Vertex, Inc. (NASDAQ: VERX) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with fiscal 2021. Vertex provides indirect-tax software, tax content, and related services. The filing was signed March 10, 2023.
Business context and operating performance
Vertex reported 4,289 customers at year-end, supported tax compliance in more than 130 countries, and served over 19,000 tax jurisdictions. Subscription revenue is its primary revenue source. Cloud subscriptions represented 41% of software-subscription revenue, up from 35% in 2021.
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $491.6 million | $425.5 million | +15.5% |
| Software subscriptions | $415.5 million | $358.4 million | +15.9% |
| Services | $76.2 million | $67.1 million | +13.4% |
| Gross profit / GAAP gross margin | $298.5 million / 60.7% | $263.7 million / 62.0% | Margin down 1.3 percentage points |
| Operating loss | $(8.1) million | $(2.9) million | Loss widened |
| Net loss | $(12.3) million | $(1.5) million | Loss widened |
| Adjusted EBITDA (non-GAAP) | $78.7 million; 16.0% margin | $78.0 million; 18.3% margin | EBITDA +0.9%; margin down 2.3 points |
| Operating cash flow | $76.8 million | $92.0 million | Down $15.1 million |
| Free cash flow (non-GAAP) | $3.4 million; 0.7% margin | $46.9 million; 11.0% margin | Down $43.5 million |
Financial position and liquidity
- Year-end unrestricted cash and cash equivalents were $91.8 million, and available-for-sale investment securities were $11.2 million on the balance sheet. Funds held for customers, $14.9 million, are restricted for customer tax remittances and are not operating cash.
- Debt was $49.1 million at year-end, all under a term loan; no borrowings were outstanding on the $200 million revolving credit facility. The term loan’s year-end interest rate was 5.42%, with quarterly principal payments and a balloon payment due in March 2027.
- The credit agreement is secured by nearly all company assets, includes financial and operating covenants, and limits certain dividends. Vertex reported covenant compliance at year-end.
- Cash used in investing activities was $85.0 million, chiefly reflecting $73.4 million in property, equipment, and capitalized software additions, plus net investment-security purchases. Investing cash use was far lower than 2021, when acquisitions accounted for substantial spending.
- Management said existing cash resources and the revolving facility should be sufficient for operating and capital needs; additional financing may be sought if those resources prove inadequate.
Material changes and notable items
- Revenue growth was driven mainly by existing customers: subscription revenue from existing customers increased $55.5 million, compared with $1.6 million from new customers. ARR rose 16.5% to $431.1 million.
- Net revenue retention improved to 110% from 108%, and gross revenue retention was 96% versus 95%. Average annual revenue per customer increased to approximately $100,500 from $86,700.
- Margins came under pressure as subscription costs grew 22.3%, faster than subscription revenue, reflecting personnel, hosting and infrastructure spending, and amortization of capitalized software and acquired intangibles. Increased sales and marketing and administrative investment also contributed to the lower Adjusted EBITDA margin.
- Free cash flow fell substantially as operating cash flow declined and property/equipment spending increased, including investment in cloud customer solutions and internal infrastructure modernization.
- Vertex recorded $2.0 million of legal-settlement costs, a $2.3 million increase in Tellutax acquisition contingent consideration, and $0.7 million of offering costs in 2022. Interest expense increased to $2.0 million, including acquisition-related financing costs and costs associated with credit-agreement refinancing.
- Vertex changed on-premise subscription pricing effective January 1, 2022 so initial-year and renewal prices were consistent, eliminating the material right for new transactions under the prior pricing arrangement.
Outlook, risks, and contingencies
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management expects continued investment in product development, sales and marketing, cloud infrastructure, international expansion, and scaling operations; it cautions these investments may make profitability more difficult to achieve or maintain.
- Management expects continued customer migration to cloud offerings. This may support long-term ARR, but higher hosting costs could reduce gross margin.
- Key risks include retaining and expanding customers, competitive pressure, reliance on technology and referral partners, successful product innovation and cloud migration, cybersecurity and service disruptions, tax-law changes, and managing growth and international operations. Inflation and weaker economic conditions could increase costs or reduce customer spending.
- Vertex sued competitor Avalara in January 2022, alleging unfair competition, interference with contractual relations, and trade-secret misappropriation. Vertex sought injunctive relief and damages; it reported the outcome remained uncertain and did not recognize a potential financial impact.
- Vertex handles customer funds for tax remittances and disclosed exposure to operational errors, fraud, cyber incidents, and concentration of deposits at financial institutions. It also has acquisition-related payment commitments, including a $20.0 million deferred LCR-Dixon payment and obligations to acquire the remaining Systax interest.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The filing did not include an external auditor attestation on internal controls because Vertex qualified for the emerging-growth-company exemption. Vertex also disclosed ongoing implementation of a new ERP system as a risk area.
- Vertex is a controlled company and has elected exemptions from certain Nasdaq corporate-governance requirements. It does not anticipate paying dividends in the foreseeable future.
Most important facts for investors to verify
- Whether subscription and ARR growth, retention rates, and the contribution from existing customers continue, particularly as new-customer subscription revenue contributed relatively little to 2022 growth.
- Whether cloud expansion and infrastructure investment can improve cash generation and margins after the 2022 decline in GAAP gross margin and free cash flow.
- The timing and amount of capital spending and software capitalization, and how these affect reported expenses, depreciation, and free cash flow.
- Debt repayment, variable-rate exposure, covenant headroom, and the funding of acquisition-related commitments.
- Developments in the Avalara litigation, the Tellutax contingent-consideration estimate, and any other legal or tax contingencies.
- Progress and control implications of the ERP implementation, plus any material cybersecurity, service-availability, or customer-funds incidents.
Adjusted EBITDA, its margin, and free cash flow are non-GAAP measures; consider them alongside the reported GAAP results. Amounts and comparisons above reflect the filing’s fiscal-year data, not a standalone 2022 fourth quarter.