Summary
Vertex closed fiscal 2023 with fourth-quarter revenue of $154.9 million, up 18.1% from the prior-year quarter, and full-year revenue of $572.4 million, up 16.4%. Fourth-quarter gross profit was $93.6 million, up 14.6%, and full-year gross profit was $348.6 million, up 16.8%. Gross margin slipped in the quarter to 60.4%, down 1.8 percentage points. The full-year gross margin edged up to 60.9%, up 0.2 percentage points. Management said the quarterly revenue growth rate was the highest since Vertex became a public company.
Subscription and cloud lines carried the top line. Fourth-quarter software subscription revenue was $130.7 million, up 17.9%, and cloud revenue was $60.6 million, up 29.9%. For the full year, software subscription revenue was $480.8 million, up 15.7%, and cloud revenue was $214.6 million, up 27.1%.
The company still reported an operating loss. Fourth-quarter operating loss was $2.5 million, and full-year operating loss was $17.5 million. Operating margin was -1.6% in the quarter, up 1.0 percentage point, and -3.1% for the full year, down 1.4 percentage points. Net income told a different quarterly story. Vertex posted fourth-quarter net income of $15.3 million, a swing to a profit from the prior-year quarter. For the full year, net loss was $13.1 million.
Non-GAAP measures show the underlying profitability trend. Fourth-quarter Adjusted EBITDA was $32.0 million, against $21.0 million in the prior-year quarter, and Adjusted EBITDA margin was 20.7%, against 16.0%. Full-year Adjusted EBITDA was $100.8 million, against $78.7 million, with margin of 17.6%, against 16.0%. Non-GAAP operating income was $28.2 million in the quarter. Non-GAAP net income was $21.0 million and non-GAAP diluted EPS was $0.13. For the full year, non-GAAP net income was $63.7 million and non-GAAP diluted EPS was $0.39.
Operational metrics point to durable demand but some retention pressure. Annual Recurring Revenue was $512.5 million, up 18.9% year over year. Net Revenue Retention was 113%, compared with 110% at December 31, 2022, and 111% at September 30, 2023. Gross Revenue Retention was 95%, compared with 96% at December 31, 2022, and September 30, 2023. Total customers rose to 4,714 from 4,559 a year earlier, with 4,310 direct customers and 404 indirect customers.
Cash generation was solid. Fourth-quarter operating cash flow was $47.6 million, up 18.4%, and full-year operating cash flow was $74.3 million, up 16.4%. Capital expenditures were $13.9 million in the quarter, up 16.0%, and $49.3 million for the full year, up 8.2%. Free cash flow, a non-GAAP measure, was $28.8 million in the quarter, against $23.7 million a year earlier, and $6.1 million for the full year, against $3.4 million. Deferred revenue was $292.7 million, up 4.9% from the prior-year quarter.
Guidance points to continued growth. For the first quarter of 2024, Vertex expects revenue of $152 million to $156 million and Adjusted EBITDA of $29 million to $31 million. For the full year 2024, the company expects revenue of $650 million to $660 million, cloud revenue growth of 28%, and Adjusted EBITDA of $130 million to $135 million. Management said it sees drivers to deliver ongoing revenue growth into the mid to high teens along with earnings leverage. Risks include retention and expansion of existing customers, integration of acquisitions, and partner relationships. A continued shift to cloud solutions could pressure gross margin through hosting costs. The company also booked roughly $4.9 million in transaction costs in 2023 tied to a public tender offer that was withdrawn in January 2024.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2023 | Q3 FY2023 | QoQ | Q4 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $154.9M | $145.0M | +6.8% | $131.1M | +18.1% |
| Gross profit | $93.6M | $88.2M | +6.2% | $81.6M | +14.6% |
| Gross margin | 60.4% | 60.8% | -0.4 pp | 62.3% | -1.9 pp |
| Research & development | $12.9M | $16.8M | -23.1% | $11.6M | +11.4% |
| Sales & marketing | $37.0M | $33.9M | +9.2% | $35.7M | +3.9% |
| General & administrative | $36.9M | $35.4M | +4.2% | $31.1M | +18.4% |
| Total operating expenses | $96.1M | $90.2M | +6.6% | $85.0M | +13.0% |
| Operating income (loss) | -$2.5M | -$2.0M | -23.4% | -$3.4M | +26.4% |
| Operating margin | -1.6% | -1.4% | -0.2 pp | -2.6% | +1.0 pp |
| Net income (loss) | $15.3M | -$3.4M | +551.1% | -$5.3M | +388.8% |
| Net margin | 9.9% | -2.3% | +12.2 pp | -4.0% | +13.9 pp |
| Customers | 4,300 | 4,303 | -0.1% | 4,200 | +2.4% |
| Net retention rate | 113.0% | 111.0% | +2.0 pp | 110.0% | +3.0 pp |
Risks
A large portion of revenue depends on subscriptions to the indirect tax software, and customers have no obligation to renew. MD&A states net revenue retention was 113% in 2023 and 110% in 2022, while gross revenue retention was 95% in 2023 and 96% in 2022, so gross retention declined.
Vertex faces competition from tax-specific software vendors, outsourced transaction tax compliance services offered by accounting and consulting firms, and potentially large enterprises in adjacent compliance, finance, or eCommerce verticals. Some competitors have substantially greater revenue, personnel, and resources.
Success depends on attracting and retaining tax-content specialists, software developers, technical support, and R&D personnel. The filing states Vertex recently experienced efforts by a significant competitor to solicit its employees, and other competitors may take similar actions.
Vertex handles significant customer money for tax remittance, exposing it to liability from errors, delays, fraud, or system failures. Cash and cash equivalents, including customer funds, are concentrated in financial institutions where deposits routinely exceed federal insurance limits, so bank insolvency could limit access to deposits and create liability to customers.
Changes in tax laws, regulations, or their interpretation could reduce complexity or filing frequency, lower demand, require substantial software modifications, or draw new competitors. The filing notes uncertainty following South Dakota v. Wayfair and similar non-U.S. indirect tax developments.
The FY2023 filing adds AI-specific risk, warning that deficient, inaccurate, or biased AI content, analyses, or recommendations, or cybersecurity incidents tied to AI applications, could cause reputational or competitive harm and legal liability. Vertex may incorporate AI into its platform and services, making this an expanded risk.
Vertex depends on third-party software application publishers and its partner ecosystem for integrations across ERP, CRM, eCommerce, POS, billing, and other systems. If partners withdraw support, compete with Vertex, or fail to maintain secure integrations, customer experience and revenue could be harmed.
Electronic payment of customers' taxes may be subject to federal or state money transmission laws. If regulators apply these laws to Vertex, it could face enforcement, penalties, new compliance programs, and difficulty maintaining banking relationships.
Vertex recently implemented a new ERP system across multiple business areas. Issues from implementation or subsequent operation, or failure of controls governing the new ERP, may impact its ability to operate the business or timely and accurately report financial results.
On December 13, 2023, Vertex commenced a public tender offer to acquire a global e-invoicing provider and withdrew it on January 14, 2024 after competing offers, incurring approximately $4.9 million in transaction costs during 2023. Future acquisitions may not yield expected benefits and integration could divert management attention.
Vertex has historically signed a higher percentage of software subscription agreements in the fourth quarter of each year. Customer agreement cancellations or usage tier true-ups may be concentrated at year-end, and quarterly or annual results can fluctuate due to timing of large subscriptions, renewals, and customer budget decisions.
MD&A states that as revenue from cloud-based solutions continues to increase as a percentage of total revenue, gross margin may decrease due to associated hosting costs. Reported gross margin was 60.4% in the current quarter, down 1.8 pp from the prior-year quarter, while current year-to-date gross margin was 60.9%, up 0.2 pp.
Vertex no longer qualifies as an emerging growth company, so it is subject to additional disclosure and compliance requirements, including auditor attestation of internal control over financial reporting under Section 404(b). This is expected to increase legal and financial compliance costs and divert management attention.
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)
Non-GAAP Gross Margin
Direct customers
Average Annual Revenue per direct customer (AARPC)
Indirect Customers
Net Revenue Retention
Cloud revenues
Summary, forecast, risks and KPIs are extracted from Vertex, Inc.'s SEC filings for Q4 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.