Vertex(VERX) - 2023 Q4 - Annual Report

Part I Business Overview Vertex, Inc. is a leading provider of enterprise tax technology solutions, specializing in indirect taxes for over 4,300 global customers - Vertex is a leading provider of enterprise tax technology solutions, specializing in indirect taxes for over 19,000 unique taxing jurisdictions in the U.S. alone[21][23] - The company serves over 4,300 customers, including the majority of the Fortune 500, with tax support in over 190 countries. As of December 31, 2023, the Annual Recurring Revenue (ARR) per customer was $118,910[26][35][37] - Core solutions include tax determination, compliance and reporting, tax data management, document management, and pre-built integrations with major ERP, CRM, and eCommerce platforms like SAP, Oracle, and Salesforce[27][29] - Key growth strategies include retaining and expanding revenue from existing customers, acquiring new customers, broadening the partner ecosystem, and investing in new product innovation, particularly in international markets like Latin America and Europe[38][46] - As of December 31, 2023, Vertex had over 1,500 full-time employees, with 88% based in the U.S.[57] Risk Factors The company faces significant risks related to customer retention, partner relationships, technological change, cybersecurity, and its controlled company status - A substantial portion of revenue depends on maintaining and growing business with existing customers and adding new ones. Failure to do so would harm financial results[64] - The business depends on strategic relationships with third parties, including its partner ecosystem. Failure to maintain or expand these relationships could harm the business[67] - The market is characterized by rapid technological change. Failure to introduce new and enhanced solutions, including those incorporating AI, could adversely affect the business[70][72] - The company faces significant competition from other tax software vendors, outsourced compliance services, and native ERP functions[76] - Cybersecurity and data privacy risks, including those from cyber-attacks, data breaches, and remote work arrangements, could expose the company to legal liability and reputational damage[103][106][107] - Changes in tax laws and regulations, such as the evolution of economic nexus laws following the South Dakota v. Wayfair, Inc. decision, may require substantial investment to modify software and could alter the competitive landscape[101][102] - As a "controlled company," Vertex is exempt from certain NASDAQ corporate governance requirements, including having a majority of independent directors, which may result in fewer protections for stockholders[142][143] Unresolved Staff Comments The company reports that there are no unresolved staff comments - Not applicable[149] Cybersecurity Disclosures Vertex outlines its cybersecurity risk management program, integrated into enterprise risk management and overseen by the Board's Audit Committee - The company's cybersecurity risk management program is based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[151] - The Board of Directors has delegated oversight of cybersecurity risk to the Audit Committee, which receives quarterly reports from management[156][157] - The General Counsel is responsible for assessing and managing the company's material risks from cybersecurity threats[159] - The company has not identified any risks from known cybersecurity threats or prior incidents that have materially affected its operations, business strategy, or financial condition[153] Properties The company leases its corporate headquarters in King of Prussia, Pennsylvania, and maintains additional offices domestically and internationally - The corporate headquarters is located in King of Prussia, Pennsylvania, under a lease expiring in September 2028[161] - Additional leased offices are located in Naperville, Illinois; Frankfurt, Germany; Sao Paulo, Brazil; Chennai, India; and Killorglin and Cork, Ireland[161] Legal Proceedings Vertex has filed a complaint against Avalara, Inc. alleging unfair competition and trade secret misappropriation, seeking injunction and monetary damages - On January 25, 2022, Vertex filed a complaint against Avalara, Inc. in the U.S. District Court for the Eastern District of Pennsylvania[163] - The complaint alleges unfair competition, intentional interference with contractual relations, and trade secret misappropriation. Vertex is seeking an injunction and monetary damages[163] Mine Safety Disclosures This item is not applicable to the company - Not applicable[166] Part II Market for Common Equity and Related Matters Vertex's Class A common stock trades on NASDAQ, while Class B is not public; the company does not anticipate paying dividends, retaining earnings for operations - Class A common stock trades on the NASDAQ Global Market under the symbol "VERX". Class B common stock is not publicly traded[169][170] - The company intends to retain all available funds for business operations and does not anticipate paying dividends on its common stock in the foreseeable future[173] Stock Performance Comparison (from 7/28/20 to 12/31/23) | Company / Index | 7/28/20 | 12/31/23 | |---|---|---| | Vertex, Inc. | $100.00 | $112.55 | | S&P 500 | $100.00 | $154.56 | | NASDAQ U.S. Benchmark Software TR | $100.00 | $159.09 | [Reserved] This item is reserved Management's Discussion and Analysis (MD&A) Vertex achieved significant revenue growth in 2023, driven by software subscriptions and cloud adoption, while increasing investments led to a wider net loss Financial Performance Summary (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | % Change | |---|---|---|---| | Total Revenues | $572,387 | $491,624 | 16.4% | | Software Subscriptions Revenue | $480,830 | $415,473 | 15.7% | | Gross Profit | $348,579 | $298,492 | 16.8% | | Loss from Operations | ($17,510) | ($8,082) | 116.7% | | Net Loss | ($13,093) | ($12,304) | 6.4% | - Cloud-based subscriptions accounted for 45% of software subscription revenues in 2023, up from 41% in 2022, indicating a continued shift to cloud solutions[186][199] Key Business Metrics (as of Dec 31) | Metric | 2023 | 2022 | |---|---|---| | Annual Recurring Revenue (ARR) | $512.5 million | $431.1 million | | Net Revenue Retention Rate (NRR) | 113% | 110% | | Gross Revenue Retention Rate (GRR) | 95% | 96% | | Number of Customers | 4,310 | 4,289 | | Avg. Annual Revenue Per Customer (AARPC) | $118,910 | $100,500 | Non-GAAP Financial Measures (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | |---|---|---| | Adjusted EBITDA | $100,848 | $78,673 | | Adjusted EBITDA Margin | 17.6% | 16.0% | | Free Cash Flow | $6,099 | $3,428 | - Operating expenses increased significantly, with R&D up 39.0% and G&A up 20.0%, reflecting strategic investments in technology, business process re-engineering, and resources to support growth[240][245] - The company has a $200 million line of credit and a $50 million term loan. As of December 31, 2023, $46.9 million was outstanding on the term loan and there were no borrowings under the line of credit[263][264][265] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on variable-rate debt and foreign currency risk from international operations, while inflation has not had a material effect - The company is exposed to interest rate risk on its variable-rate debt. A 100 basis point increase in rates is projected to increase annual interest expense by $0.5 million[315] - Foreign currency risk exists as approximately 4% of 2023 revenues were generated in currencies other than the U.S. dollar. The company specifically hedges a portion of its exposure to the Brazilian Real[316][317] - Inflation is not considered to have had a material effect on the business, as the company generally offsets cost increases through price adjustments[318] Financial Statements and Supplementary Data This section indicates that the required financial statements and supplementary data are presented at the end of the report, beginning on page F-1 - The required information for this item is presented at the end of this report beginning on page F-1[319] Changes in and Disagreements with Accountants The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[321] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with an unqualified audit opinion - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[326] - Management concluded that as of December 31, 2023, the company's internal control over financial reporting was effective, based on the COSO framework[329] - The independent registered public accounting firm, Crowe LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[332] Other Information The company reports no changes to Rule 10b5-1 or non-Rule 10b5-1 trading arrangements by directors or officers in Q4 2023 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended December 31, 2023[339] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[340] Part III Directors, Compensation, Security Ownership, and Accountant Fees Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Shareholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Shareholders[343][344][345] Part IV Exhibits and Financial Statement Schedules This section states that consolidated financial statements are filed, while all financial statement schedules are omitted or included elsewhere - The financial statements are filed with the report, while all financial statement schedules are omitted[350] Form 10-K Summary The company reports that there is no Form 10-K summary - None[351] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Crowe LLP issued unqualified opinions on Vertex, Inc.'s consolidated financial statements and internal control over financial reporting for 2023, with no critical audit matters - Crowe LLP issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2023[369] - The firm also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2023[370] - The audit determined there were no critical audit matters[373] Consolidated Financial Statements The consolidated financial statements present the company's financial position, results of operations, changes in equity, and cash flows, reporting a $13.1 million net loss on $572.4 million revenues in 2023 Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2023 | 2022 | |---|---|---| | Cash and cash equivalents | $68,175 | $91,803 | | Goodwill and other intangible assets | $260,238 | $257,023 | | Total Assets | $759,927 | $719,192 | | Deferred revenue, current | $290,143 | $268,847 | | Total Liabilities | $506,946 | $489,467 | | Total Stockholders' Equity | $252,981 | $229,725 | Consolidated Statement of Comprehensive Loss Highlights (Year Ended Dec 31) | (in thousands) | 2023 | 2022 | 2021 | |---|---|---|---| | Total Revenues | $572,387 | $491,624 | $425,548 | | Gross Profit | $348,579 | $298,492 | $263,656 | | Loss from Operations | ($17,510) | ($8,082) | ($2,942) | | Net Loss | ($13,093) | ($12,304) | ($1,479) | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31) | (in thousands) | 2023 | 2022 | |---|---|---| | Net cash provided by operating activities | $74,332 | $63,848 | | Net cash used in investing activities | ($66,171) | ($72,048) | | Net cash (used in) provided by financing activities | ($26,482) | $17,094 | Notes to Consolidated Financial Statements The notes provide detailed financial disclosures, including revenue recognition, business combinations, debt, stock-based compensation, and income tax calculations, with a revision for cloud computing arrangement costs - Previously issued financial statements were revised to correct an immaterial error in the presentation of capitalized Cloud Computing Arrangement (CCA) implementation costs, which were incorrectly shown as property and equipment instead of other assets[391][392] Disaggregation of Revenue (Year Ended Dec 31) | Revenue Source (in thousands) | 2023 | 2022 | |---|---|---| | Software licenses | $266,213 | $246,577 | | Cloud subscriptions | $214,617 | $168,896 | | Total Software Subscriptions | $480,830 | $415,473 | | Services | $91,557 | $76,151 | | Total Revenues | $572,387 | $491,624 | - The company details several business combinations, including the 2021 acquisitions of LCR-Dixon ($99.1 million purchase price) and Taxamo ($200.7 million purchase price), and the 2021 acquisition of Tellutax, which includes contingent consideration[484][491][497] - As of December 31, 2023, the company had $46.9 million in outstanding borrowings under its Term Loan and no outstanding borrowings under its $200 million Line of Credit[554][555] - Total stock-based compensation expense was $33.9 million in 2023, a significant increase from $19.7 million in 2022, primarily driven by RSU expense[591] - The company's effective tax rate was 39.6% in 2023, resulting in an income tax benefit of $8.6 million on a pre-tax loss of $21.7 million. This was a significant shift from the (21.5)% effective rate (a tax expense) in 2022[599]