Avalara, Inc.
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Good afternoon. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Avalara First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Greg McDowell, Investor Relations. Please go ahead.

[Greg McDowell:]

Good afternoon and welcome to Avalara’s first quarter 2019 earnings call. We will be discussing the results announced in our press release issued after market close today. With me are Avalara’s CEO, Scott McFarlane, and CFO, Bill Ingram.

[Scott McFarlane:]

Thanks, Greg and welcome to everyone joining our Q1 2019 earnings call. Q1 was a strong start for Avalara. For the first quarter, we reported total revenue of $85 million, representing an increase of 38% over the prior year. Our financial results are a testament to the strength of our team, continued solid execution and the differentiated value proposition that we are delivering to our customers. I would like to take a moment to congratulate our employees on their hard work and thank our customers and partners for their trust in Avalara. We look forward to celebrating their success later this week at Avalara CRUSH, our annual conference for customers and partners. Our vision is to be part of every transaction in the world and my aspiration for Avalara is to build a great enduring company. To accomplish this perhaps my most important role as CEO is to continue to evolve, expand and build a successful senior leadership team. We need leaders with skills that can scale Avalara to much higher levels as we execute against our ambitious goals.

[Bill Ingram:]

Thanks, Scott. Avalara adopted the new revenue recognition accounting standard ASC 606 effective January 1, 2019 on a modified retrospective basis. As a result, financial results during 2019 are presented in compliance with ASC 606, while historical financial results prior to 2019 are presented in conformity with ASC 605. Our earnings press release includes additional information to reconcile the impacts of the adoption of the ASC 606 standard. From a big picture perspective, there was not a material impact on revenue as a result of moving from 605 to 606 both in the quarter and in our expectations for the future. We do receive a benefit on the bottom line that I will discuss in a moment, but there is no difference in our cash or cash flow between the two accounting standards.

[Operator:]

Your first question comes from the line of Chris Merwin from Goldman Sachs. Please go ahead. Your line is open.

[Chris Merwin:]

Alright, thanks very much for taking my questions and congrats on a great quarter. So, I guess, I think, you’ve got about 40 states now that have legislation in place or pending as it relates to taxes for other state sellers. And I think last quarter, that was probably closer to 30. And I know some of the biggest states really move the needle, whether it be New York going live in January, or I think California went live in April. So can you just talk about the impact, the states had on net adds in the quarter and the really strong revenue growth that we saw and also the sustainability of that tailwind, as we move through the year and into fiscal 2020 as well? Thanks.

[Scott McFarlane:]

Thanks, Chris. Appreciate it. So, it means we’ve always said that the Wayfair decision has really created a great tailwind for us. The large states and I think I’ve said this in previous earnings calls, are really the ones that matter, and they are starting to weigh in, as you said, California and New York and Texas, is coming on in October, Pennsylvania in July. And there’s still four out there that’s fumbling around trying to figure out what they’re going to do. And I think that those will all be, I mean very, very big states, and that’s where most of the economy is spending there spending their money. So obviously, it will drive businesses to really take a look at their sales tax decisions and the like. And so, I can’t say for sure that those things happening, California coming on a month ago and New York in January had a big impact on what we were doing in the quarter, it will build over time as people get around to deciding to do that, getting registered, getting set up. And so, this is a long-term program that will just continue to drive businesses. I guess what I’ll just say, in general and I’ve said this all along the line, that the concept of a people doing sales tax manually in a digital world, over 10, 15, 20 years is absurd, it’s going to be automated. And so, whether it’s Wayfair or whether it’s any number of the other triggers along the way, that’s the tailwind that’s actually driving Avalara, because we know that’s what’s going to happen.

[Chris Merwin:]

Okay, great, thanks. And if I could just ask a quick follow-up on sales and marketing. Looks like you saw some really nice leverage there year-on-year, I think it is almost 10 points of leverage on a like-for-like basis on 605. Was that all just the change in quarters for the sales force, I’m sure there was natural operating leverage there as well, but just curious if you wouldn’t mind kind of, breaking out some of those drivers. Thanks.

[Scott McFarlane:]

Sure, I’ll give you an overview and then Bill can step in and give you the real good details behind it. But here is the I mean, here is our reality, I mean the sales team has done an excellent job in execution. And yes, you know the improved quotas and dealing with all that has been a factor for sure. But you know, look, we’ve been doing this long enough and we’ve always said that having the partners, in particular the ERPs was is really important, and it’s important as you build out the ecosystem and creating that ecosystem and getting all of that competitive mode has been expensive. But what it earns you the right to do is to get some of the larger partnerships that we’ve been able to win, whether it’s Wix, Shopify, BigCommerce, Amazon, those that actually bring large leverage to the sales and marketing business. So, you earn the right to own that core mote, but then as a result of that, you get the ability to go after some of these large what we call AI deals, which don’t have a lot of sales and marketing associated with them. So, it’s we’re really reaping the benefits of a strategy that started back in 2004. Billy, I mean, you will probably have some deeper details.

[Bill Ingram:]

Yes. Thanks, Chris. Yes, we’re obviously pleased with the leverage, but it’s not just one thing, sales force has just done a great job. I mean, I can’t speak any higher than I can about what a great job. So, I just see it, if you visit our site, Scott and I sit right on the sales force and we hear the action all day long and the team is just working so well, the close rates and reducing the friction and so on. So that’s why I said in the earlier call, really sales execution has really stepped up, and we’re so proud of that team. But in addition, we’re now generating revenue from some additional sources, and again I mentioned it briefly, and in the Analyst Day, I’ll go into more detail, but what you’ll see is that with alliance sources of revenue, that are not that big, but are growing nicely, that’s starting to give us leverage in the sales efficiency. I mean, Scott, and I’ve been telling you that it’s coming for a couple of years now, and I think you just starting to see start to see here this quarter. So, we’re very pleased with how the team is executed and really the strategy of building parallel revenue streams around our core partner model.

[Chris Merwin:]

Okay, thanks so much.

[Operator:]

Your next question comes from the line of Sterling Auty from JPMorgan. Please go ahead, your line is open.

[Sterling Auty:]

Yes, thanks. Hi guys. I wanted to kind of extent on a lot of question on sales marketing and the states going live. I’m curious, are you seeing the incremental customers still coming through. So, in other words, with the initial outreach coming from the ERP partners? Or are you starting to actually see some brand awareness and some of those customers are reaching out to you directly, and is that changed the sales motion or process or even the sales cycle at all?

[Scott McFarlane:]

Thanks, Sterling. So, look we our partners drive really high-quality leads to us, but we get lots and lots of web leads and whether it’d be trade show leads all sorts of other type of leads and the awareness of Wayfair and the changing environment around sales tax is clearly a driver. So, it’s really driving both partner leads and a non-partner leads to I mean to the team. It’s just helping all the way along the line, the awareness of. And I mentioned it in my notes, I mean, being public and bringing a shining a light on a in industry that everybody thought had been solved long before this, right? So, it’s a host of things that are driving the awareness, but there are all really good strong tailwinds for us.

[Sterling Auty:]

Alright, great. And then one follow-up for you Bill. Can you just remind us, so last quarter when you gave the initial guidance for 2019 around the operating loss. Was that still under 605 versus obviously the results now in 606 and the new guidance, which obviously, I think is 606?

[Bill Ingram:]

Yes. That’s great. So back in February, Sterling, the guidance we gave I gave was all 605 guidance, because we had not yet reported under 606. And so, I didn’t want to confuse things. So, we are reporting on the fourth quarter and the fiscal year ending 2018, and so since that was 605, we gave guidance for 605. But I did in this call and in the notes, you’ll see, since we are now reporting under 606 and we gave guidance over 606, but we also commented the anticipated benefit from the capitalization of the sales and marketing costs. And so, I believe, let me check my notes, if I say it correctly, but Q2 benefit from sales and marketing capitalization is $4.5 million and full-year benefit is $20 million. So, what you can do is, you can take the guidance I gave under 606 and you can reconcile it back to the 605 from last quarter. But the point is revenue doesn’t change under 605 or 606, it’s just the operating loss.

[Sterling Auty:]

Exactly. Great, thank you.

[Bill Ingram:]

Yes.

[Operator:]

Your next question comes from the line of Pat Walravens from JMP Securities. Please go ahead, your line is open.

[Pat Walravens:]

Great, thank you and congratulations you guys. It’s great to see the business cranking like this. So, Bill, I think, my first question is for you, which is you have encouraged us to think of this as a 20% to 25% grower, which makes sense sort of when you’re at 25%, 26%, but now your last three quarters have gone 26%, 33%, 38%. So how should we think about sort of long-term growth here?

[Bill Ingram:]

Well, again I’d point you back to the guidance, I gave a few minutes ago for the quarter second quarter and for the full year. Also, the billings number we are reporting now, which we haven’t reported before, is below that. And then, I also called out that $2 million non-recurring bit in the first quarter. So, I don’t give we don’t give guidance for growth rates, but if you notice, I mean we’re feeling pretty good about the raise we gave in February and the raise we gave you today for full year numbers. So, we’re going to do our best to earn your trust and hit those numbers.

[Pat Walravens:]

Okay. And then let me add and I’m not sure which of you should address this. But Scott, we talked about being part of every transaction in the world. In order to do that, part of what you need is content for every transaction in the world, right? So where do you still not have the content that you need. And if you look at that total addressable opportunity, sort of what percentage of it are you missing?

[Scott McFarlane:]

I’ll jump in on that one. Thanks, Pat, I do appreciate it. But so, you know, there’s two things that you have to be part of every transaction in the world. You have to have a all of the ecosystem that creates invoices and you have to have the partnerships, where you’re doing returns for everybody. I mean, that’s a that’s just a given on that. And then obviously you have to have all of the content in order to make the proper calculation. And so today, we have a considerable amount of the tangible personal property content in the United States, but not all of it, and I would say it’s greater than 50%, but less than a 100%. And we have fuel and we have lodging and telco, and we’ll probably add things like tobacco and the like. So, we are going to continue to build out the U.S. content. There is a lot of it that we have, but there is a still a lot more to get and it can be around things like battery content, it can be around ammunition, it can be around rare coins, it can be, I mean, around leases, automotive, we’re – those are things that we still are in the process of building out and we’ll continue to do that and we think our Indix acquisition will help us do that even faster in the future. Internationally, we support 210 countries at the federal level. And the key to that is, as you enter these markets and go deeper than that like we did in Brazil, when our acquisition in Brazil gave us much, much deeper content in all of the states and all of the products. Their regime is much more similar to what we have in the United States, where every jurisdiction has different rates. So, you attack those. And then we will continue to build those out deeper and deeper and deeper in the countries that we enter like we’ve done in India, where we’ve moved with the tax regime change that they did around GST. And we’ll continue to build out that content in other countries like that. So, there is a – we have a lot, but there’s still a lot to do, it would be, yes, it would be like asking how far Google is along in their mapping process, I mean, it’s a constant program that you’re doing to refine the areas that you don’t have. And we’re just going to continue to do that and hopefully, we can do, Pat, in a more automated fashion that we’ve been able to do in the past.

[Pat Walravens:]

Okay, that’s awesome. Thank you for that perspective.

[Operator:]

Your next question comes from the line of Brad Sills from Bank of America Merrill Lynch. Please go ahead. Your line is open.

[Brad Sills:]

Hey guys. Thanks for taking my question. Wanted to ask about the pending changes on state taxation of e-commerce and any impact you’re seeing that have both on the core customer business as some of these mid-market firms gear up for compliance, and then also just any direct impact in the e-commerce business itself?

[Scott McFarlane:]

So, with Wayfair, it really, I mean, it affects all businesses, both just – I mean, normal standard businesses with sales forces that have economic nexus, as well as e-commerce. Obviously, it’s probably going to affect the e-commerce businesses more than the others, because they’re already doing nexus in many – in those locations with their sales force. But I guess, my answer really isn’t any different than what I said in the beginning, which is the tailwinds of all of these states and in particular, the large states will continue to drive this and we’ll continue to drive this not only this year, but into the future years, as more and more companies expand their e-commerce business, expand their footprint with products, expand all of those things that we talk about from a trigger point, as they expand with those, so does their reason they have economic nexus. I guess, what I will change on this discussion and redirect actually to SST. So, Streamline Sales Tax was founded in around – in 2000 and this was a group of states, 23 states then that got together and said, hey, we want to simplify sales tax. It was a volunteer program at that time, people could get amnesty if they signed up voluntarily, and Avalara – I’m really proud, because in 2005, Avalara was one of the first 3 certified sales tax providers for SST. And I think what’s the real reason and the catalyst for sort of what got us going in the beginning, but because it was voluntary, it did not really materialize that much. But with the advent of Wayfair, SST and now it’s 24 states, has a really automated solution and it’s a solution that allows businesses to get sales tax free. We provide free sales tax to businesses that are in the SST states that sign up for SST and then the states pay us a percentage of the sales tax collected. And so I – so we’ve seen since Wayfair, a dramatic increase in the people signing up for SST and we expect that to continue to happen going forward and we will be receiving a percentage of that collected and the customers will be getting those services free, that was one of really the conditions of the Wayfair decision. The Wayfair decision, the Supreme Court rule that since these states were providing free in many instances, that it was okay, and it made sense to go-ahead and make the ruling that they did. So, I think that, that again is another tailwind that’s driving the business and one of those extra sort of added services that Bill was talking about that has come to bear, that’s different than our normal core business, and I think we’ll continue to see that grow as the year goes on.

[Brad Sills:]

That’s great. Thanks, Scott. And one more, if I may please. Just any update on where you are in addressing the global retailers particularly as it relates to your build-out of content globally to satisfy the needs of some of these retailers and international geographies like LatAm and Europe?

[Scott McFarlane:]

Well, it’s a good question. The marketplaces, the things like working with Amazon and Alibaba and all of those, they are under enormous pressure by the various governments to get people registered and collecting taxes or get them off of their solution. So, obviously, there’s a lot of discussion that’s going forth around how we deal with that marketplace. And when you deal with the marketplaces and that’s again some of the things that Bill was talking about, things that we’ve put in place that are affecting just our core business. What I mean by that is, we’re able to get those marketplaces and reduce the dependence on just the normal core business and increases our sales efficiency and the like. And the pressure of that is for us to grow with them, get more content, which puts us pressure on us to hire people to get that done and gives us a little pressure on our gross margin. So, all of those things we’re addressing and it’s a race for us and we’re really excited about it, because we’ve really put ourselves in the center of all of this with what we’ve done with the strategy to-date.

[Brad Sills:]

Thanks, Scott.

[Operator:]

Your next question comes from the line of Brent Bracelin from KeyBanc. Please go ahead. Your line is open.

[Brent Bracelin:]

Good afternoon, and thanks for taking the question here. I’m going to start with Bill, obviously, revenue growth accelerated again this quarter 38%, very strong. I guess my question here is, as we think about organic growth, what was the contribution from Compli in the quarter? Was it material or immaterial?

[Bill Ingram:]

Well, we don’t – we didn’t break that out, but I can tell you it was not material, it’s less than $1 million. And it was really our core business that delivered again, as I said, a moment ago, the sales team just executing fantastic, deals are coming in nicely. But we have now started to see some early, but positive contributions from a handful of new revenue streams. And so what you’re seeing there is, you’re seeing a little bit of boost in the growth rate, but you’re also above the organic kind of core customer growth rate, but then you’re also seeing a little bit of improvement again on the margin on sales efficiency, as I think Sterling and Chris asked earlier. So, it’s not any one thing, but I can tell you we’ve kind of – we are kind of hidden across a range of initiatives that are all contributing nicely.

[Brent Bracelin:]

Certainly, good to see. Thank you for that. And then Scott, just wanted to better understand where you plan to invest and focus your time now that you’ve expanded the breadth of the leadership team, a new President, Chief Product Officer. Where are you wanting to shift your resources to focus on? Is it partners? Is it these SST relationships? Is it international? Just love to understand as you free up cycles by expanding the breadth of the team, what would you do with those extra cycles?

[Scott McFarlane:]

You know, I’m really, I just could not be more excited for the senior leaders that we’ve added to the team, because I think ultimately, as I teach them the business, which is really the first business at hand with them is that we work together to – so they understand the vision and the strategy and the mission. And once we’re there, I think that they’re really going to start driving the scale of the business putting some of the great things in place that we’ve done and that’s going to free up my time to work on things that I think are really important, customer satisfaction, the culture of our business, international expansion, strategic initiatives and acquisitions, which I think are really critical things for us to go beyond, just where we are today. I mean, this is – Bill and I just firmly believe that this is just a long strong growing business for many, many years. So, what I want to do is, is make sure that it’s the enduring business that we all know that it can be. And I will turn a lot of our attention to international and how we expand internationally, how we get content and the people and culture of the business.

[Brent Bracelin:]

Very helpful color. That’s all I had. Thank you.

[Bill Ingram:]

Thanks, Brent.

[Operator:]

Your next question comes from the line of Scott Berg from Needham and Company. Please go ahead. Your line is open.

[Scott Berg:]

Hi, Scott and Bill. Thanks for taking my questions. Congrats on a good quarter. And I apologize for the noise at the airport.

[Scott McFarlane:]

We’ve all been there .

[Scott Berg:]

Yes, I guess two questions. Scott, I wanted to follow up, I mean, different angle on the Wayfair question, because you mentioned improved partner impact, with the change in that regulatory environment, is it changing the types of deals that partners bring to you? Obviously, volume can be in there, but I don’t know if there’s any composition around deal size, what type of target that might be impacted?

[Scott McFarlane:]

As I said, SST in the beginning and Wayfair now are important aspects of why people choose us with their partnerships, right? I mean, these are things that their customers are asking. We are very – I mean, we’re a certified service provider for SST, and so that’s what drives – that’s what drives them to us, but I don’t see a significant change in the way or even the reason that we’re doing – that we’re doing deals with our partners. They want to do what’s really right for their customers and a SaaS platform with content and the ability to integrate with them and give their customers a really great onboarding experience, a really good customer experience. I think is – it’s what they’re really looking for and that sort of what we’ve built up for the last 15 years. I guess. what I’ll – I’ll take this opportunity to point out Wayfair is a fantastic thing, SST is a fantastic thing, but what’s interesting is that it only matters if you have the connectors and integration is built. It only matters if you have the content that they need. It only matters if you can actually take those customers and go live. And so anybody, just because of Wayfair, it doesn’t really make a difference to people that don’t have those things. Avalara spent 15 years getting ready for this moment and to be able to take advantage of it, and I think that that’s what partners and everybody sees. We are the good safe obvious choice to choose and the minute we’ve added, now we are going with cross-border and being able to do duties and customs. So, an e-commerce partner not only gets us for the Wayfair and all the things I just discussed, but all their international customers can benefit from what we’re doing as well. So, it’s not one thing, Scott, it’s a whole host of things that I think the discussions are happening with the partners around the strategy that we’ve set up for a long time.

[Scott Berg:]

Great. Super helpful. And then I guess from a follow-up perspective, I might be jumping the gun from Thursday, but any color on some of the new products that you talked about, I guess, mainly more along the lines and how they’re priced, I didn’t know if there is a transactional element or if it’s going to be more of a flat subscription fee on some of the things you’re talking about later this week?

[Scott McFarlane:]

I think we’ll probably, it will go the way more depth on Thursday and we’ll do some demonstrations and we’ll be able to show you exactly what we’re thinking about. But some of the new products that Bill was mentioning to us, we’re talking about some of the things, I mean, our registration product, I mean, is driving revenue and some business for us and cross-border, which we will show and demonstrate, we’ve got consumer use tax, what we call our cut product, we’ll be demonstrating as well. So, lots of things like that and those are all additive kinds of businesses that we can do moving forward.

[Scott Berg:]

Thanks for taking the questions. Congrats on a great quarter.

[Scott McFarlane:]

Right, thank you very, very much.

[Operator:]

Your next question comes from the line of Sterling Auty from JPMorgan. Please go ahead. Your line is open.

[Sterling Auty:]

Hey, Scott, I’m back. Just wanted to follow up on SST. I think you mentioned that you are one of 6 providers at this point. What determines whether you’re providing the sales tax calculation versus one of the other providers? And what’s the performance like at the other end, at the retailer level doing an SST program versus having a direct relationship through one of your partners?

[Scott McFarlane:]

It’s a great question. So, there are 6, I’m not even sure that all of them still exist today to be honest with you, but there were 6 certified. And it really – that doesn’t change any experience whatsoever. I mean, because in the end, it only really makes a difference to – for SST, if you have the connector built. And that’s what really determines how a customer interact. So, a customer from any one of our partners can sign up under SST and get those transactions free from us and we then collect from the government, right? And then for outside the 23 states, it would be the exact same experience that they get today. So, for them, it doesn’t look anything, any different, it’s only for us, it’s how we get paid and how we interact with the states. So, it’s not significantly different for anybody today in their experience. Did that help, Sterling?

[Sterling Auty:]

Alright, great. It does. Thank you.

[Scott McFarlane:]

Okay, good.

[Operator:]

And there are no further questions at this time. I would now turn the call back over to Scott McFarlane, Co-Founder and CEO for closing remarks.

[Scott McFarlane:]

Well, thank you all. I just want to take this opportunity to once again thank our employees, our customers and our partners for their hard work and support in our business. Thank you for your interest in Avalara, and we look forward to seeing many of you at our Analyst Day later this week. Thank you all very much.

[Operator:]

This concludes today’s conference call. You may now disconnect.