Vertex, Inc. (NASDAQ: VERX) — FY 2023 Form 10-K
Business and reporting period: Annual report for the year ended December 31, 2023, filed February 29, 2024. Vertex provides indirect-tax software, tax content, and related services, primarily through subscriptions. It reported 4,310 customers, served customers in more than 190 countries, and generated most revenue from software subscriptions.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $572.4 million | $491.6 million | +16.4% |
| Software subscription revenue | $480.8 million | $415.5 million | +15.7% |
| Services revenue | $91.6 million | $76.2 million | +20.2% |
| GAAP gross profit / margin | $348.6 million / 60.9% | $298.5 million / 60.7% | Margin +0.2 percentage points |
| Operating loss | $17.5 million | $8.1 million | Loss widened |
| Net loss | $13.1 million | $12.3 million | Loss widened by $0.8 million |
| Adjusted EBITDA (non-GAAP) / margin | $100.8 million / 17.6% | $78.7 million / 16.0% | Margin +1.6 percentage points |
| Operating cash flow | $74.3 million | $63.8 million | +16.4% |
| Free cash flow (non-GAAP) | $6.1 million | $3.4 million | +$2.7 million |
Revenue growth reflected cross-selling to existing customers, increased product usage and pricing; new-customer subscriptions contributed a smaller share of subscription revenue than in 2022. ARR rose 18.9% to $512.5 million. Net revenue retention improved to 113% from 110%, while gross revenue retention declined to 95% from 96%. Cloud subscriptions represented 45% of software subscription revenue, up from 41%.
Operating expenses increased 19.4% to $366.1 million, faster than revenue, including R&D growth of 39.0% and general and administrative growth of 20.0%. Stock-based compensation rose to $33.9 million from $19.7 million. GAAP diluted loss per Class A share was $0.09 versus $0.08 in 2022.
Liquidity, debt, and cash flows
- At year-end, unrestricted cash and cash equivalents were $68.2 million, down from $91.8 million; available-for-sale investment securities were $9.5 million. These figures exclude $21.0 million of funds held for customers.
- Operating cash flow was $74.3 million. Capital spending included $49.3 million of property and equipment additions and $19.0 million of capitalized software, leaving reported free cash flow of $6.1 million.
- Outstanding term-loan debt was $46.9 million, with a 6.46% interest rate and maturity in March 2027. The $200 million revolving credit facility was undrawn at year-end. Debt is secured by nearly all company assets; Vertex reported compliance with financial and operating covenants.
- Management said existing cash resources and the revolving facility should cover operating and capital needs for the next 12 months and longer-term liquidity needs. Customer funds are held separately for tax remittances; customer funds obligations were $17.7 million.
Changes, outlook, and material items
- Management expects continued investment in product development, sales and marketing, infrastructure, and international expansion. It expects customer migration to cloud offerings to continue, while noting cloud hosting costs may pressure gross margin. The filing provides no specific numerical revenue or earnings guidance.
- Vertex’s December 2023 tender offer for a global e-invoicing provider was withdrawn on January 14, 2024 after competing offers. The company expensed $4.9 million of related transaction costs in 2023.
- In 2023, Vertex corrected immaterial prior-period presentation errors related to cloud-software implementation costs, reclassifying amounts between property and equipment and other assets and adjusting cash-flow classifications. The company said the errors were not material to prior financial statements.
- Vertex is pursuing litigation against Avalara alleging unfair competition, interference with contractual relations, and trade-secret misappropriation. The case remained in jurisdictional discovery at year-end; outcome and financial impact are uncertain. The company reported no other proceedings it believed would have a material adverse effect.
- Key risks include customer retention and expansion, competition, successful product innovation and cloud migration, cybersecurity and service interruptions, tax-law changes and errors in tax determinations or remittances, talent retention, and handling customer funds. Vertex also notes customer deposits at financial institutions can exceed insured limits.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. Vertex is a controlled company and uses certain Nasdaq governance exemptions. It does not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- Whether subscription growth, ARR growth, and 113% net revenue retention can continue, and whether the 95% gross retention rate stabilizes.
- Whether operating-expense growth, stock-based compensation, and capitalized software and infrastructure spending translate into sustainable GAAP profitability and stronger free cash flow.
- How cloud migration affects revenue mix, hosting costs, and gross margins.
- Liquidity after the tender-offer withdrawal, future Systax purchase commitments, debt service, and planned investments; review the credit-facility covenants and customer-funds arrangements.
- The assumptions underlying non-GAAP measures, particularly adjustments for stock compensation, amortization, acquisition-related items, and transaction costs.
- Developments in the Avalara litigation and the impact of any future legal, tax, cybersecurity, or customer-remittance issues.