Tax compliance software maker Avalara (NYSE:AVLR) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 33.1% year on year to $204.5 million. Guidance for next quarter's revenue was $209 million at the midpoint, which is 1.64% above the analyst consensus. Avalara made a GAAP loss of $32.5 million, down on its loss of $29.9 million, in the same quarter last year.
Avalara (AVLR) Q1 FY2022 Highlights:
- Revenue: $204.5 million vs analyst estimates of $198 million (3.26% beat)
- EPS (non-GAAP): $0.08 vs analyst estimates of -$0.12 ($0.20 beat)
- Revenue guidance for Q2 2022 is $209 million at the midpoint, above analyst estimates of $205.6 million
- The company lifted revenue guidance for the full year, from $856.5 million to $869 million at the midpoint, a 1.45% increase
- Free cash flow was negative $31.1 million, down from positive free cash flow of $18 million in previous quarter
- Net Revenue Retention Rate: 115%, in line with previous quarter
- Customers: 19,160, up from 18,270 in previous quarter
- Gross Margin (GAAP): 70.6%, in line with same quarter last year
Founded by Scott McFarlane in 2004, Avalara (NYSE:AVLR) offers software as a service that provides companies with real-time information on how much tax to charge and automates tax compliance.
Transactional taxes are complex, with thousands of rules set by local, regional, state, federal and international authorities. For example, in New York sliced bagel is taxed, but if you just take a plain bagel to go - no tax. Navigating these rules and staying up to date is challenging for any company, but especially for small and mid-sized businesses that have limited resources and have been typically keeping track of tax rates for their products manually in spreadsheets.
Avalara works through integration with a wide variety of point-of-sales systems (cash registers) and online billing platforms like Shopify or Stripe. Every time a customer is about to be charged, either in the real world or online, a request is sent to Avalara to determine the tax. The company maintains a huge database of millions of products and their appropriate tax rates in different geographies worldwide, and within a few milliseconds returns back the correct tax amount to be charged. It then passes the information into the merchant's tax software and even helps with filing the tax.
The company was started with a focus on small and medium size businesses that have until recently been lacking the tools to deal with transaction tax compliance. Most of them are in the United States, but the company also supports transaction tax compliance in Europe, South America, and Asia.
The demand for easy to use, integrated cloud based finance software that integrates tax and accounting operations continues to rise in tandem with the difficulty workers find trying to use existing accounting tools like spreadsheets given the growing volume of finance data littered across a multitude of enterprise applications. A related demand driver is the secular increase of e-commerce and rising adoption of modern point of sales and payments platforms which easily integrate with backend financial software.
Avalara is mainly replacing work their customers either used to do manually themselves or with outside help, but there are other software companies operating in this space like Vertex (NASDAQ:VERX), TaxJar, and Thomson Reuters.
As you can see below, Avalara's revenue growth has been very strong over the last year, growing from quarterly revenue of $153.6 million, to $204.5 million.
And unsurprisingly, this was another great quarter for Avalara with revenue up 33.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $9.38 million in Q1, compared to $13.9 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Avalara is expecting revenue to grow 23.6% year on year to $209 million, slowing down from the 45.1% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 20% over the next twelve months.
You can see below that Avalara reported 19,160 customers at the end of the quarter, an increase of 890 on last quarter. That's in line with the customer growth we have seen over the last couple of quarters, suggesting that the company can maintain its current sales momentum.
One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.
Avalara's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 115% in Q1. That means even if they didn't win any new customers, Avalara would have grown its revenue 15% year on year. Trending up over the last year, this is a good retention rate and a proof that Avalara's customers are satisfied with their software and are getting more value from it over time. That is good to see.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Avalara's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 70.6% in Q1.
That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.
Cash Is King
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Avalara burned through $31.1 million in Q1, reducing the cash burn by 2.52% year on year.
Avalara has generated $13.5 million in free cash flow over the last twelve months, 1.8% of revenues. This FCF margin is a result of Avalara asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.
Key Takeaways from Avalara's Q1 Results
With a market capitalization of $7.06 billion Avalara is among smaller companies, but its more than $1.48 billion in cash and positive free cash flow over the last twelve months give us confidence that Avalara has the resources it needs to pursue a high growth business strategy.
It was good to see Avalara deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 7.15% on the results and currently trades at $75 per share.
Is Now The Time?
When considering Avalara, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Avalara is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its customers are increasing their spending quite quickly, suggesting that they love the product, unfortunately its gross margins aren't as good as other tech businesses we look at.
Avalara's price to sales ratio based on the next twelve months is 6.8x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Avalara doesn't trade at a completely unreasonable price point.
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