Avalara, Inc.

Good afternoon, and welcome to Avalara’s fourth quarter and fiscal year 2020 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 provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements concerning financial and business trends, the impact of COVID-19 on our business and global economic conditions, our expectations related to our acquisitions, our expected future business and financial performance and financial conditions, and our guidance for the first quarter and fiscal year 2021, and can be identified by words such as expect, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today’s press release, our annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2020, 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.

Thanks, Jennifer. And welcome to everyone joining our Q4 2020 earnings call.

I’d like to congratulate the entire Avalara team for an outstanding performance in the fourth quarter and fiscal year 2020. We beat our outlook from the beginning of the year, despite COVID-19 challenges.

We ended the year achieving $0.5 billion in revenue, an increase of 31% year-over-year with a narrower than expected non-GAAP operating loss of $3 million. We also reported record annual free cash flow of $34 million and increased our non-GAAP gross margin to 74%.

In Q4, we reported to total revenue of $145 million, representing an increase of 35% year-over-year. We also reported Q4 calculated billings growth of 38% year-over-year.

Our 35% total revenue growth rate was driven by continued strong execution across the business, and the addition of a few highly strategic acquisitions that we closed in Q4. Our results demonstrate the strength and resilience of our business model in challenging times.

In 2020, while others were pulling back, we released more new products than ever before in our history. In addition, we announced our largest acquisition to bolster our content portfolio and enterprise capabilities, and acquired companies to extend our offerings in licensing and registration and e-invoicing, and the entered of the global insurance compliance market.

We have a bold vision. And I’m proud that we have found a working formula that allows us to deliver strong results today and aggressively build the global category-defining cloud compliance platform of the future.

While we continue to focus on increasing penetration in our core mid-market, we are also investing in product development and acquisitions that we believe will accelerate our ambition to deliver the end-to-end compliance journey to customers of all sizes, globally. Many of you ask, how would we have done in 2020 without COVID?

Our customer base is very diverse, encompassing large Fortune 500 enterprises, all the way to tiny emerging small businesses. Our customers operate on business models ranging from B2B direct sales to e-commerce to brick and mortar retail, and increasingly our omnichannel with various combinations of these.

In 2020, many companies adopted our solutions as they reinvented their business models and rapidly adopted cloud and e-commerce solutions. We have B2B direct sales companies who did terrific and purchased our solutions or expanded their business with us.

But we have also had many direct sales and e-commerce prospects that didn’t do well, and as a result chose to delay their tax automation plan to a future time. We believe compliance automation is inevitable.

As COVID retreats, we expect Avalara to remain the durable long and strong business we have built it to be. The acceleration of e-commerce is our trend.

Businesses adopting or expanding e-commerce are excellent prospects for us, as their omnichannel complexity and compliance exposure grow. We expect the same for other trends that persisted during the pandemic, cloud solution adoption and increasing regulatory complexity to say nothing of the imperative of cost efficiency in difficult economic environment.

And for the many businesses who have struggled, we’ll be there to support their needs as they return to growth and begin again to experience a classic trigger event that might lead to the adoption of our solutions. We saw these trends play out with our customers during the fourth quarter.

We won our largest deal of 2020 of seven-figure deal value, which includes annual recurring software, plus onetime fees and services within international marketplace in the streaming media segment. This is a great multiproduct example, including our AvaTax communications, sales tax, and return solution.

The Company selected Avalara for its ability to handle real time calculations for both, communications and sales tax use cases, as well as related filing requirements. Other communication deals included a cellular network company, and one of Colorado’s fastest growing software companies.

Additionally, we completed several competitive wins and takeaways. We won an enterprise deal with a food products company for a deal value of $40,000, because of our integration with disparate ERP system.

This is an example of how our partner centered business makes it easier for our customers to integrate our solutions into their application. Next, we won a deal with a multibillion dollar international food business, going head to head against the competition.

Use tax compliance was the main pain point for this customer. We also won a global internet marketplace in a deal valued above $200,000.

We won against our competitors due to our one stop shop strategy for all their transactional tax compliance needs, including U.S. sales and use tax calculation and returns, streamlined sales tax, VAT determination, and international returns.

Finally, we unseated the incumbent to win $100,000 takeaway deal value with an international medical device company. The customer chose Avalara for the benefits of a single cloud platform for sales and use tax compliance, and our integration with their large multinational ERP vendor.

In the e-commerce space, we want to marquee Japanese maker of watches. NetSuite recommended Avalara due to our strength in omnichannel commerce and integration with NetSuite and Shopify Plus.

In addition, we converted a BigCommerce customer of child safety products for more than $100,000 in deal value, due to our multiproduct capabilities, and omnichannel integration with a large multinational ERP vendor and BigCommerce, as well as our FFC program. Also, a home décor company is in the process of moving to e-commerce and selected Avalara for a $32,000 deal value due to our pre-built integration with Shopify Plus, and a well known accounting software application.

But my favorite deal this quarter was for a pet apparel company for $175,000 deal value. This deal exemplifies what we are doing at Avalara and why I stick firm to my belief that over time, every business will automate tax compliance.

The Company’s been around for more than 20 years and has only now adopted tax automation. The business evolved into an omnichannel company, supporting e-commerce transactions on Shopify.

They found Avalara through our Shopify relationship and trusted our solution for our prebuilt integration with Shopify Plus. And they’re leading mid-market ERP vendor.

Like many of our customers who feel overwhelmed by the burdens of tax compliance, this customer’s rapid omnichannel growth led them to an untenable state of noncompliance that could no longer be addressed by their status quo. This led to a multiproduct deal, including voluntary disclosure agreement, nexus study, tax registration services, sales tax calculations integrated to a leading ERP and Shopify’s ecommerce platform.

Our CertCapture exemption management and managed services offerings, and our returns compliance solution. As demonstrated through our customer wins, Avalara’s partner moat continues to be a key differentiator, especially as businesses shift to omnichannel and seek a single tax compliance platform that can integrate for multiple disparate systems.

That’s why we continue to enhance our partner moat by actively forging new relationships that offer integrations with more business applications, and exposure to potential customers. We offer far more prebuilt integrations with these applications than any other tax software providers, and plan to add more.

As a reminder, our total number of partner integrations, including all of those that have been signed, but are not yet live is over 1,000. It’s great to know that in a competitive landscape, these companies continue to choose Avalara, and our launch team is fully engaged to get these new and emerging partnerships up and running.

Software developers who build integration that connect solutions and services into various business applications represent another essential partner segment for Avalara. Working to extend our relationships with this community, we recently held Avalara NEXT, our first ever code-focused event where we brought together developers from all over the world at the forefront of global commerce and tax technology.

Attendees learned about Avalara’s new products, APIs, tools, and best practices to help build tax compliance into their business application. With hundreds of registrations NEXT was an important opportunity for us to showcase our leadership position in the market, build brand awareness, create valuable resources, including our updated developer portal, and connect with and support the global commerce and test technology community.

I’m excited to talk to you about the progress of our multiproduct platform journey. 2020 was a remarkable year for our product releases as we accelerated our transformation into a product machine.

We had a total of seven product releases, including Avalara Consumer Use, Avalara Cross Border, Avalara Returns for Small Businesses, Avalara India GST and e-Invoicing solution, Avalara for Beverage Alcohol compliance, Avalara AvaTax Advanced Transaction Rules and Fiscal Rep service. Our latest product availability release in January is Avalara Managed Returns for Accountants, also known as MRA.

MRA is our cloud sales tax returns solution designed exclusively for accounting for firms, another milestone event in our journey to build out our accounting channel business. The Avalara for accountant industry team that we have attracted is an accomplished group with deep industry knowledge and experience selling competing tax compliance software technology products in the market.

MRA enables firms to extend their practice with automated sales tax preparation and filing services, provide clients with the benefit of a fully managed returns service and add efficiency while focusing on other high value services. Now, I’d like to talk a little bit about our recent acquisitions.

Rather than retreating amid the challenges of 2020, we drove hard organically and through M&A to continue building our global cloud compliance platform and future proof our leadership in the space. We leveraged M&A to expand our tax content repository, add new capabilities and technology and further our geographic expansion.

In addition, we’ve added impressive talent and are aggregating some of the brightest minds in transactional tasks. We are in a market where M&A presents efficient opportunities to accelerate our products and go-to-market roadmap to address our near and long-term ambition.

In Q4, we substantially improved our enterprise and content offering through the acquisition of Transaction Tax Resources, Inc. And we expanded our platform to include a complementary compliance solution for licensing and registration requirements with the acquisition of Assets from Business Licenses.

Recently, we acquired in Impendulo Limited to enter the global insurance compliance market. And we signed a definitive agreement to acquire INPOSIA, which we believe will hasten our entry into the rapidly growing real-time compliance market and enable the replication of our U.S.

moat globally. Now, I’d like to share with you more details on Impendulo and INPOSIA.

On December 5th, we acquired Impendulo to enter the global insurance compliance market. I’m excited to welcome Chris James, the founder and leading experts in insurance tax compliance, as well as all of the Impendulo employees to the Avalara family.

Impendulo is a London based provider of insurance tax compliance technology and services, specializing in support for multinational insurance companies. Insurance premium taxes are just another slice of the indirect tax pie that funds a significant and growing revenue stream for governments around the world.

Like with our past acquisition to enter communications, fuel, lodging, and beverage alcohol compliance markets, we believe that global insurance compliance market is ripe for automation and a natural addition for our global offering. Now, I’d like to talk to you about our most recent transaction.

On December 29th, we signed a definitive agreement to acquire INPOSIA. This deal is expected to close in the first half of this year, subject to satisfactory closing conditions.

INPOSIA is a German software company focused on e-invoicing, digital tax reporting, and business and data integration to address real-time compliance requirements for companies worldwide. So, why INPOSIA and why now?

Our ambition is to see around corners others have not had in their sights, to innovate a global compliance platform that serves the next generation of client requirements, which we believe will future proof Avalara’s business. The future of tax is real time reporting where electronic invoicing will enable the customer, vendor and taxing authority, so all receive invoice information and monies due at the same time in that magic moment of commerce.

Where compliance today maybe a monthly or weekly requirement, we anticipate it will become real time, meaning tax authorities will be a live party to every transaction. This will result in a more complex transactional tax environment where calculation, reporting, and remittance are all real-time, like U.S.

calculation is today. Automation will be critical.

Winning in this environment would be no different from our strategy in the U.S. The winner must be able to connect any business application where transactions happen to any government around the globe.

In other words, Avalara will need to recreate our U.S. moat globally, and we believe INPOSIA is a critical element to making that happen.

INPOSIA expands our European footprint and our real-time compliance capability. We believe that INPOSIA provides an essential platform to connect sellers and suppliers and businesses and government.

The trusted facilitation of data between each party and across any business system is essential to success as governments move from the end of the transactional tax chain to the middle. With INPOSIA, we have the opportunity to further our vision of being the leading global compliance automation provider.

We continue to focus on integrating our acquired companies, including TTR and Business Licenses. Integration is not new for us and it is going as we expected.

Mission number one is to support and invest in the growth of the standalone businesses that we’ve acquired. Mission number two is to cross sell product.

We are working well with both companies to begin to uncover opportunities where we can sell to existing customers for shared prospects. We have an early building pipeline of mostly large enterprise customers and partner opportunities that we are coworking with TTR, and several deals were already cross sold to one another’s customers.

We are optimistic about our ability to integrate these companies into Avalara and pursue the cross-sell synergy potential from these acquisitions. M&A has been in our manifesto since we founded the Company.

And we will continue to look for opportunities that we believe will improve and sustain Avalara and our growth objectives. We believe that we must build for the future.

And we are looking five years down the road to ensure that we remain relevant in a growing and ever-changing market. The investments we’ve made in our product machine and acquisitions are paying off.

Both avenues provide us with new and enhanced products that we believe will provide fresh opportunities to acquire new customers, upsell existing customers and better monetize our offerings. As we’ve always said, we believe we are long and strong business, single digit penetrated in a large addressable market and a long-term play, based on automating statutorily required functions.

We’re excited to have reached over a $0.5 billion in revenue, and believe we can grow and scale Avalara into a multiproduct, multibillion dollar revenue company over time. Finally, I’m excited to tell you that in the fourth quarter, we launched the Sustainability page on our Investor Relations website to highlight our progress and address investors’ requests for more disclosure.

We believe that sustainability is a key component to our long-term value and business resiliency. And I encourage you to go to our site for more information.

Thank you. I will now turn the call over to Ross.

Thanks, Scott. We are very pleased with our full year 2020 results that exceeded our guidance provided at the beginning of 2020, despite a uniquely challenging year.

2020 reaffirmed our strategy, market leadership and belief that Avalara is building a durable, long-term business that can compound growth in the 20% to 25% range as nearly every business automates tax compliance over time. We achieved a new milestone by hitting the $0.5 billion mark for 2020 revenue.

We did that at 31% year-over-year growth, while increasing our non-GAAP gross margin to 74% and delivering record free cash flow of $34 million on a non-GAAP operating loss of $3.1 million. Avalara posted strong Q4 performance across the board that exceeded our guided metrics.

Q4 total revenue was $144.8 million, up 35% year-over-year, or up 28% after excluding $6.5 million of revenue, primarily from the October 5th acquisition of TTR, and then November 5th acquisition of Business Licenses. Subscription and returns revenue grew 33% year-over-year to $132.6 million or up 29% excluding acquisitions and represented 92% of our total revenue.

Professional services revenue was $12.2 million, up 59% year-over-year, or up 24% excluding acquisitions. Our core customer count increased by 710 from the previous quarter to approximately 14,890, at the end of Q4 2020, a year-over-year increase of 23%.

The increase of 710 was up from an increase of 620 in Q3. While gross revenue churn unexpectedly ticked up in 2020, it remains at a level that is meaningfully lower than 4%.

We define gross revenue churn as the annual revenue contribution associated with billing accounts that cancel all of their agreements with us, divided by the total annual revenue recognized during a measurement period. As a reminder, our gross revenue churn does not include downgrade.

Our net revenue retention rate was 104%, down from 108% last quarter, and resulting in a 107% four-quarter average. Our NRR is impacted by two factors.

First, our NRR is calculated using total revenue, which is subject to the impact of non-recurring professional services. Second, our NRR currently excludes upsell revenue from our Streamlined Sales Tax for SST program, which grew significantly in 2020.

Conversely, our NRR calculation includes revenue contraction that may occur when existing customer changes from our standard subscription returns program to our SST program. While this downgrade is offset by the SST upsell, our NRR calculation only captures the value of the downgrade.

Avalara’s 2020 revenue from SST was $39.3 million. As a reminder, the SST governing board recently renewed the SST program for another three-year term, covering January 1, 2021 to December 31, 2022.

The renewal included an expected reduction in the program’s compensation formula percentage that we will absorb in 2021. We believe that absent this pricing change, we would realize 3 million or more of additional revenue per quarter in 2021, which is factored into our 2021 revenue guidance.

Even though the SST program is a slight headwind to our growth rate, we still expect SST revenue grow in 2021, as we continue to add new SST customers and work down our existing backlog. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued just before this call.

Gross profit was $107.7 million in Q4, representing a 74% gross margin. This compares with gross profit of $76.8 million and a 71% gross margin in the same period last year.

Sales and marketing expense was $53.5 million in Q4 or 37% of total revenue, an improvement of more than 300 basis points year-over-year. Sales and marketing expense again benefited from reduced travel and sales-related events.

We intend to invest aggressively in sales and marketing capacity in 2021 as long as we continue to see a healthy demand environment. Q4 research and development expense was $13.5 million or 21% of revenue, down from 22% of revenue in Q4 ‘19.

We expect R&D as a percent of revenue to increase in 2021 as we invest more aggressively in building our global cloud platform, integrating acquisitions and building new capabilities to drive long-term growth and cost efficiency. Q4 general and administrative expense was $24.3 million or 17% of revenue, versus 14% of revenue in Q4 ‘19.

Q4 G&A expense included approximately $1.6 million for third-party legal and professional fees in support of our recent M&A activity. Q4 operating loss was $600,000, which is better than our guidance, as a result of stronger than expected revenue and gross margin, slower hiring, and reduced travel and event expenses.

Q4 diluted net income per share was $0.09 in the quarter, based on 89.3 million diluted shares outstanding. Looking now at our fiscal year 2020 results.

Total revenue of $500.6 million was up 31% year-over-year, or 29% after excluding $6.5 million in revenue, primarily from the October 5th acquisition of TTR and then November 5th acquisition of Business Licenses. Subscription and returns revenue contributed $465.8 million.

This represented 93% of our total revenue, and it grew 31% year-over-year or 30%, excluding our Q4 acquisitions. Professional services and other revenue contributed $34.7 million.

Gross profit was $368.5 million for 2020, representing a 74% gross margin. This compares with gross profit of $275.1 million and a 72% gross margin in 2019 as automation and reduced expenses due to COVID-19 lowered our investments in cost of revenue.

Operating loss for 2020 was $3.1 million, compared with a $14.4 million operating loss in the prior year. Our cash, cash equivalents and restricted cash were 731.2 million at the end of Q4 ‘20, an increase of $264.3 million from $467 million at the end of Q4 ‘19.

Total deferred revenue at the end of Q4 ‘20 was $209.7 million, up 30% from $161.2 million at the end of Q4 ‘19. Calculated billings is a non-GAAP metric that takes into consideration revenue and the change in deferred revenue as well as the change in contract liabilities.

Calculated billings was 167.1 million in Q4 ‘20, up 38% year-over-year, or 31%, excluding the impact from Q4 acquisitions on revenue, deferred revenue and contract liabilities. Free cash flow was $28.6 million in the fourth quarter compared to $14.2 million in the same quarter last year.

For 2020, we achieved record free cash flow of $34 million, compared to $12 million for 2019. I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q1 and for the full year 2021.

Our strategy is clear. Avalarains work hard every day to deliver strong results, like those producing 2020, while simultaneously investing aggressively to build the compliance platform in the future.

We have a vision for the future of tax compliance and believe we can evolve our platform to maintain a leadership position that sustains our long-term growth ambitions. As you have seen in 2020, this evolution is being built through a combination of organic product launches and acquisitions.

Specific to 2021, our thesis has not changed. We believe we are addressing a large, low-penetrated market, and that Avalara is well-positioned to deliver durable long-term growth, 20% to 25%.

We’d like to provide more clarity on revenue mix expectations. For 2021, we expect a higher mix of professional services and other revenue of approximately 8% of total 2021 revenue.

This is predominantly due to our expectation that the mix of our previously guided $30 million in 2021 revenue from Q4 acquisition, will be split two-thirds in subscription returns revenue, and one-third in professional services and other revenue. Much of this is from the categorization of revenue for Business Licenses, and not a change in our core business strategy.

For Q1 2021, we expect total revenue between $142 million and 144 million, which represents a 28% year-over-year growth rate at the midpoint of the range, or 22% year-over-year, excluding approximately $7 million in revenue from acquisitions closed in Q4 ‘20. We estimate these figures are approximately 3 million, or three percentage points lower than they would have been without the SST price reduction.

We expect our Q1 non-GAAP operating loss to be in the range of $10 million to $12 million, reflecting a resumption in more aggressive spending in sales and marketing, research and development, and M&A integration. Similar to prior years, we expect to have significant Q1 cash outflows for bonus payments, software and insurance renewals and other large expenses.

For the full year 2021, we expect total revenue between $628 million and $633 million, which represents a 26% year-over-year growth rate at the midpoint of the range, or 22% year-over-year, excluding an expected $30 million in revenue from acquisition closed in Q420. We estimate these figures are $12 million to $15 million, or 2.5 to 3 percentage-point lower than they would have been without the SST price reduction.

As a reminder, M&A is part of Avalara’s DNA, and we’ve acquired dozens of companies since Avalara’s founding. We don’t acquire for revenue but rather to accelerate our vision to become the global compliance platform through the acquisition of talent, additional content, new technology and geographic expansion.

We expect our full year 2021 non-GAAP operating loss to be in the range of $18 million to $22 million, reflecting a resumption in more aggressive investments in sales and marketing, research and development and M&A integration. In 2020, we made progress automating activities that drove gross margin leverage.

We also benefited from slower hiring and other savings from the COVID-19 pandemic. We intend to continue investing in automation that we expect will improve gross margin for our core products and geographies.

However, we expect these improvements may be offset by new products and recent acquisitions that carry a lower gross margin, until we automate and drive higher scale. We expect this may result in a 2021 gross margin that is similar to our 2020 results.

We continue to expect a modest level of free cash burn in 2021, consistent with what we shared on our November 2020 earnings call. Please note that our virtual Analyst Day will be held on Thursday, May 27th in conjunction with our virtual CRUSH annual users’ conference.

Also, we will participate in upcoming conferences including Goldman Sachs, JMP Securities, Morgan Stanley, Raymond James and Stephens, in the first quarter. Thank you for participating in today’s call.

At this point, we would like to open up the call for your questions.

Congrats on a great finish to the year. I wanted to ask about the INPOSIA acquisition.

Can you talk a bit about what integration that has today with core systems, like ERPs and governments? And to roll out a product like this in the U.S., can you talk about some of the integration work that would be required?

Thanks.

Hey Chris, thanks a bunch. The way I would say it is, this is really an international phenomenon.

That’s where I’m going to start with INPOSIA, because today that is really a reporting solution, bat in, bat out. I mean, you do your reporting.

But, what e-invoicing does and what INPOSIA does is, it actually takes all of that transactional information and does it in real-time. So, it’s actually moving that closer to where we are in the U.S., right, making it transactional.

So, the governments are getting in the middle of the transaction. So, they know the information that’s going on with the e-invoice, so they have an audit trail.

So, that’s the fundamental difference. It’s actually pushing that closer to where we are in the transactional nature in the U.S.

So, it’s probably not something that’s going to come to the U.S. It’s actually making international more like what’s happening here in the U.S.

I do think, ultimately in the U.S. that government’s going to do the same thing here.

But it’s -- but we’re not keen on government business. So, I think it will take a while for that to happen.

So, what you do is you take the INPOSIA -- I mean, the INPOSIA product, and it is then integrated in with our connectors on a global basis. So, when a transaction comes in, they know to be able to bounce out to the government, get approval, return that information and it’s stored and then reported on in real-time.

That’s essentially what’s taking place, Chris.

Okay. That makes a lot of sense.

And is there any opportunity for like an additional transaction fee with the e-invoicing component of this, or is this just something that’s going to be brought into your suite and sold as part of the broader package on a subscription basis?

No, it’s really a bonus for Avalara, because today, in the VAT world, doing calculations is just not really a revenue-generating area for us. I mean, it’s really all about reporting.

In the United States, we have calculation and then you -- we charge for returns. Internationally, the VAT returns are very expensive and the calculation is not that much.

So, by moving to e-invoicing, it’s actually making our calculation module much more important, and we will get all of the transactions that today we don’t internationally.

I wanted to ask about the enterprise traction. Scott, you mentioned some nice pipeline builds there.

Can you remind us how different is the enterprise from a product and go-to-market standpoint, the requirements there, and how has Avalara made some changes to meet those requirements?

That’s a great question. Look, I’m a mid-market guy.

There is just no doubt about that, right? That’s where we started.

That’s where our home is. That’s where I feel most comfortable.

And so, as we built out our opportunistic program for enterprise, and what I mean by that is, we’re using the same go-to-market strategies today, and when these enterprise deals come up, we turn our team towards that goal. And we are winning our fair share of those deals, meaning both new deals and takeaway deals in the marketplace, because most of the largest enterprise companies already have a solution.

So, most of them are takeaways. I’m shying away from doing the rip and replace where we just go full bore into the enterprise for the longest time.

I mean, we’ve been doing this 16, 17 years. But, we’ve declared that now is the time to start moving upmarket.

So, we’ve spent a lot of time in how we build out our product, and we’ve done great work to make our products more -- have that feature parity with all of the big businesses out there. But, we do have a ways to go to building out our processes and our operations, so I would say to be as good in enterprise as we are in the mid-market.

So, we have -- we definitely have work to do in order to build out the services, our go-to-market process and really just our ability to do high-level technology consulting for the largest companies. And so, we’re going to have to invest in that in the coming quarters, in order to really be an enterprise machine.

And then, one more, if I may, please. Just if you could remind us kind of where you are with some of these new compliance offerings.

Obviously, Avalara has done a great job expanding the footprint beyond sales tax into things like landed cost and licensing and more compliance-related workflows. And at the Analyst Day last year, you talked about some interesting compliance applications on top of the platform.

So, if you could just remind us kind of where those are and when those might start to contribute. Thanks so much.

You really heard it in our examples. And I’m really proud of the team for the way we’ve been able to take things like use tax, right?

I mean, everybody’s heard me talk about the four horsemen of sales -- of tax, right, sales tax, use tax, you’ve got returns and exemption. And a lot of the work that we did is building those out to really be a step-up in functionality and usability for our customers.

I mean, a lot of the deals that we are winning in enterprise, and most people don’t know this. When it comes to enterprise selling, use tax is one of the most -- their largest pain point.

And so, improving our use tax, and you saw by doing that in some of the examples, that’s what we actually led with, in the enterprise space. So, I’m really pleased that we’ve been able to continue our sort of rinse and repeat model, which is, look, we started out with calculation, then we added returns.

Returns today, almost 40% of our revenue, exemption certificates, a big add to it. So, we just continue to do that with use tax.

We’re continuing to do that with Cross-Border, where that’s growing significantly. And then you add on TTR subscription services and business licenses, and you can start to see the pattern of how we’re doing this and how we’re able to expand our footprint in new sales and in upsell.

And I just really think that that’s one of the unique aspects of our business and what we’ve been able to do. And we’re going to continue to keep our foot on the pedal on that one, Brad.

So, Scott, you talked about some potential customers pushing out tax solution decisions because of the pandemic. With that in mind, what should investors expect in terms of new customer additions throughout 2021, especially post-pandemic?

I mean -- so I’ll talk in general, and then we’re going to bring Ross in. We got to wake him up over there, so he can chime in here.

So, look, when I think about what we’re doing is the large amount of our customers, I mean, that’s what’s so unbelievable, we have this huge cross section of businesses. And I know, everybody is focused on e-commerce, and I’m sure we’ll get questions on that.

But, there are a lot of businesses that didn’t do as well as everybody thinks around the e-commerce area. And we know that there are people that want to do this but just decided to push out that decision-making process until COVID is over, so they’re back at work and the trigger events will start to be at play again.

So, I mean, we know that there’s a pent-up group of customers out there that want to continue to automate, need to automate, but are sitting on the sidelines a little bit. So, I expect that to be a tailwind for us as we move into 2021 and beyond.

Ross?

Yes. I mean, you said it well.

Hi, Sterling. I think, our point is, it’s not bad or good.

It’s just -- we have very diverse customers from the largest to the smallest in every industry. And so, there’s a number of businesses, whether they’re e-commerce, brick-and-mortar, direct sales that unfortunately haven’t done well amid the pandemic.

And, as hopefully this recedes and the economy and the situation improves, we would hope that those come back. And so, many customers we saw in the past would be back pursuing compliance, and we’ll get those.

And in the meantime, a lot of people ask about e-commerce, and, hey, how do you feel about 2021, given there was a surge in 2020? And if that recedes, how is that going to impact your business?

And the good news for us is, we get in with the platforms, we get in with the partners and we try to be built into those relationships. The relationships like Shopify, where they pay the bill for the calculation, and we want to be built in and be calculating for everybody.

And then, it gives us our own hunting ground into those customers, and our mission is to then upsell them. And Scott had a great example on the prepared remarks, the pet company, which was in business since 1999, got into e-com in 2018.

They were on Shopify Plus. They then realized that, oh my gosh, we’re not a local player anymore.

We’re national, maybe global. And compliance is crazy.

I can’t do the status quo compliance that I’ve been doing in the past. So 20 years later, they called Shopify and Shopify told them to come to us.

We’re already doing the calculation. And we upsold them for $150,000-plus deal on pretty much everything, getting back into compliance, returns, SST, document management.

And so, that’s the type of funnel we’re prosecuting, and it’s still early innings on those e-commerce customers are just becoming commerce companies, made their businesses that much more complex, but haven’t realized all of the compliance obligations they’re under. And we hope to continue to prosecute those for the long term.

And we hope that some of the customers that didn’t do well in 2020 come back and pursue again. So, I think it all goes to the long, strong model that we talk about.

Ross, just one quick housekeeping. The 710 net customers added, how many of those came from TTR?

None, there’s no M&A in the core customers right now.

Hey Ross, one for you to start. Can you just go over again the net revenue retention and the downtick there and maybe break out what the biggest components of that were?

Yes. Thanks, Pat.

I love starting, too. Scott always gets to start and I get tired.

So, yes, so net revenue retention rate was 104%. That didn’t surprise us, and we called this out the last few quarters.

But, I’m glad you asked because I want to be really explicit about it. And I really think that the downtick is mostly due to this SST calculation issue where, let’s just pretend you’re a customer, Pat, and you’re in all 50 states, right?

So, you do calc and returns in all 50 states. You enter into a subscription with us for both calc and returns in all those states.

And then, let’s just say, a year later, upon renewal, we bring it to you or you bring it to us that you want SST. SSTs in 24 of those states and its one platform.

We’re running one compliance solution for you, whether it’s SST or not. The only difference is, in SST, the states are paying the bill through we clip a coupon when we do the remittance versus outside of SST states, you, the client, pay the subscription, right?

So, that’s the only real difference there. And so, Pat, you say upon renewal, hey, I want to go with SST in the 24 states.

And what happens mechanically is, we downgrade your 50-state subscription, so that for the 26 states that are non-SST and then we add on SST for the 24 states that are SST. And so, for the 24 And so, for the 24, the SST states are paying the bill; for the 26, you’re paying the bill, but it’s the same offer.

But what happens in NRR is our NRR calculation, it picks up that downsell that I explained, but it doesn’t include that upsell. And you’re saying well actually, why not?

Well, it’s an unfortunate way it was set up and it’s a data related thing that we can correct and we hope to come out with a revision in some future date. But, that’s what happens.

So, if you just think about SST going from around 15 revenue in 2019 to around 40 in 2020, some of that increase is from existing, and that’s actually not impacting NRR. So, that’s what’s putting weight.

And then, there’s a few other things. There’s more downsell in 2020 than we had in the past just from COVID we think, nothing scary but you expect there’s some more downsell.

Our fuel excise business had some downsell on it just because of the end market, small numbers, but end market struggled and there’s some issues there. But overall, it’s really that SST calculation circumstance.

We also include all of the professional services in the calculation, which goes away the next year. So, it’s really punitive from that regard.

Okay. And then, Scott, big picture for you.

I mean, even for those of us who sort of have been following you from the beginning, you guys had a lot going on here. What are like the one or two most important things you think that investors should take away from today?

So, I think I really said it in my prepared remarks. And I really -- I mean, I’m really proud of the business from this regard, because I think we have found a stride.

We found our rhythm in delivering and over-performing it during the COVID crisis and all of that here and now. I mean, the team is focused on delivering in the short term but we have an innate ability in the Company to look beyond just performing today and look to where this business is going in five years.

Ross taught me a word, future-proofing. I mean, I love that word now.

But, that’s essentially what we’re doing. We’re saying, okay, look it, this is where VAT is going; this is where the market is going.

And we’re always trying to be out in front. And the best way I can describe that, Pat, is to say, look at what we did with SST.

We started SST in 2005, and here it is, post Wayfair when it’s all come together, and it’s really an important factor in what we’ve been doing. I like to look at things that we can do today and help us in the short term but really position us long term.

I think, Cross-Border is that way. I think TTR is going to be that way.

And I’m really keen on our growing enterprise focus. So, if I were to say the growing enterprise focus, I think, integrating the businesses that we had and making sure that they continue to grow at a high rate, I think -- is what I think about day in and day out, Pat.

Great. Thanks very much.

Ross, just one last one on the net dollar retention. As we think about 2021, should we expect it to stay in the 4Q range?

What would be the puts and takes, if not?

Yes. I mean, Brad, we don’t guide to it.

So, I can’t exactly answer how you want it. I think my intention is to provide some kind of revision to the definition, so that it’s including SST and so it gives you guys a little bit better information.

In the past, we’ve always said, think about it as 110 plus or minus, right? And I still believe in that.

But, that was without the realization of the divergence from this issue. So, I still -- ultimately, if you just want to think long term, we’ve launched a bunch of new products.

We bought some new businesses. And there’s a lot of outcomes from that.

But one of those outcomes is being able to more fully monetize the end-to-end compliance journey of our customers. And I think that sets us up for a lot in the bag to go upsell our customers.

So, the metric isn’t working for you right now. That’s on me, and I got to correct it for you.

But, my expectation and our internal focus is to really drive more through the channel -- through to our customers and drive that thing upwards over time. But, I can’t give you specifics for 2021.

Scott, I wanted to start with the enterprise segment strength that you’ve seen. It’s kind of a follow-up on Brad’s question.

But, if there was a particular functionality set or feature that you’ve introduced maybe over the last 12 to 18 months, what would that be that’s driving some of that -- some of your excise success recently?

Thanks, Scott. Look, we did not have, I mean, feature parity with the best enterprise solutions out.

I mean, it just -- I mean, it’s one of the areas that we just did not focus on. Over the last few years, we’ve decided that that is something that we needed to do.

And there’s feature parity and then there is service and sort of operational parity. And I want to distinguish between those.

I think, we’re starting to fill the gaps, and one of those is complex custom rules, which we didn’t have and now we do. But, it’s also filling the gaps around operations in the go-to-market motion.

And when I say go-to-market motion, tax technologists play an important role in the integration process, whether we’re doing it or whether one of the big four are doing it. And we have to build that functionality out in order to be called to the table.

I’ve coined this phrase inside the Company that the big four really played a huge role in what happens in the enterprise. And I call them the royals.

The royals really determine who gets the biggest businesses out there. And we have to improve our relationship with the big four, the royals, if you will, and really -- in order to find a way for us to continue to grow and expand in the marketplace.

And I think -- I mean, we’re making the definite steps to do that. It will take us a bit of time.

And I’m pretty pleased with the wins that we’re getting, both competitive, takeaway and the new sales when they come our way. So, we’re in the game and we’ve got to get better over the coming quarters.

And then, a quick follow-up. Ross, you had mentioned revenues from kind of the marketplace and platforms in one of your earlier comments.

One of the questions I’ve had a lot this year is what’s kind of the e-commerce pipe, maybe not in your direct customer segment, but how should we think about some of the revenue contributions or tailwinds that you’ve received from your exposure to some of these platforms that have obviously seen great acceleration to their businesses?

Yes. Thanks, Scott.

I mean, look, e-commerce marketplace, but just the whole e-commerce trend, I would say, my view, and Scott’s been doing it since the beginning, is it’s got to be top two drivers for Avalara’s business long time. I mean, this and cloud are the generational shift that will drive us long term.

So, maybe we’ll quantify like we did last year at Analyst Day this year. But if you think about doing $500 million, 31% year-over-year growth and the performance we delivered that exceeded our original guide in the year, in the pandemic, you got to appreciate that e-commerce was a big driver.

And it really comes down to that omnichannel point that we keep making. It’s just when you were a storefront 20 years ago and people walked in the store, you could figure out how to do calc and returns.

You didn’t have a lot of products, you didn’t -- you had one geography. But what happens is once you go e-com and you’re usually not just e-com, you’re on marketplaces, you maybe have stores, maybe a direct business, you’re usually omnichannel, you’re transacting now not locally but nationally or globally.

And so, the first thing you think of the customers, I got a calc. And so, that’s our first mission, make sure we’re built in through these platforms for the calc.

And then, the customer feels really good, because they’ve got calc and check out all works and they’re really feeling really good. Until they get notices and they realize that, oh, gosh, I’m in 50 states, maybe I’m global and I’m out of compliance potentially in many of those.

And now, I’ve got a compliance problem, I got to do back filings, I got to figure out where I got to do DBAs, I got to get registered n all these states. I got to do collection in all these states.

I got to do filings. I got to do compliance document management.

There’s just all kinds of headaches. And so, just as you can imagine, saying I’m going to do this status quo the way I’ve done it for the last 20 years, like the pet apparel example just is not tenable in many cases.

And so, that’s what drives it. And my only point, again, the question -- everyone wants to ask the question, some businesses that you all cover seen a surge in 2020 from COVID, and we know that’s going to back off post-COVID.

And so, they worry what’s going to happen to Avalara? And I just say, look, when we talk inside, and we said this publicly, one of the things that we feel like we’re still trying to get perfect is that funnel to where we’re upselling Shopify or BigCommerce customers on everything else.

We’re doing pretty well, but we’re not dialed into where we want to be in. We continue to focus on the monetization.

And so, there’s just a lot of those out there that we’re just very early innings on. And we believe, over time, they’re going to adopt and automate more fulsomely.

And we have a really good position as the one doing their calculation in many cases to go get them. So, I think it’s just -- again, it goes to like we keep backing them down day in, day out.

Some people want us to accelerate it, hard to do. They have to have their trigger events.

But, over time, they’re going to keep adopting.

Hey. Thanks guys.

Congrats on the results. Good numbers.

So, first, maybe I’m curious where you think the market is in terms of regulatory enforcement. I think, there was an expectation that 2020 could be a big year for states to figure out Wayfair, and then obviously, COVID hit.

So, I’m curious, how you’re thinking about ‘21 along those lines? And I guess, the related question is, how many customers turn to you after having a compliance issue versus trying to get ahead of one?

Gosh, a lot there to unpack. I’ll start at the end and try to work my way back.

So, I think, we’ve said this before. If you ask the majority of CFOs out there, how you’re doing with sales tax, the answer is, is that we’re probably not doing it right.

So, there’s a high degree of understanding that whatever they’re doing in the marketplace is not right. They’re trying to do the best they can.

And we’ve always talked about those trigger events, I mean, what is the thing that makes them change. And obviously, audit is one of those.

But, it’s actually not the biggest one. There’s just a host of other things that sort of come before that.

But, I guess, the basis is, and the answer to the question is, most everybody knows they’re not doing it right and they would like to do it better. They don’t have the time or the resources or the inclination at this particular time.

They know that they’ll have to get around to doing it, and some trigger event usually kicks them into making that happen. Having said that, I’ve always said that we’re swimming with the tide when it comes to government regulation and then enforcement.

How that’s going to happen? I mean, it’s still sort of TBD.

I mean, every state is trying to figure out how they can get more information, more data to understand what businesses they’re doing so they can do enforcement. I mean, I would say, COVID put a big hold on that this year.

I think COVID continues to do that because I think many of the states’ strategies right now is to just figure out how to get some federal money to be able to bail them out of that. But, at the same time, they’re all working on ideas and ways to enforce.

So, enforcement is -- it’s a tailwind, it will happen. How and to what degree it will happen, it’s interesting.

I mean, I think it’s way more acute internationally than it is domestically here. I mean, international, where they’re really outside of the transaction, they’re trying to get in that.

And you’re seeing a lot of activity with countries. And over -- between now, 2022 to 2024, I mean, Poland, France, Spain, you’ve got, I mean, the Philippines, a bunch of different countries that are really taking a strong look at e-invoicing and have particular measures that they’re doing in order to make the regulatory environment much more stringent, transactional.

Yes. Okay.

That’s super helpful color. And then, Scott, maybe one more, if I can.

Just at what pace should we expect to see you expand into other compliance categories, right? Like, is Business Licenses just a toe in the water?

Is it the first of like a bunch of others to come? It just seems like there’s such a big opportunity, obviously, in your -- the core tax compliance market.

Wondering how to think about all these other adjacencies.

Well, I mean, again, job number one -- and I just want to reiterate this, job number one is always strong growth in our core area, right? Like I said, I’ve just been really happy with the way we’ve been able to focus on the here and now and at the same time be able to build out our SaaS cloud compliance platform.

I mean, because that’s really the ultimate goal. And we have some unique aspects of the way we work with integrations that allow us to move different things down the channel and to build out a cloud compliance platform, which I think is the ultimate goal.

So, I mean, I think what you’ve seen and what we’ve said. I mean, our platform allows us to do things like 1099, W-9, W-8, property tax.

I mean, there’s lots of areas that we can take our existing platform and expand it, because it’s all really about content. And if you get the content, we have the engines to be able to do that with integration and then combine that with the calculations, returns and reporting to the government.

So, I think, we’re well-positioned to continue to do that. And I think, we’ve said that that’s a direction that we’re going to continue to move in.

So, just one from me, high level. There’s really a lot going on.

There’s a lot of growth initiatives. I’m just curious how the hiring environment looks.

And as you’re thinking about adding people and particularly in the go-to-market and the product side, how should we think about those efforts over the next few years? Thank you.

I’d start off by saying, I mean, that is one of the criteria and one of the reasons that we’ve been acquisitive over the years. I mean, I think, finding great tax technologists, tax people and innovative developers has been one of the great things through our acquisitions.

I mean, we’ve built out, I would say, just a world-class team of people that understand tax technology. And I think, we benefit from that all the time.

So, acquisitions have been a great way for us to do it. In our space, we have not found it to be exceedingly difficult.

It’s always difficult but exceedingly difficult to find the talent that we need. I mean, Avalara is well positioned.

I think, when we hire good people, they bring along good people. I will say that our -- we have almost 1,000 people in India, and finding people in India and developers in India in our location is a challenge for us at times.

So, domestically and internationally, I mean, it stretches us a bit. But, I think, we’ve got a really good program to be able to hone in on it with our recruiting teams and through acquisition.

So, Scott and Ross, 2020, you kind of like e-commerce was one of the tailwinds, and then, you talked about so many products, expanding like 7 products going upmarket, downmarket and international. So, as you look at 2021, 24% organic growth, so what are you most excited about?

What do you think are the key drivers for you in 2021?

There’s -- as you say, we have a lot going on, and there’s just a lot to be excited about. What I get excited about is, I think, our ability to start moving upmarket more.

I think it will stretch us. It will challenge us as we move into that space.

But, I think, it’s a big opportunity for us. I think monetization of our partnerships, whether it be with Amazon or Shopify or Woo or a BigCommerce, all of those really dynamic partnerships that we have, how we monetize them, how we grow them, how we can push them forward with a variety of products, I think, is really, really exciting.

I think, SST has been a fantastic program for us. And I know that that -- despite the reduction in the contract price, I know that we’re going to grow that area.

So, when I stop and I think about it, it’s like, okay, we just have to take care of our moat. We have to take care of the mid-market that we’ve been so strong in for all those years, but monetize these other avenues, I mean, TTR and pulling that in.

So we’ve got a lot to be thankful for, I mean, a lot in sort of in our bag. And I think if we just stay focused, we can cross-sell, upsell and use those partnerships to really drive some nice business.

I’d just like to take this opportunity to thank our employees, our customers, partners for all their hard work in this difficult 2020. And we look forward to talking to all of you on our next call.

Thanks very much for your support. We appreciate it.

Thank you.