Vertex, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; interim financial statements are unaudited. Unless otherwise noted, financial figures below are in U.S. dollars.
Business context
Vertex provides indirect-tax software, subscriptions and related services. It operates as one segment. Revenue is primarily recurring software subscriptions; cloud subscriptions represented 47% of software-subscription revenue, up from 43% in Q1 2023. Approximately 7% of revenue came from customers outside the U.S.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $156.8 million | $132.8 million | +18.1% |
| Software-subscription revenue | $131.8 million | $111.0 million | +18.8% |
| Services revenue | $25.0 million | $21.7 million | +14.8% |
| Gross profit / margin | $95.8 million / 61.1% | $81.0 million / 61.0% | Margin +0.1 percentage point |
| Operating loss / margin | $(1.6) million / (1.0)% | $(8.9) million / (6.6)% | Loss narrowed |
| Net income (loss) | $2.7 million | $(18.1) million | Improved $20.8 million |
| Operating cash flow | $24.6 million | $3.5 million | +$21.1 million |
| Free cash flow, non-GAAP | $4.5 million | $(10.6) million | Improved $15.1 million |
| Adjusted EBITDA, non-GAAP | $36.7 million; 23.4% margin | $20.2 million; 15.2% margin | +$16.5 million |
Q1 2024 net income included a $4.5 million income-tax benefit; the effective tax rate was unusually high at 245.0%, primarily reflecting tax benefits on stock awards and other tax items. Stock-based compensation expense was $16.3 million, compared with $11.4 million a year earlier. Non-GAAP measures exclude specified expenses and should be considered alongside GAAP results.
At March 31, cash and cash equivalents were $56.1 million, available-for-sale investments were $9.1 million, and funds held for customers were $36.5 million and restricted for customer tax remittances. Total debt was $46.0 million, including $46.3 million of term-loan principal before deferred financing costs; the $200 million revolving facility had no outstanding borrowings. The company reported $755.8 million in total assets and $505.7 million in total liabilities.
Deferred revenue was $301.0 million, up from $283.1 million at March 31, 2023. ARR was $524.5 million, up 17.5% year over year; net revenue retention was 112% (110% in 2023) and gross revenue retention was 95% (96% in 2023). Direct customers totaled 4,309.
Material changes and management commentary
- Management attributed subscription growth mainly to cross-selling to existing customers, expanded usage and price increases; growth from new customers was a smaller contributor. Services growth reflected implementation and managed-services activity, including increased tax-return volumes.
- Operating expenses rose 8.3%, slower than revenue growth. Management cited increased personnel, cloud infrastructure and technology investment, while some planned brand-awareness spending was delayed until later in the year.
- Investing cash outflow increased to $19.5 million, including $14.4 million of property-and-equipment additions and $5.6 million of capitalized software additions. Free cash flow remained positive after these investments.
- Management said existing cash resources and the credit line should meet operating and capital requirements for the next 12 months and longer-term liquidity needs. No specific full-year revenue or earnings guidance is provided in the filing text.
Subsequent events, risks and contingencies
- After quarter-end, Vertex amended its credit agreement on April 19, 2024, and on April 26 issued $345 million principal amount of 0.750% convertible senior notes due 2029. Net proceeds were $333.7 million; $42.4 million funded capped-call transactions, with the remainder intended for general corporate purposes. The initial conversion price is approximately $36.32 per Class A share; capped-call coverage has an initial $55.88 cap price.
- The notes add potential interest, repayment and dilution exposure. The filing describes risks concerning debt-service capacity, covenant compliance, note repurchases or cash payments upon conversion, and possible effects on reported earnings and diluted EPS. The company states its preliminary accounting treatment for the notes is not final.
- The risk-factor section states that indebtedness as of March 31, 2024 was approximately $436.9 million, while the debt note and liquidity discussion report approximately $46 million of bank debt at that date and disclose the $345 million notes as issued in April. This apparent difference in presentation is not reconciled clearly in the provided filing text and merits verification.
- Vertex’s lawsuit against Avalara alleging unfair competition, interference with contractual relations and trade-secret misappropriation remained before the court. The company seeks injunctive relief and damages; outcome and financial impact are uncertain. Management reported no other legal matters it believes would have a material adverse effect.
- Key stated risks include customer retention and expansion, competition, technology and AI-related challenges, cybersecurity and data privacy, software defects, tax-law changes, foreign-currency exposure, and the ability to sustain growth and profitability. A 100-basis-point increase in benchmark rates was estimated to increase annual interest expense by $0.4 million. The company reported that disclosure controls were effective as of March 31, 2024.
Investor verification priorities
- Reconcile the $436.9 million indebtedness figure in the risk factors with the quarter-end debt balances and the post-quarter convertible-note issuance.
- Assess the notes’ final accounting, cash interest and maturity obligations, conversion and dilution scenarios, capped-call limits, and use of proceeds.
- Monitor whether ARR growth and 112% net retention persist, and whether gross retention’s decline to 95% signals increased customer contraction.
- Evaluate earnings quality and cash generation relative to $16.3 million of stock compensation, the material tax benefit, and continuing software and infrastructure investment.
- Track the Avalara litigation and other disclosed operating, cybersecurity, regulatory and foreign-exchange risks.