2023-04-19 14:25:56 ET
Summary
- Vertex, Inc. provides tax calculation and compliance software to companies worldwide.
- The company has produced top line revenue growth, but operating results are turning negative.
- Macro risks are rising with a U.S. bank lending pullback now underway.
- I'm on Hold for Vertex, Inc. stock in the near term.
A Quick Take On Vertex
Vertex, Inc. ( VERX ) provides tax calculation and compliance software to businesses worldwide.
The company continues to produce top line revenue growth and has seen its stock price multiple expand in recent months.
However, a U.S. bank lending pullback is underway, pressuring its customer base. Vertex, Inc. is generating deteriorating operating results, so I’m on Hold for VERX in the near term.
Vertex Overview
King of Prussia, Pennsylvania-based Vertex was founded to create hybrid software solutions for sales tax, seller's use tax, consumer use tax and value-added taxes, among others.
Management is headed by president and Chief Executive Officer Mr. David DeStefano, who has been with the firm since 2015 and was previously Principal and Vice President at The Mid Atlantic Companies.
The company has more than 4,000 customers worldwide, including over half of the Fortune 500 firms while providing tax support in more than 130 countries.
The company’s primary offerings include:
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Tax determination
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Compliance
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Reporting
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Data management
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Document management.
Vertex’s Market & Competition
According to a 2021 market research report by Verified Market Research, the global market for sales tax software was $6.5 billion in 2020 and is expected to reach $13.5 billion in 2028.
This represents a forecast CAGR of 8.4% from 2021 to 2028, a reasonably strong growth rate.
The main drivers for this expected growth are a growing complexity in indirect tax requirements and an increasing number and selection of solutions available to companies.
Also, as companies transition to the cloud, they will be able to offset retraining costs with lower upfront software costs in certain situations.
Major competitive or other industry participants include:
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Thomson Reuters
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Ryan
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LexisNexis
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Sales Tax DataLINK
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Sage Intacct
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Zoho
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Commerce Clearing House
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Edocs Solutions
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Avalara (Acquired by Vista Equity in Oct. 2022)
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In-house solutions.
Vertex’s Recent Financial Trends
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Total revenue by quarter has grown per the following chart:
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Gross profit margin by quarter has produced no discernible long-term trend:
Gross Profit Margin (Seeking Alpha)
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Selling, G&A expenses as a percentage of total revenue by quarter have trended higher in recent quarters:
Selling, G&A % Of Revenue (Seeking Alpha)
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Operating income by quarter has trended lower more recently:
Operating Income (Seeking Alpha)
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Earnings per share (Diluted) have worsened into negative territory recently:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP.)
In the past 12 months, VERX’s stock price has risen 46% vs. that of the iShares Expanded Tech-Software Sector ETF ( IGV ) fall of 7.9%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
The company’s gross revenue retention rate was 96%, "consistent with prior quarters and within our targeted range of 94% to 96%."
For the balance sheet , the firm ended the quarter with $103.0 million in cash, equivalents and short-term investments and $48.9 million in total debt, of which $2.2 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $18.3 million, of which capital expenditures accounted for $58.5 million. The company paid $19.7 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Vertex
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 6.8 |
Enterprise Value / EBITDA | 454.7 |
Price / Sales | 6.8 |
Revenue Growth Rate | 15.5% |
Net Income Margin | -2.5% |
GAAP EBITDA % | 1.5% |
Market Capitalization | $3,380,000,000 |
Enterprise Value | $3,350,000,000 |
Operating Cash Flow | $76,850,000 |
Earnings Per Share (Fully Diluted) | -$0.16 |
(Source - Seeking Alpha.)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
Vertex, Inc.’s most recent GAAP Rule of 40 calculation was 17.0% as of Q4 2022’s results, so the firm needs material improvement in this regard, per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 15.5% |
GAAP EBITDA % | 1.5% |
Total | 17.0% |
(Source - Seeking Alpha.)
Future Prospects For Vertex
In its last earnings call ( Source - Seeking Alpha ), covering Q4 2022’s results, management highlighted Q4’s revenue growth of 17.4% year-over-year, the highest in the company since going public.
Notably, two of the four strategic focuses for the company are increasing its strategic partnerships and strengthening its presence globally with particular focus on Europe due to a recently strong growth rate there.
The firm grew its average annual revenue per customer, from $97.3K in Q3 to $100.5K in Q4.
Looking ahead, Vertex, Inc. management expects 2023 revenue to grow at 12.5% at the midpoint, which they believe is a conservative estimate given the level of uncertainty ahead.
Adjusted EBITDA, which usually excludes stock-based compensation, is expected to be $94 million at the midpoint.
The company's financial position is reasonably strong, with ample liquidity, low debt and substantial positive free cash flow.
Regarding valuation, the market is valuing VERX at an EV/Sales multiple of around 6.8x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.3x on March 30, 2023, as the chart shows here:
EV/Next 12 Months Revenue Multiple Index (Meritech Capital)
So, by comparison, VERX is currently valued by the market at a slight premium to the broader Meritech Capital SaaS Index, at least as of March 30, 2023.
The primary risk to the company’s outlook is a likely macroeconomic slowdown or recession, perhaps already underway, which may produce slower sales cycles and reduce its revenue growth trajectory.
Furthermore, the recent U.S. banking crisis is already producing a lending pullback by small and regional banks, adding to the uncertainty for the firm’s customer base.
The recent rise in VERX’ stock price appears to be due primarily to multiple expansion, as the chart shows below:
EV/Revenue Multiple History - VERX (Seeking Alpha)
If macroeconomic conditions deteriorate, whether due to further interest rate hikes or bank lending pullback affecting risker industries such as technology, that multiple expansion may come to an end or reverse.
I believe the risks are growing for a wider economic drop in the quarters ahead, especially as Vertex’s operating results turn negative, so I’m on Hold for Vertex, Inc. stock in the near term.
For further details see:
Vertex Grows Top Line But Macro Clouds Darken