IPO Launch: Vertex Seeks $317 Million U.S. IPO
Vertex (VERX) intends to raise $317 million from the sale of its Class A stock in an IPO, according to an amended registration statement.
The company provides enterprises with various types of indirect tax calculation, management and reporting software.
VERX is well positioned within the indirect tax software industry and the IPO appears reasonably valued.
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.
Below is a brief overview video of the firm's cloud product:
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
- 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:
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)
- 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:
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.
VERX intends to sell 21.15 million shares of Class A common stock at a midpoint price of $15.00 per share for gross proceeds of approximately $317.25 million, not including the sale of customary underwriter options.
Class A stockholders will be entitled to one vote per share and the company founder will hold the Class B shares and 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.
If the underwriters sell more than the 21.15 million Class A shares, they will have the option to purchase up to an additional 542,335 shares of Class A stock from selling stockholders and 2.63 million shares of Class A stock from the company.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $2.3 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 14.77%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:
We intend to use a portion of the net proceeds to repay all outstanding indebtedness under our existing credit agreement (the "New Credit Agreement") and to pay related fees and expenses. Prior to this offering, proceeds from the term loan entered into under the New Credit Agreement were used to repay amounts outstanding under the Company's previous credit agreement of $61.7 million, with the balance being used to fund a portion of a $123.0 million dividend to our stockholders on May 29, 2020 $122.8 million of which was paid to our directors Amanda Westphal Radcliffe, Stefanie Westphal Thompson and Jeffrey Westphal or trusts for their respective benefit or the benefit of their immediate family. In addition, we intend to use approximately $17.4 million of the proceeds from this offering to pay for costs we expect to incur in connection with the amendment of outstanding SARs as part of this offering... The remainder of the net proceeds will be used for working capital and other general corporate purposes, including investments in our solutions, technology and sales force.
Management’s presentation of the company roadshow is available here.
Listed underwriters of the IPO are Goldman Sachs, Morgan Stanley, BofA Securities, Citigroup, Jefferies, JMP Securities, Stifel, William Blair, and CastleOak Securities.
Vertex is seeking public investment capital to pay down debt incurred as part of paying a large dividend to various Westphal family trusts.
The firm’s financials show continued moderate topline revenue growth rate but a swing to sharp operating losses and cash flow used in operations.
Selling and marketing expenses as a percentage of revenue rose and the firm’s selling and marketing efficiency rate dropped in the most recent reporting period.
The market opportunity for providing indirect sales tax software is large and expected to grow at a moderately fast growth rate for the near future.
However, Vertex faces significant competition in the marketplace which will require it to spend at an elevated rate on continued innovation as well as operations costs.
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 82.2% since their IPO. This is a top-tier performance for all major underwriters during the period.
As a comparable-based valuation, VERX is valued at significantly lower multiples than competitor Avalara, which is not surprising given the firm’s lower topline growth rate.
As to its exposure to Covid19 pandemic effects, management says that ‘We did not experience an abnormal number of non-renewals in the first or second quarter of 2020, nor any declines in revenue associated with declines in our customers' revenues, and we currently expect our existing customer base to remain largely stable, as it did through the recession in 2008 and 2009.’
While the firm’s topline revenue outlook may be relatively stable, the swing to operating losses is not insignificant.
Still, one value of subscription-based businesses is the relative smoothness of their revenue streams over time.
VERX appears well positioned in the indirect tax software market, and Covid19 pandemic effects notwithstanding, I believe its future prospects are strong.
While the stock may see significant volatility in early trading, my opinion is a BUY at up to $15.00 per share.
Expected IPO Pricing Date: July 28, 2020.
(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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