Avalara Announces Fourth Quarter and Fiscal Year 2018 Financial Results

Fourth Quarter Total Revenue of $76.9 Million

Fiscal 2018 Total Revenue of $272.1 Million

Approximately 9,070 Core Customers as of December 31, 2018

SEATTLE–(BUSINESS WIRE)–Avalara, Inc. (NYSE: AVLR), a leading provider of tax compliance
automation for businesses of all sizes, today announced financial
results for its fourth quarter and year ended December 31, 2018.

“We achieved strong fourth quarter and fiscal 2018 results, measured by
revenue growth, an expanding customer base and broadening partner
channel,” said Scott McFarlane, Avalara co-founder and chief executive
officer. “Transaction tax compliance remains a highly manual process and
is in the early stages of automating, representing an estimated $8
billion addressable market for us. This year we expanded our tax
content, software platform, partner channel, and pre-built integrations,
which we believe position Avalara as a clear choice to lead this
automation cycle.”

“One of the numerous triggers that drives our customers to automate is
changes in tax policy, and over the course of 2018 we began to
increasingly benefit from tax policy changes in several states as they
respond to the Supreme Court’s Wayfair decision. These changes have
raised awareness and increased the number of states where small and
mid-sized businesses must remit sales taxes, which is driving a sense of
urgency among many businesses. Avalara is well positioned to capitalize
on these changes due to our industry leading offerings and strong
partner network.”

Fourth Quarter 2018 Financial Results

  • Revenue: Total revenue was $76.9 million, up 33% from $58.0
    million in the fourth quarter of 2017. Subscription and returns
    revenue was $71.7 million, up 33% from $54.1 million in the same
    period last year. Professional services revenue was $5.2 million, up
    33% from $3.9 million in the same period last year.
  • Gross Profit: GAAP gross profit was $54.7 million, representing
    a 71% gross margin, compared to a GAAP gross profit of $42.6 million
    and a 73% gross margin in the fourth quarter of 2017. Non-GAAP gross
    profit was $56.2 million, representing a 73% non-GAAP gross margin,
    compared to a non-GAAP gross profit of $43.8 million and a 76%
    non-GAAP gross margin in the fourth quarter of 2017.
  • Operating Loss: GAAP operating loss was $19.4 million, compared
    to a GAAP operating loss of $21.9 million in the fourth quarter of
    2017. Non-GAAP operating loss was $13.3 million, compared to a
    non-GAAP operating loss of $9.2 million in the fourth quarter of 2017.
  • Net Loss: GAAP net loss was $18.4 million, compared to a GAAP
    net loss of $22.4 million in the fourth quarter of 2017. Non-GAAP net
    loss was $12.3 million, compared to a non-GAAP net loss of $9.8
    million in the fourth quarter of 2017.
  • Net Loss per Share: GAAP net loss per share was $0.28 based on
    66.7 million weighted-average shares outstanding, compared to a GAAP
    net loss per share of $3.78 based on 5.9 million weighted-average
    shares outstanding in the fourth quarter of 2017. Non-GAAP net loss
    per share was $0.19 based on 66.7 million non-GAAP shares outstanding,
    compared to a non-GAAP net loss per share of $0.17 based on 56.8
    million non-GAAP shares outstanding in the fourth quarter of 2017.
  • Deferred Revenue: Total deferred revenue was $134.7 million at
    December 31, 2018, up from $118.2 million at September 30, 2018. The
    current portion of deferred revenue was $125.3 million at December 31,
    2018, up from $109.3 million at September 30, 2018.
  • Cash: Net cash provided by operating activities was $7.0
    million, compared to $2.0 million used in operating activities in the
    fourth quarter of 2017. Free cash flow was positive $4.5 million,
    compared to negative $5.6 million in the fourth quarter of 2017. Our
    cash and cash equivalents totaled $142.3 million at December 31, 2018.

Fiscal Year 2018 Financial Results

  • Revenue: Total revenue was $272.1 million, up 28% from $213.2
    million in fiscal 2017. Subscription and returns revenue was $254.1
    million, up 27% from $199.9 million in the prior year. Professional
    services revenue was $18.0 million, up 37% from $13.2 million in the
    prior year.
  • Gross Profit: GAAP gross profit was $193.4 million,
    representing a 71% gross margin, compared to a GAAP gross profit of
    $155.2 million and a 73% gross margin in fiscal 2017. Non-GAAP gross
    profit was $199.1 million, representing a 73% non-GAAP gross margin,
    compared to a non-GAAP gross profit of $159.9 million and a 75%
    non-GAAP gross margin in fiscal 2017.
  • Operating Loss: GAAP operating loss was $76.1 million, compared
    to a GAAP operating loss of $63.3 million in fiscal 2017. Non-GAAP
    operating loss was $45.0 million, compared to a non-GAAP operating
    loss of $37.4 million in fiscal 2017.
  • Net Loss: GAAP net loss was $75.6 million, compared to a GAAP
    net loss of $64.1 million in fiscal 2017. Non-GAAP net loss was $44.5
    million, compared to a non-GAAP net loss of $38.2 million in fiscal
    2017.
  • Net Loss per Share: GAAP net loss per share was $1.95 based on
    38.7 million weighted-average shares outstanding, compared to a GAAP
    net loss per share of $11.39 based on 5.6 million weighted-average
    shares outstanding in fiscal 2017. Non-GAAP net loss per share was
    $0.67 based on 66.2 million non-GAAP shares outstanding, compared to a
    non-GAAP net loss per share of $0.68 based on 56.5 million non-GAAP
    shares outstanding in fiscal 2017.
  • Cash: Net cash used in operating activities was $3.1 million,
    compared to $3.5 million used in operating activities in fiscal 2017.
    Free cash flow was negative $18.5 million, compared to negative $17.5
    million in fiscal 2017.

Reconciliations of GAAP to non-GAAP financial measures have been
provided in the tables included in this release.

Fourth Quarter and Fiscal Year 2018 Operating Highlights

  • Key Metrics: We ended the fourth quarter of 2018 with
    approximately 9,070 core customers, up from approximately 8,490 core
    customers at the end of the previous quarter and up from 7,490 at the
    end of the previous fiscal year. Net revenue retention rate was 108%
    in the fourth quarter of 2018 and has averaged 107% over the last four
    quarters.
  • Announced 41 Newly-Certified Integrations into Business
    Applications:
    We recently announced the release of 41
    newly-certified integrations with accounting, ERP, ecommerce,
    point-of-sale, mobile commerce, and CRM software applications.
    Certified integrations are built to ensure customers enjoy a fast,
    reliable, and easy process for embedding Avalara’s automated tax
    management into existing systems.
  • Addition to Board of Directors: We recently announced the
    appointment of global business leader and innovator Kathleen Zwickert
    to our board of directors. Zwickert was formerly Chief People Officer
    at NetSuite (now Oracle NetSuite), a provider of cloud-based
    applications, where she transformed the company’s Human Resources
    function through technological innovations. Prior to NetSuite,
    Zwickert was EVP of Human Resources and Communications for Oclaro, a
    leading provider of optical communications solutions. She has more
    than 25 years of experience working with leaders, boards, and global
    teams to help companies scale and architect change.
  • Acquisitions: In January 2019, we acquired the operating assets
    of Compli, Inc., a provider of compliance services and technology to
    producers, distributors, and importers of alcoholic beverages in the
    United States. In February 2019, we acquired intellectual property and
    other assets from Indix Corporation, an artificial intelligence
    company providing comprehensive product descriptions for more than 1
    billion products sold and shipped worldwide.

Financial Outlook

For the first quarter of 2019, the Company currently expects:

  • Total revenue between $78.0 and $79.0 million.
  • Non-GAAP operating loss between $10.0 and $11.0 million.

For the full year 2019, the Company currently expects:

  • Total revenue between $328.0 and $332.0 million.
  • Non-GAAP operating loss between $30.0 and $35.0 million.

Conference Call Information

Avalara will host a conference call at 2:00 p.m. Pacific Time (or 5:00
p.m. Eastern Time) today, February 12, 2019, to discuss its financial
results and business highlights. The conference call can be accessed by
dialing (866) 393-4306 from the United States and Canada or (734)
385-2616 internationally with conference ID 2077397. A live webcast of
the call will also be available on the Avalara investor relations
website at investor.avalara.com.

A telephone replay of the conference call will be available until 8:59
p.m. Pacific Time on Tuesday, February 19, 2019 and a webcast replay
will also be archived at investor.avalara.com. The telephone replay will
be available by dialing (855) 859-2056 from the United States and Canada
or (404) 537-3406 internationally with conference ID 2077397.

About Avalara, Inc.

Avalara helps businesses of all sizes get tax compliance right. In
partnership with leading ERP, accounting, ecommerce, and other financial
management system providers, Avalara delivers cloud-based compliance
solutions for various transaction taxes, including sales and use, VAT,
excise, communications, and other indirect tax types. Headquartered in
Seattle, Avalara has offices across the U.S. and around the world in the
U.K., Belgium, Brazil, and India. More information at avalara.com.

Forward-Looking Statements

This press release and the accompanying conference call contain
forward-looking statements including, among others, statements about our
financial outlook for the first quarter and full year 2019. In some
cases you can identify forward-looking statements because they contain
words such as “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,”
“predict,” “project,” “seek,” “should,” “target,” “’will,” “would,” or
similar expressions and the negatives of those terms.

These forward-looking statements involve risks, uncertainties, and
assumptions that could cause actual performance or results to differ
materially from those expressed or suggested by the forward-looking
statements. If any of these risks or uncertainties materialize, or if
any of our assumptions prove incorrect, our actual results could differ
materially from the results expressed or implied by these
forward-looking statements. These risks and uncertainties include risks
associated with: our ability to sustain our revenue growth rate, to
achieve or maintain profitability, and to effectively manage our
anticipated growth; our ability to attract new customers on a
cost-effective basis and the extent to which existing customers renew
and upgrade their subscriptions; the timing of our introduction of new
solutions or updates to existing solutions; our ability to successfully
diversify our solutions by developing or introducing new solutions or
acquiring and integrating additional businesses, products, services, or
content; our ability to maintain and expand our strategic relationships
with third parties; our ability to deliver our solutions to customers
without disruption or delay; our exposure to liability from errors,
delays, fraud, or system failures, which may not be covered by
insurance; our ability to expand our international reach; and the risks
described in the other filings we make with the Securities and Exchange
Commission from time to time, including the risks described under the
heading “Risk Factors” in our quarterly report on Form 10-Q, which was
filed with the Securities and Exchange Commission on November 8, 2018,
and which should be read in conjunction with our financial results and
forward-looking statements. All forward-looking statements in this press
release are based on information available to us as of the date hereof,
and we do not assume any obligation to update the forward-looking
statements provided to reflect events that occur or circumstances that
exist after the date on which they were made, except as required by law.

Use of Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we have
disclosed non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP
gross margin, non-GAAP research and development expense, non-GAAP sales
and marketing expense, non-GAAP general and administrative expense,
non-GAAP operating loss, non-GAAP net loss, non-GAAP net loss per share,
non-GAAP shares outstanding, and free cash flow, which are all non-GAAP
financial measures. We have provided tabular reconciliations of each
non-GAAP financial measure to its most directly comparable GAAP
financial measure at the end of this release.

  • We calculate non-GAAP cost of revenue, non-GAAP research and
    development expense, non-GAAP sales and marketing expense, and
    non-GAAP general and administrative expense as GAAP cost of revenue,
    GAAP research and development expense, GAAP sales and marketing
    expense, and GAAP general and administrative expense before the
    stock-based compensation expense and the amortization of acquired
    intangible assets included in each of the expense categories.
  • We calculate non-GAAP gross profit as GAAP gross profit before the
    stock-based compensation expense and amortization of acquired
    intangibles that is included in cost of revenue. We calculate non-GAAP
    gross margin as GAAP gross margin before the impact of stock-based
    compensation expense included in cost of revenue as a percentage of
    revenue and amortization of acquired intangibles included in cost of
    revenue as a percentage of revenue.
  • We calculate non-GAAP operating loss as GAAP operating loss before
    stock-based compensation expense, amortization of acquired
    intangibles, and goodwill impairments. We calculate non-GAAP net loss
    as GAAP net loss before stock-based compensation expense, amortization
    of acquired intangibles, and goodwill impairments.
  • We calculate non-GAAP shares outstanding as GAAP weighted-average
    shares outstanding during the period adjusted as if (1) the conversion
    of preferred stock into common stock had occurred at the beginning of
    each respective period presented and (2) the issuance of 8,625,000
    shares of common stock in our IPO had occurred as of January 1, 2018.
  • We calculate non-GAAP net loss per share as non-GAAP net loss divided
    by non-GAAP shares outstanding.
  • We define free cash flow as net cash (used in) provided by operating
    activities less cash used for the purchases of property and equipment.

Management uses these non-GAAP financial measures to understand and
compare operating results across accounting periods, for internal
budgeting and forecasting purposes, and to evaluate financial
performance and liquidity. We believe that non-GAAP financial measures
provide useful information to investors and others in understanding and
evaluating our results, prospects, and liquidity period-over-period
without the impact of certain items that do not directly correlate to
our performance and that may vary significantly from period to period
for reasons unrelated to our operating performance, as well as comparing
our financial results to those of other companies. We believe that
non-GAAP per share measures provide investors and other users of our
financial information consistency with our past financial performance.

The company has not reconciled its expectations of non-GAAP financial
measures to the corresponding GAAP measures primarily because
stock-based compensation expense cannot be reasonably calculated or
predicted at this time. Accordingly, a reconciliation is not available
without unreasonable effort.

Our definitions of these non-GAAP financial measures may differ from the
definitions used by other companies and therefore comparability may be
limited. In addition, other companies may not publish these or similar
metrics. Thus, our non-GAAP financial measures should be considered in
addition to, not as a substitute for, or in isolation from, measures
prepared in accordance with GAAP. We encourage investors and others to
review our financial information in its entirety, not to rely on any
single financial measure and to view non-GAAP financial measures in
conjunction with the related GAAP financial measure.

Definitions of Key Business Metrics

Core Customers

We also use key business metrics, such as core customers and net revenue
retention rate. We believe core customers is a key indicator of our
market penetration, growth, and potential future revenue. We use core
customers as a metric to focus our customer count reporting on our
primary target market segment. We define a core customer as:

  • a unique account identifier in our billing system (multiple companies
    or divisions within a single consolidated enterprise that each have a
    separate unique account identifier are each treated as separate
    customers);
  • that is active as of the measurement date; and
  • for which we have recognized, as of the measurement date, greater than
    $3,000 in total revenue during the last twelve months.

Currently, our core customer count includes only customers with unique
account identifiers in our primary U.S. billing systems and does not
include customers who subscribe to our solutions through our
international subsidiaries or certain legacy billing systems primarily
related to past acquisitions. As we increase our international
operations and sales in future periods, we may add customers billed from
our international subsidiaries to the core customer metric.

We also have a substantial number of customers of various sizes who do
not meet the revenue threshold to be considered a core customer. These
customers provide us with market share and awareness, and we anticipate
that some may grow into core customers. We believe there is strategic
value to addressing the small business and self-serve segment of the
marketplace.

Net Revenue Retention Rate

We believe that our net revenue retention rate provides insight into our
ability to retain and grow revenue from our customers, as well as their
potential long-term value to us. We also believe it reflects the
stability of our revenue base, which is one of our core competitive
strengths. We calculate our net revenue retention rate by dividing (a)
total revenue in the current quarter from any billing accounts that
generated revenue during the corresponding quarter of the prior year by
(b) total revenue in such corresponding quarter from those same billing
accounts. This calculation includes changes during the period for such
billing accounts, such as additional solutions purchased, changes in
pricing and transaction volume, and terminations, but does not reflect
revenue for new billing accounts added during the one-year period.

Currently, our net revenue retention rate includes only customers with
unique account identifiers in our primary U.S. billing systems and does
not include customers who subscribe to our solutions through our
international subsidiaries or certain legacy billing systems primarily
related to past acquisitions.

Reported Consolidated Results

AVALARA, INC.

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
For the Three Months Ended December 31,
2018   2017
Revenue:
Subscription and returns $ 71,730 $ 54,117
Professional services   5,193   3,918
Total revenue   76,923   58,035
Cost of revenue:
Subscription and returns 18,572 13,166
Professional services   3,700   2,222
Total cost of revenue (1)   22,272   15,388
Gross profit   54,651   42,647
Operating expenses:
Research and development (1) 13,577 10,890
Sales and marketing (1) 49,630 37,152
General and administrative (1) 10,816 8,097
Restructuring charges (41 )
Goodwill impairment     8,418
Total operating expenses   74,023   64,516
Operating loss   (19,372 )   (21,869 )
Other (income) expense:
Interest income (742 ) (29 )
Interest expense 113 768
Other (income) expense, net   (160 )   563
Total other (income) expense, net   (789 )   1,302
Loss before income taxes (18,583 ) (23,171 )
Provision for (benefit from) income taxes   (151 )   (757 )
Net loss $ (18,432 ) $ (22,414 )
 
Net loss per share attributable to common shareholders, basic and
diluted
$ (0.28 ) $ (3.78 )
Weighted average shares of common stock outstanding, basic and
diluted
66,654 5,934
 
For the Three Months Ended December 31,
(1) The stock-based compensation expense included above was as
follows:
2018 2017
Cost of revenue $ 484 $ 236
Research and development 908 591
Sales and marketing 1,818 1,034
General and administrative   1,300   900
Total stock-based compensation $ 4,510 $ 2,761
 
The amortization of acquired intangibles included above was as
follows:
 
Cost of revenue $ 1,114 $ 952
Research and development
Sales and marketing 468 496
General and administrative     9
Total amortization of acquired intangibles $ 1,582 $ 1,457

AVALARA, INC.

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
For the Year Ended December 31,
2018   2017
Revenue:
Subscription and returns (1) $ 254,056 $ 199,942
Professional services   18,042   13,217
Total revenue   272,098   213,159
Cost of revenue:
Subscription and returns 66,556 48,849
Professional services   12,093   9,128
Total cost of revenue (2)   78,649   57,977
Gross profit 193,449 155,182
Operating expenses:
Research and development (2) 51,909 41,264
Sales and marketing (2) 168,817 133,794
General and administrative (2) 39,603 34,286
Restructuring charges 752
Goodwill impairment   9,174   8,418
Total operating expenses   269,503   218,514
Operating loss (76,054 ) (63,332 )
Other (income) expense:
Interest income (1,553 ) (77 )
Interest expense 2,608 2,585
Other (income) expense, net   (583 )   (495 )
Total other (income) expense, net   472   2,013
Loss before income taxes (76,526 ) (65,345 )
Provision for (benefit from) income taxes   (976 )   (1,219 )
Net loss $ (75,550 ) $ (64,126 )
 
Net loss per share attributable to common shareholders, basic and
diluted
$ (1.95 ) $ (11.39 )
Weighted average shares of common stock outstanding, basic and
diluted
38,692 5,632
 

(1) Interest income on funds held for customers of $1.055 million
was reclassified from Interest
income within Total other
(income) expense, net to Subscription and returns revenue in the
fourth quarter
of 2018. This reclass was done
retrospectively, and impacted the reported second and third
quarter 2018
consolidated statements of operations. See the
Unaudited Reclassified Consolidated Statements of
Operations
at the end of this press release.

For the Year Ended December 31,
(2) The stock-based compensation expense included above was as
follows:
2018 2017
Cost of revenue $ 1,665 $ 976
Research and development 3,179 2,391
Sales and marketing 5,492 3,789
General and administrative   5,585   4,601
Total stock-based compensation $ 15,921 $ 11,757
 
The amortization of acquired intangibles included above was as
follows:
 
Cost of revenue $ 4,020 $ 3,717
Research and development
Sales and marketing 1,951 1,913
General and administrative   17   102
Total amortization of acquired intangibles $ 5,988 $ 5,732

AVALARA, INC.

   

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
December 31, December 31,
2018 2017
Assets
Current assets:
Cash and cash equivalents $ 142,322 $ 14,075
Trade accounts receivable—net of allowance for doubtful accounts 40,287 26,596
Prepaid expenses and other current assets   11,307   7,016
Total current assets before customer fund assets 193,916 47,687
Funds held and receivable from customers—net of allowance for
doubtful accounts
  13,383   13,395
Total current assets 207,299 61,082
Noncurrent assets:
Property and equipment—net 33,373 25,394
Goodwill 61,300 72,482
Intangible assets—net 19,371 19,074
Other noncurrent assets   1,589   780
Total assets $ 322,932 $ 178,812
 
Liabilities and shareholders’ equity (deficit)
Current liabilities:
Accrued expenses and trade payables 47,064 38,164
Deferred revenue 125,260 83,778
Credit facility and notes payable     859
Total current liabilities before customer funds obligations   172,324   122,801
Customer funds obligations   13,349   14,061
Total current liabilities 185,673 136,862
Noncurrent liabilities:
Deferred revenue 9,393 8,453
Deferred tax liability 560 1,854
Credit facility 38,840
Deferred rent 17,317 14,689
Other noncurrent liabilities   436   785
Total liabilities   213,379   201,483
Convertible preferred stock     370,921
Shareholders’ equity (deficit):
Common stock 7 1
Additional paid-in capital 599,493 18,121
Accumulated other comprehensive income (loss) (2,345 ) 338
Accumulated deficit   (487,602 )   (412,052 )
Total shareholders’ equity (deficit)   109,553   (393,592 )
Total liabilities and shareholders’ equity (deficit) $ 322,932 $ 178,812

Contacts

Investors
Kevin Faulkner
ICR, LLC
investor@avalara.com
206-641-2425

Media
Jesse Hamlin
Avalara
media@avalara.com
518-281-0631

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