Vertex, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited results compared with the corresponding 2022 periods. Vertex provides indirect-tax software subscriptions and related services.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $139.7m | $119.3m | $272.4m | $234.3m |
| Gross profit / margin | $85.8m / 61.4% | $71.1m / 59.6% | $166.8m / 61.2% | $141.3m / 60.3% |
| Operating loss | $(4.1)m | $(4.3)m | $(13.0)m | $(3.8)m |
| Net loss | $(6.9)m | $(5.5)m | $(25.0)m | $(5.9)m |
| Adjusted EBITDA (non-GAAP) | $22.0m | $17.8m | $42.2m | $36.9m |
| Adjusted EBITDA margin (non-GAAP) | 15.7% | 14.9% | 15.5% | 15.8% |
- Q2 revenue grew 17.1%; subscriptions rose 16.6% and services 20.2%. First-half revenue grew 16.3%.
- Cloud subscriptions were 43% of subscription revenue, up from 40% in both comparable 2022 periods.
- First-half operating cash flow was $(0.9)m, versus $8.6m provided in 2022. Free cash flow, a non-GAAP measure, was $(31.8)m versus $(19.2)m; Q2 free cash flow was $(21.2)m versus $(5.0)m.
- At June 30, cash and cash equivalents were $41.9m, plus $11.2m of investment securities. A further $30.2m was held for customers and is restricted for customer tax remittances. Total debt, net of financing costs, was $48.0m; the $200m revolving facility had no borrowings. Deferred revenue was $277.1m.
- Total assets were $725.1m and stockholders’ equity $225.7m. Accumulated deficit was $12.5m. Stock-based compensation was $18.5m in the first half, versus $9.1m.
Changes versus prior comparable periods
- Existing-customer cross-selling and expanded usage were the primary subscription growth drivers; price increases also contributed. New-customer subscriptions represented a lower share of subscription revenue than in 2022.
- Q2 gross margin improved to 61.4% from 59.6%, while the first-half margin rose to 61.2% from 60.3%. Services cost grew faster than services revenue, and services cost as a share of services revenue increased.
- Operating expenses grew faster than revenue in the first half, especially research and development (+43.1%) and general and administrative (+25.2%). Higher G&A included planned technology, process, staffing and public-company investments, as well as higher stock compensation.
- First-half net loss widened substantially, principally alongside higher operating expenses and income-tax expense. Tax expense was $12.5m versus $1.3m; the filing cites state and foreign tax differences, limits on certain compensation deductions, and valuation allowances on certain foreign deferred tax assets.
- The company corrected immaterial prior-period presentation errors involving cloud-computing software implementation costs, reclassifying amounts from property and equipment to other assets and adjusting cash-flow classifications. It says the errors were not material; some affected periods are to be revised in future filings.
Outlook, commentary and risks
- Management said existing cash resources and the undrawn credit line should be sufficient for capital requirements and operations. It also cautioned that additional financing, if needed, may be unavailable or unfavorable and could dilute shareholders or impose restrictive covenants.
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects absolute costs to rise as the company invests in infrastructure, personnel, R&D and growth; it expects cloud deployment to continue gaining share.
- ARR was $467.7m, up 17.5% year over year; net revenue retention was 111% and gross revenue retention 96%. Management attributed ARR growth to expansion and pricing among existing customers and new-customer additions.
- Principal disclosed risks include customer acquisition and renewals, growth and profitability, product development and market acceptance, international operations and foreign exchange, cybersecurity and service-provider disruptions, tax compliance and law changes, and economic and capital-market conditions. Variable-rate debt is exposed to rate changes; management estimates a 100-basis-point increase would add about $0.5m of annual interest expense on outstanding borrowings.
- Vertex’s lawsuit against Avalara alleging unfair competition, interference and trade-secret misappropriation remained in jurisdictional discovery; the outcome and any financial impact are uncertain. The company reported no other litigation it believes would have a material adverse effect.
- Management concluded disclosure controls were effective at a reasonable-assurance level as of June 30, 2023. It reported no material changes to internal control over financial reporting other than new or modified controls associated with its ERP system rollout.
Important facts for investors to verify
- Whether operating cash flow and free cash flow improve after substantial first-half investment and working-capital outflows.
- How much of revenue and ARR growth continues to come from existing-customer expansion versus new customers, given the lower new-customer contribution cited by management.
- Whether G&A, R&D, stock-based compensation and tax expense moderate, and how reported GAAP losses compare with non-GAAP measures.
- The status and terms of the Avalara litigation, Systax purchase commitments and Tellutax contingent consideration.
- Future filings’ treatment of the immaterial presentation corrections, and continued effectiveness of controls following the ERP rollout.