Q4 2019 Earnings Call
Fiscal year 2019 earnings conference call.
This time all participants are no was the only mode. After the speakers presentation. There will be a question answer session to ask the question during the session you'll need to press star one on your telephone. Please be advised that stays conference is being recorded if you require any further assistance. Please press star zero I would now like to hit the conference over to your Speaker today, Greg Mcdowell Investor Relations. Thank.
You. Please go ahead Sir.
Good afternoon, and welcome to Apple Erez fourth quarter in fiscal year 2019 earnings call.
[music] market close today.
With me are at Volaris CEO Scott.
[music], Vice president of strategic initiatives, Rob Tanenbaum.
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.
Our expected future business and financial performance and financial condition, and our guidance for the first quarter in fiscal year. It can be identified by words, such as expect anticipate intend plan believe seek or will you.
These statements reflect our views as of today only should not be relied upon as representing our views that 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.
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 or annual report on form 10-K filed with the Securities and Exchange Commission on February 28, 2019 in or otherwise.
Periodic filings with the FCC.
During the call. We will also discuss Nongaap financial measures, which are not prepared in accordance with generally accepted accounting principle.
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 I didn't faster dot Avalere dot com.
With that let me turn the call over to Scott.
Thanks, Greg and welcome everyone, joining our Q4 2019 earnings call.
So it was another strong quarter parabola capping off an amazing here in Q4, we reported total revenue of $107.6 million, representing an increase of 40% over the same quarter last year.
Our girls was driven by continued strong execution across the business.
Saw new customer wins.
[music] geography, and we experienced strong customer attention and solid upsell activity.
I would like to say all of our customers and partners who contributed to our success in 2019.
I would like to thank our employees for their hard work.
Continued commitment to our customers our vision and each other is greatly appreciated.
We recently had a chance to celebrate our success and hard work at all hands Company me.
It was amazing to see the involvement excitement and enthusiasm of all of our employees at the annual event.
[music].
Our new five year vision dock.
[music].
Before I share some of the key aspects of our vision with you I would like to outline how we got here, we all live in the digital world that flies because of automation.
We see it every day on a personal lives and we see it in our work lives as well.
Any of the once manual repeatable business requirements have been automated.
That's your Salesforce management.
Enterprise resource planning inventory management accounts receivable payments, that's fulfillment among others.
But there are laggard as you know governments worldwide display businesses to collect the limit taxes and you saved government imposed a complicated an endless evolving array of compliance obligations.
And the bulk of the processes surrounding global compliance are still manual for most businesses.
This is where avalere steps, we exist Easter confounded government mandated bird every business on the planet must face the obligations of transaction tax.
And regulatory compliance.
It was our core belief the compliance should not and will not remain a manual process. We believe it should and will be pardon me.
We believe compliance automation is inevitable and the same otherwise it's simply irrational.
This brings me back to our vision for Avalere and how it is a ball.
Said before that we want to be part of every transaction in the world.
This is true today as it was over a decade ago, when we first articulated.
Well, what's exciting to me.
[music].
Oh, the compliance challenge.
Well, we started dabble or more than 15 years ago.
Only service was tax calculation, so naturally our Grand vision was very focused on transaction today Avalere isn't end and compliance provider, having added robust automate churns and remittance services exemption certificate and other document collection storage and management.
Solutions licensing and registration services cross border compliance and more.
So for sometime now oddly enough just seem to be part of every transaction on the planet wasn't really big enough to capture everything we do.
What about the returns you file for customers payments, we make on their behalf compliance documents, we manage and so forth.
We undertook a lengthy answer all process to frame, our updated vision and the key principles required to pursue it.
And we now stake our long range claim to becoming a global cloud compliance platform and automate all aspects of compliance for global businesses.
Bruce process, we also reconfirm our commitment to meeting our promises to our customers.
And clarified that while growth remains our prime directive.
The efficiencies in our business is also an imperative.
During 2019, we focused on improving sales and marketing efficiency and on driving the business towards cash flow breakeven.
I'm proud of the continuing the results we achieved from those efforts and excited about the emphasis we are placing on improving our margins in the long term.
Efficiency initiatives, such every element of our business today.
From customer and partner Onboarding, the self service support initiatives continued application to the advanced technologies the manual parts of the compliance journey.
These investments have a profound and exciting impact on a business.
Well, we believe they remain in the early days of value creation for Avalere.
A good example is the application of artificial intelligence and machine learning technology that we acquired from index last year.
Did you may recall, what are the primary initial projects. We asked the team to explore was using AI to accelerate the acquisition of new content and the mapping of a massive database of global product codes the tax code.
We're excited to share amazing progress by the team in this area.
We can now store sales can use tax rates for most states at the click of a button.
In addition, we have delivered automation tools that assist with cross border product classification.
Okay theme, a dedicated group of taxi compliance experts that avalere relies on to maintain and expand our extensive content database can now use these automation tools to work more efficiently reading time to assemble new content.
As a reminder, do taxing compliance content unlocks new markets traveler, expanding our potential customer and partner base with each new vertical.
Geographic or tax type added to our global database.
If I take a minute to articulate the difficulty of the content acquisition and maintenance path.
Want to share some of the stats around the changes made to our U.S. database last year.
These changes are based on the ever changing laws and regulations that govern state and local taxes.
And the rate change can be disease.
In 2019, we made almost 300000 updates to our after tax calculation engine.
These changes include everything from rate updates the taxability rule changes boundary amendments tax holidays and more.
Well imagine trying to keep up with all that you accounting office will be small or medium sized goes or even a large accounting for.
I'm excited that our technology investments not only drive major efficiencies in our internal processes, but also show up is big usability improvements for our customers existing and new.
We're in the final testing of automatic habitat sold classifications, and automated taxability analysis or accelerate new customer onboard.
The process of mapping at customers product portfolio and the skews to tax goes can be labor intensive and our new systems.
The first [noise].
We're also.
[noise] powered backend and better search technology.
Finally, before I close my comments today allow me to touch briefly on our talent today at Avalere last year, we brought in an astounding caliber of new leadership for the organization.
I want to recognize two of our most recent hires who have joined the team generally joined dabbled era as chief marketing officer in November coming to the team from prior marketing leadership roles I pay Pal American Express and G D.
And last month, Salim Ali joint Adler as SVP of international.
Right Avalere Celine was CEO of lawyer and enterprise data sharing platform build on block chain technology and is overseeing global marketing product partnership efforts for notable enterprise technology companies, including SJP Indira tossed technologies.
With that allow me to close this section was when I'm sure. Many of you are waiting for I'm about to hand, this earnings call over to my partner billing growth for the last time.
There's been a great honor of my career to worked alongside Bill for the past several years.
And I could not be more grateful for his willingness of enthusiasm to join our company.
I can confidently say that we would not be where we are today without his leadership and skill.
I believe we've been led by one of the best Cfos in the business.
As a testament to that I believe its transition plan was one of his final stellar strategies and Ross Tannenbaum is the best choice. The following this what steps.
Ross's works with travelers.
[noise] show.
It is managing director role at Goldman Sachs Ross led the team managed our IPO.
Ross's experience was built over a 10 year investment banking career at Goldman Sachs and credit Suisse, nearly seven years and leadership roles at via Corporation, a web collaboration software company.
Since arriving at Avalere last year losses, let our strategic initiatives group, including our cross border lodging communications and excise businesses, which represent strategic growth areas for our business.
They will deliver our financial updates side by side today, and I Trust that folks on the phone will enjoy working with Ross in the years to comp.
With that.
Already you Bill.
Thanks Scott.
A reminder.
[noise] recognition accounting standard you see 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 well historical financial results. Prior to 2019 are presented in conformity with assay six or five.
Our earnings press release includes additional information to reconcile the impacts of the adoption of the S. C. Six so six standard.
[laughter] here too.
Right. It by strong sales execution and continued market demand for the year, our total revenue under HFC six so six grew 41% to 382.4 million.
For the fourth quarter total revenue was 107.6 million up 40% on a year over year basis.
Strong growth in the quarter was once again driven by increased demand from both new and existing customers combined with strong sales execution across channels.
Subscription or returns revenue was 99.9 billion. This represented 93% of our total revenue grew 39% year over year professional services revenue was 7.7 million our core customer count increased by 722, approximately 11960 at the end of Q4 2019.
Our net revenue retention rate was 111% in Q4 and has averaged 111% over the last four quarters.
Revenue retention rate supported by low gross churn contributed to strong customer lifetime value.
In discussing the remainder of the income statement. Please note that unless otherwise stated all references to our expenses operating results and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release. It was issued just before this call.
Gross profit was 76.8 million for Q4 19, representing a 71% gross margin. This compares with gross profit of 56.2 million and 73% gross margin in the same period last year.
The two percentage point decline in gross margin primarily results from third party software hosting costs and our expansion into international markets as we have discussed in prior quarters.
Turning to operating expenses, we continue to invest in sales and marketing to fuel long term growth and new customer acquisition.
Sales and marketing expense was 43.4 million in Q4 for 40% of revenue.
On a six so five basis sales and marketing expense would have been 49.3 million or 46% of revenue.
Sales and marketing expense was up on a sequential basis. This was inline with our expectations and due mainly to seasonality.
We're pleased with our continued sales and marketing efficiency for Q4 research and development expense was 23.7 million or 22% of revenue.
The increase in research and development expense was consistent with our expectations as we continue to invest in new products content at features to drive sales growth efficiency and increase our competitive mode for Q4 general and administrative expense was 14.8 million or 14% of revenue the decrease from the prior quarter in general one.
<unk> expense was driven primarily by an insurance, but occasion recovery, which was recognized during the quarter.
Non-GAAP operating loss was 5.1 million for Q4, which was better than our previous guidance due primarily to the revenue upside in the quarter on 65 basis non-GAAP operating loss was 10.9 million compared to 13.3 million non-GAAP operating loss in Q4 18.
Non-GAAP loss per share was three cents in the fourth quarter based on 77.1 million shares outstanding on a six so five basis non-GAAP loss per share was 10 cents compared to loss of 19 cents per share in the fourth quarter of 2018 based on 66.7 million shares outstanding in preparing our 2019.
In annual financial statements, we discovered an immaterial here in recording deferred sales commissions for the first three quarters of 2019 impacting our previously reported AOCI six so six financial results.
On the last page of the financial schedules, we presented for each of the first three quarters of 2019 are unaudited consolidated statements of operations as previously reported and there's corrected.
Correction resulted in additional sales and marketing expenses of approximately $1 million for each of the first three quarters of 2019 under his see 66.
There's no change to our previously reported here see six or five financial results.
Looking now at our fiscal year 2019 results total revenue of 382.4 million was up 41% on a year over year basis subscription or returns revenue contributed 355.2 million Theres represented 93% of our total revenue grew 40% year over year.
Professional services and other revenue contributed 27.2 million.
Non-GAAP gross profit was 275.1 million for 2019, representing a 72% gross margin.
This compares with gross profit of 199.
Right.
[noise] 18.
The same factors discussed earlier, which impacted our Q4 gross margin also contributed to the gross margin results for the full year.
GAAP operating loss for 2019 was 14.4 million compared with a 45 million to our loss in the prior year.
Note 18.6 million of the year over year improvement in operating loss was due to the adoption of assay six so six the results are consistent with our expectations as we continue to invest in our business to drive long term growth in new customer acquisition.
Turning to our balance sheet cash flow statement, our cash and cash equivalents were $467 million at the end of Q4 19, an increase of 20.4 million from 446.6 million at the end of Q3 90.
Total deferred revenue as of Q4 19 under NSC six so six was 161 point.
[music].
[noise] $5 million at the end of Q3 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 probably abilities.
They did billings were 120.8 million in Q4, 19 up 29% from 93.4 million in the same period last year. As a reminder are calculated billings growth rate began increasing meaningfully in late 2018, we will continue to face challenging year over year comparisons relative to this trend throughout fiscal year 2020.
Yes.
Yeah.
<unk> point 5 million in the same quarter last year as we've stated on past calls our free cash flow will fluctuate from quarter to quarter caused by many factors, including the timing of working capital the seasonality of our billing and expense cycles as well as our overall level of investment in the business.
As we previously announced I will be retiring on March 30, Onest and have joined our board of Directors Cross Tennenbaum, Our executive Vice President of strategic initiatives will take over the role of Chief Financial Officer.
Just as experience was built over a 10 year investment banking career at Goldman Sachs and credit Suisse, including working with Apple ever since 2014, and leading its IPO in 2018.
Scott I have great confidence and Ross and we were very fortunate to have them step into the role of Chief Financial Officer.
In addition, I want to thank our team for the strong financial operations, we have built it avalere I firmly believe the company is well positioned for the future.
With that let me turn the call over to Ross.
Thanks Bill.
On behalf of all Valera I would like to thank bill for his leadership as Chief Financial Officer over the last four years.
Bill has built a strong team and foundation that a scaled our financial operations to support an initial public offering and high growth.
Bill has been a great mentor to many other clarion and I'm Grateful that has joined our board of directors and will remain engaged and accessible as a long term trusted adviser to me and our entire team.
I joined novel, they're almost one year ago after serving as an investment banking advisor to Scott Bill and the company for nearly six years.
Through these experiences I've had the opportunity to immerse myself deeply in the business and work alongside Bill on the finance team to drive operations.
I'm excited to assume that chief financial officer position to help the company achieve its long term ambitions.
I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q1 and for the full year of 2020 under the S. C. Six of six standard.
As a reminder, after a strong 2019 performance highlights.
Right.
[laughter] challenging year over year comparisons in 2020.
For Q1, 2020, we expect total revenue to be between 107.5.
[noise], we expect our Q1 non-GAAP operating loss to be in the range of $8.5 billion to $9.5 billion.
For the full year 2020, we expect total revenue to be between 470 and $474 million.
We expect our full year non-GAAP operating loss.
In the range of $18 million to $22 million.
We continue to expect a modest level of cash burn in 2020.
System with what we shared on our November 2019 earnings call.
We believe the momentum in our business compelling customer economics, and our leadership position in a large market all support continued investment in the business to drive long term growth.
Before closing please note that our investor and analyst day will be held on Wednesday may 13th in Saint Louis <unk>.
In conjunction with our crush annual users conference.
In person attendance will be limited so if you're interested please contact our investor relations team.
For those of you who cannot join us in person a webcast of the event will be accessible on our IR website.
At this point, we'd like to open up the call for your question.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Well talk for just a moment to compile the Q and a roster.
Your first question comes from Chris Merwin from Goldman Sachs. Your line is open.
Okay. Thanks, so much and congratulations on a great ended the year Scott in your prepared remarks that you talked a bit about the progress index has been making in aggravating tax content can you update us on any content gaps you might still haven't in certain verticals, how you're thinking about closing those gaps either organically or through M&A and how that could potentially open.
You know.
I guess the opportunity from a customer additions in time. Thanks.
Thanks, Thanks, Chris you know we said.
On calls or.
Previously that we have about I would say we have some place around 60% of the content of U.S. I'm now some of that content doesn't really there is not a big market for it. So we've got the majority of the the big the big areas, but there's a lot of work that we can do.
You know around food food and beverage automotive manufacturing those are the things that we're going to pick up once once as I said in my remarks wants to index kicks in and we're starting to you know do maintenance on an automated basis all of our teams can start focusing on on that effort going for.
And I think that that's a big big change for US one I think it'll have gross margin impacts for us a in the future, but it will also allow us to add growth. That's exactly the kind of initiative that we want to work on ones that have work on on efficiency and grow simultaneously, so I'm pretty I'm pretty optimistic about that.
Okay, great. Thank you maybe just one quick follow up the full year margin guidance. It looks like it implies a little bit a de leveraging the model and I realize fiscal 20 was a year of accelerated growth through all that probably came in well ahead of the original plan. So maybe can you just talk about.
Where you're investing in 20, and you know I guess can you said that you do see some over delivery should we be thinking about that pulling through the bottom line or do you see kind of continue to continued opportunities to reinvest that and growth. Thanks.
Thanks, Chris you have as Bill you know, we're we're very pleased we you know with the the profile of our income statement, we're going to continue to invest across where we oh, where we see the ability to drive growth and as Scott said.
Long term improvements in margin and so we've done a number of investments this year that I'm very pleased with we've invested in the capacity of our network in the security of our network, we've invested in content Oh product development product marketing product management.
And then we've also invested.
And in.
In other areas, along or sales and marketing and our general administrative were really putting in the foundation building blocks.
To build a much bigger company here and so you know Scott and Ross and I, we clearly have arise keenly on the.
On the income statement, all the levers, we can pull up but I.
I I don't think the de leveraging the as you pointed out has anything to.
Be overly concerned about as were because were prudently, making investments really to broaden the total served market kind of like what you talked about earlier and also start to deliver some efficiencies across across income said you know the biggest concern we had coming out of the IPO. You're in Africa was you know our sales and marketing efficiency and Weve.
Done a nice jobs demonstrating that.
And now we're taking the a the content the capacity the scalability the security of our network and core infrastructure you know into a great place also so so so so we think we've got the right that'd be great great extra here Chris. Thanks.
Thanks Bill.
Your next question comes from Sterling Auty from Jpmorgan. Your line is open.
Yeah. Thanks, Hi, guys. So you added over 700 customers again in the in the fourth quarter can you help us understand what are the profile of the customers that you're adding today versus let's say a year ago, and what I mean by profile.
I would you characterize these larger companies smaller.
What do you.
Those customers and what's kind of the tip of the sphere as it always tax code, that's bringing them in or is there kind of another type of the sphere that you're starting to see developed.
Thanks, Darren This is bill I'll start and you know.
Others can can can jump in and add to kind of cover that trend. That's good question. So first of all I just want to remind everybody. The core customer count. We report is not purely new net adds it's a you know it's our it's our metric of those customers that they've generated more than $3000 a revenue in the last 12 months and so its a.
Very nice metric, we like it because it's very predictable but to your point, we are seeing on margin a newer customers slightly larger than we've seen a year ago that was your premise compare your go to now. So so first first comment I'd make would be the average average customer size is larger.
And it's not just the entry point of tax Calkins known as Scott Even said a few minutes go that's where we started the company, but we really have multiple entry points for our business not just tax Cal but also returns.
Clients.
Correct.
Particles that are expertise comes through so the other thing I was going to make on your point about core customer count don't again over emphasizing the last decimal, though the growth rate or the numbers. If you remember last quarter I report, we reported a 80 of those core customers.
Same inorganically from our completely acquisition and so.
So again, the nice thing about the core customer count is it still represents a tick that cohort represents more than 80% over revenue currently and the average selling prices increasing on the margin, but it's a nice solid base is just over 11000, which grows at a very steady basis and that you know brings me back.
Back to my my My Tag line, which as you know, we we like the business here because it's a large tam Scott low churn and we see real strong steady stable growth for many many years.
Scott certainly I'm sure. Let me, let me add just a little bit of color to that right. I mean, I think I said in my opening remarks, a little bit which is you know we're doing a lot of brought things other than just the tax calculation that we did and I always.
Yes.
Sales.
Hi, which is I mean, you have one or all of these problems. I mean, you know you have a calculation problem you have a returns filing problem you have an exemption Sir you have the exemption or certain certificate issue right those or you have a U.S tax problem. Those are the ways and so avalere as really tried to.
Work to build out our product offering so were ever your problem is you have an entry point into Avalere now we've added cross border and then of course, you have that as well. So we really have seven ways that customers field pain that can that can come into a odd that can come into our business.
And we want to make it easy for them to do that.
That makes sense and then one follow up on the investment and the margin outlook.
Can you give us a sense how much of this is actual just people's than in other words headcount increase how much of it is other investment like the infrastructure in terms of cloud and support international and maybe to help us would that can you give us a sense what was the headcount at the end to the ended the year and Directionally, where do we see that going.
Hi, Thanks, various bill.
We don't we don't breakout head count at the end of year, but what it can tell you is we have absolutely grown head count in the company's Scott talked about new leadership, we brought in and I got to tell you you know in the four plus years I've been here. The the the company has really made toward attracted a.
Yes, great people to to join us So I'm very pleased with the profile of the work or the workforce in terms of the investment.
We don't ever broken out in terms of percentages, but I would say you know.
Your your kind of where you phrased question, it's kind of 50 50, 50% you know the of the overall investment isn't in people and talented training so.
<unk>.
On that front.
But the other 50% really has come from some big systems, I think I've talked about earlier and that are kind of a step function in investment for us because.
We feel very confident about the long term future the business and so just for example, you know we're putting in a worldwide HR system, that's kind of going to be really very very good for the company I'm, having to Oh my team overseeing a socs for a for implementing implementation because of our or Mark.
At cap makes us a large accelerate if I were now so there's just some some kind of big company things that we're doing now, which I think are very prudent and so to your question I'd say it was kind of 50 50 head count and systems.
Thank you.
Your next question comes from Brad cells from Bank of America Securities. Your line is open.
Oh, Great Hey, guys. Thanks.
Yeah.
[noise] focus on the content side, where do you feel you are in kind of the buildout of content, particularly in Europe and Latin am.
No such that you know, we're getting close to potential investment and go to market in those regions to kind of originate more customers in international geographies.
Thanks, Brad I'll take this one.
International is as we've said is really.
[music].
We lay the groundwork for for this when we talk about international we're talking about businesses.
That reside outside of the outside of the U.S., but I'll remind everybody that you know because of the promise of the internet anything anywhere any place any time mean AVOD tax.
We have to calculate that may be prepared to do international rates at the at the at the highest level for 210 countries around the world and in fact, we do over 160 different countries every I mean it mean.
Every year for early in 2019.
Ketamine calculating so to in order to do really good service and which I think you know sort of distinguishes avalere. It at times is is that you have to be able to calculate that at all so I mean, our basic business is is is centered around being able to do 210 countries now so.
Typically I think to your question is we take that the those that high level rates and now we start driving down. So you know AMEA and end the cut and the other countries around that.
I think we have pretty good caught me pretty good contact we made an acquisition about four years ago. When they were the leading you know group with a with their content. So we've been able to take AMEA and have a pretty good ever have a pretty good base for growing that business getting it.
Integrated into AVOD tax is what we're doing today. So we can you expand that that content and send it out even further and I think you know use our you know really good you I knew I mean, you X experiences to a two to help more customers lab Tam, we really started in Brazil in Brazil, as we all know as the hardest.
Tax regime, and we continually build out that build out that content in its probably that job is never done because it's a lot to update and a lot to continue to grow and will continue to do that but I. You know, we're moving into met me in Mexico and other other regions in that.
Area, and we will grow outlet lab Tam over this year and the coming in the coming years. So those are our to our main basis, you know basis right now, obviously and we've talked about that with the investments that we that we've made well the investment that we got in our secondary and the like that we want to expand you know that even further.
Aster and further you know beyond so I think we have all wheel.
Oh.
[music].
But we've made we've got a good start into into base areas and we will continue to grow from there.
That's great. Thanks, Scott and then one more if I may please.
On the net revenue retention at 111% is it possible to unpack a little bit what's driving that you know transaction volume growth is obviously key.
More states more geographies I am sure as a secondary driver and then you've got other other services like.
Cross border landed cost.
Cetera.
I guess, where where are those I guess those three how do they rank today versus say a year ago. When you look at your net revenue retention, which one would you say is contributing more.
And then do you think that this kind of onetime.
Yes.
Thank you.
Sure sure sure Brad Thanks, well as you know we always say.
We encourage you to look at kind of the.
The four quarter average as opposed to any one quarter and so you know hundred 11%. We're we're pretty pleased with that a year ago, a that four quarter average would have been less than.
111%. So I think it's fair to say that it has moved up a few points.
You know year over year again, I'm I'm talking about a four quarter average not not quarter to quarter.
You kind of wait it out a we've talked about as you know the past about Wayfair Wayfair really is a is a long term.
Tailwind for the business that is a is driving existing and new customers basically to register and more a restaurant file in more states.
And that contributes for existing customers to the net revenue retention.
We talked in the past I think a little bit about SST revenue.
That's a with existing customers, primarily which which picks up a a point or two and then cross border starting to is starting to come into play and I think it's fair to say that you know most companies not all but but most companies have some are early requirement for an international transaction and whether they are using.
Yes, or not today, we think thats really again to a steady a steady kind of long tailwind for so you kinda you're going to answered. The question as you asked it I can't add much more to what you said, but but those things are driving and have picked up a few points for us.
Net revenue retention, you know from from a year ago.
Great. Thanks Bill.
Your next question comes from Pat Walravens from JMP Securities. Your line is open.
Oh, great. Thank you.
One for Scott and then one for for Ross and Bill. So Scott for you know in your prepared remarks, you talked about applying.
Some AI power tools.
What do you mean by that I mean, you guys are.
I'd category.
Somebody process automation.
Hey, good examples of something that you think you can do better.
Sure.
Ill.
And I think I've said this in the past Pat but.
What what I would like a focus everybody on for a high for US I mean, there's just lots of App and machine learning, there's lots of applications because there's things like when you have to go and find.
Tax.
Updates and information today, we do that in a very manual way you know we're on the phone we're doing research on the computer we're looking around for where the where the changes have happened, we're taking information that the state send us and get in consolidating all of that but you know there can be done way more efficiently you know with with.
Hi, I mean people that could you mean machines that can go out crawl and look for that information consolidate that information test that information and then be able to produce it to a group of people that can audit it and get it out so manual becomes only the automate <unk> main manual becomes only.
The the auditing function, whereas all of that extra work can't you can and should be done Oh, you know I mean automatically mean, you know the ability to find new content I mean, that's really the Holy Grail for US is then to expand that out and so no. We no longer have to use people to go find.
All that all that content that we know that we don't have today, meaning we can do that in an automated fashion my goodness I mean that is that as a a big boon to gross margin and it's also a a way to accelerate growth because you're able to expand your market.
Wait wait wait wait fat way faster you know doing Onboarding you know.
No, making sure taking information that the customers have inside their accounting systems and being able to take that manipulate that and suggest a solutions for them as to where they have nexus or how or or how their products are are going to be tax from a taxability perspective presenting that.
Out to them.
And then being able to allow them to do it without having to do the manual staff and the and the taking of product codes and mapping it the tax decisions all of that stuff is sold manual it's a burden for the customer and it's a burden for for for US saw in Onboarding. So to the degree that we can take the information that.
We've got out from or the IP that we got out of index and provided a two hour to our customers and us internally. It's a it's a fantastic thank Pat.
All right that's super helpful. Thank you and so on the CFO front Ross congratulations.
Bill. Thank you for helping guide us for the last four years.
To the extent that you're willing to hear it and you might not be what advice have you given ross about dealing with investors and analysts like me.
Yeah. That's a good that's a great question. That's a good question I have no idea when they're going to how they're going to answered, but it's a great question well I got to give you want that we didnt prep for that [laughter].
No. We're so fortunate ever us here, Scott and ours is could couldn't be couldn't be more please ross is going to be great.
Super Smart very high integrity.
And so I think you'll find working with Ross.
Just just just outstanding so he doesn't need my advice, but I'll give them all the support and encouragement that I can't Ross.
Yeah.
Okay give me is big market low churn so [laughter].
So I I do that but I'd say now having about six years working with the company externally and leading the company through the IPO and now here for a year I really I joined the company.
I'm really believing in the long term the long term opportunity, we have and it's been really a great plan that bill and Scott to put into place in terms of the transition.
Spending a year operating several of our important businesses that are important growth areas for the company.
And really getting deeply immersed into the business how it operates working with the whole team.
And working with Bill alongside Bill from an operating you know me being the operator, he being financially during his great team and now as we spend.
Hours, a day together, a and deeply immersed myself in the financial operations I'll, just say overall, there's been a lot of wisdom and advice and and I'm thankful that Bill will continue on as a board members. So I will continue to have his advice and tutelage, there's not any one thing, but it's it's a smart transition that bill and Scott.
I have affected here and I'm appreciative of it.
Pat Pat. This is this is Scott what I, what I would say it is I mean, this is something that I really believe and deeply in the in the business. We have all the new executives and I and I see the same thing to everybody joining the company because the tendency for people is this the jump in and want to do everything right away and my.
Thanks to all the new leaders Weve has here is take your time, you'll never get this opportunity again, and bill and Ross have been doing this and Ross did it for a year is learned the business learned the business understand the customers understand how we operate and then once you do that then you're ready to take.
On you know the you know the jobs. So thats the same for Ross is for Ahmed as it is for saline and all of the other people learn our business. It's complicated it's hard mean demo the product be able to do that and then from that you can just really be effective in your you know in your in your in your jobs.
Thank you all for those perspectives.
Your next question comes from Brad Reback from Stifel. Your line is open.
Great. Thanks, very much Bill would you be willing to sort of help us out maybe point to when you think gross margins.
We will bottom.
Well I can't I can't really do that Brad.
But what I can say is.
You know, we've got our hands on the on the controls and really taking.
Well.
Just a this is process of kind of tax compliance as Scott says is pretty funny, you know it hasn't been around for decades, it's been around for thousands of years and so we're taking is very very manual process and we're really automating it.
For the first time at least in a in a in a cloud solution and so as a result, there's a lot of friction to that automation, we've talked about it or Scott talked about a question earlier and so I'm I'm just I'm. Just you know very confident that over time I emphasize time, you'll see nice solid margin improvement here, but I can't say.
Hey, when that's going to be and I wouldn't focus on you know any any near term quarters. Because were again. We're taking this is manual process were automating and industry a market that has never done this before its still very much you know internal status quo and as we do these these numerous things across the bay.
Business.
I'm confident we'll see a steady gradual and inevitable you know.
Gross margin expansion and then on the on the operator.
[noise] improvement there just due to scale because we have such a such a long steady growth opportunity ahead of us.
Great. Thanks very much.
Your next question comes from Scott Berg from Needham Your line is open.
Hi, Scott Bill and Ross Congrats on the good quarter. Thanks for taking my questions I.
I guess a bill good luck in the the next adventure.
[noise], that's new boss is that correct.
We like that and on the board.
I don't think I haven't heard it [laughter].
I guess the two questions for me Scott, let's start on the index acquisition, I mean kind of unamortized with that one since you made it because of how obviously could make onboarding of your customers more customers more quickly given some of the content mapping that you have there but have you seen any maybe change in competitive win.
Rates or opportunities that are out in the end markets. They specifically based on that functionality.
So so I I mean, I'm, a numbered with it as well and I think it's a real game changer on any bill said it I've said it I mean, I think it's a big game changer for for Avalere and for our for our customers and and we have not rolled it out yet and I think I said that in the opening remarks that we're just very very.
Pre close to do mean doing that so we have high we have high hopes that it will provide the kind of a customer customer service that we really want and they in the efficiencies around that you know in the in the quarters in the quarters to come so.
Stay tuned on on that one because I think it's I think it's important for us.
Great and then from a follow up perspective, probably for for Bill or for Ross is you've had nice core customer growth over the last.
Four or five quarters, nice increase and acceleration there, but can you comment on customer ARPU trends, maybe have some of those new customers that are coming into the into the avalere ecosystem over the last year relative to maybe that 12 or 24 month time, a timeframe for that.
Yeah sure this bill.
I'll take Scott. Thanks, Thanks for your time kind comments.
We are seeing again, you know on the margin slightly larger deals coming through I don't want to overemphasize that fact, but you know with a base now of over 11000 core customers. They're there. They are ticking up and you know you can kind of do the math and and we did the math last year at our analyst day.
But you're saying you're not seen any degradation in ARPU I guess is what I should say, you're saying you're seeing a nice steady kinda upticks in that in that in that average revenue per Boe.
Per core customer so.
Okay.
You, probably more significant but but because of our base and <unk> and and you know the size of that group and the size of opportunity we're going after.
You can assume there's a slight uptick in the average revenue per core customer that is going on and the new deals coming in are slightly bigger.
Your next question comes from Richard Davis from Canaccord. Your line is open.
Hey, thanks.
Look we all know that you know hiring is a challenge these days for companies.
And so you guys have done it we've also seen more aqua hires I mean I think.
Whatever portway was recording or guys.
Ron I was I don't know 80, or 100 employees, but how do you is there a ratio I've always been wondering when your company is there a ratio as to how you think about whether you buy a company on an actual higher basis as it dollars per employee.
Yes.
Two different paths and stuff like that I'm, just curious as you.
On a go forward, how you guys think about that thanks.
Interestingly I mean, Richard Thank so interesting question.
So.
No I said this in the past I mean, what are they really I think one of the key success aspects of Avalere has been our willingness to make a tuck in acquisitions I mean, I don't think avalere would be where it is without without doing that [noise].
Yes.
It was always about catching up it was about getting.
Yes.
Correct.
Rates and rules and content for the most part but men, but some of that actually.
Getting people.
And they'll technology and in a car in a combination and so for US we have a bias towards let us do what we do really really well internally and when we need to learn something where we don't have it internally, we always turn to the outside I mean, we will we will I can just say this with with.
A lot of certainty, we will not domain enter China with just doing it without with it would just our people we will look to make it an that I mean, an acquisition, we will look for the technology and the expertise to two you know and or enter those markets and that's what we really do I mean, we start out with the.
Yes towards action and getting that information and obviously, we do the comparison were always looking at what would it cost us to build it internally compared to what we can do you know externally and and the speed at which you do so I don't think you can I think everybody would say that what I'd.
<unk> said, but I think the difference in what I, what I think it's sorta distinguishes us is our bias towards action and making it happen through and you know as you say in an inaccurate higher we really we really do like that methodology and I think we'll continue to do that.
Thank you. Thank you very much and I'm all set but I appreciate it good color.
Your next question comes from Alex far from Raymond James Your line is open.
Yes. Thanks, I had two questions on international first you added the new Sep of International last month I think in the in the release and then again today you talked about his role in shaping the companies go to market strategy. There I know, it's only been a month, but can you just talked about any early results [noise].
Yes.
Sure. Thanks, Alex I mean.
What I'll say is I'll, just do a little bit a walk down memory lane to begin with but you know a when we when we decided to do this move internationally I mean, I took one of our senior executives Marshall cushion, Eric moved them to move moved into Europe, and and and that's how we started to develop our stay.
Atg, that's what drove US you know to make the the acquisitions that we've we've done there you know Pascal Vandort, who as you know as worked with US for a long time had international and when he stepped aside at leftists vacancy, which we filled with with a with footwear saline. So weve you know.
So we've had I think a very sort of strategic way of saying, Hey, we have to enter Brazil, because that's the worlds you know most complex area and it really drives what happens in Latam and then obviously you know.
EMEA and end. The you mean, we have that we had to cover those and I think we had a really great strategy around going to market in those areas, but what would it when I say it in your question really is around mean, Celine is going to say, how do we move out of those and how do we take it.
Joe.
Yeah.
Gain more in Asia, how do we enter these other these other markets that were not in today and which one should we go first which one should we go second and third how do we actually think about.
Our moat strategy internationally. So we develop that moat internationally the same way we've been able to develop it in that in the U.S. I think that that's really the the thing that on that I'm looking to Mitt and then and Salim to to drive for us.
Got it that makes sense I guess, just following up on that international revenues kind of held steady in this year, so far at about 6% of revenue.
Did that pick up at all in fourth quarter, and then and would that kind of how you just since the last part or would you think we're far enough through the investments internationally that we could see an inflection in that growth rate, we're kind of grows faster than the blended average.
Oh, Thanks, Knoxville, Yeah, we reported.
International pretty stays percent, but you cant remember, how how well we've done overall in the U.S. and.
And so you know what we like say when I say is there's certain fundamental building blocks you got to get into place before you're going to see any sort of.
You know a change in the revenue profile and we're putting those built building blocks and voice remember you know this company is founded 15 years ago and there's many many years of investment development in an effort well those things are now also being you know duplicated certainly at a faster rate internationally, but you know when.
When international revenue gets over 10% of our total our plan is to us start breaking it out at that point. So we're not quite there yet, but we're very pleased with what's going on your Nash, we're investing in internet.
[noise] similar.
Similar tailwinds and demands internationally and so we think a you know international marketplaces.
Presents a very very.
Compelling long term opportunity for the company.
You mean, <unk>, we everybody knows how sort of excited I am and I think the company is for that and bills talked about this in the past. Its you know, it's really a growing area for us. It's a strong strong growing area for us. It's just growing on a on the small base and and you know the good news is.
That the big base is growing pretty fast as well, it's just hard it's hard to to get out in front of that but that big that big number, but but it is it is one of our you know really good growth areas and and were and we're pleased with where we are.
Your next question comes from Frank Bracelin from Piper Sandler Your line is open.
Thanks for taking the question topping out here I guess I'll echo the a the well wishes for a bill's retirement here.
First question is for for Scott here and have a follow up for Beeler Ross.
Scott tax regulation has and continues to be a tailwind to the business a tailwind to kinda automating the complexity.
The latest kind of regulation was the marketplace facilitator law that kind of wind to place in Q4, what did you learn a in the quarter around that new regulation and what are some of the what's been some of the early feedback from from some of those marketplace facilitators and again, one quick follow up for for the CFO.
Hey, Brent. Thanks. Thanks, Thanks, a bunch I mean, I think you know what you're seeing in the market in the marketplace Act I mean, what.
I I mean, it's I think it's a reflection of what's just happening in tax around the world I, It's I mean wayfair.
Marketplace all of the efforts that the rest of the world is putting into you know a VAT reporting you know live reporting.
And those are all just fantastic awareness tail tailwinds for for for Us, but what I think I've learned about the this is much. It's it's that they are always that they are always there and they are always creating complexity.
I mean and and this one case complexity as our friend I mean, and and it's not one thing. It's the culmination of all of those things that I think are driving to what I've always said this is inevitable and and and it means specifically around market.
Places, it's it became easier in one sense, but way more complex for the customers because if they're doing something on their ecommerce their own ecommerce site than than they have to report.
You know everything just as if nothing changed and so decipher in what they have to report and what they don't have to report because it's already been done is really actually more difficult than what they had before and and so we're starting I mean, we see we see that in conversations throughout.
Throughout the you know our our discussions throughout the you know the chain it around marketplaces, the marketplaces themselves the customers that there that they're dealing with.
So it's hard to say, what which ones exactly you know pushing them along but the whole concept. The sales tax I mean, I think everybody is it is getting more and more you know aware of you know of of what they have to do and and the difficulty or oh around it.
Got it helpful color and then as we think biller Ross as I, just think about the two components of the business. The core customer cohort. That's a 300 million dollar business growing pretty consistently in that low 30% range. The the remaining cohort or kind of non core or smaller cost.
Summer cohort that smaller 20% the business 76 million dollar business, but growing much faster over 80% growth.
Year over year this.
This year as you think about that cohort.
Faster growing court are these are I assume these are smaller kind of deal revenue sizes is there an opportunity to kind of up sell.
[music].
Customer cohorts.
Walk me through just the the puts and takes the growth levers in that smaller, but fast growing part of the business today.
Sure sure brand I don't want to no kind of reconcile your math, but.
You know, we see a lot opportunity as I've always described you know in the in the mid market in the United States. We identify you know history for 500.
But.
That oh fewer than 20 employees segment of the marketplace, which are the you know the small smaller merchants.
There's over 5 million registered business in United States.
So to your point this this long tail of smaller merchants.
We think oh, well further out for us.
Is very very significant I know, we've got some some great executives here like a met and and Jay and others that are very very familiar with that marketplace from their days it.
Hey, Palin and and other companies and so you know in terms of upsell and an add on and so and so forth. The again the core customer Patrick as you know it is 3000 or number if we sign up a new customer. It you know 3600 hours a year.
Well there not a core customer until you know month 10, but if we sign up a new customer at $36000 year, there were a customer month, one and so we're going after both segments are very aggressively we're obviously very.
I believe like so we've been successful with kind of the mid market segment of which there is still hundreds of thousands a potential customers out there, but in the in the smaller segment of which the volume as much larger we're going to do lots of things and we're making very significant investments in that area to purchase but but.
It kind of goes to something Scott said that that needs to be much more automated needs to be much more self serve it needs to be much lower friction and again back kind of my premise about we're so early in the adoption cycle here, we think as we solve those.
Speed bumps or friction points or hurdles, we think that we'll open up opportunities for us in this and this was large a smaller customer segment not only to.
Get them to use our service, but then to sell them more things.
As a reminder to ask a question. Please press star one and please limit yourself to one question. One follow up question. Your next question comes from the Vod, sorry from William Blair. Your line is open.
Hey, guys nice job and thanks to my question, we left here.
[music].
Any changes from the lower end players.
Or the higher end players and then and then just as you think about the idea of automation you might took something like a wants clear where there's a lot of sort of manual stuff that's done there.
Integration process flow et cetera, I worked well for the large customers as you guys do more and more automation does that move up market becomes just more natural obvious or is there a limit to what you think because of the deep seated to relationships. Some of the strategic guys might have there that sort of limits you in that market. Thanks.
Well thank you.
No.
This this that you're last part of the question I think is probably the more.
The more difficult aspect of it and I guess, that's what I'll probably focus is.
Right because our competition really hasn't changed I mean, you know in the beginning it's always status quo, meaning that's what we're fighting against and I would say the only change that we've had there is or the tailwinds that we've talked about I think are beneficial for awareness.
I think that that that that is that is changing in the more things that happen is pushing is pushing us along but you know the competition that's out there about the low end and at the at the higher end you know, they're doing what what what they're doing and they would you know love to trade places with Avalere and the moat that we've created around content and around.
Partner relationship partner relationships, but because of things like adding cross border and all of the things that we do internationally just makes it see it mean exceedingly difficult for people to a you know the to break into that into that into that mode.
But you know they they're they're definite they're definitely pushing in the Tailwinds help you know you know raises all boats right. So.
They're out there, but like I said the last part of your question you know streamlining you know work flow and all of that I. It goes to actually what I was saying in my opening comments you know, yes, we started out in calculation and yes. We are doing returns, but there are a great deal of things.
You can do beyond that and and you know which ones those are not going to not going to comment on now, but you know as we move up market in the enterprise space I mean that there'll be lots of opportunity for us to add products around work flow and the things like that.
I mean.
No. It will just it'll it'll just be natural for us for us to do that but having said that our big focus is that Midmarket mean, you know we are moving upstream you know you see it all the time, we're protecting the low end, but the Midmarket is what were you know is what we're really what really focused on.
So most of our effort is going to be into into doing.
Indeed be doing products and initiatives around around the mid market, which would not include some of the things that you were talking about we'll let waters Wolters kluwer continue to do that.
[laughter] appreciate the color. Thank you guys nice so let's take my question.
Thanks.
Your next question comes cemetery Kamala from first analysis. Your line is open.
Hey, good afternoon.
Relations Bill it's been a pleasure working with you.
But one question for Scott about Scott Youve talked about automation and how it's benefiting you or your customer base I'm wondering if you're seeing any signs on a state by state or munis, how municipal level of any signs of automation for states to crack down on Noncompliant remote seller is if there's any any.
Technologies that seats are either.
Using themselves coordinating with each other up to speed the compliance and the actual filing of returns.
Yeah, I think some you know I made mention to this saw in the past and I think it's notable so the at the direct answer to your question is no.
They're not that sophisticated yet, but yes, they want to be that sophisticated and they will and they will do it and they will start using digital methodologies like looking at customers.
Bank ecommerce transactions and credit card main credit card transactions. So they may not know what what's happening you know in retail when cash is done they may not know a what's happening when checks are done but when credit cards are done they they can get get.
That information just like everybody else and then well look at.
And our they over their thresholds and so already are starting to see some states being organized around trying to find that data and then send out notices to customers.
So to say hey, you're approaching this threshold or we see you go over the threshold you know you need to you need to take a look at that but that's all that they're doing right now they're not they haven't been able to get that okay. From here. This is what.
[music].
[noise] said, let's contact Avalere get you registered and and collected in the life, but Oh, we still haven't we still haven't gotten there yet but.
I don't think we're not try and.
Great. Thank you.
Your next question comes from 15 milligram. He from Mizuho. Your line is open.
Siti Panigrahi, Okay, Bill a pleasure working with you in a they're all congratulation and looking forward to walking with you.
I'll, just pull up to that market that fit signatures or <unk> laws.
Uh Huh last quarter I think you guys talked about 16 partners.
Yes.
Any update on that.
On having more partners and the second one on the I guess is the most let's just leave it at low single digits laws that went effective last quarter and EBIT talked about is six points impact to the DMV do you do collecting cells that are still expected. So I'm wondering.
One of their partner and I guess, so you should help I'm wondering is that some 2020 is that any update on that oh it'd be great.
You know it's a good question and I I you know I don't think that we talk about partners each and every each and every call but.
[music].
Pointing into the sphere, and that's again sorry.
Right.
Really good it going out and doing it and the team.
Okay.
Yes.
I mentioned on that on that on that list trying to.
Get trying to help them solve this problem and mean it is driving lots of lots of lots of conversations and you know as they become more and more Ah. Yes from you know, we'll be able to we'll be able to report on that but what I can report on it is a big initiative for us in 25.
[music].
Our partnerships deep into the into the into them into the market places both domestically and internationally.
We have no further questions I'll now turn the call over to topic from co founder and CEO for closing remarks.
Sure. Thank you I want to close by saying, Thank you to our employees customers and partners for what wasn't ambitious and exciting 2019 with renewed coming.
Okay.
[music].
Head of us in 2020 and beyond.
Thank you for your interest in Avalere, and we will look forward to our next call with you all and congratulations to Bill it's been a fantastic journey couldn't have done it you know what without you and Ross.
Really excited to work with.
Thanks.
[noise] that's under this concludes today's conference call you may now disconnect.
[music].