AVALARA, INC.
You should read the following discussion and analysis of our financial condition
and results of operations together with the consolidated financial statements
and related notes that are included elsewhere in this Quarterly Report on Form
10-Q and our 2020 Annual Report. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under "Risk Factors," in Part II, Item 1A of this Quarterly Report on Form
10-Q and our 2020 Annual Report. See "Special Note Regarding Forward-Looking
Statements" above.
Overview
We are a leading provider of tax compliance automation for businesses of all
sizes. The Avalara Compliance Cloud includes calculation, returns, compliance
document management, licensing and registration, fiscal representation, and tax
content and insight solutions. We sell our solutions primarily on a subscription
basis through our sales force, which focuses on selling to qualified leads
provided by our marketing efforts and by partner referrals.
We focus on maintaining and expanding our partner network, which has been and
will continue to be an essential part of our growth. We continue to increase the
available number of partner integrations, which are designed to link the Avalara
Compliance Cloud to a wide variety of business applications, including
accounting, ERP, ecommerce, marketplace, POS, recurring billing, and CRM
systems. Through marketing activities, we generate awareness from many
businesses, both large and small, and enhance communications with our existing
customers.
We make substantial investments by increasing headcount, investing in better
software tools and technologies, and making strategic acquisitions to
continuously improve the Avalara Compliance Cloud. With these investments, we
will continue scaling our platform for continued growth, adding new features and
functionality, supporting new products and content types, and improving the user
experience. Through acquisitions in 2020, we added tax content research and
automation tools in the U.S. , business license and registration compliance
capabilities for companies of all sizes, and expanded product and content to
offer insurance premium tax compliance solutions. We expect to continue to make
significant investments, both organically and through acquisitions, to gain new
and relevant content, technology, and expertise that best serve the transaction
tax needs of our customers.
Our business is impacted by the COVID-19 pandemic, which has resulted in
authorities implementing numerous preventative measures to contain or mitigate
the extent of the impact, including travel bans and restrictions, limitations on
business activity, quarantines, and shelter-in-place orders. These measures have
caused, and may continue to cause, business slowdowns or shutdowns in affected
areas. Almost all our employees currently work offsite and we expect these
arrangements to continue for most of our workforce for a significant portion of
2021. As the COVID-19 pandemic continues to evolve, the extent and timing of the
broader impact of the pandemic on our results of operations, overall financial
performance and operating cash flows remains uncertain, including the impact on
our future revenue growth, the timing of the resumption of normal operating
expenses, and the extent to which any incremental expenses associated with the
preventative and precautionary measures will be necessary.
Key Business Metrics
We regularly review several metrics to evaluate growth trends, measure our
performance, formulate financial projections, and make strategic decisions. We
discuss revenue and the components of operating results under the section of
this report titled, "Key Components of Consolidated Statements of Operations,"
and we discuss other key business metrics below.
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30,
2021 2020 2020 2020 2020 2019 2019 2019
Number of core
customers (as
of end of
period) 15,580 14,890 14,180 13,560 12,940 12,150 11,400 10,560
Net revenue
retention rate 107% 104% 108% 107% 109% 111% 113% 111%
30
--------------------------------------------------------------------------------
Number of Core Customers We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. The small and mid-market customer segments have been and remain our primary target market segments for marketing and selling our solutions. We use core customers as a metric to focus our customer count reporting on our primary target market segment. As ofMarch 31, 2021 andDecember 31, 2020 , we had approximately 15,580 and 14,890 core customers, respectively.
We define a core customer as:
• a unique account identifier in our primary
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
Currently, our core customer count includes only customers with unique account identifiers in our primaryU.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries and certain legacy and acquired billing systems that have not yet been integrated into our primaryU.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). 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 that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have larger customers that are early in their adoption or only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers. In addition to customers with whom we have a direct relationship, some of our customers are business application publishers (including ecommerce platforms) that include automated tax determination powered byAvalara . While those platform providers may be core customers toAvalara , their end-user customers generally are not. 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 primaryU.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy billing systems that have not been integrated into our primaryU.S. billing systems. Our SST solution is not included in net revenue retention rate. This means that revenue expansion from existing customers adopting our SST solution is not included, while revenue contraction from customers replacing one or more ofAvalara's other solutions with SST is included. Our net revenue retention rate was 107% for the quarter endedMarch 31, 2021 and on average has been 106% over the last four quarters endedMarch 31, 2021 . Key Components of Consolidated Statements of Operations
Revenue
We generate revenue from two primary sources: (1) subscription and returns; and (2) professional services. Subscription and returns revenue are driven primarily by the acquisition of customers, customer renewals, and additional service offerings purchased by existing customers. Revenue from subscription and returns comprised approximately 91% of our revenue for the three months endedMarch 31, 2021 and 95% of our revenue for the three months endedMarch 31, 2020 . 31 -------------------------------------------------------------------------------- Subscription and Returns Revenue. Subscription and returns revenue primarily consist of fees paid by customers to use our solutions. Subscription plan customers select a price plan that includes an allotted maximum number of transactions over the subscription term. Unused transactions are not carried over to the customer's next subscription term, and our customers are not entitled to any refund of fees paid or relief from fees due if they do not use the allotted number of transactions. If a subscription plan customer exceeds the selected maximum transaction level, we will generally upgrade the customer to a higher tier or, in some cases, charge overage fees on a per transaction or return basis. Customers purchase tax return preparation on a subscription basis for an allotted number of returns. Fees paid for subscription services to tax content vary depending on the volume of tax information accessible to the customer. Our standard subscription contracts are generally non-cancelable after the first 60 days of the contract term. Cancellations under our standard subscription contracts are not material, and do not have a significant impact on revenue recognized. We generally invoice our subscription customers for the initial term at contract signing and upon renewal. Our initial terms generally range from twelve to eighteen months, and renewal periods are typically one year. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term. Currently a small component of our total revenue, we offer SST services to businesses that are registered to participate in the program. We earn a fee (SST revenue) from participating state and local governments based on a percentage of the sales tax reported and paid, and as a result, we generally provide SST services at no cost to the seller. During the first quarter of 2021, we renewed our agreement with the SST Governing Board to provide SST services at a lower percentage rate than we previously earned. Subscription and returns revenue also include interest income generated on funds held for customers. In order to provide tax remittance services to customers, we hold funds from customers in advance of remittance to tax authorities. These funds are held in trust accounts atFDIC -insured institutions. Prior to remittance, we earn interest on these funds. Professional Services. We generate professional services revenue from providing tax analysis and services, including tax registrations, voluntary disclosure agreements, nexus studies, and backfiling services. We also provide configurations, data migrations, integration, and training, for our subscriptions and returns products. Our 2020 acquisitions of TTR and Business Licenses expanded the scope of professional services we offer to include business licenses and registration services and tax refund claims and recovery assistance. We bill for service arrangements on a fixed fee, milestone, or time and materials basis, and we recognize the transaction price allocated to professional services performance obligations as revenue as services are performed and are collectable under the terms of the associated contracts.
Costs and Expenses
Cost of Revenue. Cost of revenue consists of costs related to providing the Avalara Compliance Cloud and supporting our customers and includes employee-related expenses, including salaries, benefits, bonuses, and stock-based compensation and the amortization of capitalized software development costs. In addition, cost of revenue includes direct costs associated with information technology, such as data center and software hosting costs, tax content maintenance, and certain services provided by third parties. Cost of revenue also includes allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as acquired technology from acquisitions. We plan to continue to significantly expand our infrastructure and personnel to support our future growth, including through acquisitions, which we expect to result in higher cost of revenue in absolute dollars. Research and Development. Research and development expenses consist primarily of employee-related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, and the cost of third-party developers. Research and development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs, and are amortized as cost of subscription and returns revenue. Research and development expenses also include allocated costs for certain information technology and facility expenses, along with depreciation of equipment. We devote substantial resources to enhancing and maintaining theAvalara Compliance Cloud, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology. We expect research and development expenses to increase in absolute dollars. Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses for our sales and marketing staff, including salaries, benefits, bonuses, sales commissions, and stock-based compensation, integration and referral partner commissions, costs of marketing and promotional events, corporate communications, online marketing, solution marketing, and other 32 -------------------------------------------------------------------------------- brand-building activities. As a result of the current COVID-19 pandemic, we have suspended in-person promotional and customer events and have converted many of these activities to virtual events, which has temporarily reduced these types of marketing expenses. We expect to resume in-person marketing activities when conditions allow. Sales and marketing expenses include allocated costs for certain information technology and facility expenses, along with depreciation of equipment and amortization of intangibles such as customer relationships, customer lists, and backlog from acquisitions. We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit, currently six years. We expense the remaining sales commissions as incurred. Sales commissions are earned when a sales order is completed. For most sales orders, deferred revenue is recorded when a sales order is invoiced, and the related revenue is recognized ratably over the subscription term. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel. At the beginning of each year we set group and individual sales targets for the full year. Sales commissions are generally earned based on achievement against these targets. We defer the portion of partner commissions costs that are considered a cost of obtaining a contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit. The period of benefit is separately determined for each partner and is either six years or corresponds with the contract term. We expense the remaining partner commissions costs as incurred. Our partner commission expense has historically been, and will continue to be, impacted by many factors, including the proportion of new and renewal sales, the nature of the partner relationship, and the sales mix among partners during the period. In general, integration partners are paid a higher commission for the initial sale to a new customer and a lower commission for renewal sales. Additionally, we have several types of partners (e.g., integration and referral) that each earn different commission rates. We intend to continue to invest in sales and marketing and expect spending in these areas to increase in absolute dollars as we continue to expand our business. We expect sales and marketing expenses to continue to be among the most significant components of our operating expenses. General and Administrative. General and administrative expenses consist primarily of employee-related expenses for administrative, finance, information technology, legal, and human resources staff, including salaries, benefits, bonuses, and stock-based compensation, professional fees, insurance premiums, and other corporate expenses that are not allocated to the above expense categories. General and administrative expenses include amortization of intangibles such as tradenames and noncompetition agreements from acquisitions.
We expect our general and administrative expenses to increase in absolute
dollars as we continue to expand our operations, hire additional personnel,
evaluate and integrate acquisitions, and incur costs as a public company.
Specifically, we expect to continue to incur increased expenses related to
accounting, tax and auditing activities, legal, insurance, acquisition
evaluation and execution,
Total Other (Income) Expense, Net
Total other (income) expense, net consists of interest income on cash and cash
equivalents, quarterly remeasurement of contingent consideration for
acquisitions accounted for as business combinations, foreign currency gains and
losses, and other nonoperating gains and losses.
Results of Operations
The following sets forth our results of operations for the periods presented and
as a percentage of our total revenue for those periods. The period-to-period
comparison of financial results is not necessarily indicative of financial
results to be achieved in future periods.
The comparability of periods covered by our financial statements is impacted by
acquisitions. In the fourth quarter of 2020, we acquired the outstanding equity
of TTR, substantially all the assets of Business Licenses, and the outstanding
equity of Impendulo.
33
--------------------------------------------------------------------------------
For the Three Months Ended March 31,
2021 2020
(in thousands)
Revenue:
Subscription and returns $ 139,318 $ 105,546
Professional services 14,283 5,897
Total revenue 153,601 111,443
Cost of revenue:
Subscription and returns 38,163 29,517
Professional services 6,508 4,737
Total cost of revenue(1) 44,671 34,254
Gross profit 108,930 77,189
Operating expenses:
Research and development(1) 39,156 25,847
Sales and marketing(1) 64,304 49,634
General and administrative(1) 30,851 21,388
Total operating expenses 134,311 96,869
Operating loss (25,381 ) (19,680 )
Other (income) expense, net 2,250 (4,814 )
Loss before income taxes (27,631 ) (14,866 )
Provision for income taxes 2,357 417
Net loss $ (29,988 ) $ (15,283 )
(1) The stock-based compensation expense included above was as follows:
For the Three Months Ended March 31,
2021 2020
(in thousands)
Cost of revenue $ 2,207 $ 1,196
Research and development 5,286 2,394
Sales and marketing 4,266 2,815
General and administrative 7,018 3,326
Total stock-based compensation $ 18,777 $ 9,731
The amortization of acquired intangibles included above was as follows:
For the Three Months Ended March 31,
2021 2020
(in thousands)
Cost of revenue $ 2,020 $ 1,230
Research and development - -
Sales and marketing 1,540 607
General and administrative 861 4
Total amortization of acquired intangibles $ 4,421 $ 1,841
34
--------------------------------------------------------------------------------
The following sets forth our results of operations for the periods presented as a percentage of our total revenue for those periods:
For the Three Months Ended March 31,
2021 2020
Revenue:
Subscription and returns 91 % 95 %
Professional services 9 % 5 %
Total revenue 100 % 100 %
Cost of revenue:
Subscription and returns 25 % 26 %
Professional services 4 % 4 %
Total cost of revenue 29 % 31 %
Gross profit 71 % 69 %
Operating expenses:
Research and development 25 % 23 %
Sales and marketing 42 % 45 %
General and administrative 20 % 19 %
Total operating expenses 87 % 87 %
Operating loss (17 )% (18 )%
Other (income) expense, net 1 % (4 )%
Loss before income taxes (18 )% (14 )%
Provision for income taxes 2 % 0 %
Net loss (20 )% (14 )%
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Revenue
For the Three Months Ended
March 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Revenue:
Subscription and returns $ 139,318 $ 105,546 $ 33,772 32 %
Professional services 14,283 5,897 8,386 142 %
Total revenue $ 153,601 $ 111,443 $ 42,158 38 %
Total revenue for the three months ended March 31, 2021 increased by $42.2
million , or 38%, compared to the three months ended March 31, 2020 . Subscription
and returns revenue for the three months ended March 31, 2021 increased by $33.8
million , or 32%, compared to the three months ended March 31, 2020 . Professional
services revenue for the three months ended March 31, 2021 increased by $8.4
million , or 142%, compared to the three months ended March 31, 2020 .
Growth in total revenue was due primarily to increased demand for our services
from new and existing customers. The increase in total revenue for the three
months ended March 31, 2021 compared to the same period in 2020, was due
primarily to $14.7 million from new U.S. customers, $10.6 million from 2020
acquisitions, $8.0 million from existing U.S. customers, $5.9 million from SST
revenue growth, and $3.3 million from revenue growth in our international
operations, partially offset by $0.4 million lower interest earned on funds held
from customers. Excluding 2020 acquisitions, total revenue for the three months
ended March 31, 2021 increased by $31.6 million , or 28%, compared to the three
months ended March 31, 2020 . Of the growth from 2020 acquisitions, $5.6 million
was generated from subscriptions and returns and $5.0 million from professional
services. Despite lower transaction fees for the three months ended March 31,
2021 , SST revenue increased from the prior period due to higher transaction
volume.
35
--------------------------------------------------------------------------------
Cost of Revenue
For the Three Months Ended
March 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Cost of revenue
Subscription and returns $ 38,163 $ 29,517 $ 8,646 29 % Professional services 6,508 4,737 1,771 37 % Total cost of revenue$ 44,671 $ 34,254 $ 10,417 30 % Cost of revenue for the three months endedMarch 31, 2021 increased by$10.4 million , or 30%, compared to the three months endedMarch 31, 2020 . The increase in cost of revenue was due primarily to an increase of$9.6 million in employee-related costs from higher headcount, an increase of$0.8 million in amortization expense, an increase of$0.5 million in depreciation expense, and an increase of$0.5 million in allocated overhead cost, partially offset by a$0.7 million decrease in software hosting costs. Cost of revenue headcount increased approximately 32% from the first quarter of 2020 to the first quarter of 2021. Excluding the impact of 2020 acquisitions, cost of revenue headcount increased approximately 18% due to our continued growth to support our solutions. Employee-related costs increased due primarily to a$7.4 million increase in salaries and benefits (including$3.4 million from 2020 acquisitions),$1.1 million increase in compensation expense related to our bonus plans, a$1.0 million increase in stock-based compensation expense, and a$0.6 million increase in contract and temporary employee costs, partially offset by a$0.5 million decrease in travel costs. Amortization expense increased due primarily to acquired intangible assets from our 2020 acquisitions of TTR and Business Licenses. Depreciation expense increased due primarily to an increase in capitalized software costs for projects placed into service in 2020. Allocated overhead consists primarily of facility expenses and shared information technology expenses. Shared information technology expenses are higher compared to the prior period due primarily to higher headcount throughout our operations. Software hosting costs decreased due primarily to volume commitment and usage credits that benefited the current period's expense. While these credits have a near term effect of modestly reducing our software hosting costs when compared to prior periods, we still expect software hosting costs to increase in absolute dollars as our usage continues to increase. Gross Profit For the Three Months Ended March 31, Change 2021 2020 Amount Percentage (dollars in thousands) Gross profit Subscription and returns$ 101,155 $ 76,029$ 25,126 33 % Professional services 7,775 1,160 6,615 570 % Total gross profit$ 108,930 $ 77,189$ 31,741 41 % Gross margin Subscription and returns 73 % 72 % Professional services 54 % 20 % Total gross margin 71 % 69 % Total gross profit for the three months endedMarch 31, 2021 increased by$31.7 million , or 41% compared to the three months endedMarch 31, 2020 . Total gross margin was 71% for the three months endedMarch 31, 2021 compared to 69% for the same period of 2020. This increase in gross margin was due primarily to continued process automation for service offerings in our European operations, and to a lesser extent, improved service delivery and efficiency inU.S. professional services and a temporary decline in software hosting costs. 36 --------------------------------------------------------------------------------
Research and Development
For the Three Months Ended
March 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Research and development $ 39,156 $ 25,847 $ 13,309 51 % Research and development expenses for the three months endedMarch 31, 2021 increased by$13.3 million , or 51%, compared to the three months endedMarch 31, 2020 . The increase was due primarily to an increase of$11.2 million in employee-related costs from higher headcount, and an increase of$2.1 million in third-party purchased software costs. Research and development headcount increased approximately 46% from the first quarter of 2020 to the first quarter of 2021. Excluding the impact of 2020 acquisitions, research and development headcount increased approximately 37%. Employee-related costs increased due primarily to a$7.0 million increase in salaries and benefits (including$1.4 million from 2020 acquisitions), a$2.9 million increase in stock-based compensation expense, including$0.5 million of new PSU grants for executives, and a$1.6 million increase in compensation expense related to our bonus plans, partially offset by a$0.4 million decrease in travel costs.
Software costs increased due primarily to additional investment in software hosting costs and information technology security and reporting tools for product analysis, development, and testing activities.
Sales and Marketing
For the Three Months Ended
March 31, Change
2021 2020 Amount Percentage
(dollars in thousands)
Sales and marketing $ 64,304 $ 49,634 $ 14,670 30 % Sales and marketing expenses for the three months endedMarch 31, 2021 increased by$14.7 million , or 30%, compared to the three months endedMarch 31, 2020 . The increase was due primarily to an increase of$8.8 million in employee-related costs, an increase of$1.8 million in marketing campaign expenses, an increase of$1.5 million for partner commission expense, an increase of$1.0 million in amortization expense, an increase of$0.7 million in outside professional service expenses, and an increase of$0.7 million in allocated overhead cost. Sales and marketing headcount increased approximately 31% from the first quarter of 2020 to the first quarter of 2021. Excluding the impact of 2020 acquisitions, sales and marketing headcount increased approximately 25%. Employee-related costs increased due primarily to a$6.3 million increase in salaries and benefits (including$1.1 million from 2020 acquisitions), a$2.1 million increase in sales commission expense, a$1.5 million increase in stock-based compensation expense, a$1.2 million increase in contract and temporary employee costs, and a$0.7 million increase in compensation expense related to our bonus plans, partially offset by a$2.9 million decrease in travel costs. Travel costs decreased due primarily to cancelling all in-person customer activities and events beginning in March of 2020 because of the COVID-19 pandemic. Marketing campaign expenses increased due primarily to increased spending on brand awareness, online advertising, and outbound direct mail advertising. Partner commission expense increased due primarily to higher revenues. Amortization expense increased due primarily to acquired intangible assets from our 2020 acquisition of TTR and Business Licenses. Outside professional services expenses increased due primarily to increased third-party consulting services to improve the customer experience during onboarding, to develop prospective customer data, and to produce brand recognition and positioning studies. General and Administrative For the Three Months Ended March 31, Change 2021 2020 Amount Percentage (dollars in thousands) General and administrative$ 30,851 $ 21,388
$ 9,463 44 % 37
-------------------------------------------------------------------------------- General and administrative expenses for the three months endedMarch 31, 2021 increased by$9.5 million , or 44%, compared to the three months endedMarch 31, 2020 . The increase was due primarily to an increase of$7.7 million in employee-related costs, an increase of$0.9 million in amortization expense, an increase of$0.5 million in outside professional services expense, an increase of$0.4 million in insurance, and an increase of$0.4 million in third-party purchased software costs, partially offset by a$0.7 million expense to settle a contract dispute in the first quarter of 2020 and a decrease of$0.5 million in non-income tax expense. General and administrative headcount increased approximately 31% from the first quarter of 2020 to the first quarter of 2021. Excluding the impact of 2020 acquisitions, general and administrative headcount increased approximately 23%. Employee-related costs increased due primarily to a$3.4 million increase in salaries and benefits (including$1.0 million from 2020 acquisitions), a$3.7 million increase in stock-based compensation expense, including$2.3 million of new PSU grants for executives,$1.0 million increase in compensation expense related to our bonus plans, and a$0.2 million increase in contract and temporary employee costs, partially offset by$0.6 million decrease in travel costs. Amortization increased due to acquired intangibles from our 2020 acquisitions of TTR and Business Licenses. Outside professional services expenses increased due primarily to increased investment in employee engagement, principally satisfaction surveys, support services, and training programs and acquisition related costs. Insurance expenses increased due to higher insurance premiums in the current year. Software costs increased due primarily to an increase in the number of licenses purchased and higher subscription fees for key financial and human resources information system applications. During the three months endedMarch 31, 2020 , we agreed to settle a contract dispute, with no comparable costs in the current period. Non-income tax expense decreased due primarily to lower foreign indirect taxes.
Total Other (Income) Expense, Net
For the Three Months Ended March 31, Change
2021 2020 Amount
(dollars in thousands)
Other (income) expense, net
Interest income $ (24 ) $ (1,442 ) $ 1,418
Other (income) expense, net 2,274 (3,372 ) 5,646
Total other (income) expense, net $ 2,250 $ (4,814 ) $ 7,064
Total other expense for the three months ended March 31, 2021 was $2.3 million
compared to other income of $4.8 million for the three months ended March 31,
2020 . Interest income decreased due primarily to a decline in the interest rate
earned on our cash and cash equivalents. Other (income) expense, net was $2.3
million other expense for the three months ended March 31, 2021 compared to $3.4
million other income for the three months ended March 31, 2020 , due primarily
to changes to our earnout liabilities. We estimate the fair value of earnout
liabilities related to business combinations quarterly. During the three months
ended March 31, 2021 , the adjustments to fair value increased the carrying value
of the earnout liability for our acquisitions of TTR and Business Licenses,
resulting in other expense of $1.4 million . During the three-months ended March
31, 2020 , the adjustments to fair value decreased the carrying value of the
earnout liability for our acquisition of Portway, resulting in other income of
$2.5 million . The fair value of the Portway acquisition earnout liability
decreased at March 31, 2020 due primarily to a reduction in the revenue
projections used to estimate the fair value of the earnout to reflect a decrease
in anticipated cross-border transactions as a result of the economic disruption
caused by the onset of the COVID-19 pandemic.
Provision for Income Taxes
For the Three Months Ended March 31, Change
2021 2020 Amount
(dollars in thousands)
Provision for income taxes $ 2,357 $ 417 $ 1,940
38
-------------------------------------------------------------------------------- The provision for income taxes for the three months endedMarch 31, 2021 was$2.4 million compared to a provision for income taxes of$0.4 million for the three months endedMarch 31, 2020 . The effective income tax rate was an expense of 8.5% for the three months endedMarch 31, 2021 compared to an expense of 2.8% for the three months endedMarch 31, 2020 . The effective tax rate in both quarters differs from theU.S. Federal statutory rate due primarily to providing a valuation allowance on deferred tax assets. The increase in tax expense and increase in the effective rate is due primarily to measurement period adjustments related to the 2020 acquisition of TTR recorded during the three months endedMarch 31, 2021 (see Note 5 in the Notes to Consolidated Financial Statements). We have assessed our ability to realize our deferred tax assets and have recorded a valuation allowance against such assets to the extent that, based on the weight of all available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. In assessing the likelihood of future realization of our deferred tax assets, we placed significant weight on our history of generating tax losses in theU.S. ,U.K. , andBrazil , including in 2021. As a result, we have a full valuation allowance against our net deferred tax assets, including net operating loss carryforwards and research and development tax credits. We expect to maintain a full valuation allowance for the foreseeable future. Liquidity and Capital Resources We require cash to fund our operations, including outlays for infrastructure growth, acquisitions, geographic expansion, expanding our sales and marketing activities, research and development efforts, and working capital for our growth. We have financed our operations primarily through cash received from customers for our solutions and public offerings of our common stock. As ofMarch 31, 2021 , we had$638.8 million of cash and cash equivalents, most of which was held in money market accounts. OnApril 1, 2021 , we acquired the outstanding equity of Inposia for €30 million (approximately$35.2 million using the exchange rate onApril 1, 2021 ) subject to certain purchase price adjustments and closing conditions. In connection with this agreement, we previously paid to Inposia shareholders a$2.4 million deposit in the fourth quarter of 2020. OnApril 20, 2021 , we acquired substantially all the assets of Davo for aggregate cash consideration of approximately$26.2 million .
Borrowings
As of
Future Cash Requirements
As ofMarch 31, 2021 , our cash and cash equivalents included proceeds from our previous public offerings of common stock. We intend to continue to increase our operating expenses and capital expenditures to support the growth in our business and operations. We expect to also use our cash and cash equivalents to acquire complementary businesses, products, services, technologies, or other assets. We believe that our existing cash and cash equivalents of$638.8 million as ofMarch 31, 2021 will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our financial position and liquidity are, and will be, influenced by a variety of factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing spending, the introduction of new and enhanced solutions, the cash paid for any acquisitions, and the continued market acceptance of our solutions.
The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:
For the Three Months Ended March 31,
2021 2020
(in thousands)
Cash provided by (used in):
Operating Activities $ (28,247 ) $ (24,471 )
Investing Activities (5,844 ) (1,600 )
Financing Activities 13,554 13,734
39
--------------------------------------------------------------------------------
Operating Activities Our largest source of operating cash is cash collections from our customers for subscriptions and returns services. Our primary uses of cash from operating activities are for employee-related expenditures, commissions paid to our partners, marketing expenses, technology costs such as software hosting costs, and facilities expenses. Cash used in operating activities is comprised of our net loss adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, other non-cash income and expense items, and net changes in operating assets and liabilities. For the three months endedMarch 31, 2021 , net cash used in operating activities was$28.2 million compared to net cash used of$24.5 million for the three months endedMarch 31, 2020 . The increase in cash used in operations of$3.8 million was due primarily to the timing of cash payments from a large international customer that was slow to pay during the three months endedMarch 31, 2021 compared to the prior period. InApril 2021 , this customer resumed timely payment of amounts owed.
Investing Activities
Our investing activities primarily include cash outflows related to purchases of property and equipment, additions of capitalized software, and from time to-time, the cash paid for asset and business acquisitions.
For the three months endedMarch 31, 2021 , cash used in investing activities was$5.8 million , compared to cash used of$1.6 million for the three months endedMarch 31, 2020 . The increase in cash used in investing activities of$4.2 million was due primarily to an increase in cash paid for acquisitions of businesses of$2.2 million , an increase in additions of capitalized software of$1.6 million , and an increase in capital expenditures of$0.5 million . In the first quarter of 2021, we paid$1.5 million of additional purchase price to finalize net working capital and other adjustments related to the 2020 acquisitions of TTR and Impendulo and a$0.2 million deposit for the acquisition of Davo that closed in the second quarter of 2021.
Financing Activities
Our financing activities primarily include cash inflows and outflows from issuance and repurchases of capital stock, our employee stock purchase plan, deferred cash payments made in connections with acquisitions of businesses, and changes in customer fund obligations. For the three months endedMarch 31, 2021 , cash provided by financing activities was$13.6 million compared to cash provided of$13.7 million for the three months endedMarch 31, 2020 . This decrease in cash provided by financing activities of$0.1 million was due primarily to a$2.4 million decrease in cash proceeds from exercise of stock options, a$2.0 million increase in deferred cash payments related to business combinations, a$0.6 million increase in deferred cash payments related to asset acquisition earnouts, and a$3.6 million increase in customer fund obligations in the first quarter of 2021 compared to a$3.9 million increase in customer fund obligations in the prior period, partially offset by a$3.8 million decrease in deferred cash payments related to business combination earnouts and a$1.4 million increase in cash proceeds from common stock purchased under our employee stock purchase plan.
Funds Held from Customers and Customer Fund Obligations
We maintain trust accounts withFDIC -insured financial institutions, which allows our customers to outsource their tax remittance functions to us. We have legal ownership over the accounts utilized for this purpose. Funds held from customers are not commingled with our operating funds but are typically deposited with funds also held on behalf of our other customers. Funds held from customers represents restricted cash equivalents that, based upon our intent, are restricted solely for satisfying the obligations to remit funds relating to our tax remittance services. Changes in customer funds assets account that relate to activities paying for the trust operations, such as banking fees, are included as cash flows from operating activities.
Customer funds obligations represent our contractual obligations to remit collected funds to satisfy customer tax payments. Customer funds obligations are reported as a current liability on the consolidated balance sheets, as the obligations are expected to be settled within one year. Changes in customer funds obligations liability are presented as cash flows from financing activities.
Contractual Obligations and Commitments
During the three months ended March 31, 2021 , our purchase commitments increased
approximately $20 million compared to December 31, 2020 , primarily related to
software hosting and software license subscriptions that extend up to three
years beyond March 31, 2021 . There were no other material changes to our
contractual obligations as of March 31, 2021 compared to December 31, 2020 .
40
--------------------------------------------------------------------------------
Use and Reconciliation 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 income (loss), non-GAAP
net income (loss), free cash flow, and calculated billings, 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.
• 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 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 thestock-based compensation expense and amortization of acquired intangibles
included in cost of revenue. We calculate non-GAAP gross margin as GAAP
gross margin before the impact of stock-based compensation expense and the
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 the
stock-based compensation expense, amortization of acquired intangibles, and
goodwill impairments. We calculate non-GAAP net loss as GAAP net loss before
the stock-based compensation expense, amortization of acquired intangibles,
and goodwill impairments.
• We define free cash flow as net cash used in operating activities less cash
used for the purchases of property and equipment and capitalized software
development costs.
• We define calculated billings as total revenue plus the changes in deferred
revenue and contract liabilities in the period, excluding the acquisition
date impact of deferred revenue and contract liabilities assumed in a
business combination. Because we generally recognize subscription revenue
ratably over the subscription term, calculated billings can be used to
measure our subscription sales activity for a particular period, to compare
subscription sales activity across particular periods, and as a potential
indicator of future subscription revenue, the actual timing of which will be
affected by several factors, including subscription start date and duration.
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 when comparing our financial results to those of other companies. 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.
41
--------------------------------------------------------------------------------The following schedules reflect our non-GAAP financial measures and reconcile our non-GAAP financial measures to the related GAAP financial measures:
For the Three Months Ended March 31,
2021 2020
Reconciliation of Non-GAAP Cost of Revenue:
Cost of revenue $ 44,671 $ 34,254
Stock-based compensation expense (2,207 ) (1,196 )
Amortization of acquired intangibles (2,020 ) (1,230 )
Non-GAAP Cost of Revenue $ 40,444 $ 31,828
Reconciliation of Non-GAAP Gross Profit: Gross Profit $ 108,930 $ 77,189 Stock-based compensation expense 2,207 1,196 Amortization of acquired intangibles 2,020 1,230 Non-GAAP Gross Profit $ 113,157
$ 79,615
Reconciliation of Non-GAAP Gross Margin: Gross margin 71 % 69 %
Stock-based compensation expense as a percentage of revenue
1 % 1 %
Amortization of acquired intangibles as a percentage
of revenue 1 % 1 %
Non-GAAP Gross Margin 74 % 71 %
Reconciliation of
$ 39,156 $ 25,847
Stock-based compensation expense (5,286 ) (2,394 )
Amortization of acquired intangibles - -
Non-GAAP Research and Development Expense $ 33,870 $ 23,453
Reconciliation of Non-GAAP Sales and Marketing Expense: Sales and marketing $ 64,304 $ 49,634 Stock-based compensation expense (4,266 ) (2,815 ) Amortization of acquired intangibles (1,540 ) (607 ) Non-GAAP Sales and Marketing Expense $ 58,498
$ 46,212
Reconciliation of Non-GAAP General and Administrative Expense: General and administrative
$ 30,851 $ 21,388
Stock-based compensation expense (7,018 ) (3,326 )
Amortization of acquired intangibles (861 ) (4 )
Non-GAAP General and Administrative Expense $ 22,972 $ 18,058
Reconciliation of Non-GAAP Operating Loss: Operating loss $ (25,381 ) $ (19,680 ) Stock-based compensation expense 18,777 9,731 Amortization of acquired intangibles 4,421 1,841 Non-GAAP Operating Loss $ (2,183
) $ (8,108 )
Reconciliation of Non-GAAP Net Loss:
Net loss $ (29,988 ) $ (15,283 )
Stock-based compensation expense 18,777 9,731
Amortization of acquired intangibles 4,421 1,841
Non-GAAP Net Loss $ (6,790 ) $ (3,711 )
Free cash flow:
Net cash used in operating activities(1) $ (28,247 ) $ (24,471 )
Less: Purchases of property and equipment(2) (1,366 ) (883 )
Less: Capitalized software development costs(2) (2,311 ) (717 )
Free cash flow $ (31,924 ) $ (26,071 )
42
-------------------------------------------------------------------------------- (1)We have presented corrected net cash used in operating activities for the three months endedMarch 31, 2020 . The correction to net cash used in operating activities resulted in a change of$0.2 million for the three months endedMarch 31, 2020 . (2)Capitalized software development costs were previously included in purchases of property and equipment and does not impact previously reported free cash flow. The following table reflects calculated billings and reconciles to GAAP revenues. In addition to the defined reconciling items for calculated billings, the fourth quarter of 2020 includes a one-time reconciling adjustment related to the impact of business combinations. Three Months Ended Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, 2021 2020 2020 2020 2020 2019 2019 2019 (in thousands) Total revenue$ 153,601 $ 144,760 $ 127,879 $ 116,487 $ 111,443 $ 107,627 $ 98,525 $ 91,299 Add: Deferred revenue (end of period) 225,531 209,690 180,640 167,719 165,369 161,241 148,466 138,811 Contract liabilities (end of period) 12,466 10,134 7,673 6,195 6,330 5,197 4,843 4,508 Less: Deferred revenue (beginning of period) (209,690 ) (180,640 ) (167,719 ) (165,369 ) (161,241 ) (148,466 ) (138,811 ) (132,714 ) Contract liabilities (beginning of period) (10,134 ) (7,673 ) (6,195 ) (6,330 ) (5,197 ) (4,843 ) (4,508 ) (4,208 ) Deferred revenue assumed in business combinations - (9,194 ) - - - - - - Calculated billings$ 171,774 $ 167,077 $ 142,278 $ 118,702 $ 116,704 $ 120,756 $ 108,515 $ 97,696
Critical Accounting Policies and Estimates
There have been no material updates or changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates described in our 2020 Annual Report.
Recent Accounting Pronouncements
For further information on recent accounting pronouncements, refer to Note 2 in the consolidated financial statements contained within this Quarterly Report on Form 10-Q.
© Edgar Online, source
