included $1.3m of expense from remeasurement of Tellutax acquisition contingent consideration; the nine-month expense was $2.0m. The company also recorded a $370,000 write-off of deferred financing fees. Foreign-currency translation contributed to comprehensive loss and accumulated other comprehensive loss, which reached $42.0m.
- Management outlook: No quantified revenue or earnings guidance is provided in the supplied filing text. Management described continued cloud adoption and customer expansion as growth opportunities, and expects investment in infrastructure, research and development, and sales and marketing to support growth. It cautioned that inflation-driven labor and third-party costs may not be offset by price increases.
- Risks and contingencies: Management reported minimal COVID-19 effects through the period and no significant sales, revenue, or collection reductions attributed to the pandemic, while noting continued economic uncertainty. Other disclosed risks include customer renewals and expansion, competition, technology execution, cybersecurity and privacy, international operations and currency exposure, variable interest rates, and inflation. A lawsuit against Avalara alleges unfair competition, interference with contractual relations, and trade-secret misappropriation; Vertex seeks injunctive relief and damages, but the outcome is uncertain. The filing says there were no material changes to previously disclosed risk factors and no other legal proceedings believed likely to have a material adverse effect.
Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material changes in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether subscription growth, ARR expansion, and retention remain strong, and whether the continued shift to cloud supports sustainable growth.
- Whether gross margin and adjusted EBITDA margin stabilize as infrastructure, personnel, and sales and marketing costs rise.
- Whether operating cash flow improves and capital spending and capitalization of software development produce expected returns.
- Term-loan interest-rate exposure, covenant headroom, and liquidity after acquisition-related payments and investment spending.
- The assumptions behind capitalized software, Tellutax contingent consideration, acquisition-related balances, and currency translation effects.
- Developments in the Avalara litigation and any resulting financial or operational consequences.