Vertex, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 10, 2022. Vertex provides indirect-tax software subscriptions and related services. Financial statements are unaudited and presented in U.S. dollars; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $115.0 | $98.2 | +17.0% |
| Software subscription revenue | $97.1 | $83.3 | +16.6% |
| Services revenue | $17.9 | $15.0 | +19.4% |
| Gross profit / margin | $70.1 / 61.0% | $61.3 / 62.5% | Margin down 1.5 points |
| Operating income / margin | $0.5 / 0.4% | $2.1 / 2.2% | Down 78.2% |
| Net income (loss) | $(0.3) | $2.3 | Declined $2.6 |
| Adjusted EBITDA / margin | $19.1 / 16.6% | $18.2 / 18.5% | EBITDA +$1.0; margin down 1.9 points |
| Operating cash flow | $2.6 | $(3.0) | Improved $5.6 |
| Free cash flow / margin | $(14.2) / (12.3)% | $(11.4) / (11.6)% | Declined $2.8 |
Cloud subscriptions generated 39% of software subscription revenue, versus 32% a year earlier. ARR was $380.6 million, up 18.9% year over year; net revenue retention was 110%, up from 105%. Customer count was 4,242 and average annual revenue per customer was approximately $89,700.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $97.3 million; funds held for customers were a separate $25.9 million, with customer-funds obligations of $24.5 million.
- Total assets were $697.5 million, total liabilities $464.7 million and stockholders’ equity $232.8 million.
- Vertex borrowed $50.0 million under a new term loan in March. Debt was $49.8 million net of financing costs, including a $1.3 million current portion. The term loan carried a 1.35% SOFR-based rate at quarter-end and requires quarterly principal payments, with a balloon payment due March 2027.
- The amended credit agreement provides a $200 million revolving line, with no amount drawn at quarter-end; the facility expires in March 2027. The company reported compliance with its financial and operating covenants.
- Management said cash and available credit should fund operations and capital requirements for at least the next 12 months.
Material changes and management commentary
- Revenue growth reflected expansion among existing customers and new customer additions. ARR growth was attributed to existing-customer expansion and pricing, as well as new subscriptions.
- Cloud infrastructure and software costs rose, including higher depreciation and amortization. Selling and marketing costs increased 36.2%, chiefly from payroll, partner/channel expansion and advertising. These investments, alongside infrastructure modernization, contributed to lower GAAP operating margin and Adjusted EBITDA margin.
- Research and development expense fell 15.9%, partly because more development costs were capitalized. Capitalized software costs and property-and-equipment additions remained significant.
- On-premise pricing was changed effective January 1, 2022 so initial-year and renewal prices are consistent; material rights from older contracts continue to be recognized over their estimated benefit period.
- Q1 cash flow included $17.3 million of investing outflows, including $13.9 million for property and equipment and $2.9 million for capitalized software. Financing inflows included the $50 million term loan; $10 million was paid toward acquisition purchase commitments.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or other full-year numerical guidance. Management expects growth-related investment in infrastructure and personnel; it noted that selling and marketing costs may rise as travel and in-person events resume.
- COVID-19 had minimal reported effect on Q1 revenue and collections, but management cited uncertainty around new-customer billings, existing-customer projects and budgets, collections, and broader economic conditions, including recession, inflation and market instability.
- Vertex recorded $0.7 million of expense from an increase in the estimated fair value of Tellutax acquisition contingent consideration, bringing that liability to $3.2 million.
- The effective tax rate was 171%, reflecting, among other factors, foreign losses taxed at lower rates, stock-compensation tax shortfalls and limits on certain compensation deductions. The company also warned that tax-law requirements to capitalize research and experimental costs could increase current tax expense if not deferred or repealed.
- Vertex sued Avalara, alleging unfair competition, interference with contractual relations and trade-secret misappropriation; it seeks injunctive relief and damages. Avalara moved to dismiss on jurisdictional grounds. Vertex said the outcome is uncertain.
- A newly disclosed risk concerns implementation of a new ERP system: implementation problems or control deficiencies could disrupt operations, delay or impair financial reporting, and expose the company to regulatory or litigation risk. Management stated disclosure controls were effective at March 31, 2022 and reported no material internal-control changes during the quarter.
- Interest-rate sensitivity: a 100-basis-point increase in bank prime or SOFR was estimated to increase annual interest expense by $0.5 million on the applicable borrowing exposure. The company also has foreign-currency exposure, particularly to the Brazilian real, partly hedged with forward contracts.
Important facts for investors to verify
- Whether subscription growth, ARR and 110% retention persist, especially as cloud becomes a larger share of the business.
- Whether higher infrastructure, depreciation, selling and marketing spending can translate into improved margins and free cash flow.
- Capitalized development spending, the resulting amortization burden, and performance of the new ERP implementation and related controls.
- Term-loan repayment, variable-rate exposure, covenant headroom and continued availability of the undrawn revolving facility.
- Developments in the Avalara litigation, Tellutax contingent consideration and Systax purchase commitments, as well as tax-law changes affecting research-cost deductions.
Adjusted EBITDA and free cash flow are non-GAAP measures; Vertex cautions that its definitions may differ from those used by other companies.