Summary
Vertex's second quarter of fiscal 2023 showed solid top-line growth but continued GAAP losses. Total revenue was $139.7 million, up 17.1% year over year. Gross profit was $85.8 million, up 20.6%. Gross margin reached 61.4%, up 1.8 percentage points. The company still posted an operating loss of $4.1 million, an improvement from the prior-year quarter. Net loss was $6.9 million, and the loss widened from the prior-year quarter. For the first six months of 2023, revenue was $272.4 million, up 16.3%, and gross profit was $166.8 million, up 18.1%. On a non-GAAP basis, operating income was $18.1 million, compared with $14.6 million. Adjusted EBITDA was $22.0 million, compared with $17.8 million, and Adjusted EBITDA margin was 15.7%, compared with 14.9%. Non-GAAP net income was $13.6 million, and non-GAAP diluted EPS was $0.08.
Operational metrics pointed to healthy expansion. Annual Recurring Revenue was $467.7 million, up 17.5% year over year. Net Revenue Retention was 111%, compared with 110% at June 30, 2022 and in the first quarter of 2023. Gross Revenue Retention was 96%, consistent with June 30, 2022 and the first quarter of 2023. The company had 4,284 customers at June 30, 2023, compared with 4,242 at June 30, 2022. Management said the return on growth investments was evident, with scaled customer growth accelerating to the mid-teens and record average annual revenue per customer. ARR growth came from $43.4 million of expansion from existing customers and $26.2 million from new customers.
Cash generation was a weak spot. Operating cash flow was negative $4.4 million in the quarter, down 149.0% year over year. For the first six months of 2023, operating cash flow was negative $0.9 million, down 110.5%. Capital expenditures were $11.8 million in the quarter, up 8.1%. Deferred revenue was $277.1 million, up 8.6%. Free cash flow, a non-GAAP measure, was negative $21.2 million in the quarter, compared with negative $5.0 million. For the first half, free cash flow was negative $31.8 million, compared with negative $19.2 million.
Guidance was raised. For the third quarter of 2023, Vertex expects revenues of $141 million to $143 million and Adjusted EBITDA of $24 million to $26 million. For the full-year 2023, the company expects revenues of $556 million to $562 million, cloud revenue growth of 27%, and Adjusted EBITDA of $93 million to $97 million. The CFO said the increase reflected strong execution and the current view of conditions in the enterprise and upper middle market segments.
Risks remain. The company cited its ability to attract new customers on a cost-effective basis, the extent to which existing customers renew and upgrade subscriptions, its ability to sustain and expand revenues, maintain profitability, and effectively manage anticipated growth. It also flagged its ability to identify acquisition targets and successfully integrate and operate acquired businesses, maintain and expand strategic relationships with third parties, and the potential effects from a global endemic or pandemic. GAAP profitability remains elusive: the year-to-date operating loss was $13.0 million, and the loss widened 239.6% from the prior-year period. The year-to-date net loss was $25.0 million, and the loss widened 327.5%. Gross margin for the first half was 61.2%, up 0.9 percentage points. Operating margin for the first half was negative 4.8%, down 3.1 percentage points.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $139.7M | $132.8M | +5.2% | $119.3M | +17.1% |
| Gross profit | $85.8M | $81.0M | +5.9% | $71.1M | +20.6% |
| Gross margin | 61.4% | 61.0% | +0.4 pp | 59.6% | +1.8 pp |
| Research & development | $12.7M | $15.9M | -20.1% | $10.3M | +23.0% |
| Sales & marketing | $33.5M | $35.7M | -6.1% | $32.0M | +4.9% |
| General & administrative | $39.4M | $34.3M | +14.8% | $30.1M | +30.9% |
| Total operating expenses | $89.9M | $89.9M | -0.1% | $75.4M | +19.1% |
| Operating income (loss) | -$4.1M | -$8.9M | +54.4% | -$4.3M | +5.2% |
| Operating margin | -2.9% | -6.7% | +3.8 pp | -3.6% | +0.7 pp |
| Net income (loss) | -$6.9M | -$18.1M | +62.0% | -$5.5M | -24.9% |
| Net margin | -4.9% | -13.7% | +8.7 pp | -4.6% | -0.3 pp |
| Customers | 4,284 | 4,278 | +0.1% | — | — |
| Net retention rate | 111.0% | 110.0% | +1.0 pp | 110.0% | +1.0 pp |
Risks
Net loss widened to $25.0 million for the six months ended June 30, 2023 from $5.9 million in the prior-year period, while operating cash flow decreased to -$0.9 million from $8.6 million. Free cash flow decreased by $12.6 million for the same six-month period and free cash flow margin fell to (11.7)% from (8.2)%, per MD&A.
Total operating expenses increased 23.9% for the six months ended June 30, 2023, with general and administrative up 25.2% and research and development up 43.1%. This contributed to an operating loss of $13.0 million YTD that widened from $3.8 million and an operating margin decline of 3.1 pp to -4.8% from -1.6%.
Software subscription revenues derived from new customers averaged 6.5% of total software subscription revenues in the first half of 2023 versus 8.2% in the first half of 2022. Growth is increasingly dependent on cross-selling and price increases to existing customers rather than new customer additions.
Cost of services revenues increased 28.9% in Q2 2023 and 24.4% in the first half of 2023, and as a percentage of services revenues rose to 70.3% in Q2 2023 from 65.5% and to 68.1% YTD from 66.2%. This services cost pressure offsets stronger software subscription gross margins.
Income tax expense increased for the six months ended June 30, 2023 primarily due to state income taxes, foreign tax rate differences, Section 162(m) deduction limitations, and valuation allowances on net deferred tax assets established for certain foreign jurisdictions. This contributed to the net loss widening to $25.0 million YTD from $5.9 million.
As of June 30, 2023, Vertex had $48.0 million outstanding under its Term Loan, with interest accruing at 8.25% under the base rate or SOFR plus 6.25%. Interest expense on bank debt increased and remains sensitive to further rate increases.
Cloud-based subscriptions generated 43% of software subscription revenue in Q2 2023, up from 40% in Q2 2022, while on-premise software subscription revenue decreased to 57% from 60%. The ongoing shift requires continued investment in cloud infrastructure and may alter revenue timing and margin mix.
SaaS KPIs
All quarters →Adjusted EBITDA
Adjusted EBITDA Margin
Free Cash Flow Margin
Free Cash Flow
Total customers
Non-GAAP operating income
Annual Recurring Revenue (ARR)
Net Revenue Retention (NRR)
Non-GAAP Gross Margin
Average Annual Revenue per direct customer (AARPC)
Gross Revenue Retention (GRR)
Summary, forecast, risks and KPIs are extracted from Vertex, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 6, 2026.