Business Wire | Feb 10, 2021 04:10PM EST

Avalara Announces Fourth Quarter and Fiscal Year 2020 Financial Results

Feb. 10, 2021

SEATTLE--(BUSINESS WIRE)--Feb. 10, 2021--Avalara, Inc. (NYSE: AVLR), a leading provider of tax compliance automation for businesses of all sizes, today announced financial results for its fourth quarter and fiscal year ended December 31, 2020.

"In the fourth quarter, year-over-year revenue growth was 35% and year-over-year calculated billings growth was 38%, capping off an outstanding finish to our fiscal year 2020. For the full year, we delivered half a billion in revenue, up 31% year-over-year as well as record operating cash flow and free cash flow," said Scott McFarlane, Avalara co-founder and chief executive officer. "Our results demonstrate the adaptability and resilience of our business model during challenging times. As we look ahead to 2021, the generational shifts to omnichannel commerce and cloud-based solutions, a growing emphasis on efficiency through automation, and an increasingly complex regulatory environment remain ongoing tailwinds for our business. We believe we are still in the early days of penetrating a huge addressable market to automate global tax compliance and build the category-defining, global cloud compliance platform."

Fourth Quarter 2020 Financial Results

* Revenue: Total revenue was $144.8 million in the fourth quarter of 2020, up 35% from $107.6 million in the fourth quarter of 2019. Subscription and returns revenue was $132.6 million, up 33% from $100.0 million in the same period last year. Professional services revenue was $12.2 million, up 59% from $7.7 million in the same period last year. Total revenue from fourth quarter 2020 acquisitions was $6.5 million. * Gross Profit: GAAP gross profit was $104.2 million in the fourth quarter of 2020, representing a 72% gross margin, compared to a GAAP gross profit of $74.7 million and a 69% gross margin in the fourth quarter of 2019. Non-GAAP gross profit was $107.7 million, representing a 74% non-GAAP gross margin, compared to a non-GAAP gross profit of $76.8 million and a 71% non-GAAP gross margin in the fourth quarter of 2019. * Operating Loss: GAAP operating loss was $19.7 million in the fourth quarter of 2020, compared to a GAAP operating loss of $15.3 million in the fourth quarter of 2019. Non-GAAP operating loss was $0.6 million in the fourth quarter of 2020, compared to a non-GAAP operating loss of $5.1 million in the fourth quarter of 2019. * Net Loss: GAAP net loss was $11.0 million in the fourth quarter of 2020, compared to a GAAP net loss of $12.3 million in the fourth quarter of 2019. Non-GAAP net income was $8.1 million in the fourth quarter of 2020, compared to a non-GAAP net loss of $2.0 million in the fourth quarter of 2019. Fourth quarter 2020 results included a $9.4 million deferred income tax benefit related to our fourth quarter acquisitions. * Net Loss per Share: GAAP basic and diluted net loss per share was $0.13 based on 84.8 million weighted-average shares outstanding in the fourth quarter of 2020, compared to a GAAP basic and diluted net loss per share of $0.16 based on 77.1 million weighted-average shares outstanding in the fourth quarter of 2019. Non-GAAP diluted net income per share was $0.09 based on 89.3 million diluted weighted-average shares outstanding in the fourth quarter of 2020, compared to a non-GAAP diluted net loss per share of $0.03 based on 77.1 million weighted-average shares outstanding in the fourth quarter of 2019. * Deferred Revenue: Total deferred revenue was $209.7 million at December 31, 2020, up from $161.2 million at December 31, 2019. The current portion of deferred revenue was $208.0 million at December 31, 2020, up from $160.3 million at December 31, 2019. * Cash: Net cash provided by operating activities was $31.6 million in the fourth quarter of 2020, compared to $17.2 million provided by operating activities in the fourth quarter of 2019. Free cash flow was positive $28.6 million in the fourth quarter of 2020, compared to positive $14.2 million in the fourth quarter of 2019. Cash and cash equivalents totaled $673.6 million at December 31, 2020 compared to $467.0 million at December 31, 2019. * Calculated Billings: Calculated billings were $167.1 million in the fourth quarter of 2020, compared to calculated billings of $120.8 million in the fourth quarter of 2019.

Reconciliations of GAAP to non-GAAP financial measures have been provided in the tables included in this release.

Fiscal Year 2020 Financial Results

* Revenue: Total revenue was $500.6 million in fiscal year 2020, up 31% from $382.4 million in fiscal year 2019. Subscription and returns revenue was $465.8 million, up 31% from $355.2 million in the prior year. Professional services revenue was $34.7 million, up 28% from $27.2 million in the prior year. * Gross Profit: GAAP gross profit was $357.5 million in fiscal year 2020, representing a 71% gross margin, compared to a GAAP gross profit of $267.1 million and a 70% gross margin in fiscal year 2019. Non-GAAP gross profit was $368.5 million in fiscal year 2020, representing a 74% non-GAAP gross margin, compared to a non-GAAP gross profit of $275.1 million and a 72% non-GAAP gross margin in fiscal year 2019. * Operating Loss: GAAP operating loss was $62.0 million in fiscal year 2020, compared to a GAAP operating loss of $55.9 million in fiscal year 2019. Non-GAAP operating loss was $3.1 million in fiscal year 2020, compared to a non-GAAP operating loss of $14.4 million in fiscal year 2019. * Net Loss: GAAP net loss was $49.2 million in fiscal year 2020, compared to a GAAP net loss of $50.2 million in fiscal year 2019. Non-GAAP net income was $9.6 million in fiscal year 2020, compared to a non-GAAP net loss of $8.7 million in fiscal year 2019. * Net Loss per Share: GAAP basic and diluted net loss per share was $0.61 based on 81.0 million weighted-average shares outstanding in fiscal year 2020, compared to a GAAP basic and diluted net loss per share of $0.68 based on 73.3 million weighted-average shares outstanding in fiscal year 2019. Non-GAAP diluted net income per share was $0.11 based on 85.4 million diluted weighted average shares outstanding in fiscal year 2020, compared to non-GAAP diluted net loss per share of $0.12 based on 73.3 million weighted-average shares outstanding in fiscal year 2019. * Cash: Net cash provided by operating activities was $42.6 million in fiscal year 2020, compared to $22.2 million provided by operating activities in fiscal year 2019. Free cash flow was positive $34.0 million in fiscal year 2020, compared to positive $12.0 million in fiscal year 2019.

Reconciliations of GAAP to non-GAAP financial measures have been provided in the tables included in this release.

Fourth Quarter and Fiscal Year 2020 Operating Highlights

* Key Metrics: We ended the fourth quarter of 2020 with approximately 14,890 core customers, up from approximately 14,180 core customers at the end of the previous quarter and approximately 12,150 in the fourth quarter of 2019, representing a 23% increase year-over-year. Our net revenue retention rate was 104% in the fourth quarter of 2020 and has averaged 107% over the last four quarters. * We acquired Transaction Tax Resources, Inc. (TTR) to enhance our enterprise capabilities and create the leading content database in tax. TTR will continue to serve its customers with trusted solutions while integrating key products and content into Avalara's automation tools. * We acquired the operational assets of Business Licenses, LLC. Business Licenses provides software and services for the research, acquisition, and management of business licenses, registrations, and permits for businesses of all sizes. By acquiring the assets of Business Licenses, we expand our platform to include a corresponding compliance solution beyond tax. Our customers are required to obtain and maintain sales tax registrations in the jurisdictions where they have tax nexus, and building upon the existing partnership with Business Licenses, we will now be able to support these additional licensing requirements. Adding licensing allows us to better help businesses of every size manage and reduce regulatory complexity. * We acquired Impendulo Limited, a London-based provider of insurance tax compliance solutions. Impendulo gives us access to the global insurance premium tax compliance business, a new market that we believe could benefit from automation technology. * We entered into a definitive agreement to acquire INPOSIA Solutions GmbH, a German software company focused on e-invoicing, digital tax reporting, and business and data integration to address real-time compliance requirements for companies worldwide. The transaction is subject to satisfaction of closing conditions and is expected to close in the first half of 2021. With INPOSIA, we can further expand our European footprint and add e-invoicing compliance capabilities.

Recent and Fourth QuarterProduct Highlights

* We announced the availability of Avalara AvaTax Advanced Transaction Rules (ATR). ATR allows businesses to create, modify, and apply business and taxability rules that can be used before and after a tax calculation occurs. With ATR, businesses can define and align tax content decisions with enterprise resource planning, ecommerce, and other billing systems at the business process and transaction level. * In January 2021, we announced the availability of Avalara Managed Returns for Accountants (MRA), a cloud sales tax returns solution designed exclusively for accounting firms. MRA enables firms to extend their practice with automated sales tax preparation and filing services, provide clients with the benefits of a fully managed returns service, and add efficiency while focusing on other high-value services.

Financial Outlook

For the first quarter of 2021 the Company currently expects:

* Total revenue between $142.0 and $144.0 million. * Non-GAAP operating loss between $10.0 and $12.0 million.

For the full year 2021, the Company currently expects:

* Total revenue between $628.0 and $633.0 million. * Non-GAAP operating loss between $18.0 and $22.0 million.

Conference Call Information

Avalara will host a conference call at 2:00 p.m. Pacific Time (or 5:00 p.m. Eastern Time) today, February 10, 2021, to discuss its financial results and business highlights. The conference call can be accessed by dialing (866) 393-4306 from the United States and Canada or (734) 385-2616 internationally with conference ID 6557357. A live webcast of the call will also be available on the Avalara investor relations website at investor.avalara.com.

A telephone replay of the conference call will be available until 8:59 p.m. Pacific Time on Wednesday, February 17, 2021 and a webcast replay will also be archived at investor.avalara.com. The telephone replay will be available by dialing (855) 859-2056 from the United States and Canada or (404) 537-3406 internationally with conference ID 6557357.

About Avalara, Inc.

Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, GST, excise, communications, lodging, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in Brazil, Europe, and India. More information at www.avalara.com.

Forward-Looking Statements

This press release and the accompanying conference call contain forward-looking statements including, among others, statements about our financial outlook for the first quarter and full year 2021, our expectations for the integration of our acquisitions into our business, expected growth opportunities and synergies arising from the acquisitions, and expected timing of closing the INPOSIA acquisition. In some cases you can identify forward-looking statements because they contain words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "likely," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," or similar expressions and the negatives of those terms.

These forward-looking statements involve risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed or suggested by the forward-looking statements. If any of these risks or uncertainties materialize, or if any of our assumptions prove incorrect, our actual results could differ materially from the results expressed or implied by these forward-looking statements. These risks and uncertainties include risks associated with: our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth; our ability to attract new customers on a cost-effective basis and the extent to which existing customers renew and upgrade their subscriptions; the impact of the novel coronavirus (COVID-19) pandemic and any associated economic downturn on our business operations, results, and financial position; the timing of our introduction of new solutions or updates to existing solutions; our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content; our ability to maintain and expand our strategic relationships with third parties; our ability to deliver our solutions to customers without disruption or delay; our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance; our ability to expand our international reach; and the risks described in the other filings we make with the Securities and Exchange Commission from time to time, including the risks described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and subsequent Quarterly Reports on Form 10-Q, and which should be read in conjunction with our financial results and forward-looking statements. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made, except as required by law.

Use 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), non-GAAP basic net income (loss) per share, non-GAAP diluted net income (loss) per share, 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 at the end of this release.

* 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 stock-based compensation expense and the 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 income (loss) as GAAP operating loss before stock-based compensation expense, amortization of acquired intangibles, and goodwill impairments. We calculate non-GAAP net income (loss) as GAAP net loss before stock-based compensation expense, amortization of acquired intangibles, and goodwill impairments. * We calculate non-GAAP basic net income (loss) per share as non-GAAP net income (loss) divided by basic weighted average shares outstanding. * We calculate non-GAAP diluted net income (loss) per share as non-GAAP net income (loss) divided by diluted weighted average shares outstanding. Diluted weighted average shares outstanding includes weighted average shares outstanding plus the dilutive effect, if any, of outstanding common stock equivalents. * We define free cash flow as net cash provided by 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 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.

The company has not reconciled its expectations of non-GAAP financial measures to the corresponding GAAP measures primarily because stock-based compensation expense cannot be reasonably calculated or predicted at this time. Accordingly, a reconciliation is not available without unreasonable effort.

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.

Definitions of Key Business Metrics

We also use the key business metrics of core customers and net revenue retention rate.

Core Customers

We believe core customers is a key indicator of our market penetration, growth, and potential future revenue. We use core customers as a metric to focus our customer count reporting on our primary target market segment. We define a core customer as:

* a unique account identifier in our primary U.S. billing systems (multiple 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 $3,000 in total revenue during the previous twelve months.

Currently, our core customer count includes only customers with unique account identifiers in our primary U.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 primary U.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 numerous enterprise-level customers that 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.

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 primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy and acquired billing systems that have not been integrated into our primary U.S. billing systems. Our Streamlined Sales Tax solution (SST) 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 of Avalara's other solutions with SST is included.

Reported Consolidated Results

AVALARA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)

For the Three Months Ended December 31,

2020 2019

Revenue:

Subscription and returns $ 132,567 $ 99,956

Professional services 12,193 7,671

Total revenue 144,760 107,627

Cost of revenue:

Subscription and returns 34,882 28,287

Professional services 5,697 4,592

Total cost of revenue ^(1) 40,579 32,879

Gross profit 104,181 74,748

Operating expenses:

Research and development ^(1) 34,457 25,619

Sales and marketing ^(1) 59,759 46,310

General and administrative ^(1) 29,647 18,154

Total operating expenses 123,863 90,083

Operating loss (19,682 ) (15,335 )

Other (income) expense:

Interest income (32 ) (1,786 )

Interest expense - 3

Other (income) expense, net 637 (1,559 )

Total other (income) expense, net 605 (3,342 )

Loss before income taxes (20,287 ) (11,993 )

(Benefit from) provision for income taxes (9,256 ) 326

Net loss $ (11,031 ) $ (12,319 )



Net loss per share attributable to common $ (0.13 ) $ (0.16 )shareholders, basic and diluted

Weighted average shares of common stock 84,767 77,147 outstanding, basic and diluted



For the Three Months Ended December 31,

^(1) The stock-based compensation expense 2020 2019 included above was as follows:

Cost of revenue $ 1,645 $ 845

Research and development 3,971 1,966

Sales and marketing 3,219 2,325

General and administrative 4,536 3,307

Total stock-based compensation $ 13,371 $ 8,443



The amortization of acquired intangibles included above was as follows:

Cost of revenue $ 1,864 $ 1,219

Research and development - -

Sales and marketing 3,061 618

General and administrative 807 4

Total amortization of acquired intangibles $ 5,732 $ 1,841

AVALARA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)

For the Year Ended December 31,

2020 2019

Revenue:

Subscription and returns $ 465,825 $ 355,181

Professional services 34,744 27,240

Total revenue 500,569 382,421

Cost of revenue:

Subscription and returns 124,333 97,824

Professional services 18,762 17,475

Total cost of revenue ^(1) 143,095 115,299

Gross profit 357,474 267,122

Operating expenses:

Research and development ^(1) 119,710 82,442

Sales and marketing ^(1) 204,490 168,634

General and administrative ^(1) 95,242 71,918

Total operating expenses 419,442 322,994

Operating loss (61,968 ) (55,872 )

Other (income) expense:

Interest income (1,678 ) (6,037 )

Interest expense - 289

Other (income) expense, net (2,798 ) (865 )

Total other (income) expense, net (4,476 ) (6,613 )

Loss before income taxes (57,492 ) (49,259 )

(Benefit from) provision for income taxes (8,309 ) 955

Net loss $ (49,183 ) $ (50,214 )



Net loss per share attributable to common $ (0.61 ) $ (0.68 )shareholders, basic and diluted

Weighted average shares of common stock 80,985 73,345 outstanding, basic and diluted



For the Year Ended December 31,

^(1) The stock-based compensation expense included 2020 2019 above was as follows:

Cost of revenue $ 5,909 $ 3,122

Research and development 13,226 6,666

Sales and marketing 12,147 8,736

General and administrative 16,888 15,825

Total stock-based compensation $ 48,170 $ 34,349



The amortization of acquired intangibles included above was as follows:

Cost of revenue $ 5,166 $ 4,854

Research and development - -

Sales and marketing 4,664 2,271

General and administrative 819 15

Total amortization of acquired intangibles $ 10,649 $ 7,140



AVALARA, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (in thousands)

December December 31, 31,

2020 2019

Assets

Current assets:

Cash and cash equivalents $ 673,593 $ 466,950

Restricted cash 19,953 -

Trade accounts receivable-net of allowance for 75,857 51,644 doubtful accounts

Deferred commissions 12,245 9,279

Prepaid expenses and other current assets 20,098 14,127

Total current assets before customer fund assets 801,746 542,000

Funds held from customers 30,598 24,383

Receivable from customers-net of allowance for 563 420 doubtful accounts

Total current assets 832,907 566,803

Noncurrent assets:

Restricted cash 37,700 -

Deferred commissions 38,625 29,137

Operating lease right-of-use assets-net 52,320 49,321

Property and equipment-net 34,713 34,997

Intangible assets-net 86,513 22,932

Goodwill 513,234 101,224

Other noncurrent assets 6,321 2,853

Total assets $ 1,602,333 $ 807,267



Liabilities and shareholders' equity

Current liabilities:

Trade payables 20,280 11,693

Accrued expenses 84,532 59,341

Deferred revenue 208,026 160,271

Accrued purchase price related to acquisitions 22,473 2,763

Accrued earnout liabilities 749 4,120

Operating lease liabilities 11,339 8,756

Total current liabilities before customer fund 347,399 246,944 obligations

Customer fund obligations 31,549 24,783

Total current liabilities 378,948 271,727

Noncurrent liabilities:

Deferred revenue 1,664 970

Accrued purchase price related to acquisitions 49,057 -

Accrued earnout liabilities 34,468 9,835

Operating lease liabilities 56,625 58,301

Deferred tax liability 1,031 337

Other noncurrent liabilities 380 2,375

Total liabilities 522,173 343,545

Commitments and contingencies

Shareholders' equity:

Preferred stock - -

Common stock 9 8

Additional paid-in capital 1,640,867 976,627

Accumulated other comprehensive loss (1,339 ) (2,719 )

Accumulated deficit (559,377 ) (510,194 )

Total shareholders' equity 1,080,160 463,722

Total liabilities and shareholders' equity $ 1,602,333 $ 807,267



AVALARA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

For the Three Months Ended December 31,

2020 2019 ^(1)

Cash flows from operating activities:

Net loss $ (11,031 ) $ (12,319 )

Adjustments to reconcile net loss to net cash provided by operating activities

Stock-based compensation 13,371 8,443

Depreciation and amortization 8,310 4,123

Deferred tax benefit (9,612 ) (361 )

Non-cash operating lease costs 2,084 1,620

Non-cash change in earnout liability - (1,653 )

Non-cash bad debt expense 618 765

Other (9 ) 310

Changes in operating assets and liabilities:

Trade accounts receivable (5,716 ) (3,214 )

Prepaid expenses and other current assets 846 (270 )

Deferred commissions (5,029 ) (5,934 )

Other noncurrent assets (145 ) (434 )

Trade payables 3,343 965

Accrued expenses 17,732 13,941

Deferred revenue 19,857 12,776

Operating lease liabilities (3,061 ) (1,605 )

Net cash provided by operating activities 31,558 17,153

Cash flows from investing activities:

Purchase of property and equipment (1,533 ) (2,281 )

Capitalized software development costs (1,453 ) (703 )

Cash paid for acquisitions of businesses, net of (368,198 ) - cash acquired

Cash paid for acquired intangible assets (1,200 ) -

Net cash used in investing activities (372,384 ) (2,984 )

Cash flows from financing activities:

Payments of deferred financing costs (386 ) -

Proceeds from exercise of stock options 9,229 6,436

Net increase in customer fund obligations 4,057 7,520

Net cash provided by financing activities 12,900 13,956

Foreign currency effect 396 (20 )

Net change in cash, cash equivalents, restricted (327,530 ) 28,105 cash, and restricted cash equivalents

Cash, cash equivalents, restricted cash, and 1,089,374 463,228 restricted cash equivalents-Beginning of period

Cash, cash equivalents, restricted cash, and $ 761,844 $ 491,333 restricted cash equivalents-End of period

Reconciliation of cash, cash equivalents,restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets, end ofperiod:

Cash and cash equivalents $ 673,593 $ 466,950

Restricted cash 57,653 -

Restricted cash equivalents-funds held from 30,598 24,383 customers

Total cash, cash equivalents, restricted cash, $ 761,844 $ 491,333 and restricted cash equivalents, end of period

^(1) We have corrected the Consolidated Statement of Cash Flows for the threemonths ended December 31, 2019 (see Unaudited Corrected Statements of CashFlows schedule below for details).

AVALARA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

For the Year Ended December 31,

2020 2019 ^(1)

Cash flows from operating activities:

Net loss $ (49,183 ) $ (50,214 )

Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation 48,170 34,349

Depreciation and amortization 20,233 15,807

Asset impairments 794 -

Deferred tax benefit (9,419 ) (223 )

Non-cash operating lease costs 8,111 5,000

Non-cash change in earnout liabilities (2,325 ) (1,043 )

Non-cash bad debt expense 2,063 1,367

Other (230 ) 104

Changes in operating assets and liabilities:

Trade accounts receivable (17,921 ) (12,862 )

Prepaid expenses and other current assets (3,333 ) (3,544 )

Deferred commissions (12,454 ) (19,149 )

Other noncurrent assets (2,843 ) (1,265 )

Trade payables 8,026 5,783

Accrued expenses 23,979 16,246

Deferred revenue 39,254 37,558

Operating lease liabilities (10,304 ) (5,764 )

Net cash provided by operating activities 42,618 22,150

Cash flows from investing activities:

Purchase of property and equipment (4,501 ) (7,885 )

Capitalized software development costs (4,159 ) (2,295 )

Cash paid for acquisitions of businesses, net of (368,198 ) (30,310 )cash acquired

Cash paid for acquired intangible assets (1,200 ) (139 )

Net cash used in investing activities (378,058 ) (40,629 )

Cash flows from financing activities:

Proceeds from common stock offering, net of 556,312 274,705 underwriting discounts

Payments of deferred financing costs (686 ) (555 )

Proceeds from exercise of stock options 39,946 58,019

Proceeds from purchases of stock under employee 11,337 12,293 stock purchase plan

Taxes paid related to net share settlement of - (1,183 )stock-based awards

Acquisition-related post-closing payments (2,763 ) -

Payments related to business combination earnouts (3,760 ) (375 )

Payments related to asset acquisition earnouts (65 ) -

Net increase in customer fund obligations 5,738 11,506

Net cash provided by financing activities 606,059 354,410

Foreign currency effect (108 ) (33 )

Net change in cash, cash equivalents, restricted 270,511 335,898 cash, and restricted cash equivalents

Cash, cash equivalents, restricted cash, and 491,333 155,435 restricted cash equivalents-Beginning of period

Cash, cash equivalents, restricted cash, and $ 761,844 $ 491,333 restricted cash equivalents-End of period

Reconciliation of cash, cash equivalents,restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets, end of period:

Cash and cash equivalents $ 673,593 $ 466,950

Restricted cash 57,653 -

Restricted cash equivalents-funds held from 30,598 24,383 customers

Total cash, cash equivalents, restricted cash, and $ 761,844 $ 491,333 restricted cash equivalents, end of period

^(1) We have corrected the Consolidated Statement of Cash Flows for the yearended December 31, 2019 (see Unaudited Corrected Statements of Cash Flowsschedule below for details).

AVALARA, INC. UNAUDITED PRESENTATION AND RECONCILIATION TO NON-GAAP FINANCIAL MEASURES (in thousands, except per share amounts)

The following schedules summarize our non-GAAP financial measures and reconcile these non-GAAP financial measures to the related GAAP financial measures:

Summary of Non-GAAP Financial Measures:

For the Three Months For the Year Ended Ended December 31, December 31,

2020 2019 2020 2019

Non-GAAP cost of revenue $ 37,070 $ 30,815 $ 132,020 $ 107,323

Non-GAAP gross profit 107,690 76,812 368,549 275,098

Non-GAAP gross margin 74 % 71 % 74 % 72 %

Non-GAAP research and $ 30,486 $ 23,653 $ 106,484 $ 75,776 development expense

Non-GAAP sales and 53,479 43,367 187,679 157,627 marketing expense

Non-GAAP general and 24,304 14,843 77,535 56,078 administrative expense

Non-GAAP operating loss (579 ) (5,051 ) (3,149 ) (14,383 )

Non-GAAP net income 8,072 (2,035 ) 9,636 (8,725 )(loss)

Non-GAAP basic net 0.10 (0.03 ) 0.12 (0.12 )income (loss) per share

Non-GAAP diluted net 0.09 (0.03 ) 0.11 (0.12 )income (loss) per share

Free cash flow $ 28,572 $ 14,169 $ 33,958 $ 11,970

Reconciliation of Non-GAAP Financial Measures:

For the Three Months For the Year Ended Ended December 31, December 31,

2020 2019 2020 2019

Reconciliation ofNon-GAAP Cost of Revenue:

Cost of revenue $ 40,579 $ 32,879 $ 143,095 $ 115,299

Stock-based compensation (1,645 ) (845 ) (5,909 ) (3,122 )expense

Amortization of acquired (1,864 ) (1,219 ) (5,166 ) (4,854 )intangibles

Non-GAAP Cost of Revenue $ 37,070 $ 30,815 $ 132,020 $ 107,323



Reconciliation of Non-GAAP Gross Profit:

Gross Profit $ 104,181 $ 74,748 $ 357,474 $ 267,122

Stock-based compensation 1,645 845 5,909 3,122 expense

Amortization of acquired 1,864 1,219 5,166 4,854 intangibles

Non-GAAP Gross Profit $ 107,690 $ 76,812 $ 368,549 $ 275,098



Reconciliation of Non-GAAP Gross Margin:

Gross margin 72 % 69 % 71 % 70 %

Stock-based compensationexpense as a percentage 1 % 1 % 1 % 1 %of revenue

Amortization of acquiredintangibles as a 1 % 1 % 1 % 1 %percentage of revenue

Non-GAAP Gross Margin 74 % 71 % 74 % 72 %



Reconciliation ofNon-GAAP Research and Development Expense:

Research and development $ 34,457 $ 25,619 $ 119,710 $ 82,442

Stock-based compensation (3,971 ) (1,966 ) (13,226 ) (6,666 )expense

Amortization of acquired - - - - intangibles

Non-GAAP Research and $ 30,486 $ 23,653 $ 106,484 $ 75,776 Development Expense



Reconciliation ofNon-GAAP Sales and Marketing Expense:

Sales and marketing $ 59,759 $ 46,310 $ 204,490 $ 168,634

Stock-based compensation (3,219 ) (2,325 ) (12,147 ) (8,736 )expense

Amortization of acquired (3,061 ) (618 ) (4,664 ) (2,271 )intangibles

Non-GAAP Sales and $ 53,479 $ 43,367 $ 187,679 $ 157,627 Marketing Expense



Reconciliation ofNon-GAAP General and Administrative Expense:

General and $ 29,647 $ 18,154 $ 95,242 $ 71,918 administrative

Stock-based compensation (4,536 ) (3,307 ) (16,888 ) (15,825 )expense

Amortization of acquired (807 ) (4 ) (819 ) (15 )intangibles

Non-GAAP General and $ 24,304 $ 14,843 $ 77,535 $ 56,078 Administrative Expense

For the Three Months Ended December 31,

For the Year Ended December 31,

2020

2019

2020

2019

Reconciliation of Non-GAAP Operating Loss:

Operating loss

$

(19,682

)

$

(15,335

)

$

(61,968

)

$

(55,872

)

Stock-based compensation expense

13,371

8,443

48,170

34,349

Amortization of acquired intangibles

5,732

1,841

10,649

7,140

Non-GAAP Operating Loss

$

(579

)

$

(5,051

)

$

(3,149

)

$

(14,383

)

Reconciliation of Non-GAAP Net Income (Loss):

Net loss

$

(11,031

)

$

(12,319

)

$

(49,183

)

$

(50,214

)

Stock-based compensation expense

13,371

8,443

48,170

34,349

Amortization of acquired intangibles

5,732

1,841

10,649

7,140

Non-GAAP Net Income (Loss)

$

8,072

$

(2,035

)

$

9,636

$

(8,725

)

Reconciliation of Non-GAAP Basic Net Income (Loss) Per

Share:

Net loss per share

$

(0.13

)

$

(0.16

)

$

(0.61

)

$

(0.68

)

Stock-based compensation expense per share

0.16

0.11

0.59

0.47

Amortization of acquired intangibles per share

0.07

0.02

0.13

0.10

Non-GAAP Basic Net Income (Loss) Per Share

$

0.10

$

(0.03

)

$

0.12

$

(0.12

)

Reconciliation of Non-GAAP Diluted Net Income (Loss) Per

Share:

Net loss per share

$

(0.12

)

$

(0.16

)

$

(0.58

)

$

(0.68

)

Stock-based compensation expense per share

0.15

0.11

0.56

0.47

Amortization of acquired intangibles per share

0.06

0.02

0.12

0.10

Non-GAAP Diluted Net Income (Loss) Per Share (1)

$

0.09

$

(0.03

)

$

0.11

$

(0.12

)

Shares used in computing non-GAAP diluted net income (loss) per share

89,257

77,147

85,381

73,345

(1) Non-GAAP diluted net income per share for the three months and year ended December 31, 2020 was calculated using the diluted share count which includes approximately 4.5 million and 4.4 million dilutive shares, respectively, related to employee stock options and stock-based awards. For the three months and year ended December 31, 2019, all common stock equivalents have been excluded from the diluted share count as their effect is antidilutive.

Free Cash Flow:

Net cash provided by operating activities (2)

$

31,558

$

17,153

$

42,618

$

22,150

Less: Purchases of property and equipment (3)

(1,533

)

(2,281

)

(4,501

)

(7,885

)

Less: Capitalized software development costs (3)

(1,453

)

(703

)

(4,159

)

(2,295

)

Free Cash Flow

$

28,572

$

14,169

$

33,958

$

11,970

(2) We have corrected net cash provided by operating activities for the three months and year ended December 31, 2019 (see Unaudited Corrected Statements of Cash Flows schedule below for details).

(3) Capitalized software development costs were previously included in purchases of property and equipment and does not impact previously reported free cash flow.

AVALARA, INC. UNAUDITED PRESENTATION OF CALCULATED BILLINGS AND RECONCILIATION TO REVENUE

For the Three Months For the Year Ended Ended December 31, December 31,

2020 2019 2020 2019

Reconciliation ofNon-GAAP Operating Loss:

Operating loss $ (19,682 ) $ (15,335 ) $ (61,968 ) $ (55,872 )

Stock-based 13,371 8,443 48,170 34,349 compensation expense

Amortization of 5,732 1,841 10,649 7,140 acquired intangibles

Non-GAAP Operating Loss $ (579 ) $ (5,051 ) $ (3,149 ) $ (14,383 )



Reconciliation ofNon-GAAP Net Income (Loss):

Net loss $ (11,031 ) $ (12,319 ) $ (49,183 ) $ (50,214 )

Stock-based 13,371 8,443 48,170 34,349 compensation expense

Amortization of 5,732 1,841 10,649 7,140 acquired intangibles

Non-GAAP Net Income $ 8,072 $ (2,035 ) $ 9,636 $ (8,725 )(Loss)



Reconciliation ofNon-GAAP Basic Net Income (Loss) Per

Share:

Net loss per share $ (0.13 ) $ (0.16 ) $ (0.61 ) $ (0.68 )

Stock-basedcompensation expense 0.16 0.11 0.59 0.47 per share

Amortization ofacquired intangibles 0.07 0.02 0.13 0.10 per share

Non-GAAP Basic Net $ 0.10 $ (0.03 ) $ 0.12 $ (0.12 )Income (Loss) Per Share



Reconciliation ofNon-GAAP Diluted Net Income (Loss) Per

Share:

Net loss per share $ (0.12 ) $ (0.16 ) $ (0.58 ) $ (0.68 )

Stock-basedcompensation expense 0.15 0.11 0.56 0.47 per share

Amortization ofacquired intangibles 0.06 0.02 0.12 0.10 per share

Non-GAAP Diluted NetIncome (Loss) Per Share $ 0.09 $ (0.03 ) $ 0.11 $ (0.12 )^(1)

Shares used incomputing non-GAAPdiluted net income 89,257 77,147 85,381 73,345 (loss) pershare

^(1) Non-GAAP diluted net income per share for the three months and yearended December 31, 2020 was calculated using the diluted share count whichincludes approximately 4.5 million and 4.4 million dilutive shares,respectively, related to employee stock options and stock-based awards. For the three months and year ended December 31, 2019, all common stockequivalents have been excluded from the diluted share count as their effectis antidilutive.



Free Cash Flow:

Net cash provided byoperating activities ^ $ 31,558 $ 17,153 $ 42,618 $ 22,150 (2)

Less: Purchases ofproperty and equipment (1,533 ) (2,281 ) (4,501 ) (7,885 )^(3)

Less: Capitalizedsoftware development (1,453 ) (703 ) (4,159 ) (2,295 )costs ^(3)

Free Cash Flow $ 28,572 $ 14,169 $ 33,958 $ 11,970

^(2) We have corrected net cash provided by operating activities for thethree months and year ended December 31, 2019 (see Unaudited CorrectedStatements of Cash Flows schedule below for details). ^(3) Capitalized software development costs were previously included inpurchases of property and equipment and does not impact previously reportedfree cash flow.

AVALARA, INC. UNAUDITED PRESENTATION OF CALCULATED BILLINGS AND RECONCILIATION TO REVENUE

Three Months Ended

Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2020 (2) 2020 2020 2020 2019 2019 2019 2019 (1)

Total $ 144,760 $ 127,879 $ 116,487 $ 111,443 $ 107,627 $ 98,525 $ 91,299 $ 84,970 revenue

Add:

Deferredrevenue (end of

period) 209,690 180,640 167,719 165,369 161,241 148,466 138,811 132,714

Contractliabilities (end of

period) 10,134 7,673 6,195 6,330 5,197 4,843 4,508 4,208

Impact of adoption of

ASC 606 ondeferred

revenue - - - - - - - 11,250

Less:

Deferred revenue

(beginning of

period) (180,640 ) (167,719 ) (165,369 ) (161,241 ) (148,466 ) (138,811 ) (132,714 ) (134,653 )

Contract liabilities

(beginningof

period) (7,673 ) (6,195 ) (6,330 ) (5,197 ) (4,843 ) (4,508 ) (4,208 ) -

Impact of adoption of

ASC 606 oncontract

liabilities - - - - - - - (2,090 )

Deferredrevenue assumed in

business (9,194 ) - - - - - - -combinations

Calculated $ 167,077 $ 142,278 $ 118,702 $ 116,704 $ 120,756 $ 108,515 $ 97,696 $ 96,399 billings

(1) The first quarter of 2019 includes reconciling adjustments to exclude theone-time impact of adoption of ASC 606 as of January 1, 2019.

(2) The fourth quarter of 2020 includes reconciling adjustments to exclude theacquisition-date fair value of deferred revenue assumed in businesscombinations.

AVALARA, INC. UNAUDITED PRESENTATION OF KEY BUSINESS METRICS

Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, 2020 2020 2020 2020 2019 2019 2019 2019

Number of core

customers

(as of end

of period) 14,890 14,180 13,560 12,940 12,150 11,400 10,560 9,800

Net revenue

retention 104 % 108 % 107 % 109 % 111 % 113 % 111 % 107 %rate

AVALARA, INC. UNAUDITED CORRECTED CONSOLIDATED STATEMENTS OF CASH FLOWS

During the fourth quarter of 2020, we discovered an immaterial error in the presentation and classification of funds held from customers in the Consolidated Statements of Cash Flows for each of the first three quarters of 2020 and for each of the four quarters and year ended December 31, 2019. The error was related to the classification and presentation of changes in funds held from customers, which are considered restricted cash equivalents. Previously, we presented the change in funds held from customers as a separate caption within Investing Activities in the Consolidated Statements of Cash Flows. To correct this error, amounts previously reported as investing activities for the changes in funds held from customers are reported as restricted cash equivalents. In the tables below, we have presented our Unaudited Consolidated Statements of Cash Flows as previously reported and as corrected for each of the first three quarters of 2020, each of the four quarters of 2019 and the year ended December 31, 2019.

For the Three Months Ended

September 30, 2020 June 30, 2020 March 31, 2020

As As As As As As Previously Corrected Previously Corrected Previously Corrected Reported Reported Reported

Cash flows from operating activities:

Adjustments toreconcile net loss tonet cash used in operatingactivities:

Other $ 101 $ 213 $ 253 $ (424 ) $ 192 $ (10 )

Net cash provided byoperating 27,922 28,034 8,174 7,497 (24,269 ) (24,471 )activities

Cash flows from investing activities:

Net (increase) decrease (3,662 ) - 5,896 - (3,915 ) - in customer fund assets

Net cash used in (5,780 ) (2,118 ) 3,940 (1,956 ) (5,515 ) (1,600 )investing activities

Net change in cash,cash equivalents,restricted cash, and 589,666 593,440 23,876 17,303 (16,415 ) (12,702 )restricted cashequivalents

Cash, cash equivalents,restricted cash, andrestricted cash 474,411 495,934 450,535 478,631 466,950 491,333 equivalents-Beginningof period

Cash, cash equivalents,restricted cash, andrestricted cash $ 1,064,077 $ 1,089,374 $ 474,411 $ 495,934 $ 452,765 $ 478,631 equivalents-End ofperiod

For the Three Months Ended

For the Year Ended

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

December 31, 2019

As Previously Reported

As Corrected

As Previously Reported

As Corrected

As Previously Reported

As Corrected

As Previously Reported

As Corrected

As Previously Reported

As Corrected

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Other

$

112

$

310

$

32

$

311

$

137

$

396

$

58

$

(914

)

$

339

$

104

Net cash provided by operating activities

16,955

17,153

5,852

6,131

10,000

10,259

(10,421

)

(11,393

)

22,386

22,150

Cash flows from investing activities:

Net (increase) decrease in customer fund assets

(7,520

)

-

7,892

-

(4,654

)

-

(7,224

)

-

(11,506

)

-

Net cash used in investing activities

(10,504

)

(2,984

)

(7,362

)

(15,254

)

(7,490

)

(2,836

)

(26,779

)

(19,555

)

(52,135

)

(40,629

)

Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents

20,387

28,105

4,979

(2,634

)

294,706

299,619

4,556

10,808

324,628

335,898

Cash, cash equivalents, restricted cash, and restricted cash equivalents-Beginning of period

446,563

463,228

441,584

465,862

146,878

166,243

142,322

155,435

142,322

155,435

Cash, cash equivalents, restricted cash, and restricted cash equivalents-End of period

$

466,950

$

491,333

$

446,563

$

463,228

$

441,584

$

465,862

$

146,878

$

166,243

$

466,950

$

491,333

View source version on businesswire.com: https://www.businesswire.com/news/home/20210210005895/en/

CONTACT: Investor Contact Jennifer Gianola Avalara jennifer.gianola@avalara.com 650-499-9837 Media Contact Tommy Morgan Avalara media@avalara.com 540-448-7551