Q1 2022 Avalara Inc Earnings Call
Filed with the Securities and Exchange Commission after market close today, and our other periodic filings with the SEC.
During the call. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
Conciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at Investor <unk> Avalere on Dot com.
With that let me turn the call over to Scott.
Thanks, Jennifer and welcome to everyone. Joining our Q1 2022 earnings call Q1 was another good quarter for <unk>. We reported total revenue of $204 5 million, an increase of 33% year over year and delivered positive non-GAAP operating income of $4 seven.
Million.
Exceeding our guidance expectations.
We exceeded our top line growth, while deploying fewer resources and we believe those efficiencies should accelerate our path towards profitability.
We have delivered on expectations since our IPO, we have always intended to focus on growth, but emphasize the level of efficiency that would keep us around breakeven investment level, while driving strong top line growth performance.
This is manifested and an impressive 37% revenue CAGR since IPO combined with a three years of positive free cash flow in the first positive year of non-GAAP operating income in 2021.
Looking forward as we meet and surpass $1 billion in revenue, we intend to provide even more focus on profitability as we continue to grow this year and beyond.
<unk> will share more details on improving operating margin performance later in the call and sharing more details on our intermediate term targets at our upcoming analyst day in June .
I want to reiterate what I've said before not all SaaS businesses enjoy the structural advantages we have we.
We help businesses become more efficient we have a strong and sticky customer base that needs. Additional compliance. We believe we are a long and strong growth comp pounder and well positioned to grow in good and in challenging times.
Our thesis envision have not changed we remain a leader in category Definer and a massive global market driven by statutory requirements and we enjoy enviable tailwind tied to the increasing adoption of cloud based business applications and omni channel selling platforms.
Ongoing ROI focus in purchasing decisions and ever increasing regulatory burdens.
We believe that over the long term every business will adopt tax automation.
We are still early in this journey and we believe we are best positioned to capture the leading share in this expanding market.
We see significant opportunities in front of us and I'm excited about leveraging our growing scale competitive moats ubiquity in the market to establish <unk> as the standard cloud compliance platform.
We continue to focus on five areas of the business.
One our opportunity to cross sell more products to our large customer base.
Two winning our second wave of partnership opportunities, where many large partners from across the ecosystem are now focused on solutions we provide.
Three continuing to expand our reach upmarket to larger enterprises and down market to smaller businesses. In addition to our core SMB market.
For expanding our international presence and product portfolio in existing and new markets and five driving greater efficiency.
Shifting now to customers I'm excited that many deals are proving out the power of our multi product value proposition I believe they exemplify our leadership position, which has been built on years of investing in our differentiated strategy.
They speak volumes to the value of our competitive modes, including our content.
<unk> product portfolio and more than 200 signed partner integration.
These attributes helped us win competitive deals across nearly every size segment industry and geography.
Over the years it has been exciting to see the evolution of our customer wins, including larger deal values.
More deals with multiple products and integrations and more global customers.
Here are just a few examples.
During the first quarter, we won enterprise deals with a diverse group of companies.
First we won a large enterprise deal with an online travel agency for a deal value of $1 $5 billion.
Including annual recurring revenue onetime software and services. We won this deal due to our full end to end offering and our partnership with a big four accounting firm.
Our success in capabilities in the hospitality area began several years ago with an acquisition of a business that offered an automated compliance solution for short term rental market.
Over the years, we integrated that business into our calculation and returns engine, which allowed us to offer an enterprise class hospitality and lodging product.
This win is a great Testament to our M&A strategy and the future of our lodging business.
Next we want a mobile phone services company for a deal value of $176000, including Abbott tax communications and sales tax and registrations across 48 states.
This is a great example of <unk> ability to solve compliance challenges across multiple tax types.
The company had no compliance processes in place and was calculating tax for customers and only two states.
We also won a large printer and copier supplier for.
For a deal value of $125000, including avid tax exemption certificate management and Avalere a tax research.
Normally known as TCR research.
We won due to our integration with our cloud based field service management software and a new CFO transition.
Finally, we want to well known cookware company for a deal value of $250000 due to our integrations with leading ERP application to leading commerce applications and our exemption certificate management solution.
Additionally, we compiled several competitive wins and takeaways, we want a competitive enterprise takeaway with a nationwide pet retailer for a deal value of $292000, including avid tax exemption certificate management and Avalere a content generation for point of sale.
Porting over 1600 location.
We won due to our robust integrations with a leading e-commerce platform and Pos application.
Next we want to rip and replace with a church organization for a deal value of $91000, including avid tax business licenses exemption certificate management and our SSD program.
We won due to our integration with an open source E Commerce platform.
Next we want a competitive deal with the construction company for a deal value of $96000, including Abbott tax exemption Certificate management returns and our SSP program.
We won due to our partnership with a top 10 accounting and advisory services company and our Avalere attacks Research service.
On the international side, we beat the competition and one of the Brazilian construction services company for a deal value of $250000, including returns invoicing.
And compliance documents in.
In addition, we want to finish education Tech company for a deal value of $96000 to automate compliance in the United States for 46 States.
And last week, we won one of the largest existing customer deals with a battery distributor company for a deal value of $509000.
Including Avalere, a consumer use tax our exemption certificate management solution or SST program, Avalere and tax research and Avalere a license management.
This is an expansion of an existing customer and evidence of our potential cross sell opportunity as demonstrated through our customer wins <unk> partner moat continues to be a key differentiator, especially as businesses shift to omnichannel and seek a single tax compliance platform that can integrate into multiple.
Disparate systems.
In fact, our long tail partnerships are becoming even more formidable with an increase in multi connector deals supporting the vast array of our smaller niche partners.
That's why we continue to enhance our partner mode by actively forging new relationships enable us to offer integration with more business applications and exposure to more potential customers. We offer far more prebuilt integrations with these applications than any other tax software providers and we plan to continue adding more.
With that today, we are excited again to announce several new partnership deals that we expect to open up more opportunities for Avalere.
These new relationships are great examples of what I call. The second wave of partnership deals for Avalere on building on the first wave of ERP deals during the early days of the company.
First.
We executed an agreement in the first quarter with Shopify to expand our services supporting its merchant base beyond Shopify plus that we supported for years as a reminder.
On our last earnings call, we discussed our expanded relationship with Shopify to power cross border duty and import tax features.
Next we're pleased to share that we signed a new partnership agreement with global small business accounting platform zero.
Founded in 2006 zero has over 3 million subscribers globally and is a leader in cloud accounting in New Zealand, Australia and the UK.
Next we signed a multimillion dollar deal to power next generation cross border solutions to sellers around the globe.
<unk> III partnerships are expected to replicate the same recipe from other partnerships and for 10, what we can do with them over time.
I am pleased to share we are making progress with our Avalere returns for accountants product designed to efficiently scale tax compliance services for accounting practices.
We are ahead of plan now with over 50 firms live with our solutions and many more in the pipeline and implementation phases, including some of the world's largest accounting firms.
We believe these deals are just the beginning of more partnerships to come.
We are engaged with providers, including ecommerce platforms marketplaces point of sale providers and payment processes and they are being accelerated by the generational shift to ecommerce adoption. We have been building towards this watershed moment for years. It reminds me of when we are going after ERP vendors during the early days.
The company.
We knew we had to win these deals to solidify our position in lockout competitors. We are witnessing the same thing now in the second wave, where ecommerce payment processing and compliance converge and we are succeeding and winning in head to head deals.
At the beginning of the company I had the vision that Avalere, one day be recognized and celebrated in the developer community.
Why I'm excited about the return of Adler and next our second annual virtual developer conference in March.
It would be part of every transaction in the world, we must engage developers to work with us on our global compliance end to end journey.
Including more great technology content and talented teams that we acquired over the last year.
International expansion remains a large opportunity and a key part of our long term growth strategy.
Last year, we acquired Imposure.
To address what I believe is the next significant compliance tailwind and a multi decade opportunity.
Our strategic bets is what the future will move to global adoption of fee invoicing compliance as governments leveraged technology and automation to lead the way.
If you look across the world. There are over 60 countries announcing new mandates or legislations that require E invoicing or tax reporting in real time.
We are building out our connectivity boat with Imposure invoicing services, expanding our connectors and establishing <unk> as the digital bridge between ERP systems, and real time reporting portals of the tax authorities.
Going forward, we will continue to aggressively pursue and grow our core business and indirect tax through organic investments and M&A.
We expect M&A will be an important contributor to our international growth plans.
On the leadership front I am pleased to share that a lean who recently joined <unk> as our new Chief people officer.
He was previously the chief people officer read soon and as Helge human resource leadership roles at global companies, including 13 years at Amazon Aileen will carry on our ongoing mission to establish <unk> as one of the best places to work in all of SaaS scale, our talent programs and build a more diverse.
An inclusive workplace culture.
Finally, we published our inaugural environmental social and governance report, including the results of our first materiality assessments. We encourage you to visit our Investor Relations website to view the full report.
As we've always said, we believe we are a long and strong business single digit penetrated in a large addressable market and a long term play based on automating. Our statutorily required function. We are excited that we are approaching a $1 billion annual revenue run rate and <unk>.
We can grow and scale avalere up into a multi product multibillion dollar revenue company over time.
Thank you very much.
And I will now turn it over to Ross.
Thanks Scott.
<unk> posted a strong Q1 performance across the board that exceeded our guided metrics. We were very pleased to deliver a 33% year over year revenue growth, coupled with a non-GAAP operating profit of $4 $7 million.
As we near a $1 billion annual revenue run rate, we are more confident than ever that we have a long runway of durable double digit growth ahead of us coupled with an increasingly attractive margin profile as we scale and drive operating efficiencies in the business.
At our analyst day in June we look forward to talking more about our operating model philosophy, and providing additional color around intermediate term targets.
Q1, total revenue was $204 5 million up 33% year over year or 29% when we exclude the Q1 revenue from our track 10, 99 acquisition, which represented the majority of acquisition revenue in Q1.
As a reminder, track 10 99 is a seasonal business with all of its revenue occurring in the first quarter.
Subscription and returns revenue grew 34% year over year to $186 9 million and represented 91% of our total revenue.
Subscription and returns revenue grew 29% year over year, excluding track 10 99.
Professional services revenue was $17 7 million up 24% year over year and represented 9% of total revenue.
We ended the quarter with one of our highest ever professional services backlogs recorded.
Due to very competitive labor market, we experienced delays in onboarding incremental resources needed to convert that backlog into Q1 revenue.
Our core customer count increased by 890 from the previous quarter to approximately 19160 at the end of Q1 2022, a year over year increase of 22%.
Our net revenue retention rate was 115% compared to 116% last quarter, resulting in a 116% four quarter average our highest four quarter average since recording this revised metrics.
<unk> can fluctuate from quarter to quarter, but we remain focused on continuing to improve this metric.
In discussing the remainder of the income statement. Please note that unless otherwise stated all references to our expenses operating results and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued just before this call and.
In addition, we filed an amended Form 10-K after market close.
In preparing our first quarter financial statements, we discovered an error in our previous recognition of stock based compensation expense for our restricted stock units.
As a result of the are we understated stock based compensation expense by $10 4 million in 2021 today.
Today, we filed an amendment to our Form 10-K correcting our previously issued financial statements, including each of the years ending 2021 2020 in 2019 while.
While we concluded that the error was not material to our financial statements. We have concluded that the <unk> represents a material weakness in our internal controls as of December 31 2021.
The correction of this or increases our previously reported GAAP net losses for 2021 2020 in 2019, but does not impact previously reported revenues cash flows or our non-GAAP metrics. In addition, we have taken steps, we believe necessary to remediate the control issue and we will be testing these new activity.
<unk> as they occur over the next several quarters more information about the Earth and the impact are included in the amendment to our 10-K.
Gross profit was $150 8 million in Q1, representing a 74% gross margin.
This compares with gross profit of $113 2 million and a 74% gross margin in the same period last year.
We continue to focus on improving our gross margin over time through automation and efficiency initiatives.
Sales and marketing expense was $76 1 million in Q1, a 37% of total revenue an improvement of nearly 90 basis points year over year sales.
Sales and marketing expenses lower than expected due to delays in hiring and timing of marketing program expenses.
Q1 research and development expense was $41 4 million or 20% of revenue down from 22% of revenue in Q1 'twenty one.
Q1 general and administrative expense was $28 6 million or 14% of revenue versus 15% of revenue in Q1 'twenty one.
Q1, operating profit was $4 $7 million, which was significantly better than our guidance largely as a result of delayed hiring more robust revenue performance optimization of our software hosting spend improvements in sales rep productivity and marketing funnel conversion rates and faster realization of other spend.
<unk> optimization initiatives.
Q1 diluted net income per share was <unk> <unk> based on $88 9 million diluted weighted average shares outstanding.
Total deferred revenue at the end of Q1, 2022 with $303 $6 million up 35% from $225 5 million at the end of Q1 'twenty one.
Calculated billings is a non-GAAP metric that takes into consideration revenue and the change in deferred revenue as well as the change in contract liabilities.
Calculated billings was $219 2 million in Q1 dollars 22 up 28% year over year and 24% excluding attract 10 99 acquisition.
Ganic billings growth is impacted by several factors, including a first half 2021 organic billings comparable 38%.
The year over year change in our billings duration trending to a small but meaningful increase in the mix of quarterly or monthly billing at the expense of annual and impacts on billings and revenue from international weakness, including from our largest EU marketplace partner free cash flow was negative $31 1 million in the first quarter compared to negative $31 nine.
In the same quarter last year.
The level of cash consumption in Q1 was expected and was largely driven by the payment of our annual corporate bonuses margin <unk> renewals and the renewal of various March software licenses.
As we have 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 and level of our buildings and expenses as well as our overall level of investment in the business are.
Our cash and cash equivalents for $1 5 billion at the end of Q1 'twenty two.
Changed from $1 5 billion at the end of Q4 2021.
I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q2 and for the full year 2022.
Our thesis and vision has not changed <unk>, a simple story in the long run like other required back office functions such as payroll. We believe every company more automate their tax compliance we are addressing a large low penetrated market, where we are a leader in the space with competitive moats and a differentiated business strategy, we are positioned to capture that.
Leaders share of our market opportunity to reiterate my earlier comments, our focus on the year is to sustain a high rate of revenue growth and couple that with an improving margin profile.
We're on a journey to this valuable operating combination and we'll share more details in our June analyst day.
We are being mindful of efficiency as demonstrated by three years in a row of positive free cash flow. Our first year of non-GAAP operating profitability in 2021, and a strong outperformance in Q1 2022 non-GAAP operating profit.
In Q1, we benefited from a difficult hiring environment, but also made choices that will help us accelerate our path to profitability.
We believe our Q1 performance combined with our updated 2022 guidance demonstrates our focus on driving efficiency faster and we will evaluate our ability to over deliver as we progress through 2022.
For Q2, 2022, we expect total revenue between 280 and $210 million.
Which represented 24% year over year growth rate at the midpoint of the range.
As a reminder, in Q2, we do not expect any revenue from <unk> 99, and in April we lapped the acquisitions of <unk> and data.
We expect our Q2 non-GAAP operating loss to be in the range of $6 million to $8 million.
For the full year 2022, we expect total revenue between 867, and 871 million, which represents a 24% year over year growth rate at the midpoint of the range.
We are cutting our expected full year 2022, non-GAAP operating loss by more than half are guiding to an operating loss range of $6 million to $8 million versus our previously guided operating loss range of $17 million to $21 million. We further expect to be breakeven or better in Q4 2022.
We continue to expect 2022 professional services revenue to be around 9% of total 2022 revenue.
In closing, we have an exciting opportunity to continue building a durable growth compounding company.
We believe we are a leader in large market is still early to adopt tax compliance automation technology we.
We are seeing a demand transformation businesses become omnichannel operating many jurisdictions and ship their business to E. Commerce in the cloud these changes coupled with an ever shifting regulatory environment make it even more difficult to maintain tax compliance without automation.
At the same time, we are continuing to evolve to a platform company driving an increased supply of products and capabilities, which will deliver even more value to our customers.
We are also continuing to invest to win additional segments and geographies. So that we can continue to compound growth for the long term.
Please note that our virtual analyst day will be held on Tuesday June 28, also we will participate in upcoming conferences, including Bank of America, Jpmorgan Needham and William Blair in the second quarter.
Thank you for participating in today's call at this point, we would like to open up the call for your questions.
Ladies and gentlemen, before we start today's Q&A session I would like to turn the call back to the Chief Financial Officer, Ross Tennenbaum for additional comments.
Thanks, Brett Hi, everybody I know this question is on everyone's mind, so I'd like to address it here upfront I think it will make the cargo smoother.
They don't over index on the e-commerce growth slowdown and draw conclusions about Aguilera it would be a mistake for investors to assume that we have this outsized exposure because thats simply not the case.
Our customer base is very diverse including customers of every size from nearly every industry in many geographies.
And as a matter of fact, our customer base is more weighted to <unk>.
We are also a subscription model business and not tied the GMB.
Even our calculation business, which is tied to transaction volumes is now less than 50% of revenue and is shown as resiliency throughout the pandemic due to our wide pricing bands designed to reduce volatility of customers, having to move up and down tiers and in our compliance business, our customers must file compliance documents where.
Required regardless of how well our poor their business is performing.
The last two years acceleration of e-commerce, Indeed benefited us, but it didn't have anywhere near the financial benefit on our business that it had on E Commerce and <unk> related businesses. For example, we grew organic revenue by 29% in each of the last two years.
Great results, but hardly an accelerated pull forward in demand.
In addition, we believe our broad customer diversity.
Helps insulate us from shocks to ecommerce in the broader economy as evidence of this diversity when we map our customer database to third party data, we found that less than 20% of our Q1 2022 revenue comes from retail customers. In addition, only around 10% of Q1 2022 revenue came from marketplaces and our auto area.
Included relationships, including Shopify, Big Commerce, and Wix among others.
When we add in our direct E Commerce partners.
Including partners, such as Salesforce and Adobe. The total comes to approximately one third of Q1 2022 revenue, though we see many larger customers and a higher mix of <unk> customers with these direct E. Commerce partners. In addition, these numbers reflect total revenue from customers with these connectors, which would incorporate all <unk>.
<unk> of activity even outside of e-commerce.
Lastly, while other companies greatly benefit in the last year's by ecommerce acceleration, we saw less of that benefit and continue to believe the acceleration of E. Commerce is one of the strongest trends for our business as it greatly increases the complexity of managing tax and therefore the need for automation.
Customers of all sizes and in all industries, and we're quickly becoming omnichannel, having to deal with tax compliance across multiple systems and a more jurisdictions even globally. This greatly increases our tax compliance complexity and renders manual status close status quo solutions and effective the millions of new ecommerce customers created over the lab.
Two years, we'll need to deal with this reality and recapture tens of thousands of them and still growing using our calculation on our E. Commerce partners platforms. This offers us a large number of prospects to upsell additional compliance products beyond just calculations and we believe provides us with a steady drumbeat of future business.
In growth, even if not one more company adopt E. Commerce. This year in fact in Q1. The vast majority of Avalere included customer bookings came from cohorts activated in prior years. Thank you very much I'll now turn it back to Brent to open it up to Q&A.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Brad Sills with Bank of America Securities. Your line is open.
Wonderful Thanks for taking my question guys.
Wanted to ask about the net revenue retention and real nice results here. This quarter you saw some acceleration there could you help us unpack that a little bit.
Was there some cross sell upsell in the broader stack I know you have a wider stack now with $2 99 imposed year GTR.
Ctr, we hear that from the channels. So any color on the upsell activity. This quarter. Thank you yeah hi.
Hi, Brian Thanks, a lot.
Yes, I mean, we're really excited about <unk>, 116% four quarter average, which was the highest that we've posted since reporting the metric.
I think it's two things one.
We continue to have a really good result around the churn in down sell side. So some of that that was more difficult than COVID-19 has continued to improve and so we like where that is it feels really healthy and then on the upside part of NR.
Cross sell as we've talked about a lot going from a couple of products to many products. We've got a huge opportunity in our base. We think it's hundreds of millions of dollars to go start to add additional products. We're early in that journey, but we're seeing some really good momentum and proof points. In fact, we had our largest one of our largest deals to existing.
Customers about half a million dollar deal just recently, where we were able to sell used tax our GTR product our business license licensing product.
And several of our star capture product and several other things.
And so we've got more evidence of deals like that where we're cross selling more products. We've seen a really good adoption of Sir capture which we've had for a long time, but is benefiting from the.
The investments, we're making to really drive the cross sell business.
Really well, we're seeing really good results from <unk> as well. So we still have work to do but we're really really happy with where it's headed.
Awesome, that's great to hear thanks, and then.
The question on everyone's mind, not just for you but for software in general.
Anything youre seeing internationally you mentioned some weakness some softness maybe is a better categorization. What are you seeing in some of the international geographies, particularly in Europe with what's happening over there. Thank you.
Yeah, Hey, Brad Scott.
Look.
I mean international business right now is it is it is a challenge, but it's a huge opportunity in green space.
Avalanche going forward sell.
Selling AD attacks, just our basic business into global companies.
A real big Greenfield for Us and.
Many many companies are trying to do more and more business inside the United States. So we enjoy that.
That tailwind.
We're always working on our our prospects.
Internationally in and I think that Thats going to continue to grow and I think we've been really clear about what we're thinking.
<unk> business historically internationally has really been around.
The great improvements that we've made in the UK and as we talked about it in past earnings mean, moving beyond the UK into more of EMEA is a real is a real opportunity for us to continue to do that and Thats exactly what were gearing up gearing up to do meaning it's not a.
A one quarter.
Graham, but over the next over the rest of this year and into next year, we really think that that's a great opportunity for us to us to grow and we always continually talk about <unk>.
Moving beyond just EMEA growing out in growing our business into Latam and then Asia. So there is considerable opportunity for avalere to continue to grow and build the type of boats that we've done here in the past and as I said in my my My my notes.
My prepared notes here on the earnings call is is that you know.
Invoicing is a really significant driver.
Think can really help build.
Avellino's business going forward.
That's great to hear thanks, Scott.
Okay.
Your next question is from the line of Gabriela Borges with Goldman Sachs. Your line is open.
Hi.
Gabriela congrats on the quarter.
Question would be just following up on some of the E. Commerce comments. Thank you for all the detail there.
King.
The pipeline for customers tied to ecommerce regarding Colombia, let's turn back for some other verticals could you remind us what some of the other key vanilla call exposure you have.
Ross you did such a great job on the on the.
<unk> why don't you continue on with that one.
Yeah, Yeah, Hi, Kelly.
Vertical exposure I would just reiterate that we are very diverse throughout the retail.
Our exposure to retail that I, just said in the prepared remarks of 19%.
But we are very diverse across vertical so I wouldn't say that there's any major concentration you can see online or at last year's analyst day that has a pie chart of that.
So we're good there.
And on the ecommerce pipeline I think the way people ought to think about it is.
We look at the cohorts back quarterly for last few years and just look at.
You become an.
E Commerce company, let's say on pick your favorite ecommerce platform.
And youre using calculation for us and then we get some small fee from that.
But those fees or last couple of years, they're meaningful we like them, but they're relatively small fees.
We have a relationship with the platforms.
It provide them with the calculation so that theres calculation on the card the big opportunity and the value that we've been able to create over the years has been to then upsell those.
And customers on additional products, because they probably a calculation in other channels that have the returns. They may have to do cross border. They don't have to use tax certs bunch of other things have to happen to be compliant well beyond calculation.
So that's the game for us is to Mark.
Market to them and to upsell them and we've been doing that for years and so my point in the prepared remarks was that a lot of the bookings that we saw in Q1. For example are coming from customers that already became ecommerce companies and a cohort over the last few years that we were able to convert and upsell with more and.
And so therefore, it is not in quarter.
Youre seeing GMB slowdown and Youre seeing new customer ecommerce adoption slowdown, we're not really dependent on that as much as continuing to convert this large pool of customers that are using us for calculation and monetize them and so we've got it we've got I call. It top of funnel and we got to keep on trying to help them understand the value.
Proposition of what we do the gaps that they have in compliance and that what we do is more cost effective and better than the manual status quo status quo.
And I would point out and I pointed out on top of that it mean a.
Couple of things in the verticals.
Covid, we reported the travel.
Under pressure.
And just remind everybody of one of the deals that we identified as one of our.
One of our larger deals.
Overall over $1 million was.
<unk> an online travel company.
So some of the verticals that have been under pressure before are coming back and adding more resilience to the overall business I mean, the great thing about.
Taxes is that.
Theres just solve it means all types of businesses are affected by it.
And and.
They it's sort of insulate Savile era.
From the the good and the bad up and down that everybody is worried about that's what I think is so unique about about this about this about this business and I'll just point out.
Everybody talks about.
How does how to partnerships.
Get affected during during the good and bad times.
The first thing that you have to do is winter and that's the most important thing for Avalere in these ones so expanding our relationship with shopify.
Do more customers and to do to do more business with them.
Continued.
AD.
The low end of the market was zero.
And then doing the.
The really large multimillion dollar deal that that that.
We had with another third party vendor. So mean, winning these partnerships is the most important thing that you have because then you have got a law.
Long term relationships that you can grow and build over time, so I'm really proud of the fact that we were able to continue to do that and dominate from a partner perspective.
Hello, Thank you for standing up our it the power plant.
One more from me would just be any changes to the competitive perspective at vertex.
Frances cloud offering on the enterprise side.
If you could give us an update on what you're seeing in terms of win rates and customer feedback on where there is room for improvement on the product tanker startup.
We're not seeing any significant change in competition.
Then than what than what's out there I mean avalere our remains dominant in the in the in the mid market.
We're winning.
<unk> upstream and we're creating partnerships like zero downstream and then tightening our relationships with the omni channel World doing things like Shopify and other partners to really solidify our our position and I think that that's the the tell tale sign.
<unk>.
Of Avalere and <unk>.
And how a company is doing in this space are they winning the key partnerships are those things.
Future proofing the business so it can grow and continue to sell.
Sell in the Omnichannel World. So I think as we reported along the line. We're just continue to add more of the long tail customers, we're winning those second way businesses.
And I think that that's the best evidence of what's happening from competitively in the marketplace.
Thank you congrats again on the quarter.
Thank you.
Your next question comes from the line of Pat <unk> with JMP. Your line is open.
Oh, great. Thank you and let me add my Congrats Hey, Ross can you just help us with why your profitability for the year improved so much. So if I got it right last time it was negative 17% negative 21% now it's negative six to eight so just walk us through some of the key points on that because that's what Eric was nervous about and that's turning out not to be that big a deal.
That's right. Thanks, Pat how are you doing.
Yes, Q1, we had a big beat compared to where we guided I think was around $15 million.
I'll say, we like our peers.
Had the or in this difficult hiring environment and so we are behind on hiring and so that contributed to the benefit and we may give a little bit of that back but overall you've got to go back to last summer. When we internally started talking about the next few years and what our model looks like and we start laying.
Our version of the rule of 40 model.
Something that sustains growth rates and starts to really drive operating leverage and we're going to share that with you in June at analyst day and go through those details.
But what we wanted to do and we've been working hard late last year and in Q1 is what are some things. We can start to do now and can we accelerate any of these and so.
Around hiring we found areas of efficiencies, where we can stretch and do a little more with less things that we may not exactly need that we had in the plan.
Cost of revenue, we looked at some things, we could do around efficiencies with with hosting and some of our other functions there.
In R&D, we are working on just prioritization modeling.
How do we get the most important thing is we want to get done and be really innovative, but where can we maybe do a little bit more with less on the heads.
Sales and marketing, while we're a little behind on sales capacity, we were able to drive some good productivity improvements which were which.
Helped to offset that.
And G&A is just kind of scaling slowly as you would expect so I would say this is a.
Three year view that we're going to share more of in June .
It's something that we think that in Q1, we could take advantage of the environment, but also make some decisions that would help accelerate that path and that's what you are seeing and we'll be very judicious as we proceed through the year to see if we can continue to drop more to the bottom line.
Okay.
That's super Thank you and then Scott.
Little bit of an unfair question, but I'll ask anyways so.
I mean, what do you do about it.
Sorry, the morale and retention of people.
Who came in and got their RF user options or whatever use priced at the wrong point now the stock is down 45% year to date and it's a little unfair because another company that's reporting right now.
Stocks down 63% year to date.
Even worse, there and I didnt ask them, but how do you how big Tech companies deal with this what are you guys going to do.
It's a good question Pat.
I mean, everybody as you say everybody is dealing with it but the reality is as I mean, one I think it's really important that you have a well defined culture.
Built out of your business model right, so everybody, everybody understands where you're going and for us it's being part of every transaction in the world.
And you can't go up with the good times and you can't go down with the with the Bad times. So when people believe in the model when they believe in the direction that Youre going it just gives you a little bit of an installation now reality always imposes itself as I say.
And people are going to be.
Being dealing with that but the market in general is it.
Is dealing with that so you just have to create the best environment make sure that people understand their roles and responsibilities and they're fulfilled at work and have good engagement and if you can do those things then you can weather these difficult these difficult times and you're just true to.
You are authentic to your culture into your business, that's the best way I can answer it.
Okay. Okay. Thank you Bob.
Your next question is from the line of Frank Rosslyn with Piper Sandler Your line is open.
Okay.
Hi, guys. This is Hannah Rudolph on for Brent today. Thank you for taking my questions. First one is you talked about the second wave of partnerships, helping drive the next leg of growth I guess can you talk about which partnerships you're most excited for what the roadmap for continued traction with these partners looks like.
Yes, I've said, a little bit about it and so I'll just I'll be reiterate it right I mean.
You want to win these deals and we want Shopify plus a long time in a long time ago, I don't know where theyre six seven years ago, and we've been working with them to build out that business and then to sell them more more things. It was cross border now we're talking about expanding that relationship even further.
And the most important thing is to win those.
That's the that is the first that's the first act in doing it and Theres lots of players out there that that we still we still want to win and do business with right.
We don't have them all our goal is to get our goal is to get them all and so they really fall into multiple players in there all of the large aggregators right.
The business is that we don't have that are doing large at aggregation around e-commerce.
You know you've got you've got you know the squares of the world right that fall into multiple categories. There I mean, those are the kinds of deals that we want to win and payment processing.
Hum.
<unk> relationship with Paypal and the likes so those are the kinds of deals that we continue to fight for and what's great is that.
Sales tax you know when we started the business was like.
Why do we need to focus on this now all vendors.
Paul.
Of our of our financial service companies that we deal with they're all understand that this is something that everybody needs to deal with it needs to be part of their offering and so that's why we call. It the second way. There. These players that we wanted to have in the past that we have not gotten are now coming to the.
Table and we now have the opportunity to.
The sell in and Windows, that's that's what's happening.
Here today, and it's still I would call. The next step in the journey.
Being part of every transaction in the world because I've always said that Theres only two things that matter right you have to have a partnership with the people who create invoices and you have to have all the content on the other end in order to calculate.
The tax compliance around the world and Thats, what Avalere is focused on winning those deals being part getting part of every transaction in the world and then building out the content. So when we calculate it.
It's right accurate.
Great that makes a lot of science on that get to your second question from me Ross. It was nice to see that 80 to 90 net customer add this quarter anything out of the ordinary to note there and I may have missed it but did you disclose the revenue from core customers this quarter.
Yes. The 890, we're pleased with it it was 22% growth again and.
Nothing to note it doesn't still excludes the M&A our recent M&A.
When we add those and we would call those out so as we've talked about we want to continue to drive that kind of consistent growth algorithm in the new customer adds.
And on the other one no we didnt, we didnt, we didnt put that out there.
We didnt disclose it in the prepared remarks.
Alright, thank you.
Okay.
Ladies and gentlemen in the interest of time, please limit yourself to one question.
Next question comes from the line of Matt Stotler with William Blair. Your line is open.
Hey, guys. This is <unk> on for Matt Stotler. Thanks for taking the questions I wanted to touch on the accounting from products a little bit could you provide any color.
On the demand or the traction that youre seeing with these products and how big do you think that that opportunity it could become over time.
I think Ross and I will tag team. This one a little bit, but I'll start out by saying.
Compliance.
Talk about tax calculation, and that's where <unk> started but doing returns and actually complying with the compliance part is is the critical aspect of doing.
Doing sales tax properly.
And nobody had ever built out an automated solution in the.
In the marketplace, I mean, taking calculation data and transaction and being able to seamlessly.
Provide.
Tax returns.
<unk> is one of the most.
Most important the most difficult things that's done in compliance and to do it end to end with a single thread is.
It's really really really hard.
And when we did that we realized that our products are the ones that we're using and I'll just remind everybody. When I started this company and we built this business. We had 100 people doing 100000 returns. It was manual today, we have 100 people.
Doing millions of returns and so we built a very efficient system domestically here in the United States.
For that we got the idea that instead of being able to just have everybody use us why don't we use accountants.
With large accounts and small accounts the big four all the way down to the smallest accounts and provide them the back of the house.
The solution that they actually can do the returns themselves and we just become the backend providers. This is another way that <unk> is using the channel to its advantage because thats. What avalere is really all about I mean partnerships are is what made avalere what it is today.
So these products just enable partners to be able to expand it.
Spanned the compliance opportunity and as I said in my prepared remarks.
We're seeing really nice traction in small and large and large businesses and we think that.
This has the opportunity.
To get us to be part of every every return in the world right.
That's how we think of this thing <unk> got calculation and through our own work with with the customers doing returns and with our partners. During returns gives us this huge opportunity in the marketplace.
<unk> you want to add anything to that.
No I think thats perfect, but if you want to talk about efficiency I mean.
Get the 60 70 80000.
Accounting firm that bookkeepers and the U S.
Grab share through that versus onesie twosies through sales reps.
And give them new revenue streams and have ability to sell through them.
It's just a massive potential to grab massive share and efficiency. So we love. It I think it's the most exciting potential future thing that we've developed.
Your next question is from the line of Citi.
Graiae with Mizuho Your line is open.
Thanks for taking my question.
Scott just wanted to ask about the cost motor two years back you investors on that and I think one of the pretty strong offering you have in the cross border side.
Also anything shopify markets the launch in February as well.
Wondering how is that trending and what have you seen in the early days in the southeast markets.
And also overall how is that helping you in getting some of the larger deals.
Landing enterprises.
Thanks.
Let me just review for a second I mean.
When you when you are in the tax calculation business.
Doing calculations and integrating with ERP.
Especially some some that even.
Arent cloud base Theyre still on Prem.
That's difficult work to be done it's really hard.
To do a inefficient integration with ERP.
E Commerce companies.
Doing tax calculation is not as difficult.
It's it's many many lines of code in ERP, but it's generally just an API call into E. Commerce. I mean, this is what we've known for a long time.
And so when when when we were growing the company. My idea was that this concept of doing cross border work, where cross border is done by a third party.
After the transaction is absurd. It just makes no sense I mean, you've got.
People shipping things around the world and somebody showing up the door and saying Hey, you. All this for duties and taxes. They should know that the moment. They are buying it should be included in the.
In the.
In the checkout process and so we've had that idea that.
No.
Three commerce E Commerce, especially should support cross border activities, and we went out and built that and made some acquisitions around that.
To come up with.
I think the most innovative cross border solution in the marketplace.
And it's not only just for e-commerce, it's for it's for all businesses and we think that this can be a very large business going forward as we've as we've reported.
Before.
Hundreds of millions of dollars and so.
And the reason that we did it originally was to not only for the revenue that I've, just talked about but to protect our moat and thats exactly what cross border has done for us I mean, it helps us solidify our relationship with Shopify, it's helping us solidify all of our relationship with E Commerce <unk>.
<unk> and its one of the reasons that we are winning the second.
Generation.
No.
Wave of partnerships out there.
Businesses can't bet against business as not wanting to do <unk>.
International Commerce, and so you know not only is it a great upside potential. It is it is one of those things that distinguishes us tremendously from anybody else in the marketplace. That's why I think it's so it's so powerful.
Okay.
Your next.
Question is from the line of Scott Berg with Needham Your line is open.
Hey, guys. Thanks for taking my question. This is Josh on for Scott.
Core customer growth was.
Once again really strong in the quarter can you just discuss how much of that.
Is cross sell contributing to growing existing customers, who maybe weren't spending three can a trailing 12 month basis, but are entering that category with a few additional products versus net new customer growth. Thanks.
Yes, yes, youre right <unk> been given.
Focused on it for a while because there is just for everyone's benefit.
You have become a core customer when you're trailing 12 months of $3000 of revenue or greater and so you could be a customer that we signed up nine months ago and we.
Added something and you went over the 3000 Mark.
Historically, the vast majority like like.
Vast majority of which is put out because we haven't quantified it.
Is from new customers and we haven't seen a shift in that so I would think about that number pretty indicative of new customers coming in.
Your next question is from Robert Galvin with Stifel. Your line is open.
Hi, This is Rob galvin onto Bradbury back. Thanks for taking the question. Two part question first I'm wondering what the benefit in Q1 was for important customer funds and second what is modeled for the remainder of the year in terms of customer funds held and the benefit from them. Thank you.
I think the question was what was the benefit in Q1 from customer funds.
And what's the model for the rest of the year.
So the customer funds. These are the funds that we pull from our customers and our remit to government agencies with the returns we hold those funds for I think on average around five ish days plus or minus.
Pre COVID-19 when interest rates were higher we were.
On a path to around $1 million a quarter $4 million a year, then interest rates went to zero and we've had really no benefit in.
In Q1, there was pretty much even though interest rates are going up.
We have not.
A little bit of a delay in what we are going to get from that and so I would say Q1, there was almost no benefit from from that piece.
And we have not modeled anything of significant increase for the year. So that if rates were to really meaningfully rise and we will start to get revenue.
That would be upside, though I would not.
I don't think that will be meaningful for this year yet.
Okay.
Your next question is from the line of Keith Weiss with Morgan Stanley . Your line is open.
Excellent. Thank you guys for taking the call.
Really nice quarter.
You guys did a really nice job of sort of.
Ring fencing E Commerce, and explaining why you guys don't see the same impact that the e-commerce vendors themselves.
But there is just a broader kind of macro malaise that we're all worried about you mentioned a little bit of softness in Europe . When you guys were looking at the FY 'twenty to guide and you brought up the guidance for the full year more than what you beat Q1 by was there any increased conservatism that you put into it.
That forecast for the topline for the revenues and then on the operating margin side of the equation it sounds like most of the.
Sort of.
The spending savings or the efficiencies was not.
Not really by choice. It was more so it is just a difficult hiring environment, but am I wrong in that was there any element.
Looking to be a little bit more conservative given the environment.
Yeah, let me try to hit that if you go back two years from now sorry to always go back but at the beginning of the pandemic. There was the question amongst all of us to guide or not to guide and many of our peers withdrew their guidance and we looked at and said.
Heyward, where subscription model, we should have pretty good visibility into the rest of the year. There is a lot of uncertainty will be conservative and obviously, there's a dose of conservatism that goes into that all worked out pretty nicely. So as we stand here now.
There is a lot of uncertainty right as you highlight and.
Think that we would proceed in a guidance that has de risked that.
Okay.
Those risks so I would say we're guiding.
Like we did two years ago.
Time of uncertainty.
We feel good about the business overall.
There are some challenges in international.
There is some hiring challenges that put put some put some challenges into the business, but overall I think we have good visibility.
I think we've got some cushion in conservatism to Derisk the plan for the year.
We feel pretty good.
On the spending side.
It's hard to break out what's by choice and whatnot, Yes, you got it right that we're behind on hiring I think like everybody, it's a challenging hiring environment.
And that contributed to savings in the year and I think that flywheel of hiring would hopefully accelerated maybe we give a little bit of that back but as I said earlier in the call. We've made intentional choices that are part of really getting going on this rule of 40 model that we're going to lay out for you in June to try to.
Accelerating those efficiency gains and those are things that are like in cost of revenue around hosting optimization. Some things that we're doing with some of our execution teams and cost of revenue.
Where we think we can do a little more with less.
<unk>.
Areas in R&D and sales and marketing, where we think we can hire a little bit less than we originally planned not meaning that we're behind choosing not to because we found other ways to achieve our objectives with less so I would say we are definitely accurately tightening the screws and driving efficiencies faster than we are.
We could otherwise do and we look forward to getting more into the details with you on June 28th in the analyst day.
The only thing I would add the only thing I would add to that is that I just want to remind everybody and I think we said it again in the prepared remarks, but I think it warrants.
And emphasis on it I've always said that Avalere I as in this unique position because it's positioned to be good in good times and not as bad as others and maybe even good and bad times.
Because we have a unique ROI message I mean, taking.
Automation sales tax is a is a mess.
Message that works.
Both environments and our business is starting to set up to be a low beta so it doesn't rise with it.
It doesn't rise with the all the Fabs and it doesn't go down with all of the bad time, and that's that's what I think youre seeing.
In our in our in our comments.
And feelings.
Feeling about the business.
Yes.
Your next question comes from the line of Peter Levine with Evercore. Your line is open.
Okay. Thanks, guys for squeezing me in.
Just you called out services backlog impacted revenue recognition in the quarter can you quantify what the <unk> impacts.
What the impact was and then what the impact could or will be for the year, considering or you think currently constraints.
Remain persistent at these levels.
Yes.
I don't think we will quantify it I mean, it's a small.
It's a small probably couple of million bucks, but but it's.
We expect a little bit more in professional services revenue.
I think we were pleased we had one of the highest backlogs that we've had and professional services revenue and really it was behind on hiring as you know to get PFS revenue you have to hit milestone and complete projects.
So being at capacity under hired on the PFS reps.
US to complete fewer jobs and recognize less revenue than we wanted to.
I think we are on top of it and.
Right now we hope to.
Be able to make it up in the year, but it was it wasn't a big Delta.
I was just calling it out because if you look sequentially it looks a little bit weird in and then maybe a question on People's minds. So I wanted to know if it's just a little bit light in the quarter because of that nothing nothing concerning and we were pleased with that.
The robust backlog we are seeing.
Yeah.
Your next question comes from the line of DJ Hynes with Canaccord. Your line is open.
Hey, guys congrats on the nice quarter here.
So you are pretty fresh off your developer conference I'd Love to hear you talk about engagement Youre seeing with the low code studio and maybe from their kind of.
Talk about the path in general timeline to monetizing this partner activity.
Okay.
Yes.
It's a great. That's a great question actually because I think it really.
It really points to that one of the distinguishing factors about avalere I mean from the deck from the day. The day. We started this company we were an API business.
That's how we connect into all of all of our.
All of our.
Publishers I mean, all of the financial applications.
But what I think is really unique about the <unk>.
<unk>.
Our new integration studio is that it just makes it simpler and simpler and simpler for people to be able to take our code and not only build it into you know.
The traditional way of connecting into enter integration, but to go outside and create products and connections that we've never had in the past I mean, one of the first things I challenge the team on back in the day was I wanted to be famous.
In the developer community because I think that that is ultimately the way that you dominate in industry and go beyond just what you can do and turn on the power you know.
Other developers.
Activities that they want to see done for their customer base and so I think that this is a big step forward I mean.
It's just.
To me, it's mind blowing how well that they created this so it just makes it simple for anybody on a local basis to integrate.
Taxes and returns.
Into into a workflow that they wanted to create so I think it's a huge opportunity for us to step out and continue to lead and dominate in this in this in this space. It really was a big step forward very impressive and very proud of the team.
Your next question is from Alex Sklar with Raymond James Your line is open.
Yes.
Ross I appreciate all the organic call out can you quantify the revenue and billings headwind in the corner from the European marketplace partner renegotiation and are there any opportunities to expand with that particular.
Partner in other geographies.
Yes, Thanks, Doug.
We're not going to call. It out specifically every quarter, we said going into the year, we thought it would be a few points.
And I would just say for in.
In the last couple of quarters, we said look we're not going to break out total and organic revenue anymore. Because the 2021 acquisitions were small and it creates an insignificant delta and between that and the offset on the EU marketplace.
Roughly offsets.
The reported numbers are pretty good representation.
But we did call out the track 10 99. This quarter track 10, 90 Nines are $10 99 acquisition, obviously in the name and the revenue is all in Q1, it's a seasonal business all in Q1, and so because that created a wider delta between reported revenue of 33% in organic of about 29%.
We want we wanted to call that out for you to understand it.
On the billing side I would just say this.
As you guys do all your permutations of billings in organic billings billings in the past has been a good leading indicator metric for us I would say right now it's not a perfect metric for us as you think about billings.
I think it detaches, a little bit as an indicator of future revenue growth and here's what's interesting. If you go back to Q1 2020, beginning of the pandemic, we did 21% billings growth organic and we had a 29% revenue growth year organic.
Q1, 2021, we did 37 or 8% billings growth because of the easy comp and we again to 29% revenue growth very very consistent in each year.
Here, we are now looking at the 38% billings organic billings comp and I think that that weighs on the billings result, this quarter, coupled with the marketplace partner point and then we've had a little bit of a mix shift over the last year.
From annual billings to monthly quarter monthly and quarterly.
That's kind of a result of the pandemic, where we were giving easier terms to customers.
Which I think was a good trade off but that movement.
Probably a couple of points in Q1 impact to billings. So theres. Some theres some puts and takes there, but I think overall.
Really good billings result for the quarter I think it is a little bit less indicative of future revenue growth.
And so I think if you just focus in on sort of revenue guidance and.
And all of the other commentary that we provided around how we're feeling about the business.
Your next question comes from the line of Andrew <unk>.
Sperry with Aaron Berg Your line is open.
Thanks for fitting me in.
I apologize if this has already got asset two earnings calls were juggling, but.
Just on that one.
First quarter bookings.
Can you clarify did you say that the majority came from the existing base and if so should we see that net retention rate.
Shop from that greater than what it was and then maybe any comments in terms of are you seeing any change in that top of funnel in terms of E Commerce one.
Sure.
I didn't I didn't say that Andrew I'm not you lost me I think what you may be referring to as I said for.
And our e-commerce business from the Avalon included business with like the Shopify isn't that the Congress of the world most of the bookings come from customers that activated on those platforms in prior cohorts in other words we.
Didn't need somebody to sign up for E. Commerce this quarter to produce the bookings we are monetizing through conversion upsell.
People that came onto the platform in prior quarters and that goes with what we've always been saying.
That that.
We have a large funnel from all these people that became ecommerce they have calc in their card from their platform, but they haven't necessarily dealt with other channels with returns with search with cross border, but use tax et cetera, and it's our opportunity to start converting and upselling them, there's tens of thousands even more of those out there that way.
We're doing <unk> and we can go convert an upsell so that doesn't really affect the MLR calculation.
It's a separate it's a separate point Andrew.
I lost the rest of what you are asking is I'm trying to figure out.
Yes.
Yes.
Your final question comes from the line of Daniel Jester with BMO. Your line is open.
Great. Thanks for squeezing me in could you just talk a little bit about how you're viewing.
To your acquisition strategy this year.
Obviously, it's in part of your DNA in the past, but you talked about sort of the cost control and some macro volatility just wondering how you're thinking about the acquisition environment <unk> change in valuation I think it would be helpful. There. Thank you.
Yeah.
Look as you said DNA I mean up M&A as part of our DNA.
It's important to grow tax types.
It's important to grow content.
It is important to grow internationally.
And I think that we're looking at doing all of those things, but we're paying more attention to whats the whats the impact on gross margin and bottom line.
But theres no question that.
To move.
Beyond where we want to go internationally that M&A is going to play an important an important role in that.
Think we're being very selective about what we look at when we think about indirect taxes.
We probably will not expand out as greatly.
In the other tax.
Areas that we have in the past so we'll be we'll be more mindful of.
The overall.
The overall efficiency of the company, but in order to grow internationally.
And to build out.
Invoicing I would expect M&A to be focused in those kinds of areas. The same as we've sort of had in the past.
And we've told everybody. So it's not a big change, we're just just a little bit more focused on efficiency and making sure that we have the right prioritization.
There are no further questions at this time I would now like to turn the call back over to the co founder and Chief Executive Officer, Mr. Scott Mcfarlane. Please go ahead.
Hey, I'd, just like to close today by taking the opportunity to thank all of the Avalere employees all of our customers and partners.
For all their hard work and support during our during a trying during a trying time and we look forward to talking to everybody on the next call and thank you all so.
So much for your questions today I appreciate it.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
[music].