IPO Preview: Vertex Pursues U.S. IPO Effort

IPOStreet

Vertex (VERX) intends to raise $100 million in an IPO of its Class A stock, according to an S-1 registration statement.

The firm provides software to companies seeking to automate the computation of their indirect tax operations.

VERX has produced strong growth results but may be temporarily negatively impacted by the Covid19 pandemic in Q2 and beyond.

I’ll provide a final opinion when we learn more about the IPO from management.

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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 led 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.

Below is a brief overview video of the firm's cloud product:

Source: Vertex

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:

  • Tax determination
  • Compliance
  • Reporting
  • Data management
  • Document management

The company integrates its products with technology partners and it collaborates with various consulting and accounting firms who serve as implementation partners.

The company sells its services primarily through a direct sales force and pursues medium and large size businesses as customers.

Vertex' solutions are shown in the graphic below:

vertexsolutions

Selling & Marketing expenses as a percentage of total revenue have been rising as revenues have increased.

The Selling & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling & Marketing spend, dropped from 0.7x to 0.6x in the most recent reporting period.

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 trajectory. VERX’s most recent calculation (for calendar year 2019) was 31%, so the firm needs some improvement for this metric.

The firm’s net revenue retention rate grew from 104% in 2018 to 109% in 2019. This is a positive result as any figure over 100% indicates the company is adding revenue from the same cohort over succeeding periods.

According to a 2019 market research report, the global market for sales tax software was $6.2 billion in 2018 and is expected to reach $13.1 billion in 2027.

This represents a forecast CAGR of 8.8% from 2019 to 2027, 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:

  • Thomson Reuters (TRI)
  • Sovos
  • Avalara (AVLR)
  • In-house solutions

Vertex’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increased gross profit but uneven gross margin
  • Uneven operating income
  • Positive cash flow from operations in recent full-year periods

Below are relevant financial results derived from the firm’s registration statement:

vertexpl

Source: Company registration statement

As of March 31, 2020, Vertex had $40.4 million in cash and $504.6 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $54.4 million.

Vertex intends to raise $100 million in gross proceeds from an IPO of its Class A stock, although the final amount may differ.

Class A stockholders will be entitled to one vote per share and Class B shareholders, likely the firm’s existing investor(s), will be entitled to ten votes per share.

The S&P 500 index no longer admits firms with multiple classes of stock into its index.

Management says it will use the net proceeds from the IPO ‘to repay all outstanding indebtedness under our existing New Credit Agreement and to pay related fees and expenses.’

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, BofA Securities, Citigroup, Jefferies, JMP Securities, Stifel, William Blair, and CastleOak Securities.

Commentary

Vertex is seeking an IPO transaction to pay down debt associated with paying a dividend to the Westphal family.

The company’s financials indicate the firm is growing topline revenue and gross profit, but gross margin is continuing to drop and its operating and net results have been uneven.

VERX is having to compete against a new entrant in Avalara and the Westphal family is likely seeking to take money off the table while also hoping to monetize further with the public flotation and provide the firm with added capital to fend off the competition.

Selling & Marketing expenses as a percentage of total revenue have increased; its Selling & Marketing efficiency rate has decreased, so both are negative signals.

The market opportunity for indirect tax software is large and expected to grow at a reasonably strong growth rate through 2027, so market dynamics are expected to be in the firm’s favor.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 91.7% since their IPO. This is a top-tier performance for all major underwriters during the period.

I suspect VERX’ Q1 2020 results are a function of the Covid19 pandemic’s negative effects, so will be transitory to the degree the pandemic continues to dampen economic activity.

When we learn more about the IPO from management, I’ll provide an update.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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