Vertex, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Vertex provides cloud-based indirect tax software and solutions, helping businesses automate complex tax compliance.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

  • Business Overview: Vertex Inc. (VERX) is a software-as-a-service (SaaS) company specializing in indirect tax automation. They provide solutions that help companies calculate, comply with, and manage indirect taxes like sales and use tax, VAT, and goods and services tax. Their primary clients are large and medium-sized businesses, for whom tax compliance is particularly complex. The company’s offerings include software for tax calculation, returns filing, compliance management, and tax data analysis. Vertex’s mission is to be the most trusted technology enabling global commerce through seamless, simple, and precise tax solutions that allows businesses to operate efficiently and with confidence.

  • Revenue Distribution: The majority of Vertex’s revenue comes from its software subscriptions, which involve recurring fees over time. They also generate revenue from services related to the implementation of their software. The company primarily targets large and medium-sized businesses.

    The company reports revenue in two major categories:
1.  **Software subscriptions:** recurring revenue from clients for their software platform
2.  **Services:** implementation, integration, and other related professional services
In the company’s 10Q report, the software subscriptions are detailed into:
* Software subscriptions: Recurring revenue from clients for access to Vertex’s core software tax solution
* Cloud software subscriptions: Recurring revenue from clients for access to Vertex’s cloud based offerings.
* Software interoperability. The company's revenue model is highly scalable and has recurring revenues as a major component.
  • Industry Trends: The indirect tax software market is growing due to factors such as increasing complexity in tax regulations, the globalization of businesses, and the need for accurate and efficient tax management. Many companies are still using manual processes or outdated systems, leading to growing demand for modern automated solutions. There is an increasing demand for automation that creates efficiency and accuracy in the complex tax landscape. The rise in global commerce and e-commerce transactions increases complexity for companies which generates more demand for the company’s services. The complexity of global tax regulations favors the need of companies to keep up. And the adoption of cloud services continues as the most cost-effective method of delivering tax compliance.

  • Competitive Landscape: The competitive environment is fragmented, with various competitors including enterprise resource planning (ERP) providers offering built-in tax functionalities, smaller specialized software companies, and in-house developed solutions. The competitive landscape is becoming increasingly competitive, with several companies specializing in tax compliance that provide multiple solutions.

  • What Makes Vertex Different?: The company has a large focus on delivering solutions specifically designed for indirect tax, allowing it to handle complex tax issues globally. They specialize in indirect taxes such as sales and use tax, and VAT, and many other complex taxes, which allows them to stand out from their peers. They have a long operating history with a large customer base, and they often tout about the global expertise and knowledge of the company in tax compliance. They have strong data and tax content that ensures the accuracy and integrity of their product.
  • Financials:
    • Q3 2023 Performance:
      • Total revenues were $148.2 million, up 14.1% year over year.
      • Software subscriptions revenue increased 14.4%, while services revenue grew 12.7%. This means their recurring revenue remains strong and growing.
      • Annual Recurring Revenue (ARR) reached $587.6 million, an increase of 15% year over year, which is very important for a subscription based company.
      • GAAP net loss was $14.5 million, or 9.8% of revenue, showing that though they have strong revenue the company is still not profitable. However, non-GAAP net income was $19.5 million, which is 13% of revenue, showing solid profit potential once the company’s structure scales more efficiently.
      • Gross profit margin of 76.6% was very strong. The increase in revenue outpaced the cost of revenue.
    • Balance Sheet:
      • Cash and equivalents were $150.9 million
      • Total liabilities were $604 million, which includes $173 million of long term debt
      • They are working through a period of high spending to establish infrastructure and product, their debt-to-asset ratio is on the higher side.
  • Profitability: The company has struggled to create consistent earnings, but its gross profit margin remains very strong. The company has been reporting profits on an adjusted basis, after excluding the costs of acquisitions and restructuring. This indicates that though the company is not profitable yet, their underlying business does have good profit margins. However, GAAP profitability remains a challenge.
  • Recent Concerns/Controversies:
    • Guidance: During their latest earnings call, management projected a revenue slowdown for the last quarter, mainly due to companies focusing on cost cuts instead of new software implementations. This led to a stock price drop on the earnings date. It’s not something investors would like, the fact they might not meet guidance on software subscriptions might lead to concerns about the company’s long-term prospects.
    • High Spending: The company’s spending is currently on the higher end as it establishes operations globally, which can raise concerns about profitability.
  • Management Outlook:

  • Management stated that they expect long term growth will be driven by large companies with global tax operations, which are looking for automation and compliance to help them navigate regulatory complexities. They also intend to focus more on their higher revenue generating channels and products. Also, in terms of margins, management stated they are focusing on reducing operating costs to get the company to GAAP profitability soon. They also mentioned that they are confident on the long term trends towards tax automation. And are expanding their partnerships with companies like Salesforce, NetSuite, SAP, and others.

  • Moat Analysis: Vertex’s moat is based on switching costs and intangible assets. The switching costs arise from high implementation costs and high risk when changing to new software platforms. The integration with other software providers creates stickiness to the customers. The company’s tax engine with integrated tax content and workflows is also hard to replicate, giving them competitive advantage. The company has created a robust, scalable, and adaptable system for international compliance which also creates an intangible asset. Also, their expertise in regulatory issues acts as an intangible asset.

    However, their moat is not that wide because competitors may be able to copy the software and the data, and customers can possibly use other competing services. Also, they have low control on their customers’ pricing. Also, the industry, while having high growth potential, is extremely competitive, and that may hinder Vertex to create a long and wide moat.

    Based on these considerations, Vertex earns a moat rating of 2/5.

  • Moat Risk and Business Resilience:
    • Competition: Intense competition within the industry and technological disruptions could harm its customer base.
    • Technological Obsolescence: Their reliance on legacy software solutions and lack of consistent R&D can cause product obsolescence which could force customers to switch to competitors.
    • Regulatory Changes: Changes in tax laws or compliance requirements can disrupt their software and also can render certain parts of their solution useless for clients.
    • Acquisitions: Acquisition integration can be difficult and might reduce revenue growth or synergies that it was seeking, additionally the higher spending to secure and perform acquisitions are also a drag on profitability. Overall though, because of their recurring revenue business model and the need for its solutions, it’s likely to stay a financially sound company.

  • Understandability: Vertex’s business model is moderately complex due to its reliance on several accounting rules and tax laws. Understanding the company’s business model and how it generates its revenue is fairly straightforward. However, due to the technicalities, I would give an understandability rating of 2/5.

  • Balance Sheet Health: Vertex’s balance sheet health is decent, but they have higher amounts of debt and higher spendings on acquisitions and R&D, which make them less resilient than a company with less debt. As they transition to profitability, the balance sheet should improve over time. However, there is no imminent risk of financial default in the current state of the company. Based on this, they get a balance sheet rating of 3/5.