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.