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Edited Transcript of AVLR.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·62 min read

Q3 2020 Avalara Inc Earnings Call SEATTLE Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Avalara Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jennifer Gianola Avalara, Inc. - VP of IR * Ross Tennenbaum Avalara, Inc. - CFO & Treasurer * Scott M. McFarlane Avalara, Inc. - Co-Founder, Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * Alexander James Sklar Raymond James & Associates, Inc., Research Division - Senior Research Associate * Brad Robert Reback Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst * Bradley Hartwell Sills BofA Merrill Lynch, Research Division - VP * Brent Alan Bracelin Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Christopher David Merwin Goldman Sachs Group, Inc., Research Division - Research Analyst * Joey Marincek JMP Securities LLC, Research Division - Research Analyst * Lucas Lincoln Morison Canaccord Genuity Corp., Research Division - Associate * Matthew Alan Stotler William Blair & Company L.L.C., Research Division - Analyst * Sitikantha Panigrahi Mizuho Securities USA LLC, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to Avalara's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I'd now like to hand the conference over to your first speaker today. Jennifer Gianola, Vice President, Investor Relations. Thank you. Please go ahead. -------------------------------------------------------------------------------- Jennifer Gianola, Avalara, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Good afternoon, and welcome to Avalara's Third Quarter 2020 Earnings Call. We will be discussing the results announced in our press release issued after market close today. With me are Avalara's CEO, Scott McFarlane; and CFO, Ross Tennenbaum. 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, the impact of COVID-19 on our business and global economic conditions, our expected future business and financial performance and financial conditions, 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, 2020, 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, Jennifer, and welcome to everyone joining our Q3 2020 earnings call. Q3 was a stellar quarter that exceeded our expectations amid a challenging business climate. Our revenue was $127.9 million, up 30% year-over-year. It's great to see our top line year-over-year growth accelerate from last quarter. I'm proud to tell you that we hit a major milestone this quarter by reaching $0.5 billion annual revenue run rate. And I'm so fortunate to be part of a great team that I believe will take us to $1 billion in revenue and beyond. I would like to thank all of our employees for their hard work and their commitment to our customers. Our Q3 results validate the adaptability and resiliency of the Avalara team. Our enduring business model and our value proposition, which we believe is resonating well with our prospects in this difficult time. ROI and efficiency have always been compelling aspects of our solutions, but they're even more critical and tougher times as businesses look to streamline resources. I'm more confident than ever in our ability to build a lasting company with durable growth characteristics. The COVID-19 pandemic has either created or enhanced 4 macro trends that we believe will sustain beyond the pandemic to produce multiyear tailwinds for Avalara. There is no question that our business is benefiting from the acceleration of e-commerce adoption, which we foresee as a generational shift that will benefit Avalara for the long run. Avalara also continues to benefit from companies moving to the cloud. The COVID-19 crisis is forcing businesses to modernize their systems to facilitate digital and remote workforces. We believe this is accelerating the adoption of cloud solutions like ours as businesses shed inflexible legacy systems. Earlier this year, I told you, I believe that in tough times, Avalara would benefit from businesses placing a growing emphasis on ROI and efficiency. Since March, Avalara has shifted our marketing and sales messaging to promote our compelling and demonstrable ROI, which continues to resonate with prospects and customers and has become a great tailwind in a challenging environment. And lastly, we have highlighted that we expect the regulatory environment will continue to be a tailwind for Avalara. State and local governments faced a tremendous fiscal challenge, and we anticipate that new stricter enforcement of tax laws is on the horizon. Internationally, regulatory events such as Brexit mean new and onerous VAT reporting for U.K. and EU businesses. And tax authorities are shifting the VAT burden on the marketplaces in the EU beginning in July. And digitization of tax reporting means a shift to live and e-invoicing reporting that India is enforcing as of the beginning of October 2020. We are seeing all of these macro trends play out. So let me now spend a moment and share a few customer examples. One of our largest recent deals was a Fortune 500 leader in the online travel and related solutions. Our success and capabilities in the hospitality industry began several years ago with an acquisition of a business that offered an automated compliance solution for the 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 products. We are very excited about the future opportunities in this market. Additionally, we completed several competitive takeaways in the enterprise space this quarter. As I've said before, we continue to expand our capabilities and move upmarket. Most companies in this segment have an existing legacy tax solution. And over time, they experience trigger events that caused them to reevaluate their compliance programs. We want to be part of the consideration process every time that happens and to be there for every at BAT. Here just a few examples of Avalara winning during those at BAT. First, a modern American fashion brand decided to rip and replace their legacy on-prem solution with Avalara's cloud-based platform rather than go through a costly upgrade cycle. Second, a catalog and e-commerce company, selling consumer goods to over 4 million customers switched to Avalara due to our certified integration with a lesser-known multichannel order management system and the clear ROI of our streamlined sales tax program. Third, a high-quality home furnishing company switched to Avalara because of our integration with a leading retail software platform and our consumer use products. And finally, we went head-to-head against the competition in one of premier cloud-based payroll and HCM software company based on our depth of integration with NetSuite OneWorld and SuiteBilling. Let me also share a couple of our recent wins in the emerging small business space. A family-owned framing company selected Avalara due to our solution that integrates with their ERP, e-commerce and marketplace application. I mentioned this one because it highlights our unique ability to address the needs of omnichannel customers using multiple software applications. And a fast-growing connected exercise bicycle company selected Avalara because of our prebuilt integrations that connect to their applications and our SST program. In the e-commerce space, here's a great example of how we converted a Shopify Plus client into a direct Avalara customer. A leading producer of sustainable food crops and ornamental plants upgraded their AvaTax subscription and added Managed Returns, CertCapture and SST. This is the type of conversion that we are focused on winning as we target and upsell the Shopify Plus customer base. These are just a few examples of the breadth and scope of our fast-growing customer base that support our belief that every type and size of company across the globe will adopt tax automation and compliance solutions over time. As part of our growth strategy to expand our international reach, I'm really excited to highlight our first ever virtual global VAS summit that brought together well-known government policymakers and private sector tax compliance experts with Avalara customers, partners and prospects. This event was hosted by our team in the U.K. and is a great example of the resilience and creativity of our teams. Not only did we find a way to overcome COVID-related restrictions on live events and continue our outreach to customers, government officials, media and others, we actually managed to exponentially increase our exposure. More than 3,000 people signed up for this year's event compared to 340 in 2019. So the event was very productive in terms of generating new leads and interest in Avalara. Our robust content on Brexit and EU marketplaces highlighted the company's leadership position as being part of the heart of digital reform. Avalara has been a partner-centric company with our founding, and our partner strategy has created a competitive moat that also drives growth. The result of this long-term strategy is that Avalara offers far more prebuilt integrations into applications companies use to run businesses than any competitor. At our Analyst Day in June, we reported that we had over 700 prebuilt integrations live on our platform. If we include all signed agreements, even if the integrations are not yet live, the total is over 1,000 today. We believe this is a better way to look at it because this is the beginning of a commitment and a long-term relationship with these partners. It's great to know that in a competitive landscape, these companies continue to choose Avalara, and our launch team is fully engaged to get these partnerships up and running. The strength of our offering and long-standing partner relationships play nicely to our advantage when working with prospects using the largest traditional business systems, but our advantage is even greater in the long tail. By that I mean the hundreds of smaller or specialized applications, where we are one of the very few or often the only automation provider with an integration. Each quarter, we add new partners and new integrations to our moat, and we will continue to do so as we drive towards our vision of becoming a global cloud compliance platform. In fact, in September, we announced 16 new certified integrations with a broad variety of solutions, including Rubicon Cloud ERP, Volusion V1 and the Plex Smart Manufacturing Platform to name a few. The combination of breadth and depth is incredibly difficult to replicate and represents a key strategic differentiator as we acquire new customers and become more deeply embedded with those we already have. As we continue to increase our lead in the world of partners and integrations, we also continue our efforts to build out our global cloud compliance platform. We are backing this effort with a multi-product portfolio that is rapidly growing and a product development team that has accelerated. During our Analyst Day, we told you we are transforming into a product machine and the investments we have made are paying off. During our product planning last year and continuing when COVID-19 hit, we said we are investing and doubling down even when other providers were pulling back. I am pleased to report that we continue to invest and deliver on key product releases, including the following highlights. In September, we announced the general availability of Avalara Returns for Small Businesses. We now have a tighter integration with numerous marketplaces and e-commerce platforms, which lays the groundwork downmarket and intensify our focus on winning customers in the Fortune 5 Million. In addition, we announced the availability of Avalara India GST e-Invoicing, an end-to-end solution that helps companies manage e-invoicing requirements and comply with India's e-invoicing reform. In October, we announced the availability of Avalara AvaTax Advanced Transaction Rule or ATR allowing businesses to create custom rules for transactions that are essential to enterprise sales tax compliance. By adding advanced rules alongside our other products, we now believe we have a complete feature set that is comparable to our enterprise competitors. And most recently, we launched our physical rep service to help businesses of all sizes expand in the European market by outsourcing representation requirements that minimize complexity. Avalara is partnering with LianLian Global, a leading global fintech company, to launch Avalara physical representation to collect and convert payments from different currencies, pay for and BAT obligations and seamlessly conduct business across borders. We also continue to invest in efficiency and automation in our own business. We have previously discussed our intense focus on improving gross margin over the long term, and that hasn't changed. Q3's gross margin improvement reflected a mix of results from ongoing automation efforts as well as a slower hiring pace than originally expected. As I said at our Analyst Day, Avalara is a technology-first company. To support the billions of API calls that are processed by our platform each year, we recently released a meaningful update to our AvaTax calculation engine as part of our focus on infrastructure and technology improvement. In September, we deployed the update for all customers, and the results have been amazing. The speed at which this service calculate tax has dramatically improved. The new service is easier to deploy, easier to update and more reliable, making our engineering team more efficient, and our customers benefit from a better performing tax calculation survey. This upgrade is just part of the many improvements our engineering team is making to ensure we are well prepared for Cyber Week later this month. Now I'd like to talk a little bit more about our recent acquisition. As you all know, acquisitions have been an important part of our success. I wake up every day thinking about how to bolster Avalara's leadership position, drive growth and achieve our vision to become the global cloud compliance platform for every transaction in the world. Our follow-on offering provided Avalara with the capital to seek opportunities to invest in the business. We believe that the acquisitions we've announced in the last month demonstrate our continuing commitment to deploy this capital to deliver long-term growth for our investors. And as always, we continue to look for acquisitions, both domestically and internationally that advance our goals in compliance. Our October 5 acquisition of Transaction Tax Resources, also known as TTR, represents a big step forward in our journey. TTR builds and maintains an industry-leading database of U.S. sales and use tax content that it monetizes via subscriptions to enterprise customers. In addition, offering other enterprise sales tax automation solutions such as exemption certificate management. TTR represents a highly strategic acquisition for Avalara as it expands our content moat, add new product capabilities and accelerates our journey into the enterprise space. Some of the strategic highlights of the TTR acquisitions include: increasing our addressable market by expanding our U.S. tax content, which we can monetize through TTR's stand-alone content product as well as through Avalara's tax automation solution enabling Avalara to take an exciting step forward in our pursuit of the enterprise market. TTR has had particular success in the upper mid-market and with large enterprise customers and will significantly augment our enterprise capabilities by adding content, products, sales, support, and customers, adding enterprise products and go-to-market capabilities to our exemption certificate management business. And lastly, we see the potential for meaningful revenue synergies as we cross-sell products across each other's customer bases and combine our strengths to provide more value to our customers and partners. Now I'd like to talk about our most recent acquisition. Just today, we announced that Avalara acquired substantially all of the assets of Business Licenses, LLC, which I will refer to as BL, for $97 million, including a $21 million earn-out over 4 years tied to the future growth in new areas. BL was co-founded in 2004 by David Polatseck and Abe Brach a brock and is based in Monsey, New York. I'm excited to welcome Dave and Abe and BL's 100 employees to the Avalara family. BL provides software and services for the research, acquisition and management of business licenses, registrations and permits for businesses of all sizes. Let me tell you a bit about why this acquisition is so strategic for Avalara. The acquisition of BL represents a meaningful milestone for Avalara as it's a natural and complementary step beyond tax. BL accelerates Avalara's global compliance vision and the ability to address the approximate 1 billion U.S. market for licensing and registration compliant. Together, we are all moving forward in the journey to provide end-to-end complex solutions for businesses of all sizes. In addition, like most of our acquisition, BL expands the compliance content repository and deepens and extends our partner moat. At our Analyst Day in June, Sanjay, our Chief Product Officer; showed the 6 product families where we focus our platform expansion, one of those product families is licensing and registration. Why is that important? Because all of our customers are required to obtain and maintain sales tax registrations in the jurisdictions where they attack nexus. In the past, we partnered with BL to help our customers with sales tax registration. But that's just the beginning. What is really exciting is the entire business of licensing and registration. The number and diversity of licenses is vast, ranging from basic business licenses, certificates of authority, and occupancy permits to specialty licensing such as those for health care and assisted living or childcare facility. Regulated industries are fraught licenses those in alcohol, banking, insurance, fuel, hazardous materials and transportation businesses. And then you have the specialty industry licenses such as those for food services, manufacturing, all sorts of wireless and cell tower licenses and those in construction, such as for general contractors and electrician tech. Every elevator you ride or soda drink vending machine requires a license. Large enterprises have to manage hundreds, if not thousands of licenses and registrations across their businesses, which is a massive compliance challenge that is right for automation. For example, a national home improvement retailer uses BL's software and services to manage more than 8,000 licenses. BL has nearly 200 enterprise customers with a significant number of those customers in the Fortune 1000 that uses its solutions to manage compliance. Avalara is excited to join forces with BL to extend our compliance capabilities as part of our burgeoning enterprise product portfolio. While BL has enjoyed success in the enterprise and emerging small business segment, the company has spent a little time focusing on the mid-market segment, the area where Avalara is strongest. We see this as an opportunity to cross-sell their solutions through our sales force and to our existing customers. On the partner side, BL brings us new relationships with partners such as our leading legal technology company that services the emerging small business segment. As we add BL's products to our platforms, it will enhance many of our existing partner relationships as we are able to provide more value to these partners and their customers. We believe that BL will be particularly valuable to our accounting channel, marketplace, and e-commerce platform partners. Once again, I'm super excited to welcome the BL family to Avalara. Before I turn it over to Ross, I want to reiterate how pleased we are with our stellar performance in Q3. We continue to focus on our customer messaging and our ROI story, embracing our partners with mutually beneficial market strategies reaching our prospects in new and innovative ways and supporting our customers. We are cautiously optimistic based on the encouraging data we are seeing. But the COVID-19 crisis remains a very fluid situation with headlines suggesting continued uncertainty well into next year. We intend to keep our heads down and remain maniacally focused on expanding our cloud platform, extending our content and increasing our partnerships, both through organic and inorganic means to take advantage of our large opportunity and the levers we have to sustain our cloud compliance leadership position. Thank you, and I'll now turn this over to Ross. -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Scott. I am pleased with our strong Q3 results, which exceeded our guidance. Avalara is benefiting from several trends, including the increasing adoption of e-commerce, cloud and omni channel, and increasing global tax complexity that we believe will continue to drive our growth for many years. Our business has been strong and stable in good and in challenging time. We are pleased that we were able to achieve Q3 billings and revenue growth in the 30% range. These results were stronger than expected as we were able to close pent-up demand that has lingered since the start of the pandemic. We expect this pace to moderate in Q4 and 2021. We produced positive free cash flow and non-GAAP operating income during these challenging times. And believe this shows that we can produce these results when appropriate. We are a leader in a very large global market that we believe remains single-digit penetrated. As such, we intend to invest aggressively to capitalize on the opportunities that we believe will allow us to continue building a sustainable business that compounds revenue at high rates of growth for the long term. For the third quarter, total revenue was $127.9 million, up 30% year-over-year. Subscription and returns revenue grew 30% year-over-year to $119.2 million, which represented 93% of our total revenue. We continue to be pleased with our subscription revenue growth rate given the COVID-19 pandemic, and given the very strong year-over-year subscription revenue growth we saw in Q3 '19. Professional services revenue was $8.7 million, up 33% year-over-year. Our core customer count increased by 620 from the previous quarter to approximately 14,180 at the end of Q3 2020, a year-over-year increase of 24%. As a reminder, core customers is a lagging indicator for Avalara, and we expected the increase to be moderate in Q3 as a result of earlier year impacts from COVID-19. Despite the current macro environment, compliance requirements remain. Our customers must still calculate taxes and file returns, and our business model and customer base so far has shown stability and resiliency. Our gross revenue churn continues to remain at levels that are meaningfully lower than 4%. We define gross revenue churn as the annual revenue contribution associated with billing accounts that canceled all of their agreements with us divided by the total annual revenue recognized during a measurement period. As a reminder, our gross revenue churn does not include downgrade. Our net revenue retention rate was 108%, up from 107% last quarter and resulting in a 108% 4-quarter average. Our net revenue retention rate is calculated using total revenue which is subject to the impact of nonrecurring professional services. In addition, the calculation currently excludes our streamlined sales tax, or SST business, which has been growing significantly in 2020. Year-to-date, our revenue from the SST program has grown year-over-year by more than 100%. We are excited to tell you the SST governing board recently renewed the SST program for another 3-year term, covering January 1, 2021 to December 31, 2023. SST remains an important and differentiating program for Avalara. The changes to pricing were expected. We anticipate the SST program to grow in 2021 despite the reduced pricing as we continue to add new SST customers from our existing backlog and new sales in 2021. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and per share results 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 $95.5 million in Q3, representing a 75% gross margin. This compares with gross profit of $70.8 million and a 72% gross margin in the same period last year. We remain pleased with the gross margin improvement we've been able to show with 75% representing our highest gross margin rate in 11 quarters. In Q3, we hired more slowly than expected and continue to realize early returns from some of our automation initiatives. Going forward, we intend to increase our investments in cost of revenue and expect to return to more measured improvements from current levels. Sales and marketing expense was $45.5 million in Q3 or 36% of total revenue, an improvement of 360 basis points year-over-year. Sales and marketing expense remained lower than normal due to reduced travel and sales related events as we are seeing a healthy demand environment. In Q4, we plan to invest more aggressively in sales and marketing capacity. Q3 research and development expense was $28.8 million or 23% of revenue, up from 20% of revenue in Q3 '19. This increase was consistent with our expectations as we continue to invest in our global cloud platform, including in new products, content and features to drive long-term sales growth and cost efficiency. Q3 general and administrative expense was $19.6 million or 15% of revenue versus 16% of revenue in Q3 '19. Q3 G&A expense included approximately $2 million for third-party legal and professional fees in support of our recent M&A activity. Q3 non-GAAP operating income was $1.7 million, which was once again better than our guidance as a result of stronger-than-expected revenue and gross margin, lower hiring and reduced travel and event expenses. Non-GAAP diluted net income per share was $0.02 in the quarter based on 86.7 million diluted shares outstanding. Turning to our balance sheet and cash flow statement. Our cash and cash equivalents were $1.06 billion at the end of Q3 '20, an increase of $589.7 million from $474.4 million at the end of Q2 '20. During the third quarter, we closed a follow-on equity offering and raised $556 million net of fees. Total deferred revenue at the end of Q3 '20 was $180.6 million compared to $167.7 million at the end of Q2 '20. 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 liability. Calculated billings was $142.3 million in Q3 '20, up 31% year-over-year. Our billings growth was strongest in the first half of the quarter, driven by strong June bookings demand, while the back half of the quarter was more measured. Free cash flow was $25.8 million compared to $3.6 million in the same quarter last year. I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q4 and for the full year of 2020. Our guidance assumes continued improvement in the economic environment in the fourth quarter. As part of our guidance, we will include comments on how to think about our recent acquisition. When we announced the TTR acquisition in October, we stated that estimated TTR would produce approximately $20 million in 2020 GAAP revenue and be breakeven on GAAP operating income on a stand-alone full year basis. We estimate business licenses would produce approximately $10 million in 2020 GAAP revenue and be breakeven on GAAP operating income on a stand-alone full year basis. These figures exclude any impact of deferred revenue write-downs and additional investments we intend to make in these businesses. For Q4 2020, we expect total revenue to be in the range of $132 million to $134 million. This range includes $3 million in Q4 revenue from the October 5 acquisition of TTR and November 5 acquisition of Business Licenses. This number includes our best estimate for deferred revenue write-downs, which we expect to be meaningful in Q4. Moving to non-GAAP operating loss. We delayed nonessential operating expenses in the early stages of the COVID-19 pandemic. But due to a healthy demand environment, we have resumed more aggressive spending. We expect our Q4 non-GAAP operating loss to be in the range of $4 million to $6 million. As implied by our Q4 guidance, we are raising our full year 2020 revenue guidance from a range of $465 million to $470 million to a range of $488 million to $490 million. As implied by our Q4 guidance, we are improving our full year 2020 non-GAAP operating loss guidance from a range of $16 million to $20 million to a loss range of $7 million to $9 million. We are in the early stages of our 2021 budget process and plan to provide detailed guidance on our fourth quarter conference call. That said, I would like to share some early thoughts on 2021. Our thesis and vision have not changed. We are addressing a large, low penetrated market opportunity and believe that Avalara is well positioned to deliver durable long-term top line growth of 20% to 25% as we continue to pursue building a global multi-product, multi-billion dollar business. On top of this, we expect the acquisitions of TTR and Business Licenses to add approximately $30 million in 2021 revenue. This number reflects our early thinking and includes preliminary expectations for deferred revenue write-down. We may refine this number on our fourth quarter conference call. Efficient growth is important to us. In 2020, we have demonstrated our ability to produce positive free cash flow and non-GAAP operating income. However, we believe the momentum in our business, compelling customer economics and unique position in a large market all support more aggressive investment in 2021. Our early 2021 investment plans result in a non-GAAP operating loss margin in the low- to mid-single-digit range and a modest level of free cash flow burn in 2021. This includes additional investments to support our recent acquisitions and enhance our corporate development and integration team. Thank you for participating in today's call. 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 Chris Merwin from Goldman Sachs. -------------------------------------------------------------------------------- Christopher David Merwin, Goldman Sachs Group, Inc., Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Congrats on another great quarter. Obviously, a lot going on this quarter, a lot of good things. I wanted to ask about Shopify, actually. So you talked about converting a Shopify Plus customer to a direct customer. And when we think about the channel, obviously, there's a lot of businesses there. So can you talk a bit more about the opportunity to create more direct relationships with some of these e-commerce customers, particularly the larger ones and how that can give you more direct exposure through upsell? And obviously, to be able to cross-sell as well, but more exposure through upsell to the structural growth in that vertical? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Sure, Chris. Thanks. I'll start, and then Ross can jump in. We've always -- we've talked about Shopify, Wix and BigCommerce and a lot of the ones that we put in the category of Avalara included. These are relationships that we have where we've done a global relationship to be their sales tax provider. And with our relationship with them, we have -- we are put into the box with them, and we're doing the calculations with them. The joint task that we have is, okay, now how do you take them and just take them from a calculation customer and monetize them down the road. So we've gotten in the box with these players. And then our work is just beginning because you want to get them to step up to returns and the like. And so what we want to highlight in this call is just that transformation. Okay, you're in the box with them. Now, how do you take them and add a much more robust offering throughout their organization. And that's, quite frankly, been our playbook. We start out, and we did this in with the ERPs. You get in the box, you start working with them, and then the minute you're on solid ground and your integration is working, you then go out and monetize that channel. So we're early in the process with Avalara included at these low end -- of not low end, but at these e-commerce platforms. And now we're just seeing how we can continuously push and monetize that channel even more. -------------------------------------------------------------------------------- Christopher David Merwin, Goldman Sachs Group, Inc., Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. Great. And maybe just a quick follow-up on TTR. I know it's still really early here, but from a pipeline perspective, has that started to open up some opportunities in verticals maybe where you haven't had as big a footprint in the past? And any commentary on the progress with the integration to date. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- Yes. Chris, for TTR, it's -- I mean, you know I'm really excited about that because anytime that we have additional content, it opens the door for other -- for more business, right? I mean, it's one of the levers that you have. You can add more, as I talked about in my opening remarks. We can add more partners, and that's a way to increase the market. You can add content. And every time you add content, you are adding more customers to your sales force's ability to do deal. And TTR has a really robust sets of content that's different than ours in many areas, and we're able to add that. Now it's going to take us a while to do that. And I think I said this before, I mean we bought content from TTR. We brought it into our platform before. So we're familiar with doing that. And we think that we can do that over the next year to 18 months. And so each and every quarter, we'll be adding more content to the sales teams' bag of tricks. -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [6] -------------------------------------------------------------------------------- Chris, I would add. It's Ross. It's encouraging. The integrations, they take time, as you know, and they're long-term integrations. But I would say it's encouraging even in the early days, we one of the first things we did was compared pipelines, looked at deals they're in, looked at deals we're in, where there's complementarities. And I've been involved and are aware of a few situations already where we're helping each other out, where there's opportunities that we can help each other out. So I've been impressed with the early developments around the sales pipeline and the go-to-market synergies we can get from the deal. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Your next question comes from Sterling Auty from JPMorgan. -------------------------------------------------------------------------------- Unidentified Analyst, [8] -------------------------------------------------------------------------------- This is at [Arpit Agrawal] on for Sterling Auty. So can you give us more color on the demand and uptake of your solutions in the international markets? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [9] -------------------------------------------------------------------------------- Ross, why don't you jump in on just -- from a numbers perspective and a thought process, and then I'll give you my follow-on color. -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [10] -------------------------------------------------------------------------------- Yes. So international, we're running the playbook. We talked about earlier in the year in the first half with COVID. International was hit pretty hard. And it's really come back in a nice way in Q3. So early on, we saw some softness there. I think we've done well around it in Q3. We've got a strong team, a great leadership bench there. And I think the good news in the EU is we've got good tailwinds on our back. We've got regulatory tailwinds that we've highlighted. We've got the product mix that we need. We've got the sales team and marketing team in place. So that's an area where in the EU, we have what we need, and we have high expectations. And I think we're beyond some of the challenges we had with COVID. So we're optimistic there. And then -- and Scott can talk more about it, but we just launched a new product in India. And so we're really moving in India from what's been an engineering center and a cost center to trying to promote a revenue center there. So we've got some early customers, new product launch in India. Scott can probably talk a little more about that one. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [11] -------------------------------------------------------------------------------- So I'm really impressed with the team and their resiliency, as Ross was talking about. And we've said this before, I think we said it on the last earnings call, where we -- where the EU is our most mature market from an international perspective. I mean it's really -- it's the one we've had the longest. We feel really comfortable that our product offering gets better all the time. The sales team is really doing well. We talked about our leadership position with our show that we got 3,000 people to come in and listen about all that's going on international. But what I'm really impressed with that is, is that the majority -- I mean, the vast majority of those were not Avalara customers, they were prospects. So I mean I think we're doing really well from that perspective. And then Latin America, we -- in Brazil, in particular, is a good market for us. A lot of businesses have -- I mean, it's the most difficult tax regime and a lot of businesses have a lot of difficulties. So we're really helping our international customers out in that area. India is the least developed. And as Ross said, it's just a brand-new area, but it really simplifies what's happening internationally. I mean India changed its tax regime. I mean it changed the GST and created this immense opportunity that our teams in Avalara built a product, got it out and we're in the market, and we're starting to sell. So what I like about international, it goes across the whole gamut from more mature to really emerging. And then obviously, international will expand beyond just those 3 markets as we move into future quarters. -------------------------------------------------------------------------------- Unidentified Analyst, [12] -------------------------------------------------------------------------------- Okay. So just a follow-up on the Business Licenses acquisition. So how does that impact our employee count? And what would be the revenue run rate of it? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [13] -------------------------------------------------------------------------------- Yes. We have right around, I think, 3,000 employees, and this is an additional 100, as I said in my remarks. So it's a smaller number of people and here all in the United States. So it's just sort of business as usual from our perspective. -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [14] -------------------------------------------------------------------------------- Yes. And on the revenue side, just to add on the revenue side, we said in the prepared remarks to think about TTR and Business Licenses combined adding about $30 million of revenue in 2021. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Your next question comes from Brad Sills from Bank of America. -------------------------------------------------------------------------------- Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [16] -------------------------------------------------------------------------------- Great. I wanted to ask about the SST program. Congratulations on the renewal there. I know that's an important program. Can you describe a little bit for us what that does beyond just the business itself, the revenue you generate from the licensing? When you bring in a customer through SST, what have you seen historically with these customers? Have they've grown with you? They start out with a smaller footprint of states that they're filing in. And just any commentary on kind of that customer set and so we can think about that kind of going forward in the model. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [17] -------------------------------------------------------------------------------- Sure. Brad, we talked about this in the past, but SST is an area that's been around for a long time. I mean it was one of the first things that we did when we started our business. We got certified, I think, in 2005 or 2006 back in the day. And we thought it was really significant because it was a government -- I mean it was a state program that people have to get approved for, and we were 1 of the 3 original companies to get approved for that. And I think it was actually 1 of those things that made Avalara what it is today because we distinguished it ourselves from everybody else. And when we were doing OEM deals, you couldn't bet that it was not going to be this really powerful force. Now it turned out not to be that big of a deal in the very beginning. Enter Wayfair, it just blossomed begin because now all of these businesses -- I mean, all these states had a program where they were paying for the customers to do transactions, they're paying us a percentage for the transactions they are doing. So it's a win-win for everybody. The state collects the revenue, we get paid by the state and the transactions are free to the businesses. I mean that's a tremendous tailwind for us. And so we've just really developed that SST program into something, I think it's a meaningful competitive advantage for us. And it really helps the customer. But for the most part, it's not something that they grow into in your specific question. I mean they grow as their transactions grow, but the minute that they do it, all of their transactions are free to them so they're incented to do whatever they need to do there, and we get a percentage of the tax collected from the states. So right off the bat. The minute they start doing it, it's meaningful to Avalara and the customer. -------------------------------------------------------------------------------- Bradley Hartwell Sills, BofA Merrill Lynch, Research Division - VP [18] -------------------------------------------------------------------------------- That's great. And then 1 more, if I may. Ross, you mentioned some pent-up demand that kind of you caught up in Q3. Yet some of the trends you mentioned earlier in the call that are driving this acceleration in e-commerce, cloud, omnichannel, these are very compelling tailwinds that you would think are ongoing. Just trying to parse out how much of your success you saw in Q3 came from some of that pent-up demand when the underlying trends in the business, some of these drivers of growth seem to be very compelling and not accelerating? -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [19] -------------------------------------------------------------------------------- Yes. I mean it's a good question. The underlying drivers that we talk about, e-commerce, cloud, ROI, we've always said and we still believe these are long-term sustainable drivers and tailwinds for our business. And to me, they sustain in a world with COVID or without COVID. So I think we've shown that this business is strong in good and challenging times. I wouldn't over-index on the pent-up demand point, Brad. I think when you think about billings as a proxy for that end market demand, we said we were happy that we accelerated from 22% growth last quarter to 31% this quarter and commented that the first half of the quarter was higher than that on the growth rate and the second half was lower than that. And so the point is, there's a little bit of lumpiness than usual because I think there's some lingering deals in the pipeline that would have closed earlier in the year. But because of the COVID, people have delayed. So that's really the point. And as we think about modeling forward, we think about what we saw in the back half of the quarter as the billings growth rate that we're thinking about modeling forward. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question is from Pat Walravens from JMP. -------------------------------------------------------------------------------- Joey Marincek, JMP Securities LLC, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- This is Joey Marincek on for Pat. Scott, I was hoping you could talk about ATR. And why is that so important for enterprise businesses? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [22] -------------------------------------------------------------------------------- Sure. So in our standard business -- in the standard mid-market business, they are concerned about getting sales tax right. They're concerned about -- but it's not something they want to spend a lot of time on. And they just want it done for them. As you move upstream, all of these -- the larger businesses, all have big tax department. And they all have their own research teams, and they all have their own ways of thinking about how they want to classify their products, how they want to tax, they make -- they do custom rules. And that's what the advanced rules does. It allows them the flexibility to create the taxing environment in our software that best fit them and their needs as they see it. So we've been focused on making it simple and easy for businesses that don't have that kind of technical and tax expertise in their business. This allows the most advanced people in tax to do what and when they want to do. And so it's just one of those things that if you're going to be in the enterprise space, and I've said this all the way along the line, you need that functionality for many of those customers. And it just wasn't something that we had on our radar screen for a number of years. We were opportunistic, we got deals that it didn't require that. But there are a lot out there that do, and it was just time for us to step up, get that done, add that to things like cross-border, add that to exemption certificate management and then consumer use. Those things together create a really strong enterprise offering. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from Brad Reback from Stifel. -------------------------------------------------------------------------------- Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [24] -------------------------------------------------------------------------------- Great. Ross, back on your commentary around the second half of the quarter slowing from the first half of the quarter. Without getting too granular here, but can you give us a sense of if November -- in October, I should say, we saw a firming of the demand pipeline? -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [25] -------------------------------------------------------------------------------- No. I'm not going to -- we never comment on the current quarter, Brad. I mean look, overall, Q3 strong quarter. You saw our results. Billings accelerated from 22% to 31%; revenue accelerated 30%; gross margin, 75%; positive operating -- free cash flow, positive non-GAAP operating income. So business is working. It's working in the enterprise, it's working in the mid-market, it's working in ESP. It's working internationally. We're benefiting from e-commerce. We're benefiting from cloud. We're benefiting from ROI. So we feel really good about the business and things are working. I'm just -- I've been giving you guys color. We stood in there and guided from the beginning. We gave monthly color, so we could be transparent. So I just wanted to give you a little color. June had strong bookings and I think July, first half of Q3 benefited on the billings number and the back half was also strong on billings, but it was just lower. So nothing to worry about, Brad. I'm just trying to give you a little color. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from Siti Panigrahi from Mizuho. -------------------------------------------------------------------------------- Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division - MD [27] -------------------------------------------------------------------------------- I just wanted to ask about your success going down market. You guys introduced a couple of products that -- Returns for Small Business and in sales and use tax. And then we saw marketplace facilitator laws that was enacted. Now some of this marketplace, they are doing sales calculation and selling referral to you. So I'm wondering like what sort of success you have seen -- early success out of Q3? And how big is that opportunity going down market? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [28] -------------------------------------------------------------------------------- Sure. Look, I mean, we really believe, and we've said this all the way along the line, as we talk about it, the biggest market in this space is the mid-market. It's where -- it's where the biggest TAM is and that's where we started. But having said that, we want to move downstream to capture the businesses as they start to grow because nobody starts out as a business. It's an enterprise company or even a mid-market. They start out at the lower end. And that is a play that has to be done through partnership. And as I've always said, or at least our playbook and our strategy is that you must win that mid-market. And once you win that mid market, you then get the street credit, if you will, to be able to move downstream and to be able to do those large partnership deal. You cannot go after the low end of the market without winning the large partnership. And so -- and then as we said I think on the first question, once you win those large partnership, then for the rest of eternity, you are working there to monetize that business. And if you can do that, and when you do that, it means there is a substantial TAM and a substantial market to have there. But it just takes a little bit longer to develop than it does at the mid-market and even at the enterprise space because you have to work through those partners over a period of time to monetize it with products other than tax calculation. So it's -- I think it can be a fantastic market for us. It just is going to take time to evolve and monetize as we push through that market. The key to it, though, is, is you must win those deals. I mean every one of those deals are competitive, and you must be the one that people choose. So you have to have a good tax calculation. You have to be able to do registration. You have to be able to do returns, you have to be able to onboard those customers. So it's one of the things that plays really strongly to Avalara's sort of competitive moat, if you will. -------------------------------------------------------------------------------- Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division - MD [29] -------------------------------------------------------------------------------- That's a great color, Scott. So another high-level question about states enforcement act. We saw almost last year almost all states have started enacting this economic mix as well. Then this year, we are seeing most of the states now struggling in terms of revenue. So what could they do? Or have you started seeing states enforcing this kind of law? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [30] -------------------------------------------------------------------------------- So I mean, that's a great question because -- I mean, the states are really in a tough spot if stop and think about it because, one, they -- obviously, they need revenue. But the minute COVID came out, everybody started to say how can we help small businesses. How can we help businesses. And the first thing that everybody did was say, okay, we're not going to -- we're going to give you a hall pass on when and how you pay sales tax. And it just further really pushes them down. Now without stimulus packages and things like that, businesses are still struggling. So I think states are reluctant to really jump in and be the enforcement arm right now. But having said that, the states are developing digital ways to see what businesses are doing so what are -- who is selling in their states, who's not registered with their state because that's a key thing, registrations, that's how they know. They are matching registrations with marketplaces. I mean information is starting to be developed for them, and businesses are starting to be able to provide that kind of matching to the state. And they will start taking that and enforcing it in the future. And there's all sorts of different things that they're looking to do. But in the end, that's what the bottom line is how do we get visibility into who's doing business in our state and matching it to registration. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Your next question comes from David Hynes from Canaccord. -------------------------------------------------------------------------------- Lucas Lincoln Morison, Canaccord Genuity Corp., Research Division - Associate [32] -------------------------------------------------------------------------------- This is Luke on for DJ. So you've said in the past that I think e-commerce drives around half of customer transaction volume, ARR related to e-commerce customers has grown at around a 50% CAGR over the last 3 years, historically. So just thinking about it, you've provided some color here already, but I was just wondering if you could just expand on how you're thinking about the recent acceleration in e-commerce adoption impacting demand for your product stack going forward? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [33] -------------------------------------------------------------------------------- Ross, do you want to jump in on that one and, we can talk about... -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [34] -------------------------------------------------------------------------------- Yes. Sure. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [35] -------------------------------------------------------------------------------- Whole beta status and things like that. So... -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [36] -------------------------------------------------------------------------------- So. Yes. DJ, look, it's -- or Luke, thanks for taking the call. We're definitely benefiting from e-commerce. We've got a lot of customers that are either full e-commerce businesses or hybrid. It's hard to think about a customer more that's just a point-of-sale retail store business. Everybody is getting into e-commerce, and we stand to benefit from that. And when you think about the pipeline that we've called out in the past, there's over 1 million e-commerce users on the Shopifys and the BigCommerces and all those. And we're getting them -- because of our relationships with those platforms and we're built in, when Shopify adds a user to Shopify Plus, they come on our platform. And then we do the calculation for them. And so the name of the game, as Scott was talking about before, is to continue to deepen the partnership with these customers and to get more and more of their customers calculating on our platform. And then we know who they are. And then our job is to target them and sell them on other solutions that we have. And now we have many solutions for tax appliance that we can sell. And so every quarter, we're focused on upselling these customers converting them to Avalara direct customers and monetizing more fully. And so that's really how it's working quarter in quarter out for us. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [37] -------------------------------------------------------------------------------- Let me see if I can -- I mean, this is a great question, and I'm glad you asked it because I think this will help understand -- help everybody understand why Avalara is a special company in this case. First off, when we -- and a little color around monetization, what does that mean? Okay, we are in the lower end of the market, the Wix', BigCommerces and Shopify, a lot of customers down there. The key is you're doing calculations for their e-commerce business. But people don't file out of their e-commerce solution. They file out of their ERP. And what's interesting about that. So the minute we get the big commerce customer, you then want to go get their ERP. Avalara with 1,000 partnerships is in the best position to be able to aggregate all of their transactions because that's what this is about aggregating transactions because not everybody is doing everything on just on Shopify. They may be doing it on many different types of platforms. You pull all of your transactions together and then you file. And the ability to actually do that is how you monetize the e-commerce relationship. And yes, the e-commerce market is doing really, really well. But as I was saying, we're a low beta, right? I mean customers buy huge transactions for us and so -- with us in band, and it doesn't go up oftentimes as much as you might think, but it does not -- as we've proven through this COVID, does not go down as well. So yes, it's a tremendous market for us. It's very, very steady. And the minute we get it, we have this ability to upsell, monetize and to get their -- the rest of their business. I hope that helps. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Your next question comes from Alex Sklar from Raymond James. -------------------------------------------------------------------------------- Alexander James Sklar, Raymond James & Associates, Inc., Research Division - Senior Research Associate [39] -------------------------------------------------------------------------------- Scott, you've got a lot of new products and upgraded features and functionality that have hit this year and that are coming up in the medium-term road map. But TTR and BL acquisitions both seem like they're solutions that your sales force can actually lead with. I'm curious how much that was factored into the acquisitions? And with your existing product portfolio, any other products that you've had success in terms of landing new logos outside of calculations? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [40] -------------------------------------------------------------------------------- So I mean it's a really good question and a good observation. I mean what we're always looking for, I mean, I talk about the 4 horsemen of sales tax. There are 5 if you include VAT, right? You've got sales tax, you've got consumer use. You've got exemption certificates and returns. Every business in the United States has one or all of those as a problem. So our sales. So what we're trying to do is provide entry places for our sales teams to talk to customers. If you don't do sales tax, highly likely that you're doing consumer use or you're doing exemption. And everybody is doing returns. So you have an avenue to talk to them. Now I've always -- I loved, as I said in -- before I loved TTR because some businesses start with you because they just want to buy a subscription for their tax experts. But once you have -- once you're engaged with them, they understand your -- all of your tax rules and you're helping them with audits and all the other things that they're doing then it's a nice upsell to calculation and return and the like. And the same thing with Business Licenses. Look, it's a great position to be in when small businesses have to come to you to register because the minute they register, you then have a chance to talk to them about returns or about calculations or about other licenses. And in the end, you're always trying to add more products to them because it makes it a stickier sale and you just get advantages that way. So yes, it's a strategy that we've employed and and we're going to continue to do that. -------------------------------------------------------------------------------- Alexander James Sklar, Raymond James & Associates, Inc., Research Division - Senior Research Associate [41] -------------------------------------------------------------------------------- Okay. Great. And then just 1 follow-up for you, Scott. Just in terms of the BL acquisition, you already had a licensing and registration products. This is obviously some -- this expands on that. Was this something that your customers were already asking you to go to? I know you have a broader kind of vision to be part of global compliance. I'm just curious if this is an area that you've been asked to go and if there's any other ancillary kind of compliance there, that have been pain points that you've been asked to go by your customers? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [42] -------------------------------------------------------------------------------- Well, I really like this one. I mean I've known David and Alex for -- Abe for a long time. I've known them for a long time. They were in this business, and they actually came up with the first sales tax file that would be sold to businesses. And they ended up selling their business and then starting this because it was a niche in the market that they saw that there was a lot of demand. And so I have watched them and talked to them about what they've done for many, many years. I've seen how their business has grown, how they can take that content, sell it just like we do. And I've known all the way along the line that we could take their services and sell that to our customers because there's a need for businesses to do that. So we don't lead with -- I don't get -- at a trade show, nobody comes up to me and says, "Hey, do you do licenses? But we've watched what they've done and watched what they've developed and had that partnership with them selling business licenses, registration, and we knew that we could add that to the bag and sell it down through our channels. So it is a little bit of a divergence for us. It's a lot like cross-border. You asked do I have other examples. Cross-border would be just that same way. I mean cross-border doing duties and customs is something that should happen at the time of checkout. It just should. That's where it makes the most sense. Now every once in a while, a customer will say that. But when you develop and put it in there, it's like, "Oh my gosh, that's exactly what I need. That's exactly where it should be." So yes, you're talking to customers, yes, you're getting an idea. But in the end, sometimes, we can see that even in advance of where the customers are and really help them out. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question comes from Brent Bracelin from Piper Sandler. -------------------------------------------------------------------------------- Brent Alan Bracelin, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [44] -------------------------------------------------------------------------------- One just quick follow-up for, Scott. Scott, you've now had looks like, what, 30 days since announcing TTR. Any large enterprise or partner feedback that surprised you so far? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [45] -------------------------------------------------------------------------------- I think I said this when we were -- we did our conference call and the like. We just shocked me to knowing was how much the TTR customers love -- I mean love them. I mean with the 76, I think that's what it was, a 76 NPS score. And then all of our due diligence and follow-up with their customers, it was amazing how much they're trusted in and liked by their customers. But what I've also seen because Sean has shared many, many of the -- much of the feedback to me, with our customers is that they appreciated the sale to Avalara. So that's -- I mean that's what was also interesting that they would reach out say, "Hey, glad you -- if you trust Avalara, we trust Avalara." I mean just the feedback that we're getting was amazing and it really validated why I think it was a great acquisition for us. -------------------------------------------------------------------------------- Brent Alan Bracelin, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [46] -------------------------------------------------------------------------------- Great. And then I guess, Ross, I appreciate the tempered enthusiasm here, I think Bill Ingram's smiling out there somewhere. But I'm going to push back a little bit. Subscription revenue, I think, was up, what, 10% sequentially. That's the highest sequential rebound in any quarter of '19 and 2020. So far, the highest Q3 sequential increase, I think, in 4 years. Appreciate kind of the pent-up demand having some contribution, but it does feel like there is something kind of different happening here. You've got a lot of new products, move upmarket with the down market, the e-com tailwinds. It just feels like there's a lot of momentum and the strength feels like it's broad-based. And so just trying to understand, as you think about the components of what drove, again, this highest sequential increase in subscription revenue in quite some time, how much of that is sustainable, is durable and is tied to a lot of the trends you guys have been working on for the last couple of years? -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [47] -------------------------------------------------------------------------------- Yes. No, Brent, it's a good question. I mean, I think, as I said earlier, it was a good quarter across the board. Everything is working across the different customer segments, geographies. The new products and acquisitions, that's pretty new. So I'm not going to say that we had -- we have some early successes on some of those cross-borders working. We're seeing some nice results out of consumer use. So we are seeing some results from these products, but these are long-term things, and these are long-term trends. We had a few million more than we expected this quarter. And that's why I called out, I think that there was some extra demand that's been in the pipeline that didn't come in, in Q2 because of COVID that came through. And so I think they're a little extra than that, that delivered more -- a higher result this year or this quarter than it has in past years. So look, overall, Brent, business is working well. We're proceeding with cautious optimism. We're pleased with the results. And we want to be cautious going forward. We're still sitting here in a pandemic. My kids are still doing school from home. We don't know when this is going to end. And we're happy with the business, but we want to be cautious moving forward. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Your last question comes from Matt Stotler from William Blair. -------------------------------------------------------------------------------- Matthew Alan Stotler, William Blair & Company L.L.C., Research Division - Analyst [49] -------------------------------------------------------------------------------- So just in terms of enterprise functionality, obviously, you guys have been adding a lot of key pieces this year to use tax, integrated cross-border, custom rules, TTR acquisition, et cetera. And then your commentary that this -- you've kind of reached a stage where you see yourselves as kind of on par from a functionality perspective with some of the enterprise competitors out there. I would love to just get some color in terms of, I guess, what the enterprise -- sorry, engineering focus is from here in terms of kind of outside of just continuing to add to the content database? What are you focused on in terms of remaining crucial pieces of functionality going forward? Or should we now expect to see more of the shift towards adjacent market opportunities, which we obviously just got a flavor for with BL? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [50] -------------------------------------------------------------------------------- It's a great Matt, it's a great question. Thanks. What I think we are going to continue to see us do is really focus on usability making everything that we do, completely simple integrating all of these products into 1 UX experience. And we'll just continue to build out all of our areas, right? I mean there's a lot more that we can do in cross border. There's considerably more that we can do in driving some of the verticals that we're talking about, telco, fuel, hospitality, working on partnerships as one of the things I said in my prepared remarks, is we'll continue to push returns for small businesses and fiscal representation. So I would say that what we would do is that we're in the V1, V2 development of all of these things, and it's going to get better and better all the way down the line. And then as you said, I think we've signaled that we want to be a global cloud compliance platform. And so you'll see lots of things happening as we pull all of these things that we've got together, and we explore how we can grow our international presence. -------------------------------------------------------------------------------- Ross Tennenbaum, Avalara, Inc. - CFO & Treasurer [51] -------------------------------------------------------------------------------- And Matt, the only thing I would add is, as you know, part of the story, we've been opportunistically enterprise. And so it's moving from being there when customers want to displace or want to adopt and being in that fight and winning a good fair share of deals, to taking all the pieces, you mentioned them all, consumer use, cross-border, ATR, TTR business licenses, everything that we have and really making it an enterprise suite, like an integrated enterprise suite, as Scott called out, and shifting the go-to-market to really -- like really focused on marketing that actively to the enterprise customers out there so that we're increasing our game up there from being what we've caught opportunistic is something more forward-leaning than that. So that's all coming together now between the go-to-market and all these great products that we have. -------------------------------------------------------------------------------- Matthew Alan Stotler, William Blair & Company L.L.C., Research Division - Analyst [52] -------------------------------------------------------------------------------- Got it. That's super helpful. And then just 1 more follow-up on the enterprise. So 1 thing that enterprise customers place a lot of value on is obviously this white glove support looking for technology providers to be more partners and vendors. So as you move up market, any thoughts on how you expect to build out those capabilities? Is that something that you expect to do internally? Or is your strategy more leveraging partners? Or what are you going to do to try and provide this kind of deep level of service in that segment of the market? -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [53] -------------------------------------------------------------------------------- Great observation. One of the things that we've done in building Avalara part of our playbook, which has been entering markets like some of the strategic initiative markets like we've done with fuel, telco, hospitality, all of those have come with a large enterprise focus. I mean we do 9 out 10 super fuel companies in excise. But -- and so we've been learning the white glove process. Meaning we were a mid-market company when we started. We've been buying these businesses, learning it. TTR was a significant step forward in building the muscle around white glove service. So it's something that we're going to have to build and invest in, in the coming year. We're going to continue to drive to do that because you have to do that as you say. Now the 1 interesting thing that you talked about, which is are you going to do that internally? Or are you going to do that through partners? Avalara is a partner-centric company. So the very first thing that we think about is how can we utilize the big 4, how can we use system integrators, how can we develop that relationship which is something that's new and different for Avalara at that high end of the market. And we're going to continue to push and develop that muscle. And at some of the lower ends of the market there, we'll be doing a lot of that professional services ourselves. But whenever we can use a partner, that's our first choice. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- We have no further questions. I would now like to turn the call over to Scott McFarlane, Co-Founder and CEO, for closing remarks. -------------------------------------------------------------------------------- Scott M. McFarlane, Avalara, Inc. - Co-Founder, Chairman & CEO [55] -------------------------------------------------------------------------------- I'd like to thank everyone for joining us today. We continue to focus on bolstering Avalara's leadership position, driving growth and achieving our vision to become the global cloud compliance platform for every transaction in the world. I just ask everybody to please stay safe and healthy, and we look forward to next quarter's call. Thanks, everybody. Really appreciate it. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. You may now disconnect.