Avalara, Inc.
Q1 2022 Earnings Call Transcript

Published: 5 May 2022

[Operator:]

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Avalara First Quarter 2022 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. It is now my pleasure to turn today's call over to Jennifer Gianola, Vice President of Investor Relations. Ma'am, please go ahead.

[Jennifer Gianola:]

Good afternoon and welcome to Avalara's first quarter 2022 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, Ross Tennenbaum. Today's call will contain forward-looking statements, which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends; 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 second 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 a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release, our amended annual report on Form 10-K filed with the Securities and Exchange Commission after market close today and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at investor.avalara.com. With that, let me turn the call over to Scott.

[Scott McFarlane:]

Thanks, Jennifer, and welcome to everyone joining our Q1 2022 earnings call. Q1 was another good quarter for Avalara. We reported total revenue of $204.5 million, an increase of 33% year-over-year and delivered positive non-GAAP operating income of $4.7 million, exceeding our guidance expectations. We exceeded our top-line growth while deploying fewer resources, and we believe those efficiencies should accelerate our path towards profitability. We have delivered on expectations since our IPO. We have always intended to focus on growth, but emphasize the level of efficiency that would keep us around breakeven investment level while driving strong top-line growth performance. This is manifested in an impressive 37% revenue CAGR since IPO, combined with the three years of positive free cash flow and first positive year of non-GAAP operating income in 2021. Looking forward, as we meet and surpass $1 billion in revenue, we intend to provide even more focus on profitability as we continue to grow this year and beyond. Ross will share more details on improving operating margin performance later in the call and share you more details on our intermediate term targets at our upcoming Analyst Day in June. I want to reiterate what I'd said before. Not all SaaS businesses enjoy the structural advantages we have. We help businesses become more efficient. We have a strong and sticky customer base that needs additional compliance. We believe we are a long and strong growth compounder and well positioned to grow in good and in challenging times. Our thesis and vision have not changed. We remain a leader and category definer in a massive global market, driven by statutory requirements, and we enjoy enviable tailwinds tied to the increasing adoption of cloud-based business applications and omnichannel selling platforms, ongoing ROI focus and purchasing decisions and ever-increasing regulatory burdens. We believe that over the long-term, every business will adopt tax automation. We are still early in this journey and we believe we are best positioned to capture the leading share in this expanding market. We see significant opportunities in front of us and I'm excited about leveraging our growing scale, competitive moats, ubiquity in the market to establish Avalara as the standard cloud compliance platform. We continue to focus on five areas of the business

[Ross Tennenbaum:]

Thanks Scott. Avalara posted a strong Q1 performance across the board that exceeded our guided metrics. We were very pleased to deliver 33% year-over-year revenue growth coupled with a non-GAAP operating profit of $4.7 million. As we near a $1 billion annual revenue run rate, we are more confident than ever that we have a long runway of durable, double-digit growth ahead of us coupled with an increasingly attractive margin profile as we scale and drive operating efficiencies in the business. At our Analyst Day in June, we look forward to talking more about our operating model philosophy and providing additional color around intermediate term targets. Q1 total revenue was $204.5 million up 33% year-over-year or 29% when we exclude the Q1 revenue from our Track1099 acquisition, which represented the majority of acquisition revenue in Q1. As a reminder Track1099 is a seasonal business with all its revenue occurring in the first quarter. Subscription and returns revenue grew 34% year-over-year to $186.9 million and represented 91% of our total revenue. Subscription returns revenue grew 29% year-over-year, excluding Track1099. Professional services revenue was $17.7 million, up 24% year-over-year and represented 9% of total revenue. While we ended the quarter with one of our highest ever professional services backlogs recorded due to very competitive labor markets we experienced delays in onboarding incremental resources needed to convert that backlog into Q1 revenue. Our core customer count increased by 890 from the previous quarter to approximately 19,160 at the end of Q1, 2022, a year-over-year increase of 22%. Our net revenue retention rate was 115% compared to 116% last quarter, resulting in a 116%, four quarter average, our highest four quarter average since reporting this revised metric. NRR can fluctuate from quarter-to-quarter, but we remain focused on continuing to improve this metric. 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. In addition, we filed an amended Form 10-K after market close. In preparing our first quarter financial statements we discovered an error in our previous recognition of stock based compensation expense for our restricted stock units. As a result of the error, we understated stock based compensation expense by $10.4 million in 2021. Today we filed an amendment to our Form 10-K correcting our previously issued financial statements, including each of the years ending 2021, 2020 and 2019. While we concluded that the error was not material to our financial statements, we have concluded that the error represents a material weakness in our internal controls as of December 31, 2021. The correction of this error increases our previously reported GAAP net losses for 2021, 2020, 2019, but does not impact previously reported revenues, cash flows or our non-GAAP metrics. In addition, we have taken steps. we believe, necessary to remediate the control issue and we'll be testing these new activities as they occur over the next several quarters. More information about the error and the impact are included in the amendment to our 10-K. Gross profit was $150.8 million in Q1 representing a 74% gross margin. This compares with gross profit of $113.2 million and a 74% gross margin in the same period. Last year, we continue to focus on improving our gross margin over time through automation and efficiency initiatives. Sales and marketing expense with $76.1 million in Q1 or 37% of total revenue an improvement of nearly 90 basis points year-over-year. Sales and marketing expenses lower than expected due to delays in hiring and timing of marketing program expenses. Q1 research and development expense was $41.4 million or 20% of revenue down from 22% of revenue in Q1 2021. Q1 general and administrative expense was $28.6 million or 14% of revenue versus 15% of revenue in Q1 2021. Q1 operating profit was $4.7 million, which was significantly better than our guidance, largely as a result of delayed hiring, more robust revenue performance, optimization of our software hosting spend, improvements in sales rep productivity and marketing funnel conversion rates and faster realization of other spend optimization initiatives. Q1 diluted net income per share was $0.08 based on $88.9 million diluted weighted average shares outstanding. Total deferred revenue at the end of Q1, 2022 was $303.6 million up 35% from $225.5 million at the end of Q1 2021. Calculated billings is a non-GAAP metric that takes into consideration revenue in the change in deferred revenue, as well as the change in contract liabilities. Calculated billings was $219.2 million in Q1, 2022 up 28% year-over-year and 24% excluding the Track1099 acquisition. Organic billings growth is impacted by several factors, including a first half 2021 organic billings comparable of 38%, a year-over-year change in our billings duration trending to a small but meaningful increase in the mix of quarterly and monthly billings at the expense of annual and impacts on billings and revenue from international weakness, including from our largest EU marketplace partner. Free cash was negative $31.1 million in the first quarter compared to negative $31.9 million the same quarter last year. The level of cash consumption in Q1 was expected and was largely driven by the payment of our annual corporate bonuses, largely insurance renewals and the renewal of various large software licenses. As we have stated on past calls, our free cash will fluctuate from quarter-to-quarter caused by many factors, including the timing of working capital, the seasonality level of our buildings and expenses, as well as our overall level of investment in the business. Our cash and cash equivalent were $1.5 billion at the end of Q1 2022 unchanged from $1.5 billion at the end of Q4 2021. I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q2 and for the full year 2022. 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 penetrated market where we are a leader in the space with competitive moats and a differentiated business strategy. We are positioned to capture a leader, share of our market opportunity to reiterate my earlier comments. To reiterate my earlier comments our focus on the year is to sustain a high rate of revenue growth and couple that with an improving margin profile. We are on a journey to this valuable operating combination and we'll share more details in our June Analyst Day. We are being mindful of efficiency as demonstrated by three years in a row of positive free cash flow. Our first year of non-GAAP operating profitability in 2021 and a strong outperformance in Q1 2022, non-GAAP operating profit. In Q1, we benefited from a difficult hiring environment, but also made choices that will help us accelerate our path to profitability. We believe our Q1 performance combined with our updated 2022 guidance demonstrates our focus on driving efficiency faster. And we will evaluate our ability to over deliver as we progress through 2022. For Q2 2022, we expect total revenue between $208 million and $210 million, which represents a 24% year-over-year growth rate at the mid-point in the range. As a reminder, in Q2, we do not expect any revenue from Track1099. And in April we left the acquisitions of Inposia and Davo. We expect our Q2 non-GAAP operating loss to be in the range of $6 million to $8 million. For the full year 2022, we expect total revenue between $867 million and $871 million, which represents a 24% year-over-year growth rate at the midpoint of the range. We are cutting our expected full year 2022 non-GAAP operating loss by more than half by guiding to an operating loss range of $6 million to $8 million versus our previously guided operating loss range of $17 million to $21 million. We further expect to be breakeven or better in Q4 2022. We continue to expect 2022 professional services revenue to be around 9% of total 2022 revenue. In closing, we have an exciting opportunity to continue building a durable growth compounding company. We believe we are a leader in large market that’s still early to adopt tax compliance automation technology. We are seeing a demand transformation as businesses become omni-channel, operating manager jurisdictions and shift their business to e-commerce in the cloud. These changes coupled with an ever shifting regulatory environments, 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 that our virtual Analyst Day will be held on Tuesday, June 28. Also, we will participate in upcoming conferences, including Bank Of America, JP Morgan, Needham, and William Blair in the second quarter. Thank you for participating in today’s call. At this point, we would like to open up the call for your questions.

[Operator:]

Ladies and gentlemen, before we start today’s Q&A session, I would like to turn the call back to the Chief Financial Officer, Ross Tennenbaum for additional comments.

[Ross Tennenbaum:]

Thanks, Brent. Hi everybody. I know this question’s on everyone’s mind. So I’d like to address it here up front. I think it’ll make the call go smoother. I’d say don’t over index on the e-commerce growth slowdown and draw conclusions about Avalara. It would be a mistake for investors to assume that we have this outsized exposure because that’s simply not the case. Our customer base is very diverse, including customers of every size from nearly every industry and many geographies. And as a matter of fact, our customer base is more weighted to B2B than B2C. We are also a subscription model business and not tied to GMV. Even our calculation business, which is tied to transaction volumes is now less than 50% of revenue and has shown its resiliency throughout the pandemic due to our wide pricing bands, designed to reduce volatility of customers having to move up and down tiers. And in our compliance business, our customers must file compliance documents where required regardless of how well or poor their businesses performing. The last two years, acceleration of e-commerce indeed benefited us, but it didn’t have anywhere near the financial benefit on our business that it had on e-commerce and GMV related businesses. For example, we grew organic revenue by 29% in each of the last two years, a great result, but hardly an accelerated pull forward in demand. In addition, we believe our broad customer diversity helps insulate us from shocks to e-commerce in the broader economy. As evidence of this diversity, when we map our customer database to third-party data, we find that less than 20% of our Q1 2022 revenue comes from retail customers. In addition, only around 10% of Q1 2022 revenue came from marketplaces and our Avalara included relationships, including Shopify, BigCommerce and Wix among others. When we added in our direct e-commerce partners including partners such as Salesforce and Adobe, the total comes to approximately one-third of Q1 2022 revenue though, we see many larger customers and a higher mix of B2B customers with these direct e-commerce partners. In addition, these numbers reflect total revenue from customers with these connectors, which would incorporate all channels of activity, even outside of e-commerce. Lastly, while other companies greatly benefit in the last years by e-commerce acceleration, we saw less of that benefit and continue to believe the acceleration of e-commerce is one of the strongest trends for our business as it greatly increases the complexity of managing tax and therefore the need for automation. Customers of all sizes and in all industries are more quickly becoming omni-channel, having to deal with tax compliance across multiple systems and in more jurisdictions even globally. This greatly increases their tax compliance complexity and renders manual status quo solutions ineffective. The millions of new e-commerce customers created over the last two years will need to deal with this reality and we capture tens of thousands of them and still growing using our calculation on our e-commerce partners platforms. This offers us a large number of prospects to upsell additional compliance products beyond just calculation. And we believe provides us with a steady drumbeat of future business and growth, even if not, one more company does e-commerce this year. In fact, in Q1, the vast majority of Avalara included customer bookings came from cohorts activated in prior years. Thank you very much. I’ll now turn it back to Brent to open it up to Q&A.

[Operator:]

Your first question comes from the line of Brad Sills with Bank of America Securities. Your line is open.

[Brad Sills:]

Wonderful. Thanks for taking my questions guys. Wanted to ask about the net revenue retention, a real nice result here this quarter, you saw some acceleration there. Could you help us unpack that a little bit? Was there some cross sell, upsell in the broader stack? I know you have a wider stack now with 1099 Inposia TTR. We hear that from the channel. So any color on the upsell activity this quarter. Thank you.

[Ross Tennenbaum:]

Yes. Hi Brad, thanks a lot. Yes, I mean, we’re really excited about NRR 116% fourth quarter average, which was the highest that we posted since reporting the metric. I think it’s two things. One, we’ve continued to have a really good result around the churn and down sell side. So some of that that was more difficult in COVID has continued to improve. And so we like where that is, it feels really healthy. And then on the upside part of NRR, cross sell, as we’ve talked about a lot, going from a couple products to many products, we’ve got a huge opportunity in our base. We think it’s hundreds of millions of dollars to go start to add additional products. We’re early in that journey, but we’re seeing some really good momentum and proof points. And in fact, we had our largest – one of our largest deals to existing customers about $0.5 million deal just recently where we were able to sell, use tax, our TTR product, our business license – licensing product and several our CertCapture product and several other things. And so we’ve got more evidence of deals like that where we’re cross selling more products. We’ve seen a really good adoption of CertCapture, which we’ve had for a long time, but is benefiting from the investments we’re making to really drive the cross-sell business. That’s doing really well. We’re seeing really good results from TTR as well. So we still have worked to do, but we’re really happy with where it’s headed.

[Brad Sills:]

Awesome. That’s great to hear, Ross. Thanks. And then the question on everyone’s mind, not just for you, but for software in general, anything you’re seeing internationally, you mentioned some weakness, some softness maybe is a better categorization. What are you seeing in some of the international geographies, particularly in Europe with what’s happening over there? Thank you.

[Scott McFarlane:]

Yes. Hey Brad, Scott, look I mean, international business right now is a challenge, but it’s a huge opportunity in green space for Avalara going forward. Selling AvaTax just our basic business into global companies is a real big greenfield for us. And many, many companies are trying to do more and more business inside the United States. So we enjoy that, that, that, that, that tailwind. We’re always working on our products internationally, and I think that that’s going to continue to grow. And I think we’ve been really clear about what we’re thinking. I mean Avalara’s business, historically internationally has really been around the great improvements that we’ve made in the UK. And as we talked about in past earnings, I mean moving beyond the UK into more of EMEA is a real opportunity for us to continue to do that. And that’s exactly what we’re gearing up to do. I mean it’s not a one quarter program, but over the rest of this year and into next year, we really think that that’s a great opportunity for us to grow. And we always continually talk about moving beyond just EMEA, growing out and growing our business into LATAM and then Asia. So there is considerable opportunity for Avalara to continue to grow and build the type of moats that we’ve done here in the past. And as I said in my notes, my prepared notes here on the earnings call is that e-invoicing is a really significant driver that I think can really help build Avalara’s business going forward.

[Brad Sills:]

That’s great to hear. Thanks, Scott.

[Operator:]

Your next question is from the line of Gabriela Borges with Goldman Sachs. Your line is open.

[Unidentified Analyst:]

Hi, it’s on for Gabriela. Congrats in the quarter. My question would be just following-up on some of the e-commerce comments and thank you for all the detail there, but what are you seeing in the pipeline for customers tied e-commerce regarding demand and willingness to invest versus other verticals? And could you remind us in some of the other key vertical exposures you have?

[Scott McFarlane:]

Ross, you did such a great job on the intro. Why don’t you continue on with that one?

[Ross Tennenbaum:]

Yes. Yes. Hi Kelly . Vertical exposure, I would just reiterate that we’re very diverse. We threw out the retail, our exposure to retail that I just said in the prepared remarks of 19%. But we are very diverse across verticals. So I wouldn’t say that there’s any major concentration. You can see online, our last year’s Analyst Day that has a pie chart of that. So we’re good there. And on the e-commerce pipeline, I think the way people have to think about it is, we look at the cohorts back quarterly for last few years, and just look at you become an e-commerce company let’s say on pick your favorite e-commerce platform and you’re using calculation for us. And then we get some small fee from that. But those fees over the last couple years, they’re meaningful. We like them, but they’re relatively small fees. We’re – we have a relationship with the platforms to provide them with a calculation so that there’s calculation of the cart. The big opportunity and the value that we’ve been able to create over the years has been to then upsell those end customers on additional products, because they probably have calculation in other channels, they have to do returns. They may have to do cross-border. They probably have to use tax certs, bunch of other things have to happen to be compliant well beyond calculation. And so that’s the game for us is to market to them and to upsell them. And we’ve been doing that for years. And so my point in the prepared remarks was that a lot of the bookings that we saw in Q1 for example, are coming from customers that already became e-commerce companies in a cohort over the last few years that we were able to convert an upsell with more. And so therefore, it’s not in quarter, you’re seeing GMV slowdown and you’re seeing new customer e-commerce adoption slowdown. We’re not really dependent on that as much as continuing to convert this large pool of customers that is using us for calculation and monetize them. And so we’ve got I call it top of funnel and we’ve got to keep on trying to help them understand the value proposition of what we do. The gaps that they have in compliance and that what we do is more cost effective and better than the manual status quo status quo.

[Scott McFarlane:]

And I would point out on top of that is, I mean a couple of things. In the verticals, during COVID, we reported that travel was under pressure. I mean – and just remind everybody one of the deals that we identified is – one of our larger deals, over $1 million was a travel – an online travel company. So some of the verticals that have been under pressure before are coming back and adding more resilience to the overall business. I mean the great thing about tax is that – there’s just so – I mean, all types of businesses are affected by it. And they – it sort of insulates Avalara from the good and the bad, up and downs that everybody is worried about. That’s what I think is so unique about this business. And I’ll just point out. Everybody talks about how do partnerships get affected during these good and bad times. The first thing that you have to do is win them. And that’s the most important thing for Avalara in these wins. So, expanding our relationship with Shopify to do more customers and to do more business with them, to continue to add the low end of the market was zero, and then doing the really large multimillion dollar deal that we had with another third-party vendor. So, I mean winning these partnerships is the most important thing that you have because then you’ve got a long-term relationship that you can grow and build over time. So, I’m really proud of the fact that we were able to continue to do that and dominate from a partner perspective.

[Unidentified Analyst:]

Thank you for that. One more from me would just be any changes you would call from a competitive perspective as Vertex rents its cloud offering on the enterprise side. And if you could give us an update on what you’re seeing in terms of win rates and customer feedback and where there’s room for improvement on the product stack or service experience?

[Scott McFarlane:]

We’re not seeing any significant change in competition than what’s out there. I mean, Avalara remains dominant in the mid-market. We’re winning businesses upstream, and we’re creating partnerships like Xero downstream, and then tightening our relationships with the omnichannel world, doing things with Shopify and other partners to really solidify our position. And I think that, that’s the telltale sign of Avalara and how a company is doing in this space is are they winning the key partnerships, are those things future-proofing the business so it can grow and continue to sell in the omnichannel world. So, I think as we reported along the line, we’re just continue to add more of the long-tail customers. We’re winning those second-wave businesses. And I think that, that’s the best evidence of what’s happening competitively in the marketplace.

[Unidentified Analyst:]

Thank you. Congrats again on the quarter.

[Scott McFarlane:]

Thank you.

[Operator:]

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

[Pat Walravens:]

Great. Thank you. And let me add my congrats. Ross, can you just help us with why your profitability for the year improved so much? So if I got it right, last time, it was negative 17 to negative 21, and now it’s negative six to negative eight. So just walk us through some of the key points on that because that’s what everyone is nervous about and it’s turning out not to be that bigger deal.

[Ross Tennenbaum:]

That’s right. Thanks, Pat. How are you doing? Yes, I mean, look, Q1, we had a big beat compared to where we guided. I think it was around $15 million. I will say we, like our peers, had the – have – are in this difficult hiring environment, and so we are behind on hiring. And so that contributes to the benefit, and we may give a little bit of that back. But overall, you’ve got to go back to last summer when we internally started talking about the next few years and what our model looks like. And we started laying out our version of the Rule of 40 model, something that sustains growth rates and starts to really drive operating leverage. And we’re going to share that with you in June on the Analyst Day and go through those details. But what we wanted to do when we’ve been working hard late last year and in Q1 is what are some things we can start to do now and can we accelerate any of these. And so around hiring, we found areas of efficiencies where we can stretch and do a little more with less, things that we may not exactly need that we had in the plan. In cost of revenue, we looked at some things we could do around efficiencies with hosting and some of our other functions there. In R&D, we’re working on just prioritization modeling and how do we get the most important things we want to get done and be really innovative, but where can we maybe do a little bit more with less on the heads. Sales and marketing, while we’re a little behind on sales capacity, we were able to drive some good productivity improvements, which were – which helped to offset that. And then G&A is just kind of scaling slowly as you would expect. So, I would say this is a three-year view that we’re going to share more of in June. It’s something that we think that in Q1, we could take advantage of the environment, but also make some decisions that would help accelerate that path. And that’s what you’re seeing. And we’ll be very judicious as we proceed through the year to see if we can continue to drop more to the bottom line.

[Pat Walravens:]

Okay. That’s super. Thank you. And Scott, this is a little bit of an unfair question, but I’ll ask anyway. So, I mean what do you do about sort of the morale and retention of people who came in and got their RSUs or options or whatever you use, priced at the wrong point now the stock is down 45% year-to-date. And it’s a little unfair because another company that’s reporting right now, their stock is down 53% year-to-date. And even worse there, and I didn’t ask them. But how do you – how do tech companies deal with this? What are you guys going to do?

[Scott McFarlane:]

It’s a good question, Pat. I mean everybody – as you say, everybody is dealing with it. But the reality is – I mean, one, I think it’s really important that you have a well-defined culture that’s built out of your business model, right? So everybody understands where you’re going. And for us, it’s being part of every transaction in the world. And you can’t go up with the good times and you can’t go down with the bad times. So when people believe in the model, when they believe in the direction that you’re going, it just gives you a little bit of an insulation. Now reality always imposes itself, as I say, and people are going to be being dealing with that. But the market, in general, is dealing with that. So you just have to create the best environment, make sure that people understand their roles and responsibilities, and they’re fulfilled at work and have good engagement. And if you can do those things, then you can weather these difficult times. And you’re just true to – if you’re authentic to your culture and your business. Pat, that’s the best way I can answer it.

[Pat Walravens:]

Okay. Good. Thank you both.

[Operator:]

Your next question is from the line of Brent Bracelin with Piper Sandler. Your line is open.

[Hannah Rudoff:]

This is Hannah Rudoff on for Brent today. Thank you for taking my questions. First one is you talked about the second wave of partnerships helping drive the next leg of growth. I guess, can you talk about which partnerships you’re most excited for? And what the road map for continued traction with these partners looks like?

[Scott McFarlane:]

Yes. I mean I said a little bit about it, and so I’ll just – I’ll reiterate it, right? I mean you want to win these deals. And we won Shopify Plus a long time – I mean, a long time ago. I don’t know whether six years, seven years ago. And we’ve been working with them to build out that business and then to sell them more things. It was cross-border. Now, we’re talking about expanding that relationship even further. And the most important thing is to win those. That’s the first act in doing it. And there’s lots of players out there that we still want to win and do business with, right? We don’t have them all. Our goal is to get them all. And so they really fall into multiple players, and they’re all the large aggregators, right? The businesses that we don’t have that are doing large aggregation around e-commerce. You’ve got POS. You’ve got the Squares of the world, right, that fall into sort of multiple categories there. I mean those are the kinds of deals that we want to win. And payment processing. Love to have a relationship with PayPal and the likes. So those are the kind of deals that we continue to fight for. And what’s great is that sales tax, when we started the business, was like why do we need to focus on this. Now all vendors, all of our financial service companies that we deal with, they all understand that this is something that everybody needs to deal with. It needs to be part of their offering. And so that’s why we call it the second wave. There – these players that we wanted to have in the past that we have not gotten are now coming to the table, and we now have the opportunity to sell and win those. That’s what’s happening here today. And it’s the – what I would call the next step in the journey of being part of every transaction in the world, because I’ve always said that there’s only two things that matter, right? You have to have a partnership with the people who create the invoices; and you have to have all the content on the other end in order to calculate the tax compliance around the world. And that’s what Avalara is focused on. Winning those deals; being part – getting part of every transaction in the world; and then building out the content. So when we calculate it, it’s right and accurate.

[Hannah Rudoff:]

Great. That makes a lot of sense in. That’s good to hear. Second question for me. Ross, it was nice to see the 890 net customer adds this quarter. Anything out of the ordinary note there? And I may have missed it, but did you disclose the revenue from core customers this quarter?

[Ross Tennenbaum:]

Yes, the 890, we were pleased with it. It was 22% growth again. And nothing to note. It doesn’t – still excludes the M&A, the recent M&A. If when we add those in, we would call those out. So as we’ve talked about, we want to continue to drive that kind of consistent growth algorithm in the new customer adds. And on the other one, no, we didn’t put that out there. We didn’t disclose that in the prepared remarks.

[Hannah Rudoff:]

All right. Thank you.

[Operator:]

Your next question comes from the line of Matt Stotler with William Blair. Your line is open.

[Unidentified Analyst:]

Hey guys, this is Hailey Mok on for Matt Stotler. Thanks for taking the questions. I wanted to touch on the accounting firm products a little bit. Could you provide any color on the demand or the traction that you’re seeing with these products? And how big do you think that that opportunity could become over time?

[Scott McFarlane:]

I think Ross and I will tag team this one a little bit, but I’ll start out by saying compliance, we talk about tax calculation, and that’s where Avalara started. But doing returns and actually complying with the compliance part is the critical aspect of doing sales tax properly. And nobody had ever built out an automated solution in the marketplace. I mean, taking calculation data and transaction and being able to seamlessly provide tax returns is one of the most important and most difficult things that's done in compliance. And to do it end-to-end with a single thread is really, really hard. And when we did that we realized that our product, the ones that we're using and I'll just remind everybody when I started this company and we built this business, we had a hundred people doing a hundred thousand returns, it was manual. Today we have a hundred people doing millions of returns, and so we've built a very efficient system domestically here in the United States for that and we got the idea that instead of being able to just have everybody use us, why don't we use accountants, both large accountants and small accountants, the big four all the way down to the smallest accountants and provide them the back of the house solution that they actually can do the returns themselves, and we just become the backend provider. This is another way that Avalara is using the channel to its advantage because that's what Avalara is really all about. I mean, partnerships are – is what made Avalara what it is today, and so these products just enable partners to be able to expand the compliance opportunity. And as I said in my prepared remarks we're seeing really nice traction in small and large businesses. And we think that this has the opportunity to get us to be part of every return in the world, right? I mean, that's how we think of this thing, you've got calculation and through our own work with customers doing returns and with our partners during returns gives us this huge opportunity in the marketplace. Ross, you want anything to – add anything to that?

[Ross Tennenbaum:]

No, I think that's perfect. But if you want to talk about efficiency, I mean, if you can get the 60,000, 70,000, 80,000 accounting firms and bookkeepers in the U.S. and grab share through that versus 1Z, 2Z through sales reps and give them new revenue streams and have ability to sell through them. It's just a massive potential to grab massive share and efficiency. So we love it. I think it's the most exciting potential future thing that we've developed.

[Operator:]

Your next question is from the line of Siti Panigrahi with Mizuho. Your line is open.

[Siti Panigrahi:]

Thanks for taking my question. Scott just want to ask about the cross-border few years back you investors on that, and I think one of the pretty strong offering you have in the cross-border side and also I think Shopify markets they launch in February as well. Wondering how is that trending and what have you seen in the days in the Shopify markets? And also overall, how is that helping you even getting some of the larger deals on landing enterprises?

[Scott McFarlane:]

Thanks. Let me just review for a second. I mean, when you're in the tax calculation business doing calculations and integrating with ERPs especially some, some that even aren't cloud based there's still on-prem, that's difficult work to be done. It's really hard to do an efficient integration with ERP. With e-commerce companies doing tax calculation is not as difficult. I mean, it's many, many lines of code in ERP, but it's generally a – just an API call into an e-commerce. I mean, this is what we've known for a long-time. And so when we were growing the company, my idea was is that this concept of doing cross border work, where cross border is done by a third-party after the transaction is absurd. It just makes no sense, mean you've got people shipping things around the world and somebody showing up the door and saying, hey, you owe this for duties and taxes. They should know that the moment they are buying it should be included in the checkout process, and so we've had that idea that for e-commerce – e-commerce especially should support cross border activities. And we went out and built that and made some acquisitions around that to come up with, I think the most innovative cross-border solution in the marketplace, and it's not only just for e-commerce, it's for all businesses. And we think that this can be a very large business going forward as we've reported before, hundreds of millions of dollars. And so – and the reason that we did it originally was to not only for the revenue that I've just talked about, but to protect our moat and that's exactly what cross border has done for us. I mean, it helped us solidify our relationship with Shopify. It's helping us solidify all of our relationships with e-commerce vendors. And is one of the reasons that we are winning the second generation wave of partners that's out there. I mean, because businesses can't bet against businesses not wanting to do international commerce. And so not only is it a great upside potential, it is one of those things that distinguishes us tremendously from anybody else in the marketplace, that's why I think it's so powerful.

[Operator:]

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

[Unidentified Analyst:]

Hey guys thanks for taking my question. This is Josh on for Scott. Core customer growth was once again really strong in the quarter. Can you just discuss how much of that is cross sell contributing to growing existing customers who maybe weren't spending 3K on a trailing 12-month basis, but are entering that category with a few additional products versus net new customer growth? Thanks.

[Scott McFarlane:]

Yes, yes, you're right. You've been focused on it for a while because there is just for everyone's benefit it's – you become a core customer when you're trailing 12 months of $3,000 of revenue or greater. And so you could be a customer that we signed up nine months ago and we added something and you went over the 3,000 mark. Historically the vast majority like –like vast majority let's just play that way because we haven't quantified it is from new customers. And we haven't seen a shift in that. So I would think about that number pretty indicative of new customers coming in.

[Operator:]

Your next question is from Robert Galvin with Stifel. Your line is open.

[Robert Galvin:]

This is Rob Galvin on from Brad Reback. Thanks for taking the question. I have a two part question. First, I'm wondering what the benefit in the Q1 was for holding customer funds. And second, what has modeled for the remainder of the year in terms of customer funds held and the benefit from them? Thank you.

[Scott McFarlane:]

I think the question was what was the benefit in Q1 from customer funds and what's modeled for the rest of the year? So the customer funds, these are the funds that we pull from our customers and then remit to government agencies with the returns. We hold those funds for – I think an average around 5-ish days plus or minus pre-COVID when interest rates were higher we were on a path to around a $1 million a quarter $4 million a year, then interest rates went to zero and we've had really no benefit. In Q1 there was pretty much even though interest rates are going up we have not, and there's a little bit of delay in what we are going to get from that. And so I'd say Q1, there was almost no benefit from that piece. And we have not modeled anything of significant increase for the year, so that if rates were to really meaningfully rise and we were to start to get revenue that would be upside though. I would not – I don't think that'll be meaningful for this year yet.

[Operator:]

Your next question is from the line of Keith Weiss with Morgan Stanley. Your line is open.

[Keith Weiss:]

Excellent. Thank you guys for taking the call and really nice quarter. You guys did a really nice job of sort of referencing e-commerce and explaining why you guys don't see the same impacts that the e-commerce vendors themselves see. But there is just the broader kind of macro MLAs that we're all worried about. You mentioned a little bit of softness and in Europe, when you guys were looking at the FY22 guide, and you brought up the guidance for the full year more than what you beat Q1 by. Was there any increased conservatism that you put into that operating margin side of the equation? It sounds like most of the sort of the spending, savings or the efficiencies was not really by choice; it was more so it is just a difficult hiring environment. But am I wrong in that? Was there any element that you're looking to be a little bit more conservative given the environment?

[Scott McFarlane:]

Yes, let me try to hit that. If you go back two years from now, I taught I'd go back, but at the beginning of the pandemic, there was a question amongst all of us to guide or not. We looked at and said, hey, we're subscription model. We should have pretty good visibility into the rest of the year. There is a lot of uncertainty. We'll be conservative and obviously there's a dose of conservatism that goes into that. It all worked out pretty nicely. So as we stand here now, there is a lot of uncertainty, right, as you highlight and I think that we would proceed in a guidance that has de-risk that, those risks. So I would say we're guiding like we did two years ago in a time of uncertainty we feel good about the business overall. Yes, there's some challenges in International. There's some hiring challenges that that put some challenges into the business, but overall I think we have good visibility. I think we've got some cushion in conservatism to de-risks the plan for the year and we feel pretty good. On the spending side, it's hard to break out what's by choice and whatnot. Yes, you got it right that we're behind on hiring, I think like everybody. It's a challenging hiring environment and that contributed to savings in the year. And I think that flywheel of hiring would hopefully accelerate. And maybe we give a little bit of that back, but as I said earlier in the call we've made intentional choices that are part of really getting going on this Rule 40 model that we're going to lay out for you in June to try to accelerate those efficiency gains. And those are things that are like in can cost of revenue around hosting optimization. Some things that we're doing with some of our execution teams and cost of revenue where we think we can do a little more or less. Areas in R&D and sales and marketing where we think we could hire a little bit less than we originally planned, not meaning that we're behind, but meaning choosing not to because we found other ways to achieve our objectives with less. So I'd say we are definitely actively tightening the screws and driving efficiencies faster than we thought we could otherwise do, and we look forward to getting more into the details with you on June 28 in the Analyst Day.

[Keith Weiss:]

The only thing I would add to that is that I just want to remind everybody, and we said it again in the prepared remarks, but I think it warrants an emphasis on it. I've always said that Avalara is in this unique position because it's positioned to be good in good times and I mean not as bad as others and maybe even good in bad times because we have a unique ROI message. I mean, taking automating sales tax is a message that works in both environments. And our business is sort of set up to be a low beta. So it doesn't rise with the – it doesn't rise with all the fabs and it doesn't go down with all of the bad time. And that's – that's what I think you're seeing in our comments and feelings about the business.

[Operator:]

Your next question comes from the line of Peter Levine with Evercore. Your line is open.

[Peter Levine:]

Great. Thanks for squeezing me in. Maybe, Ross, Just, you called out auto services backlog impacted revenue recognition in the quarter. Can you quantify what the 1Q impacts – what the impact at was? And then what the impact could or will be for the year, considering or if you think the current labor constraints will remain persistent at these levels?

[Ross Tennenbaum:]

Yes. I don't think we'll quantify it. I mean it's a small – it's a small probably a couple of million bucks, but it's – we expect a little bit more in professional services revenue. I think we were pleased. We had one of the highest backlogs that we've had in professional services revenue. And really, it was behind on hiring. As to get PS revenue, you have to hit milestone and complete projects. And so being at capacity and underhired on the PS reps allowed us to complete fewer jobs and recognize less revenue than we wanted to. I think we're on top of it. And right now, we hope to be able to make it up in the year. But it wasn't a big delta. I was just calling it out because if you look sequentially, it looks a little bit weird. And it may be a question on people's minds, so I wanted to know, it was just a little bit light in the quarter because of that. Nothing concerning, and we were pleased with the robust backlog we're seeing.

[Operator:]

Your next question comes from the line of DJ Hynes with Canaccord. Your line is open.

[DJ Hynes:]

Hey guys. Congrats on the nice quarter here. Scott, you're pretty fresh off your developer conference. I'd love to hear you talk about the engagement you're seeing with the low-code studio. And maybe from their kind of – talk about the path and general time line to monetizing this partner activity?

[Scott McFarlane:]

It's a great question actually because I think it really – it really points to one of the distinguishing factors about Avalara. I mean from the day we started this company, we were an API business. I mean that's how we connect into all of our publishers; I mean all the financial applications. But what I think is really unique about our new integration studio is that it just makes it simpler and simpler and simpler for people to be able to take our code and not only build it into the traditional way of connecting into integration, but to go outside and create products and connections that we've never had in the past. I mean, one of the first things I challenged the team on back in the day was I want to be famous in the developer community because I think that, that's ultimately the way that you dominate an industry and go beyond just what you can do and turn on the power of other developers in the activities that they want to see done for their customer base. And so I think that this is a big step forward. I mean it's just – to me, it's mind blowing how well that they created this. So it just makes it simple for anybody on a low-code basis to integrate taxes and returns into a workflow that they want to create. So I think it's a huge opportunity for us to step out and continue to lead and dominate in this space. It really was a big step forward, very impressive and very proud of the team.

[Operator:]

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

[Alex Sklar:]

Ross, I appreciate all the organic callouts. Can you quantify the revenue and billings headwind in the quarter from the European marketplace partner renegotiation? And are there any opportunities to expand with that particular partner in other geographies? Thanks.

[Ross Tennenbaum:]

Yes. Thanks, Alex. Yes, I mean, we're not going to call it out specifically every quarter. We said going into the year, we thought it would be a few points. And I would just say for – in the last couple of quarters, we said look, we're not going to break out total and organic revenue anymore because the 2021 acquisitions were small and it creates an insignificant delta. And between that and the offset on the EU marketplace, it's roughly offsets and we thought the reported numbers are pretty good representation. But we did call out the Track1099 this quarter, Track1099 is our 1099 acquisition, obviously, in the name. And the revenue is all in Q1. It's a seasonal business all in Q1. And so because that created a wider delta between reported revenue of 33% and organic of about 29%, we wanted to call that out for you to understand it. On the billing side, I would just say this. As you guys do all your permutations of billings and organic billings, billings in the past has been a good leading indicator metric for us. I would say right now, it's not a perfect metric for us. As you think about billings, I think it detaches a little bit as an indicator of future revenue growth. And here's what's interesting. If you go back to Q1 2020, beginning of pandemic, we did 21% billings growth organic, and we had a 29% revenue growth year organic. If you go to Q1 2021, we did 37% or 38% billings growth because of an easy comp. And we again did 29% revenue growth, very, very consistent each year. Here we are now looking at the 38% billings, organic billings comp. And I think that, that weighs on the billings result this quarter, coupled with the marketplace partner point. And then we've had a little bit of a mix shift over the last year from annual billing to monthly quarter – monthly and quarterly. That's kind of a result of the pandemic where we were giving easier terms to customers, which I think was a good trade-off. But that movement adds probably a couple of points in Q1 impact to billings. So there's some puts and takes there. But I think overall, really good billings result for the quarter. I think it's a little bit less indicative of future revenue growth. And so I think you should just focus in on sort of revenue guidance and all the other commentary that we provided around how we're feeling about the business.

[Operator:]

Your next question comes from the line of Andrew DeGasperi with Berenberg. Your line is open.

[Andrew DeGasperi:]

Thanks for fitting me in. I apologize if this already got asked. I have two earnings calls were juggling. But just on the first quarter bookings, can you clarify, did you say that the majority came from the existing base? And if so, shouldn't we see the net retention rate pinch up from that greater than what it was? And then maybe any comments in terms of – are you seeing any change in the top of funnel in terms of e-commerce limits? Thanks.

[Ross Tennenbaum:]

I didn't say that, Andrew. I'm not – you lost me. I think what you may be referring to, as I said for in our e-commerce business from the Avalara – the included business with like the Shopifys and the e-commerce of the world, most of the bookings come from customers that activated on those platforms in prior cohorts. In other words, we didn't need somebody to sign up for e-commerce this quarter to produce the bookings. We are monetizing through conversion and upsell of people that came on to the platform in prior quarters. And that goes with what we've always been saying, that it's – we have a large funnel from all these people that became e-commerce, they have calc in their card from their platform, but they haven't necessarily dealt with other channels, with returns, with certs, with cross-border, with used tax, et cetera and it's our opportunity to start converting and upselling them. There's tens of thousands even more of those out there that where we're doing calc and we can go convert and upsell. So that doesn't really affect the NRR calculation. It's a separate point, Andrew. I lost the rest of what you're asking at this time to figure out question.

[Operator:]

Your final question comes from the line of Daniel Jester with BMO. Your line is open.

[Daniel Jester:]

Great. Thanks for squeezing me in. Could you just talk a little bit about how you're viewing sort of your acquisition strategy this year? Obviously, it's been part of your DNA in the past, but you talked about sort of the cost control and some macro volatility. Just wondering how you're thinking about the acquisition environment. A changing valuation, I think, would be helpful there. Thank you.

[Scott McFarlane:]

Yes. Look, as you said, DNA – I mean M&A is part of our DNA. It's important to grow tax types. It's important to grow content. It's important to grow internationally. And I think that we're looking at doing all of those things, but we're paying more attention to what's the impact on gross margin, bottom line. But there's no question that to move beyond where we want to go internationally that M&A is going to play an important role in that. I think we're being very selective about what we look at when we think about indirect taxes. We probably will not expand out as greatly into other tax areas that we have in the past. So we'll be more mindful of the overall efficiency of the company. But in order to grow internationally and to build out e-invoicing, I would expect M&A to be focused in those kinds of areas. It's the same as we've sort of had in the past and we've told everybody. So it's not a big change. We're just a little bit more focused on efficiency and making sure that we have the right prioritization.

[Operator:]

There are no further questions at this time. I would now like to turn the call back over to the Co-Founder and Chief Executive Officer, Mr. Scott McFarlane. Please go ahead.

[Scott McFarlane:]

I'd just like to close today by taking the opportunity to thank all of the Avalara employees, all of our customers and partners for all their hard work and support during a trying time. And we look forward to talking to everybody on the next call. And thank you all so much for your questions today. Appreciate it.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.