Avalara, Inc.

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Avalara fourth quarter and fiscal year 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. And to withdraw your question, please press star one again.

Thank you, Jennifer Giannola, Vice President of Investor Relations. You may begin.

Good afternoon and welcome to Avalara's fourth quarter and fiscal year 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 Security Litigation Reform Act of 1995. 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 conditions, and our guidance for the first quarter and fiscal year 2022, 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 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 on 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 Q4 2021 earnings call. I would like to congratulate the entire Avalara team for an outstanding performance in the fourth quarter and fiscal year 2021. 2021 was another terrific year for Avalara. We accelerated our top line growth, reporting total annual revenue of 699 million, an increase of 40% year over year. With our first ever annual positive non-GAAP operating income of $6 million. Even excluding acquisitions in 2021, organic revenue growth increased 29% year over year, consistent with the prior year's organic growth. We also reported free cash flow of $13 million, our third straight year of positive operating and free cash flow. Reflecting on the last three years since IPO, I'm proud of our team for delivering a 37% three-year revenue kegger, and consistent operating results that exceeded expectations in good and challenging times. In 2021, we added several exciting milestones. We achieved our first-ever annual non-GAAP operating profit. We crossed over 100,000 in total end customers. We were recognized as a leader in all three IDC MarketScape reports on global cloud tax automation. We delivered more new products and capabilities than ever before in our history. We expanded our relationship with Shopify to power cross-border duty and import tax features of its global commerce hub, Shopify Markets. We achieved the largest attendance ever at our virtual crush, and we issued nearly $1 billion of convertible notes, providing ample financial flexibility for the large opportunity in front of us. As we approach $1 billion in annual revenue run rate, we are excited about our opportunity to leverage our growing scale, competitive moats, and ubiquity in the market to establish Avalara as the standard cloud platform for compliance. Our thesis and vision have not changed. We remain a leader and category definer in a massive global market driven by statutory requirements. and with enviable tailwinds tied to the adoption of cloud, e-commerce, ROI, and regulatory. We believe that over the long term, every business will adopt tax automation. We are early in this journey, and we believe we are best positioned to capture the leading share. As we look forward to 2022, it feels as though we have more opportunities to capture than in prior years. Here are some of the opportunities that I get excited about. After 18 months of aggressively building and buying content and products, we have a significant opportunity to cross-sell more products to our large customer base. It feels like we are entering our second wave of partnership opportunities where many large players from across the ecosystem are more focused on what we do. This opens exciting opportunities with new partners and potentially large expansion with existing partners. In addition to our core SMB market, we continue to expand our reach up market to large enterprises and down market to smaller businesses. And building on our 2021 success in international, we have opportunities to expand our presence and our product portfolio in existing and new markets. We believe compliance automation is inevitable. We are right where we want to be in our journey, and now we must continue to execute our strategy and drive towards our vision of becoming a global, category-defining, cloud-compliant platform. I love talking about our customer wins. I believe they exemplify our leadership position, which has been built on years of investing in our differentiated strategy. They speak volumes to the value of our competitive moats including how our content, broad product portfolio, and more than 1,200 signed partner integrations help us win competitive deals across nearly every size segment, industry, and geography. Over the years, it's been exciting to see the evolution of our customer wins, including larger deal values, more deals with multiple products and integrations, and more global customers. Here are just a few examples. During the fourth quarter, we want enterprise deals with a diverse group of companies. First, we want an enterprise deal with a florist company for a deal value of $300,000, including annual recurring revenue, one-time software, and services due to our integrations with disparate systems, including ERP, point of sale, and commerce platforms. Next, we want to deal with a boating supply company for a deal value of $180,000. After discovering serious license exposure, the company selected us to package an end-to-end license management and compliance offering built on the assets we acquired from our 2020 business licenses acquisition. We won a tree wholesaler and a multi-product deal for $238,000, including Avatax, certificates, returns, and our SST program. We won this deal due to our integration with the leading ERP applications, and our relationship with a global software and consulting partner. Finally, we want to deal with a financial services company for $99,000. The company is operating in 11 states, and a recent audit led to a negative judgment. We won this deal due to our pre-built integration with a leading ERP application, coupled with a strong recommendation from one of our business transformation partners. Additionally, we compiled several competitive wins and takeaways. We won a competitive enterprise deal with one of the leading distributors of air conditioning and heating supplies for a deal value of $215,000, including AVA tax, consumer use tax, and exemption certificates. We won against the competition due to our embedded integration with a leading business software application. Next, we won a deal with a vehicle services company for a deal value of $170,000, including Avitax, Consumer Use Tax, TTR Research, and CertCaps. We won this competitive deal due to our unified product offering, TTR Research, and our integration with a leading accounting and finance software application. We won a competitive takeaway deal with a global industrial company for a deal value of $100,000, including Avitax, CertCapture, and TTR Research. We won due to our partner integration with a leading ERP application for global manufacturers and superior technology and feature sets. Finally, we won a competitive takeaway exemption certificate management deal with a multinational conglomerate for a deal value of $231,000. The company wanted a better solution and was impressed with our eCMS platform. We have great examples of customers experiencing rapid growth that triggered the need to move away from status quo, manual processes to tax automation. First, we want to deal with the restaurant chain for a deal value of $147,000 for our licensing managed services. Thanks again to our business licenses team. The company was tracking licenses manually, and the rapid growth exceeded their ability to keep up with demand. triggering the need for a cloud-based solution that replaced Excel spreadsheets. We also won a diversified power solutions provider for a deal value of $53,000, including AvaTax and CertCapture. We won this deal due to our integration with the leading ERP application and our CertCapture offering. The company has been using manual processes for exemption certificates, and its rapid growth triggered the need to automate compliance. On the international side, we want to deal with a fast-growing tech company based in Spain for a deal value of $350,000, including Avitax, VAT Reporting, and India GST, beating out the competition. This win is a great example of why our portfolio of products matters in the world of global commerce. We want a multinational Indian conglomerate for a deal value of $40,000, including Avitax, cross-border, and returns. opening the door for more opportunities in the future. We won this deal due to our integrations with a multinational ERP application and a leading enterprise commerce platform. Finally, we won a UK-based fashion retailer for a deal value of $309,000, including Avitax cross-border and returns with future opportunities, including TTR research and business licenses due to our integrations with an e-commerce platform and a leading cloud ERP system. As demonstrated through our customer wins, Avalara's partner mode continues to be a key differentiator, especially as businesses shift to omni-channel and seek a single tax compliance platform that can integrate into multiple disparate systems. That's why we continue to enhance our partner mode by actively forging new relationships that enable us to offer integrations with more business applications and exposure to potential customers. We offer far more pre-built integrations with these applications than any other tax software providers, and we plan to continue adding more. Our total number of partner integrations, including all of those that have been signed but are not yet live, has increased to 1,200. With that, today we are excited to announce several new partner deals. These new relationships are great examples of what I call the second wave of partnership deals for Avalara, building on the first wave of ERP deals during the early days of the company. First, we signed a multi-year partnership with an industry-leading online payroll and HR solutions company, expanding our reach to over 50,000 small and mid-sized accounting practitioners. This deal positions Avalara for Accountants, our recently launched suite of tax compliance tools, as the sales tax technology solution of choice for accounting practices. We signed a multi-year deal with one of the largest point of sale providers in the market, servicing many verticals, including restaurants, banking, retail, and hospitality, supporting thousands of locations. Next, we signed a tax services partnership deal with an international cloud-based accounting provider to build and offer a joint sales tax solution to small businesses in the United States. Today, this partner has over 200,000 customers in the United States and growing. We are excited to announce that the Davo team we acquired last year signed a partnership deal with a leading restaurant and accounting bookkeeping company for small businesses with 1,900 locations. After evaluating our solution, this partner saw the return on investment immediately and chose Avalara to be the tax automation engine powering their sales tax function. Finally, we signed a deal with a large American multinational shipping company covering 5,000 stores. We were selected to help the company achieve their goals of increasing accuracy of sales tax automation at their point-of-sale locations and reducing the risk of liability in an audit. We believe these deals are just the beginning of more partnerships to come. We are engaged with providers like e-commerce platforms, marketplaces, point-of-sale providers, and payment processors, and they are being accelerated by the generational shift to e-commerce. We have 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, and we are succeeding and winning head-to-head deal. To further expand our moat, software developer engagement is a key focus area for Avalara. Software developers who build integrations that connect solutions and services into various business applications represent another essential partner segment for Avalara. That's why we're holding our second annual virtual developer conference called Avalara Net in March, where we bring together developers from all over the world at the forefront of global commerce and tax technology. Also, I want to remind you that we'll be hosting our virtual global crush in May 2022. We will provide more details in the coming weeks. We hope you'll be able to join us at this event. We believe we are building the most robust compliance platform, And 2021 was another milestone year for advancing our vision, both organically and through M&A. I'm pleased by the early contributions from recent acquisitions. Our two largest acquisitions, PTR and business licenses, exceeded our expectations in 2021. We are entering 2022 with the strongest portfolio of products that we've ever had. including more great technology, content, and talented teams that we acquired over the last year. Going forward, we will continue to aggressively pursue and grow our core business in indirect tax through organic investments and M&A. We expect M&A will be an important contributor to our international growth plan. 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 a statutorily required function. We're excited that we're approaching a billion dollars in annual revenue run rate and believe we can grow and scale Avalara into a multi-product, multi-billion dollar revenue company over time. Thank you. I will now turn it over to Ross.

Thanks, Scott. We were very pleased with our full year 2021 results that exceeded our guidance throughout the year. I was particularly pleased to see our durable compounding growth story continue. We are building a great long-term business and are still very early in our journey. Despite the pandemic, we were able to consistently deliver 29% organic revenue growth in 2020 and 2021, showing no deceleration. This resulted in 699 million in total revenue, or 40% total year-over-year growth, including M&A. We coupled that with our third straight year of positive free cash flow and a new milestone of achieving positive annual non-GAAP operating income. Q4 exceeded our guided metrics and was again driven by balanced execution across the business. Q4 total revenue was $195.1 million, up 35% year-over-year, or up 27% after excluding revenue from acquisitions since Q4 2020. Subscription and returns revenue grew 34% year-over-year to $177.1 million or up 28% excluding acquisitions and represented 91% of our total revenue. Professional services revenue was $18 million, up 48% year-over-year. Our core customer count increased by 870 from the previous quarter to approximately 18,270 at the end of Q4 2021. a year-over-year increase of 22%. Our core customer count under our previous definition increased by 830. Our net revenue retention rate was 116%, unchanged compared to 116% last quarter, resulting in a 115% four-quarter average. Our NRR under our previous definition increased to 113%, the second highest result since our IPO, resulting in a 110% four-quarter average. Core customer revenue grew 26% year-over-year to $155.4 million in Q4 and grew 28% for the year. Q4 revenue from non-core customers grew 32% year-over-year to $20.2 million, primarily driven by strong growth in EMEA, and grew 39% for all of 2021. Q4 revenue from acquisitions made since Q4 20 was $19.5 million and $62.2 million for all of 2021. 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 $142.1 million in Q4, representing a 73% gross margin. This compares with gross profit of $107.7 million and a 74% gross margin in the same period last year. Subscription gross margins were 75%, down from 76% in the same period last year. The year-over-year impact on gross margin was driven by new acquisitions as well as higher hosting infrastructure costs. Sales and marketing expense was $75 million in Q4, or 38% of total revenue, compared to 37% last year. The increase in sales and marketing is a reflection of our desire to continue investing in our go-to-market motions to take advantage of the large market opportunity. Q4 research and development expense was 38.8 million, or 20% of revenue, down from 21% of revenue in Q4 20, but included a higher benefit from capitalized software in the current quarter versus the prior year. Absent the increased capitalization, Q4 R&D expense would be roughly in line with the year ago comparable period. Q4 general and administrative expense was 26.6 million, or 14% of revenue down from 17% of revenue in Q4 20. Q4 operating income was 1.7 million, which was better than our guidance, largely as a result of strong revenue and some expense favorability. Q4 net loss per share was 6 cents in the quarter based on 87 million shares outstanding. Total deferred revenue at the end of Q4 21 was 283 million, up 35% from 209.7 million at the end of Q420, and up 34% year-over-year, excluding acquisitions since Q420. 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 liability. Calculated billings was $217.8 million in Q421, up 30% year-over-year, and up 25% year-over-year, excluding acquisitions since Q420. On an adjusted basis, when we flew the impact of our large EU marketplace partner, our organic calculated billings was a consistently strong 29%. As a reminder, in Q4, we evolved our contract with this partner, resulting in lower volume-based pricing and a switch from annual to monthly billings over the course of 2022. These changes are intended to improve the customer experience and increase adoption volume. As you know, We don't guide the billings, but as you think about your 2022 billings, please keep in mind that the changes to the agreement may impact our billings growth rate by a few percentage points, while the impact of the new pricing and billings frequency normalizes. We remain excited and believe we are still early in our journey with this important partner and believe there are additional opportunities to expand our relationship by supporting them with a broader range of compliance offerings and across more jurisdictions. Free cash flow was $18 million in the fourth quarter compared to $28.6 million in the same quarter last year. For 2021, we achieved free cash flow of $12.7 million compared to $34 million for 2020. As we have stated on past calls, our free cash flow will fluctuate from quarter to quarter caused by many factors, including the timing of working capital, the seasonality and levels of our billing and expenses, as well as our overall level of investment in the business. Our cash and cash equivalents were 1.5 billion at the end of Q421, an increase of 840 million from 674 million at the end of Q420. Looking now at our fiscal year 2021 results, total revenue of 699 million was up 40% year-over-year, or 29% after excluding 62.2 million in revenue from acquisitions since Q420. Subscription and returns revenue contributed 633.1 million, This represented 91% of our total revenue, and it grew 36% year-over-year, or 29% excluding acquisitions. Professional services and other revenue contributed $65.9 million. Gross profit was $513.7 million for 2021, representing a 73% gross margin. This compares with gross profit of $368.5 million and a 74% gross margin in 2020. We were very pleased to have achieved, for the first time, positive operating income of $5.5 million in 2021, which compares with a $3.1 million operating loss in the prior year. I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q1 and for the full year 2022. We are excited to be entering 2022 coming off a 31% organic billings and 29% organic revenue growth year. Our thesis and vision have not changed. Avalara is a simple story. In the long run, like other required back office functions such as payroll, we believe every company will automate their tax compliance. We are addressing a large, low penetrative market where we are a leader in the space with competitive moats and a differentiated business strategy. We are positioned to capture a leader's share of our market opportunity. We believe this position translates into durable, long-term, organic revenue growth of 20 to 25%. as we continue to pursue a multibillion-dollar revenue business. In recent years, we have outperformed our long-term growth objectives. We will continue to strive for outperformance as we scale the business. For 2022, there are several growth initiatives where solid execution can help us achieve outperformance, including new customer acquisition velocity, cross-selling new products to our vast customer base, sustaining international growth and expanding into new regions, and closing key second wave partner opportunities. Taken all together, our growth algorithm gives us confidence that we can deliver another strong year. For the full year 2022, we expect total revenue between 854 and 859 million, which represents a 23% year-over-year growth rate at the midpoint of the range. We expect our full year 2022 non-GAAP operating loss to be in the range of 17 to 21 million dollars. We are proud to have delivered positive free cash flow in each of the last three years and positive operating income in 2021. Our 2022 guidance reflects our view into numerous attractive investment opportunities that support our long-term growth thesis. We expect 2022 professional services revenue to be around 9% of total 2022 revenue. We expect 2022 revenue seasonality to be generally consistent with prior years. We expect 2022 total non-GAAP gross margin to be similar to our 2021 results of 73.5%. This reflects an increase from our ongoing automation efforts, countered by a decrease from recent M&A and new product efforts, and work required by some of our exciting new partner relationships that require our solutions to run on another cloud infrastructure. For Q1 2022, we expect total revenue between 197 and 199 million, which represents a 29% year-over-year growth rate at the midpoint of the range. We expect our Q1 non-GAAP operating loss to be in the range of $9 to $11 million. Please note that similar to prior years, we expect a significant Q1 cash outflows for bonus payments, software and insurance renewals, and other large expenses. 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 compliance 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-shifting regulatory environment, make it even more difficult to maintain tax compliance without automation. At the same time, we are continuing to evolve to a platform company, driving an increased supply of products and capabilities, which will deliver even more value to our customers. We also continue to invest to win additional segments and geographies so that we can continue to compound growth for the long term. Please note, we will participate in upcoming conferences, including JMP and Morgan Stanley in the first quarter. Thank you for participating in today's call. At this point, we would like to open up the call for your questions.

As a reminder, if you'd like to ask a question, please press star then 1 on your telephone keypad. Our first question is from Brad Sills with Bank of America Securities. Your line is open.

Oh, great. Thanks, guys, for taking my question. And I wanted to focus a little bit on, you know, reopening. uh there's been a lot of discussion around what impact that may or may not have on on software uh in the industry and just curious what are your expectations as we get into that i think e-commerce is a focus here uh there's there's a decent amount of underlying uh transaction volumes that drive your business so maybe even just if you could drill in on e-commerce versus erp upgrades how do you expect those two drivers to kind of um you know trend as we get into reopening

Hey, Brad. Let me jump in that. Ross can give some color if he wants after I'm done here. But look, I mean, we've always said this about Avalara. I mean, we're a good company in good and in bad times, right? I mean, a low beta business. And as, you know, with the emergence of e-commerce and all that has gone along with that, I mean, we've seen a lot of opportunity come out of that. But we're secondary to it, right? It has to develop, you know, around the world. It has to develop with our partners. And then we come along behind that. And so it's a long-term growth program for us as we continue to work with those partners to grow. So we see e-commerce as an important part of our business moving forward in 2022 and beyond. It's just, it's not going to, we do not see it as a decreasing, you know, program. As a matter of fact, we see it as one of the big drivers of our business as we move forward. That's great, Scott. Thank you so much.

And then, yeah, go ahead. No, I was just going to say, like, Like 2020, pandemic hits and everyone's worried about software and it's slowing down and software did great and we did really well and did almost 30% growth that year. And then e-commerce did well for us. Other things did well. And then 2021, people worried that things were going to slow down. Like we were tied to e-com and it was going to slow down with others. And we posted the same growth rate. We did 29% organic both years. So it's just like a strong position to be in. I think it goes to Scott's point that, you know, we're a consistent business that can compound growth, good times and bad. And, you know, we're at the center of that, those four forces we always talk about, e-comm, cloud, ROI, and, you know, regulatory change. And I think those continue to be there in 2022. And e-comm will be good. And, you know, ERP is important. And there's a lot of opportunity out there for us.

That's great to hear. Thanks, Ross. And then one more, if I may, please. You mentioned focusing on investment in added geographies and segments. Could you drill into a little bit there, just a little bit more detail as to, you know, which geos and what are some of the segments that you're focusing on this year as far as investment? Thanks so much.

Yeah, Brad. Look, I mean, we've talked about this pretty consistently. I mean, you know, we see, you know, we're single-digit penetrated in this huge SMB market. So, I mean, one of the things that I'm excited about this year is to continue to focus in on that. But having said that, I mean, there is opportunity for us as we intentionally move upstream into the enterprise world. I mean, that's something that we're going to continue to do. And I think you saw that a little bit or heard that a little bit in my comments about the deals we're winning. Likewise, I mean, you know, our DNA is in partners. I mean, that's something that we just, you know, we thrive on. And the SMB world is ripe for that, right? And we talked a little bit about that in my earnings script. So I see those two as just sort of that's what we always do. Now, moving beyond that internationally, you know, we see huge opportunity in growing what we do in EMEA. You know, we've really had a good go of it in UK and some of the other countries, but we can expand that even more to more of the countries in EMEA. And then, you know, we have a big presence in India, and we're going to continue to use that presence to grow our sales business there. And Brazil has been a great place for us to, you know, be a beachhead for us in LATAM. So what I think you'll see us internationally is to continue to focus on the things I just talked about. But we'll start to do exploratory work in putting, you know, our BD and product management people in country in some of the other countries in Asia and LATAM. So we can start to build that out. Because, I mean, developing these markets, it's not a single year journey. It's a multi, multi-year journey. And we want to start that, albeit small, but growing outside of the areas that we're in today.

That's exciting. Thanks, Scott. Our next question is from Gabriela Borges with Goldman Sachs.

Your line is open.

Hi, this is Kevin Kumar on for Gabriela. Thanks for taking my question. Curious on the enterprise go-to-market. As you invest more sales resources there, How is the surround strategy impacting the types of conversations you're having with customers? And are you starting to see a broadening of the use cases within enterprise?

Thanks. Good questions. So, like I said, you know, we've been – more intentional than we've ever been in our enterprise space. That comes with growing out our products, growing out our feature sets, as well as building out the sales force. I have to say our sales force is probably the most mature aspect of what we're doing in enterprise today. When we talk about enterprise, you have to be careful because there's the Fortune 1000 And then there are all the companies that need compliance that can spend a lot of money. Some of those you heard today, 300,000, 350,000, and those are not household names. So our team is pretty adept at selling those. We're growing out our product. But what I think one of the biggest areas that we continue to grow is build out our team of specialists and getting a better understanding around how you sell with the sales engineer in motion, and how you work with the big customers and the big partners that are out there. And that's a long-term journey for us, and we continue to grow on it. And I think as evidence about, as the script said in some of our use cases, case wins that we had, I think we're expanding in all areas. I mean, you could just see it. All industries, all geographies, you know, from an omni-channel perspective is where we really shine. And I think it's highlighted by, you know, the customers that we talked about today. So I expect to see more of that. I expect us to get better at doing that over the years to come. So I'm really excited about where we are and how we can grow enterprise.

Great. And then regarding the 2022 operating guide coming in, I think it's slightly negative. How should we think about investment priorities between product and go to market this year and just the general cadence of hiring throughout the year? Thank you.

I wanted to jump in on that one.

Yeah, I mean, I think where we're focused, our investments is a lot in sales and marketing. So I think as we talked about last quarter, you'll see a little bit of a deleveraging in sales and marketing as a percent of revenue as we focus on some of these opportunities we've highlighted. We've got a huge opportunity with some of these partners, what we're calling the second wave of partners, new partners and expansion of existing partners. And so we are expanding our investments around those teams and functions. We've got a lot of opportunity to expand in international new countries and geos. So we'll be expanding investments there. And then you know, cross-sell, up-sell, and just getting the, you know, organization aligned, the teams aligned, and the investments required to hit that opportunity. We've got, you know, a tremendous amount of new products and a great opportunity. We have over 100,000 end customers. We hit that milestone last year, total end customers. It's a lot of opportunity to sell more products to these customers, and so we're investing in that. So you'll see that in the sales and marketing line. R&D is the percent of revenue which should stay somewhere similar as last year. We're going to continue to you know, invest at the same level, but that's, you know, that's a high-level investment as we continue to build out the platform. It gives us opportunities for future growth. You know, we always think that it allows us to really build something special in the global compliance platform and start to pull away from the competition. So we like that a lot, and those are the two main areas, with sales and marketing being the key one that will increase year-over-year.

You know, I'll just...

follow on with what Ross said because I think it's really worth mentioning. I mean, this is a huge market with just enormous opportunities and the things that we focus on is, you know, is being as focused as we possibly can in this world where there is so much opportunity. And so when Ross talks about, you know, multi-products and cross-sell, big opportunity for us. Get, you know, immensely excited about that. But I can't, I just can't emphasize enough how exciting it is when you see the second wave of partners. Like I said, partnerships are in our DNA. It's who we are. It's how we shine. The world economy and all that's happening is really driving a lot of business opportunity around that. I just feel like it was back in the day. It's an exciting opportunity. Then you have international to focus on. And this doesn't get said enough, but I think a lot of our investment is around how we wow our customers and our partners and how we build out our people and culture. So you've got all those exciting opportunities, but there's just reality around you've got to take care of your customers, your partners, your people, and all of those constituents. And so it's an exciting year for us, and I think there's lots of opportunity to do some great things.

Appreciate the call. Thanks. Our next question is from Brent Braceland with Piper Sandler. Your line is open. Brent Braceland with Piper Sandler. Your line is open. We'll move on to the next question, which is from Matt Stadler with William Blair.

Your line is open.

Yeah, hey, thanks for taking the questions. I guess first, you know, we'd love to maybe get an update on, you know, when thinking through some of the, you know, TAM expansion opportunities here. Obviously, you've made some recent acquisitions that get you more, you know, expand out of the initial indirect tax landscape into more direct taxes and other types of taxes. Any updates on how you're thinking about how those opportunities expand your functional TAM and any early traction or thoughts on how that progresses going forward?

yeah i mean um uh at the at the highest level at the highest level you know i always talk about this right you know the four horsemen attacks you know those are the things that you know that everybody has to do you know it's sales tax use tax you've got exemptions and you and you've got returns i mean that is what the what avalara has been based on you know that's where the majority of our our revenue is today but um as we've talked as you as you talk i mean we've we've really started to expand outside of those four things into transactional tax in indirect taxes as well, you know, that, you know, doing cross border, doing a whole host of things like business licenses and, and then just, you know, research TTR research. And so, you know, like I said, I mean, we really want to focus and bring focus to making sure that we are expanding those areas as much as we possibly can. We've explored beyond those areas and early innings in going outside of indirect tax. And those have huge TAM implications. I mean, we know that those are big. We know that those are areas that we're going to continue to grow. But as I said with one of the other earlier calls, I want everybody to know that we are really focused on that indirect area because, I mean, there's just so much opportunity there. When I look at beyond indirect tax, I look at that as future-proofing the business. We can take care of the business and grow the business with indirect and future-proofing the business with other compliance opportunities. And we're going to be proving out that thesis, you know, in this year and the years going forward. But I expect them to be big contributors, but not just immediately. So we're going to grow them like we do all of the other ones. We'll continue to push that. But I want to make sure that we're really focused on, you know, what we do really well and with the opportunity in front of us in indirect tax.

Right. Got it. That's helpful. And then maybe just one more, looking at the enterprise investments and specific to go to market, obviously you have this great kind of partner-driven motion that works very well in the SMB segment, the mid-market segment's been getting you guys into the enterprise as well. But you've also talked about kind of building out more white-globe services for those customers. They tend to like that higher touch in some cases. Any update on how you're thinking about, you know, building out those kind of white glove resources and that, you know, I guess more intense, you know, services model upmarket?

Sure. Like I said, I mean, I think from a sales perspective, I think we're, you know, pretty well, you know, set. We're going to continue to grow that, and that will evolve over time. When it comes to the white glove services, you know, I mean – That's where I think that build out of the team that I was talking about, you know, your tax technologists, the people that are there both involved in the selling process, but also in the support implementation process. But I want to point out that we are a partner-driven company. And, you know, moving into the enterprise space, we want to do that in conjunction with partners. It's not something that we want to do on our own. You know, we believe in the partner model, and we want to utilize, you know, partners in doing that and joining us in that white glove service. So it'll be, you know, us, we may take the lead, but our partners will be right there next to us in providing that. And that's a motion that, you know, we want to continue to, you know, learn and grow and develop. And that will happen over the coming years.

Got it. Understood. That's helpful. Thanks again.

Our next question is from Siti Panagrahi with Mizuho. Your line is open.

Thanks for taking my question. So you talked about the second wave of partnership deals. So Scott, help us understand how long it takes usually when you do this kind of investment with partners. When do they start contributing to revenue?

You know, so they take a while to develop. And you started to see it, you know, I mean, you started to see it with Shopify. And I'll just talk about that in general. I mean, that was a company that we, you know, that came out of our emerging group, if you can imagine, right? It was, I mean, hardly anybody had heard about it. You know, we started developing it with them. We started, you know, going to market with them. And that's been a six-plus year journey. But then they start to hit their stride. We start to hit our stride with them. And we continue to grow. But then once you get that, then you get second opportunities, and third opportunities, and fourth opportunities. And what I mean by that is that you get a cross-border opportunity that we announced last quarter. And that starts to bring more and more revenue. Then you start to expand it even further to get a larger portion of their business. And then that continues to expand it even more. They feel comfortable with it. You get a little bit more integrated in with their solution. And then finally, you've really got something that's developing. And we see that with almost every one of our partners. I mean, whether it be in the beginning with the Sages and the Epicores and the Microsofts, or now with e-commerce, payment processors, POS, and the like. So, yeah, you will always get a bump from them early on, but what you hope is that that bump continues to grow and expand beyond that, and then it's a really significant partner.

That's how we see these developing.

Our next question is from Brad Reback with Stiefel. Your line is open.

Great. Thanks very much. Ross, I think last quarter, as you talked about the sort of evolving relationship with your European e-marketplace customer, that they had stopped sending volume of sellers to you for a period of time. Now that you've renegotiated that deal, have those volumes picked back up, and are they running it where they were pre-renegotiation? Thanks.

Yeah, hey, Brad. Thanks for the question. So, I mean, I'm probably not going to get in the habit of talking about the volumes every quarter, you know, for one partner that's, you know, less than 4% of revenue. But, you know, we did work through the contract change, and just a reminder to people, it's meant to drive adoption. And at the end of the day, we're aligned on the same cause, which is that there's statutory requirements to be compliant with that for all these marketplace sellers, the merchants. And we and the partner want to get everybody compliant, and we want to get as many as we can on our platform. And so to do that, you know, there's the customer experience element, there's the pricing element, and then there's the, you know, the billing business model element. And so we've made some adjustments to go, you know, from annual to monthly billing. We think that that will help with the experience. It's what the customers want. You know, they hit a new volume tier, so that brings the pricing down. And so all of that is playing out as we discussed last quarter. And I think as we talked about, it'll have some impact on revenue. That's reflected in our guidance. And we said it'll have a few points impact on billings growth because billings gets impacted by pricing and by the duration change. And obviously the duration change doesn't impact MRR or the economics. It's just the duration change. So overall, Brad, like what I would say is, you know, this is a really important partner. We have a lot of opportunity with this partner within the business that we're doing already. And then there are other opportunities outside of that business. And we think there's a long runway to do a lot more with this partner over the years and continue to grow that business. And the last thing I would say is we're not depending on them. It was $27 million of revenue last year. It's less than 4% of our total revenue. We're not dependent on them. And, you know, we've got over 1,200 signed partners. We're diversifying in the EU. So it's good business, and, you know, we'll work through this. It's not that huge, you know, an issue, and we're excited about all the opportunities we have with this partner and with other partners in the international realm over time.

Our next question is from Stan Zlotsky with Morgan Stanley. Your line is open.

Hi, guys. You have Ben Nassodi on for Stan. Congratulations on a strong quarter and pipeline for the upcoming year.

Just could you talk about what the revenue and billings growth is excluding their European marketplace business?

So on the billings growth excluding the partnering Q3 and Q4 were both 29%. For revenue, it's pretty close to the same, so I wouldn't worry about revenue. But for billings, 29% in each of Q3, Q4. Organic, excluding the impact of the partner.

Got it. And then one more follow-up question. Can you just provide us with an update on... your relationship with the big four and any possible pipeline that build up that partnership is introducing in the near term?

So I alluded that in some of the other conversations here. I mean, that's one of the journeys that we have to go forth with the enterprise space. I mean, we have a nice relationship with them. uh you know it hasn't been our you know number one area enterprise so you know we've got some grounds and some some work to uh uh to do with them to you know you know get up to the their full potential but we see them in many deals right we see that mean you know we're we're with that with them with many deals you know uh and and i think one of the other questions was is our surround strategy You know, it does work, right, because, you know, we see the big four and, you know, exemption certificate customers, you know, the big customers in excise fuel, you know, most of our strategic products, you know, many of the deals. So, I mean, I would say we're doing well with them. The pipeline is building. We see a good relationship with them. But, you know, frankly, I mean, that's an area that we want to continue to grow and get better at as we develop that enterprise space. You know, I'm pleased with where we are, but there's always room for improvement.

Our next question is from Brent Braceland with Piper Sandler. Your line is open. Great. Can you hear me? Hello?

Hi, Brad. Oh, good. Hey, Brent. Hi. Sorry. Just making sure you can hear me there. Good afternoon. Thanks for the question here. I'm going to ask one question, and I'll direct it towards Ross. I think it's interesting. A year and a half, two years ago, the Wall Street narrative was, well, how much can commerce and e-com be a big driver for Avalara? Conversely, now people are a little worried about exposure to e-com. So, Ross, could you just maybe – put a finer point around what is Avalara's exposure to e-commerce today as we think about some tougher compares in the first half of the year there and how we should think about the Avalara kind of exposure to higher or lower volumes given part of the business is volume dependent, part of it is more subscription dependent. Thanks.

Yeah, I mean, it's a great question, Brent, and I just think were a lot more insulated from the ups and downs of the, you know, GMB pure e-commerce models that a lot of people watch. And, you know, it's funny, and we've talked about this. You go back in 2020, everybody was like, oh, you know, you're not going to do well because of the pandemic. And then we did well, software did well, and it was like, oh, you benefited from e-commerce. And then in 2021, everyone was really concerned that we and others were going to slow down as a result of e-commerce starting to slow down in 2021. And, you know, again, I just highlight something we're really, really proud of. You know, we did 31% organic billings for the year last year, and we did 29% organic revenue growth last year, which was the same as the prior year. So 2020, 2021, we did 29% organic revenue growth. You know, very, very consistent, no deceleration in a year where everyone was worried that, you know, did you pull forward demand? Is it going to slow down? What's your exposure to e-commerce? And as I look forward into 2022 and beyond, e-commerce is one of these great drivers. It's one of these four forces along with cloud and along with ROI and along with regulatory that propels our business. And it's a generational shift. For us, it's not about you became an e-commerce company and how much GMV you're coming in. It's about you became an e-commerce company. You may have some stores. You're on some marketplaces. you're selling in multiple channels, omni-channel. And so therefore, where you used to be able to manage your tax complexity because you're a lot more simple. Old days, you were simple. You had a store. You had a single site, fewer products, whatever, selling to a few jurisdictions. You could probably handle that. But now, you're an e-commerce provider. You've got some stores. You've got multiple marketplaces. You're selling in many jurisdictions in the U.S., maybe beyond the U.S. globally. And you've got to be compliant with that. I mean, you know, accepting status quo and doing that manually is very, very difficult to do. That's what's driving our business. And everyone that's become an e-commerce company, that acceleration over the last couple of years, most of those are still out there. They're getting calc on their e-commerce engine, probably from us, but they haven't solved the rest of compliance. They haven't solved returns. They haven't solved exemptions. They may not be doing cross-border customs and duties. They might not be doing use tax. And that's licensing. All these products we have, we've got to go after them and sell them more products.

So think about us, as you always have, Brent, consistent, long, strong business.

Our next question is from Pat Walravens with JMP Securities. Your line is open.

Thank you so much. This is Joey Minzyk. I'm for Pat. I just want to touch on the hiring environment and sort of back to those sales and marketing investments. How are you thinking about your ability to recruit and retain talent? And then how do you think about the type of talent you're looking for as you continue to scale? Thank you, guys.

Hey, Pat. Well, I mean, just as a general note, right, I see us sort of struggling with the same things that everybody else in the pack is struggling with, right? It's not, I mean, this isn't rocket science. I mean, it's harder to hire people. It's, you know, you have to, we're having to pay them more. You know, return to the office is an issue. All of those things. But, you know, what I'm really proud of from an Avalara perspective is, I mean, we have not seen a change in, you know, our retention rates. You know, I think our engagement with our employees is, is, is, the same as it has been prior to the pandemic and maybe even better a little bit. And so finding people is something that we've been really, really competitive at. I mean, we've added 1,500 people last year. I mean, we've been pretty good at doing that in a lot of different areas. And we have not seen the same kind of challenge some of the areas and sales and marketing is one of those as we have in, you know, hiring developers, which I'm sure everybody talks about because it's a difficult thing. And a lot of our hiring is happening in the U.S. and outside of that because we're a global company on four different continents. So, I mean, I don't think I have anything, you know, I mean, out of the usual to report. We're doing really, really well. We continue to grow our team in a large and aggressive way. Developers are always difficult, but we've been able to find our way to keep people and to add the people that we need to grow the business.

Our next question is from Sterling Auti with JP Morgan. Your line is open.

Hi, guys. This is for Sterling.

Can you please provide details around FX impact on the quarter? What was that? Details on the what? I missed it. FX impact. Oh, FX.

Yeah, we've never called out an FX impact. It hasn't been meaningful enough for us. I know you're seeing it with a lot of other companies. International is about 8% of revenue now, so we're starting to look at it more. But I wouldn't say it's a meaningful thing to disclose at this point in time.

Our next question is from Peter Levine with Evercore.

Your line is open.

Thank you, Pastor.

Maybe just one for Scott, more high-level. In your prepared remarks, you kind of sounded excited about your partner channels, but maybe looking at the compliance side of the business, what gets you excited about the compliance roadmap? Is it about integrated workflows with tax, AI automation, new product development, kind of that differentiates every layer? But just curious to know kind of what you're excited about on the compliance side. Thanks.

Yeah, I mean, what I'm really – they sort of go hand in hand in this sense. I mean, what I'm really excited about is we have been on an aggressive program to build out what I think to be, you know, today, even in direct tax. And as I talked earlier, I mean, moving out of indirect tax and dipping our toe into direct tax, this, this broad end to end, you know, solution that helps customers with their compliance product. I mean, I mean, I, This has been one of my dreams is to build out this whole suite of services so you're helping customers where they need the help throughout that process. You are their partner in going forward with their business. And I just think the team has done a magnificent job of sort of pulling our platform vision, pulling our platform together, You're going to start to see some really nice developments around our user experience, around how this is all tied together. I think you'll see efficiency at the back end of how we're tying all of this together that are really going to be good. And why I say that they're tied together with partners, because this is what partners are seeing. This is what gives us our competitive advantage. I mean, we've always been really good at finding the next thing in compliance. And whether it be right in the early days it was adding, you know, sort of end-to-end, you know, calculation and returns or doing address validation, you know, to make the calculations and compliance, you know, even better. And then you add cross-border, which, you know, is just, you know, something that, It should be done right at the time of checkout. So it's the combining of all of these things that makes our moat so strong and helps our customers so well. So it's that combination of how it all fits together. I mean, that's what really gets me fired up. That's what gets me into the office every day. And that is the journey that you have to do to be part of every transaction in the world. And when you do it both domestically and internationally, I mean, it's really compelling, and, you know, it gets me and, you know, about 5,000 other people fired up every single day.

Our next question is from David Hines with Canaccord. Your line is open.

Hey, this is Luke on for DJ. Thanks for taking the question. So SST, I think, was a 300 or so basis point headwind to growth this year, if I'm remembering correctly. due to that compensation formula change. First, should we expect any headwind in calendar 22 as you lap that change that I believe took effect at the beginning of February? And then second, how should we think about its impact on your net dollar retention as you lap that headwind? Is there upward bias there?

Thanks, Luke. I think you nailed it. ends in January. So January will be the last month where we, starting February, we lapped the compensation formula change. So that pricing change headwind that we saw last year, we're over with, ending in January. You should think about, people ask, how do you think about SST growing in 2022? And our view is, think about our returns platform. It's our second largest product. Customers in the U.S. have they have Nexus in certain states, some of them are SST states, some of them are not, but they're buying our returns products. Some of them need more SST, some of them need less. It should grow somewhere in line with our returns product sales. So that normalizes now, which is great. And then on NRR, we've been showing the revised metric, and that revised metric includes SST and excludes professional services. and the legacy metric we're also still reporting, which was the second highest since IPO, that one excludes SST. And so what you see is the legacy metric that excludes SST has been rising pretty consistently, and the new metric has been flat. Not in a bad way. It's been 160%. It's really strong, but it's been flat. And that's because the new one includes SST, so it's getting the hit from the SST pricing. In fact, the old one does not. So you're seeing it go up because it's reflecting the rest of the business and not the SST impact. I expect in 2022, those will move in the same direction. So you should just think NRR long-term. Our ambition internally here is we've got a lot of products. We've got a lot of customers. We have a huge opportunity to keep selling more products to our customer base. I think that supports our high NRR rates, and we've said over time we would love to push those even higher.

Our next question is from Alex Sklar with Raymond James. Your line is open.

Hi. Thanks for taking the question. This is John on for Alex. Just one from us. I know you've spoken about it quite a bit today, but as you look at the international opportunity, how do you think about Avaladar Direct versus Marketplace and other partnerships contributing to your international growth over the next few years?

I mean, as you said, we have talked about it a little bit, but I just, you know, I love saying it, so I'll just say it again. I mean, our DNA, our focus is in partnerships. I mean, you know, we have a rinse and repeat model that we really, you know, believe in in the United States, and we've carried it, you know, into our international markets. Partnerships is key to how we believe, you know, the growth is going to happen. I mean, let's just call it the way it is, right? I mean, you can't, we have to be in this space, you have to have partnerships with the people who create the invoices. I mean, that's just a given. And so, when we talk about international, You know, it's the same motion. You know, we want to go to market with all sorts of different partners, you know, whether they be marketplaces, e-commerce, ERP, POS. And we're just going to continue to, you know, execute that, you know, model that we have.

Our next question is from Andrew Degasperi with Berenberg. Your line is open.

Thanks for taking my question. I just had one for Ross. Particularly when it comes, I know you talked a lot about the marketplace partner and the change on the rate card and duration of the contracts. I was just wondering, is this fully reflected in the Q1 guide? And then is that impact linear as far as the year is concerned? And then lastly, how do I compare the Q1 growth guidance of 29% or high 20% relative to that full-year growth? Is that just a function of conservatism on your part, or is there something else at play?

Yeah, I mean, the marketplace is reflected in the guide, yes. And, you know, we don't guide to billings, as you know, but, you know, we gave some color around. We think it's a few percentage points. Billings, remember, gets hit a little bit worse than revenue because you got the billings frequency duration changed. So just as you guys think about your models and how you're going to do billing, just keep in mind that there's a few points impact from that partner situation. On revenue, it's reflected. And then I think your second part of your question is around Q1 versus the rest of the year. And if that's correct, I think our guidance philosophy has been consistent for years now. And it always starts with the point that, you know, think about us as a growth compounder where we can grow revenue organically 20%, 25% for a long time, you know, build a multibillion-dollar business. We're in a large market. It's early days, low penetration, leader in the space, all that good stuff that gives us, you know, confidence that we can consistently compound growth for a long time. And that's the starting point, you know, for the guidance for the year is And a lot of people will say, well, yeah, in the last few years, you've outperformed that pretty meaningfully in the 30s plus. How do you kind of think about that? And it's like any given year, we're going to obviously work hard to exceed. It's not a guarantee. It's not a given. I think as we head into this year, we have some really exciting opportunities that Scott talked about. And the ones that really are there is just like that cross-sell opportunity of all these products to the base, 100,000 end customers, 18,000 core customers, All these partnerships, the second wave concept Scott talked about, new partners and expansion of existing ones. International, the direct piece has been largely UK, so expanding throughout Europe and other areas of the globe, just really, really early opportunity there. Those are the three biggest highlights, and so I just think we need to execute on those, and we feel good about the opportunities ahead and our ability to deliver a strong year.

Our final question is from Daniel Jester with BMO. Your line is open.

Great. Thank you for squeezing me in. Just two quick ones for me. When you're talking about the business wins earlier in the call, cross-border came up a couple of times. You know, we've heard that, you know, some of the supply chain challenges globally have really disproportionately hit small business and mid-sized business. So I'm wondering if If that's being reflected in the growth and demand of that product, are you able to kind of grow through that? And then secondly, Ross, can you just comment, is there any inorganic revenue contribution in the guide? Thanks.

Well, I mean, I'll start on the cross-border, and then I'm going to turn it over to Ross. He can give color to it because Ross actually runs the cross-border business for us. And then he can finish up with your second question. But, you know, look, cross-border I think is a very meaningful part of, you know, of the Avalara growth story in years to come. So I would say that we do not see that impact that you were referring to, I mean, in our business. But it's early days and we're growing that business, you know, quite substantially. And I think it will continue to do that. So just from a growth perspective, we're not seeing that supply chain hitch hit our business.

Yeah, and that business is doing really well. And the thing is, it goes back to the earlier question around e-commerce models and GMV. If you're shipping across borders, you have to be complying with duties and tariffs and import taxes and all that, period. Whether you're doing one thing or... or a billion things that you're shipping. So while your GMV may go up and down from supply chain, you're either compliant or you're not compliant. You're not supposed to be semi-compliant. So that's the good thing about our business is you've got to do it. And so that business keeps going even if there's issues. And sometimes when there's issues, it's good for us because it heightens awareness. So I think that's going fine. And then on the second question, is there inorganic in the guides? The guide does incorporate all acquisitions, including acquisitions we did in 2021. We said last year that we wouldn't break out, or we've been breaking out organic and inorganic. We always want to be transparent. To the extent that these are material, they'll be in our filings. But the gap between organic and inorganic isn't like 10 points like it was last year. It's small and not material in our view. So that's why we're not showing it. If it grows to be more material, it'll be in our filings, and we may talk about it, but we don't think there's a need to now. And so the way I think about it is you've got a tiny bit of inorganic there on the positive side. You've got this EU marketplace situation on the negative side that's probably about balanced out, and therefore what we're reporting is, we think, pretty reflective of the actual performance of the business.

That will conclude our question and answer session. I'll turn the call back over to co-founder and chief executive officer Scott McFarland for any closing remarks.

Everybody, I'd like to take this opportunity to thank all of our employees, our great customers and partners for their hard work and support. And we look forward to talking to you and seeing everybody as soon as we possibly can. And thank you all so very much for being on the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

You may now disconnect.