Avalara An Attractive Short Ahead Of Lockup Expiration

Dec. 07, 2018 4:49 PM ETAvalara, Inc. (AVLR)8 Comments3 Likes
Don Dion profile picture
Don Dion
12.68K Followers

Summary

  • When the 180-day lockup period for AVLR expires on December 12, pre-IPO shareholders and company insiders can sell restricted stock for the first time.
  • A large number of shares - more than 57 million - are currently subject to restrictions.
  • Any significant sale of these currently-restricted shares could cause a sharp, short-term downturn in AVLR's share price.
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The 180-day lockup period for Avalara Inc. (NYSE:AVLR) ends on December 12, 2018. When this period ends, company's pre-IPO shareholders may opt to sell large blocks of currently-restricted shares for the first time. More than 57 million shares are subject to trading restrictions, while 64 million shares are currently trading pursuant to the IPO. Any significant sales of restricted stock could flood the secondary market when the lockup period expires and cause a sharp, short-term downturn in AVLR share price.

(Source: S-1/A)

Trading in Avalara has been mixed during this six-month period, and AVLR currently has a 25% return from IPO. The stock was priced at $24 and closed on its first day of trading at $44.94, for an increase of 87.5%. The shares climbed to a high of $53.37 on June 29 but then began a long decline reaching $29.64 on November 20. Currently, the stock trades between $30 and $31.

Business Overview: Provider of Tax Compliance Solutions

Avalara offers cloud-based solutions for transaction tax compliance. Its product portfolio includes a suite of compliance software that allows organizations to manage the complex transaction tax compliance. Their software keeps detailed records of transactions and taxes, process transactions in real time, decrease audit exposure, reduce errors, and track total costs related to tax compliance.

(Source: S-1/A)

The company markets AvaTax, which is a software solution for calculating sales tax in the U.S. It also offers Avalara Returns for completing tax returns as well as filing those returns; Avalara Compliance Document Management solutions, which creates, verifies, and manages reseller and sales tax exemption certificates; and Matrix Master, which is a database for retail operations to determine product taxability.

In addition, Avalara offers the Avalara CloudConnect, which is a hardware device, professional services such as voluntary compliance initiatives, nexus studies and analysis, specialized tax research, and tax registrations. Its VAT Expert solution is a web-based product that verifies the validity of supplier and client VAT numbers. Avalara also offers tax compliance solutions in Brazil.

In 2017, Avalara processed 16 million tax determinations on average per day, and its solutions cover thousands of national, state, regional, and local taxing authorities.

Avalara's clients include Reebok, The New York Times, Groupon, Porsche, Prada, Stripe, Oracle, SAP, WooCommerce, Salesforce, Magento, and QuickBooks.

The company was previously called Advantage Solutions. It changed its name to Avalara in 2005. The company, incorporated in 1999, has approximately 1,500 employees and keeps its headquarters in Seattle, Washington.

Business overview was sourced from the company's S-1/A and website.

Financial Highlights

Avalara reported the following highlights for the end of the third quarter for fiscal 2018 ended September 30, 2018:

  • Total revenue was $69.5 million, an increase of 26% over $55.3 million in the third quarter of 2017. Subscription and returns revenue reached $64.2 million, an increase of 24% over $51.7 million last year. Professional services and other revenue reached $5.3 million, an increase of 47% over $3.6 million last year.
  • GAAP gross profit was $49.3 million for a 71% gross margin, down slightly from a 73% gross margin in the third quarter of 2017.
  • GAAP operating loss was $24.7 million, versus a GAAP operating loss of $11.8 million last year.
  • GAAP net loss was $24.1 million, versus a GAAP net loss of $10.3 million last year.

Financial highlights were sourced from the company's website.

Management Team

Co-founder and CEO Scott McFarlane has extensive experience in the software technology industry. Prior to Avalara, Mr. McFarlane served at CheckPoint Software Technologies, MetaInfo, Community Sector Systems, and AIRCOA. Mr. McFarlane graduated from Claremont McKenna College in southern California with a degree in Economics.

CFO and Treasurer William Ingram has been with Avalara since December 2015. His previous experience comes from senior financial positions at Khan Academy, Leap Wireless, AudioCodes, and Nuera Communications. Mr. Ingram holds a B.A. in economics from Stanford University and an M.B.A. from Harvard Business School.

Management biographical information was sourced from the company's website.

Competition: ONESOURCE Indirect Tax, Vertex, and Sovos

Avalara faces competition from three key areas: DIY methods such as tax tables and transaction-specific research; outsourced compliance services offered by consulting and accounting firms; and tax compliance software offered by other vendors including ONESOURCE Indirect Tax, CCH Incorporated, Vertex, and Sovos.

Early Market Performance

The underwriters for Avalara priced its IPO at $24 above its expected price range of $21 to $23 per share. The stock has had a mixed performance. It reached a high of $53.37 on June 29, but it currently trades between $30 to $31.

Conclusion

When the 180-day IPO lockup period for AVLR expires on December 12th, pre-IPO shareholders and company insiders will be able to sell more than 57 million currently restricted shares in the secondary market for the first time. This group of pre-IPO shareholders and company insiders includes six individuals and three corporate entities with significant stakes.

(Source: S-1/A)

Significant sales of these restricted securities would likely push AVLR sharply lower in the short-term when the lockup expires. Aggressive, risk-tolerant investors should take advantage of this trading opportunity by shorting shares of AVLR ahead of the lockup expiration on December 12th. Interested investors should cover short positions late in the trading session on December 12th or during the trading session on December 13th.

This article was written by

Don Dion profile picture
12.68K Followers
Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com
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Disclosure: I am/we are short AVLR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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