Avalara, Inc.

Thank you for standing by. Welcome to the Avalara first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jennifer Vice President, Investor Relations. Please go ahead.

Good afternoon and welcome to Avalara's first quarter 2021 earnings call. We will be discussing the results announced in our press release issued after market closed today. With me are Avalara CEO Scott McFarland and CFO Ross Tenenbaum. Today's call will contain forward-looking statements, which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements include statements concerning financial and business trends, the impact of COVID-19 on our business and global economic conditions, expectations regarding the integration of acquisitions into our business and growth opportunities, and synergies arising from such acquisitions, our expected future business and financial performance and financial condition, and our guidance for the second quarter and fiscal year 2021. and can be identified by words such as expect, anticipate, intend, plan, believe, seek, or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risk and other important factors that could affect our actual results, please refer to the risk discussed in today's press release, our annual report on Form 10-K filed with the Securities and Exchange Commission on February 25th, 2021, and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at investor.avalera.com. With that, let me turn the call over to Scott.

Thanks, Jennifer, and welcome to everyone joining our Q1 2021 earnings call. Q1 was a great start to the year for Avalara, continuing the momentum we experienced in 2020. We reported a total revenue of $154 million, representing an increase of 38% year-over-year, an acceleration in growth from the fourth quarter exceeding our expectations. Calculated billing hit a quarterly record of $172 million, an increase of 47% year-over-year, our highest year-over-year growth rate since going public. Our 38% year-over-year growth in total revenue was driven by continued strong execution across the business and the addition of strategic acquisition that we closed in Q4. We were pleased to see new customer wins across a wide range of industries, segments, and geographies, and we experienced strong customer retention and solid upsell activity. We are winning large multi-product deals and seeing more cross-sell wins from our acquisitions. Our international business performed very well as the team saw increased updates from our largest Marketplace customer. As you can see from our strong results, customers are choosing Avalara to automate their tax compliance at an excellent pace. Our value proposition has never been more relevant. and there is a massive market and category opportunity that's ahead of us. We believe compliance automation is inevitable. As the world begins to reopen and the broader environment begins to normalize, we expect Avalara to remain the durable, long, and strong business we have built it to be. As I've said before, We have a bold vision to be part of every transaction in the world. And I'm proud that we've found a working formula that allows us to deliver strong results today and aggressively build the global category defining cloud compliance platform of the future. Stepping back, it took Avalara 16 years to hit a half billion dollars in revenue in 2020. And since reaching that milestone, we are on track to hit an annual revenue run rate of $700 million in 2021. As a startup back in the early 2000s, we envisioned a flywheel effect where our content, partner moat, and technology platform would come together to produce a truly unique and scalable business. We believe that this year is an important inflection point for Avalara. Over the past several years, we've been making the investments organically and through acquisitions that have positioned us to lead and shape the future of global compliance. Regardless of our success to date, this journey is really just getting started. We are benefiting from fundamental shifts in the fabric of commerce and regulatory obligations, along with rising adoption of cloud-based infrastructure and ROI expectations in the market. The growth of omnichannel commerce is a generational opportunity for Avalara. Businesses adopting or expanding e-commerce are excellent prospects for us as their omni-channel complexity and compliance exposure grows. Avalara has often benefited from the consistent drumbeat of regulatory change. When combined with other triggers, these changes act as important events that drive businesses to adopt tax automations. As a recent example, Florida, one of the last states to adopt the Wayfair Economic Nexus standard, is enacting it into law this summer. In addition, Congress has amended the Prevent All Cigarette Trafficking Act, also known as PAC, to cover vaping products starting this year. Vaping products will now be treated like cigarettes, which require the collection and reporting of excise taxes. As a reminder, several years ago, we acquired a company with domain expertise in fuel and built it into an excise compliance business. We have now leveraged that platform to automate compliance related to vaping and tobacco products. As more and more businesses of all sizes continue to replace on-premises financial and business applications with cloud services, The concept of cloud compliance has become more broadly accepted in the market. One of the drivers of this shift is the economic efficiency cloud services and automation delivers. As the economy continues to resurrect from the challenges of the COVID pandemic, we expect cost efficiency and ROI considerations to remain part of the new system acquisition discussions. And our message on that front continues to resonate with our prospects. We saw these trends play out with our customer and partner wins in the first quarter. Here are just a few examples. We won a large deal with a skincare company for a deal value of $245,000, which includes annual recurring revenue, one-time software and services. The company selected Avalara based on our integration with a small e-commerce application, our largest marketplace partner, our SST program, and our Avalara consumer use product. We won a large international deal in India with a fast-growing online gaming company for a deal value of $225,000. The deal is both an international win and an AvaTax win. We were excited to have won this large-sized deal after having launched our first products in India in the back half of last year. We are seeing early successes winning deals with our Avalara and PTR go-to-market strategy, including an enterprise deal with an electric vehicle company for $53,000 and a real estate technology company for $160,000. PTR was instrumental in helping us win the EV deal due to their content expertise around electric vehicle charging stations, taxability, and parking fees. Additionally, we won several competitive and takeaway deals. We won a takeaway of a Global 2000 luxury brand retailer for a deal value of $164,000. This company selected Avalara because of our AvaTax integration with SAP ERP, our integration with a retail POS application, and our relationship with a tax consulting firm. We displaced a competitor at a coffee company with a deal value of $112,000 due to our integration with Oracle's JD Edwards Enterprise One and our integration with a mobile and POS platform. We also want to deal with an eyewear company for a deal value of $145,000 due to our pre-built integration with Oracle ATG Web Commerce and our partnership with an online digital commerce consulting company. And we had even more wins on the e-commerce front. We want a pool kit company for a deal value of $88,000 due to our integration with NetSuite and an e-commerce platform. We want a learnings product company for a deal value of $178,000 due to our integrations with a well-known accounting software application and a leading e-commerce platform. In the cross-border space, we want a $249,000 deal with an e-commerce services company for our cross-border calculation and item classification solutions. One of my favorite deals is an identity monitoring company for a deal value of $70,000. This deal exemplifies what we are doing at Avalara and why I stick firm to my belief that over time, every business will automate tax compliance. This company has been around since 2009, and they just now adopted tax automation because they learned they had nexus in 40 states and were out of compliance. If you step back and think about all the customer examples I've just discussed, we are selling across the global economy in every industry from pool kits to eyewear to e-sports. As demonstrated by our broad and diverse customer wins, Avalara's partner moat continues to be a key enabler, especially as businesses shift to omni-channel commerce. and seek a single tax compliance platform that can integrate to multiple disparate systems. That's why we continue to broaden and expand our competitive partner mode by actively forging new relationships that offer integrations with more business applications and exposure to more potential customers. In February, we announced the release of 10 new certified integrations with more accounting, ERP, e-commerce, point-of-sale, mobile commerce, and CRM software applications, in addition to adding 22 new marketplace customers utilizing Avalara tax technology solutions. More recently, we announced another 22 new certified integrations into business applications, including Oracle, VRM, RapidPOS powered by NCR CounterPoint, and Sage BusinessWorks. Our total number of signed partner integration is over 1,000 and growing. We offer far more prebuilt integrations with business applications than any other tax software provider and plan to continue adding more. Integration into niche business applications are often major, if not deciding factors when evaluating Avalara. So the long tail strategy remains important. It's great to know that in a competitive landscape, these companies continue to choose Avalara as their compliance provider to their customers. And our launch team is fully engaged to get these new and emerging partnerships up and running. Now I'd like to talk a little bit about Avalara's R&D machine and how our investments are accelerating our platform journey, allowing us to outpace the market Avalara is and always has been a technology-first and cloud-first company. We are technology-first because we have put engineers and tax professionals together to design and build modern cloud-first solutions to meet complex tax and compliance challenges for our customers. We have been cloud-first since we started Avalara in 2004 and hosted our first tax calculation service in our own cloud data center. What do I mean by cloud first? Cloud first means inherent scalability, security, high speed and high availability, all based on a globally distributed platform. Three years ago, we started a major transformation. We have nearly tripled our investment in R&D headcount and moved all our cloud services onto AWS. Today, nearly one quarter of our employees work in R&D. We hired engineers and engineering leaders with vast experience from major cloud companies to build modern cloud-first solutions. Our future-focused multi-product platform, the Avalara Compliance Cloud, consists of calculations, returns, compliance document management, licensing and registration, fiscal representation, tax content, and insight solutions. While others are building on-premises or point products in the cloud that focus on tax, we are building a modern, integrated, global cloud compliance platform that will support a broader complement of global compliance interactions. Based on feedback from our portfolio wins, customers buy into our long-term product vision and future roadmap. That means our upcoming products are just as important as the products we have today. After a remarkable 2020 for product rollout, we are excited about bolstering our portfolio again in 2021. At our upcoming analyst day, Sanjay Pathirathy, our chief product officer, will provide an update on our multi-product journey and expanding platform vision for 2021 and beyond. We also continue to charge ahead in our acquisition strategy. We are driving hard organically and through M&A to continue building our global cloud compliance platform and future-proof our leadership in this space. We leverage M&A to expand our tax content repository, add new capabilities and technology, and further our geographic expansion. In addition, we have been adding impressive talent and are aggregating some of the brightest minds in transaction tax. On April 6th, we announced the closing of our acquisition of Imposia, a German software company focused on e-invoicing, digital tax reporting, and business and data integration to address real-time compliance requirements for companies worldwide. Today, Imposia serves more than 500 customers, primarily multinational European businesses, and owns or manages 19 integrations in the country-level tax reporting systems. I'm excited to welcome co-founders Musti and Javi of Imposia, as well as all the Imposia employees to the Avalara family. We look forward to our work with Imposia as governments continue to adopt and expand electronic reporting requirements. The proliferation of real-time compliance requirements from tax authorities around the world arose from the need for financial transparency and fraud reduction. More than 60 countries rely on or have announced intent to move to e-invoicing systems for compliance. On April 20th, we announced the acquisition of the operational assets from Davo Technologies, a privately held Maine-based company that helps small businesses automate sales tasks. Davo integrates with trusted point of sale systems such as Clover, Square, and others to support more than 4,000 small businesses in the United States, including coffee shops, bike stores, flower shops, bakeries, restaurants, and many other types of businesses. Davo is highly strategic to Avalara for two reasons. The first, Davo accelerates our capabilities integration and know-how to advance our efforts in winning the low end of the market. Combined with our own organic point-of-sale efforts, which have mostly been focused on the mid-market and enterprise segments, we are paving the way to grow a large, next-generation point-of-sale business. This is so important because it enables us to serve not only the brick-and-mortar-only merchants, but also the rapidly growing omni-channel merchants that serve their customers through combinations of point-of-sale applications, e-commerce platforms, and marketplaces. We believe we are building the only tax compliance company that can service any type of customer's omni-channel requirements. Second, Davo has designed a solution and has capabilities to enable real-time remittances. It manifests today through a managed compliance solution that sets aside funds daily and then files and pays the taxes when due. Dabble provides us with the capabilities to help complete our vision to enable real-time compliance with variable split payments to government at the time of the transaction. Davo is a natural strategic fit, and I'm excited to welcome Pete, Davo's CEO, and David, Davo's founder, as well as all of the Davo employees to the Avalara family. Also, I would like to update you on another previous acquisition. In February 2019, we acquired Index's AI technology and expertise. I'm very excited to provide an update to you today. The holy grail of getting customers live is to automate tax code mapping. Historically, tax code mapping has been a challenging process for customers that onboard onto AvaTax, sometimes taking several months. But in the last few weeks, we have shipped our new tax classification feature, and it's available to all AvaTax customers. With Avalara's machine learning platform for tax code mapping, Tax code recommendations come back in real time. I've always believed that to win, we must provide a holistic approach, including great products, great content, great integration, and great onboarding. A big part of driving great onboarding is to automate tax code mappings. It's difficult to overstate the significance of this holistic approach in making the lives of our customers easier. Last but not least, to guide Avalara's continued growth and innovation, we established the Avalara's Founders Forum, a dynamic group that includes the founders of companies that have been acquired by Avalara and who remain employees of the company. This group is a unique cohort of talented founders who have the experience and industry know-how to help Avalara drive forward into the future and realize our bold vision to build the global cloud compliance platform. We will continue to move forward with the foundational elements of our business. Acquisitions have been an important part of our success. we will continue to look for and close opportunities that we believe will improve and sustain Avalara and our growth objectives. I'm really excited to tell you that our annual Crush Conference is back this year on May 27th in our first-ever virtual-only format. This event is our fifth annual tax conference and industry gathering and will be much broader, bigger, and more global than previous events. We are aspiring to hit 10,000 registered attendees, 10x the attendance of 2019. We are bringing together some great professionals and practitioners at the forefront of tax compliance, commerce, and technology. We look forward to all of you joining us later this month at the event. Finally, I'm pleased to tell you that Avalara won the Virtual Wellbeing Programs Category Award from Reagan's Employee Communications Award Class of 2021. This honor recognized Adler's excellence in creating and executing exceptional internal communication campaigns, programs, benefits, and initiatives that kept our workforce, remote or in-person, engaged and informed, especially throughout the challenges posed by the COVID-19 pandemic. In addition, we continue to make progress with our corporate sustainability initiative, including the launch of our new leadership training program and a new employee resource group called Access, focused on employees with disabilities, bringing our total number of employee resource groups to six. As we've always said, we believe we are a long and strong business, single-digit penetrated in a large addressable market and a long-term play based on automating statutorily required functions we believe we are outpacing the competition and driving the future of not only sales tax automation but global compliance we're excited to raise our guidance for fiscal year 21 and we believe we can grow and scale avalera into a multi-product multi-billion dollar revenue company over time thank you And with that, I'll turn it over to Ron.

Thanks, Scott. Avalara posted a strong Q1 performance across the board that exceeded our guided metrics. Q1 billings exceeded expectations driven by a notably balanced environment with strong demand from new and existing customers, strength in international, which outgrew North America, and deals across all customer segments, including multi-product deals with large deal values. The rise of Omnichannel, driven by the generational shift to e-commerce, continued to be a growth driver in Q1, and we believe will remain a tailwind for the longer term. Q1 total revenue was $153.6 million, up 38% year-over-year, or up 28% after excluding revenue from acquisitions since Q4 2020. I am pleased to tell you that this strong performance reflects the expected reduction in the SST program's compensation formula in February and March, as January was the last month under the former compensation formula. We continue to add new SST customers and work down our backlog. Subscription and returns revenue grew 32% year-over-year to $139.3 million, or up 27% excluding acquisitions, and represented 91% of our total revenue. Professional services revenue was $14.3 million, up 142% year-over-year, or up 58% excluding acquisitions. The high growth rate in organic services revenue reflects stronger demand for our services, which include nexus studies, voluntary disclosure agreements, backfiling services, and implementations. Inorganic growth was largely driven from strong licensing and registration work from our business licenses acquisition and, to a lesser extent, tax recovery services from TPR. Our core customer count increased by 690 from the previous quarter to approximately 15,580 at the end of Q1 2021, a year-over-year increase of 20%. Our net revenue retention rate was 107%, up from 104% last quarter and resulting in a 106% four-quarter average. This reflects healthy gross revenue churn consistent with last quarter. While we were pleased to see NRR improve over Q4, we remind you that our NRR is calculated using total revenue, which is subject to the impact of non-recurring professional services. NRR also currently excludes upsell revenue from our SST program, which has been growing meaningfully. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued just before this call. Gross profit was $113.2 million in Q1, representing a 74% gross margin. This compares with gross profit of $79.6 million and a 71% gross margin in the same period last year. Gross margin improvements have resulted from automation activities that slow headcount growth in our compliance and content functions, as well as improved pricing and more efficient consumption of our cloud infrastructure. Sales and marketing expense was $58.5 million in Q1, or 38% of total revenue, and improvement of more than 300 basis points year over year. We still intend to invest aggressively in sales and marketing capacity in 2021, as long as we continue to see a healthy demand environment. Q1 research and development expense was $33.9 million, or 22% of revenue, up slightly from 21% of revenue in Q1 2020. We continue to invest aggressively in building our global cloud platform, integrating acquisitions, and building new capabilities to drive long-term growth and cost efficiencies. Q1 general and administrative expense was $23 million, or 15% of revenue, versus 16% of revenue in Q1-20. Q1 operating loss was $2.2 million, which was better than our guidance, largely as a result of stronger than expected revenue and gross margin. Q1 net loss per share was $0.08 in the quarter, based on 85.4 million shares outstanding. Total deferred revenue at the end of Q1-21 was $225.5 million, up 36 percent from $165.4 million at the end of Q1-20, and up 29 percent year-over-year, excluding acquisitions since Q4-20. Calculated billings is a non-GAAP metric that takes into consideration revenue and the change in deferred revenue, as well as the change in contract liabilities. Calculated billings was $171.8 million in Q1-21, up 47% year-over-year, or 37% excluding the impact from acquisitions with Q4-20 on revenue, deferred revenue, and contract liabilities. We were excited to produce 37% year-over-year organic calculated billings growth, which reflected a strong demand environment and an easier comparison from the COVID-19 impact on Q1-20 billings. Our free cash flow was negative $31.9 million in the first quarter compared to negative $26.1 million in the same quarter last year. The level of cash consumption in Q1 was expected and was largely driven by the payment of our annual corporate bonuses, large insurance renewals, and the renewal of various large software licenses. As we have stated on past calls, our free cash flow will fluctuate from quarter to quarter caused by many factors including the timing of working capital, the seasonality and levels of our billings and expenses, as well as our overall level investment in the business. Our cash and cash equivalents were $638.8 million at the end of Q1 2021, an increase of $188.3 million from $450.5 million at the end of Q1 2020. I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q2 and for the full year 2021. We'd like to update you about our revenue mix expectations. We now expect a slightly higher mix of professional services and other revenue in the range of 8% to 9% of total 2021 revenues. This is predominantly due to our expectation of the mix from recent M&A and not a change in our core business strategy. For Q2 2021, we expect total revenue between 153 and 155 million, which represents a 32% year-over-year growth rate at the midpoint of the range, or 25% year-over-year excluding revenue from acquisitions closed since Q4 20. These figures reflect the SST price reduction, which we believe produces a growth headwind of approximately three percentage points. We expect our Q2 non-GAAP operating loss to be in the range of $8 to $10 million, reflecting a ramp in more aggressive spending for M&A integration, sales and marketing, and research and development. For the full year 2021, we expect total revenue between $650 and $654 million, which represents a 30% year-over-year growth rate at the midpoint of the range, or 24% year-over-year excluding an expected $37 million in revenue from acquisitions closed since Q420. We estimate these figures are approximately three percentage points lower than they would have been without the SST price reduction. As a reminder, M&A is part of Avalara's DNA, and we have acquired dozens of companies since Avalara's founding. We don't acquire for revenue, but rather to accelerate our vision to become the global compliance platform through the acquisition of talent, additional content, new technology, and geographic expansion. We expect our full year 2021 non-GAAP operating loss to be in the range of $15 to $19 million, reflecting a ramp in more aggressive investments for M&A integration, sales and marketing, and research and development. We continue to expect a modest level of free cash burn in 2021, consistent with what we shared on our February 2021 earnings call. Please note that our Virtual Annals Day will be held on Thursday, May 27, in conjunction with our Virtual Crush Annual Users Conference. Also, we will participate in upcoming conferences, including Bank of America, JPMorgan, Needham, Stifel, and William Blair in the second quarter. Thank you for participating in today's call. At this point, we would like to open up the call for your questions.

As a reminder, to ask questions, you need to press star 1 on your telephone. If you have a question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Chris Merwin with Goldman Sachs. Your line is open.

OK, thanks so much for taking my question. Congrats on the great results here. I wanted to ask about the sales motion for the company. I know you built this company, Scott, with a huge partner network, bringing in leads, closing those leads, primarily on the Avatex platform historically. But now the product has evolved so much broader, and you're doing enterprise-level deals. So can you talk a bit about how the sales motion and culture has been evolving, how the sales team is doing, obviously, in closing? you know, kind of some of these cross-sell opportunities and, you know, where I'm kind of going with this is just curious how we should be thinking about the net retention rate long-term as the expansion opportunities keep growing within the base. Thanks.

Sure, Chris. Thanks a lot. What I'll do is I'll talk a little bit about our sales motion, and I'll let Ross talk a little bit about net retention rate and how he sees all that coming together. But, I mean, for us, we've had a really simple formula. I mean, we know that as we've been emerging this market, we had to build out a qualified team of inside salespeople that could react to the leads that we were creating throughout the business. And that is both direct and indirect leads. And over time, that was generally going to be, you know, just a ground-up effort. We also had to have what I call our SAM team, right, which is the team that is, you know, working with partners and growing partners so those leads continue to generate, and we're keeping them and their sales teams engaged. And then once you build out that team, you know, you have the ability to go after all of our partner, you know, all the partner network that we have. And I think that we were really successful in that. And, you know, we talked a little bit about that, you know, right after the IPO, and you started to see our results of, you know, the cost of sales going down, you know, tremendously. Because once we built that out, once we got that going, you know, We were able to add other partners along the line, whether it be the large marketplaces, the large e-commerce solutions where they were doing the selling for us. And we were just picking up the deal. We've had a really strong motion of let's protect our moat, and once you earn the right, and that's really what I've always said, you must earn the right to go after these big e-commerce businesses, the large partners, the large marketplaces. And once you earn that right, then you have the ability to sell to them at a much lower cost basis. And we have been really successful at doing that. And then on the upper end, Chris, what we really talk about is because we've sort of earned that right in the mid-market, because we've been building out our product level, because we've been working with our partners, we've been able to gradually move up the market. And the first thing that I would say is that you go to the upper end of the mid-market. And the upper end of the mid-market, the sales motion is almost identical to the rest of the mid-market. So it wasn't a huge transition for us. Now, going up to the global 5,000 or the Fortune 2,000 here in the United States, where it's really a rip and replace, I mean, that takes a different motion. That takes more tax technologists. That takes deeper industry knowledge by your sales team. and by the people that are supporting that team. And obviously, you have to support all that on the back end as well. But we've been able to do that, and we've got work to do as we move even further and further up the market. We've got to build out some of those different skill sets. But we're pretty good at taking on the opportunistic deals that we get and both doing, you know, takeaways and competitive wins in those spaces. So I'm really encouraged with where we're going at both, you know, the upper end of the market and at the lower end of the market through our partnerships. And then, obviously, you know, we've always dominated that mid-market. So, Ross, I mean, you can say a little bit how that sales motion works with NRR.

All right, Chris. You know, the way we think about it, first, in analyst day in a few weeks, we're going to talk more about it, and we're going to update the definition to fix the SST issue we've been calling out. But you've got to really think about us as a platform for compliance. So everything we're doing organically with the products we've added and through acquisition, the products we've added, is all about we've mapped the compliance journey of our customers in tax and tangentially outside of tax and say, okay, how can we, you know, help our customers more and sell more to them in that compliance journey and monetize more. The way it manifests itself is obviously in more ways to land new customer acquisition, more tip-of-spear ways to land than just with calculation. It manifests in more products up front. So we're seeing more multi-product deals up front, and I think you'll see more in analyst day how we're seeing higher ASPs up front. And then, of course, we want to continue to be able to sell more to our base and upsell our base and support our nr over time and certainly our ambition is you know to sell as much as we can and support and maybe even increase that nr over time but that you know it's early in that journey and that'll that'll remain to be seen perfect thanks so much thanks chris our next question comes from bradson thanks america your line is open

Oh, great. Hey, thanks, guys. Thanks for taking my question. Congrats on a real nice quarter. I wanted to ask about the success you're seeing with business license. Obviously, you guys are getting more and more into Avalara as a compliance platform, not just sales tax, automation. Obviously, that's core. But what does your success there tell you about customers' willingness to kind of look to Avalara as that platform provider? There's a lot of other things in the works I know with 1099 and

and know your customer power you know power of attorney um anything you're hearing from customers and kind of the propensity to kind of you know add more of these types of services just given the success you're seeing there yeah brad i mean thanks a bunch um you know business licenses and in particular you know we're talking about registrations here at least that's where we started out You know, I've always said that doing registrations and getting people signed up is one of the critical elements of an end-to-end compliance solution. I mean, being able to get them registered in the states that they are and then doing new registrations as they grow and expand is is really, really key. So when we started that partnership with business licenses, we had a really good idea that that was going to work out. And we got the opportunity to prove that out with our partnership, which is how we like to start a lot of our M&A activities. And so we had a really good idea that that was going to work. But we also knew that business licenses supported tens of thousands of licenses around the country, and customers had real problems with that. And so it really wasn't a stretch for us to expand what we were doing. and get both our CAM team, the people that are doing the hunting on the existing accounts, to start selling it and adding it on. And we've seen a really nice uptick in our ability to do that. And likewise, I'm seeing a lot of new deals adding it on as well. Typically when we do these acquisitions, It usually starts out with the CAM group, selling to the existing team. But I've been really impressed with how the new sales team have been able to pick this up, the TTR up, and make significant sales and progress in the add-on. I mean, it just goes, it's a proof point for me personally that this is exactly what customers want because, you know, they have huge compliance needs. And when they're dealing with this, they are in stress, they're having issues, they want it to go away. And the more problems we can solve for them, the stickier our service is, you know, the more we can get trusted, the more we can do other add-ons. So I think this kind of, you know, add-on just begets, you know, more add-ons and more trust and more business. So I'm very, very encouraged about where we are in the platform, you know, program.

Our next question comes from Sterling Audie with J.P. Morgan. Your line is open.

Hi, this is Maya on for Sterling. I was hoping we could just give a bit more color on the integration work that's necessary for the Dotto acquisition and maybe some of the contribution that you're expecting for the full year that's maybe baked into the guidance.

Yeah, thank you. That's a great question. I mean, so Davo, I think, is really, really interesting. One, they are a – as I said in my prepared remarks there, that we – we see them as a sort of an entree into the low end of the market. And I mean the low end of the market. This is where you're at the restaurants and at flower shops, and they are not wanting to deal with sales tax. So you've got, obviously, the calculation, and you have all of the issues that go around solving that part of the problem. But people don't want to... have to dig deep in their pocket at the end of every month and to find the money in order to make their tax payments. What Dabo does is it just, at the end of every day, it collects the money in advance. And so it's the first step. in really going to, you know, a split payment process. And so for us, you know, we're going to let Davo do what Davo does today. And we're going to work with them on integrating into their POS solutions that they've become really, really good at. And it's got some great POS relationships. And so this is our entree, you know, into the split payment. and also at the lower end of the market, in particular around POS, where there's a real burden on small businesses to do this. And so for us, it'll just be a gradual inclusion as split payments take hold in the governmental agencies and in the states and jurisdictions. And then also, you know, how we can go deeper and exploit the relationships that they've already started, you know, with the POS vendors, which we think is a very, very big market for us going forward.

On the guidance question or the contribution from Davo, you know, since we last spoke, we closed Davo, we closed Imposia. And we're being really transparent on the calls with breakout organic and total growth. We're not going to talk about it for every acquisition anymore. But what we said was we were going to, for the year, it was going to be going from $30 million of revenue from M&A to $37 million. And so what you can see based on the numbers I gave you is in Q1 we did $10.5 million of revenue from acquisition. And part of that was you can't just extrapolate that and multiply by four. Part of that was a really strong Q1. We had some really good strong PS performance in Q1, which is a little more volatile than a subscription. And so I think about it three ways. Number one, we're feeling really good about the acquisitions we've done. We had really good performance in Q1. We've increased our confidence and visibility into how they're going to play out for the rest of the year. And then we also layered in the Imposia and Davao acquisitions. And those three things combined gave us the view to take it from $30 million to $37 million of revenue from M&A.

Our next question comes from Brent Brayton with Piper Chambers. Your line is open.

Thanks for taking the question here. I had one for Ross and a follow-up for Scott, if I could. Ross, I want to drive into the underlying strength of the quarter. Appreciate the organic billings growth figure you gave us there. But if I look at the quarter-over-quarter change in short-term deferred, I think it was up over $15 million sequentially, that by far is the strongest build we've seen in really any Q1 by far. So walk me through what's going on there. Is it broad-based? Is it more of an enterprise shift? Just trying to understand the underlying drivers of such a big seasonal increase sequentially in that deferred revenue number. Thanks.

Yeah, no, thanks for parsing that out. You know, the great thing about Q1, and I think really Q4 as well, was it's been really balanced. It's been really strong across the board. We've seen really good balance between new customer acquisition as well as upsell to the base. Q1 international business outgrew the U.S., very strong performance in international. We've seen across our segments from ESB to mid-market to enterprise, we've seen really healthy growth across all the segments. We've seen a continued trend of landing multi-product, multi-connector deals, really exciting deals. We keep highlighting them on our calls, but just really exciting proof of this omni-channel world and how the platform is coming to play by selling multiple products to our customers. So, you know, there was nothing unusual or any sort of increased duration or more enterprise or anything like that. It was really, really a nice quarter, very well balanced in Q1. So that's the general answer, Brent.

Got it. Certainly helpful to see. And then, Scott, getting a lot of questions from investors on, Stripe acquiring TaxJar, getting access to their own tax calculation engine. I'd love to get your thoughts. I know that was a company, a competitor in the low end of the marketplace you saw, but walk us through your thoughts on Stripe acquiring TaxJar. It obviously validates the market, but I would love to get your views on how that impacts or could impact your business.

Thanks. Thanks, Brent. Thanks for asking that because I'm sure it's on a lot of people's minds out there, but Look, I mean, sales tax, it's a pretty small community. So I guess first off, I'd just like to say congrats to Mark and his team, right? Because it does validate, you know, this market. I mean, I know you said that, but it really does do that. It's a proof point about how important, you know, sales tax compliance is, you know, in the marketplace today. I mean, sales tax or compliance in general, it's not a sideshow anymore. It's front and center in commerce. And that's essentially what Stripe was saying in their press release and what they know. And I know as much about what they're going to do as you do. But the reality is what they're doing has really no bearing on really where we are. We just fundamentally see the market differently. I mean, we believe in an independent third party across all competitive groups where you can aggregate data and you can deal with end-to-end compliance. I mean, we just do not believe that this is a market where single platforms can exist. You know, look, every quarter I talk to you about the moats. I mean, I've been doing this for 17 years, and the partner moat is really hard to develop. And we have over 1,000 different partners. And that's what I'm talking about is aggregating. And it's really important in an omni-channel world. And when you get the content, You know, content is really hard. I mean, you think you've got it, but there's always more that you can do. And we've been at this for 17 years, doing not only the U.S. and around the world. And we believe... that in a, you know, the world of Internet, you know, anything, anywhere, anytime, anyplace, that you just have to be able to handle all that different compliance. And although, you know, look, Stripe can do whatever Stripe can do. I mean, they're a big company. It's just a long journey to get to the point where you can serve the full end-to-end customer base of partners. mean it's one thing to be able to deal with the smallest customers but you have to be able to deal with their most complex customers And it doesn't be any good if you have to build out the small ones and then have to turn over the larger ones down the road. And we get, you know, the knock comes on the door, the phone rings every time customers start out small and that they have to go to a larger, more complex, you know, omni-channel tax environment. That's where Avalara really, really shines. And I don't see that happening. you know, changing at all. They'll certainly be able to sell to their own base at the low end. But that's not where we see the market going in the long run. So we just fundamentally have a different approach to, you know, to where they are. And as you can see from our customer wins and the things that we were talking about, it really does play out in an omnichannel way. I hope that helps.

Certainly does, Scott. Certainly helpful, and I appreciate your thoughts there. Thank you.

Thanks, Brent. Thank you.

Our next question comes from Matt Stotler with William Blair. Your line is open.

Hey, guys. Thanks for taking my questions. I've got a couple on the enterprise opportunity. you're starting off i mean you talk a little bit about the um you know kind of development towards a a direct sales force and enterprise capabilities there um but obviously the channel is just as important in the enterprise as it is in the core mid market um so We'd love it if you could just maybe talk about where you are in establishing those enterprise-focused partnerships, what you see as the most crucial relationships to be successful in that move-up market, and particularly considering the strong relationships that potential enterprise partners may already have with incoming providers in that segment of the market.

You know, I'm going to punt this one to Ross here for a second, because he does a really good job of explaining how we talk about the enterprise and the big deals. I mean, because I think there's a difference between the large deal sizes and then enterprise in general. And then I'll come back and give you a little bit of the color on the partnerships. But I think to get a basis of how we think about it is probably the right place to start.

Yeah, I mean, I think... When we think about enterprise, and we talk about companies with over 500 employees in enterprise. And so for us, there's about 20,000 of those in the U.S. And, you know, let's just say split that into 15,000 and 5,000. So 5,000 is where Scott will come back and talk about what we're doing around partners and integrations and all the things that we're doing there to win the largest 5,000. What I'd say is, one, For us, it's about two things, just doing bigger deals for any size customer, whether it be those 15,000 mid-market customers. Even I think you'll be surprised when we get to Annals Day, you know, how we're doing even at the lower end of the market in terms of ASPs. And so we've really been focused around the product expansion, the platform expansion, and the go-to-market to be able to sell more to customers of any size and increase the value we're delivering to customers. And then second, really win those top 20,000. And in the top 20,000, we'll just take those 15,000 upper mid-market, lower-end enterprise. You know, we really view that as our wheelhouse. And we see those deals all the time. And these are deals that are complex. They're omnichannel. They usually want cloud. They've got a – You know, they've got a cloud ERP. They've got an e-commerce platform. They may be on multiple marketplaces, so their omni-channel plays right into our strength. They're usually global, and so they're looking for U.S. content, international content, and then they usually need multiple products, not just capital returns, but certs and international and cross-border and use tax. And so we really feel good about the partnership base that we've built and the strategy we've taken to win those. And now it's really about continuing to move up and win the $5,000, which is more displacement. And what we're doing there is based on all that we've built around product and platform and now really expanding the go-to-market and the partnership. So, Scott, if you want to talk a little bit about some of the partner and channel things we're doing.

Sure. I think we've alluded this to quite a bit in the past, and I think Ross nailed it just right on the head. I mean, those 15,000, those are our same partners. Those are the partners we deal with today, and we're just doing bigger deals with them. And as a result of that, you know, we learn and build out our products so it really goes to, you know, the largest kind of customers that are out there. Now, as we move up to the, you know, Fortune 2000 or the Global 5000, I mean, that's a different story. I always say that that group is dominated by the royals. And when I say the royals, I mean those are the big four and large integration groups. And that's been an area for us that we've had to develop over time. And, you know, the Vertexes and the Sovoses, they've, you know, had a long-term relationship with them on-prem and, you know, now with their fledgling, you know, cloud products. But as they move to the cloud, it creates opportunity for us to step in. It's a buying decision. Our job is to maintain adding the features and the – improving our products so we can handle the most complex cases, which I believe that we are well on our way to having done and continue to improve on, and developing partnerships with the integrators. And it's not only just the upper end big four, it's the integrators that are doing the work on behalf of those integrators those integrators that we're developing relationships with. So I've always said that Fortune 2000 is opportunistic for us at this time. I mean, we continue to push that envelope. I know we're putting pressure upstream, and we're going to continue to do that. And, you know, the more we win, the more the upper end of the market has to take, you know, us into account because we are a player and we are going to be there and we are going to win our fair share of takeaways and deals up there. I mean, for me, this is just a long, strong, you know, sort of approach to, you know, to moving upstream, protect what we have at the mid-market, you know, dominate, you know, in those 15,000, as Ross said, and win our way, you know, through, you know, the partnerships that we have to improve and build on at the enterprise level. But we're doing that every single day, and we'll continue to move upstream.

Right. Yeah, that's a lot of helpful color. And maybe just a quick follow-up on the, you know, kind of the, you know, building the product and platform piece. And obviously you've added a lot of, you know, kind of key components over the past year or so, use tax, custom rules, exemption management, stuff like that. I guess what's next, right? Where are the remaining gaps in the product side that you're kind of focused on, you know, when you're looking at that kind of upper end of the enterprise? Thank you.

You know, I mean, like we've said, you know, like we've said before, you know, I mean, from a compliance cloud platform perspective, I mean, it's already been mentioned on the call. You know, we've talked about 1099s, W-9s, W-8s. You know, there's property tax that's out there. You know, we have to build out, you know, more international content. You know, we have to integrate the things that we already have. I mean, I really think You know, doing the imposure and all of the e-invoicing from an international perspective is really, really important. So we've got a lot already in the company that we have to build out, but there's still quite a bit of the platform to go on. And there's more document types available.

you know that you can that you can deal with so there's lots of things that we can that we can do both currently what we have and and in the future and in the future great thanks again thank you please limit yourself to one question to allow the participants time for questions again if you would like to ask a question press star one on your telephone our next question comes from

Thanks for taking my question. Scott, last year around this time, you talked about your vision to becoming a multi-product company, do an end-to-end complex platform, moving up market, down market. So help us understand how the journey has been in the last one year in terms of those initiatives driving your growth. And then, you know, previously you talked about Avalara being a mid-20% grower. So does this initiative now, you know, changes your growth profile? And if so, like, you know, how should we think about that?

You know, we've all – I mean, I'll just start with the last part first. And, you know, we just fundamentally believe that this is a – you know, it's just a long, strong, growing, you know, business. And – mean I don't think we see it changing dramatically you know over what we've been telling everybody a lot along the way even with the platform mean are the platform is going to keep it you know going strong for walk me home you know a long period of time as we add all those but I would say you know from my perspective you know and and and I'll change it quite slightly your question and go into you know how do I prioritize I mean, how do I think about, you know, what we're doing? You know, I wake up every single day and I'm thinking, how do we, you know, continue growth? Growth is our primary, you know, objective. You know, we want to do it efficiently and we want to bring all the efficiencies we can, but how do we build, you know, the platform to scale, not only in the short term, but in the long term? You know, and if you want to break that down even further, I'd say job number one for us here, and I think we're doing an excellent job of that over the last year, is to protect and scale our partner mode. Protect what we have. Continue to grow it. You know, expand and win more deals in the mid-market. Move upstream, as Ross and I just talked about. You know, we have to advance in the enterprise. We have to win business. and protect the lower end of the market, as we've talked. And we have to break out even more international. And I think we've done an excellent job in balancing those objectives. And I think you can see that in our results. And I think that those results will continue as a result of us being so focused on on what you might say are simplistic things, but for us, that's how we see building this business.

Quick follow-up, if I may. You said Florida is the last one launching this economic nexus law, but have you started seeing states enforcing these laws post-pandemic?

I mean, they're all enforcing it in their own way. But for the time being right now, they're focused on the pandemic and dealing with that. But they're all starting to, as I've said in previous calls, they start looking at, you know, the number of auditors that they have, you know, the number of, you know, how they're going with digital audit ways of looking at how people are performing and which ones have crossed over the nexus thresholds. And so sending them letters that says you need to start you know, filing here. We haven't seen that. So they're all, you know, in different stages of how they're doing that. But what I would point out to everybody, and I've said this before, and I think it's really important, the governmental tailwinds have been with us for 17 years, and they're going to be with us for another 100. I mean, that's just the reality of what governments do. And what that means is that, yes, they are a tailwind, but the trigger events and the things that are happening, the ROI discussions, what are they doing with the growth of their business and the growth of e-commerce, Those are the things that ultimately drive the, you know, drive it, but they're coming on the tails of, you know, real good, strong, you know, tailwinds. And that's exactly what you're seeing in Florida. That's what you saw in the example of the vaping law. I mean, you know, there's changes all the time. It's just forcing more and more compliance.

Our next question comes from Stephen Chang. Stephen, you're welcome.

Hi, thanks for taking my question. I just wanted to know if there's maybe any, I know you talked about in your prepared remarks about that takeaway deal of that G2000 customer. I wanted to see if any reason where we can expect these takeaway deals to remain maybe a normal occurrence in each quarter, like maybe a change of sales motion, and to build upon that, I was curious on any new features that you've recently added that you've seen have been widely adopted within enterprise level customers, whether new or existing, or maybe any features that might have hit the scales for them to sign with you?

So takeaway deals and competitive wins, and I know we've pointed the one out here, but we've pointed those out in previous quarters. I mean, we just see a steady stream of those. I mean, I can't say it any other way. I mean, we win those deals. And I would say, you ask, what do I attribute that to? One, I think our product is better. I think our team, you know, is better at identifying those and working with our partners and our selling motion and how to sell those bigger deals because it's a new motion for us, and we're learning that as we go along. So we're all, you know, we're – you know are very early in that in that process and we've got ok you know a lot in our pay you know the you know the continue to that to fill out and grow their show arm but I would say the thing that really distinguishes us from everybody else is the omni-channel aspect of what we do and these big customers don't have just one system and and now with e-commerce And POS and all the things that they're dealing with, they are looking for a solution that handles all of those and that can provide them with all of the tax research that they need at the back end. So, I mean, it's really a culmination of all the things that we've been talking about, but we really, really see it at the upper end when we go to do battle up there that the omni-channel is the difference maker.

Our next question comes from Scott Berg with Needham. Your line is open.

Hey, guys. This is Josh on for Scott. Since you've introduced returns for small businesses with a lower price point, curious how that product has increased your funnel of new customers, particularly from a competitive standpoint when paired with SST for the other 25 states. You know, you're more competitive than ever on price, and you have a broader product portfolio versus the competition in that segment of the market there.

Yeah, I mean, it's a growing area for us. And, you know, it's something that, you know, we've always had in one form or another. But I think it's now taking a new prominence in how we're going to go to market with our big partners, right? In the end, I mean, calculation is nice. And people can build calculations, especially simple calculations. And even at the lower end, they can do it with a single API call. So adding things like cross-border, simple cross-border, and things like that make all offerings, even at the ESB level, better. But compliance is mandatory. And we've just said we want to own that market. We do millions of tax returns every year, and we want to extend that down to that lowest possible end. And it's not – when I would just say – everybody just says, hey, it's just simple to do returns, or I do returns. But there are state returns. There's local and jurisdictional returns. I mean, it's a hard nut to crack. And as you point out, I think we have a real competitive advantage at that low end for the broader compliance play. And it's at the low end ESB. But every one of the big, you know, partners, NetSuite, you know, all of the different, you know, companies, they all have ESB customers and we want to be selling to them. And that's a new motion for us. So we're really excited about that growing and that be one of the future-proofing parts of our business.

Our next question comes from Morgan Stanley. Your line is open.

Hey, guys. Good afternoon. Thank you so much for taking my question. Maybe going back to what you were talking about recently, which a couple of questions ago, which is international. With the acquisition of Intopia now under your belt, how are you thinking about growth in international for the remainder of this year? And then I have a very quick follow-up.

So, I mean, real quickly, we saw great traction in Q4 and then continuing acceleration in Q1 of international. I mean, I guess the best way to say it is that we believe that the international market and the U.S. market are equal and maybe even bigger internationally. And so it has to have strong growth. over time. I mean, that's just the mathematical, you know, certainty. And we fundamentally believe that the markets are equal. So, you know, we're expecting it to continue to grow. And as we build out our product and we add more features, like you said, with Imposia and what we're doing with, you know, all of the e-invoicing, you know, we're gearing up for that to be a big part of our business, not only at the end of this year, But, you know, in many, many years to come.

Perfect. And I wanted to come back to Ross with net revenue retention for a second. Very nice uptick sequentially versus Q4. What drove the uptick in net revenue retention and how should we be thinking about it moving forward through the rest of the year? Thanks, guys.

Yeah, and I think we will talk more about it a few weeks of analyst day to clean some of the the issues up with it. But I think what we're seeing now is last year, because of COVID, while churn still has remained meaningfully below 4% very healthy all along, we did see some tick up in churn. We saw some tick up in downgrades last year. So we've seen some improvement in those metrics. And then on the upsell booking side of the house, it continues to be consistently very, very strong. And so we continue to do well there. So I think it's sort of getting through COVID improvement in churn and downsell and continued strong performance in upsell. And then we'll clean up the metric and get it in better shape for you in a few weeks.

Our next question comes from Peter Levine. If ever called, your line is open.

I guess this one on your Spotify big commerce partnerships. What has surprised you either to the upside or downside so far for this year? And then are there any other partners, connectors within your network worth calling out that doesn't necessarily get as much airtime as these do? Thanks.

You know, we have an excellent, I think, an excellent relationship and growing relationship with Shopify. You know, we're really pleased with how that's developing and growing. And, you know, the same is true, you know, for what we're doing with, you know, Amazon and, you know, some of the others. So, you know, from... Our partner relationships is what Avalara has distinguished itself on. I mean, we have found a way to work with them, to get them started, learn with them, monetize the business, and that's constantly being able to look at what we're doing together jointly and see how we can do it better through the partnership. I mean, I wouldn't call out any other ones that, you know, that probably don't get the airtime. But I would say this just as a general rule of thumb. Everybody talks about these big, all the big partners. And Ross has said this before, and I've said it before. The long tail is so critical. So that's the unsung hero of Avalara, right? Because, you know, everybody can say they go to the big ones. But, man, a lot of these big deals are driven by, you know, smaller e-commerce sites, smaller ERPs, more specialized ERPs in specific industries. You know, those 950, you know, partnerships that we have that aren't in the top 50 that everybody knows about, I mean, we get a lot of business out of that. Ross will talk a little bit about that in our analyst day. But, you know, the long tail, that's the call out that I think that you're looking for. And for us, there is no competition in that space. none of the other players have been chosen to be built out. These are the partners that are building Avalare into them with their own dollars, right? So they don't want multiple players in it. They don't want to have to do it. So, you know, I think that that's really, you know, the area that I would call out.

There are no further questions at this time. I'll now turn the call back over to Scott McFarland, co-founder and CEO for closing comments.

Sorry we went a little long today. I'd just like to take this final opportunity to thank all the employees here at Avalara and all of the new employees that we have from the companies that we've purchased and all the customers and partners for all their hard work and support to sort of make all of this come together. So we look forward to talking to you on the next call. Thank you all very, very much. Appreciate it.

This concludes this conference call. Thank you for participating. You may now disconnect.