Avalara, Inc.
Q2 2019 Earnings Call Transcript

Published: 7 Aug 2019

[Operator:]

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Avalara Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Greg McDowell, Investor Relations. You may begin your conference.

[Greg McDowell:]

Good afternoon and welcome to Avalara's second quarter 2019 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 McFarlane, and CFO, Bill Ingram.

[Scott McFarlane:]

Thanks, Greg, and welcome to everyone joining our Q2 2019 earnings call. Q2 was another strong quarter for Avalara. We reported total revenue of $91 million representing an increase of 43% over the prior year. Our accelerating growth rate was driven by solid sales execution in every segment from small business to mid-market, to enterprise and increased revenue from a variety of initiatives. I said if before, and I will say it again. We have a vision to part of every transaction in the world, as our value proposition gains more traction, I'm increasingly confident in our ability to build a great company with durable growth characteristics. 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. Many people have been with us a long time and seen us through many stages of growth. I especially want to thank two of our early investors and longstanding Board Members, Gary Waterman and Ben Goux, who have stepped down from Avalara's Board each after more than a decade of service. They are outstanding advocates for Avalara and we are grateful for their service and support.

[Bill Ingram:]

Thanks Scott. As a reminder, 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. Our 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 ASC 606 standard. Let me now discuss our second quarter results. For the second quarter, total revenue under AFC 606 was 91.3 million, 43% on a year-over-year basis. The strong growth in the quarter was a result of increased demand from both new and existing customers, strong sales execution across all sales channels and the adoption of new services previously described by Scott. Subscription and returns revenue under ASC 606 was 85 million. This represented 93% of our total revenue and it grew 42% year-over-year. Professional services and other revenue was 6.3 million. Our core customer count increased by 730 to approximately 10.430 at the end of Q2 '19. We define our core customer as a unique billing account that was active as of the measurement date and for which we recognized greater than $3000 in total revenue in the 12 months prior to the measurement date. Our net revenue retention rate was 111% in Q2 and has averaged 108% over the last four quarters. As a reminder, we've seen the net revenue retention rate vary by several percentage points across quarters. However, the trailing fourth quarter average has remained steady. Our revenue retention rate supported by low gross churn contributes to strong customer lifetime value. 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 and are reconciled to our GAAP results in the earnings press release that was issued just before this call. Gross profit under ASC 606 was 65.9 million for Q2 '19 representing a 72% gross margin. This compares with ASC 605 gross profit of 46.5 million and a 73% gross margin for the same period last year, 1%-point decline in gross margin primarily results from investments in content, third party software hosting and our expansion into international markets.

[Operator:]

And your first question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.

[Chris Merwin:]

Okay. Thanks very much for taking my question and congrats on a great quarter. I just want to start-off by asking a bit about content aggregation. And you've done some tuck-in acquisitions in the past and you've got the index team working hard on going out mapping all the different product SKUs and using algorithms for that. Maybe can you just talk about where the biggest content gaps are at the moment in the portfolio? How you think about filling those over time and when you do, did that shift -- help with the shift up market and into other geographies as well? And then, I've a follow up. Thanks.

[Scott McFarlane:]

Thanks Chris. What I would say is, I mean content is, we have always said is one of the two key things as part of our business. And there is, I mean when you're in this business and I think one of your questions was this going to move -- can we move upstairs stream with it, I guess I'll start out by saying that main content for a big business is the same as the content for a small business. So, I mean doing adding content doesn't help us move up or down market. It just allows us to cover more businesses in all of the different markets. And so, in the U.S., we've estimated that we've got about 60% of the content that's out there in the marketplace. We have the majority of the key ones, but we don't do anti-coins or ammunition and things like that. We'll be tucking those in overtime and actually we'll be using some of the AI capabilities to actually go out and find those without having to do it with people. The biggest gap that I would say that we have in content is rest of world. That's where the -- that's for us that's where we have to move. Obviously, we've made a big investment in Brazil and we're adding that but there's the rest of Latam that you have to do. The EU is what you mean -- we have that today but going deeper and broader in all of that. So, it's doing more of what we've been doing, but actually increasing the pace internationally. And we've said it, when we said it on the road, we set it on the call. We're going to continue to look for acquisitions to tuck-in to help us add that content around the world. It's the easiest way to do it. It's the most efficient way to do it. And will be -- I mean aggressively looking to do that.

[Chris Merwin:]

Okay, great. Thanks. And maybe one for Bill as well. I mean if we look at the revenue per customer -- just coming back into that, with the customer account it looks like that accelerated again this past quarter. So, really healthy growth there. Does that more reflect just think the growing number of taxable transactions for your customers in part due to the new legislation or is that more just a bigger backlog of customers who haven't yet spent the 3000 on a trailing basis with you. Just curious, what were the main factors driving that higher again?

[Bill Ingram:]

Well, Chris. Yes, kind of both. You kind of nailed it. We're seeing kind of lateral expansion with our customer base in new filings and jurisdictions. I think we can point to government legislation to be driving that. But, we also -- we had a nice growth in core customer count where we're adding customers in a nice clip and on average the new customers tend to be a little bit bigger than our customers in the past. And so, I think it's -- I think just kind of a broadening of our footprint in the marketplace. As you know, we've talked in the past with others that we see greater adoption of our services over time. We talk about our rate of attachment of different services, but as our customers kind of mature and spend the second or third year after us they pick up a little bit more service, a little bit more geography. And so, you're seeing that that kind of trickle through into the implied ASP per core customer that you just said. So, your answer is what you said both of those are driving.

[Chris Merwin:]

Okay, great. Thanks so much.

[Operator:]

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

[Brad Sills:]

Oh, great. Hi guys. Thanks for taking my question. I wanted to ask about net revenue retention, obviously, really strong this quarter. And you called out some of these newer services that are contributing there. Could you parse it out a little bit for us on that versus expansion with more transactions or even with Wayfair into more states. Is Wayfair having an impact on the net revenue retention metric in the sense that you start with one state and as you get more mandates you see some of these retailers adding more states. And could that carry into the future?

[Bill Ingram:]

Yes. Thanks Brad. It’s Bill. I will start. Yes. On the ground we're seeing our existing customer base as I said kind of expand a little bit more into additional geographies that as you know picks up additional returns’ revenue for us also more calculated transactions that could pick up on that margin. As you know, what's implied in there obviously as a denominators is our churn rate. So, we're pleased with the performance of our churn rate being low. And those two combined together have driven that revenue retention rate up to 111% for the quarter. But as I said in my comments, really want everybody to realize that our historical net revenue retention has been kind of between a 107% and 108%. And we expect kind of that range in the future. So, this obviously was a strong quarter and we're pleased about that. We think it's been driven by our existing customer base expanding a little bit more rapidly into new geographies in the past. We've also had some additional early revenue streams, we've talked about it last quarter. Those are things like the SST revenue, the business licensing things of that nature, which we're really pleased about. They're not that big revenue contributors but they tend to contribute to our existing base, which is probably pushed a point or point-and-a-half in that net revenue retention number. So, the best answer I can give you Brad is, we're kind of hitting on all cylinders and everything's contributing nicely on the margins.

[Scott McFarlane:]

Brad, I'll just add to that. It's very similar to what Bill is saying. But I want to a shout out actually to the -- to my -- the sales motion, the sales team because they've really been --they've been operating at a high-level and really been delivering on all the opportunities that we've had. And what I mean by that is, they are out talking to them about these additional things. SST, about business licenses and registrations. And we're actually starting to drive that home. And so, you're seeing a really good combination of sales motion and the sort of little ancillary projects that we've had in the works for a long time and now that we're starting to see them both with new customers and with the existing customer. So, I'm pleased with where we're going.

[Brad Sills:]

That's great. Thanks guys. And then, one more if I may please. Just on the core customer strength. Is it possible to, I guess parse out what impact Wayfair is having on that? I guess the question is really, what have conversations been like with retailers? Are they saying well now that we have these mandates here, we're going to adopt soon, or do you expect this to be kind of a longer tale of adoption as audits occur. I mean what's your expectation for kind of the curve of adoption related to Wayfair? Thank you.

[Scott McFarlane:]

I mean, so if I'll generalize your question, it's really about trigger events. I mean, and Wayfair is one of those trigger events. You mentioned audits, it's one of those trigger events. I think all of these things are heightened for right now. I mean people are talking about them, were being pushed in that direction and it is certainly a tailwind that we've had with the business. There's just no question about that. I just keep coming back to what we've been saying all the way along the line that this is a long steady process of people moving from no automation to full automation. I mean this process is inevitable. And for me, I'm not getting too excited about whether it spikes up this quarter or next quarter because I think this is just a steady long-term growing business. I mean that's how it's been founded on. I mean, and I think that that's the way it's going to be which is so exciting to me, because I just think we can continue to deliver on that automation promise.

[Brad Sills:]

That's great. Thanks Scott.

[Operator:]

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

[Brent Bracelin:]

Thanks for taking the question. I guess, so now that we're past the first anniversary of the Wayfair decision. I would love to get your kind of early read on the larger states like New York, California, Texas that are just in the beginning stages of enforcing economic nexus for the first time. How are you seeing that manifest in either inbound activity? Any color now that some of the larger states are certainly kind of moved this direction. What are you seeing there? And I got one follow-up for Bill. Thanks.

[Scott McFarlane:]

I mean we don't break it out. I wish I could say, “Hey, when a state comes live we know that this is exactly what's going to happen.” There is just no question, I mean in our minds that when these states start to move in that direction mean we get more inbound conversation. And as they get into it and businesses start to adopt it because it's hard to tell when businesses hit the thresholds. And businesses aren't going to do it until they have to. We all think, “Oh, it's been mandated, so everybody is going to race to do it.” It's really a steady process of education that the customers have to go through internally with themselves to “Okay. Now, I'm hitting the California threshold or now I'm going to hit the Florida, if Florida actually enacted it,” because Florida hasn't done that. It's one of the ones that's still sitting out there that, and Missouri are the two that are out there. But, when they happen that it takes a while to actually move it through the process and we don't have a really great sense of what are the little measurements and nuances that we can tell, how it's happening? But, we know that it is definitely, I mean a tailwind. And I want to point out just in this one as well that this is ever evolving process. It doesn't -- I mean the states are tweaking things, some are doing transactional thresholds, some are not. Businesses are sort of catching up with this whole process. And I think Kansas is actually an interesting example that I want to point out to you. Kansa, I mean did not adopt the threshold. They actually started to use an old 1980s law that basically said we're going to collect tax under this law that was created way back when it says we can do taxes all the way up to whatever the constitution allows. Well, Wayfair changed the constitution and Kansas basically said there is no threshold, there is no transaction or revenue threshold. Everybody has to comply with it. Everybody is really looking at Kansas because that's exactly what they all want. They do not want thresholds. They want to get it to everybody having to collect sales tax. So, there's a lot of eyes on that. And I say that only to say that people that today are waiting for thresholds, but tomorrow as Kansas and some of these other laws pushed through, I think you have a real -- I mean there's going to be a lot of business -- a lot of states that are pushing towards no thresholds whatsoever. It's going to be very, very dynamic and these are the things I think are the tailwinds that are going to happen both here domestically for us as we move to this inevitable stage of everybody -- I mean having to do it automated to what's happening around the globe, which is just as dynamic and just as you know important for the countries in. And how they're going after extra sales tax and VAT revenue.

[Brent Bracelin:]

Helpful color there, Scott. And then, just Bill as a follow-up, obviously, revenue growth in the quarter, billings growth in the quarter, very strong accelerated once again above 40% this quarter? Could you just talk a little bit about what were some of the factors that drove the strength? You said it was broad based, but how much of a tailwind that's key in the quarter. Any other factors that you would point out as we just think about the underlying strength of the business here. Thanks.

[Bill Ingram:]

Sure, Brent. Thanks for the question. I wish I could give you a better answer than you want. But, it really has just been very good solid sales execution, we're seeing the close rates shorten; we're seeing the sales team hit all their marks; we're seeing broad based bits of revenue across all of the products and services that we sell. We're a subscription business, so our revenue performance actually is a result of prior sales, closings sales bookings. And although, we don't report bookings, we've just had and have repeated this this very, very strong sales execution. I think our message is getting through and call out kind of our marketing and product teams. We've done some great positioning. We talked a lot about Wayfair and Scott and I explained the Wayfair want to trigger events and we look at close rates on every deal that comes through. And we see Wayfair, but it's not nearly the top reason. The top reason still tends to be adoption, change of ERP systems. And so, I think there's been an acceleration in the industry for newer upgrades and adoptions of ERP systems. And we get obviously with our partner model and our go-to-market motion, we get pulled into those deals. And so, we see some increased velocity there. And so, Wayfair comes up as one of multiple triggers or multiple points in the call. So, it's great for awareness, but it's really still this adoption and conversion of ERP systems that really helps close the deal for us. Having said all that, Brent, you know me, you know us, the comps are just getting tougher in the second half of the year. And so, while we're very, very pleased with the strong revenue performance this quarter. We really think this is a long steady business. We think we're still less than 10% penetrated in a big market. We've got a big market opportunity here, seeing lots of dynamic things internationally. We're very pleased with the current performance of the business. But, the comps will get tougher in the second half of the year.

[Brent Bracelin:]

But, whatever you're doing is certainly working and keep it up.

[Scott McFarlane:]

Gosh, I wish I thought of that. Gosh.

[Operator:]

Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

[Pat Walravens:]

Oh, great. Thank you and let me add my congratulations. I want to talk about Portway and the customs brokerage services. And here's the context for this, incredibly I covered a company, and this was all they did. I don't know if you remember Scott, it was called Vastera and eventually got bought by JPMorgan and then eventually JPMorgan -- right, you totally know it right. But, that was such a tough business. Their customers kept changing their mind and the competition from the brokerage services was just brutal. So, what's your approach going to be. It sounds like what happened to them, I'm sure you have a strategy. What is that?

[Scott McFarlane:]

Sure. So, it's two things, Portway is a strategic partner for us that we've had since we started this business. And for me it was just important for us to own our own destiny in that one. And that's doing classifications and we're doing millions and millions of classifications both in a manual way and now really starting to push it towards an automated way. So, it just really made sense to bring that expertise and all of that in-house under one roof. That's about half of the Portway business. The other half of the Portway business is what they're doing with custom brokers. And Avalara has a recipe and I'll tell you if you promise not to tell anybody, but what it really is, our recipe is this. We bring these things in-house in a manual fashion because nobody is ever automated these things. And the key for us is to bring them in-house and we did this with returns. We did it with registrations. I mean it's how we go about our business. We understand how it happens in the real-world manually. And then, we wake up every single day to automate it to the point where you really don't need custom brokers anymore. So, our strategy is really to be in this business. But, this concept of people having the secret sauce that where you do classifications. And then, you do some magic, and then, you get it to the government and only manual could happen, it's just absurd in our mind. It's just like doing sales tax in a manual way. It's absurd in a digital world. So, our strategy is one to be the very first business to every -- to automate the custom brokerage business from the end-to-end, from classification to getting the documents to where they need to go in the government. And Avalara is an expert at doing that. So, this was our first four way in entering to do that and in an automated fashion.

[Pat Walravens:]

All right. Awesome. And then, forgive me, if I missed it, but Bill did you tell us what the impact of it is or how big it is?

[Scott McFarlane:]

No. You didn't miss it. No, I didn't tell you. So, when it becomes significant, we'll start breaking that out. As you see, we've done last couple of quarters about the SST business licenses, the interest income, we'll start talking about it as it starts to contribute significant or meaningful amount. So, we'll get to that in the future.

[Bill Ingram:]

But, all these little events are just all additive and what I think you see, some of the really strong growth. So, there are small today and we expect them to continue to mature.

[Pat Walravens:]

Okay. Thank you, guys.

[Operator:]

Your next question comes from the line of Brad Reback from Stifel. Your line is open.

[Brad Reback:]

Great. Thanks very much. Bill for customers that have been on the platform for a couple of years. Have you seen any signs of any instances of macro headwinds out there? Thanks.

[Scott McFarlane:]

Well, for customers that will have a longer tenure with the company in terms of macro headwinds. No, but like churn or downgrades or so and so forth. But, what I can't tell you and I think we've talked about before and with others is, once we get customers business and we do a good job forum and they're pleased there's not really a vast amount of kind of expansion or growth opportunities. It's kind of like, I say many of us, I'm sure on this call, have personal tax people that handle our individual taxes. Well, we as I do give them all my tax information and they do a good job and I'm paying for it. So, it's a little bit different than the land and expand bandwagon that a lot of companies get on. We try to serve our customers and do a good job and of course never lose them. And so, in terms of macro headwinds for our longstanding or more tenured customers, no, as you asked the question. But, again, once we have their business and as long as we do a good job and serve them well, they're very satisfied, but there's not a lot of expansion opportunity at that point.

[Brad Reback:]

Great. Thanks very much.

[Operator:]

Your next question comes from the line of Scott Berg from Needham. Your line is open.

[Scott Berg:]

Hi, Scott and Bill. Great looking quarter here. I guess I got two. Scott, we'll start off with sales capacity and kind of where you guys are for the year. We look at your results in the first half they're clearly much better than our expectations. Not sure about maybe all of your own internal expectations but are you able to actually process and manage all the leasing and opportunities out there today or finding yourself maybe trying to hire ahead of the curve?

[Scott McFarlane:]

Well, no self-respecting CEO would say that they ever have enough opportunities. I mean we're always out there and in search of the opportunities. And converting opportunities into sales qualified leads is really the big issue for any business that's out there, for Avalara for anybody. And so, we're always trying to hire in advance to have the right number of people that are qualifying them because I think that's where the big numbers actually take place. The sales team is really pretty good and pretty adept and we're keeping it up with the hiring of the salespeople to be additive, when we see that it can be can be a beneficial to us. But, we're out there really pushing what we call the SDR team and the ADR team to find more opportunities and we're expanding that definitely in advance, because it takes a time to get people trained up and the like.

[Bill Ingram:]

I'd make a comment Scott, the sales team and really sales leadership in my view have just done an outstanding job in terms of capacity, efficiency as I mentioned earlier, close rates, professionalism. And so, while I agree with Scott, we can always use more opportunities. Boy, the organization in the last couple of years has really stepped up. I've seen as the CFO really stepped up to operate at a higher level and I give all the credit to the team and the leaders that have put that in place, we're operating with really a very professional team.

[Scott Berg:]

Got it. Helpful. And then, follow-up perspective Bill on the Portway acquisition. Any commentary maybe on how the products and the services are priced. I don't know assuming it's not all subscription, but maybe something transactional. Just trying to understand how it -- can hit the P&L as you're able to leverage it. Thank you.

[Bill Ingram:]

Sure, Scott. Right now, it's very transactional. Scott said majority the activity is just classification. And from my view this is very similar if not virtually identical to what we do in the sales tax and VAT world. It's taking a p description, geographic set of conditions and applying a code or a classification to that item. So, then it can be rated in effect for any sort of economic activity. And so, this is really just in my view and our view just scratching the surface. We needed to get this key capability in-house as Scott said, we've been working with Portway for quite a while. There are some great future opportunities out there in terms of going after new adjacent markets. But, right now, day-in and day-out just to pick up this capacity and this capability for classification, so it's going to be a key foundation in our expansion internationally into e-commerce worldwide. So, the revenues right now are transaction-based, but over the next year or two, I'm sure our brilliant product teams will figure out how to position and price it and organize it such that we'll bring it into the kind of the SaaS subscription world.

[Scott McFarlane:]

I would add to what Bill said is that just like content for determination of sales tax. This classification is a precursor for international transactions. And it's really interesting because I mean in sales tax and classification and all of the content that we've got, we have the build and we didn't charge people to do that. It's really interesting in cross-border transactions and the classifications that we're doing with the Portway is, we get paid to do that. And then, they turn into subscriptions for us. So, it's actually a bonus because it's so difficult to do and Avalara has been able to do that classification at a very much lower rate because of the automation and the things that we've brought to it. Then, what some of the traditional vendors out there doing this and that would be your big carriers that are doing that today. Because, I mean I'll just take this opportunity to do a plug. I really fundamentally believe, and we believe here at Avalara that this concept of doing cross-border with a third-party is really not the proper way to do it. Cross-border should be done at the moment, invoices are calculated not by some other person. And so, bringing that in and automating it in, it will allow us to expand our subscription services in the cross-border area as well. And we're getting paid for the classification. So, I hope that that clarifies it a little bit.

[Scott Berg:]

Wonderfully. Thanks, and congrats again.

[Bill Ingram:]

Thank you.

[Scott McFarlane:]

Thanks, Scott.

[Operator:]

Your next question comes from the line of Terry Kiwala from First Analysis. Your line is open.

[Terry Kiwala:]

Hey, good afternoon and congratulations on a great quarter. My question Scott and Bill is, in light of what you said Scott about Kansas and in states watching what Kansas is doing with not really having a threshold. Are you seeing a trend either with SST states or elsewhere that states are actively lowering the thresholds or changing them one way or another either from a transaction volume, or a gross receipts for remote sellers?

[Scott McFarlane:]

Terry, thank you for the question. Nice to have you. So, what I would say is this, is the thresholds that we're seeing in what 43 states plus the District of Columbia and I think are really an offshoot of just adopting what South Dakota did. And I mean what South Dakota did was say, “Hey, listen. We're going to do these thresholds and the Supreme Court like that.” It was one of the key decisions that are the key things that made the decision easier for the Supreme Court to do that. I think over time; the pressure will be to reduce that. That is what's going to happen now. How long that takes? I mean obviously none of it's happening today, but Kansas -- what Kansas did really mean, I think is like, wow! it caught people by surprise and I think that it will continue to put pressure over time to always reduce the threshold. And I think over time, you will see it go away. That's my prediction. Have nothing behind it other than human nature.

[Terry Kiwala:]

Thank you.

[Operator:]

Your next question comes from the line of Bhavan Suri from William Blair. Your line is open.

[Bhavan Suri:]

Hey, Scott, Bill. Thanks for taking the call. Congratulations. Really nice job there. I guess I just wanted to touch on pricing power. You discussed it about the benign competitor mind the legacy carriers there because you guys strategically think about pricing power. What kind of -- what it did look like in the market? Did you think about the product you've seen SaaS companies now that have a better environment start to raise pricing as well as adding feature functionality. I guess strategically price increases kind of at all a part of the business strategy. Do you think it's just adding more feature functionality given the price kind of the platform at stable sort of level? But, how you think about that?

[Scott McFarlane:]

What I'll do is, I'll kick this off and talk about future products and the like. I mean, so I mean Avalara I think has had -- I mean a really pretty balanced strategy around raising prices and I'll let Bill talk about pricing power and the like. But, we also combine that with new products and it's gone all the way back to the beginning of our company when we started the business we were determination only but knew that we could add-on returns. And now the returns is 30 plus percent of our business. And we added CertCapture with exemption certificates, you've got consumer use, you've got cross-border. And our platform is built such that we can do all sorts of different compliance kind of products. We talk about being part of every transaction in the world, but we also what we believe is to have a global SaaS platform for compliance. And so, it gives us this ability, if you tell us the rules and rates, we have the engines and the technology to be able to deliver multiple products. So, we will be always adding products and services around our platform, which will continue to grow the business and whether that's , W8, business -- broader businesses licenses then registrations, a whole host of things. We'll continue to do that. So, it's really a combination of adding new products. And then your ability to do pricing. And I'll turn that over to Bill to deal with that one.

[Bill Ingram:]

Thanks, Bhavan. Technically as we've reported in the past, in our standard terms and conditions, we have the ability to raise prices every year up to a maximum of 5%. But, we don't actually do that. And that may sound strange to some people, but we're trying to roll up a big market here. As you've heard us talk in our Analyst Day and other times, we believe there's over 500,000 mid-market customers, there's about 20,000 enterprise larger customers, about 5 million very, very small emerging business customers. And so, you have to be very careful when you do have pricing power and I believe we do have pricing power. You don't want to gouge your customers. You don't want to take advantage of them because you have that leverage when you're trying to roll up a big market and build a big business. And so, we could probably arm wrestle about what the exact correct price is. But, given our performance here, I think we're on the right track. And you just got to be very, very cautious about raising prices in a market that is converting for manual automating, is adopting this solution and we're of course we want to be the winner in it. So, to answer your question, we do have the ability to raise prices both contractually in our terms and conditions. And we also do believe we have leverage, but we want to be very careful and conscious of treating our customers properly so that we can build a big business here.

[Bhavan Suri:]

Now that's really helpful and thank you for the information. I guess longer-term product question. So, let's fast forward and expand into the very large businesses, expand into the very large businesses globally and you think about the automation you build from this platform. Do you think there's a point in time where you let folks define their own custom automation on the platform? Or is it still the process where you take it in sort of manually absorb it and then everyday work to automate them for them. As you think about that, obviously, this is a great way of owning it, but it's also the sort of hey there's going to be a whole bunch of stuff that's done slightly differently by everybody and its configuration. There's also sort of custom workflows. I just like to get your thoughts since the way you think that evolving. Again, not the next 2, 3, 5 years where that might evolve especially as you start capturing from the very, very large companies that are incredibly complex and unique sort of reporting filing et cetera processes. Thank you.

[Scott McFarlane:]

Yes. It's a really great question. Interesting question one that I think about a lot. One of the features that is really important when you're in the enterprise space. It's doing complex custom rules right. So, allowing people to enter their own rules to be able to override, let's go -- happening. And I think that's just a precursor for things to take place right. It will be using lots of data and insights. As a matter of fact, we're just talking about a data and insights team. How do you provide that? And then once you've provided that how do you will allow customers to be able to do that themselves, but not give them so much leeway that you start to make wrong calculations. But, you give them data to say this is where I need to be doing business, transfer and the like and all that I think will be absolutely part of what we do. And that will be I think an important demarcation for inflection point for us, right. Now, you're not only just doing the transactions, but you're helping them run their business with information that. So, I do see Avalara moving in that direction in the coming years.

[Bill Ingram:]

Hey, Bhavan. I just want to make a correction or clarification something I said. We technically are not limited to a 5% price increase. I just used that as a proxy to make my point about being cautious with price increases and rolling up the big market. But, I want to be very clear that we're not limited to that number that was just a reference point I put out.

[Operator:]

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

[Scott McFarlane:]

Hey, I just want to take this opportunity to once again thank our employees, customers and partners for their hard work and the support. As you can see, we're very excited about the market opportunity and the momentum that we're building in the business. So, thank you for your interest in Avalara and we look forward to speaking with you again next quarter. Thanks everybody.

[Operator:]

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