Vertex, Inc. Q3 FY2021 earnings

Vertex reported third quarter fiscal 2021 revenue of $110.7 million, up 17.0% from the prior-year quarter. Gross profit rose 43.2% to $66.8 million, and gross margin expanded to 60.3%, up 11.0 percentage points. The company still posted an operating loss of $3.6 million, but that was an improvement of 92.8% from the prior-year quarter. Net loss narrowed to $3.9 million, an improvement of 81.2%. On a year-to-date basis, revenue was $313.9 million, up 14.1%. Year-to-date gross profit was $195.6 million, up 34.1%. The year-to-date operating loss narrowed to $2.9 million, an improvement of 97.3%, and the year-to-date net loss narrowed to $0.9 million, an improvement of 98.9%. Non-GAAP operating income was $18.3 million, compared with $19.8 million in the prior-year quarter. Non-GAAP net income was $13.2 million, and non-GAAP diluted EPS was $0.08. Adjusted EBITDA was $21.4 million, compared with $22.5 million, while Adjusted EBITDA margin fell to 19.3% from 23.8%.

The operating picture includes a steady shift to cloud. Cloud-based subscriptions generated 36% of software subscription revenue in the quarter, up from 29% a year earlier. Annual Recurring Revenue was $352.9 million at September 30, 2021, up 15.1% year over year. The customer count reached 4,258 at September 30, 2021, up from 4,040 at September 30, 2020. Net Revenue Retention was 106% in the third quarter of 2021, consistent with the second quarter, though the MD&A notes a 200 basis point decline from 108% at September 30, 2020. Management attributed that decline to delays in signing deals as customers focused on remote work and to economic uncertainty tied to COVID-19. Vertex also completed acquisitions. It bought LCR-Dixon for a purchase price of $98.7 million, Taxamo for $200.7 million, and Tellutax for $6.1 million in cash. The LCR-Dixon deal added 72 net new customers.

Cash generation improved. Operating cash flow was $26.2 million in the quarter, up 3,780.2% from the prior-year quarter. Year-to-date operating cash flow was $52.7 million, up 162.8%. Capital expenditures were $8.0 million in the quarter, up 81.4%, and year-to-date capital expenditures were $23.9 million, up 59.5%. Deferred revenue stood at $222.6 million at September 30, 2021, up 12.7% from the prior-year quarter. Free cash flow, a non-GAAP measure, was $15.4 million in the quarter, compared with $15.8 million in the prior-year quarter. Free cash flow margin was 13.9%, compared with 16.7%. The company had no outstanding bank debt at September 30, 2021, and management believes existing cash and its line of credit are sufficient for at least the next 12 months.

Guidance points to slower growth in the fourth quarter and lower profitability for the full year. For the fourth quarter of 2021, Vertex expects revenue of $108 million to $110 million, representing growth of 8.5% to 10.6% from the fourth quarter of 2020. It expects Adjusted EBITDA of $15 million to $17 million, a decrease of $2.1 million to $4.1 million from the fourth quarter of 2020. For the full-year 2021, the company expects revenue of $422 million to $424 million, growth of 12.6% to 13.2% from full-year 2020. Organic cloud revenue growth is expected to exceed 40% for the full year, and Adjusted EBITDA is projected at $74 million to $76 million, a decrease of $2.4 million to $4.4 million from full-year 2020. The company says the lower Adjusted EBITDA reflects additional spending in research and development and selling and marketing. Risks include the COVID-19 pandemic, delays in signing deals, economic uncertainty, potential declines in existing customers' revenues, non-renewals, collection delays, and the challenge of integrating acquisitions. The company also notes that it cannot reconcile forward-looking Adjusted EBITDA to net income without unreasonable effort because certain items are difficult to predict.