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Edited Transcript of AVLR.N earnings conference call or presentation 5-Nov-19 10:00pm GMT

Q3 2019 Avalara Inc Earnings Call SEATTLE Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Avalara Inc earnings conference call or presentation Tuesday, November 5, 2019 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Scott M. McFarlane Avalara, Inc. - Co-Founder, Chairman & CEO * William D. Ingram Avalara, Inc. - CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Bhavanmit Singh Suri William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications * Bradley Hartwell Sills BofA Merrill Lynch, Research Division - VP * Brent Alan Bracelin Piper Jaffray Companies, Research Division - MD & Senior Research Analyst * Brian Christopher Peterson Raymond James & Associates, Inc., Research Division - Senior Research Associate * Christopher David Merwin Goldman Sachs Group Inc., Research Division - Research Analyst * James Paul Rutherford Stephens Inc., Research Division - Research Analyst * Patrick D. Walravens JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst * Richard Hugh Davis Canaccord Genuity Corp., Research Division - MD & Analyst * Scott Randolph Berg Needham & Company, LLC, Research Division - Senior Analyst * Sitikantha Panigrahi Mizuho Securities USA LLC, Research Division - MD * Sterling Auty JP Morgan Chase & Co, Research Division - Senior Analyst * Terrence Kiwala First Analysis Securities Corporation, Research Division - VP of Enterprise Productivity Software * Gregory Ryan McDowell ICR, LLC - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Avalara Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Greg McDowell, Investor Relations. Thank you. Please go ahead, sir. -------------------------------------------------------------------------------- Gregory Ryan McDowell, ICR, LLC - MD [2] -------------------------------------------------------------------------------- Good afternoon, and welcome to Avalara's Third Quarter 2019 Earnings Call. We will be discussing the results announced in our press release issued after market closed today. With me are Avalara's CEO, Scott McFarlane; and CFO, Bill Ingram. 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 fourth quarter and fiscal year and can be identified by words such as expect, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release, our annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019 and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at investor.avalara.com. With that, let me turn the call over to Scott. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Greg, and welcome to everyone joining our Q3 2019 earnings call. Q3 was another strong quarter for Avalara. We reported total revenue of $98.5 million, representing an increase of 41% over the prior year. Our growth rate was driven by continued success across the business. We saw new customer wins across a wide range of industries, segments and geographies. We also experienced strong customer retention and solid upsell activity. I've said it before and I'll say it again, Avalarians worldwide have a shared vision to be part of every transaction in the world. As our value proposition gains more traction and validation, I'm increasingly confident in our ability to build a great company with durable growth characteristics. Once again, I'd like to thank our employees for their hard work. Your continued commitment to our customers, our vision and each other is much appreciated. And I would like to thank our customers and partners for your trust in Avalara and our team. Before we dig into several interesting topics for this quarter, I want to reemphasize the primary driver of Avalara's growth right now. Critical to our ongoing strategy is success in our core business, supporting sales tax compliance. I have mentioned now for several quarters that our global sales team is driving strong execution and efficiency, and we applaud them for their success across all market segments. Our net revenue retention rate continues to be strong, demonstrating further need and deeper trust from our customers. We've also seen sustained adoption of our additive solutions like SST and business licensing. Today, I'll focus my remarks on 3 topics: Our international opportunity; our expanding partner ecosystem; and marketplaces. International expansion has been and will continue to be a great opportunity for Avalara, providing solutions to the challenges of global tax regimes, like VAT and GST as well as the specifics of managing cross-border compliance are key growth areas for Avalara. While international business represents less than 10% of our revenue today, that segment continues to grow quickly, and we are investing to take advantage of the enormous opportunity in front of us. Every country is different and governments around the world are deploying technology in unique and fascinating ways to increase the enforcement of their tax policies and reduce fraud and revenue gaps. There are many different tax and trade regulations, things like E-invoicing, real-time authorization, live reporting, split payments, fiscal representation requirements and so forth. Avalara's cloud platform is uniquely positioned to adapt quickly to these changing technology requirements and environments. Another key area of international opportunity is cross-border commerce. Cross-border e-commerce is forecasted to exceed $1 trillion by 2020. Our customers have an immense need for calculating, collecting, filing and remitting customs and duty obligations that comply with ever-changing rates, rules and regulations that govern sales across country borders. Currently, our cross-border offering supports 2 of the largest marketplaces in the world. In addition to our cross-border offering, we are partnering and building other services that will further help global sellers in the EU market, including local fiscal representation in countries where physical presence is required. Fiscal representation is a requirement in many countries where the tax authorities require out-of-region companies to appoint a local fiscal representative to manage the filing obligations, record management and associated inquiries with the tax authorities. Globally, governments are looking at new methods of oversight to increase compliance and reduce tax fraud. These activities create great challenges for businesses around the world, and Avalara is working to be the disruptive force for change in all of these markets, just as we have been in the U.S. Moving on to partners. We continue to deepen and widen our partner moat by adding new partners and certifying new integrations with accounting, ERP, e-commerce, point-of-sale, mobile commerce and CRM software applications at a rapid pace that keeps us well ahead of our competitors. It's hard to imagine anything more important to our business than this relentless pursuit. Of course, signing new partners gives us access to ever-growing numbers of end-user customers. But more important, in an omnichannel economy, the breadth of our partner ecosystem becomes invaluable to almost any business. It gives our customers choice and power to adopt Avalara into all of the systems and technologies they use to run their business. Technical enablement of our partners is an important step in our partner development process as we rely on a network of APIs to manage the flow of data between systems. When our partners build an integration, Avalara provides detailed technical documentation to facilitate data collection and functionality mapping between the 2 systems. We help our partners by providing proven requirements, such as all the unique items on an invoice required for a compliance calculation, based on years of successful integration development. With these requirements in hand, our partners know they are building a consistent experience for our shared customers and are building with tax expertise that only a compliance expert can provide. The certified integration partners and customers alike can be confident that the technology will meet the customers' needs. We already have a substantial foothold with the major providers of business systems to the mid-market, NetSuite, Microsoft, Sage, Epicor and the like. But many companies rely on specialized systems as part of their business. An example is our newly certified integration with Adaptive Jewelry, a software platform for the jewelry industry. This is a niche segment with the specific requirements to connect manufacturers, distributors, designers and retailers of leading jewelry brands. And Avalara's integration works efficiently in their system. We also recognize and are adapting to the changing natures of where and how invoices or sales are being created. In the earliest days of Avalara, we concentrated on ERPs, the system of record for many mid-market companies. Today, as our economy continues to shift towards omnichannel selling models, our business development team is building relations with all kinds of transaction platforms, e-commerce, recurring billing, sharing economy, payments, social media and more. What we know and understand about the SMB space as well as the emerging small business market is that we cannot reach each business in a one-to-one engagement. A partner ecosystem is the only way to dominate the market. To win there, we have to understand the pain points of their customers, their data flow, their go-to-market motions, so that efficient compliance processes can be embedded and integrated through all the systems that they already trust. In that way, the Avalara benefit is felt by customers and partners alike. In just about the same way that we, Avalara, understand that we cannot address the small business segment one-by-one, governments around the world have realized that they cannot efficiently enforce compliance requirements on thousands and thousands of small businesses that transact within their borders. As governments become increasingly focused on closing revenue gaps, taxing authorities are turning in new forms of enforcement, including shifting their tax compliance burden from the sellers themselves to the marketplaces. In other words, the burden has moved to the marketplace to collect and remit sales tax on behalf of all sellers that list on its platform. The marketplaces have thus become the focal point. In the U.S., this legislation has swept across states in the form of marketplace facilitator laws. And in the EU, member states have agreed to make online marketplaces responsible for charging and collecting VAT for all their non-EU sellers. Avalara works with marketplaces like GOAT, Discogs, Poshmark, Amazon and others. Our solutions serve a range of roles, depending on the unique needs of the marketplace and the region where we partner. In some instances, we serve the seller on the platform. And in others, we serve the marketplace directly. And in some cases, we play both roles, offering compliance services to the seller and the platform. As of October 1, 33 states and Washington, D.C. have marketplace facilitator laws in effect. And here is our perspective. While these laws make it easier for state tax authorities to manage and enforce tax compliance, they create new challenges for businesses. Why? As I said earlier because it's really an omnichannel world now. Many, if not most businesses, not only sell on their own e-commerce sites but on an online marketplace as well. Through these channels, businesses are touching a patchwork of states with marketplace facilitator laws, leaving it unclear at best as to who is responsible for the sales tax collection and remittance in each state. This makes compliance especially difficult because those sellers have to determine which transactions are covered by marketplaces and which are not, state by state. Because of our many integrations and aggregation capabilities, Avalara helps navigate the maze of state-specific requirements. We recognize that at its core, this process requires clean data management, a problem that we can solve. At this stage, it would be a herculean task to manage this process manually, and Avalara has the right set of tools to ease this burden. As we have discussed on this call and others, we work with dozens of marketplaces to offer compliance services to their sellers and for their core business. The marketplace model is an important growth area in digital commerce and one we continue to invest in globally. In summary, we have a global vision at Avalara because we believe the move from manual to automated tax compliance is inevitable. As businesses of every size makes a decision to automate compliance, we will continue to be there for them. Now let me turn the call over to our CFO, Bill Ingram. -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Scott. As a reminder, Avalara adopted the new revenue recognition accounting standard, ASC 606, effective January 1, 2019, on a modified retrospective basis. As a result, financial results during 2019 are presented in compliance with ASC 606 while historical financial results prior to 2019 are presented in conformity with ASC 605. Our earnings press release includes additional information to reconcile the impacts for the adoption of the ASC 606 standard. Let me now discuss our third quarter results. For the third quarter, total revenue under ASC 606 was $98.5 million, up 41% on a year-over-year basis. Strong growth in the quarter was a result of increased demand from both new and existing customers, combined with strong sales execution across channels. Additionally, third quarter revenue included $1.5 million of legacy customer revenue from the acquisitions of Compli and Portway, both completed in 2019. These businesses were primarily acquired for their content and domain expertise, and we are pleased with the early results. Subscription and returns revenue was $92 million. This represented 93% of our total revenue and grew 42% year-over-year. Professional services revenue was $6.5 million. Our core customer count increased by 810 to approximately 11,240 at the end of Q3 2019. Of this increase, approximately 80 new core customers were added following our acquisition and integration of the Compli customer base. Our net revenue retention rate was 113% in Q3 and has averaged 110% over the last 4 quarters. Our revenue retention rate, supported by low gross churn, contributes to strong customer lifetime value. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued just before this call. Gross profit was $70.8 million for Q3 '19, representing a 72% gross margin. This compares with ASC 605 gross profit of $51.3 million and a 73% gross margin in the same period last year. The 1 percentage point decline in gross margin primarily results from third-party software hosting cost and our expansion into international markets. Turning to expenses. Sales and marketing expense was $37.6 million in Q3 or 38% of revenue. On a 605 basis, sales and marketing expense would have been $42.4 million or 43% of revenue. We are pleased with the continued year-over-year improvement in sales and marketing efficiency. For Q3, research and development expense was $20.1 million or 20% of revenue. The absolute dollar increase in research and development expense was in line with our expectations as we invest in new products, content and features to drive future sales growth. For Q3, general and administrative expense was $15.3 million or 16% of revenue. New corporate initiatives include adoption of SOX 404, new HR systems, recruitment and leadership training, all of which are important investments for our future. Non-GAAP operating loss was $2.2 million for Q3, which was better than our previous guidance, due primarily to the revenue upside in the quarter. On a 605 basis, non-GAAP operating loss was $6.9 million compared to a $9.2 million non-GAAP operating loss in Q3 '18. Non-GAAP loss per share was $0.01 in the third quarter, based on 76.2 million shares outstanding. On a 605 basis, non-GAAP loss per share was $0.07 compared to a loss of $0.14 per share in the third quarter of 2018, based on 66.6 million shares outstanding. Turning to our balance sheet and cash flow statement. Our cash and cash equivalents were $446.6 million at the end of Q3 '19, an increase of $5 million from the $441.6 million at the end of Q2 2019. Total deferred revenue as of Q3 '19 under ASC 606 was $148.5 million, up 7% from $138.8 million at the end of Q2 '19. Calculated billings is a non-GAAP metric that takes into consideration revenue and the change in deferred revenue as well as the change in contract liabilities. Calculated billings were $108.5 million in Q3 '19, up 38% from $78.8 million in the same period last year. It is worth pointing out that beginning in Q4 '19, we start to face what we would consider more challenging year-over-year comps. Operating cash flow was $5.9 million in Q3 '19 compared to $1.2 million in Q3 '18. Our operating cash flow performance was driven by strong cash collections tied to our billings activities. Free cash flow was $3.6 million compared to a negative $3.6 million of free cash flow consumption in the same quarter last year. We would like to remind you that our free cash flow will fluctuate from quarter-to-quarter caused by many factors, including the timing of working capital, the seasonality of our billing and expense cycles as well as our overall level of investment in the business. I will conclude by providing guidance on revenue and non-GAAP operating loss for Q4 and for the full year 2019 under the ASC 606 standard. For Q4 '19, we currently expect total revenue to be between $99.5 million and $100.5 million. We expect our Q4 non-GAAP operating loss to be in the range of $7 million to $8 million. For the full year 2019, we currently expect total revenue to be between $374.3 million to $375.3 million. We now expect our full year non-GAAP operating loss to be in the range of $13.2 million to $14.2 million. We are still in the early stages of our 2020 budgeting process and plan to provide detailed guidance on our fourth quarter conference call. That said, I would like to share some thoughts regarding the financial outlook for Avalara beyond 2019. The business has meaningfully outperformed our top line expectations since going public in June of 2018. Revenue growth has accelerated from the mid-20% range to over 40% in the last 2 quarters. We've also demonstrated operating leverage over the past year. We are proud of the team's execution to deliver such great results and are confident in the long-term leverage in our business. We are addressing a large market and believe that Avalara is well positioned to deliver durable long-term growth of 20% to 25% as we move toward our objective of building a meaningful business. As we look at 2020, in particular, our early planning supports mid-20% revenue growth. This is at the high end of our longer-term growth target and takes into consideration that we expect to exit 2019 at a $400 million revenue run rate, in addition to facing a much more challenging comparison based on our strong performance in 2019. Our early investment plans for 2020 result in a non-GAAP operating loss margin in the low to mid-single-digit range, and likely a modest level of cash burn in 2020. We believe the momentum in our business, compelling customer economics and our unique position in a large market all support continued investment in the business to drive long-term growth. At this point, we would like to open up the call for your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Chris Merwin from Goldman Sachs. -------------------------------------------------------------------------------- Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Okay. And congrats on another great quarter. So maybe to start off, I wanted to ask a bit about the cross-border product and what type of adoption you've seen there so far? Is that actually helping to land some larger logos maybe than you have seen in the past? Or is this mainly been a source of cross-sell so far? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- So it is both a source of bookings and revenue for us today. We've landed some significant deals. I think we've reported that we've been doing that with Amazon in the past. We continue to do that. We're adding more businesses all the time to it. So it's growing. We're just starting to get it deployed throughout the sales system and selling it as an add-on. I think our sales team will be picking that up later. I mean this quarter and into next year. And we see really strong demand for it. We're working on the messaging. We're working on all of the implementation things to -- in order to make it as strong as we possibly can but it's really started out pretty well for us. -------------------------------------------------------------------------------- Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. Great. And then it looks like customer growth accelerated for the fifth quarter in a row. I know you're starting to lap the impact of some of these legislative changes, but obviously, customer growth continues to accelerate. So just curious how we should think about the sustainability of the pace of net adds going forward? When SMBs are now going through the typical trigger events and change events that you've talked about in the past, are they just much more likely now to take Avalara in light of the legislative changes that they need to solve for? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- Chris, I mean, look, there's no question that the governmental tailwinds are helping us. So that's a given. It's bringing awareness to the table. But I think -- and -- I mean there'll be a lot of questions about this over the day, so I'll just get it out now, really. I mean yes, those are important aspects of it. And the laws have been pushing the business, but the states really haven't caught up from a way of monitoring it and enforcing it. And as they start doing that, I think, it's just going to push this further and further and further on. So we do not see this as this run-up and then it goes away. We see -- and we see this as just this long, strong buildup towards what we always say, the inevitable aspect of this business is everybody is going to do this in an automated fashion. In a digital world, it would be ridiculous to think of anything other than that. So again, back to our message, which is the trigger events that we all know that are happening are driving this business. Wayfair is pushing us along from a tailwind, and we're yet to see, I think, the real effects of Wayfair, which I think will push us even further as we go down the line. But it will be a slow, gradual process as they work through the triggers. -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [6] -------------------------------------------------------------------------------- And Chris, this is Bill. With regard to specifically the reported number, as we've talked in the past, that technically is not new net adds. Those are core customers as defined, customers that generated more than $3,000 of revenue in the last 12 months. So many of those customers are existing ones that have exceeded the threshold. So I wouldn't overanalyze exactly any one quarter as to whether it's accelerating or decelerating. And we see, as Scott said, really strong, steady customer capture and customer growth across the whole base of the business. So there's no one thing or one trigger that I would point you towards. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Your next question comes from the line of Sterling Auty from JPMorgan. -------------------------------------------------------------------------------- Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- So I want to follow up on the international. I mean beyond just cross-border, but just the full international opportunity. I mean all the comments in the prepared remarks, is probably the most positive I've heard you talk about the international opportunity since prior to the IPO. And what I'm wondering is it something actually fundamentally has changed in that opportunity? Or you're just deeper in your knowledge of the opportunity and the solutions that you have positioned to capture that opportunity? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [9] -------------------------------------------------------------------------------- So I would say it's -- and thanks, Sterling. I would say that it's really the latter. We've always known that the international market is going to be a strong market for us. Our beachhead and really our foundation, our -- core of our businesses is in the U.S. So us moving out of that has been an educational process. We've known where it's going. But every day, we fight the battle here in the U.S. And as we start to develop our EMEA business, in particular, our Brazil business, we're constantly learning about how and best way to position this. And we see -- we're seeing strong growth with our business in EMEA and our Amazon business that we're working with them on. So we're very focused on the opportunity that we have in front of us there. And I think we're optimistic about it. -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [10] -------------------------------------------------------------------------------- And Sterling, it's Bill. While it's not yet 10% of our business, and we break it out in our 10-Q. With the additional teams that we've built -- we've talked about some of the executives that you've seen, but we've also built a nice group of new managers and executives across the company. We can talk about some of our international leaders, but we've seen a lot more visibility in terms of things that are happening around the world that just reinforce our conviction of opportunities internationally, I'd say necessarily. We've got more intelligence and more understanding and really a terrific team of people that have joined the company in the last couple of years that help us confirm that. -------------------------------------------------------------------------------- Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [11] -------------------------------------------------------------------------------- That makes sense. And then one follow-up on the marketplace opportunity, or let me play devil's advocate. I could see investors being worried that if things concentrate down to where you have a handful or maybe more than a handful of marketplaces that are responsible for sales tax calculation, collection, remittance, et cetera, that they would be worried that those marketplaces would actually look to bring something like this in-house and do it for their vendors. Can you talk to why you would think that would not be a concern in the long run? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [12] -------------------------------------------------------------------------------- Sure. I mean it's -- what I said in the opening remarks, the complexity that the marketplace creates, the marketplace laws creates is real for businesses, meaning they cannot -- I mean they are in an omnichannel world working with lots of marketplaces. They're working with their own POS systems. They're working with their own sales forces and their own websites. So deciphering all of that information and getting the right information filed to the right place is still -- is really a difficult task for everybody. I mean we're working with, as I said, dozens and dozens of marketplaces to help them through this process. I just -- I don't see it as a core competency that any business wants to get involved in. It's what we do really, really, really well, and we take the burden away from both their sellers and them in the process. You throw cross-border on top of that, and the complexity is even bigger. So I just don't see that as one of the issues that really is confronting us at this time. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from the line of Brad Sills from Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [14] -------------------------------------------------------------------------------- You've seen a nice acceleration in net revenue retention over the last several quarters. Can you unpack that a little bit for us, please? I'm sure, it's a combination of transaction growth, perhaps customers are adding more states, starting with 1 or 2 and then going into more as they become more compliant. You've got more transaction types in there. I just -- if you can comment on just kind of what is driving that -- what's been driving that acceleration and kind of the sustainability of that? -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [15] -------------------------------------------------------------------------------- Sure. I'll talk the first half, kind of unpack it for you. I really can't comment on any sustainability. And as I said, historically, it's been -- last 4 quarters it's been 110%. We are seeing with new customers now greater filing -- schedules filing adoption, which, as you said, is more states, more jurisdictions and more types. And we believe it's just because of greater awareness, greater awareness of the issue, obviously, some of the legislative changes and attention. But in the past, we'd work with customers and they'd say, well, I currently have nexus in 3 locations, and we'd sign them up and get them going at 3 locations. Now they're saying well, I may only have nexus in 3, but I'm anticipating 6 more. So we'll sign them up for 9 or 10 at the beginning. So I don't think there's anything dramatically going on other than greater awareness. Sales team is doing a great job making them aware. And we're signing up greater geographic distribution for nexus filing of their filing calendar at an earlier stage. So I think it's compressing the inevitable historical adoption rate of geographic distribution. It's compressing a little bit. With regards to sustainability, I really can't comment on that. But we are pleased, obviously, this quarter with 113% number. -------------------------------------------------------------------------------- Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [16] -------------------------------------------------------------------------------- And then one more, if I may, please. In the past, you've talked about the ability to take the platform into other transaction types or even regulatory functions over time. I know you can't comment on the roadmap specifically. But just generally, are there any categories of transactions or even other regulatory functions that you see as more natural adjacencies, perhaps you're hearing more inbound feedback from customers on? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [17] -------------------------------------------------------------------------------- Sure. Sure, Brad. We've always said that everybody thinks of us as this transaction company, a company that -- and we talk about being part of every transaction in the world. But I've said it before, we really want to be the global SaaS platform for compliance. And as a result of that, there -- it's not just transactions. It's documents. It can be -- I mean we do CertCapture, obviously, which is a document management system for exemption certificates that businesses have all over. But we can do things, I mean, inside of our fuel business, we are doing lots of compliance around trucking about moving -- I mean documents that we have to file on behalf of the people who are moving the fuel from state to state that aren't transactional. So we can move into different areas along that line, whether it be environmental kind of documents, all sorts of compliance documents that need to get from the business to the government on file. That is what we are really set up to do. And it's not one of the things that we talk about every day in the business because we've got a lot of other things going on. But in the back of our mind, and what we're working on here is always trying to be thoughtful about how we expand that global SaaS platform for compliance. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Your next question comes from the line of Scott Berg from Needham. -------------------------------------------------------------------------------- Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [19] -------------------------------------------------------------------------------- Scott, Bill, congrats on the great quarter. Scott, I just wanted to start with -- as you reflect over the last year since the Wayfair decision, the deals that have come in, the transactions that you've signed, have they changed in terms of types of partners, whether it's your direct channels, yourself or the partners that they're coming in? Just didn't know if that regulatory tailwind is maybe changing what that composition of those deals looks like? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [20] -------------------------------------------------------------------------------- Scott, so when it's all said and done, and I try to make this as simple as possible here in the office and when I'm talking to everybody. Because really, when it's all said and done, means, we go-to-market where invoices are created, where sales are made. And that is always done through a partner network. So there's really no escaping that. And I say it's only that way. We have our APIs, which I talked about on this call, and we continue to get our APIs out and doing that other things and that represents a good solid portion of the business. But when it's all said and done, it's really about how we work with our partners, how we grow our partners, how we support their customers and that really doesn't change. I mean it's one of the key things. And again, I try to just keep everybody focused on this. I mean in order to take advantage of Wayfair, you need to be able to -- you need to have a connector and an integration made with the people who are creating invoices. You need to be able to register those customers and you need to be able to take those customers live. And those are 3 things that Avalara does really, really well. And so I don't -- we don't see -- we don't see much beyond that, right? We only see the transactions that we have connectors for, and we have 700 partners more than anybody else. So we get our -- more than our fair share of the apple there. But it really isn't -- there really hasn't been any change in the business motion because we're really focused on that partner world. -------------------------------------------------------------------------------- Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [21] -------------------------------------------------------------------------------- Got it. Super helpful. And then a question for you, Bill, on the kind of preliminary look into calendar '20. Have you changed your assumptions kind of along the same vein in terms of maybe deal composition, whether deals are coming in, maybe through partners or maybe it's more marketplace activity or the e-commerce vendors? Trying to understand if you're using this year's template as kind of the stamp for next year or if there's something different in those assumptions? -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [22] -------------------------------------------------------------------------------- Well, thanks -- yes, thanks, Scott. No real change other than we see a broadening of our business across numerous initiatives. And so kind of our core customers that we report and that deal size and that average selling price and that filing breadth and calendar, so on and so forth. There's no great change in that. As you know, we've -- Scott and I've been talking now for the last 1.5 years, that we think this is a large market, very low penetration. Inevitably, it's going to convert to an outsourced, cloud-based solution, like one that we provide. And so we think we're still early, early in the adoption cycle of this type of solution. So there's really no change to that kind of core base business. Now in addition, as we've said, I think, in prior calls and Scott said a little bit today, we're seeing some nice early areas of additional contribution to the revenue, which do not have those exact same characteristics that you asked about. And so these are things, again, like marketplace providers, what we call Avalara included in terms of some of our international business, cross-border classification. So what -- we're cautiously optimistic about is that we've got a lot of irons in the fire here for these additional revenue streams, none of which today are that significant, but we're very hopeful, and we're planning to try to grow some of those other types of business. So that will change the composition kind of the current model. But as it does, we'll give you plenty of insight and direction around that. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from the line of James Rutherford from Stephens Inc. -------------------------------------------------------------------------------- James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [24] -------------------------------------------------------------------------------- I wanted to ask a follow-up on the cross-border opportunity. It's something you've mentioned on a few occasions, and I believe you have a couple of offerings in market around cross-border today. Just help -- give us a sense whether any of this could be material to growth in 2020? And if there's any ambition to launch a guaranteed-landed cost offering, which seems like it could be a catalyst for that business? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [25] -------------------------------------------------------------------------------- Well, you're right. We have a couple of offers in it. We do -- I mean at the very basic level, and probably the -- probably one of the biggest problems that people have is around classification of cross-border items. The HS code, the harmonized system code, that's what businesses struggle for, and that's what -- we're doing a considerable amount of work for that, and that's the front-end of the system. Once they have that classified then actually doing the transaction, the calculation part is really pretty simple. And then you can get it out to, I mean, a variety of businesses. You can send the information from all the documentation that is needed to get to the shipper and so forth. And that's really what we're in the marketplace selling -- the beginning parts of that selling today. And we think that this is -- it can be a big, both, competitive advantage for us throughout the marketplace with our -- with competitors in ERP and the like and it will be a revenue producer for us in 2020. -------------------------------------------------------------------------------- James Paul Rutherford, Stephens Inc., Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Okay. Helpful. And then a follow-up, if I may, on the competitive landscape from, I guess, Vertex, Sovos, the usual crew. As this land grab is underway in the post-Wayfair world, are you seeing any push from the big guys to move -- or the players in enterprise, I should say, to push into the kind of the mid-market where you guys play? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [27] -------------------------------------------------------------------------------- Yes. Listen, we've said it before with everybody at the low-end and at the high -- I mean at the high-end with us. Everybody wants to be where Avalara is. That's one of the great things of this market opportunity. People want to get into it. But again, I just -- I keep saying this, because I think it's really the basis of the Avalara business, in order to take advantage of Wayfair, you have to have the partnerships. You have to be able to register simply and you have to be able to take people take businesses live on the system. And it doesn't matter how much you want to be in this space, and it doesn't matter how much tailwind Wayfair is providing. If you cannot do those things you cannot take advantage of the market opportunity. And Avalara, with over 700 partnerships and integrations, we're really in the catbird seat in order to take it -- in order to take advantage of that. So yes, our competitors definitely want to move into this space, and they're working hard to do what they can to do that. It's our job and our team's job is to make sure they can't do that and -- or make it difficult for them to get into the space. And we're doing it just as we've done for the last 15 years. So yes, there's definitely competitive pressure. We understand this space, and we're really good at the partner programs. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- And your next question comes from the line of Richard Davis from Canaccord. -------------------------------------------------------------------------------- Richard Hugh Davis, Canaccord Genuity Corp., Research Division - MD & Analyst [29] -------------------------------------------------------------------------------- So one, I know the Supreme Court just sided with, I guess, Charter Communications on kind of voice over IP taxing and things, but they basically overturned it state-by-state. Is this an area kind of -- I mean I guess telecom taxation makes e-commerce look simple. Is that an area of a vector of growth for you guys? And then I'll give you a quick follow-up. -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [30] -------------------------------------------------------------------------------- Sure. Thanks, Rich. This is Bill. As you said, the telecom taxation world is infinitely complex and has probably even more hands on it than even sales and use tax does. But what it goes to show is that things change all the time. And so voice over IP taxation actually is very, very interesting. Internet of Things taxation is very interesting. We have services and capabilities that handle many of these things, not all, but we see this as a nice growth opportunity. And we have some great customers in this space that we serve for our telecom group. And we just think same dynamics are at play in telecom as in retail, general commerce or e-commerce, which is trigger events are going to move people off from doing it on-premise in-house. It's going to be outsourced, going to be adopted in the cloud. And we think we're a viable solution for all the telecom providers out there, and we do have offerings in that area. But you're right, it's much more complicated than basic sales and use tax. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [31] -------------------------------------------------------------------------------- And so in complexity, right, is -- was one of the things that we actually find is our strong suit is how we take that and make it simpler for businesses. I mean that really is at the foundation of Avalara. I mean taking these complex laws, making them simple, making it easier for businesses to operate. So we thought the telecommunication was -- space was great. We made an acquisition of (inaudible) a number of years ago. We've been building that up. I think it's just totally fascinating for everybody on the call. I can't help myself because when you think about the Internet of Things when airplanes' engines are talking to mother earth, I mean, that's a taxable transaction. When OnStar customers are talking to cars, that's a taxable event. And so those are the things that we're helping businesses work through. And we love that aspect of it. We can help businesses make their life a lot easier. -------------------------------------------------------------------------------- Richard Hugh Davis, Canaccord Genuity Corp., Research Division - MD & Analyst [32] -------------------------------------------------------------------------------- And then on the sales side, do you have a philosophy with regard to bifurcating customer success versus kind of hunters and farmers? Is that -- are you at that point? How do you titrate that? How do you kind of view that as a go-to-market strategy over the next few years? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [33] -------------------------------------------------------------------------------- Really, it's a good question. I think probably one of the most significant changes Avalara made early on in the process was to bifurcate hunters and farmers. We did that, I don't know, 10 years ago and have been working through that, working through that process. I think it has really been one of the great things that Avalara has done and really made our sales execution a lot easier to separate that. Whether we continue to do that going forward and how that happens going forward, we're always looking at what's the right way to do it. But for the foreseeable future, that's the way we are. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Your next question comes from the line of Brian Peterson from Raymond James. -------------------------------------------------------------------------------- Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [35] -------------------------------------------------------------------------------- So I wanted to ask on the noncore customer trends. And specifically, did they play a larger factor in terms of driving your core customer growth this quarter? Or did we see more customers come in at core customer levels? -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [36] -------------------------------------------------------------------------------- Yes. Thanks, Brian. We don't break that out. But what I can tell you is there's been no significant change in trends. So the same behavior that we've seen in the past quarters has occurred in this quarter. And it's a mix, as I've said -- we said a number of times, it is a mix of both existing customers that have achieved that $3,000 threshold and new customers who have come in. So let me just give you a mathematical example. If we sign up a new customer at $3,600 a year or $300 a month, they're not a core customer until month 10, 300 x 10 is 3,000. We sign up another customer at $36,000 a year, they're a core customer in month 1. And so what happens is, actually, we have very good visibility as to the number of core customers we're going to deliver each quarter. But it's not purely one or the other. And to answer your question, the trends have not changed in the past many quarters in terms of the mix between those 2. -------------------------------------------------------------------------------- Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [37] -------------------------------------------------------------------------------- Understood. And Bill, maybe a follow-up for you. I think you covered this in some of the prior questions, but sales and marketing efficiency was much better than we had modeled this quarter. Maybe expand a bit on what drove that? And how we should think about the pace of investment, both in terms of maybe direct sales hires or investments with partners going forward? -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [38] -------------------------------------------------------------------------------- Again, we're very pleased with sales efficiency. I reported both the 605 and 606 comparison for reconciliation. I think it's driven, obviously, by the strong sales revenue growth because that's the denominator we get to use to calculate the percentage. But what I tried to do is you remember in the closing comments, was say, we're seeing really nice performance on the top line that we're going to make very prudent, reasonable investments in that area. We won't call out how many people we're going to hire. But what I can tell you is that we've got a good line of sight on our sales and marketing expenses. The team is doing a great job. We're so pleased with that group. And we want to be sure to feed it and nurture it and invest in it, both the people and the partners, to make sure that it continues to thrive going into the future, and we'll do that. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- And your next question comes from the line of Pat Walravens from JMP Securities. -------------------------------------------------------------------------------- Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [40] -------------------------------------------------------------------------------- Great, and congrats you guys. Bill, I'm going to ask my favorite question, which is -- so what content areas do you not yet have the content for. And how much of the TAM does that represent? And what are the chances of acquiring that content? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [41] -------------------------------------------------------------------------------- So there's -- I mean that's a big question. So let's just focus on North America right now, Pat, because I think that that's where your question is directed because there's lots of content, Rest of World, which we don't have. We're working to get Latin American -- deeper into Latin America, moving into Asia, so let's just hold that aside and deal with the U.S. here, North America. I would say -- and these are just estimated numbers that we've said that we're approximately at 60% of the content that we have for North America. So there's 40% out there that we need to get. Some of that is more valuable than others. And so we don't deal with amusement taxes. We don't deal with utility taxes. We don't deal with insurance taxes today. There are areas like what could be rare coins, I think we actually do that, but I'm not sure. But rare coins or ammunition that we just -- that we don't do, and that we're constantly working on building that -- those other areas out. And we have a hierarchy of which ones are the most important and which are the ones that we think our salespeople can sell. But it's also driven by the sales force. When they get a deal, oftentimes -- we've talked about examples where we've gone in and done that and then been able to sell that same content that we've done to 300 other companies in the marketplace. So I mean, Pat, that's what we do every single day. But we have a lot still to go, and that just expands our market every single time that we do that because I would also say to everything else I've said, you need integrations. You need registrations. And you need to be able to go live. But you also have to have the content in order to take care of Wayfair. So we're trying to do that as fast as we possibly can, so we can take advantage of the tailwinds. -------------------------------------------------------------------------------- Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [42] -------------------------------------------------------------------------------- Okay. Great. And so just to help me tell the story when I do this. What's an example of one of the big chunky attractive areas? Is utilities particularly attractive? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [43] -------------------------------------------------------------------------------- No, actually utilities isn't. And I'll tell you why, I'll just give you an example because utilities are generally regional. And because they're regional, everybody knows what the rates and rules are in that area. So there's not a need for multi-region. Amusement, automotive, some different kind of manufacturing businesses would all be -- would be all great examples of what we can do in the past. We can add leasing to the leasing rules, which we do a little bit of, but there's a lot more to be had. We've made the acquisition in alcoholic beverage taxes. So we do retail distribution -- I mean we do distribution and the like. But we can get into the retail business around food and beverage, which we don't have the content for, which we'll be adding going forward. Those would all be examples of areas where we would continue to invest in the coming months and quarters to go after. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- And your next question comes from the line of Brent Bracelin from Piper Jaffray. -------------------------------------------------------------------------------- Brent Alan Bracelin, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [45] -------------------------------------------------------------------------------- One for Scott and a follow-up for Bill. Scott, I wanted to follow up on Sterling's question on international. Maybe I'll take a little bit of a different stance. This is a business going into 2020 that will be approaching a $400 million run rate, generating positive free cash flow, over $400 million cash and investments in the bank here. What is your appetite and the opportunity to do things organically and inorganically to accelerate your international footprint? And then one quick follow-up for Bill. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [46] -------------------------------------------------------------------------------- So a lot of people, they'll say our phrase of being part of every transaction in the world. That might be a trite thing. But for me, it's not. When I wake up every single day, that's what I think about. And being part of every transaction in the world means that you have to expand internationally. I think we've done it in a responsible way, moving into EMEA first, adding Brazil, which is the most difficult tax regime. But I will give you, I mean, this note on our moving into those spaces, we have always done that. I mean sort of gradually, slowly moving into it and then with an acquisition. Getting the content on your own in places that you don't know, I just don't -- I don't -- I personally don't believe in. And so I think the way that we will enter these additional markets and expand the markets that we're already in, will be through acquisition. There's interesting technology that's out there in the marketplace today as laws are -- as the laws are changing for e-invoicing, split payments and the like. And I am a real believer, and that is the best way to enter these new unknown areas. -------------------------------------------------------------------------------- Brent Alan Bracelin, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [47] -------------------------------------------------------------------------------- Helpful color and good to hear. Bill, as a follow-up, if I just look at subscription revenue growth remains very strong here, 42% growth for 2 consecutive quarters. But if I look at the pro services growth, that did downtick a little bit, still 23% good growth there. But should we expect pro services, going forward, just to be a lower margin, slower-growing part of the business? Is that the right way to think about it going forward? -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [48] -------------------------------------------------------------------------------- Yes. I wouldn't over-index on professional services. I mean we have a great team, and they're doing a wonderful job. But the game here, obviously, is to get recurring revenue. And so the larger customers will pay for and value professional services, we're really investing, working very hard to get smaller customers to self-serve and go live without professional services. And so it's partially our strategy in order to open up the TAM and create a greater-served market with a broad base of customers that can at their option get themselves live and be much more high automate or use our terrific professional services team to really educate them and get them professionally handled. So I wouldn't correlate the 2, Brent, because a lot of it is our strategy of self-serve for lower-end customers and demand from larger customers that may be kind of chunky or bulky quarter-by-quarter. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [49] -------------------------------------------------------------------------------- And I would like -- and I'd just like to say that, I mean, we can't forget that Avalara is a channel-based business. And we enjoy a fantastic relationship with our partners, and we want them to be doing as much of the professional services as they can. And so we enjoy that relationship. So I like where we are in the area, whether we're up 1 point or 2 points in either direction, I wouldn't over-index on. But I think that that is our general strategy is to let our partners do what they can for us to fill in a certain amount of that with our businesses. And I think that that -- you should continue to plan on that in the future. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- And your next question comes from the line of Bhavanmit Suri from William Blair. -------------------------------------------------------------------------------- Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [51] -------------------------------------------------------------------------------- Congratulations, and probably the last question before we wrap up, but somewhat more strategic. As you think about competitors, I think I'm thinking of Richard Davis, or someone's question from earlier. But as you think about competitors, you think about [OnStar], you think about Thomson, you think about their offerings, which are isolated tenancy, like on-premise or great client-centric, heavily customized. And you think about the multi-tenant approach, you have to take them with SaaS approach, you think about AI. Do you think that at some point -- not saying maybe around 5 years, but at some point, that plays out to where the values offered start to become really appealing to large guys? Like decision-making, filing, taxation, how do you decide, this is the actual tax or something that may not have been decided? I've got toothpaste and toothbrush and the combined factor is different. How do you think about that potential future given that you have a platform that has more data than any of those guys combined because they're so siloed? How should we think about that? Or is that too much of a stretch? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [52] -------------------------------------------------------------------------------- I mean we've talked about this in the past. And look, the competitors have been around a long time. They're well entrenched in the enterprise space. I've always said it's a fool's errand to try to go into that main market and do rip and replace and the like. I just don't believe it. But Avalara is about being opportunistic. And we get our fair shares of wins in those markets as they decide to make that switch that you so eloquently talked about. I think that that is -- that will play out more and more in the future. So I mean, again, when I say I want to be part of every transaction in the world, I mean it. And that means that I think over time, you will start to see businesses migrate towards the SaaS-compliance platform. So I think that that's -- I think what you're saying is it will actually play out. -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [53] -------------------------------------------------------------------------------- And Bhavan, this is Bill. I think kind of as a sound bite, we view that the current target market are the early adopters, but the large enterprise customers with on-prem solutions will be later adopters, but they will adopt. And so we can't put a time frame on that, but I think you can think of it in terms of early adopters and late adopters and the large companies will inevitably adopt this type of solution but they're not the early adopters. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [54] -------------------------------------------------------------------------------- Yes. In the -- the enterprise competitors that you were talking about, they are really -- they're good at what they do, and they service their customers. And we just focus on our market and the mid-market is so big, and we are just at the beginning of adoption there, 4%, 5%, 6% penetrated, there's just a lot of green space for us to move in, and we can be opportunistic when those opportunities come along to move upstream. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- And your next question comes from the line of Terry Kiwala from First Analysis. -------------------------------------------------------------------------------- Terrence Kiwala, First Analysis Securities Corporation, Research Division - VP of Enterprise Productivity Software [56] -------------------------------------------------------------------------------- Congratulations on a great quarter. Just want to confirm that in your 2020 revenue growth rates that does not include any impact from any legislative success in Florida? And if -- one way or another, if you have any early indications of the potential 2020 revenue impact, if any pending legislation is successful? -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [57] -------------------------------------------------------------------------------- Let me just talk about the comments and Scott can talk about triggers and legislation. No, we don't put into our budgeting or planning any specific event for any specific state or law or regulation. As we've said, which is kind of amazing about this market is legislative and kind of government tax changes just happen all the time. Now certainly, last year, Wayfair was a big one, but there will be more changes in the future, not just domestically, but internationally. So that's one of the kind of constant, inevitable triggers and drivers for this business. It's not just the complexity, but the evolution of kind of regulations and legislation around tax compliance. With regard to Florida, Scott, I don't. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [58] -------------------------------------------------------------------------------- I mean Florida is that the remaining biggie, right, that has not decided they're faithfully anti-tax. And they're trying to work through their own program. Look at when Florida happens, it's a big state. It will drive awareness and business just like the others. But I'll keep cautioning everybody, is that when they come forward, there is great awareness but the state has yet to adopt a program of really enforcing the rules that they have on the books, and they are just working through that. So this is going to be a long sort of drawn-out program that we're talking -- I mean that we're talking about. And we're just, I mean, continually pleased with the sales execution of our team as we take on these opportunities once they get triggered. So I don't think you're going to see any change for that. And that's the way we're looking at 2020 as well. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Your next question comes from the line of Siti Panigrahi from Mizuho Securities. -------------------------------------------------------------------------------- Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division - MD [60] -------------------------------------------------------------------------------- First one, I'm not sure if you guys talked about. What was your core customer revenue as a percentage of total revenue? Or is in the trend in your average revenue per core customer? -------------------------------------------------------------------------------- William D. Ingram, Avalara, Inc. - CFO & Treasurer [61] -------------------------------------------------------------------------------- Thanks, Siti. We don't break it out quarter-by-quarter. But if you remember from our Analyst Day back in May, we've plotted that. And our core customer revenue is still in excess of 80% of the total. And so using whatever assumptions you want to use against that number, against the core customer count we gave you can get to an ASP in the high $20,000, $27,000, $28,000, something like that. And I can walk you through that another time. But kind of more generally to a prior question about core customers, we see the same behavior, the same mix. As Scott said, we think we're less than 10% penetrated in a big market. Smaller customers grow up into becoming core customers, larger customers come on and become core customers sooner, but we think that's still a very good metric for modeling and understanding our business. And if and when that changes, we'll break that out and help investors understand it. But today, core customer revenue is above 80% of our total. -------------------------------------------------------------------------------- Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division - MD [62] -------------------------------------------------------------------------------- I appreciate that. And then when you think about 2020 growth opportunity, you talk about momentum on your core customer compliance, and then you talk about new products and services through both organic and acquisition, and then also, like cross-border and international opportunity. So I am wondering, what are you more excited about for 2020 growth opportunity? And how is your sales organization prepared for that? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [63] -------------------------------------------------------------------------------- I mean it's a nice problem to have, I would say. I mean what I'm really most excited about is the team. I mean what I mean by that is, I mean, we have great core sales execution. I really like where the management team is taking us now and growing the business and becoming more professional in all the aspects of it. So I wouldn't say that there's any one particular area that just jumps out to me that says, hey, this is going to be earth-shattering or that we're really pleased with. I mean the things that we've talked about, we're going to continue to push SST and business licenses, cross-border. We're going to go into international. I mean I think what you -- I mean we are just really sort of locked in what we need to do. And it's a testament to all the employees that we've had in the past, and frankly, the new team that's grown both on a domestic and international basis. That's what I'm most excited about. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- And there are no further questions at this time. Mr. Scott McFarlane, Co-Founder and CEO, I turn the call back over to you for some closing remarks. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [65] -------------------------------------------------------------------------------- Sure. Thank you. I'd like to take this opportunity to once again thank our employees, customers and partners for their hard work and support. We continue to be really excited about the market opportunity and the momentum that we're building in the business. So thank you all for your interest in Avalara. And we look forward to talking to you on the next call. Thanks much. -------------------------------------------------------------------------------- Operator [66] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.