Avalara (AVLR) a very sticky solution

[rtichy]

Avalara provides Sales Tax calculations as SaaS to businesses, not just in the USA but globally. Within the U.S alone, there are hundreds, if not thousands, of different sales tax jurisdictions within the United States alone. Avalara also provides additional services such as: electronically storing sales tax certificates, automatic sales tax calculations, automatically filing sales tax returns in proper filing jurisdictions. (Even if taxes in one town are different from another, these taxes are usually remitted to the state for disbursement out to the towns.)

91% of revenues were subscription revenues in the most recent quarter.

**AVLR_Income Statement				    Q4 2020	     TTM5	    TTM		  YoY	 QoQ**
  Total Revenue					 144,760,000	 382,421,000	 500,569,000	130.9%	134.5%
  Cost of Revenue				 (40,579,000)	(115,299,000)	(143,095,000)	124.1%	123.4%
                                                 ___________     ___________     ___________
Gross Profit					 104,181,000	 267,122,000	 357,474,000	133.8%	139.4%

  Selling, General and Administrative Expenses	 (89,406,000)	(240,552,000)	(299,732,000)	124.6%	138.7%
    General and Administrative Expenses		 (29,647,000)	 (71,918,000)	 (95,242,000)	132.4%	163.3%
    Selling and Marketing Expenses		 (59,759,000)	(168,634,000)	(204,490,000)	121.3%	129.0%
  Research and Development Expenses		 (34,457,000)	 (82,442,000)	(119,710,000)	145.2%	134.5%
                                                 ___________     ___________     ___________
Operating Income/Expenses			(123,863,000)	(322,994,000)	(419,442,000)	129.9%	137.5%
                                                 ___________     ___________     ___________
Total Operating Profit/Loss			 (19,682,000)	 (55,872,000)	 (61,968,000)	110.9%	128.3%

Gross Profit is growing faster than Revenues both YoY and QoQ.
Operating Loss is slowing as the business scales.

Avalara has few competitors and, logically few customers are likely to develop a product to compete with them on any scale. I think Avalara is in a wonderful position to be a growing and recurring business. Almost no one that signs up to become their customer will undertake the expense of forgoing the services, as I would think the cost of “rolling your own” will be too prohibitive, forever. Whether someone else can offer a solution that is better or significantly cheaper is always a problem.

The best candidates for doing that are Target, WalMart, Shopify and Amazon. Which probably means only Shopify, because who wants to pay their probable competition to make a sale? But they already are integration partners with Amazon and Shopify, so that leaves WalMart or Target to become a SaaS vendor? Not really in their DNA, imo. Maybe Wal-Mart’s digital guy would try such an undertaking?

2020 was just the first year of a real online strategy for a lot of the companies that had to pivot to the online world. 2021 will be when they start to really invest in it as a growth venue and start to look at their costs structures. Exploding sales tax issues will drive many, many companies “crazy” in their Accounting departments and implementation of a solution will be critical just to let “Sales” go forward on pursuing even more online revenues. I see strong growth ahead for Avalara, it only makes sense.

On top of this, they offer services internationally, handling VAT taxes in many countries. They offer products in Brazil, which is one of the most complicated VAT regimens any of us can imagine. Suffice it to say, in Brazil the taxes are different for sales to customers within “states” than to customers outside the seller’s state, and the taxes rates are different for farm tractor parts than for car parts (even if they are identical parts!) based on materials, local manufacturing competition, importance of the usage to gross national product, and on and on. Truly disheartening for businessmen, and especially accountants and programmers all over the world.

Saul has mentioned OKTA as a company whose ongoing success seems very sticky and stable. I suggest Avalara has similar characteristics. Once a business has it installed, unless they stop needing to collect taxes and make filings for many jurisdictions, they won’t cancel this relationship and install another solution.

The Forward View:
Annual Run rate for Revenues off the 4Q is $580MM, and while this may have some seasonality in a mature state, every quarter has increased revenues from the quarter before for the last 11 quarters (3 years). Guidance by management last night was:

For the first quarter of 2021 the Company currently expects:
• Total revenue between $142.0 and $144.0 million. <== I already said they’ve never not grown from Q-to-Q
• Non-GAAP operating loss between $10.0 and $12.0 million.

For the full year 2021, the Company currently expects:
• Total revenue between $628.0 and $633.0 million. <== This is guiding for 25% growth Y-o-Y
• Non-GAAP operating loss between $18.0 and $22.0 million.

[dawsdaws]

A note of caution - The original poster has overstated the YoY and QoQ numbers by 100.

From the press release:

Fourth Quarter 2020 Financial Results

Revenue: Total revenue was $144.8 million in the fourth quarter of 2020, up 35% from $107.6 million in the fourth quarter of 2019. Subscription and returns revenue was $132.6 million, up 33% from $100.0 million in the same period last year. Professional services revenue was $12.2 million, up 59% from $7.7 million in the same period last year. Total revenue from fourth quarter 2020 acquisitions was $6.5 million.

[rtichy]

My apologies. I didn’t intend to confuse anyone. But, the numbers are exactly as implied by the term “year over year” or “quarter over quarter”.

The commenter is correct, though, in that by not showing the quarterly figures for Q4 2019 I left that overly ambiguous.

-Another Rob

[fsuarjun03]

Thanks for the write-up.

The biggest competitor to Avalara is Vertex (https://www.vertexinc.com/). They’ve been around since the 1970s whereas Avalara has been around since 2004. Vertex went public last year in July.

I’ve worked on implementations for a few fortune 500 companies and I’ve seen them choose to go with Vertex over Avalara. Either that or they’ve had Vertex for a long time and don’t want to switch over anytime soon. Its too engrained in their ecosystem.

I’ve never been involved with the sales process but what I’ve regularly heard is that Vertex integrates better into ERP systems like SAP and Oracle.

Doing some quick research online, it seems to me that Avalara is just starting to target enterprise customers where as Vertex has just started to do the opposite.

I’d be interested to hear if any of the readers of our forum have first hand experience with the two and can shed some light on why Avalara is better than Vertex.

[GaryMF2020]

thanks for the summary ritchy. The first things I check are:
*YoY (Organic) Revenue Growth, looking for something greater than 40% to 50%
*Recurring revenue, looking for the majority of the revenue to be recurring, and growing.
*Adj. Gross Margin %, looking for something north of 70%
*Customer Growth, looking for a material gain in customers each quarter
*Net Retention >110%
*Outlook: are they growing?
*TAM size and their penetration into it: like to see a big TAM and a small penetration %

If those metrics look interesting, I dig further. You’ve already given many of the metrics I evaluate. So taking a look at those and other metrics…(unless stated otherwise, all data is taken from the last quarterly announcement or investor presentation)

*YoY Rev growth: 35%: Total Q4’20 revenue was $145M up 35% from $108M in Q4’19. 35% is nothing to sneeze at but I’ve become spoiled with the likes of CRWD, NET, NARI, and others that are firing on all cylinders with 70%+ YoY growth, some over 80%, and one over 100%.
*Recurring revenue: Subscription and returns revenue was $133M (92% of total rev!), up 33% from Q4’19. This is very good.
*Adj. Gross Margin %: Adj gross profit % = 74% non-GAAP gross margin; Q4’19 adj gp = 71%, so it’s good margin and growing. “check”

• Customer Growth: ended Q4’20 with ~14,890 core customers, up from ~14,180 core customers, so they added about 710 customers in the quarter, 23% increase year-over-year. I’m not sure this is meaningful customer growth. It might be, I just don’t have a good handle on retail. Given they started with such a high number, (14k+), suggests this customer add is good, especially in this economy.
  *Net retention: 104% in Q4’20; average of 107% over the last 4Qs. Again, nothing to sneeze at since it’s over 100%, but not by much, and I don’t love that they are lower than their average.
  Outlook: Q1’21 total revenue between $142.0 and $144.0M, which represents “flatish to down” sequential growth.
  *TAM and penetrations: around $8B, (not including International) and less than 10% penetrated
  Mid Market: ~600k businesses and $4B; <10% penetrated
  Emerging Markets: Estimated U.S. TAM: ~5.3 M businesses and $2B; <10% penetrated
  Enterprise: Estimated U.S. TAM: ~20k businesses and $2B; displacement market
  (TAM is a number I like to look at but I know it can be very easy to inflate, so I take it with
  the appropriate dose of salt)

All in all, AVLR hits and exceeds many of the metrics I like to see and will be added to my watchlist. Things I am watching: YoY revenue growth (want to see it grow much more than 35%) and their outlook was somewhat pessimistic. Perhaps they are sandbagging?

[rtichy]

1. Sounds like you are more current than me.
2. If I were an Oracle > PeopleSoft > JDE World customer running an ERP system and had 3-5 RPG III programmers on staff, I’d probably want whatever Vertex was selling over Avalara’s web service, too. But I haven’t been “that” for 15 years, now.

I just want to bring up “fast food” companies as an example. Starbucks has 15000 thousand locations, and places like Wingstop, Panda Express, Chipotle and McDonalds have had to implement and augment their online and phone app ordering systems greatly. These ordering systems are web-native, like Shopify or Amazon and are more likely to use Avalara? These are tens of thousands of tax jurisdictions being implemented simultaneously by the developers. The ramp up is daunting, and there’s not likely to be an old ERP system behind them.

[NajdorfSicilian]

I’ve mentioned AVLR a few times on the boards, I think they have one of the brightest L-T outlooks for the software industry. More taxes are going to be instituted and localities are becoming MUCH harder on cracking down on any kind of shop or SMB online or offline that hasn’t paid or doesn’t calculate correctly.

They also have very large international potential as you touched on with Brazil.

Long AVLR,

[Ysdrasill]

Hi everyone,

Having worked previously in the industry, for one of the first companies to sell synchronous and asynchronous product classification, I can tell you Avalara is not the best at what it does - and it has many more competitors than the ones listed in previous posts:

• Webinterpet: Own a large number of key acccounts over EU/GB
• Global-e: another significant competitor

You are all correct that the need for OTFC (on the fly product classification) will become increasingly strong as jurisdictions change rules very often; and it is not a smart investment for any company to try to develop that expertise in-house, unless they plan to sell it as a service.

I believe Avalara is particularly strong in the US, has taken a large share of the market, and will probably be able to hang-on to it. However the quality of their product classification (HS codes) as well as the quality of the T&D rules they use is vastly worst internationally, whereas some competitors (above mentioned) are able to be significantly better in both areas.

Classification and duty & taxes is a subject that is extremely complicated; as such, a number of companies might not be able to tell the difference between Avalara and a better product. Companies mostly expect a system that allows them to be:

1. Compliant
2. As accurate as possible
   Avalara and competitors do provide that, with competitors having a clear edge on the accuracy part internationally.

Whether Avalara will step up to these challenges, and whether clients are going to notice the difference remains to be seen, but for now it will stay out of my watchlist for these reasons.

No position in AVLR

[aroop]

Here are few other companies which also provide similar service

https://www.taxjar.com/
https://paddle.com/platform/comply/

Stripe is also another potential candidate which can provide this service in the future.

[mess7777]

This is totally anecdotal and from only a handful of large Enterprise customers on Oracle ERP that I work with. 100% of them use Vertex and zero have mentioned any intention to change. There hasn’t been any overt displays of dissatisfaction in my experience either , meaning not a lot of incentive to change.

[mickeyj26]

this is something i have worked on. One thing i can tell is this business is very sticky. Once you start using a tax provider you never stop using it. Its too much of an hassle to try and change providers. Worry about what happens to old data(i think most big enterprises are supposed to keep 7 years of data for audit).

I have used vertex with one client and they have been using them for last 15-16 years. They just upgrade and always upgrade to new version from vertex. They think about other products, but once they have already worked with vertex in past and its so reliable, no bother switching. simply upgrade to their newer version.
Between AVLR and VERX i know, AVLR is probably cloud first product where as VERX has been around for 40 years. AVLR has more smaller business where as VERX has mostly focused on big enterprise companies(since they used to sell in most jurisdictions around the world). Now i think both companies are trying to gain customers in each others territories.

Having said that, tax business is incredibly complex. No company enterprise or SMB which sells in different jurisdictions will try to manage tax themselves. There are so many jurisdictions just in the US. rates keep on changing all the time. So most companies just prefer to outsource this to tax companies like AVLR and VERX. I think this space definitely has a big tailwind behind it since more business keep going online and selling out of state/country. More governments would want their share of sales taxes. Audits and compliance from gov will prob ramp up in near future coz gov will be looking to get as much money as possible post pandemic from where ever possible.