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.