Avalara, Inc. (NYSE:AVLR) Q3 2019 Results Earnings Conference Call November 5, 2019 5:00 PM ET
Greg McDowell - Investor Relations, Managing Director of Technology Group at ICR, LLC
Scott McFarlane - Co-Founder, Chief Executive Officer
Bill Ingram - Chief Financial Officer
Conference Call Participants
Chris Merwin - Goldman Sachs
Sterling Auty - JPMorgan
Brad Sills - Bank of America Merrill Lynch
Scott Berg - Needham
James Rutherford - Stephens Inc.
Richard Davis - Canaccord
Brian Peterson - Raymond James
Pat Walravens - JMP securities
Brent Bracelin - Piper Jaffray
Bhavan Suri - William Blair
Terry Kiwala - First Analysis
Siti Panigrahi - Mizuho Securities
Ladies and gentlemen, thank you for standing by and welcome to the Avalara third quarter 2019 earnings conference call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to your speaker today. Mr. Greg McDowell, Investor Relations. Thank you. Please go ahead, sir.
Good afternoon and welcome to Avalara's third quarter 2019 earnings call. We will be discussing the results announced in our press release issued after market close today. With me are Avalara's CEO, Scott McFarlane and CFO, Bill Ingram.
Today's call will contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends, our expected future business and financial performance and financial condition and our guidance for the fourth quarter and fiscal year and can be identified by words such as expect, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements.
Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release, our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019 and our other periodic filings with the SEC.
During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC and is also available on our website at investor.avalara.com.
With that, let me turn the call over to Scott.
Thanks Greg and welcome to everyone joining our Q3 2019 earnings call. Q3 was another strong quarter for Avalara. We reported total revenue of $98.5 million representing an increase of 41% over the prior year. Our growth rate was driven by continued success across the business. We saw new customer wins across a wide range of industries, segments and geographies. We also experienced strong customer retention and solid upsell activity.
I have said it before and I will say it again. Avalaraians worldwide have a shared vision to be part of every transaction in the world. As our value proposition gains more traction and validation, I am increasingly confident in our ability to build a great company with durable growth characteristics. Once again, I would like to thank our employees for their hard work. Your continued commitment to our customers, our vision and each other is much appreciated. And I would like to thank our customers and partners for your trust in Avalara and our team.
Before we dig into several interesting topics for this quarter, I want to reemphasize the primary driver of Avalara's growth right now. Critical to our ongoing strategy is success in our core business, supporting sales tax compliance. I have mentioned now for several quarters that our global sales team is driving strong execution and efficiency and we applaud them for their success across all market segments. Our net revenue retention rate continues to be strong, demonstrating further need and deeper trust from our customers. We have also seen sustained adoption of our additive solutions like SST and business licensing.
Today, I will focus my remarks on three topics, our international opportunity, our expanding partner ecosystem and marketplaces. International expansion has been and will continue to be a great opportunity for Avalara. Providing solutions to the challenges of global tax regimes like that and GST as well as the specifics of managing cross-border compliance are key growth areas for Avalara. While international business represents less than 10% of our revenue today, that segment continues to grow quickly and we are investing to take advantage of the enormous opportunity in front of us.
Every country is different and governments around the world are deploying technology in unique and fascinating ways to increase the enforcement of their tax policies and reduce fraud and revenue gaps. There are many different tax and trade regulations, things like e-invoicing, real-time authorization, live reporting, split payments, fiscal representation requirements and so forth. Avalara's cloud platform is uniquely positioned to adapt quickly to these changing technology requirements and environments.
Another key area of international opportunity is cross-border commerce. Cross-border e-commerce is forecasted to exceed $1 trillion by 2020. Our customers have an immense need for calculating, collecting, filing and remitting customs and duty obligations that comply with ever changing rates, rules and regulations that govern sales across country borders. Currently, our cross-border offering supports two of the largest marketplaces in the world.
In addition to our cross-border offering, we are partnering in building other services that will further help global sellers in the EU market, including local fiscal representation in countries where physical presence is required. Fiscal representation is a requirement in many countries where the tax authorities require out of region companies to appoint a local fiscal representative to manage the filing obligations, record management and associated inquiries with the tax authorities.
Globally, governments are looking at new methods of oversight to increase compliance and reduce tax fraud. These activities create great challenges for businesses around the world and Avalara is working to be the disruptive force for change in all of these markets just as we have been in the U.S.
Moving on to partners. We continue to deepen and widen our partner moat by adding new partners and certifying new integrations with accounting, ERP, e-commerce, point-of-sale, mobile commerce and CRM software applications at a rapid pace that keeps us well ahead of our competitors. It's hard to imagine anything more important to our business than this relentless pursuit. Of course, signing new partners gives us access to ever-growing numbers of end-user customers but more important, in an omnichannel economy, the breadth of our partner ecosystem becomes invaluable to almost any business.
It gives our customers choice and power to adopt Avalara into all of the systems and technologies they use to run their business. Technical enablement of our partners is an important step in our partner development process as we rely on a network of APIs to manage the flow of data between systems. When our partners build an integration, Avalara provides detailed technical documentation to facilitate data collection and functionality mapping between the two systems. We help our partners by providing proven requirements such as all the unique items on an invoice required for a compliance calculation based on years of successful integration development.
With these requirements in hand, our partners know they are building a consistent experience for our shared customers and are building with tax expertise that only a compliance expert can provide. With a certified integration, partners and customers alike can be confident that the technology will meet the customer's needs. We already have a substantial foothold with the major providers of business systems to the midmarket, NetSuite, Microsoft, Sage, Epicor and the like. But many companies rely on specialized systems as part of their business.
An example is our newly certified integration with Adaptive Jewelry, a software platform for the jewelry industry. This is a niche segment with the specific requirements to connect manufacturers, distributors, designers and retailers of leading jewelry brands. And Avalara's integration works efficiently in their system.
We also recognize and are adapting to the changing natures of where and how invoices or sales are being created. In the earliest days of Avalara, we concentrated on ERPs, the system of record for many midmarket companies. Today, as our economy continues to shift towards omnichannel selling models, our business development team is building relations with all kinds of transaction platforms, e-commerce, recurring billing, sharing economy, payment, social media and more.
What we know and understand about the SMB space as well as the emerging small business market is that we cannot reach each business in a one-to-one engagement. A partner ecosystem is the only way to dominate the market. To win there, we have to understand the pain points of their customers, their data flow, their go-to-market motions so that efficient compliance processes can be embedded and integrated through all the systems that they already trust. In that way, the Avalara benefit is felt by customers and partners alike.
In just about the same way that we, Avalara, understand that we cannot address the small business segment one-by-one, governments around the world have realized that they cannot efficiently enforce compliance requirements on thousands and thousands of small businesses that transact within their borders. As governments become increasingly focused on closing revenue gaps, taxing authorities are turning to new forms of enforcement including shifting to tax compliance burden from the sellers themselves to the marketplaces.
In other words, the burden has moved to the marketplace to collect and remit sales tax on behalf of all sellers that list on their platform. The marketplaces have thus become the focal point. In the U.S., this legislation has swept across states in the form of marketplace facilitator laws. And in the EU, member states have agreed to make online marketplaces responsible for charging and collecting VAT for all their non-EU sellers.
Avalara works with marketplaces like GOAT, Discogs, Poshmark, Amazon and others. Our solutions serve a range of roles depending on the unique needs of the marketplace and the region where we partner. In some instances, we serve the seller on the platform and in others we serve the marketplace directly and in some places we play both roles offering compliance services to the seller and the platform.
As of October 1, 33 states and Washington, DC have marketplace facilitator laws in effect and here is our perspective. While these laws make it easier for state tax authorities to manage and enforce tax compliance, they create new challenges for businesses. Why? As I said earlier, because it's really an omnichannel world now. Many, if not most businesses, not only sell on their own e-commerce sites, but on an online marketplace as well. Through these channels, businesses are touching a patchwork of states with marketplace facilitator laws, leaving it unclear at best as to who is responsible for the sales tax collection and remittance in each state.
This makes compliance especially difficult because the sellers have to determine which transactions are covered by marketplaces and which are not, state-by-state. Because of our many integrations and aggregation capabilities, Avalara helps navigate the maze of state-specific requirements. We recognize that at its core, this process requires clean data management, a problem that we can solve. At this stage, it would be a Herculean task to manage this process manually and Avalara has the right set of tools to ease this burden.
As we have discussed on this call and others, we work with dozens of marketplaces to offer compliance services to their sellers and for their core business. The marketplace model is an important growth area in digital commerce and one we continue to invest in globally. In summary, we have a global vision at Avalara because we believe the move from manual to automated tax compliance is inevitable. As businesses of every size make the decision to automate compliance, we will continue to be there for them.
Now let me turn the call over to our CFO, Bill Ingram.
Thanks Scott. As a reminder, Avalara adopted the new revenue recognition accounting standard ASC 606 effective January 1, 2019 on a modified retrospective basis. As a result, financial results during 2019 are presented in compliance with ASC 606 while historical financial results prior to 2019 are presented in conformity with ASC 605. Our earnings press release includes additional information to reconcile the impacts of the adoption of the ASC 606 standard.
Let me now discuss our third quarter results. For the third quarter, total revenue under ASC 606 was $98.5 million, up 41% on a year-over-year basis. Strong growth in the quarter was a result of increased demand from both new and existing customers, combined with strong sales execution across channels. Additionally, third quarter revenue included $1.5 million of legacy customer revenue from the acquisitions of Compli and Portway, both completed in 2019. These businesses were primarily acquired for their content and domain expertise and we are pleased with the early results.
Subscription returns revenue was $92 million. This represented 93% of our total revenue and it grew 42% year-over-year. Professional services revenue was $6.5 million. Our core customer count increased by 810, to approximately 11,240 at the end of Q3 2019. Of this increase, approximately 80 new core customers were added following our acquisition and integration of the Compli customer base. Our net revenue retention rate was 113% in Q3 and has averaged 110% over the last four quarters. Our revenue retention rate supported by low gross churn contributes to strong customer lifetime value.
In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued just before this call. Gross profit was $70.8 million for Q3 2019, representing a 72% gross margin. This compares with ASC 605 gross profit of $51.3 million and a 73% gross margin in the same period last year. The one percentage point decline in gross margin primarily results from third-party software hosting costs and our expansion into international markets.
Turning to expenses. Sales and marketing expense was $37.6 million in Q3, or 38% of revenue. On a 605 basis, sales and marketing expense would have been $42.4 million or 43% of revenue. We are pleased with the continued year-over-year improvement in sales and marketing efficiency.
For Q3, research and development expense was $20.1 million or 20% of revenue. The absolute dollar increase in research and development expense was in line with our expectations as we invest in new products, content and features to drive future sales growth. For Q3, general and administrative expense was $15.3 million or 16% of revenue. New corporate initiatives include adoption of SOX 404, new HR systems, recruitment and leadership training, all of which are important investments for our future.
Non-GAAP operating loss was $2.2 million for Q3, which is better than our previous guidance due primarily to the revenue upside in the quarter. On a 605 basis, non-GAAP operating loss was $6.9 million compared to a $9.2 million non-GAAP operating loss in Q3 2018. Non-GAAP loss per share was $0.01 in the third quarter based on 76.2 million shares outstanding. On a 605 basis, non-GAAP loss per share was $0.07 compared to a loss of $0.14 per share in the third quarter of 2018 based on 66.6 million shares outstanding.
Turning to our balance sheet and cash flow statement. Our cash and cash equivalents were $446.6 million at the end of Q3 2019, an increase of $5 million from the $441.6 million at the end of Q2 2019. Total deferred revenue as of Q3 2019 under ASC 606 was $148.5 million, up 7% from $138.8 million at the end of Q2 2019. Calculated billings is a non-GAAP metric that takes into consideration revenue and the change in deferred revenue as well as the change in contract liabilities. Calculated billings were $108.5 million Q3 2019, up 38% from $78.8 million in the same period last year. It is worth pointing out that beginning Q4 2019, we start to face what we would consider more challenging year-over-year comps.
Operating cash flow was $5.9 million in Q3 2019, compared to $1.2 million in Q3 2018. Our operating cash flow performance was driven by strong cash collections tied to our billings activity. Free cash flow was $3.6 million, compared to a negative $3.6 million of free cash flow consumption in the same quarter last year. We would like to remind you that our free cash flow will fluctuate from quarter-to-quarter caused by many factors, including the timing of working capital, the seasonality of our billing and expense cycles as well as our overall level of investment in the business.
I will conclude by providing guidance on revenue and non-GAAP operating loss for Q4 and for the full year 2019 under the ASC 606 standard. For Q4 2019, we currently expect total revenue to be between $99.5 million and $100.5 million. We expect our Q4 non-GAAP operating loss to be in the range of $7 million to $8 million. For the full year 2019, we currently expect total revenue to be between $374.3 million to $375.3 million. We now expect our full year non-GAAP operating loss to be in the range of $13.2 million to $14.2 million.
We are still in the early stages of our 2020 budgeting process and plan to provide detailed guidance on our fourth quarter conference call. That said, I would like to share some thoughts regarding the financial outlook for Avalara beyond 2019. The business has meaningfully outperformed our topline expectation since going public in June 2018. Revenue growth has accelerated from the mid-20% range to over 40% in the last two quarters. We have also demonstrated operating leverage over the past year.
We are proud of the team's execution to deliver such great results and are confident in the long term leverage in our business. We are addressing a large market and believe that Avalara is well positioned to deliver durable long term growth of 20% to 25% as we move toward our objective of building a meaningful business. As we look at 2020 in particular, our early planning supports mid-20% revenue growth. This is at the high end of our longer term growth target and takes into consideration that we expect to exit 2019 at a $400 million revenue run rate in addition to facing a much more challenging comparison based on our strong performance in 2019.
Our early investment plans for 2020 result in a non-GAAP operating loss margin in the low to mid single digit range and likely, a modest level of cash burn in 2020. We believe the momentum in our business, compelling customer economics and our unique position in a large market, all support continued investment in the business to drive long term growth.
At this point, we would like to open up the call for your questions.
[Operator Instructions]. Your first question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.
Okay. Thanks so much and congrats on another great quarter. So maybe to start off, I wanted to ask a bit about the cross-border product. What type of adoption you have seen there so far? Is that actually helping to land some larger logos maybe than you have seen in the past? Or has this maybe been a source of cross-sell so far? Thanks.
So it is both a source of bookings and revenue for us today. We have landed some significant deals. I think we have reported that we been doing that with Amazon in the past. We continue to do that. We are adding more businesses all the time to it. So it's growing. We are just starting to get it deployed throughout the sale system and selling it as an add-on. I think our sales team will be picking that up later, I mean this quarter and in to next year. And we see really strong demand for it. We are working on the messaging. We are working on all of the implementation things in order to make it as strong as we possibly can. But it's really started out pretty well for us.
Okay. Great. And then it looks customer growth accelerated for the fifth quarter in a row and I know we are starting to lap the impact of some of these legislative changes, but obviously customer growth continues to accelerate. So just curious how we should think about the sustainability of the pace net adds going forward? When SMBs are not going through the typical trigger events and change events that you have talked about in the past, are they just much more likely now to take Avalara in light of the legislative changes that they need to solve for?
Chris. I mean, look, there is no question that the governmental tailwinds are helping us, So that's a given. It's bringing awareness to the table. But I think and I am sure there will be a lot of questions about this over the day, so I will just get it out now really. I mean, yes, those are important aspects of it and the laws have been pushing the business. But the states really haven't caught from a way monitoring it and enforcing it. And as they start doing that, I think it is just going to push this further and further and further on.
So we do not see this as this run up and then it goes away. We see this as just as long strong build up towards, what we always say the inevitable aspect of this business is everybody is going to do this in an automated fashion. In a digital world, it would be ridiculous to think of anything other than that. So again, back to our message, which is the trigger events that we all know that are happening are driving this business. Wayfair is pushing us along from a tailwind. And we are yet to see, I think the real effects of Wayfair, which I think will push us even further as we go down the line. But it will be a slow gradual process as they work through the triggers.
And Chris, this is Bill. With regard to specifically the reported number, as we have talked in the past, you know that technically is not new net adds. Those are core customers as defined, customers that generate more than $3,000 of revenue in the last 12 months. So many of those customers are existing ones that exceeded the threshold. So I wouldn't over analyze exactly any one quarter as to whether it's accelerating and decelerating. We see, as Scott said, really strong steady customer capture and customer growth across the whole base of the business. so there is no one thing or one trigger that I would point you towards.
Okay. Thank you very much.
Your next question comes from the line of Sterling Auty from JPMorgan. Your line is open.
Yes. Thanks. Hi guys. So I want to follow up on the international, I mean, beyond just cross-border but just the full international opportunity. I mean all the comments in the prepared remarks is probably the most positive I have heard you talk about the international opportunities since prior to the IPO. And what I am wondering is, is it something actually fundamentally has changed in that opportunity? Or you are just deeper in your knowledge of the opportunity and the solutions that you have positioned to capture that opportunity?
Thanks Sterling. I would say that it's really the latter. We have always known that the international market is going to be a strong market for us. Our beachhead and really our foundation, our core of our businesses in the U.S. So us moving out of that has been a educational process. We have known where it's going but you know, every day we fight the battle here in the U.S. And as we start to develop our EMEA business in particular, our Brazil business, we are constantly learning about how and best way to position this. And we are seeing strong growth with our business in EMEA and our Amazon business that we are working with them on. So we are focused on the opportunity that we have in front of us there and I think we are optimistic about it.
And Sterling, it's Bill. While it's not yet 10% of our business and we break it out in our 10-Q, with the additional teams that we have built, we have talked about some of the executives that you have seen, but we have also built a nice group of new managers and executives across the company. We can talk about some of our international leaders. But we are seeing a lot more visibility in terms of things that are happening around the world that just reinforces our conviction of opportunities internationally, I would say. And we have got more intelligence and more understanding and really a terrific team of people that have joined the company in the last couple of years that helped us confirm that.
That makes sense. And then one follow-up on the marketplace opportunity or let me play the devil's advocate. I could see investors being worried that if things concentrate down to where you have a handful or maybe more than a handful of marketplaces that are responsible for sales tax calculation, collection, remittance, et cetera that they would be worried that those marketplaces would actually look to bring something like this in-house and do it for their vendors. Can you talk to why you would think that would not be a concern in the long run?
Sure. I mean it's what I said in the opening remarks. The complexity that the marketplace creates, the marketplace laws creates is real for businesses. I mean they cannot, I mean they are in an omnichannel world working with lots of marketplaces. They are working with their own POS systems. They are working with their own sales forces and their own websites. So deciphering all of that information and getting the right information filed to the right place is still is really a difficult task for everybody.
I mean, we are working with, as I said, dozens and dozens of marketplaces to help them through this process. I don't see it as a core competency that any business wants to get involved in. It's what we do really, really, really well and we take the burden away from both the sellers and them in the process. You throw cross-border on top of that and the complexity is even bigger. So I just don't see that as one of the issues that really is confronting us at this time.
Got it. Thank you.
Your next question comes from the line of Brad Sills from Bank of America Merrill Lynch. Your line is open.
Great. Hi guys. Thanks for taking my question. You have seen a nice acceleration in net revenue retention over the last several quarters. Can you unpack that a little bit for us, please? I am sure it's a combination of transaction growth, perhaps customers are adding more states starting with one or two and then going into more as become more compliant? You got more transaction types in there? If you can comment on just kind of what is driving that? What's driving that acceleration and the sustainability of that?
Sure. I will talk to the first half and unpack it for you. I really can't comment on any sustainability. As I said, historically, it's been, last four quarters it has been 110%. We are seeing with new customers now greater filing schedules, filing adoption which as you said is more states, more jurisdictions and more types. And we believe it's just because of greater awareness. Greater awareness of the issue. Obviously some of the legislative changes in attention. But in the past, we would work with customers and they would say, well I currently have nexus in three locations and we would sign them up and get them going in three locations.
Now they are saying, while I may only have nexus in three but I am anticipating six more. So we will sign them up for nine or 10 at the beginning. So I don't there is anything dramatically going on, other than greater awareness, sales teams doing a great job of making them aware and we are signing up in greater geographic distribution for nexus filing of their filings calendar than in earlier states. So I think it's compressing inevitable historical adoption rate of geographic distribution. It's compression of it.
With regards to sustainability, I really can't comment on that. But we are pleased obviously this quarter with the 113% number.
Thanks Bill. And then one more, if I may please. In the past you have talked about the ability to take the platform into other transaction types or even regulatory functions over time. I know you can't comment on the roadmap specifically but just generally are there any categories of transactions or even other regulatory functions that you see as more natural adjacencies perhaps you are hearing more inbound feedback from customers on?
Sure, Brad. We have always said that everybody thinks of us as this transaction company and we talk about being part of every transaction in the world. But I have said it before, we really want to be the global SaaS platform for compliance. And as a result of that, it's not just transactions. It's documents. It can be, we do CertCapture obviously, which is a document management system for exemption certificates that businesses have all over. But we can do things inside of our fuel business. We are doing lots of compliance around trucking, about moving documents that we have to file on behalf of the people who are moving the fuel from state to state that aren't transactional.
So we can move into different areas along that line whether it be environmental kind of documents, all sorts of compliance documents that need to get from the business to the government on file. That is what we are really set up to do. And it's not one of the things that we talk about every day in the business because we have got a lot of other things going on but in the back of our mind and what we are working on here is always trying to be thoughtful about how we expand that global SaaS platform for compliance.
That's great. Thanks Scott.
Your next question comes from the line of Scott Berg from Needham. Your line is open.
Hi Scott and Bill. Congrats on a good quarter and thanks for taking my questions. Scott. I just wanted to start with, as you reflect over the last year since the Wayfair decision, have the deals that have come in, the transactions that you have signed, have they changed in terms of types of partners whether it's your direct channels yourself or the partners that are coming in. Just didn't know if that regulatory tailwind is maybe changing what that composition of those deals looks like?
Okay. Scott, so when it's all said and done and I try to make this as simple as possible here in the office and what I am talking everybody because really when it is all said and done, we go to market where invoices are created, where sales are made. And that is always done through a partner network. So there is really no escaping that. And I say, it's only that way. We have our APIs, which I talked about on this call and we continue to get our APIs out and doing that other things and that represents a good solid portion of the business.
But when it's all said and done, it's really about how we work with our partners. how we grow our partners, how we support their customers and that really doesn't change. I mean it's one of the key things. And again I try to just keep everybody focused on this. I mean in order to take advantage of Wayfair, you need to be able to, you need to have a connector and an integration made with the people who are creating invoices. You need to be able to register those customers and you need to be able to take those customers live.
And those are three things that Avalara does really, really well. And so we don't see much beyond that, right. We only see the transactions that we have connectors for and we have 700 partners, more than anybody else. So we get more than our fair share at the apple there. But there really hasn't been any change in the business motion because we are really focused on that partner world.
Got it. Super helpful. And then a question for you, Bill, on the preliminary look into calendar 2020. Have you changed your assumptions along the same being in terms of maybe deal composition, whether deals are coming in maybe through partners or maybe it's more marketplace activity or the e-commerce vendors. Just trying to understand are you using this year's template as the stamp for next year? Of if there would be something different in those assumptions? is
Yes. Thanks, Scott. No real change other than we see a broadening of our business across numerous initiatives. And so our core customers that we report and that deal size and that average selling price and that filing breadth and calendar and so on and so forth, there is no great change to that. As you know, Scott and I have been talking now for the last year-and-a-half that we think this is a large market, very low penetration. Inevitably, it's going to convert to an outsourced cloud-based solution like the one that we provide. And so we think we are early, early in the adoption cycle of this type of solution. So there is really no change to that kind of core base business.
Now, in addition, as we have said, I think, in prior calls and Scott said a little bit today, we are seeing some nice early areas of additional contribution to the revenue, which do not have those exact same characteristics that you asked about. And so these are things, like marketplace providers, what we call Avalaraian included in terms of some of our international business, cross-border classification.
So we are cautiously optimistic about it. So we have got a lot of irons in the fire here for these additional revenue streams, none of which today are that significant, but we are very hopeful and we are planning to try to grow some of those other types of business. So that will change the composition of the current model, but as it does, we will give you plenty of insight and direction around that.
Thanks again guys. Congrats on a good quarter.
Thanks Scott. Thanks.
Your next question comes from the line of James Rutherford from Stephens Inc. Your line is open.
Hi. Thanks. I wanted to ask a follow-up on the cross-border opportunity. It's something you have mentioned on a few occasions and I believe you have a couple of offerings in market around cross-border today. Just help give us a sense whether any of this can be material to growth in 2020? And if there is any ambition to launch a guaranteed landed cost offering which seems like it could be a catalyst for that business?
Well, you know, you are right. We have a couple of offers in it. We do mean, at the very basic level and probably one of the biggest problems that people have is around classification of cross-border items, the HS codes, the Harmonized System code. That's what businesses struggle for and that's what we are doing a considerable amount of work for that. And that's the front end of the system. Once they have that classified, then actually doing the transaction, the calculation part is really pretty simple and then you can get it out to a variety of businesses. You can send the information from, all the documentation that is needed to get to the shipper and so forth. And that's really what we are in the marketplace selling, the beginning part of that, selling today. And we think that this can be a big, both competitive advantage for us throughout the marketplace with competitors and ERP and the like and it will be a revenue producer for us in 2020.
Okay. Helpful. And then a follow-up, if I may, on the competitive landscape from I guess Vertex, Sovos, the usual crew. As this land-grab is underway in the post-Wayfair world, are you seeing any pushing the big guys to move or the players in the enterprise, I should say, to push into the midmarket where you guys play? Thank you.
Yes. Listen, we have said it before, with everybody at the low end and at the high end with us. Everybody wants to be where Avalara is. That is one of the great things of this market opportunity. People want to get into it. But again, I keep saying this because I think it's really the basis of the Avalara business. In order to take advantage of Wayfair, you have to have the partnerships, you have to be able to register simply and you have to be able to take people, take businesses live on the system. And it doesn't matter how much you want to be in the space and it doesn't matter how much tailwind Wayfair is providing, if you cannot do those things you cannot take advantage of the market opportunity. And Avalara, with over 700 partnerships and integrations, we are really in the catbird seat in order to take advantage of that. So yes, our competitors definitely want to move into the space and they are working hard to do what they can to do that. It's our job and our team's job is to make sure they can't do that or make it difficult for them to get into the space and we are doing it just as we have done for the last 15 years. So yes, there is definitely competitive pressure. We understand this space and we are really good at the partner program.
And your next question comes from the line of Richard Davis from Canaccord. Your line is open.
Hi. Thanks. So one, the Supreme Court decided with I guess Charter Communications on kind of voice over IP taxing and things but they basically overturned it state-by-state. Is this an area I guess telecom taxation makes e-commerce looks simple. Is that an area of a vector of growth for you guys? And then I will give you a quick follow-up. Thanks.
Sure. Thanks. Rich, this is Bill. As you said the telecom taxation world is infinitely complex and has probably been more hands on it than even the sales and use tax does. But what it goes to show is that things change all the time. And so voice over IP taxation, actually is very, very interesting. Internet of Things taxation is very interesting. We have services and capabilities that handle many of these things, not all but we see this as a nice growth opportunity and we have some great customers in the space that we serve for our telecom group. And we just think same dynamics are playing in telecom as in retail, general commerce or e-commerce which is trigger events are going to move people off from doing it in on-premise in-house. It's going to be outsourced. It's going to be adopted in the cloud and we think we are a viable solution for all the telecom providers out there and we do have offerings in that area. But you are right, it's much more complicated than basic sales and use tax.
And so complexity, right, is one of the things that we actually, you will find, is our strong suit, is how we take that and make it simpler for businesses. I mean that really is at the foundation of Avalara, taking these complex laws, making them simple, making it easier for businesses to operate. So we thought the telecommunication base was great. We made an acquisition of that a number of years ago. We have been building that up. I think it's just totally fascinating for everybody on the call, I can't help myself because when you think about the Internet of Things, when airplanes, engines are talking to Mother Earth, I mean that's taxable transaction. When OnStar customers are talking to cars, that's a taxable event. And so those are the things that we are helping businesses work through. And we love that aspect of it. We can help businesses make their life a lot easier.
And then on the sales side, do you have a philosophy with regard to bifurcating customer success versus hunters and farmers? Are you at that point? How do you titrate that? How do you kind of view that as a go-to-market strategy over the next few years? Thanks.
Really, it's a good question. I think probably one of the most significant changes Avalara made early on in the process was to bifurcate hunters and farmers. We did that, I don't know 10 years ago and have been working through that process. I think it has really been one of the great things that Avalara has done and really made our sales execution a lot easier to separate that. Whether we continue to do that going forward and how that happens going forward, we are always looking at what's the right way to do it. But for the foreseeable future, that's the way we are.
Got it. That's perfect. Thanks so much.
Your next question comes from the line of Brian Peterson from Raymond James. Your line is open
Hi gentlemen. Thanks for taking the question. So I wanted to ask on the non-core customer trends and specifically did they play larger factor in terms of driving your core customer growth this quarter? Or did we see more customers come in at core customer levels?
Yes. Thanks Brian. We don't break that out. But what I can tell you is, there has been no significant change in trend. So the same behavior that we see in the past quarters has occurred in this quarter. And it's a mix, as I have said, you know, we have said it a number of times, it's a mix of both existing customers that have achieved that $3,000 threshold and new customers who have come in.
So let me just give you a mathematical example. If we sign up a new customer at $3,600 a year or $300 a month, they are not a core cup customer until month 10, 300 times 10 is 3,000. We sign up another customer at $36,000 year. They are core customer in month one. And so what happens is, actually we have very good visibility as to the number of core customers we are going to deliver each quarter. But it's not purely one or the other. And to answer your question, the trends have not changed in the past many quarters in terms of mix between those two.
Understood. And Bill, maybe a follow-up for you. I think you covered this in some of the prior questions, but the sales and marketing efficiency, it was much better than we had modeled this quarter. Maybe expand a bit on what drove that? And how we should think about the pace of investment, both in terms of maybe direct sales hires or investments with partners going forward? Thank you.
Well, again, we are very pleased with sales efficiency. I reported both the 605 and 606 comparison for reconciliation. I think it's driven obviously by the strong sales revenue growth because that's the denominator we get to use to calculate the percentage. But when I tried to do is, remember in the closing comments, we are seeing a really nice performance on the topline that we are going to make very prudent, reasonable investments in that area. We won't call out how many people we are going to hire. But what I can tell you is that we have got good line of sight on our sales and marketing expenses. The team is doing a great job. We are so pleased with that group and we want to be sure to feed it and nurture it and invest in it, both the people and the partners to make sure that it o continues to thrive going into the future and we will do that.
And your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.
Great. Thank you and congratulations you guys. Bill, I am going to ask my favorite question, which is so what content areas do you not yet have the content for? And how much of the TAM does that represent? And what are the chances of acquiring that content?
So there is, I mean that's a big question. So let's just focus on North America right now, Pat, because I think that's where your question is directed because there is lots of content rest of world which we don't have. We are working to get deeper into Latin America, moving into Asia. So let's just hold that aside and deal with the U.S. here, North America.
I would say and these are just estimated numbers that we have said that we are approximately at 60% of the content that we have for North America. So there is 40% out there that we need to get. Some of that is more valuable than others. And so we don't deal with amusement taxes. We don't deal with utility taxes. We don't deal with insurance taxes today. There are areas like, could be rare coins. I think we actually do that but I am not sure, but rare coins or ammunition that we don't do and that we are constantly working on building those other areas out.
And we have a hierarchy of which ones are the most important and which were the ones that we think our salespeople can sell. But it's also driven by the sales force. When they get a deal, oftentimes we have talked about examples where we have gone in and done that and then been able to sell that same content that we have done to 300 other companies in the marketplace.
So Pat, that's what we do every single day. But we have a lot still to go and that just expands our market every single time that we do that because I would also say to everything else I have said, you need integrations, you need registrations and you need to be able to go live but you also have to have the content in order to take care of Wayfair. So we are trying to do that as fast as we possibly can so we can take advantage of the tailwind.
Okay. Great. Thanks Scott. And so just to help tell the story when I do this, like what's an example of one of the big chunky attractive areas? Like these utilities are particularly attractive?
No. Actual utilities isn't. And I will tell you why and it just gives you an example because utilities are generally regional and because they are regional, everybody knows what the rates and rules are in that area. So there is not a need for multi-region. Amusement, automotive, some different kind of manufacturing businesses would be all great examples of what we can do in the past. We can add leasing to the leasing rules which we do a little bit of but there is a lot more to be had. We have made the acquisition in alcoholic beverage taxes. So we do retail distribution, we do distribution and the like, but we can get into the retail business around food and beverage which we don't have the content for, which we will be adding going forward. Those would all be examples of areas where we would continue to invest in the coming months and quarters to go after.
And your next question comes from line of Brent Bracelin from Piper Jaffray. Your line is open.
Thanks and good afternoon. One for Scott and a follow-up for Bill. Scott, I wanted to follow-up on Sterling's question on international. Maybe I will take a little bit of a different stance. This is a business going into 2020 that will be approaching a $400 million run rate, generating positive free cash flow, over $400 million cash and investments in the bank here. What is your appetite and the opportunity to do things organically and inorganically to accelerate your international footprint? And then one quick follow-up for Bill.
So a lot of people, they will say, our phrase of being part of every transaction in the world, that might be a trite thing, but for me it's not. When I wake up every single day, that's what I think about. And being part of every transaction in the world means that you have to expand internationally. I think we have done it in a responsible way, moving into EMEA first, adding Brazil, which is the most difficult tax regime. But I will give you this note on our moving into those spaces. We have always done that sort of gradually, slowly moving into it and then with an acquisition. Getting the content on your own in places that you don't know, I personally don't believe in. And so I think the way that we will enter these additional markets and expand the markets that we are already in will be through acquisition. There is interesting technology that's out there in the marketplace today as the laws are changing for e-invoicing, split payments and the like. And I am a real believer and that is the best way to enter these new unknown areas.
Helpful color and good to hear. Bill, as a follow-up, if I just look at subscription revenue growth, remains very strong here, 42% growth for two consecutive quarters. But if I look at the pro services growth, that did downtick a little bit, still 23%, good growth there. But should we expect pro services going forward just to be a lower margin, slower growing part of the business? Is that the right way to think about it going forward? Thanks.
Yes. I wouldn't over-index on professional services. I mean we have a great team and they are doing a wonderful job. But the game here obviously is to get recurring revenue. And so the larger customers will pay for and value professional services, we are really investing, working very hard to get smaller customers to self-serve and go-live without professional services. And so it's partially our strategy in order to open up the TAM and create a greater served market with a broad base of customers that can, at their option, get themselves live and be much more high autonomy or use our terrific professional services team to really educate them and get them professional handle. So I wouldn't correlate the two, Brad, because a lot of it is our strategy of self-serve for lower-end customers and demand from larger customers that may be kind of chunky or bulky quarter-by-quarter.
And I would just like to say that we can't forget that Avalara is a channel-based business and we enjoy a fantastic relationship with our partners and we want them to be doing as much of the professional services as they can. And so we enjoy that relationship. So I like where we are in the area. Whether we are up one point or two points in either direction, I wouldn't over-index on. But I think that that is our general strategy is to let our partners do what they can, for us to fill in a certain amount of that with our businesses and I think that that you should continue to plan on that in the future.
And your next question comes from the line of Bhavan Suri from William Blair. Your line is open.
Hi gentleman. Congratulations and I am probably the last question before we wrap up. But somewhat more strategic, as you think about competitors and I think some of your competitors, but as you think about competitors, do you think about Comscore, you think about Thompson, you think about their offerings which are isolated tenancy like on-premise or great client-centric heavily customized and you think about the multi-tenant approach you taken, the SaaS approach, you think about AI, do you think at some point, maybe not in five years but at some point that plays out to where the value it offers starts to become really appealing to large guys like decision-making, filing, taxation, how do you decide this is the actual the tax for something that may not have been decided. I have got toothpaste and toothbrush and the combined pack is different. Like how do you think about that potential future, given that you have a platform that has more data than any of those guys combined because they are still silo-ed? How should we think about that? Or is that too much of a stretch?
I mean we have talked about this in the past. And look, the competitors have been around a long time. They are well entrenched in the enterprise space. I have always said, it's a fool's errand to try to go into that main market and do rip and replace and the like. I just don't believe it. But Avalara is about being opportunistic and we get our fair shares of wins in those markets as they decide to make that switch that you so eloquently talked about. I think that that will play out more and more in the future. So I mean, again when I say I want to be part of every transaction in the world, I mean it. And that means that I think over time you will start to see businesses migrate towards the SaaS compliance platform. So I think what you are saying is, will actually play out.
Bhavan, this is Bill. I think, kind of as a sound bite, we view that the current target market are the early adopters but the large, large enterprise customers with on-prem solutions will be later adopters. But they will adopt. And so we can't put a timeframe on that. But I think you can think of in terms of early adopters and late adopters and the large companies will inevitably adopt this type of solution. But they are not the early adopters.
Yes. And the enterprise competitors that you are talking about, they are really, they are good at what they do and they service their customers. And we just focus on our market in the midmarket is so big and we are just at the beginning of adoption there, 4%, 5%, 6% penetrated. There is just a lot of green space for us to move in and we can be opportunistic when those opportunities come along to move upstream.
And your next question comes from the line of Terry Kiwala from First Analysis. Your line is open.
Hi. Good afternoon and congratulations on a great quarter. I just want to confirm that in your 2020 revenue growth rates that that does not include any impact from any legislative success in Florida? And one way or another, if you have any early indications of potential 2020 revenue impact if any pending legislation is successful?
So let me just talk about the comments and Scott can talk about triggers and legislation. We don't put into our budgeting or appointing any specific event for any specific state or law or regulation. As we have said, which is kind of amazing about this market legislative and kind of government tax changes just happen all the time. Certainly, last year, Wayfair was a big one. But there will be more changes in the future, not just domestically, but internationally. So that's one of the kind of constant inevitable triggers and drivers for this business is not just the complexity but the evolution of regulations and legislation around tax compliance.
With regard to Florida, Scott.
I mean Florida is the remaining biggie, right, that has not that decided. They are faithfully anti-tax and they are trying to work through their own programs. Look, when Florida happens, it's a big state. It will drive awareness in business just like the others. But I keep cautioning everybody is, is that when they come forward, there is great awareness, but the states have yet to adopt a program of really enforcing the rules that they have on the books and they are just working through that. So this is going to be a long sort of drawn out program that we are talking about and we are just continually pleased with the sales execution of our team as we take on these opportunities once they get triggered. So I don't think you are going to see any change for that. And that's the way we are looking at 2020 as well.
Your next question comes from the line of Siti Panigrahi from Mizuho Securities. Your line is open.
Hi. Thanks for taking my question. First one, I am not sure if you guys talked about. What was your core customer revenue as a percentage of total revenue or even the trend in your average revenue per core customer?
Thanks Siti. We don't break it out quarter-by-quarter, but if you remember from our Analyst Day back in May, we plotted that and our core customer revenue is still in excess of 80% of the total. And so using whatever assumptions you want to use against that number against the core customer count we gave you, you get to an ASP in the high 20,000, 27,000, 28,000, something like that. And I can walk you through that another time. But kind of more generally to a prior question about core customers, we see the same behavior, the same mix. As Scott said, we think are less than 10% penetrated in a big market. Smaller customers grow up into becoming core customers. Larger customers come on and become core customer sooner. But we think that's still a very good metric for modeling and understanding our business. And if and when that changes, we will break that out and help investors understand it. Today, core customer revenue is about 80% of our total.
I appreciate that. And then when you think about 2020 growth opportunity, you talk about momentum on your core customer compliance and then you talk about new products and services through both organic and an acquisition and then also like cross-border and international opportunity. How is your sales organization prepared for that?
I mean, it's a nice problem to have, I would say. I mean, what I am really most excited about is the team. What I mean by that is, is we have great core sales execution. I really like where the management team is taking us now and growing the business and becoming more professional in all the aspects of it. So I wouldn't say that there is any one particular area that just jumps out to me that says, hey, this is going to be earth shattering or that we are really pleased with. I mean the things that we have talked about, we are going to continue to push SST and business licenses, cross-border, we are going to go into international. I mean I think we are just really sort of locked-in in what we need to do. And it's a testament to all the employees that we have had in the past and frankly the new team that's grown both on a domestic and international basis. That's what I am most excited about.
And there are no further questions at this time. Mr. Scott McFarlane, Co-Founder and CEO, I turn the call back over to you for some closing remarks.
Sure. Thank you. I would like to take this opportunity to once again thank our employees, customers and partners for their hard work and support. We continue to be really excited about the market opportunity and the momentum that we are building in the business. So, thank you all for your interest in Avalara and we look forward to talking to you on the next call. Thanks much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.