Fiducia here, a company I wish I would have invested in a while ago finally became a bit more reasonably priced (for my timeframe) and I added a few hundred shares in my taxable portfolio. I have no cash in the LT growth fund so I figured if I wanted to compliment my BlackLine holding, I can do it through buying in my taxable portfolio. My last few days were spent sifting the 10-K and reading a ton of articles on the name. Better late than never right?
What is Avalara?
Avalara provides tax compliance automation for businesses of all sizes, which is quite similar to what BlackLine does (except BlackLine automates and controls the entire financial close process), now you can see why I want to own the two and compliment each other. I am sure many have read and understand Avalara deeper than I, this post is mostly for my own good and I hope someone extrapolates something out of it whether they know and own the name, or not. It may seem like I am rambling at times, which is most likely the case.
This company literally applies to all businesses, everyone pays taxes (you know what I mean).
Taxes are a burden for businesses, there are local, regional, state, and national taxing authorities and even doing my own taxes is an absolute pain in the ass and I could not imagine doing it at the corporate level. In comes Avalara, eliminate this time consuming part of the day and automate it so the business can focus on their core competencies (aka, their business). The company (Avalara) wants to be the global cloud compliance platform, cool. They have tailwinds in their favor like all of the cloud businesses do, but what I was always interested in was the fact it all revolves around taxes and is one of few businesses that do it. There is a shift in technology and compliance automation, just like there is an architectural shift in the network layer as Matthew Prince says, and Prince highlights "compliance" in his blog posts. These shifts are happening everywhere I am noticing, you have BlackLine for the financial close automated, you have Cloudflare for web infrastructure and security, you have Anaplan for connected planning and "spreadsheet killing" for enterprises with continuous forecasting and analytics so everyone can stay connected. The toughest part, what price are you willing to pay to own these names? I guess from my standpoint, being 25, I have nothing but time on my side. Time will tell and in reality, I dont really need any of this money until I am at least 45-50. Understand your own situation and being able to gut valuation and price volatility. I dont expect someone who is 55 to look at this business and say "yeah this is a great holding for me".
Governments are dynamic (just like markets), and regulatory changes are happening all the time. Basically, to sum up the business because anyone can read a 10-K, is their cloud compliance system has up to date licensing, registration and tax content. Ease of use is a common theme I am seeing between BL / AVLR / NET...
I like their target market, small companies to Fortune 100 enterprises. Mid-market / smaller customers have been their sweet sauce though with 20 - 500 employees, I like these kind of investments (SharpSpring for marketing automation for small businesses). The ability to have a product for all size enterprises hits the sweet spot for me.
Some competitive moats as noted in the filing:
Partner Moat: Having a strong partner ecosystem (Like BlackLine) can be a risk and a blessing, Avalara has pre-built integrations with Magento, QuickBooks, Microsoft, NetSuite, Sage, 3dcart, Salesforce commerce, Epicor. Some big names in here, also have relationships with ecomm platforms (BigCommerce, Shopify)
Content Moat: Have tax research analysts and use "AI" (lol buzzword) to update their content library. Local, regional, state, and national tax return forms + more.
Platform and Tech Moat: Nothing I was too surprised by reading. Single point of management for numerous compliance solutions, but I suspect thats a given.
Sifting through the 10-K still, I wonder why the Net Revenue Retention Rate has fallen off quite a bit since Sept 30, 2019. I guess I will have to read more earnings calls (I started with the 10-k). I am sure this will rise again with their most recent acquisitions.
No Unresolved Staff Comments, that is good.
There is a lawsuit going on, from PTP OneClick on a patent infringement. Obviously does not seem material.
Pretty amazing that total revenue in 2020 and 2019 generated outside the U.S was only 6% of total revenue. Aggressive investments = incoming!
93% of revenue for 2020, 2019, 2018 come from subscriptions.
Below you can see the snippet of their as a %:
The ability to cut back on S&M since 2019 that much and maintain their top-line growth is impressive, R&D is increasing too. Revenue is primarily increasing because of demand for their services from new + existing customers. The R&D is primarily due to higher headcount, salaries/benefits/comp bonus plans... S&M same stuff.
The EBIT margins have been improving very steadily over the years, this is nice to see.. (would like to see some analyst notes on the name)
Avalara from what I am gathering thus far, is becoming a backbone of e-commerce. Tax compliance for e-commerce companies are complex when selling online (global presence indeed). Integration seems like their sweet sauce too. The company is firing on all cylinders and scaling nicely through their partner ecosystem, tech platform, and the growth of e-commerce and omnichannel is very sticky. (BlackLine notes the same exact stuff).
Regulatory changes are huge tailwinds for Avalara, the more changes in taxes, the harder they work to integrate and automate those changes for customers. Talk about taking a complex boring nuanced topic (taxes) and making it fun and automated, I would call that moat-ish?
One thing I am noticing is the repetitiveness of "partner moat" when reading articles on them, businesses like this one and BlackLine emphasize that heavily. In the latest Q, management notes they added 10 new certified integrations with more accounting, ERP, eComm, PoS, mobile commerce and CRM software. Building off this they have 22 new marketplace customers using Avalara tax tech. Certified integrations +22 as well, Oracle, BRM, Rapid POS which is powered by NCR Counterpoint and Sage BusinessWorks.
I mean, this really is not even a "COVID beneficiary" IMO. Just like BlackLine, it seems COVID hurt demand as CFO's closed up the wallets, but now that mid market CFOs are getting better insights into macro, spending and wallets have opened (which is another reason I own Anaplan, hurt by COVID to an extent).
In the last Q call, management notes strong bounce back in the environment which is running parallel with the other calls I listen / read, notably BlackLine and Cloudflare. Strength in international + large product deals AND multi-product deals.
Avalara's Rule of 40 is relatively nice, seems to be bouncing around a god amount quarter to quarter which is fine for now. Data from FinBox.
For those of you who do not know what the Rule of 40 is, it is a SaaS metric. SaaS companies in general are valued fairly different from a cash flow generating machine where you would use a Discounted Cash Flow model, since SaaS (most) do not have cash flow yet, you cannot really discount anything. You dont want to put a discount rate on negative cash flows (lol).
The Rule of 40 states that the growth rate and profit margin should add up to 40% or more. Revenue Growth + EBTIDA Margin. As Avalara improves their EBITDA margin, their Rule of 40 will improve as well. A few paragraphs above you can see they are doing exactly that.
The company is growing faster than BlackLine, at a larger market cap. I like both businesses and I am glad I own both now as I think they compliment a portfolio very well. Automating these pesky areas for businesses is relatively important to save time and the company can focus on whats relevant.
Acquiring DAVO will accelerate their capabilities, integrations, to win the low end of the market. Now they can serve the brick and mortar, and omnichannel. Management straight up says "We believe we are building the only tax compliance company that can service any type of customers' omnichannel requirements. Management at Avalara also notes that DAVO has a solution for real-time remittances. Again, there are parallels between AVLR and BL, where BlackLine is real-time account recons improve the efficiency of the financial close, daily recons, journal entry, variance analysis, all real-time. They only paid $26.2m for this company according to their 10-Q, relative to their cash this is nothing.
They also added 710 new new adds last Q customer wise, +23% YoY, that is a lot relative to some other names which tells me tax compliance is in demand.
Sifting through the Transaction Tax Resources. INC (TTR) acquisition presentation here.
They provide sales and use tax content / software to serve the enterprise. Fits right into Avalara core competencies. What will this acquisition accomplish, and what do we have to monitor over the years as a shareholder now?
Expand U.S. sales tax content, increase their addressable market
Enhance enterprise product / sales portfolio
Industry leading exemption certificate management product family (sauce)
Potential cross-sell revenue synergies, like any good ole SaaS company.
The company has some very solid Sales Tax Content with >30% of the Fortune 500 already.
Below you will see a slide on the "WHY" for TTR and Avalara's content:
Overall seems like a strong name, ran by the co-founder Scott McFarlane. I will continue to monitor the business. Software names for me are just disgustingly long-term holds unless I find something more compelling or interesting.
I have my LT growth portfolio (my Roth IRA, so cannot touch that cash), and my active taxable account where I trade to live and own other names. I would really like to put AVLR in my Growth Fund, maybe Iteris, Inc gets bought out and that would free up some cash.
Industry leader, customer value, growing market, what is not working in their favor?