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(AVLR) First Focus STOCK | 8/20/20 FIRST FOCUS AVALARA INC. (Ticker: AVLR) LBIR Recommendation Stock Price: $122.79 (8/20/20) Company Size: 10.46B Author: Janice Quek Industry: Financial and Company Rank: 881 Sector: Technology Compliance ERP Software Avalara provides a platform of tax-compliance solutions. IN THIS FIRST FOCUS WE’LL COVER: Summary of the Business Avalara’s tax compliance software automates tax administration processes, saving users Grab-and-Go time and money. THESIS Recent Developments The pandemic has increased demand for its solutions as companies accelerate cloud An investment in Avalara is a play migration and retailers pivot online. on demand for tax compliance Competitive Environment software. The company is a provider Avalara is well-positioned in the mid- of tax management solutions for market segment to capture the vast number companies in the U.S. and abroad. of greenfield opportunities. Avalara is well-positioned to grow in this market if it continues to Conclusions/Recommendations broaden its offerings and deepen its Avalara has a strong value proposition, a sales relationships with its partners. good competitive moat and a large market to expand into. We think the company has high growth potential and rate it a Green Light. SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 1 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: AVLR | 8/20/20 FIRST FOCUS Data as of 8/20/20 unless specified Revenue Fwd $468M Enterprise Value: 10.46B Market Cap: 10.94B (TTM): ($434.1M) ) Fwd (TTM) 21.9x YTD Return: 67.1% RSI: 41.1 Price/Sales: (21.7x) Gross Margin Revenue Growth 69.4% 22.3% ROIC (TTM): -11.1% (TTM): (Fwd, YoY): 52-Week High: 144.20 52-Week Low 55.5 200-day Moving 93.78 Avg. EBITDA -35.9M CFO 6.7M FCF -2.1M Insider Transactions (2020): Insiders sold 336,661 shares in recent months changes. Other accounting and enterprise SUMMARY OF BUSINESS resource planning (ERP) tools have limited Avalara is a leading provider of cloud-based tax features. Tax administration has become a costly compliance solutions to automate tax processing endeavor, taking resources away from core and administration. The company’s motto is “Tax operations, and offering little benefit. As Compliance done right”. Its software is sold on a companies look to reduce costs, modern cloud- subscription basis, and more than 90% of its based tax software is transforming workloads by revenue is from subscription fees. automating several processes and delivering the cost-efficiency and convenience of operating in the cloud. Research firm Markets and Markets Increasing complexities of tax administration estimates that the global tax management market and digitization draw companies to cloud-based is valued at $15.5 billion today. software. Managing and processing taxes is a time- consuming and tedious process for most Broad product suite and extensive partner businesses. Tax laws and requirements differ network widens competitive moat for Avalara locally, regionally, across states and countries, Avalara’s mission is to provide a suite of making it challenging for businesses operating in advanced solutions to ease companies’ tax many jurisdictions to comply. Frequent rule management workloads. Its platform of products changes and temporary tax incentives add automates several key processes such as complexity to the process, increasing risk of determining taxability, identifying relevant tax errors and financial penalties. E-commerce and rates, collect taxes, preparing and filing returns, increased global selling have further intensified remitting taxes, recording tax transactions and these challenges. Yet, even as the complexities managing compliance documents. The Avalara grow, companies are still handling their tax Compliance Cloud delivers these capabilities, compliance processes manually, using and integrates seamlessly with more than 700 spreadsheets to organize and calculate tax business applications – more than any other liabilities, and hiring more staff to track tax SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 2 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: AVLR | 8/20/20 FIRST FOCUS competitor in the space, making it easy to deploy context of the pandemic which has accelerated and use. Acquisitions over time (21 acquisitions) secular trends in e-commerce and cloud have also broadened content of the cloud, migration. Avalara’s e-commerce, technology allowing Avalara to expand its services into new consulting firms and ERP partners have been verticals and internationally. For example, the instrumental in selling its software and company now offers solutions for fuel excise tax, expanding its customer base rapidly. Its solutions lodging tax, communications tax, European have especially gained traction with e-commerce value-added-tax (“VAT”), Brazilian tax, and merchants who frequently transact and sell assets to facilitate cross-border transactions on its across borders. These partners (e.g. Shopify, platform. Overall, the software delivers a BigCommerce, NetSuite) have acted as strategic compelling value proposition for companies, aggregators of potential clients for Avalara’s top- increasing efficiency and accuracy, while of-funnel sales motion, giving it access to a lowering total cost of ownership by reducing healthy supply of business opportunities to land maintenance costs, employee numbers and and expand with. Other partners have avoiding expensive errors. Avalara has often opportunistically introduced Avalara as their highlighted that the platform is a high Return On clients move to the cloud. These partnerships also Investment (ROI) to its customers, which is a act as barriers to entry, giving Avalara a strong selling point. competitive advantage. Management hopes to deepen these partnerships going forward by finding ways to make it easier for its partners to Another important aspect of the business is use and implement Avalara for their clients. Avalara’s partner network, particularly in the Source: Investor Presentation SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 3 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: AVLR | 8/20/20 FIRST FOCUS Financial and Operational Metrics administration processes and lower overall costs of tax compliance. Its broad product suite, The success of its partnerships, its industry- extensive partner network with key ERP firms, e- leading suite of solutions, and strong sales commerce publishers and technology integrators, execution has driven a solid pace of growth for and position as a certified sales tax provider are Avalara. Over the last four years, the company’s competitive strengths and barriers to entry. revenue grew at a 4-year CAGR of 32.8%, and has a large underserved market of opportunity to grow even further though vertical expansion, RECENT DEVELOPMENTS adding more tax types and content, extending geographical reach and broadening its partner network. It has more than 65,000 end customers Avalara reported good results at its recent Q2 and 13,300 core customers that make up more earnings call, benefitting from the impact of than 80% of its total revenue. Avalara’s software Covid-19 as the pandemic amplified the drivers is applicable to the small business owners, most of its business and accelerated demand for its of which belong to its self-serve segment, and solutions. Shelter-in-place measures pushed highly relevant to large enterprises. Customers companies to increase their pace of cloud-based are also expanding their accounts with Avalara, software adoption for remote work, and the wave and the company has reported net revenue of retailers shifting to e-commerce operations, as retention rates averaging 110% over the last four well as the implementation of cost-cutting quarters. Avalara is not yet profitable, but measures and employee furloughs/layoffs margins are gradually improving. The company generated strong interest in Avalara’s tax achieved its first full year of positive free cash solutions. Management also attributed the flow in FY19, and is projected to achieve positive performance to pent-up demand in March and non-GAAP net income in FY22. Avalara has no April when companies were focused on getting long term debt. their workforce transitioned to remote work. Total Addressable Market (TAM) Financial and Operating Results Research firm Markets and Markets, estimates that the global tax management market is poised Avalara announced total revenue of $116.5 to grow from $15.5 billion in 2019 to $27 billion by million in Q2 FY20, up 28% from Q2 2019, driven 2024, at a CAGR of 11.7%, driven by factors such by subscription growth. The company saw as rising volumes and complexity of financial strength particularly in its streamlined sales tax transactions, digitization, and increased vigilance (SST) program which grew by more than 100% of tax administrators. YoY (see Competitive Environment for more information on SST). It added 590 new core customers during the quarter, a 28% increase Special/Unique Characteristics of from the same quarter in FY19. Churn numbers the Company were immaterial, according to management, and in fact down YoY as a percentage of its renewal Avalara offers companies a strong value base. Avalara reported improved non-GAAP proposition to automate their labor-intensive tax gross margin, which reached 74% in Q2 20, up SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 4 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: AVLR | 8/20/20 FIRST FOCUS midpoint of the range. Hiring and expenses are planned to return to a more normal tempo, LB•LOGIC We see the potential for hence Q3 will likely see non-GAAP operating Avalara’s business to accelerate in FY21 as the IT spending environment losses in the range of $7 to $9 million. For the full improves and companies push to digitize year, management raised revenue guidance by more of their workloads, and retailers about $5-$10 million to the range $465 to $470 invest in their e-commerce operations in million, or growth of about 22.4% from FY19, the wake of the pandemic. and non-GAAP operating loss to a range of $18 to $22 million, or a margin of -4.2%.
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