Avalara, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Avalara Third Quarter 2021 Earnings Conference Call. All participant lines are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. To withdraw yourself from the queue, press star 1 again. Thank you. I would now like to turn the call over to Jennifer Gianella, Vice President, Investor Relations. Please go ahead.

Good afternoon, and welcome to Avalara's third 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 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 acquisition. Our expected future business and financial performance and financial condition and our guidance for the fourth 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 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 25, 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 Q3 2021 earnings call. Q3 was another great quarter for Avalara, demonstrating the strength and durability of our business model. we reported Q3 total revenue of 181 million, representing an increase of 42% year over year, one of our strongest quarters in history. When combined with the first half, this was the best fiscal year-to-date performance in terms of revenue growth rate since going public. Our strong growth was driven by solid performance across the business and the addition of strategic acquisitions that we closed since Q4 2020. Even excluding acquisitions, organic revenue growth in the third quarter increased 29% year over year. Once again, I'm excited to see a very balanced quarter with success points coming from many key initiatives. Our success in attracting new customers across a wide range of industries, segments, and geographies is very exciting. We are winning large, multi-product deals and cross-sell wins from our acquisition. We also experienced strong customer retention and solid upsell activity. A great proof point is our revised net retention rate of 116% and our legacy net retention rate of 112%, which was the second highest since our IPO. As part of our growth strategy to expand our international reach, we are very pleased with the attendance and the excitement at our annual international flagship event Virtual Inspire 2021 in October. The event was a big success with more than 4,000 registrations from around the world, the largest in our history. The theme this year was Powering Global Commerce and was focused on empowering leaders with the knowledge they need to grow their business internationally. We believe that to dominate the future of global compliance and distance ourselves even further from the competition, We must have the best content powered by AI and machine learning, the largest number of partner integrations, and the most robust technology platform, not to mention best-in-class onboarding. As you can see from our year-to-date results, customers are choosing Avalara to streamline their tax compliance at a brisk pace, and our value proposition has never been more relevant. As further validation, we are honored to win significant independent third-party recognition from IDC, demonstrating the impact we are making in the industry. IDC recognized Avalara as a leader in three reports covering worldwide SaaS and cloud-enabled tax automation software for small and mid-sized businesses, enterprise, and value-added tax. Being recognized as a leader across all three IDC MarketScape categories further validates the pioneering innovation our teams are delivering to best serve our customers around the globe. Stepping back, we started our journey in the SMB market with aspirations to dominate all segments. Today, we are a leader in SMB, a massive greenfield opportunity, and minimally penetrated. And over the past few years, we have successfully invested in expanding our reach into the enterprise, small, and international segments. As I've said before, it's a long-term journey, and we have a bold vision to be part of every transaction in the world. Our leadership recognition validates what we've been saying over the past few years, and we fully expect that our position in these industry analyst reports will continue to grow our vision as i've mentioned before avalera is in a unique position to benefit from four major trends we are seeing impacting businesses of all sizes including 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 omni-channel commerce is a generational opportunity for avalera Businesses adopting or expanding e-commerce and marketplaces selling are excellent prospects for us as their omni-channel complexity and compliance exposure grows. As 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 for purchasing decisions with our prospects. Against this encouraging backdrop, growth remains our top priority. So we intend to increase our investments in problem and solution awareness. We know how this story ends. compliance will be automated our goal and our obligation as a leader is to accelerate the process of helping companies around the world understand their exposure and how they can address it with the leading cloud compliance solution status quo has always been our most powerful competitor and we intend to harness these catalytic trends and capture the future our customer wins our proof points that we are executing our strategy, including expanding our moats and building out our portfolio of offerings organically and through M&A. Here are just a few examples. We won a large enterprise deal with an iron products company for a deal value of $224,000, which includes annual recurring revenue, one-time software and services. We won the deal due to our pre-built integrations with several disparate systems, including a leading erp application a leading finance and operations application an accounting software package and a business process management application we also won an iconic american snack brand for a deal value of seventy five thousand dollars due to our ability to integrate through their entire quote to cash process including our integration with a leading finance and operations application and two separate commerce platforms next We won a large international multi-product deal with a UK-based sporting e-tailer for a deal value of $295,000, including cross-border duty classification, sales tax determination in 40 states, VAT, GST determination for the new European Union VAT regime called Import One Stop Shop, or IA, and the UK government's making tax digital, as well as access to our SST program. We continue to see success winning deals with our Avalara and TTR go-to-market strategy. As one example, we won an auto services company for a deal value of $48,000, including AvaTax, CertCapture, and our battery and tire content from TTR Tax Research. The competition under-delivered, so we brought in our TTR experts and took the deal away. additionally we won several competitive wins and takeaways first we won a competitive takeaway for a screen company for a deal value of 143 000 replacing an on-premise vendor we won this deal by having all the required products including avatax ptr research registrations cert capture and consumer use tax next We want an e-commerce platform for a deal value of $97,000, including AvaTax, CertCapture, and SST. The competition did not have an exemption solution, and the company had audit exposure for not being registered yet in any states. We want a nail products distributor for a deal value of $86,000, including AvaTax, Returns, and SST. We won this deal due to our pre-built integration with an e-commerce platform and our AvaTax integration with SAP ERP. We want a digital design company for a deal value of $154,000, including AvaTax, VAT calculation and cert capture. We won the deal due to our integrations with Shopify and our AvaTax integration with SAP ERP. Finally, We want a parking technology company for a deal value of $134,000, including AVA tax, TTR, and a future requirement for our SST program. The customer had a complex manual process for tax determination and couldn't find a vendor to fit until they met with Avalara and TTR. Among our cross-border successes was a deal with a commerce as a services company for a deal value of $133,000, including our AvaTax cross-border and our Avalara managed tariff classification offering. We won this deal by leveraging our strong partnerships with Shopify and one of the largest online marketplaces in the world. One of my favorite deals is with a vitamin company for a deal value of $78,000, including AvaTax, TTR Research, and SST in 23 states. The company was established only nine months ago and experienced rapid growth, but was managing the process manually and for only one state. This is a great example where economic nexus thresholds were broached quickly and a complex product with state-to-state nuances of taxability created the trigger to call Avalara to keep them compliant. We believe we've built one of the most defensible moats in all of software with over 1,000 signed partner integrations and growing. In fact, a recent IDC report highlighted our moat by stating, and I quote, Avalara's experience gained from thousands of customers using these integrations for years has made it a no-brainer for buyers to pick Avalara in competitive situations. That's why our strategy from day one has been to offer far more integrations with business applications than any other tax software provider. And we never stopped working to add more. We are continuing to expand and deepen our relationships with partners at all levels of our ecosystem. We have put ourselves in a leading position to expand our partner relationships across industries and tax types, and we are seeing new opportunities. As one example, We are excited to announce that we recently signed a partnership with a leader in enterprise management software for convenience retail and petroleum wholesale markets. This is a major win for Avalara. The company has agreed to rip and replace their own native reporting and returns module with Avalara's returns for excise as their OEM reporting solution and be jointly named, marketed, and sold to their enterprise customers in oil and gas. The company also intends to build a connector into our calculation and determination engine with initial plans to make this available to enterprise customers next year, giving us a brand new channel in which to sell our entire technology stack for energy into some of the largest enterprises in oil and gas. Also, on our analyst day in May, we announced that we entered into an agreement to assist Shopify in supporting their cross-border duties and tax solutions. I'm excited to share that as part of Shopify's recent Shopify markets launch, the duties and tax solutions are now available in early access. This is scaling nicely with targeted plans to be generally available to all Shopify merchants in the coming months. This solution enables Shopify merchants to classify their product catalogs with international tax codes and calculate cross-border customs duties and taxes at the time of sale. Recently, Shopify declared that now every merchant is global by default, and we are excited to help Shopify enable the future of global commerce. This new relationship is a great example of what I call the second wave of partnership deals for Avalara. These deals are with providers like e-commerce platforms, marketplaces, and payment processors, and they're being accelerated by the generational shift in e-commerce adoptions. It's really an exciting time for us because we've been building towards this watershed moment for years. It reminds me of when we were going after ERP vendors during the early days of the company. We knew we had to win those deals to solidify our position and lock out competitors. We are witnessing the same thing now in a second wave, where e-commerce, payment processing, and compliance converge. We saw this coming a long time ago, strategically prepared for this moment by building a track record of success and credibility over 17 years. We have used this strategy to get ahead and stay ahead of our competitors in the past. And we believe we are going to win with it again. We also continue to advance 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, inject talented new personnel into our business, and extend our geographic expansion. At our May Analyst Day, we highlighted potential additions to our product family to expand our offerings. I'm pleased to announce that we've entered new areas of compliance automation, including 1099s, W-9s, and property tax. We started with our roots in sales tax calculation and added returns and continue to expand into other indirect tax types over the last few years. Today, we are moving beyond indirect tax into areas of direct tax, such as 1099s and property tax, increasing our TAMs as we build the most robust compliance platform in the market. To expand our range of compliance solutions, we acquired Track 1099, a provider of online software and services for cost-effectively managing, e-filing, and e-delivering IRS forms, including 1099s, W-2s, W-9s, and more. Track 1099 supported more than 40,000 customers with their filing needs in tax year 2020. By acquiring Track 1099, we are adding technology, content, and expertise to our platform and team. We are delighted to welcome founder Lindsay West and the team at Track 1099 to the Avalara family. Next, we acquired the assets of Crowd Reason, a developer of SaaS-based property tax compliance applications, as well as a related property valuation and advisory service business to help solve property tax challenges. According to the US Census Bureau data from 2018, state and local governments collected a combined $547 billion in revenue from property tax, or 17% of general revenue. Property tax revenue as a percentage of state and local general revenue was higher than each of the general sales tax revenue, individual income tax revenue, and corporate income tax revenue in 2018. We are delighted to welcome founder Carl Hemke and the team at Crowd Reason to the Avalara family. Adding property tax content and software to our global compliant portfolio extends Avalara's footprint into a large and exciting new tax type. We believe our customers and partners will value our platform for end-to-end compliance automation and the consolidation of 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. We continue to bring talented leaders with diverse backgrounds onto Avalara's board of directors. I would like to welcome global finance leader, Marcella Martin, to our board. Marcella is the chief financial officer of Squarespace, where she oversees the company's finance and corporate development functions. Marcella brings more than 25 years of global finance and leadership experience across consumer technology, software, SaaS verticals with high growth companies to Avalara's board. Her expertise in streamlining operations and M&A integration combined with her experience guiding strategic operations during periods of growth will add tremendous value to Avalara's board of directors. I am proud that Avalara's board is quite diverse. Today, more than a third of Avalara's board is made up of women. In addition, two out of three Avalara's board committees are led by chairwomen. 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, 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.