Avalara, Inc.

hello everyone and welcome to the avalara second quarter 2021 earnings conference call my name is daisy and i'll be coordinating this call you will have the opportunity to ask a question at the end of the presentation if you'd like to register a question please press star followed by one on your telephone keypads i will now hand over to your host jennifer gianola the vice president of investor relations from avalara to begin so jennifer please go ahead

Good afternoon, and welcome to Avalara's second quarter 2021 earnings call. We will be discussing the results announced in our press release issued after market closed today. With me are Avalara's CEO, Scott McFarland, and CFO, Ross Tenenbaum. Today's call will contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends, the impacts 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 conditions, and our guidance for the third quarter and fiscal year 2021. and can be identified by words such as expect, anticipate, intend, plan, believe, speak, 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 risks and other important factors that could affect our actual results, please refer to the risks 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 Q2 2021 earnings call. Q2 was an exceptionally great quarter for Avalara as we continue to execute on our vision to become the leading global cloud compliance platform. We reported total revenue of $169 million, representing an increase of 45% year-over-year. Our highest growth rate since going public. Our outstanding growth was driven by strong performance across the business and addition of strategic acquisitions that we closed since Q4. Even excluding acquisitions, organic revenue growth accelerated to 32% year-over-year. I would like to thank Amit Mastradas, our president and chief operating officer, and his team, as well as all Avalarians, for these stellar results. I was excited to see a very balanced quarter with success points coming from main key initiatives. I couldn't be more pleased with our success in attracting new customers across a wide range of industries, segments, geographies, and our continued success in large, multi-product deals and seeing more cross-sell wins from our acquisition. We also experienced strong customer retention and solid upsell activities. A great proof point is the expansion of our revised net retention rate to 116%, up from 113% last quarter. Our international business also performed very well again in the second quarter, powered by some great customer wins and our ability to monetize regulatory catalysts. Our first ever all-virtual Crush conference in May was a big success with record attendance six times higher than our previous events. We heard from our amazing customers and partners like BigCommerce, Full Beauty Brands, Groupon, Sage, Untuckit, Grant Thornton, and IDC, to name a few. And Crush is just the beginning of building our momentum as a trusted thought leader and brand in global compliance. Next, we are gearing up for a busy second half, including the reemergence of trade shows and our annual international event called Inspire 2021 Indirect Tax Summit in October. We hope all of you will join us for this landmark event. We believe to dominate the future of global compliance and distance ourselves even further from the competition, we must have the best content, the largest number of partner integrations, and the most robust technology platform, not to mention best-in-class onboarding, including what I refer to as the holy grail of onboarding, automated tax code mapping and classifications. By automating tax code mapping and classifications, we are putting in place the systems and tools to scale the business to compete more aggressively in the market. As you can see from our outstanding quarter and first half results, Customers are choosing Avalare to automate their tax compliance at a brisk pace, and our value proposition has never been more relevant. We are selling a broader selection of our products, and we are executing on our strategy of engaging with our customers at a higher, more strategic level. 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 have 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. Over the past several years, we have been making the investments organically and through acquisitions that we believe have positioned us to lead and shape the future of global compliance. And maybe the best news of all is that our journey is just getting started. We are benefiting from the 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 and marketplace selling are excellent prospects for us as their omnichannel complexity and compliance exposure grows. As more and more businesses of all sizes continue to replace on-premise applications with cloud services, the concept of cloud compliance has shifted from a novel approach to an expectation in the market. One of the drivers of this shift is the economic efficiency delivered by cloud services and automation. Even beyond COVID, we expect our cost efficiency and ROI messaging to continue to resonate and be a key driver of purchasing decisions with our prospects. We saw these trends play out with our customers and partners wins in the second quarter. Here are just a few examples. We won a large enterprise deal with an IT infrastructure company for a deal value of $233,000, which includes annual recurring revenue, one-time software, and services. The company selected Avalara to do our unmatched partner integration strategy, where we were able to integrate with all of their transactional systems, including NetSuite OneWorld, a well-known e-commerce platform, a recurring billing system, and an expense management platform. In addition, we won a large enterprise deal with one of the world's largest online wine marketplaces for a deal value of $157,000. The company selected Avalara due to our shipping verification product, a recently announced enhancement to our Avalara beverage alcohol industry solution. We won a couple of large international deals, including one of Europe's fastest-growing technology companies, for a deal value of $280,000. We won the deal based on our connector with a well-known payment processing provider and our SSD program. This deal includes managed return services in 26 countries, fiscal rep in six countries, and ongoing compliance, positioning us as a global tax compliance provider. In addition, we want to deal with a leading beauty product company in Switzerland, valued at $250,000. This is a multi-product deal, including Avitax, SST, and CertCapture. The company is also working with us on future projects to meet their global regulatory requirements, including VAT reporting, imposure, TTR, fiscal rep and filings, duties calculation, and harmonized system classification, as well as India and Brazil compliance. We continue to see early success winning deals with our Avalara and TTR go-to-market strategy. We won an enterprise communication deal, including TTR with a data center services company. for a deal value of $198,000. And we also won an industrial packing provider for a deal value of $115,000, including cert capture, business licenses, TTR, and SST. The company selected Avalara due to our integrations with a multinational ERP platform and a customer interaction management platform. Additionally, we won several competitive wins and takeaways. We won a competitive takeaway for a tech accessories company for a deal value of $150,000, replacing an on-premise vendor. We won this deal due to our Shopify Plus integration and our integration with a well-known cloud financial accounting software platform. Next, we won a medical devices company for a deal value of $165,000, including cert capture and TTR custom tax codes. And we want a competitive takeaway of a leading retail and fashion designer for a deal value of $120,000. The company selected Avalara due to our integrations with disparate systems, such as a B2C commerce platform, retail POS platform, and integrations with a leading cloud customer relations management platform. In cross-border, we want a med spa company for a deal value of $84,000 due to our integrations with a leading sales cloud software platform and a popular customizable e-commerce platform. We also want a multi-product omnichannel deal, including TTR, with a funeral products company for a deal value of $76,000. One of my favorite deals is a fencing products company for a deal value of $32,000. This 20-year-old Canadian company was selling their products in the United States, and the business started to expand and grow rapidly five years ago. The owner reached out to Avalara after receiving a letter from one of the states where they sell. The company was managing tax compliance manually and did not realize the business was at risk. Winning this deal with a company that has been doing business for years and was significantly out of compliance exemplifies why I stick with the firm belief that over time, every business will automate tax compliance. If you step back and think about it, all the customer examples I've just discussed, we are selling across the economy in nearly every industry from IT services to fencing products to funeral services. We believe we've built one of the most defensible moats in all of software with over 1,000 signed partner integrations and growing. We offer far more integrations with business applications than any other tax software provider, and we never stop working to add more. As demonstrated by our broad and diverse customer wins, Avalara's partner moat continues to be a key enabler, especially as businesses shift to omnichannel commerce and seek a single tax compliance platform that can integrate to multiple disparate systems. Integrations in the niche business applications are often major, if not deciding factors when evaluating Avalara, so the long-tail strategy remains important. We are continuing to expand and deepen our relationships with partners at all levels of our ecosystem, and we are making good progress. In e-commerce and marketplaces, I am excited to announce the expansion of our cross-border business with one of the world's largest online marketplaces. During our recent analyst day, we stated that we have a dedicated team to focus on 800-plus marketplaces globally, and that investment is paying off. As of March 31, we counted 228 marketplaces as customers and have earned a seat at the table with the world's largest marketplaces by demonstrating our ability to help customers identify and address their compliance challenges. Now I'd like to talk a little bit about Avalare's R&D machine and how our investments are accelerating our platform journey, allowing us to outpace the market. Three years ago, we started a major transformation. We tripled our investment in R&D headcount and moved our cloud services onto AWS. Today, approximately 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. We are now witnessing the sharp advancement of Avalara's compliance cloud, and as a result, we have a much bigger opportunity to serve our customers. While others are building on-premise or point solutions in the cloud that focus on tax, we are building a global cloud compliance platform that will support a broader complement of compliance interactions. Based on feedback from our portfolio wins, we believe 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. In 2021, we expect to deliver more than a dozen new and significant products and major releases that will include document central, transfer pricing, a software version of Cloud Connect, and a new content subscription service for our product information. We are expanding our moat with new content that we acquired through TTR and are opening up new industries to sell to. We continue to expand our partner moat with our new integration studio, a low-code, no-code way of building connectors and extractors so we can accelerate the long tail of integrations. 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 expand our geographic expansion. In today's digital-first economy, Merchants of any size have the ability to sell across multiple channels and geographies and employ multiple disparate systems to power the end customer experience. That's where Avalara comes in with our unique and compelling value proposition. As we discussed at our recent analyst day, over time we expect to add new content to support completely new areas of compliance, potentially including 1099s, W-9s, W-8s, property taxs, employment, healthcare, shipping and logistics, environmental, and more. We believe our customers and partners will value our platform that can automate compliance activities and consolidate today's fragmented landscape of compliance products. We will continue to look for and close opportunities that we believe will improve and sustain Avalara and our growth objectives. Finally, we continue to bring talented leaders with diverse backgrounds onto Adler's board of directors. I would like to welcome global technology leader and innovator Srini Talapragada and retired Lieutenant General Bruce Crawford to our board. Srini is president and chief engineering officer for Salesforce, where he leads the global team responsible for building and managing the company's products and platforms. Prior to Salesforce, Srini held multiple leadership roles at Oracle and SAP, where he led enterprise software development and was responsible for the integration of numerous acquisitions. Bruce is a senior vice president for strategic development and growth and sales at Jacobs, a leading technology-enabled solutions provider. Prior to joining Jacobs, Bruce served in the United States Army for 34 years. During his military career, Bruce oversaw the development of programs for the Army's senior leadership, contributing to one of the Army's most important missions, and developing the competence, character, and other leadership traits among soldiers. Bruce and Srini bring more than 50 years of combined leadership expertise and technical prowess across industries to our boards. Their addition to the board will help ensure that we are able to continue to build a world-class cloud platform and develop leaders who are equipped to guide our teams to our rapid global expansion, which are essential to Avalara's future success. As we've always said, we believe we are a long and strong business with low penetration 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 global compliance. We are excited to raise our guidance yet again for fiscal year 21. And we believe we can grow and scale Avalara into a multi-product, multi-billion dollar revenue company over time. Thank you. And with that, I'll turn it over to Ross.

Thanks, Scott. Avalara posted an outstanding Q2 performance across the board. that exceeded our guided metrics. Q2 billings exceeded our expectations, driven by balanced execution across the business, including 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 Q2, and we believe will remain a tailwind for the longer term. Q2 total revenue was $169.1 million, up 45% year over year, or up 32% after excluding revenue from acquisitions since Q4 2020. We were pleased with our strong organic revenue growth, especially given the impact of the reduction in the SST program's compensation formula starting in February this year. Subscription and returns revenue grew 40% year-over-year to $152.4 million or up 33% excluding acquisitions and represented 90% of our total revenue. Professional services revenue was $16.6 million, up 109% year-over-year. The high growth rate in services revenue was largely driven inorganically by the Q4 2020 acquisitions of business licenses and TTR, which offer professional services for licensing and registrations and tax recovery services. During the second quarter of 2021, we revised our core customer calculation methodology to include revenue from our SST customers, which results in additional customers being included in reported core customers. In addition, during the second quarter of 2021, we also revised our net revenue retention rate calculation methodology to include revenue from SST that previously was not included and to exclude professional services revenue as these services tend to be more one-time in nature. We have included both the revised and previous key metrics methodologies for core customers and net revenue retention in a table at the end of our financial results press release. Our revised core customer count increased by 840 from the previous quarter to approximately 16,570 at the end of Q221, a year-over-year increase of 21%. Our core customer count under our previous definition increased by 830. Our revised net revenue retention rate was 116%, up from 113% last quarter, resulting in a 115% four-quarter average. our NRR under our previous definition increased to 110%, up from 107% last quarter, resulting in a 107% four-quarter average. We were very pleased to see both NRR rates improve as a result of strong sales execution with our existing customers, coupled with improving customer retention dynamics. Q2 revenue from revised core customers grew 29% year-over-year to $135.4 million. Q2 revenue from non-core customers grew 59% year-over-year to $18.3 million, primarily driven by strong growth and execution in EMEA. Q2 revenue from M&A was $15.4 million. 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 $125.2 million in Q2, representing a 74% gross margin. This compares with gross profit of $85.7 million and a 74% gross margin the same period last year. Subscription gross margins were 76%, up slightly from the year-ago period. We continue to focus on increasing our subscription gross margin over time through our ongoing investments in automations. However, our improvement in subscription gross margin will be partially offset by gross margins on some of our acquisitions and less mature products. Our total gross margin will also be impacted by the mix of subscription and professional services revenue. Sales and marketing expense was $63.8 million in Q2, or 38% of total revenue, an improvement of more than 120 basis points year over year. Assuming the healthy demand environment persists, We intend to invest more aggressively in sales and marketing capacity in the second half of 2021. Q2 research and development expenses, 34 million or 20% of revenue unchanged from 20% of revenue in Q2 20, but included a higher benefit from capitalized software in the current quarter. 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. Q2 general and administrative expense was $24.8 million, or 15% of revenue, versus 13% of revenue in Q2-20. Q2 operating income was $2.6 million, which was better than our guidance, largely as a result of strong revenue and gross margin, and some expense favorability in R&D and other areas. Q2 net income per share was $0.02 in the quarter, based on 89.5 million shares outstanding. Total deferred revenue at the end of Q2 2021 was $239.4 million, up 43% from $167.7 million at the end of Q2 2020, and up 34% year-over-year, excluding acquisitions since Q4 2020. 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 $181 million in Q2 2021, up 52% year-over-year. We were also excited to produce 38% year-over-year organic calculated billings growth, which reflected a strong demand environment and an easier comparison from the COVID-19 impact on Q2 2020 billings. Free cash flow was $20.2 million in the second quarter compared to $5.5 million in the same quarter last year. 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 level of our billings and expenses, as well as our overall level investment in the business. Our cash and cash equivalents were $639.5 million at the end of Q2 2021, an increase of $165.1 million from $474.4 million at the end of Q2-20. I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q3 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 revenue in the range of 9% to 10% 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 Q3 2021, we expect total revenue between $169 and $171 million, which represents a 33% year-over-year growth rate at the midpoint of the range, or 23% year-over-year, excluding revenue from acquisitions closed since Q4 2020. These figures reflect the SST price reduction which we believe produces a growth headwind of approximately 3 percentage points. We expect our Q3 non-GAAP operating loss to be in the range of 5 to 7 million, reflecting a more aggressive ramp in second-half spending, especially in sales and marketing, research and development, and M&A integration. For the full year 2021, we expect total revenue between 672 and 676 million which represents a 35% year-over-year growth rate at the midpoint of the range, where 26% year-over-year excluded an expected $50 million in revenue from acquisitions closed since Q420. As a reminder, M&A is part of Avalara's DNA, and we've 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 $10 to $14 million, reflecting a more aggressive ramp in second-half spending, especially in sales and marketing, research and development, and M&A integration. We expect this level of non-GAAP operating loss should produce a modest level of positive free cash flow for 2021. In closing, we have an exciting opportunity to continue building a durable, growth-compounding company We believe we are a leader in a large market that is still early to adopt tax automation technology. We are seeing a demand transformation as businesses become omnichannel, operate in many jurisdictions, and shift their business to e-commerce and the cloud. These changes, coupled with an ever-changing regulatory environment, make it even more difficult to maintain tax compliance, and we believe requires automation. At the same time, we are evolving to a platform company, driving an increased supply of products and capabilities, to increase the value we are able to deliver to customers. We also continue to invest to win upmarket, downmarket, and internationally so that we can continue to compound growth for the long term. For all these reasons, it often feels like we're just getting started. Please note we are participating in upcoming conferences, including Canaccord Genuity, Citi, and Piper Sandler in the third quarter. Thank you for participating in today's call. At this point, we would like to open up the call for your questions.

Thank you very much, Ross. If you would like to ask a question, please press star followed by 1 on your telephone keypads. When preparing to ask your question, please ensure you are unmuted locally. And if you would like to withdraw your question, please press star followed by 2. Our first question is from Brad Sills from Bank of America Securities. Brad, your line is open. Please go ahead.

Oh, great. Thanks so much, guys, and congratulations on a real nice quarter here. I wanted to ask about the expansion opportunity as you get into other compliance offerings here. You've obviously shown some real success going into licensing, landed cost, other tax categories. But as you get into some of these other areas, like compliance, 1099, for example, property tax, employment, shipping logistics, things of that nature, Is there a different sales audience? These are mid-sized organizations, but you're increasingly moving up market. So perhaps if you could comment on how different that sales audience is, if at all, or is there some kind of common compliance organization that you find that sponsors Avalara that you can then go into these other areas?

Thanks, Brad. I mean, appreciate it. So the... Like we've stayed very close, right, with the business licenses and registrations and doing, I mean, returns and exemptions. So, I mean, those are all the same audience that we always see. Now, you know, most of these taxes are sort of managed in the same, you know, arena. But we often see them as different end buyers or different champions within the organization. So it's a little bit – it stretches the sales organization a little bit. And in some cases, you know, we'll have to continue building out, you know, a different sales force organization. for those particular for those particular areas could be property tax something like that now I will say you know 1099 W-9s and W-8s is something that Avalara had tested the water in for many many years you know we had partnerships with various vendors that allowed us to do 1099s, W9s, and W8s very, very successfully. It ended up that some of those partners got bought by other players and the like, and we weren't able to continue that line. But we know with our sales force that we can sell 1099s, W9s, W8s, because we've done it really, really successfully in the past. So I'm not really concerned about our ability to, you know, broaden our offering because I think that there is a huge thirst within the tax community and within the businesses to automate these antiquated systems. You know, that's really what this is really about is how do you take compliance products that – have really not had the attention of automation and bring that automation to bear that really helps the customer and does it in a trusted relationship. And many of the areas that we can add tie into our relationships with our ERPs where we have a unique situation where we're tied into the back end of those accounting applications. So although they might have a slightly different sales motion, It does all fall into the same general area within the businesses around indirect tax, property tax, and the like. And we're really adept at doing that and have a great relationship with our customers. So I'm excited to be branching out because I think it works really, really well.

That's great, Scott. Thanks so much. And then one more, if I may. Obviously, multi-channel commerce is a key driver here, and the results suggest acceleration there in those trends. ERP upgrades has been another trigger that has been a catalyst for customers to adopt Avalara. Can you classify the environment for ERP upgrades? Some channel feedback suggests that just across the ERP ecosystem, we've seen some pause, particularly in the large enterprise segment on ERP upgrades for back office type projects during the pandemic. what are you seeing in your end of the market? And could that be a tailwind of the business, perhaps, if things are improving there as we get into reopening, whenever that happens? Thank you so much.

Well, you know, you – I mean, let me just pull it up one level real quickly, and then we'll go down there. I mean, we're just really in a fortunate position, and we've got four really major tailwinds that are helping us, right? We've talked about it in the past. You know, you've got e-commerce, obviously. You said omni-channel, but it's really driven by e-commerce. You've got, you know, the regulatory sort of pressures that all of the businesses and everybody's playing on. And then, you know, ROI model. I mean, the ROI aspect of the business, which we're really helping customers during difficult times and helping them, you know, automate the back of the house. and then, you know, cloud adoption in general. I mean, those are the four big drivers that we are just fortunate to be involved with right now. And I could say, you know, at least two or three of those are generational. And the one you mentioned, you know, Omnichannel, I mean, certainly has really been driving it. But that's the way, you know, that sales tax is going because, you know, everybody thinks about, you know, I need to get an ERP or I need to get e-commerce, I need to do those things. It's really the combination of all of those. It's all of the financial applications that you have to aggregate data from and then get to the government. So that's just the backdrop of your question, and I think that's what we're really benefiting from. But specifically around ERP, I mean, it's really – that is – we're seeing a comeback of that and a significant comeback of that in our – you know in this quarter uh... really proud of that you know of the partner team and and omit and all of those that you know are are just really taking advantage of, you know, of a situation where, look, people are looking to make efficiencies. They're looking to, you know, that ROI decision, and part of that is, you know, ERP, and what gets dragged along with ERP is that trigger for sales tax. So it's been a good quarter for us, and we're seeing a nice comeback there.

Thank you, Scott.

Our next question comes from Siti Panagrahi from Mizuho Security. Siti, your line is open. Please go ahead.

Hey guys, thanks for taking my question and congrats on a great quarter. So when I look at even your growth organic, on an organic basis also, it's such a big seasonal increase sequentially. I'm wondering how sustainable some of the trends, Scott, you talked about going forward. And when you think about opportunity, you talked about moving up and down market, multiple products, going international and even made a lot of acquisitions. So wondering, what are the near-term opportunities you're seeing that's going to contribute versus some of them are long-term?

Well, I mean, you know, again, you know, like I just said, I mean, we're really fortunate to be in this situation where we've got, you know, four major tailwinds that are driving, you know, us, you know, sort of, you know, at this very moment in time. And, I mean, interestingly about sales tax, and I always talk about this with everybody, indirect tax in general, is it's a statutory requirement. I mean, so, you know, you're doing this for, I mean, the calculation for a small business is the same as the calculation is for a big business. Now, there may be some features and some things that you have to do in order to build the market. But moving up and down is not a difficulty because of that statutory. Now, I think what makes it really interesting for Avalara and in general and what really drives us and why I think that this is, you know, sustainable over the long term is that this is a partner business. We can't go to market. except by going to market with the people who are creating invoices. And this is what we're really, really good at. So, you know, moving up and down the market is our ability to really work with the partners like we have with the Shopify, the Wix's, and all those others, and then for us to move upstream as we've been talking about. So I just really don't see our motion as significantly different from We just have to continue to execute at the high level that we've been, you know, that we've been doing. Ross, you may have some thoughts on that as well.

Yeah, you know, I just want to add is when you say sustainability, I'd say exactly. We've always talked about this is a long and strong business, and we're building a durable business, and we want investors to think about us as, you know, a 10-year story where we can compound growth and build a multibillion-dollar company. And so... We think about ourselves as how do we drive sustainability. It's not how do we maximize growth in any quarter or year. It's about how do we sustain it and roll up a really big market. And so when we talk about going up market, down market, and out market, meaning internationally, some people say, well, is that too many things? Well, no, it's not all in this quarter or this year, but it's about outpacing the competition, running really fast, and having a strategy and a vision for how we're going to win up market, how we're going to win down market. And then, as Scott said, it's really just about execution. So the ability to realize sustainability is there, and it comes down to having great talent in execution.

See, let me just say one final thing, because I think it just really exemplifies where we think we are and where we think the market is. I mean, look, we know how this plays out. This is an interesting business, right, because – We know what the end result is. The end result is that everybody is going to be automated around sales tax and transactional taxes. I mean, this concept of doing it manually in a digital world, I've always said, is absurd. So you know the end result. And that's – I mean, when you're in that situation – I mean, the sustainability of it is not actually the worry, because you know where we're going. We just have to get the right partnerships. We have to execute the way that we have to do in order to get business efficiently and grow as quickly as we need to. That's where our effort is. But from a sustainability perspective, I just really fundamentally believe that this is a really long and strong market.

So one follow-up to that, you talked about R&D investment, how one-third of your employees are now working there. But in terms of investing in sales and marketing and mainly customer success, what kind of changes you are making to address this kind of multi-product, multi-segment customer that you are targeting?

That's a great question. I fundamentally believe that we have proven – one of the things that we set out to prove after the IPO is that we could really scale – and grow our sales, but did not have to do that in conjunction with costs, meaning the efficiency. And I think that we have proven that. And I think Ross has made this, and he can comment for himself on this one, in the past that we've maybe turned the dial even a little bit too far on the efficiency around sales and marketing. And I think one of the things that you're going to see in the second quarter you know, half of this year. And in the next year, we're going to try to dial up, you know, some of the noise on our sales and marketing. So we really get out there and let people know that, you know, sales tax is an issue. Avalare is there to solve that problem. We'll probably expand, you know, in areas around our, you know, our partner relationships, We'll start to add more salespeople throughout the organization, and we'll make a much larger impact on where we go with people up in enterprise. So I think you're going to just see us start to move the same way we've done in R&D. You know, we'll make a shift and start to, you know, do that in sales and marketing as well.

Thank you. Thanks for the callers.

Thanks, Ellie.

Ladies and gentlemen, as a gentle reminder, please, if we could just stick to one question. Our next question comes from Sterling from JP Morgan. Sterling, your line is open. Please go ahead.

Hi, this is Maya on First Fairling. Just have a clarifying question at first. So that 840 core customer net additions, does that include customers from acquisitions? And I guess if so, kind of what does that contribution look like?

No, it does not yet include the acquisitions. As we add them into core customers, we highlight that. So no, it does not include them yet.

Okay, great. And then I guess just in terms of the international expansion, are you mostly targeting for mid-market customers at this point, or is it more broad-based to include down market and enterprise? I guess just what is the strategy there?

For the most part, our strategy internationally is slightly different than it is domestically here. The areas that we've targeted in EMEA and Brazil is really around multinationals. That's really where we see a lot of opportunity, easy to get into, easy for us to work with them. I mean, I don't want to say that we're not in the mid-market, but it's mid-market and upper multinational companies. And I will say that, you know, with the advent of the Internet and the business internationally, many, many companies at all sizes are multinational. So, you know, we find ourselves, you know, working with a variety of customers, but it really is more of a multinational, you know, focus.

Okay, great. Thank you.

Our next question comes from Brent Bracelin from Piper Sandler. Brent, your line is open. Please go ahead.

Hi, guys. This is actually Hannah Rudolph on for Brent today. Thanks for taking my questions. I guess just building on the last question, it's good to hear about the strong international growth this quarter. But regarding the Imposia acquisition that gave you a stronger foothold into Europe, I was wondering if you could share an update on what you've learned and any new challenges or opportunities you've seen as you address the tax compliance landscape in Europe?

Well, it's a little early for us to, you know, to, you know, be talking about imposure. But listen, we, I mean, we've always known that international is a big market. We say it's a larger, you know, TAM than we have, you know, in the U.S., So we're expecting it to outpace the U.S. going forward. It's on smaller numbers today. So we're really pleased with the way that the team is developing us internationally. And as far as Imposia goes, we know the basis of what they're doing, e-invoicing, is the future. So we've been working with them, one, to just grow that business, that standalone business, and we're doing that with them. but integrating it into the broader strategy. And as that happens, I mean, we know that it will open up more opportunities. There's more and more multinational companies that want to deal with the e-invoicing requirements. So a little early to give you a bunch of specifics, but we're very, very confident that this is the way of the future and and building it into our offering, you know, from an end-to-end basis is going to make a difference. You know, Ross, I mean, do you have anything to add?

No, I think it's good. I'd just say international is going well. You know, I really think, just bringing it back to the quarter, it was really a gold medal quarter, in my opinion. I mean, total revenue, 45% year-over-year growth, billing is 52%, NRR ticked up, and international is another big highlight as well as sort of just starting attaching of new M&A. And so international on its own, the direct business did well. Our large marketplace customer did well. And Imposia contributed. You'll see it in the queue. It was a couple million in the quarter. But that really just came online in April. And so this is a big opportunity to expand our partner moat globally, to continue to expand it and be any to any, connect to any application on one side and any government on the other side over time. And And so we'll be integrating that into the platform, and it gives us, you know, a really good set of technology and capabilities to continue to drive forward long-term and international. So we're really pleased with the quarter, really pleased with how international is doing, and IMPOSI is a big part of our strategy.

Super helpful. Thank you.

Thanks, Anna.

Our next question comes from Matt Stottler from William Blair. Matt, your line is open. Please go ahead.

Hey, guys. Thank you for taking the question. I guess for my question, you know, I'll just ask on the vertical bundles. I thought that was, you know, one of the really interesting things to come out of the analyst day. Any updates you can provide in terms of, you know, whether progress is building those out or initial interest that you're seeing in the market for those and how you kind of expect that to develop going forward?

Yeah, Matt, I'll take that one. And just for everybody, in analyst day we talked about, our evolution to a platform company, both the platform technology stack and how we think about platform as a company driving our future, uh, and, and expanding beyond within and beyond indirect tax. And part of the evolution of platform is having a solutions layer up top where, um, in the past, you know, we've built applications, SAS applications that we sell calc returns, you know, specific applications that leverage everything underneath it. That would be like our integrations, APIs, our content layer. And so what we want to do is we're API-ifying everything so that we and our customers can start to attach to those capabilities and build their own workflows. They can buy SaaS apps that are prepackaged or they can build their own workflows or complete apps. And what we want to do is have a solutions layer where we can reach down into the stack and we can configure solutions that are geared towards geographies, verticals, and other regional industries, basically, as verticals, so that we can have basically deliver more value to our customers and sell it in the way that they want to consume it. I would say that's early. That's just getting started. That is what we're doing and are executing on. But it is early. We do have designs around different verticals and what are the core components that they want. You know, what are the things that the baseline must have? What are the things that they're going to attach to it? But we still have some work to do in actually building those out as productized solutions and selling them in market. So I'd say stay tuned on that over the next, you know, bunch of quarters as we really build that out and get it into market.

You know, I just remind everybody that, I mean, tax, tax automation as we see it, it's a multidimensional problem. That's what's so cool about it, right? Because, I mean, your real question goes to one of them. And when we're solving this multidimensional problem, we're looking at tax types, you know, whether it be, you know, sales tax or... you know, whether it's communication taxes or alcohol beverage taxes, all of those different tax types. You also have geographies, and everything's a little bit different. Industries, which you alluded to with the, you know, the different segments. And then all the segments themselves, you know, enterprise, mid-market, and the like. And We're taking a comprehensive look at how we tackle each and every one of those dimensions. That's what I think makes it really, really special. It's a special industry to be in, and I think Avalara's approach to it is really one that I'm proud of.

That's great. Thanks again. Thanks, Matt.

Our next question comes from Daniel Jester from Citi. Daniel, your line is open. Please go ahead.

Great. Thanks. Good afternoon. Thanks for taking my question. I appreciate the color on the enterprise wins in the script. I was just wondering, are any of them cross-sells from TTR customers? And I guess just more generally, how is that cross-sell motion happening given the Fortune 500 customer base they have? Thank you.

So, I mean, the really short answer to it is yes. I mean, yes, it is, and the pipeline is building as a result of it. I mean, these are not deals, as everybody knows, in the enterprise world that they happen overnight. But the pipeline – I mean, some of these deals and many more in the pipeline are growing out of it because – These customers, they trust TTR. They are a part of their extended tax family, and as a result of that, Avalara is getting pulled into discussions that, frankly, we would not have gotten pulled into at this moment in our growth in that market. So it is a strong growth area for us.

Great. Thanks.

Our next question comes from Scott Berg from Needham. Scott, your line is open. Please go ahead.

Hey, guys. This is Josh on for Scott. So just digging in on the ERP trigger question, would you say you're seeing more activity from cloud-based ERPs driving business here in the quarter, or is there also a lot of activity from the legacy SAP and Oracle ecosystems driving opportunities as well? And is that creating the source of competitive takeaways from on-premise competitors? Thanks, guys.

Again, you know, the short answer on that one is yes. I mean, our – second quarter results, you know, for our core sort of established market around ERPs, you know, was a significant improvement than what we saw last year during COVID. I mean, a significant increase. And so, and that is a result of both new and existing, you know, businesses. And as a result of that new and existing, especially existing, it just puts a lot of pressure on, you know, the established markets of our competitors. And we're winning our fair share of those opportunities.

Our next question comes from Stan Zlosky from Morgan Stanley. Stan, your line is open. Please go ahead.

Hi, you have been on for Stan. Congratulations on the great quarter and thanks for your time. Can you sort of elaborate more on how we should be thinking about net revenue retention long term as you continue to expand upstream and also based on the back to back strong increases for the prior two quarters?

Yeah. Yeah, it's Ross. Let me, I'll give you some general commentary on NRR because we don't guide to it. As you can see, it's improved. In our analyst day in May, we came out with a revised metric, which we had been telegraphing for a while, that fixed the SST issue and moved it to subscription revenue and excludes professional services revenue. So, we're reporting both numbers for the rest of, for the rest of the year. We'll report both numbers so you have it. And both of them, you know, ticked up in Q2. pretty meaningfully. And I think, as we talked about last year, we hypothesized that in COVID, we had a little bit more churn than prior to COVID. Nothing scary, but a little bit more churn. And we had more downsell than prior to COVID. And we had hypothesized that there was a weight there on NRR, and that as we get through COVID, or as things improve, we hope that that weight would lift, and therefore the downside would alleviate, and our upsell bookings, in other words, selling more things to our existing customers, have been doing really well. And so you're seeing a quarter here where upsell bookings has been strong, and I think we're getting a little weight, a little less pull down on the downside in the NRR, and therefore it's improved. You also have, you know, the easiest comp year over year, to be fair, where Q2 last year, you know, had some tough things in it from COVID. So we're not guiding to where this is going to go. It's a little bit too early with the new metric. We've got to go a little bit more comfortable around things before we give you guys sort of a benchmark around it. But what I would say that we talk about internally, and this is really an ambition, this is really the sort of we believe we want to do, not a commitment statement, is we've got a lot more products organically and inorganically. We're mapping to the value chain of our customers, and we've showed in our analyst day how we've been able to raise the ASP per customer to new and existing. And so our ambition is to keep ticking that up over the longer term, not necessarily over next quarter. So I hope that gives you some guidance. It's definitely an ambition of ours to keep moving up.

Our final question is from Peter Levine from Evercall. Peter, your line is open. Please go ahead.

Oh, great. Thanks for squeezing me in. So maybe just one is, could you update us on your SI partnering opportunity? Obviously, you're big enough, or at least have enough influence with your customers that, you know, partners will want to get more involved. So curious how you, you know, see partners influencing your pipelines, close rates, or even expectations on kind of what they bring on the support service side. So just wondering if you get a little bit more color around that. Thanks.

Sure. From my perspective, Avalara was founded on the concept of being a partner-based business. That is one of the things that we prided ourselves on, and we never really want to be in a position where we're competing with our channel. From an SI perspective, I mean, it's one of those things that I've talked about. You know, we have to continue to expand that area, especially as we move up market. You know, our relationships become more and more and more critical, and our motion with them becomes more critical. And so, I mean... My instruction to the team and everybody is that we need to continue to push that both at the SI level and at the big four accounting level. So that is one of our big areas. And I've talked about how, as we move upstream, have to develop the muscle inside the company to work with what I call the royals. and the big four. So I think that we're making really good progress there, both in our product and in the talent that we're bringing into the organization and how we're moving upstream. So I'm really excited for that sort of phase of the business where the SIs and the big accounting firms play a much more important role in the business.

Thank you.

At this time, we have come to the conclusion of our Q&A session. So I'll now hand back over to Scott McFarland from the CEO and co-founder of Avalara.

So I'd like to take this opportunity to thank our employees, customers, and partners for their hard work and support for what I consider to be a gold medal quarter. You know, we look forward to talking to you all and hopefully seeing you all on the next call. Ross and I are back here in the office for the first time, and it's nice to be sitting across from you, Ross. Thank you. It's awesome. Thanks, everybody. Talk to you soon.

Thank you all for joining today's earning call. You may now disconnect your lines and have a lovely day.