Recent IPO Avalara (AVLR 43.09, -2.88, -6.26%) is trading lower today after reporting
Q2 results last night, its first report as a public company. Avalara is a
provider of cloud-based software that helps companies deal with complex tax reporting
and compliance issues. While businesses ranging from small businesses to
Fortune 100 companies, use Avalara's platform, its primary target market is
mid-market customers that have 20 to 500 employees.
Constantly shifting taxation and reporting obligations from local, regional, state, and national taxing authorities has created a complex and onerous compliance burden for businesses of all sizes. In simple terms, Avalara's platform helps companies navigate a complex web of tax laws in various jurisdictions in order for these companies to collect accurate sales taxes and other taxes from their customers. Avalara helps improve accuracy by automating the processes of determining taxability, identifying applicable tax rates, determining and collecting taxes, preparing and filing returns, remitting taxes, maintaining tax records, and managing compliance documents. Today, many businesses attempt to handle transaction tax compliance using spreadsheets. However, this can result in miscalculations and incorrect collections.
Turning to the Q2 results, Avalara reported a non-GAAP loss of $(0.19) per share, a penny better than last year and better than market expectations. Revenue rose 25.2% year/year to $63.7 mln, which was modestly above market expectations. In terms of guidance, Avalara expects Q3 revenue of $66.0-66.5 mln and $260-261 mln for the full year. These are unusually narrow ranges within which to provide guidance, but they are helpful.
Avalara believes its business momentum has continued to strengthen and that it is well positioned to be a long-term leader in a multi-bln dollar market opportunity. Companies of all sizes are increasingly looking for modern, cloud-based transaction tax compliance automation systems as they digitize their businesses.
On the call last night, management said it continued to expand its customer base in the mid-market, which is AVLR's bread and butter. They also said that international opportunities are at least as large as seen in the US. For example, Europe is only 10% of sales, so a lot of room for growth overseas. Overall, AVLR feels it's in just the first inning in terms of market penetration.
AVLR also provided some color on the recent US Supreme Court decision which says states can tax out of state online sales. AVLR says the ruling has created buzz and it's seeing initial interest but it's too early to tell if it will have a long-term impact. AVLR said it's not dependent on judicial or legislative outcomes to fuel the business. Management cautioned investors to wait to see how states or Congress reacts to the ruling.
In sum, despite the upside Q2 results, the stock is trading lower. We surmise there are a number of reasons for this. First, the upside was good but not a blowout, especially in terms of revenue. With it being AVLR's first quarter out of the box as a public company, investors really like to see blowout results. Second, the commentary on the US Supreme Court struck us as pretty muted/cautious. Investors have been excited about the decision would mean for AVLR, but the company seemed to cool the talk down, advising people to wait for how the states/Congress will react. Third, the stock had run 24% in the week leading up to the report, hoping for blowout numbers. So, expectations were a bit too high and people are booking some profits.
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