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Avalara, Inc.  (NYSE:AVLR)
Q4 2018 Earnings Conference Call
Feb. 12, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Avalara Fourth Quarter and Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn my call over to Kevin Faulkner, Investor Relations. You may begin.

Kevin Faulkner -- Investor Relations

Good afternoon and welcome to Avalara's Fourth Quarter and Fiscal 2018 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 first 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 8, 2018 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.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Thanks, Kevin and welcome to everyone joining the Q4 and Fiscal 2018 Earnings Call. Q4 was a strong end to an exciting 2018. For the fourth quarter, we reported total revenue of $76.9 million, representing an increase of 33% over the prior year. It was our highest quarterly growth rate in the last two years. We exited 2018 at a revenue run rate of over $300 million. Fiscal '18 was a monumental year for Avalara and our financial results are a testament to the strength of our team and the value we deliver every day.

I'd like to take a moment to congratulate our employees on their hard work and thank our customers and partners for their trust in Avalara. Our vision is to be part of every transaction in the world and my aspiration for Avalara is to build a great an enduring Company. Our IPO last year was an important milestone for Avalara. But hard and exciting work is the head to transport Avalara to the next phase of our business and support our vision for growth.

For anyone new to the Avalara story, let me briefly summarize our business. Since we founded the Company almost 15 years ago, our mission has been to alleviate customer's tax-compliance burdens, so they can focus on their core operations. Transaction taxes affects millions of transactions every day and compliance requirements are extremely burdensome. Businesses must navigate a maze of requirements from endlessly changing rates, taxability rules, exemptions and geographic boundaries to registrations and filing requirements across thousands of overlapping jurisdictions in the US and around the world.

Today, transaction tax-compliance is a highly manual process for many businesses. We believe it's absurd to think sales tax won't be automated in the digital world. Avalara addresses this opportunity with a cloud-based suite of automated compliance solutions to register sellers and to calculate collect, record file and remit transaction taxes. Avalara's steady growth arises from the numerous constantly occurring events that trigger adoption of automated solutions.

Trigger points for potential customers include the adoption of new ERP systems, releasing new products, entering new jurisdictions, migrating to the cloud and changing government regulations.The trigger events constantly happen allowing the businesses to finally deal with something that they know that they've been doing wrong, sales tax. The adoption of an automated sales tax system happens as part of the response to these trigger events. Right now, a particularly significant shift in transaction tax regulations is shaping the US market. The Supreme Courts' 2018 Wayfair decision has been a sea change for transaction taxability, by raising awareness and creating a greater sense of urgency. The idea that a seller must have physical presence in order to be required to remit transaction tax in a given state is dead (ph). Instead, taxability can now be determined by location of the buyer.

While we continue to believe the effects of the Wayfair decision will play out over time, several states have already adopted new economic nexus rules. So far, 33 states plus Washington DC have adopted sales tax nexus rules based on the economic activity, rather than physical presence. We know everybody is tracking what the large states are doing. And since our last earnings call, we have seen significant action. New York, California, Texas, now have nexus rules based on transactions. Many of the new rules take effect at different dates throughout the year, giving sellers time to update their tax-compliance systems. But New York is enforcing their law, effective immediately. We are already seeing an uptick in the new and existing customers using our service to register in a host of new states where they now must collect and remit sales tax.

We believe Avalara is well positioned to be a primary beneficiary of this policy change. In executing, we are focused on three areas: growth, efficiency and partners. I'll highlight some of the recent progress in these areas.

Starting with growth. Q4 was a strong growth quarter. We achieved strong Q4 sales driven by new customer wins across a wide range of industries and geographies. We also saw some strong customer retention up-sell and cross-sell activity.We announced the availability of Avalara Licensing in October. Avalara Licensing allows businesses to easily obtain the required business licenses and sales tax registrations for each new jurisdictions where they have the obligation to collect and remit sales tax. Avalara Licensing has become an important product for us. We understand that whoever provides registration services has a big advantage in winning the calculation and returns business. Productizing Avalara Licensing and aggressively marketing it were important parts of our response to the Wayfair ruling. Another growth strategy has been to continue investing and expanding our content base. As our content base covers more and more segments of the world's commerce, we widen our competitive moat.

An example of building our content base is our recent Compli acquisition. Compli is a leading supplier of compliance services to the alcoholic beverage industry. The company specializes in beverage compliance and has served thousands of wineries, distilleries, breweries, wholesalers and importers through its customers. Compli service include returns filings and remittance for sales and excise taxes, license registrations and renewals for the sale of alcohol and the regulatory reporting for interstate shipments. Alcoholic beverage compliance has been a commonly requested expansion area for Avalara. And Compli will help us accelerate our ability to serve customers in retail spaces such as food and beverage, grocery and hospitality. In addition to growth, improving our efficiency is a constant focus for Avalara and is a strategic priority for fiscal '19. Since Avalara's inception, the task of gathering and maintaining tax content and global product information has been a highly manual process. It is difficult and resource-intensive, requiring specialized technology, expertise and significant human capital. We've always believed that we could close more opportunities and open up more market segments, if we could automate updates to content, which as you know is constantly changed by global taxing authorities.

We have been closely watching the artificial intelligence market to identify ways to drive global efficiency and accuracy. And I'm pleased to announce that last week, we acquired the intellectual property from Indix. Indix is an artificial intelligence company providing comprehensive product descriptions for more than 1 billion products sold and shipped worldwide. Indix was built to map details of every product sold anywhere in the world. It has an advanced natural language processing and machine learning technology that collects, aggregates and manages massive amounts of classification and attribute data related to more than 1 billion products worldwide. We see a multitude of benefits from integrating the Indix technology into our databases. We believe it will gradually over time replace the maintenance work performed by our content analysts, improve the accuracy and completeness of our content, speed up our Go Live implementation process, ease the process of adding new products or geographies for our customers and enable our customers to see exactly how their products are treated around the world to help them plan for compliance obligations as they grow.

Automation is an important initiative for us. But just to be clear, we recognize that we will never be a 100% automated. We will continue to have highly skilled tax experts, checking and ensuring the information is accurate. These technologies will simply make our tax experts more productive. In summary, when we combine the Indix product library and AI technology with Avalara's tax expertise and compliance content, we believe we will offer the industry's most accurate, up to date and comprehensive source of global tax and product content. In 2019, we are also investing to improve efficiency in our returns business, especially in Europe. We are working to reduce the need for expensive manual input by improving automation of the process of determining where to file returns, populating the data and filing the returns.In addition to those strategic priorities for fiscal '19, our engineering team delivered several efficiency improvements last year.

Here are some of the highlights. Our engineering team has made infrastructure even faster and more scalable. The increase in volumes from Cyber Week 2017 to 2018 showcase some of our improvements.Compared to 2017, in 2018 Cyber Week, we had about 50% increase in tax engine calls, calculation volume and the value of process transactions. Throughout 2018, we made progress with self-serve onboarding processes for smaller customers. This initiative has enhanced the customer's experience and reduce friction.

In 2018, we also improved efficiency through new tools such as improved data mining to deliver proactive notices to customers. For example, we can notify a customer of states they operate in that have adopted economic nexus rules when the customer is approaching a state's threshold. In Q4, we again spent less on marketing programs due to the high levels of business activity, we are seeing in light of the Wayfair decision and other regulatory changes around the world. We are seeing greater attendance at our webinars, year-over-year increases in web traffic and continue to see a high level of inbound customer activity. Now let me turn to our partnerships, we connect with our customers through the applications they use to run their businesses, Accounting and Financial Systems, ERPs, e-commerce shopping platforms and more.

That's where our partners come in. We've built the large network of partnerships with the publishers and providers of those systems and we work hand-in-hand with them to improve the lives of our mutual customers. Partnerships improve our sales efficiency by bringing us qualified leads and they drive a closer buying relationship with Avalara by reducing friction in the onboarding process and providing a better customer experience. The pace of partner adoption varies from quarter-to-quarter but over time, we've established more than 700 integrations with an array of business applications and partners. It's our strategy to continue to roll up the market by partnering with more ERP point of sale and other important application providers. In conclusion, 2018 was a good year for Avalara. We continue to win new customers, new partners and deliver strong financial performance.

We believe Avalara is well positioned to build a very large and enduring business over time. We have established strong barriers to entry with our industry-leading platform, content, pre-built integrations and partner channels. And we have proven our ability to respond to the many triggers that occur naturally in the evolving landscape of transaction tax around the world. I'm really excited about what we've achieved and what lies ahead. Now, let me turn our call over to our CFO, Bill Ingram.

Bill Ingram -- Chief Financial Officer

Thanks, Scott. Our fourth quarter and fiscal year 2018 results were highlighted by strong revenue growth and sales execution. As we saw increasing market demand. For the year, our total revenue grew 28% to $272.1 million and this past quarter, represented our highest quarterly growth rate in two years. Fourth quarter revenue of $76.9 million was up 33% on a year-over-year basis, driven by increased demand from both new and existing customers, steady Go Live activity and solid sales execution. Subscription returns revenue contributed $71.7 million, this represented 93% of our total revenue and it grew 33% year-over-year. Professional services and other revenue contributed $5.2 million. Our core customer count increased by 580 to approximately 9,070 at the end of Q4 2018. We define a core customer as a unique billing account that was active as of the measurement date and for which we recognize greater than $3,000 in total revenue in the 12 months prior. We believe this is an appropriate metric for evaluating our performance because core customers represent more than 85% of our total revenue. Our net revenue retention rate was 108% in Q4 and has averaged 107% over the last four quarters.

Our net revenue retention rate has varied between 105% and 109% for any one quarter. The trailing four quarter average remains very consistent. Our steady 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 $56.2 million for Q4 '18 representing a 73% gross margin. This compares with gross profit of $43.8 million and a 76% gross margin in the same period last year.

Similar to the prior quarter, the 3 percentage point decline in gross margin was the result of higher network costs due to increased transaction volumes, additional headcount to serve growing customer demand for compliance and filing and investments in content to expand into adjacent market segments. We continue to focus on acquiring customers in new industry verticals that require additional tax rates, rules, exemptions and jurisdictions, all of which we call content. There is no central source for content, requires research, collection, curation and delivery through our automated tax engines. As Scott mentioned, as we expand our footprint into additional market segments and geographies, we incur expenses to acquire and create content and that content can then be sold repeatedly in the future at low marginal cost.

In addition, our international growth is driving the need for more registration and filing capacity. We have staffed up headcount to manage the increase in demand generated by our international operations, in advance of launching our automated filing technologies. During the fourth quarter, we continue to invest in our sales and marketing organization to fuel long-term growth and new customer acquisition. Sales and marketing expense was $47.3 million in Q4 or 62% of revenue, up slightly from 61% for the year-ago quarter. Partner commissions were 9% of revenue in Q4 '18 and 8% in 2018. We believe our go-to market model provides us with a significant competitive moat and are committed to our investment in this area.

We expect improvement in sales and marketing leverage in 2019. Our Q4, research and development expense was $12.7 million or 16% of revenue, down from 18% for the year-ago quarter and in line with our expectations as we continue to invest in new products and features. Our Q4, general and administrative expense was $9.5 million or 12% of revenue consistent with the percentage of revenue in the year ago quarter. The increase in G&A on an absolute dollar basis was due in part to cost of being a public company. Non-GAAP operating loss was $13.3 million for Q4 compared to $9.2 million loss in Q4 of 2017. Loss per share was $0.19 in the fourth quarter based on 66.7 million shares outstanding compared to a loss of $0.17 per share in the fourth quarter of 2017 based on 56.8 million shares outstanding.

Looking out, our fiscal year 2018 results, total revenue of $272.1 million was up 28% on a year-over-year basis. Subscription returns revenue contributed $254.1 million, this represented 93% of our total revenue and it grew 27% year-over-year. Professional services and other revenue contributed $18 million. Non-GAAP gross profit was $199.1 million for 2018 representing a 73% gross margin. This compares with gross profit of $159.9 million and a 75% gross margin in 2017. Same factors discussed earlier, which impacted our Q4 gross margin also drove the gross margin decline for the full year. Non-GAAP operating loss for 2018 was $45 million compared with a $37.4 million loss in the prior year and consistent with our expectations as we continue to invest in our business to drive long-term growth and new customer acquisition.

Turning to our balance sheet and cash flow statement, our cash and cash equivalents were $142.3 million at the end of Q4 '18, an increase from $138.1 million at the end of Q3 '18. Total deferred revenue was $134.7 million at the end of Q4 '18 up 14% from $118.2 million at the end of Q3 '18. We believe the growth in our deferred revenue is another indicator of strong momentum in our business. Operating cash flow was positive $7 million in Q4 compared to negative $2 million in Q4, 2017. Free cash flow was positive $4.5 million during the fourth quarter. This compares to the negative $5.6 million of free cash flow in the same quarter last year.

Note that our free cash flow will fluctuate from quarter to quarter caused by many factors, including the timing of working capital as well as the seasonality of our billing and expense cycles. I will conclude by providing guidance on revenue and non-GAAP operating loss for Q1 and for the full year of 2019. For clarification and as a reminder, we will begin reporting under Accounting Standard 606 in Q1 2019. We do not expect a meaningful impact to revenue when we make the transition, but there will be an impact to how certain of our sales expenses are recognized. The following guidance is based on ASC 605 for comparison. For the full year 2019, we currently expect total revenue to be between $328 million to $332 million. We expect our full year non-GAAP operating loss to be in the range of $30 million to $35 million.

Our non-GAAP operating loss guidance reflects our decision to reinvest in the business based on our momentum and opportunity. In addition, we expect to be free cash flow breakeven in the second half of 2019. For Q1 '19, we currently expect total revenue to be between $78 million and $79 million. We expect our Q1 non-GAAP operating loss to be in the range of $10 million to $11 million. As in the past, we will consume cash in Q1 due to seasonal working capital requirements, which occur this time of year. In summary, our fourth quarter and 2018 results were strong performances for Avalara and showed continued progress against our objective to become the long-term winner in a large market opportunity. We have a strong management team and solid momentum and we see the Company as a steady consistent grower over the long term. Before closing, please note, our Financial Analyst Day will be held on Thursday, May 9th in Huntington Beach, California, in conjunction with our CRUSH Annual Users Conference. In person attendance will be limited, so if you are interested, please send an email to investor@avalara.com.

For those of you who cannot join us in person, a webcast of the event will be accessible on our IR website. At this point, we'd like to open up the call for your questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes the line of Sterling Auty from JPMorgan. You may begin.

Sterling Auty -- J.P. Morgan -- Analyst

Yeah, thanks. Hi guys. So we obviously have multiple calls here, but I wanted to hit two items, one in terms of how should we think about additional states layering in behind the Supreme Court ruling change and how that impacts the growth trajectory. And then I have one follow-up on on margins.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Sure. So thanks, Sterling. There is 33 states that have enacted some sort of Wayfair type law. But the real body and I've said this before and I'll just reiterate it again, the layering that you referred to are really the largest states. And since we last talked, some of the biggies are starting to weigh in New York, California, New York announced in January that it was going to go with the Wayfair type ruling. California announced, Texas announced and there are a considerable others that are already in the queue. They just haven't decided what they're going to do, Oklahoma, Arkansas, Virginia, Massachusetts and then there is a few that are lagging. But the real key is -- the way you should think about it is this all goes -- Wayfair will all go as the big states go and as they come on board. Because that's where the customer action is, that's where the businesses happen.

And so as California comes on later in April and Texas comes on in October and New York sort of sorts out its ruling because it was slightly different than the rest of them, they didn't really enact a new date, they just said, it was effective as of the Wayfair ruling date and there's still some work to be determined on that one. So the biggest amount of Wayfair and the impact will start -- we'll start to see that evolve over the next six months.

Sterling Auty -- J.P. Morgan -- Analyst

All right, great. And then on the investment in the spending side. Sales and marketing in particular, how much of that was headcount-related? Do you feel like you've put adequate level investment necessary or could we see another incremental layer of investment because if I go back and think about the last couple of quarters you've ratchet -- I think this is kind of the second time you've increased the investment relative to our expectations. So I'm wondering if we're at the steady state and now we generate the leverage from here or what the potential is for another incremental layer on top of that?

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Sterling, as we always do, I'll give you the color and then Billy will follow up here with, I'm sure his own comments as well. So the way I would -- the way I would say that is, look. We are focused on sales and marketing efficiency in 2019. I mean, that's where we see we're going to start to see the leverage. I do not see a significant additional layering of salespeople as we go for -- as we go forward. I think our investments in other areas around content and about operating -- operations and the like. But I don't see that in sales and marketing. Bill?

Bill Ingram -- Chief Financial Officer

Sterling, yeah, we really wanted to demonstrate this year, our ability to hit our revenue, hit our revenue guidance, hit our revenue numbers. And we feel like we've done that. We think we've got the model identified the way we want it. We're anticipating real efficiencies here in this year. We are very pleased with the growth that we saw in '18 and the model understandably, you guys all know -- we all know it is drive the revenue, get that solid, get that visible, drive to cash positive and as you heard my notes, we're committing to be breakeven cash second half this year and then leverage and profits will follow that. So we think, we think we've demonstrated, one. We're on track to hit two and we believe three will follow. So I think -- I think we've peaked and we've got the model and are committed to sales efficiency this year.

Sterling Auty -- J.P. Morgan -- Analyst

Sounds good. Thank you, guys.

Bill Ingram -- Chief Financial Officer

Thanks, Sterling.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Thanks, Sterling.

Operator

Thank you. And our next question comes from the line of Chris Merwin from Goldman Sachs. You may begin.

Chris Merwin -- Goldman Sachs -- Analyst

Thanks very much for taking my question. So I just wanted to ask about Compli. I think, can you just give us a sense of the opportunity for new customer adds following that acquisition particularly up market and maybe how we should be thinking about you all continuing to invest either organically or inorganically in content to give you access to new markets and customers. And then I had a quick follow up?

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Chris, thanks. I think Compli is a -- it's an interesting one because it's something that we've known for a long time that we wanted to enter and what I mean by that is we knew we want to enter fuel, telco, we wanted to enter hospitality. But Compli is interesting because it has its -- it's not dissimilar to what you would see with our exemption business, where it has a stand-alone market in it of itself. And there are customers that need exemptions and there are customers that absolutely need the compliance around alcoholic beverage. And so we're going to continue to grow that and I would say that that is just a continued steady growth, like the rest of our business.

But what makes alcoholic beverage compliance so unique and and really enticing to us is is that it really allows us to step out and to do more multi-tax types of transactions. And what I mean by that is, it allows us to do food and beverage. So it allows us to go after a market that we have not been able to go after in the past, POS that includes beverage. It allows you to do deeper hospitality than just the lodging tax. So it's an extension of business that we're already doing but it allows us to go to a new multi-tax sort of business.

Chris Merwin -- Goldman Sachs -- Analyst

Great, thanks. And just the follow-up is on billings, it looks like -- had a really strong quarter for billings in the fourth quarter, accelerating up to over 40% growth and maybe just to dive into the causes of that a little deeper. Is that more from new logos from the Wayfair ruling causing companies to try to find a solution or is it a shift of market to any degree just any more detail you can provide there would be very helpful? thanks.

Bill Ingram -- Chief Financial Officer

Hey, Chris, this is Bill. Yeah, we really saw nice activity in the second half of the year, certainly the Wayfair visibility, I gave tailwinds as Scott said, one of many key trigger events, but the whole area of kind of indirect or sales tax-compliant has just gotten more attention. So as a result, as you know our focus on the broad based mid-market in the United States is really starting to pay off and so what we saw was no one vertical or no one segment. But really a broad based advancement of -- of new deals, right in our sweet spot. And so as a result, there is seasonality. I'd like to make that point. There is seasonal in the fourth quarter, both with the tailwinds we talked about. But also with the seasonality, a lot companies say, now is the time to get in shape. Now is time to get this resolved, I want to kick the year off, right, so historically, our fourth quarter has always been a strong quarter for bookings which then billings follow and then of course revenue follows after that. So we're very pleased as Scott said with the results in the fourth quarter. We're hoping to maintain that good behavior going forward, but it is seasonal and it was a strong quarter for us. And so we're investing, as Scott said, we're investing to capture that opportunity that we see evolving right in front of us.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

I swore, I wouldn't say this again to you all, but I can't help myself. What you saw in Q4 was just really the final act of the changes that we would made in our sales force and the changes that we've made late last year and the momentum that they built up during the year and taking advantage of what took place with Wayfair, really came to fruition in the fourth quarter. So we are very pleased with how that played out.

Chris Merwin -- Goldman Sachs -- Analyst

All right, perfect. Thanks very much.

Operator

Thank you. And our name -- our next line will be come from Sherry Go from Bank of America. Please begin.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Hey guys, this is Brad Sills on with Sherry here. Wanted to ask you about the large, the global retail opportunity, kind of where are you in addressing that and what is the opportunity here. How does that differ from your core customer business?

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Look, I mean, I think if I understand the question, right, Brad. I mean, from a -- from market -- the marketplace opportunity, different businesses selling through their marketplaces around the world is one that is really evolving quickly. I mean, it's a big -- it's a big opportunity. You're starting to see people from China and selling into the US, and all over -- all over the -- all over the world and it's one of the ones that I think really fits nicely into what Avalara does. I mean because it's -- in the end, it's a partnership play taking that -- what they're doing in their marketplace, embedding our work and what we call Avalara Included. I think, it's only going to continue to -- it continue to grow and I think it's just, it's a perfect transition for us to move globally with them. This one thing for selling these marketplaces that sell into the US or into the EU or in the LatAm. It's one thing to that. But you can use those inroads that you're making with those partners to turn that around and sell in country as well. I mean, it will take us time to make that all happen, but that's how the partner network works. You get in in one avenue and then you explore it to its other conclusions. I think that that's what Avalara has been really good at doing here in the US and as we did EU and so, I would expect to that to continue even further.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Thanks, Scott. I guess, I was more asking around the large enterprise build, the global retailer segment of the market, which is different from the requirements in your core customer base. I guess, where are you in addressing that in terms of content and what should we expect over the long-term out of that segment of the market?

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Well, I appreciate you asking the first question. But anyways, as it comes to the enterprise customer, we've been really, I think pretty upfront about how we look at that. It's an opportunistic play for us. But the opportunities are coming, faster and faster. And as a result of that, we are being pushed into certain areas and it's -- we are not being pushed so much content wise, although there are lot, there's lots of additional content that we have to add and that works both up market and down market. But we do have to, we do have some things that we have to continue to evolve in our product to be able to really go after the big part of the enterprise customer and I would see that happening, certainly in 2019. But we're going to just continue to push out that envelope and it will be part of what we're doing.

Bill Ingram -- Chief Financial Officer

Yeah, Brad. This is Bill. We are seeing the same trigger events in the mid-market affecting the larger enterprise players. The move to cloud for tax-compliance driven by product geographic expansion, ERP change, legislative changes, M&A audit. It's really very exciting. All these triggers are affecting companies both large and small every day. So it's really the enterprise or I guess simply reacting to the same trigger events along with Wayfair and other cloud-based drivers. And so we think we're in a good position and we're as Scott said seeing more and more of that every week. So it's very promising.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great, thanks, guys. And then one more quickly, if I may, small office, home office. How is that performing? And could you remind us where you are with the QuickBooks partnership and what the expectations might be for that ramping as a potential channel? Thanks again.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Yeah. So the -- we've been maintaining this from the very beginning. So if I sound like a broken record, I apologize, but the only way to tackle the SOHO market in our opinion is through partnerships. And winning them one-off, it's interesting, but it can't make a big impact on the market itself. And so our relationships with Shopify and BigCommerce. I think we've talked about Wix in the past and we're just continuing to push the adoption with their customers and it's growing all the time. And so when we do that, we're doing it with a large segment of their customers. And we are helping them solve their problem. So that's how you're going to see us continue to do that and we're just going to continue to find more of those, those marketplace. I mean not marketplaces but of those partners. What I will say, QuickBooks is a little bit different, because we have a relationship with them, that is not an OEM or a publisher type relationship. We just support their product. And so their customers are coming to us and their sales force is telling them to come to us and we're just going to continue to build on that relationship. I mean, we have not seen anything out of their -- their purchase that they made a few quarters ago and moving into the space at all. As a matter of fact, we're seeing more reliance on what they're doing with us and how we're handling sales tax with them. So it's one of those relationships that I think is continuing to grow. I think, it's got large upside for Avalara but it is in the former relationship like the majority of our other partnerships.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great, thanks so much.

Operator

Thank you. And our next question comes from line of Pat Walravens from JMP Securities. You may begin.

Pat Walravens -- JMP Securities -- Analyst

Great, thank you. One for each of you. I guess, Scott , first of all. So any changes to the sales org and structure in 2019?

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

As I said, Pat, as I said earlier. I don't see anything really changing significantly as we look for leverage. I will say that I would like to see a more holistic approach of how we look at the marketplace and sort of tightening up things in our organization around how we go after SOHO and SMB and our -- what we call our core and enterprise. So I think, we'll see a -- a more, less silos, less focused on those individually. But a more holistic approach, which I think will be really good for our customers. I think, it will be good for the organization, and I think it will drive further efficiency.

Pat Walravens -- JMP Securities -- Analyst

Does that mean that reps account packages will change a lot?

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

No, I don't think that we're going to really change anything significantly around the way we compensate our people -- will be more. Certainly quotas go up, they're going to have to, you have to carry a little bit of the -- more of the burden than maybe they have in the past. So that's how we'll drive some efficiency. But I don't see comp packages changing significantly with our sales force.

Pat Walravens -- JMP Securities -- Analyst

Okay, great. And then, Bill, on the -- I just want to talk a little bit about the growth profile of Avalara and how investors should think about it. So you had some nice acceleration in the last two quarters. You have billings in the 40s (ph), revenue growth in the 30s (ph) and guidance for the year at the midpoint around 21 (ph) if my math is right. So how do we think about -- how fast do you guys want to grow this business?

Bill Ingram -- Chief Financial Officer

Well, as I said, we're cautiously optimistic here, we're very pleased with the fourth quarter, and we're investing for the future. And so, I just want to make sure we don't get over our skis here. We had a very nice fourth quarter and what I've done as you know is raised -- we've raised guidance here, each quarter in a row, raised guidance for '18. And so as we've talked over the -- over the many quarters, we want to be a grower that can deliver every quarter and every year and continue to put it behind the line.

But you can grow anything -- you can grow anything at 20 plus percent for a long time. You can get big that way. So don't take my comments as not being optimistic, I just want to make sure that we don't -- we don't trigger off of one data point here. We're very pleased with the Q4. We took -- we took guidance up from high teens and the low 20s for you. And we're looking for a solid year this year.

Pat Walravens -- JMP Securities -- Analyst

All right great, thank you.

Operator

And our next question comes from the line of Brent Bracelin from KeyBanc Capital. You may begin.

Brent Bracelin -- KeyBanc Capital -- Analyst

Thanks. And appreciate the -- taking my call. Here, I have two as well. Let's start with Scott. Noticed that you made two small acquisitions here at the start of the year, Compli and Indix. I was wondering if you could just frame maybe the broader opportunity for M&A and specifically talking about the tax content opportunities out there, how fragmented is the market relative to compliance tax content and obviously, Compli is interesting in that beverage space outside looking in -- it's hard to know how fragmented, how many options are out there, but walk us through how fragmented is the market and what's your strategy around kind of M&A more broadly?

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Good question. So the market -- so tangible personal property, the things that we buy day in and day out, what we would really consider things to be say -- around sales tax. It's a large portion of the US market in the world economy and Avalara really established itself in that particular space. There are lots of of interesting avenues around that. For the most part that's what Avalara has built internally, but there are markets like collectible coins, ammunition, leasing, manufacturing, automotive. So there are little areas that all have little tweaks or content that we need to either buy, build or partner with. And we look at all of those scenarios in every instance of what we're trying to do. Tangible personal property is something that we usually build ourselves to be quite frank, it's what we look to do. But Indix really has changed the game, because I think, we'll be able to do a lot of that with the AI and its brethren machine learning that we'll be able to start building some of that content and maintaining that content on our own.

So it may change the profile of what we're looking for. But we will always be out in the marketplace looking for things that we don't have. And beverage was one of those. Tobacco might be one that you -- you build yourself or buyer or partner with. Certainly as we enter any market internationally, we will look to do that with a partner or with with an acquisition. It's just too difficult to get up to speed without doing that Brazil or the EU and we'll continually look to go into different markets internationally. So I think that's really the profile looking at what we don't have in our content, where we want to go. And our first thing we'll say, can we build it -- it's probably not something that we're going to do as much of can we, can we buy it. I think we'll do that. Can we use Indix to make it happen more efficiently. I think we will absolutely look in that direction.

Brent Bracelin -- KeyBanc Capital -- Analyst

Very helpful color -- sound like a build buy kind of platform -- how partner strategy continue to kind of be in place there. And then shifting gears here, Bill, wanted to touch base a little bit about the online sales tax opportunity. Obviously as you start to see some of the bigger states look to enforce, how does that change the growth trajectory. I know you can build a great business growing 20% annually. But it feels like in my view, the primary driver of the business was either a vendor trigger, technology trigger or aid enforcement trigger that would drive a customer to look to automate compliance and sales tax. It feels like we have a new vector emerging around complexity. Historically, you would only have to file sales taxes in a physical location and now as -- every state starts to kind of enforce, and particularly the larger ones. It feels like the complexity vector could potentially be a new incremental lever for growth and so we're just wondering, if you could weigh in a little more. I know it's early, but can complexity become a new trigger to help augment what is a very healthy growth profile?

Bill Ingram -- Chief Financial Officer

Yeah, Brent, I think you may have invented something here. The Bracelin network effect maybe.

Absolutely, complexity is adding to the -- is adding to the need and the trigger event. I can tell you, anecdotally, we have many more calls in our team with potential customers who talk about the fact, how do they rationalize or deal with 30 or 40 different states, as opposed to one or two that they're possibly in today. I would reemphasize, what you said, which is it's early, we're coming off really a nice Q4 as we said. But Q4 has been above our historical rates and really our expectation in it's early. We'll see how '19 unfolds. We feel good about the outlook we shared. But there's still a lot of work to do, increase activity then falls by bookings. Bookings are followed by billings and billings is followed by revenue and so nothing has really changed our view of our long-term growth opportunity.

But we're really encouraged by what we're seeing and like I said, as we do our work, we will keep you informed every quarter. But certainly, I would agree, if you Brent that complexity in this Wayfair -- post Wayfair world is an additional trigger to many of the others that we talked about in the past.

Brent Bracelin -- KeyBanc Capital -- Analyst

All right, thank you.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

But Brent -- Scott. But Brent, I think, I mean complexity is sort of like the catalyst, right -- for all businesses and what Wayfair did is it made some online retailers have a more complex environment than they had before. But it takes those triggers for them to act on that catalyst and so that's what actually you are really seeing, right. There's still -- now you've got the government pressure to do it. They're still looking to do it when they're making a change, when they're doing these other things. So the model doesn't fly out -- fly completely differently. But there is pressure coming from this one act that has more businesses with a little bit more complexity or a lot more in some instances. So I do think, it will have an effect.

Brent Bracelin -- KeyBanc Capital -- Analyst

Great, thank you.

Operator

And our next question comes from line of Jeff Captain from Stifel. You may begin.

Jeff Captain -- Stifel -- Analyst

Hi guys, thanks for taking the question. So I just wanted to follow up on an earlier question about the growth rate in 2019. Just based on the guidance, it kind of implies a bit of deceleration in the back half of the year, especially in the fourth quarter. So we're just curious, that's really just kind of the conservatism on your part, or is there any kind of upcoming headwinds that we should be thinking about?

Bill Ingram -- Chief Financial Officer

Well, again as I mentioned just a moment ago, we came off a great Q4, there is some seasonality in the business as customers deal with this near the end of the year. It's really early in the year, we are committed to our long-term growth opportunities as we said on the Road Show and onwards. We think it's an $8 billion market. It's in the very -- very, very early stages. Everybody is going to move to automation, we think that's inevitable. So nothing really has changed in view of our long-term growth rate. But we're really encouraged about the increased activity we're seeing and so we just want to make sure that we can deliver to become a Company that you can count on us. This is going to be a long story. As we get into the next quarter, Jeff and beyond, we've got a lot of work to do. But as it becomes clear, we will share all that with you. So I wouldn't over-index on specific growth. This is the first guidance we've given for '19 and again, we're coming off a strong Q4. So let us do our work. And we'll keep you updated.

Jeff Captain -- Stifel -- Analyst

Got it. Thanks for the color, guys.

Operator

(Operator Instructions) And our next question comes from line of Justin Furby from William Blair.You may begin.

Justin Furby -- William Blair -- Analyst

Thanks, guys, and nice quarter. I guess just to start. I wanted to ask about just e-commerce for you, if you think about the however many billions of dollars, you're running through your tax engine every year. Can you give a sense of where, what percentage of that is sort of pure e-commerce today and where you think that could go if you look out over the next three years to five years. And then if you look at these new customers that are coming in, specifically on Wayfair. Bill, is there any way to give a sense what those deals will look like in terms of the average size versus any other customer that comes into the door and I know you have all sorts of customers you're dealing with. Is there any trend that you call out there and then I've got one quick follow-up.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Bill, why don't you start with that, just the size of the customer and then I'll give a little color on the market itself.

Bill Ingram -- Chief Financial Officer

Sure. Well, as you know, Justin, we report a measure, we call core customers. And that's really to help investors and the analysts understand where the majority of our business is today. That doesn't mean it won't change, but today, we use a measure what we call core customers. We define that and I've explained that in my notes and in my comments. Customers that have generated greater than $3,000 in revenue in the last 12 months. We reported slightly over 9,000 core customers for the quarter ending December. That was bigger growth than we've seen in the past, but that really is representative. The strong traction that we have in the market, the core customers as we've said represent currently more than 85% of our total revenue, but as that mix changes, we will give you information and break that out for you. And there were some other questions that were asked about kind of e-commerce players and things. Scott is going to get into, and so as that mix changes, again, we'll break down in the future, but right now, we use this measurement of core customers to represent really kind of the depth and breadth of our business.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

So in the market in general and this has been this way for a long time at Avalara. The majority of our -- or greater than 50% of our revenue comes from ERPs. I mean that's -- and that's the business that I think is really, really important and I want to reiterate that. Because I mean, we've built this business around owning the ERPs because that's where people aggregate their transactions and that's where they file. And so if you can win the ERPs and then go develop the ecosystem around the ERPs for point of sale, e-commerce and the like. That's how you really build a dynamic ecosystem. But -- so greater than 50% of our revenue comes from the ERP world, but more trends, but we have greater than 50% of our transactions coming from e-commerce. Our e-commerce customers do more volume, but they actually aren't as worth as much as a customer to us as it would be for an ERP. So I think you have to understand that dynamic. It's a great growth area for us and it will drive traffic, it will drive considerable transactions with us and the ability to file and they do all the other things. But it's -- that's the dynamic that we're in in our marketplace.

Justin Furby -- William Blair -- Analyst

Great. That's super helpful. And then I guess just Bill, on the guidance, I know you gave it on a 605 basis. But can you give a sense for what the impact might be. It seems like it could be fairly meaningful to you from a positive perspective on just, I think, you're directly expensing under 605. What that might look like and that's it for me. Thanks.

Bill Ingram -- Chief Financial Officer

Sure. Justin. Well, we're going to report our first quarter under 606 next quarter. So Q1 of '19 will be 606. We're reporting if you're familiar under what's called the modified retrospective election. And so in our Qs and Ks, next year, we will show side by side, so that you and other analysts, investors can do comparison purposes. As we've said in the past, when we start reporting under 606, we don't expect a significant effect on revenue, there'll be some but we'll call that out. But I'm not prepared to give guidance yet on the expense side. However, our Analyst Day that I mentioned earlier, we're going to go into great detail about the comparison and the information to be able to normalize 605 to 606 against our business. So that's going to be the -- that's going to be early May in Huntington Beach, California. And we hope to see you there. And we'll go into detail on those differences at that time.

Justin Furby -- William Blair -- Analyst

That's great. That will be good excuse to get out of Chicago. Thanks, guys.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

You bet.

Operator

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Scott McFarlane, Co-founder and CEO for closing remarks.

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

I'd like to thank everyone for your interest in Avalara. I want to take this opportunity to thank our employees, customers and partners for their hard work and support. And for supporting us in another solid quarter. As you can see, we're very excited about the market opportunity and the momentum that we're building in the business. We look forward to giving you more detail at our Analyst Day (inaudible) and we hope you can join us on the webcast or in person. Thank you all very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Duration: 58 minutes

Call participants:

Kevin Faulkner -- Investor Relations

Scott McFarlane -- Chief Executive Officer, Co-Founder and Director

Bill Ingram -- Chief Financial Officer

Sterling Auty -- J.P. Morgan -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Pat Walravens -- JMP Securities -- Analyst

Brent Bracelin -- KeyBanc Capital -- Analyst

Jeff Captain -- Stifel -- Analyst

Justin Furby -- William Blair -- Analyst

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