Q3 2019 Earnings Call
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I'd now like to hand, the conference over to your Speaker today Mr., Greg Mcdowell Investor Relations. Thank you. Please go ahead Sir.
Good afternoon, and welcome to Avalere as third quarter 2019 earnings call.
We will be discussing the results announced in our press release issued after market close today.
With me, Rob Alaris, CEO , Scott Macfarlane and CFO billing.
Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act 1995.
Forward looking statements include statements concerning financial and business trends.
Our expected future business and financial performance and financial condition, and our guidance for the fourth quarter in fiscal year and can be identified by words, such as expect anticipate intend plan believe seek will.
These statements reflect our views as of today only should not be relied upon as representing our views on 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 expectation.
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.
Annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019, and our other periodic filings with the FCC.
During the call. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles around.
A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the FCC and is also available on our website at Investor Dot Apple era Dot com.
With that let me turn the call over to Scott.
Thanks, Greg and welcome to everyone, joining our Q3 2019 earnings call.
Q3 was another strong quarter Fravel era, we reported total revenue of $98.5 million, representing an increase of 41% over the prior year.
Our growth rate was driven by continued success across the business, we saw new customer wins across a wide range of industries segments and geography.
We also experienced strong customer retention and solid upsells activity.
Said, it before and I'll say it again ABL ariens worldwide have a shared vision to be part of every transaction in the world.
As our value proposition gains more traction and validation.
I'm increasingly confident in our ability to build a great company, what durable growth characteristics.
Once again I'd like to thank our employees for their hard work your continued commitment to our customers our vision and each other is much appreciated.
And I would like to thank our customers and partners for your trust in Avalere and our team.
Before we dig into several interesting topics for this quarter.
Got to reemphasize the primary driver of Avalere as growth right now.
Critical to our ongoing strategy is success in our core business supporting sales tax compliance.
I have mentioned now for several quarters that our global sales team is driving strong execution inefficiency and we applaud them for their success across all market segments.
Our net revenue retention rate continues to be strong demonstrating further need and deeper trust from our customers.
We've also seen sustained adoption of our additive solutions like SSD and business licensing.
Today I'll focus my remarks on three topics.
International opportunity.
Our expanding partner ecosystem and marketplaces.
International expansion has been and we'll continue to be a great opportunity for Apple era.
Providing solutions to the challenges of global capture it seems like that and G.S.T. as well as the specifics of managing cross border compliance are key growth areas for Avalere.
Well international business represents less than 10% of our revenue today that segment continues to grow quickly and we are investing to take advantage of the enormous opportunity in front of us.
Every country is different and governments around the world are deploying technology and unique and fascinating ways to increase the enforcement of their tax policies.
Reduce fraud and revenue gaps.
There are many different tax and trade regulations things like invoicing real time authorization like reporting split payments fiscal representation requirements and so forth.
Adlers cloud platform is uniquely positioned to adapt quickly to these changing technology requirements and environments.
Another key area of international opportunity is cross border Commerce.
Cross border ecommerce is forecasted to exceed one trillion dollars my 2020 .
Our customers have an immense need for calculating collecting filing and remitting customs and duty obligations that comply with ever changing rates rules and regulations that govern sales across country borders currently our cross border offerings supports two of the largest marketplaces in the world.
In addition to our cross border offering we are partnering in building other services that will further help global sellers in the eagle market, including local fiscal representation in countries, where physical presence is required.
Fiscal representation, just a requirement in many countries, where the tax authorities require out a region companies to appoint a local fiscal representative to manage the filing obligations record management and associated increase what the tax authorities.
Globally governments are looking at new methods of oversight to increase compliance and reduce tax fraud.
These activities create great challenges for businesses around the world and Avalere is working to be the disruptive force for change at all of these markets just as we have been in the U.S.
Moving on to partners, we continue to deepen and widen our partner mode by adding new partners and certifying new integrations with accounting ERP ecommerce point of sale mobile commerce and CRM software applications at a rapid pace that keeps us well ahead.
Of our competitors.
It's hard to imagine anything more important to our business then this relentless pursuit.
Of course, signing new partners gives us access to ever growing numbers of end user customers, but more important an omni channel economy, the breadth of our partner ecosystem becomes invaluable to almost any business.
It gives our customers choice and power to adopt avalere into all of the systems and technologies they used to run their business.
Technical enablement of our partners, it's an important step in our partner development process as we rely on a network of Apia eyes to manage the flow of data between systems.
And our partners building integration Avalere provides detailed technical documentation to facilitate data collection and functionality mapping between the two systems.
We help our partners by providing proven requirements such as all the unique items on an invoice required for compliance calculation.
Based on years of successful integration development.
With these requirements in hand, our partners know they're building a consistent experience for our shared customers and our building with tax expertise that only a compliance expert can provide.
With a certified integration partners and customers alike can be confident that's a technology will meet the customer's needs.
We already have a substantial foothold with a major providers of business systems to the mid market.
Sweet, Microsoft Sage Epicor and the like.
But many companies rely on specialized systems as part of their business. An example is our newly certified integration with adaptive jewelry.
Software platform for the jewelry industry.
This is a niche segment with the specific requirements to connect manufacturers distributors designers and retailers of leading jewelry brands and Avalere integration work sufficiently in their system.
We also recognize that are adapting to changing natures of where and how invoices or sales are being created.
In the earliest days of Avalere, we concentrated on ERP system of record for many midmarket companies.
Today as our economy continues to shift towards omni channel selling models. Our business development team is building relations with all kinds of transaction platforms e-commerce recurring billing sharing economy payments social media and more.
What we know one understand about the SMB space as well as the emerging small business market is is that we cannot reach each business in a one to one engagement.
A partner ecosystem is the only way to dominate the market to win there we have to understand the pain points to their customers their data flow their go to market motions, so that efficient compliance processes can be embedded and integrated through all the systems that they already trust in that way the avalere benefit.
It is felt by customers and partners alike.
And just about the same way that we avalere understand that we cannot address the small business segment, one by one governments around the world and realize that they cannot efficiently and forced compliance requirements on thousands and thousands of small businesses that transact within their borders.
As governments become increasingly focused on closing revenue gaps taxing authorities are turning a new forms of enforcement, including shifting the tax compliance burden from the sellers themselves. So the market places.
In other words, the burden has moved to the marketplace to collect and remit sales tax on behalf of all sellers that list on the platform.
The marketplaces have thus become the focal point.
In the U.S. This legislation has swept across states in the form of marketplace facilitator laws.
And in the EU member States have agreed to make online marketplaces responsible for charging and collecting that for all their non EU sellers.
Avalere works with marketplaces, like goat discards posh, Mark Amazon and others are solution serve a range of roles depending on the unique needs of the marketplace and the region, where we partner in some instances we serve the seller on the platform and others, we serve the marketplace directly and in some place.
As we play both roles offering compliance services to the seller and the platform.
As of October 1st 33 States in Washington, DC have marketplace facilitator laws in effect and here is our perspective.
While these laws make it easier for state tax authorities to manage unenforced tax compliance they create new challenges for businesses why as I said earlier, because it's really an omnichannel world now many if not most businesses not only sell on their own ecommerce sites, but on an online marketplace as well.
Through these channels businesses are touching a patchwork of states with marketplace facilitator laws, leaving it unclear at best as to who is responsible for the sales tax collection and remittance in each state.
This makes compliance, especially difficult because the sellers have to determine whats transactions are covered by marketplaces, and which are not state by state because of our many integrations and aggregation capabilities Adler helps navigate the amaze us state specific requirements.
We recognize that at its core this process requires clean data management a problem that we can solve.
At this stage it would be a herculean task to manage this process manually and Avalere has the right set of tools to ease this burden.
As we've discussed on this call and others, we work with dozens of marketplaces to offer compliance services to their sellers and for their core business.
The marketplace model is an important growth area in digital commerce, and one we continue to invest in globally.
In summary, we have a global vision that avalere, because we believe the move from manual to automated tax compliance is inevitable.
As businesses of every size makes a decision to automate compliance we will continue to be there for them.
Now, let me turn the call over to our CFO Bill Ingram.
Thanks, Scott as a reminder, everywhere adopted the new revenue recognition accounting standard assay six so six effective January Onest 2019 on a modified retrospective basis as a result financial results. During 2019 are presented in compliance with assay six so six all historical financial results.
Prior to 2019 are presented in conformity with assay six so five.
Our earnings press release includes additional information to reconcile the impacts of the adoption of the assay six so six standard.
Let me now discuss our third quarter results.
For the third quarter total revenue Andreas see six so six was 98.5 million up 41% on a year over year basis.
On growth in a quarter was the result of increased demand from both new and existing customers combined with strong sales execution across channels.
Additionally, third quarter revenue included 1.5 million of legacy customer revenue from the acquisitions of complete import way both completed in 2019.
These businesses were primarily required for their content and domain expertise and we're pleased with the early results.
Subscription returns revenue was 92 million. This represented 93% of our total revenue and it grew 42% year over year professional services revenue was 6.5 million.
Our core customer count increased by 810 to approximately 11240 at the end of Q3 2019.
Oh this increase approximately 80, new core customers were added following our acquisition and integration of the complete customer base.
Our net revenue retention rate was 113% in Q3 and has averaged 110% over the last four quarters, our revenue retention rate supported by low gross churn contributes to strong customer lifetime value.
In discussing the remainder of the income statement. Please note can unless otherwise stated all references to our expenses operating results in share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release, there was issued just before this call.
Gross profit was 70.8 million for Q3 19, representing a 72% gross margin. This compares with AMC six so five gross profit of 51.3 million and 73% gross margin in the same period last year.
The one percentage point decline in gross margin primarily results from third party software hosting costs and our expansion into international markets.
Turning to expenses sales and marketing expense was 37.6 million in Q3 or 38% of revenue on a six so five basis sales and marketing expense would have been 42.4 million were 43% of revenue. We're pleased with the continued year over year improvement in sales and marketing efficiency.
For Q3 research and development expense was 20.1 million or 20% of revenue.
The absolute dollar increase in research and development expense was in line with our expectations as we invest in new products content and features to drive future sales growth.
For Q3 general and administrative expense was 15.3 million or 16% of revenue.
New corporate initiatives include adoption of Sox Forum for new HR systems recruitment and leadership training, all which are important investments for future.
non-GAAP operating loss was 2.2 million for Q3, which was better than our previous guidance due primarily to the revenue upside in the core.
On a six so five basis non-GAAP operating loss was 6.9 million compared to a 9.2 million non-GAAP operating loss in Q3 18.
non-GAAP loss per share was one cents in the third quarter based on 76.2 million shares outstanding on a six so five basis non-GAAP loss per share was seven cents compared to loss of 14 cents per share in the third quarter 2018 based on 66.6 million shares outstanding.
Turning to our balance sheet and cash flow statement, our cash cash equivalents were 446.6 million at the end of Q3 19, an increase of 5 million from the 441.6 million at the end of Q2 2019.
Total deferred revenue as a Q3 19 under assay six so six was 148.5 million up 7% from 138.8 million at the end of Q2 19.
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 were 108.5 million in Q3, 19 up 38% from 78.8 billion in the same period last year.
It is worth pointing out the beginning in Q4 19, we start to face, where we would consider more challenging year over year comps.
Operating cash flow was 5.9 million in Q3 19 compared to 1.2 million in Q3 team.
Our operating cash flow performance was driven by strong cash collections tied to our billings activity.
Free cash flow was 3.6 million compared to a negative 3.6 million of free cash flow consumption in the same quarter last year.
We would like to remind you that our free cash flow will fluctuate from quarter to quarter caused by many factors, including the timing of working capital seasonality of our billing and expense cycles as well as our overall level of investment in the business.
I will conclude by providing guidance on revenue non-GAAP operating loss for Q4 and for the full year 2019 under the U.S.C. six of six standard.
For Q4 19, we currently expect total revenue to be between 99.5, and a 100.5 million. We expect our Q4 non-GAAP operating loss to be in the range of seven to 8 million.
For the full year 2019, we currently expect total revenue to be between 374.3 to 375.3 million.
We now expect our full year non-GAAP operating loss to be in the range of 13.2 to 14.2 million.
We're still in the early stages of our 2020 budgeting process and plan to provide detailed guidance on our fourth quarter conference call.
That said I would like to share some thoughts regarding the financial outlook for Apple where our beyond 2019.
The business has meaningfully outperformed our topoint expectations since going public in June of 2018.
Revenue growth has accelerated from the mid 20% range to over 40% in the last two quarters. We've also demonstrated operating leverage over the past year.
We are proud of the team's execution to deliver such great results and are confident in the long term leveraging our business.
We are addressing a large market and believe that avalere is well positioned to deliver durable long term growth of 20% to 25% as we move toward our objective of building a meaningful business.
As we look at 2020 in particular, our early planning supports mid 20% revenue growth. This is at the high end of our longer term growth target and takes into consideration that we expect to exit 2019 at a 400 million to our revenue run rate. In addition to facing a much more challenging comparison based on our strong performance in 2000.
The 19.
Our early investment plans for 2020 result in a non-GAAP operating loss margin in the low to mid single digit range and likely a modest level of cash burn in 2020.
We believe the momentum in our business compelling customer economics, and our unique position in a large market all support continued investment in the business to drive long term growth.
At this point, we would like to open up the call for your questions.
As a reminder to ask a question you will need to press star one and your telephone to withdraw your question press. The pound key please limit yourself to one question in a brief follow up your first question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.
Okay. Thanks, so much and congrats on another great quarter.
I mean, maybe to start off I wanted to ask a bit about the cross border product and what type of adoption you've seen there. So far is that actually helping to land. Some larger logos maybe than you have seen in the past or is this many but a source of cross sell so far thanks.
So its it is both a.
A source of of bookings and revenue for US today, we've we've landed some some significant deals I think weve reported that we've been doing that with Amazon in the past we continue to do that we're adding more businesses Oh, all the time to it. So it's growing we're just starting to.
Got it deployed throughout the sales system is selling it isn't as an add on I think our sales team will be picking that up later I mean, this quarter and Indian into next year, and we see really strong demand for it.
We're working on the messaging, we're working on all of the implementation things in order to make it is strong as we possibly can but it's really started out pretty well for us.
Okay, Great and then it looks like customer growth accelerated for the fifth quarter and around I know, we're starting to lap the impact of.
If somebody's legislative changes, but obviously customer growth continues to accelerate to just curious how we should think about the sustainability of the pace of net adds going forward. What smbs are now going through the typical.
Trigger events or change advantage that you've talked about in the past or they just much more likely now to take out Valera enlighten legislative changes that they need to.
Software.
Chris I mean look there's there's no question that the the governmental tailwinds or are helping us. So so that's a that's a that's a given its bringing awareness to the to the cut to the table, but I think.
To be a lot of questions about this over the day. So I'll just get it out now really mean, yes. Those are those are important aspects of it and the loss of have been pushing the business, but the state's really.
Haven't caught up or from a way of of monitoring it and enforcing it and as they start doing that I think it's just going to push this further and further and further on so we do not see this as this run up and then it then it goes away we see we see this is just this long strong build.
Towards what we always say the inevitable aspect of this business is everybody is going to do this in an automated in an automated fashion.
In a digital world it would be ridiculous to think of you know anything other than other than that so.
Getting back to our message which is.
The trigger events that we all know they're happening are driving this business Wayfair is.
Pushing us along from a tailwind and were yet to see I think the real effects of Wayfair, which which I think we'll push us even further as we go down the line, but it'll be a slow gradual process as they work through the triggers.
And Chris has built.
Specifically you know the reported number.
As we've talked in the past that technically is not new net adds those are core customers is defined customers that generate more than $3000.
Revenue last 12 months. So so many of those customers are existing ones that have exceeded the threshold. So I wouldn't I wouldn't overran wise.
Exactly any one quarter as to whether it's accelerated do sorry, we see as Scott said really really strong steady.
Customer capture customer growth across the whole base of the business. So there is no. There's no one thing or one trigger that Oh, I would I would point you towards.
Okay. Thank you very much.
Your next question comes from the line of Sterling Auty from Jpmorgan. Your line is open.
Yes, Thanks, Hi, guys.
I wanted to follow up on the international beyond just cross border, but just the full international opportunity I mean, all the comments in the prepared remarks is probably the most positive I've heard you talk about the international opportunities since prior to the IPO and what I'm wondering is is that something actually fundamentally has changed in that opportunity or you're just deeper.
And your knowledge of the opportunity and the solutions that you have positioned to capture that opportunity.
So I would say, it's a and thanks Sterling I would say that it's really.
The latter you know we've always known that that the international market is going to be a strong a strong market for us our beachhead and really our foundation our core of our businesses in the EU is in the U.S.. So us moving out of that has been as educational process, we've known where its.
Going but you know every day, we you know we fight the battle here and in the U.S. and as we start to develop our EMEA business in particular, our Brazil business.
We're constantly learning about.
How is the best way to Ppas to position this and we see we're seeing strong growth with our with our business a in EMEA and our Amazon business that were that were Ah.
Working with them on so we're very we're very opportunity we're very.
Focused on the opportunity that we have in front of us there and I think we're optimistic about it.
It's true as bill Okay.
Well, it's well, it's not yet 10% of our business and.
We break it out in our 10-Q with the with the additional teams that we build we've talked about some of the executives that you've seen but we've also built a nice nice group of a new managers and executives across the company.
We can talk about some of our international leaders, but but weve seen a lot more visibility in terms of.
Things that are happening around the world that just reinforce our conviction.
Opportunities internationally outside you said, we've got more intelligence and more understanding and really a terrific team of people that have joined the company in the last couple of years that help us confirm that.
That makes sense and then one follow up on the marketplace.
Opportunity or Leapley, Devil's advocate I could see investors being worried that if things concentrate down to where you have.
A handful or maybe more than a handful of marketplaces that are responsible for sale tax calculation collection remittance et cetera that they would be worried that those marketplaces would actually look to bring something like this in house and do it for for their vendors can you talk to why you would think that would not be.
A concern in the long run.
Sure I mean, it's what I said in the in the opening remarks.
The complexity of the complexity that the marketplace.
Create some marketplace laws creates a is real is real for businesses.
I mean, they cannot I mean, there are in an omnichannel world working with lots of lots of marketplaces, they're working with their own Pos systems, they're working with there what their own sales forces and their own website. So deciphering all of that that information and getting the.
Right information filed to the right place is still a <unk> is really a difficult task for everybody. You know I mean, we're working with as I said dozens and dozens of marketplaces to you know the help them through this through this process I just I don't I don't see it is a core competencies any business.
Wants to get it get involved in its it's what we do really really really well and we take the burden the way for both are sellers and them.
In the in the process you throw cross border on top of that and the complexity as even bigger. So I just don't see that is as as one of the issues on that really is confronting us at this time.
Got it thank you.
Your next question comes on line of Brad Sills from Bank of America Merrill Lynch. Your line is open.
Oh, Great Hey, guys. Thanks for taking my question.
You've seen a nice acceleration in net revenue retention.
Over the last several quarters. It can you unpack that a little bit for us. Please.
Sure, it's a combination of transaction growth perhaps.
Customers are adding more states, starting with one or two and then going into more as they become more compliant you've got more transaction types in there I. Just if you can comment on just kind of what is driving that what's been driving that acceleration and kind of the sustainability of that.
Sure I'll talk first half kind of unpack it for you I I really can't.
And on any sustainability, you know as I said historically its been less work, where it's been 110%.
Our scene with new customers now.
Greater filing schedules filing.
Option.
As you said as you know more states more jurisdictions and more types and and we believe it's just because of greater awareness greater awareness of the issue obviously some of the legislative changes and attention, but but in the past you know we've worked with customers and they say well I currently have nexus in three locations and we'd signing them up and get them get him going in.
Three locations now, they're saying boy I may only have nexus in three but I'm anticipating six more so we'll sign them up or nine or 10 at the beginning so I don't I don't think theres anything dramatically going on other than a greater awareness sales teams doing a great job, making them aware.
And we're we're signing up.
Greater geographic distribution for.
For a nexus filing of their filing calendar at an earlier stage. So I think its compressing the inevitable.
Historical adoption rate of geographic distribution, it's it's compressing <unk> with regards to you know sustainability I really can't comment on that but.
We are pleased obviously this quarter <unk> hundred 13% number.
Thanks, Bill and then one more if I may please.
The past you've talked about the ability to take the platform into other transaction types or even regulatory functions over time I know you can comment on the road map, specifically, but just generally are there any categories of transactions or even other regulatory functions that you see as more natural adjacencies, perhaps you are hearing more inbound.
Feedback from customers on.
Sure sure Brad.
We've always said that you know.
Nobody thinks of us as this transaction company.
Company that and we talk about being part of every transaction in the world, but I said it before we really want to be a the global SaaS platform for compliance and as a result of that there it's not just.
It's not just transactions, it's the documents it can be you know.
I mean, we do cert capture obviously, well, which is a document management system for a exemption certificates that businesses have all over but we can do things mean inside of our fuel business. We are doing lots of compliance around trucking about moving.
I mean documents that we have to file on behalf of the people who are moving the fuel from state to state that our transactional. So we can move into different areas along that line, whether it be environmental kind of documents all sorts of compliance documents that need to get from the busy.
This to the government on file that is what we're really set up to do and it's not one of the things that we talk about every day in the business because we've got a lot of other things going on but in the back of our mind and at what we're working on here is always trying to be thoughtful about how we expand that global SaaS platform.
For compliance.
That's great. Thanks, Scott.
Your next question comes from the line of Scott Berg from Needham Your line is open.
I just got built congrats on a good quarter and thanks for taking my questions.
Scott I just wanted to start with.
As you reflect over the last year since the Wayfair decision the deals that have come in the transactions that you signed have they changed in terms of types of partners, whether it's your direct channels yourself for the partners that they're coming in just didn't know if that regulatory tailwind as maybe changing what that composition of those deals looks like.
Thanks Scott.
So.
When it's all said and done and I and I tried to make this as simple as possible here in the office and what I'm talking to everybody because really when it's all said and done I mean, we go down we go to market, where invoices are created where sales are made and and that is always done through a partner network.
So there's really no escaping that and I say and I say it it's only that way, we have our APC eyes, which I talked about on this call and we continue to you know you may get our APC eyes out and doing that other things and you know and that represents a.
A good solid a portion of the business, but when it's all said and done it's really about how we work with our partners how we grow our partners, how we support their customers and and that really that really doesnt change I mean, it's one of the key things and I again, I try to I tried to do.
Keep everybody focused on this I mean in order to take advantage of Wayfair.
You need to be able to you need to have a connector and an integration made.
With the people who are creating invoices you need to be able to register those customers and you need to be able to take those customers live and those are three things that AVOD Lyra does really really well and so I don't we don't see you know we don't see much beyond that right. We only see the transactions that we have.
Connectors for and we have 700 partners more than anybody else. So we get our you know more than our fair share at the at the at the Apple there, but it really isn't there really hasn't been any change in the in the business motion because we're really focused on that that partner world.
Got it Super helpful. And then a question for you Bill on the kind of preliminary look into.
Calendar 20.
Have you changed your assumptions kind of along the same thing in terms of.
Maybe deal composition weather deals are coming in through partners or maybe it's more marketplace activity or or the ecommerce vendors trying to understand it.
We used in this year's template is kind of stand for next year, if theres something different.
And those assumptions.
Well thanks, Thanks Scott.
No no real change other than we see a we see a broadening of our business across.
Numerous initiatives and so kind of our core customers.
Board.
And that deal size and that the average selling price and that.
Filing.
Brett than calendar. So it's over there is no there's no great change to that as you know we've we've just gotten I've been talking now for the last year and a half that we think this is a large market.
Very low penetration a inevitably it's going to convert to a two an outsourced cloud based solution you know like when we provide.
So we think we're we're still early early in the in the adoption cycle of this of this type of solution. So there's there's really no no change to that kind of kind of core base business. Now. In addition, as we've said I think in prior calls and Scott So a little bit today, we're seeing some some nice early era.
He is a you know of additional contribution to the revenue, which do not have those exact same characteristics that that.
Got you asked about and so these are things like marketplace providers.
What we call Avalere included in terms of some of our international business Cross border classification. So so so what would you know we're we're cautiously optimistic about is that we've got a lotta irons in the fire here for for these no additional revenue.
Seems not none of which today or are that significant but we were very you know.
Okay, and we're planning to try to try to grow some of those other type business. So that will change. The composition you know kind of of the of the current model, but as it does we'll we'll give you plenty of insight and you know direction around it.
Sure.
Thanks again, guys congrats on the good quarter.
Thanks.
Your next question comes from a line of James rather for from Stephens, Inc. Your line is open.
Hey, Thanks, I wanted to ask a follow up on the cross border opportunity. It's something you've mentioned on a few occasions and I believe a couple offerings in market around cross border today, or just help give us a sense whether any of this could be material to growth in 2020, and if there's any ambition to launch a a guaranteed landed cost offering which seems.
It could be a catalyst for that business.
Well you know you're right. We have a couple of offers and we do mean at the very basic level and probably them. The probably one of the biggest problems that people have is around classification of cross border items. The you know the Hs code the harmonize the hard about harmonize system code.
That's what businesses struggle for and that's what we're doing a considerable amount of work for that and that's the front end of the system. Once they have that classified then actually doing the transaction. The calculation part is really is really pretty simple and then you can get it out to you know I mean.
We have business as you can.
Send the information from a from all the documentation is needed to get to the shipper and so forth and that's really what we're in the marketplace selling the beginning parts of that selling today and and we think you know that this is a can be a big both competitive advantage for us.
Throughout the marketplace with our with competitors in ERP and and the like and it will be a a revenue producer for us in in Twentyth in 2020.
Okay helpful. Another follow up if I may on on the competitive landscape from I guess vertex. So both the usual crew and at this land grab is underway and the post Wayfair World are you seeing any push from the big guys to move the players and enterprise I should say to push into it because on the Midmarket, where you guys play. Thank you.
Listen we've said it before with with everybody at the low end and at the high I mean at at the high end with US everybody wants to be were Apple areas. That's one of the that's one of the.
Great things of this of this of the market opportunity people want to get into it but again I just I keep saying this because I think it's really the basis of of the Avalere a business.
In order to take advantage of Wayfair you have to have the partnerships you have to be able to register simply and you have to be able to take people pay cuts or take a businesses live on the system and it doesn't matter how much you want to be in the space and it doesn't matter how much weight tailwind wayfair is provide.
Thing if you cannot do those things you cannot take advantage of the market of of the market.
Opportunity and Avalere with over 700 partnerships and integrations, we're really in a in the in the catbird seat in order to take it in order to take advantage of that so yes. Our competitor is definitely want to move into this space and they're working hard to do what they can to do that.
It's our job in our teams job is to make sure they can't do that.
And our make it difficult for them to to get into the space and we're doing it just as we've done for the for the last 15 years. So yes, there is definitely competitive pressure we understand.
This space and we're really good at the partner at the partner program.
And your next question comes from the line of Richard Davis from Canaccord. Your line is open.
Hey, thanks. Thanks.
So one.
The Supreme Court decided with I guess charter communications on kind of voice over IP taxing and things, but they basically overturned state by state is this an area kind of I mean, I guess telecom taxation makes ecommerce like simple.
Is that an area of the vector of growth for you guys and then I'll give you a quick follow up thanks.
Sure. This expertise is bill.
You know as you said the telecom taxation.
World is definitely a complex and Oh has probably even more.
More you know hands on it and then even sales and use tax does but but when it goes to show you know things things change all the time and so voice over IP taxation actually is very very interesting internet of things taxation is very interesting.
We services and capabilities that a handle many of these things not all but but we see this is a nice growth opportunity and we have some great customers. A you know in this space that we serve for a pro telecom part Telecom group and we just think you know same dynamics are pointing telecom is in a you know.
Retail a general commerce or ecommerce, which is no trigger events are going to move people.
Off from doing it you know on premise in house, it's going to be a outsource going to be adopted a in the cloud and we think we're you know we're a viable solution for all the telecom providers out there and we Oh, we do have offerings in that area, but you're right. It's much more complicated than than basic sales and USEC and so and complexity.
Right is is some was one of the things that we actually it will find is is our strong suit is how we take that and make it simpler for for businesses I mean that really as it is that a foundation of Avalere I mean, taking these complex laws, making them simple, making making it easier for businesses to up to.
To operate so you know we Ah we thought the telecommunication was was was space was great. We made an acquisition of that saw a number of years ago. We've been building that up I think it's just totally fascinating for everybody on the call I can't help myself, because when you think about the internet of things when airplanes.
Engines are talking to you know a mother Earth mean that say that's a taxable transaction. When you know onstar customers are are talking to cars.
That's a that's a taxable that's a taxable event and so those are the things that we're helping businesses work work through and and.
I mean, we love that asked we love that aspect of it we can help businesses you know may make their lives a lot easier.
And then on the on the sale side do you have a philosophy with regard to bifurcate being customer success versus kind of hunters and farmers as that are you at that point, how do you titrate that how do you kind of view that as a go to market strategy over the next few years. Thanks.
So really it's a good question I think probably one of the most significant changes avalere made early on in the process was was to bifurcate hunters and farmers.
You know, we did that I don't know 10 years ago, and and have been working you know working through that working through that process. I think it has really been a you know a one of the the great things that Avalere has done and really made our sales execution a lot easier just to separate to say.
Separate that whether we continue to do that going forward and how that happens going forward. You know we're always looking at you know what's the what's the right what's the right what's the right way to do it but for the foreseeable future. That's that's the way we are.
Got it that's perfect. Thanks, so much.
Your next question comes from the line of Brian Peterson from Raymond James Your line is open.
Hi, gentlemen, thanks for taking my question. So I wanted to ask on the non core customer trends in specifically I do they play a larger factor in terms of driving your core customer growth this quarter or did we see more customers come in at core customer levels.
Yeah. Thanks, Thanks, Brian .
We don't we don't break that out, but what I can tell you is there's theres been no significant change in trend. So the same behavior that we've seen the past quarters has occurred.
And this quarter.
And it's a mix as I've said, we said a number of times is a mix of both existing customers that have a achieved that 3000 dollar threshold and new customers who have come in so let me. Let me just give you a mathematical example, if we sign up a new customer at a at a 3600 hours a year or 300 hours a month.
They're not a core comp the customer until month 10.
300 times since 3000, we sign up another customer at $36000 year, there a core customer and month, one and so what happens is actually we have very good visibility as to the number of core customers were going to we're going to deliver each quarter, but it's not purely wandrey other and to answer your question that trends or have not.
Have not changed in the in the past many quarters in terms of mix between those two.
Understood and Bill maybe a follow up for you I think you covered over the covered this in some of the prior questions, but the sales and marketing efficiency. It was much better than we had modeled this quarter, maybe expand a bit or what drove that and how should we should think about the pace of investment both in terms of maybe direct sales hires or investments with partners going forward. Thank you.
Well again, we're very pleased with sales efficiency a reported both you know the six so five and six so six comparison for reconciliation.
I think I think it's driven obviously by the by the strong sales revenue growth because that's the denominator, we get to used to calculate the percentage, but what I tried to do as you remember in the in the closing comments with say you know, we're seeing a really nice.
Performance on the topline that we're going to make very prudent reasonable investments in that area. We won't call out you know how many people were going to higher but what I. What I can tell you that we've got a we've got good line of sight on or on our sales and marketing expenses. The team sooner great job. We're so pleased with that with that group and we want to be sure.
Defeated and nurture and investing at a book that people in the partners to make sure that it continues to thrive going into the future and we'll do that.
Thanks, Phil.
Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.
Oh, great. Thank you congratulations you guys.
Well I can ask my favorite question, which is so what content areas do you not yet have the content for.
And how much of the Tam does that represent and what are the chances of acquiring that.
So there is I mean, that's a big a big question. So, let's just focus on North America right now Pat.
Because I think that that's where your question is directed because there's lots of content rest of world, which we don't which we don't have you know.
We're working to get Latin American mean deeper into Latin America moving into Asia.
So so let's just hold that lets just hold that aside and deal with is the U.S. here North America I would say and these are just estimated numbers that we've said that were approximately at at 60%.
The content that we have for footprint for North America, So there's 40% out there.
That we need to get some of that is more valuable than others.
And so we don't deal with amusement taxes, we don't deal with utility taxes, we we don't do with insurance taxes, you know today.
There are areas like.
Would could be.
A.
Rare coins I think we actually do that but I'm, not sure, but but rare coins or ammunition.
That that we just that we don't do and that we're constantly working on on building that you know those other areas out and we have a hierarchy of of which ones are the most important in which were the ones that that that we think our salespeople can sell but it's also driven by the salesforce when they get a deal oftentimes.
You know we've talked about.
Examples where we've gone in and done that and then been able to sell that same content that we've done the 300 other companies in the in the marketplace. So mean path. That's that's what we do you know every every single day, but but but we have a lot still to go and that just expands our market every single.
Time that we know that we that we do that because I would also say two to everything else I've said, you need integrations, you need registrations and you need.
To be able to go live but you also have they have the content.
Order to take care of Wayfair. So we're trying to do that as fast as we possibly can so we can take advantage of the tailwinds.
Okay, great. Thanks got and so just just to help me tell the story when I do this like what what's an example of one of the big.
The attractive areas like as utilities are particularly attractive.
No actually utilities isn't and now ill tell you why it just gives you. An example, because utilities are generally regional and because their regional the you everybody knows what the rates in rules are in that area. So there's not a need for multiple multi region you know a mute I mean amused.
You know automotive some some some a different kind of manufacturing businesses would all be fantastic would be all great. Examples of what we can you know of what we can do in the past we can add leasing.
So to the leasing rules, which we do a little bit of but there's a lot more to to be had we've made the acquisition in alcoholic beverage taxes.
So we do you know right, we do retail distribution I mean, we do a distribution and the like but we can get into the retail business around food and beverage on which we don't have the content for which we'll be adding going forward. Those would all be examples of of areas, where we would continue to invest in.
The coming months and corridors you know to go after.
Awesome. Thank you.
And your next question comes from liner Brent Bracelin from Piper Jaffray. Your line is open.
Thanks, and good afternoon, a one for Scott and a follow up for Bill Scott I wanted to follow up on Sterling's question on International maybe I'll take a little bit of a different stance.
This is a business going into 2020 that will be approaching a 400 million dollar run rate generating positive free cash flow over 400 million cash and investments and the bank here what is your appetite and the opportunity to do things organically and inorganically to accelerate.
Your international footprint and then one quick follow up for Bell.
You know so you know a lot of people.
Say, a our phrase of being part of every transaction a world you know that might be a trial thing, but for me, it's not when I wake up every single day, that's what I think about and you know being being part of very transaction. The world means that you have to expand enter into internationally I think we've done it in a response.
Couple way you know moving into EMEA first, adding Brazil, which is the most difficult accurate tax regime, but but I will give you a I mean this note on on that on our moving I'm moving into those spaces, we have always done that.
I mean sort of gradually fully moving into it and then with an acquisition getting the content on your own in places that you don't know I just don't I don't I personally don't believe in and so I think the way that we will enter these additional markets and expand the markets that that were already in will be.
Through will be through acquisition there is interesting technology that's out there in the marketplace today.
As as laws search as as the laws are changing for E invoicing.
Split payments in the light and and I am a.
A a real believer and that is the best way to enter these new I mean, these new unknown areas.
Helpful color and good here Bill as a follow up if I just look at subscription revenue growth remains very strong here, 42% growth for two consecutive quarters, but if I look at the pro services growth that did go down tick a little bit still 23% good growth there, but should we expect pro services going.
For just to be a lower margins slower growing part of the business is that the right way to think about it going forward. Thanks.
Yeah, I wouldn't over index on professional services I mean, we have a great team and Oh, they're doing a wonderful job, but you know the game here, obviously is to get recurring revenue and so.
The larger customers.
No well pay for and and and value professional services, we're really investing working very hard to get smaller customers to self serve and go live without professional services and so it it's partially our strategy in order to open up the Tam and create a greater served market with.
Broad base of customers that can.
On at their auction I get themselves alive and be much more high automate or use our U.S are terrific professional services team to.
Really.
Really educate them and get them you know a professional handle so I wouldn't I wouldn't correlate the two Brad because a lot of it is our strategy of self serve for lower end customers and demand from larger customers that may be kind of chunky or bulky quarter by quarter.
And I would like and I'd just like the to say that mean, we can't forget that Avalere is a channel base business and we enjoy a fantastic relationship with our partners and we want them to be doing as much of the professional services as as as a as they can and so.
We enjoy that you know to enjoy that rate relationships. So I like where we are in the in India in the area whether were up one point or two points in either direction I wouldn't over index on but but but I think that that is our general strategy as to let our partners do what they can for us to fill in.
In a certain amount of that with it with our businesses and I think that that you should continue to plan and that in the future.
Thanks.
And your next question comes from the line above on Suri from William Blair. Your line is open.
Hi, gentlemen, congratulations.
Last question before we wrap up.
Our strategic.
Think about competitors.
Which states someone's question.
But as you think about competitors.
Or you think about Thomson.
Other offerings, which are isolated tenancy like.
On from as were great client centric company customized.
But the multi tenant purchase hasn't taken defensive merchandising, but yeah.
Do you see some point.
Not not maybe not.
But at some point that plays out so where the value offers talks become really appealing to large that like she is making filing say share and you know how do you decide.
Tax or something it may not have been decided you know I've got to face into question the combined.
Like how do you think about that the potential future.
Platform that has more data than any of those guys bind because they're so side, how should we think about that or or is that too much constructs.
No I mean, we've talked about this in the in the pay in the past and look the the competitors have been around a long time, there well entrenched in the enterprise in the enterprise space I've always said, it's a fools errand to try to go into that you know into that mean market and do rip and replace and the like I just.
I, just don't believe it but but avalere is about being opportunistic and we get our fair share as of wins in those markets as they decide to make that switch that you. So eloquently talked about I think that that's you know that is that will play out more and more it you know in the in the future. So mean.
Again, when I say I want to be part of every transaction in the world.
I mean, it and and that means that I think over time, you will start to see businesses migrate towards towards a you know the SAS compliance platform. So.
I think that that's a I think what you're saying is it will actually play out Bob and as Bill.
You know I think kind of a sound bite, we view that the the current target market or the early adopters, but the arch large enterprise customers with on Prem solutions will be later adopters, but they will adopt and so.
We can't put a timeframe on that but I think you can think of in terms of early adopters and late adopters and the and the large companies will inevitably adopt this type of solution.
But.
They're not they're not the early adopters yeah on the any in the Oh.
The enterprise competitors that you were talking about they are really they're good at what they do and they service or their customers and we just focus on our market in the mid market is so big and we are just at the beginning of of adoption. There you know 456 per se.
And you know penetrated there's just a lot of of green space for us to move in and we can be opportunistic when when those opportunities.
Come along to to move upstream.
And your next question comes from the line of carry Koala from first analysis. Your line is open.
Hey, good afternoon, and congratulations on a great quarter I'm, just trying to confirm that in your 2020 revenue growth rates that that does not include any impact from any legislative success in Florida.
If one way or another if you if you have any early indications of the up potential 2020 revenue impact if if any pending legislation is successful.
Well, let me let me just talked about you know, there's the comments and Scott can talk about you know triggers and legislation no. We don't we don't put into our budgeting or planning any specific.
Event for any specific state or or regulation, as we've said, Oh, which kind of amazing about about this market is.
Legislative and kind of government tax changes just happened all the time now certainly last year wafer was a big one.
But but there will be more changes in the future not just domestically, but internationally. So so that's one of the kind of kind of constant inevitable triggers and drivers for this business is not just the complexity, but the evolution of a you know kind of regulations and it was legislation around you know tax comply.
Science with regard to Florida Scott.
No I mean, Florida that you know the remaining biggie right that has not decided there they're faithfully antitax and they're trying to work through you know the their or their own program look at when Florida, When Florida happens, it's a it's a big state it will drive awareness.
Listen business, just like the others, but I'll keep cautioning everybody is is that when they come forward, there's greater awareness, but the.
States has yet to adopt a program of really enforcing the rules that they have on the books and they are just working through that so this is going to be a long sort of you know drawn out you know you know program that we're talking I mean that we're talking about and we're just give me.
Continually you know pleased with the sales execution of our team as we take on these you know these these opportunities once they get once they get triggered so I don't think you're going to see any any change for that and that's the way. We're looking at you know you know 2020 as well.
Great. Thanks.
Your next question comes from the line of Citi Pendergraph. He from Mizuho Securities. Your line is open.
Hey, Thanks for taking my question.
Just one I'm not sure. If you guys talked about what was your core customer revenue as percentage.
Total revenue auditing the trend in your average revenue per customer.
Thanks City.
We don't break it out a quarter by quarter, but if you remember from our analyst day back in May.
We've we plotted that and our core customer revenue is still in excess of 80% of the total and so using what ever assumptions you want to use it gets that number against the core customer count. We gave you can get to it to an ASP in the high 20020 728000, something like that.
I can walk you through that another time, but but kind of more generally to a prior question about court customers. We see the same behavior the same mix.
As Scott said, we think were less than 10% penetrated in a big market.
A smaller customers grew up into becoming core customers larger customers come on him become core customer sooner, but we think thats a still a very good metric for modeling and understanding or business and and if and when that changes you know will will break that out.
Help investors understand it but today core customer revenues is above 80% of our total.
I appreciate that and then when you think about 2020 growth opportunity you know you talk about momentum on your core customer.
Compliance and then you talk about new products and services through both organic and you know.
And I could you share and then also like cross border and international opportunity. So I'm wondering what what are you more excited about for 2020 growth opportunity and and how is your felt organization prepared for that.
Yeah, I mean, it's a it's it's a nice problem to have I would say I would say mean, what I'm really most excited about is the team mean, what I mean by that is I mean, we have great core sales.
Execution.
I really like where the the management team is taking us now and growing the business and and becoming more professional in all the aspects of it. So I wouldn't say that there's any one particular area that that just jumps out to me that says hey, this is going to be this is going to be earth shattering or that we're really play.
He is with me and the things that we've talked about you know we're going to continue to push SST and business business licenses Cross border, we're going to go into international I mean, I think what you see it would mean, we're just really you know sort of locked in in what we need to and what we need to do and it's a testament.
Two you know all the employees that that we've had in the past and and frankly isn't the new team. That's that's that's growing both on a domestic and international basis, that's what I'm most excited about.
And there are no further questions at this time Mr., Scott Mcfarland co founder and CEO I turn the call back over to you for some closing remarks.
Sure. Thank you I'd like to take this opportunity to once again, thank our employees customers and partners for their hard work and support.
We continue to be really excited about the market opportunity in the momentum that we're building in the business. So thank you all for your interest and Avalere and we look forward to talking to you on the next call. Thanks much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.