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Avalara, Inc. (NYSE:AVLR)
Q2 2019 Earnings Call
Aug 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Avalara Second Quarter 2019 Earnings Conference Call.

[Operator Instructions]

Thank you.Mr. Greg McDowell, Investor Relations, you may begin your conference.

Greg McDowell -- Managing Director

Good afternoon, and welcome to Avalara's second quarter 2019 earnings call. We will be discussing the results announced in our press release issued after market close today. With me are Avalara's CEO, Scott McFarlane; and CFO, Bill Ingram.

Today's call will contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning financial and business trends; our expected future business and financial performance and financial condition; and our guidance for the third quarter and fiscal year; and can be identified by words such as expect, anticipate, intend, plan, believe, seek, or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release, our annual report on Form 10-K filed with the Securities and Exchange Commission on February 28th, 2019, and our other periodic filings with the SEC.

During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the GAAP and non-GAAP results is included in our earnings press release, which has been filed with the SEC, and is also available on our website at investor.avalara.com.

With that let me turn the call over to Scott.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Thanks, Greg. And welcome to everyone joining our Q2 2019 earnings call. Q2 was another strong quarter for Avalara. We reported total revenue of $91 million, representing an increase of 43% over the prior year.

Our accelerating growth rate was driven by solid sales execution in every segment, from small business to mid-market to enterprise and increased revenue from a variety of initiatives. I've said it before and I'll say it again, we have a vision to be part of every transaction in the world. As our value proposition gains more traction, I'm increasingly confident in our ability to build a great company with durable growth characteristics.

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. Many people have been with us a long time and seen us through many stages of growth. I especially want to thank two of our early investors and long-standing Board members, Gary Waterman and Ben Goux, who has stepped down from Avalara's Board, each after more than a decade of service. They're outstanding advocates for Avalara, and we are grateful for their service and support.

Our team continues to change as we move into this new phase for Avalara being carried forward by leaders, including our new executives, new managing directors around the world, and incredible talent coming to us at every level of the team. It really is amazing to me to have so many talented individuals join us. To all the new Avalarians, welcome, we are proud to have you aboard.

As we introduced during our last earnings call, we celebrated the year of the tax professional in May at CRUSH, our annual conference. We had a record number of customers and partners join us at CRUSH with attendance up more than 50% year-over-year. This year our theme was the path forward for tax-compliance, recognizing that the move to automated compliance is becoming a reality for businesses. We held our first Analyst Day at CRUSH this year, and I want to take a moment to say thank you to those on the phone today who came to the Analyst Day. It was great to see many of you in person and to show off our orange spirit.

At CRUSH, we introduced a number of new products and enhancements. We demonstrated Avalara Consumer Use, a web-based system that will give customers tools to manage their consumer use obligations, one of the most complex aspects of indirect tax in the United States. We also announced additional excise tax capabilities. Excise tax is based on production of goods and paid by the manufacturer while sales tax is borne by the end consumer. Excise taxes are most commonly levied on fuel, alcohol, and tobacco products, and are often called sin taxes.

Enhancing our excise tax capabilities further demonstrates our goal to broadly and deeply cover every type of tax in the world. We spent a lot of time at CRUSH discussing the patchwork of newly introduced marketplace facilitator laws, legislation requiring online marketplaces to collect and remit sales tax on behalf of their sellers.

Many of our customers are omni-channel merchants and the marketplace facilitator laws introduce new complexities where sellers have to determine which transactions are covered by the marketplaces and which are not. We demonstrated new functionality in AvaTax, allowing customers who sell via marketplaces to manage their marketplace transactions for more accurate compliance for each state.

We were excited to release our new AvaTax UI and have migrated most of our AvaTax customers to this advanced interface. The new design allows customers to see their transaction usage, filing due dates, economic nexus thresholds, product classifications, subscription dates and terms, and a range of other information. Not only is this improving the customer experience but it is a platform to drive further growth and will significantly improve the efficiency of our go-live and support functions as well.

We introduced the Avalara Item Classification engine, a service that helps streamline the calculation of customs duty. We view cross-border commerce as a big opportunity for us. Cross border e-commerce is forecasted to exceed $1 trillion by 2020, and merchants of all sizes are expanding their global reach for customers through marketplace providers worldwide.

Further demonstrating our investment in addressing cross-border compliance, we recently announced our acquisition of Portway, a Canadian company that provides harmonized system classifications and outsourced customs brokerage services for customers in Canada, the United States, and Europe. Portway was an Avalara partner in building our cross-border content and the acquisition helps accelerate our entry into the market for product classification and determination of customs rates, duties, and regulations worldwide.

I'm excited to report on early progress in automating a range of critical operations at Avalara. Our technical teams have demonstrated the ability to classify and identify products against a wide range of industry standards, including HS codes, UPCs, SKUs, and others. Using artificial intelligence techniques with access to more than 1 billion unique products, we are moving toward mapping products globally to tax classifications and identifiers automatically and with great accuracy. This data is critical to our product classification and furthers our mission to be part of every transaction in the world.

Artificial intelligence capabilities are not limited to product classifications for just tax calculation. Product classification is the most critical part of our onboarding process as a new customer maps their entire product catalog to a system like AvaTax. We are in early stages of using AI technology to support customers and more accurately and efficiently mapping their product catalog to unique identifiers like Amazon codes and UPCs, as well as natural language search as they onboard to Avalara.

Even though the Indix team has been with Avalara for only half a year, we couldn't be happier with the progress they've made in hitting their technology milestones, and we expect this progress to continue as it's integrated into our operations.

Let me talk about our go-to-market motion. Avalara's steady growth arises from the numerous constantly occurring events that trigger adoption of automated tax-compliance solutions. Trigger points for potential customers include the adoption of new ERP systems, releasing new products, entering new jurisdictions, migrating to the cloud, changes in financial and accounting leadership, and changing government regulations. These trigger events have been constantly compelling businesses to deal with something that they know they've been doing wrong, sales tax.

The move from manual to automated tax-compliance occurs in response to these trigger events. We believe that automation is inevitable because every company experiences these trigger events. When businesses make the decision to automate, we will be there for them. Government regulations have been a significant trigger for businesses lately.

The sales tax landscape changed dramatically following the June 2018 Supreme Court decision in South Dakota versus Wayfair. In that decision the court ruled that the businesses do not need to be physically present in a state to be required to collect and remit sales tax. States can now impose a sales tax obligations solely on economic activity or economic nexus. More than a year since the ruling, almost all of the states that charge sales tax in United States have adopted economic nexus laws, and those changes have impacted thousands of businesses nationwide.

While we are focused a lot on changing tax legislations and the ripple effects of the Wayfair ruling in United States, it's important that we also emphasize that change is occurring internationally as well. Globally, governments are looking at new methods of digital compliance to increase compliance and reduce tax fraud.

One primary theme of these changes is the move to real-time compliance, demonstrated clearly by the increasing adoption of e-invoicing for VAT across Europe and Latin America. E-invoicing regimes require electronic records for all exchanges between buyers and suppliers, with some countries requiring this for both B2B and B2C transactions that are then reported to tax authorities for verification. With e-invoicing requirements in place, governments have visibility in the amount of tax owed in real time.

With this trend work shifts from retroactive compliance to real-time authorization and live reporting. Additionally, governments around the world are increasingly relying on online marketplaces to collect tax from third-party sellers. Avalara along with marketplace and e-commerce partners, including Wix, BigCommerce, Shopify, Amazon, and others is enabling our merchant customers to comply with changing requirements seamlessly within their existing environments.

One way our partners can offer this functionality is through our Avalara Included solution. Avalara Included enables our partners to integrate our solutions into their platforms, either as part of their offering or as an add-on to their application. For example, certain e-commerce platform providers purchase an AvaTax subscription so they can offer sales tax determination to their merchant customers. Avalara and its partners work to ensure that these changing requirements don't add undue burden onto the marketplace sellers.

I would be remiss if I didn't call out the completion of our successful follow-on in Q2, raising $275 million from both existing and new institutional investors. What a great experience. Two days on the road, in New York and Boston, meeting with top investors, and the response was so positive. There is nothing more fun for me than being on the road with Bill talking about our business. We have some big goals at Avalara and with our customers, partners, employees, and investors, I could not be more excited about what we've achieved and what lies ahead.

Now let me turn the call over to our CFO, Bill Ingram.

William D. Ingram -- Chief Financial Officer

Thanks, Scott. As a reminder, Avalara adopted the new revenue recognition accounting standard, ASC 606, effective January 1st, 2019 on a modified retrospective basis. As a result, financial results during 2019 are presented in compliance with ASC 606. Our historical financial results prior to 2019 are presented in conformity with ASC 605. Our earnings press release includes additional information to reconcile the impacts of the adoption of ASC 606 standard.

Let me now discuss our second quarter results. For the second quarter, total revenue under ASC 606 was $91.3 million, up 43% on a year-over-year basis. The strong growth in the quarter was a result of increased demand from both new and existing customers, strong sales execution across all sales channels, and the adoption of new services previously described by Scott. Subscription and returns revenue under ASC 606 was $85 million. This represented 93% of our total revenue and it grew 42% year-over-year. Professional services and other revenue was $6.3 million.

Our core customer count increased by 730 to approximately 10,430 at the end of Q2 '19. We define our core customer as a unique billing account that was active as of the measurement date and for which we recognized greater than $3,000 in total revenue in the 12 months prior to the measurement date.

Our net revenue retention rate was 111% in Q2 and has averaged 108% over the last four quarters. As a reminder, we have seen the net revenue retention rate vary by several percentage points across quarters. However, the four quarter average has remained steady. Our revenue retention rate, supported by low gross churn, contributes to strong customer lifetime value.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued just before this call.

Gross profit under ASC 606 was $65.9 million for Q2 '19, representing a 72% gross margin. This compares with ASC 605 gross profit of $46.5 million and a 73% gross margin for the same period last year. 1 percent point decline in gross margin primarily results from investments in content, third-party software hosting, and our expansion into international markets.

Turning to expenses. Sales and marketing expense differs between ASC 606 and ASC 605 because we capitalize and amortize a portion of sales and partner commission expenses over the expected period of benefit under ASC 606 rather than recognizing the full expense in the current period.

Under ASC 606, sales and marketing expense was $38 million in Q2, or 42% of revenue. On a 605 basis, sales and marketing expense would have been $43.2 million, or 47% of revenue. We're pleased with the continued year-over-year improvement in sales and marketing efficiency.

Our Q2 research and development expense under ASC 606 was $17.4 million, or 19% of revenue. The absolute dollar increase in research and development expense was in line with our expectations as we invest in new products, content, and features to drive future sales growth.

For Q2, general and administrative expense under ASC 606 was $13 million, or 14% of revenue. Non-GAAP operating loss under ASC 606 was $2.5 million for Q2. On a 605 basis, non-GAAP operating loss was $7.2 million compared to a $12.2 million non-GAAP operating loss in Q2 2018.

Non-GAAP loss per share under ASC 606 was $0.03 in the second quarter based on 71.6 million shares outstanding. On a 605 basis, non-GAAP loss per share was $0.09 compared to a loss of $0.19 per share in the second quarter of 2018 based on 66 million shares outstanding.

Turning to our balance sheet and cash flow statement. Our cash and cash equivalents were $441.6 million at the end of Q2 '19, an increase of $294.7 million from the $146.9 million at the end of Q1 2019, due mostly to the completion of our follow-on public offering during the quarter. We intend to use the net proceeds from the offering for general corporate purposes, which we expect to include continued investment in our sales and marketing efforts, product development, general and administrative matters, and working capital.

In addition to other investments in our growth strategies, we may also use a portion of the proceeds to acquire or invest in complementary businesses, product services technologies, or other assets. Total deferred revenue as of Q2 '19 under ASC 606 was $138.8 million, up 5% from $132.7 million at the end of Q1 2019.

Calculated billings is a non-GAAP metric that takes into consideration revenue and the change in deferred revenue as well as the change in contract liabilities. Calculated billings were $97.7 million in Q2 '19, up 41% from $69.3 million in the same period last year.

Operating cash flow was $10 million in Q2 '19 compared to $2.1 million in Q2 '18. Our operating cash flow performance was driven by strong cash collections tied to steady billings activity. Free cash flow was $7.2 million compared to $2.4 million of free cash flow consumption in the same quarter last year. We would like to remind everyone 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 Q3 and for the full-year 2019 under the ASC 606 standard. For Q3 '19, we currently expect total revenue to be between $92.5 million and $93.5 million. We expect our Q3 non-GAAP operating loss to be in the range of $7 million to $8 million. For the full year 2019, we currently expect total revenue to be between $364 million to $366 million. We expect our full-year non-GAAP operating loss to be in the range of $15 million to $20 million.

In summary, our second quarter represented another strong performance for Avalara and showed further progress against our objective to become the long-term winner in a large market opportunity.

At this point, we would like to open up the call for your questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.

Christopher Merwin -- Goldman Sachs & Co. LLC -- Analyst

Okay. Thanks very much for taking my question and congrats on a great quarter. Just want to start off by asking you a bit about content aggregation. I know you've done some tuck-in acquisitions in the past and you've got the Indix team working hard on going out and mapping all the different product SKUs and using algorithms for that.

So maybe can you just talk about where the biggest content gaps are at the moment in the portfolio? Like how do you think about filling those over time? And when you do, does that shift help with the shift up-market and into other geographies as well? And then I had a follow-up. Thanks.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Thanks, Chris. What I would say is content is, as we have always said, is one of the two key things as part of our business. And there is -- when you're in this business, and I think one of your questions was can it -- can we move upstream with it, and I guess I'll start out by saying that content for a big business is the same as the content for a small business. So adding content doesn't help us move up or down market. It just allows us to cover more businesses in all of the different markets.

And so in the US, we've estimated that we've got about 60% of the content that's out there in the marketplace. We have the majority of the key ones, but we don't do antique coins or ammunition and things like that. We'll be tucking those in overtime, and actually we'll be using some of the AI capabilities to actually go out and find those without having to do it with people.

The biggest gap that I would say that we have in content is rest of world. That's where -- for us, that's where we have to move. Obviously, we've made a big investment in Brazil, and we're adding that, but there is the rest of LatAm that you have to do. The EU is what -- we have that today, but going deeper and broader in all of that.

So it's doing more of what we've been doing, but actually increasing the pace internationally. And we've said it -- we've said it on the road, we've said it on the call, we're going to continue to look for acquisitions to tuck-in to help us add that content around the world. It's the easiest way to do it. It's the most efficient way to do it, and we will be aggressively looking to do that.

Christopher Merwin -- Goldman Sachs & Co. LLC -- Analyst

Okay, great. Thanks. And maybe one for Bill as well. If we look at revenue per customer, just to sort of backing into that with the customer count, it looks like that accelerated again this past quarter, so really healthy growth there. Does that more reflect just the growing number of taxable transactions for your customers, in part due to the new legislation, or is that more just a bigger backlog of customers who haven't yet spent the $3,000 on a trial [Phonetic] basis with you? Just curious, what were the main factors driving that higher again.

William D. Ingram -- Chief Financial Officer

Well, Chris, yeah, it's kind of both. You kind of nailed it. We're seeing kind of lateral expansion with our customer base in the new filings and jurisdictions. I think we can point to government legislation to be driving that, but we also -- we had a nice growth in core customer count. We're adding customers at a nice clip. And on average, the new customers tend to be a little bit bigger than our customers in the past.

And so I think it's just kind of a broadening of our footprint in the marketplace. As you know, and we've talked in the past and with others, that we see greater adoption of our services over time. We talk about our rate of attachment of different services, but as our customers kind of mature and spend second and third year after us, they pick up a little bit more service, a little bit more geography. And so you're seeing that kind of trickle through into the implied ASP per core customer that you just did. So the answer is what you said, both of those are driving it.

Christopher Merwin -- Goldman Sachs & Co. LLC -- Analyst

Okay, great. Thanks so much.

Operator

Your next question comes from the line of Brad Sills from Bank of America Merrill Lynch. Your line is open.

Bradley Sills -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

Great. Hi, guys. Thanks for taking my question. Wanted to ask about net revenue retention. Obviously really strong this quarter. And you called out some of these newer services that are contributing there. Can you parse it out a little bit for us on that versus expansion with more transactions or even with Wayfair into more states? Is Wayfair having an impact on the net revenue retention metric in the sense that you start with one state and as you get more mandates, you see some of these retailers adding more states? And could that carry into the future?

William D. Ingram -- Chief Financial Officer

Yeah. Thanks, Brad. It's Bill. I'll start. Yeah, just on the ground we're seeing our existing customer base, as I said, kind of expand a little bit more into additional geographies. That as you know, picks up additional returns revenue for us, also more calculated transactions that pick up on that margin. As you know, what's implied in there, obviously, as a denominator is our churn rate. So we're pleased with the performance of our churn rate being low. And those two combined together have driven that revenue retention rate up to 111% for the quarter.

But as I said in my comments, really want everybody to realize that our historical net revenue retention has been kind of between 107%, 108%, and we expect kind of that range in the future. So this obviously was a strong quarter, and we're pleased about that. We think it's been driven by our existing customer base expanding a little bit more rapidly into new geographies in the past.

We've also had some additional early revenue streams. We talked about it last quarter. Those are things like the SST revenue, the business licensing, things of that nature, which we're really pleased about. They're not that big revenue contributors, but they tend to contribute to our existing base, which is probably pushed a 1 point, 1.5 point net revenue retention number. So the best answer I can give you, Brad, is we're kind of hitting on all cylinders and everything's contributing nicely on the margins.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Brad, I'll just add to that. Very similar to what Bill is saying, but I want to do a shout out actually to the -- to my the sales motion, the sales team, because they've really been -- they've been operating at a high level and really been delivering on all the opportunities that we've had. And what I mean by that is they are out talking to them about these additional things, SST, about business licenses and registrations. And we're actually starting to drive that home. And so you're seeing a really good combination of sales motion and the sort of little ancillary projects that we've had in the works for a long time and now that we're starting to see them, both with new customers and with the existing customers. So I'm pleased with where we're going.

Bradley Sills -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

That's great. Thanks, guys. And then one more if I may please, just on the core customer strength. Is it possible to I guess parse out what impact Wayfair is having on that? I guess the question is really what have conversations been like with retailers? Are they saying, well, now that we have these mandates here, we're going to adopt soon, or do you expect this to be kind of a longer tail of adoption as audits occur? What's your expectation for kind of the curve of adoption related to Wayfair? Thank you.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

So if I'll generalize your question, it's really about trigger events. And Wayfair is one of those -- is one of those trigger events. You mentioned audits. It's one of those trigger events. I think all of these things are heightened for right now. People are talking about them, were being pushed in that direction, and it is certainly a tailwind that we've had with the business. There's just no question about that.

I just keep coming back to what we've been saying all the way along the line that this is a long, steady process of people moving from no automation to full automation. This process is inevitable. And for me, I'm not getting too excited about whether it spikes up this quarter or next quarter, because I think this is just a steady, long-term, growing business. That's how it's been founded on, and I think that that's the way it's going to be, which is so exciting to me, because I just think we can continue to deliver on that automation promise.

Bradley Sills -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

That's great. Thanks, Scott.

Operator

Your next question comes from the line of Brent Bracelin from KeyBanc. Your line is open.

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Thanks for taking the question. I guess I'll start with Scott here. Now that we're past the first anniversary of the Wayfair decision, I would love to get your kind of early read on the larger states like New York, California, Texas that are just in the beginning stages of enforcing economic nexus for the first time. How are you seeing that manifest in either inbound activity? Any color now that some of the larger states are starting to kind of to move this direction? What are you seeing there? And I've got one follow-up for Bill. Thanks.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

We don't break it out. I wish I could say, hey, when a state comes live, we know that this is exactly what's going to happen. There is just no question in our minds that when these states start to move in that direction, we get more inbound -- we get more inbound conversation. And as they get into it and businesses start to adopt it, because it's hard to tell when businesses hit the thresholds. And they're not going -- businesses aren't going to do it until they have to. We all think, oh, it's been mandated, so everybody is going to race to do it. It's really a steady process of education that the customers have to go through internally with themselves to, OK, now I'm hitting the California threshold or now I'm going to hit the Florida, if Florida actually enacted it, because Florida hasn't done that. It's one of the ones that's still sitting out there, that and Missouri are the two that are out there.

But when they happen, it takes a while to actually move it through the process, and we don't have a really great sense of what are the little measurements and nuances that we can tell how it's happening, but we knew -- but we know that it is definitely a tailwind. And I want to point out just and this one as well that this is a ever-evolving process. It doesn't -- the states are tweaking things, some are doing transactional thresholds, some are not. Businesses are sort of catching up with this whole process.

And I think Kansas is actually an interesting example that I want to point out to you. Kansas did not adopt a threshold. They actually started to use an old 1980s law that basically said, we're going to collect tax under this law that was created way back when that says we can do taxes all the way up to whatever the constitution allows. While Wayfair changed the constitution and Kansas basically said there is no threshold. There is no transaction or revenue threshold. Everybody has to comply with it.

Everybody is really looking at Kansas because that's exactly what they all want. They do not want thresholds. They want to get it to everybody, having to collect sales tax. So there is a lot of eyes on that. And I say that only to say that people today are waiting for thresholds, but tomorrow as Kansas and some of these other laws push through, I think you have a real -- there's going to be a lot of states that are pushing toward no thresholds whatsoever. It's going to be very, very dynamic.

And these are the things I think are the tailwinds that are going to happen both here domestically for us as we move to this inevitable stage of everybody -- having to do it automated to what's happening around the around the globe, which is just as dynamic and just as important for the countries and how they're going after extra sales tax and VAT revenue.

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Helpful color there, Scott. And then just, Bill, as a follow up. Obviously, revenue growth in the quarter, billings growth in the quarter very strong, accelerated once again above I think 40% this quarter. Could you just talk a little bit about what were some of the factors that drove the strength? You said it was broad based, but how much of a tailwind was SST in the quarter? In the other factors that you would point out as we just think about the underlying strength of the business here. Thanks.

William D. Ingram -- Chief Financial Officer

Sure. Brent. Well, thanks for the question, and I wish I could give you a better answer than you want. But it really has just been very good, solid sales execution. We're seeing the close rates shorten, we're seeing the sales team hit all their marks, we're seeing broad-based bits of revenue across all the products and services we sell. We're subscription business.

So our revenue performance actually is a result of prior sales closings, sales bookings. Although we don't report bookings, we've just had and have repeated this very, very strong sales execution. I think our message is getting through, and I'll call out kind of our marketing and product teams who've really done some great positioning. We talked a lot about Wayfair and Scott and I explained that Wayfair is one of the trigger events, and we look at close rates on every deal that comes through. And we see Wayfair, but it's not necessarily the top reason. The top reason still tends to be adoption and change of ERP systems.

And so I think there's been an acceleration in the industry for newer upgrades and adoptions of ERP systems and we get, obviously with our partner model and our go-to-market motion, we get pulled into those deals. And so we see some increased velocity there. And so Wayfair comes up as one of multiple triggers for multiple points in the call, so it's great for awareness, but it's really still this adoption and conversion of ERP systems that really helps close the deal for us.

Having said all that, Brent, you know me, you know us, the comps are just getting tougher in the second half of the year. And so while we're very pleased with the strong revenue performance this quarter, we really think this is a long steady business. We think we're still less than 10% penetrated in a big market. We've got a big market opportunity here. We're seeing lots of dynamic things internationally. We're very pleased with the current performance of the business, but the comps will get tougher in the second half of the year.

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Bill, whatever you're doing is certainly working and keep it up.

William D. Ingram -- Chief Financial Officer

We'll try.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Gosh, I wish I thought of that. Gosh.

Operator

Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

Patrick Walravens -- JMP Securities LLC -- Analyst

Great, thank you. And let me add my congratulations. I want to talk about Portway and the customs brokerage services, and here's the context for this. Incredibly I covered a company and this is all they did. I don't know if you remember, Scott, it was called Vastera. It eventually got bought by JPMorgan and then eventually JPMorgan -- right, you totally know it right.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Yeah.

Patrick Walravens -- JMP Securities LLC -- Analyst

So that was such a tough business. Their customers kept changing their minds and the competition from the brokerage services was just brutal. So what's your approach going to be? It sounds like you know what happened to them. I'm sure you have a strategy. What is it?

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Sure. So it's two things. Portway is a strategic partner for us that we've had since we started this business. And for me, it was just important for us to own our own destiny in that one. And that's doing classifications, and we're doing millions and millions of classifications both in a manual way and now really starting to push it toward an automated way. So it just really made sense to bring that -- to bring that expertise and all of that in-house under one roof. That's about half of the Portway business.

The other half of the Portway business is what they're doing with custom brokers. And Avalara has a recipe and I'll tell you if you promise not to tell anybody. But what it really is, is our recipe is this. We bring these things in-house in a manual fashion, because nobody is ever automated these things. And the key for us is to bring them in-house and we did this with returns, we did it with registrations. It's how we go about our business. We understand how it happens in the real world manually. And then we wake up every single day to automate it to the point where you really don't need custom brokers anymore.

So our strategy is really to be in this business, but this concept of people having the secret sauce that where you do classifications, and then you do some magic, and then you get it to the government, and only manual can happen is just absurd in our mind. It's just like doing sales tax in a manual way. It's absurd in a digital world. So our strategy is one to be the very first business to automate the custom brokerage business from end to end, from classification to getting the documents to where they need to go in the government, and Avalara is an expert at doing that. So this is our first foray in the entering to do that in an automated fashion.

Patrick Walravens -- JMP Securities LLC -- Analyst

All right, awesome. And then forgive me if I missed it, but Bill, did you tell us what the impact of it is or how big it is?

William D. Ingram -- Chief Financial Officer

No, you didn't miss it. No, I didn't tell you. So when it becomes significant, we'll start breaking that out. As you've seen, we've done last couple quarters about -- the SST, the business licenses, the interest income. We'll start talking about it as it starts to contribute significant or meaningful amount. So, we'll get to that in the future.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

But there are all these little events are just all additive. And it's what I think you see some of the really strong growth. So they're small today and we expect them to continue to mature.

Patrick Walravens -- JMP Securities LLC -- Analyst

Okay. Thank you, guys.

Operator

Your next question comes from the line of Brad Reback from Stifel. Your line is open.

Brad Reback -- Stifel, Nicolaus & Co., Inc. -- Analyst

Great. Thanks very much. Bill, for customers that have been on the platform for a couple of years, have you seen any signs of -- any instances of macro headwinds out there? Thanks.

William D. Ingram -- Chief Financial Officer

Well, for customers that have a longer tenure with the company, in terms of macro headwinds, no, but [Indecipherable] like churn or downgrades or so on and so forth, but what I can tell you and I think we've talked about before and with others is once we get a customer's business and we do a good job for them and they're pleased, there is not really a vast amount of kind of expansion or growth opportunity. It's kind of like I like to say many of us I'm sure are on this call have personal tax, tax people that handle our individual tax as well. We, as I do, give them all my tax information and they do a good job, and I pay them for it.

So it's a little bit different than the land and expand bandwagon that lot of companies get on. We try to serve our customers and do a good job and, of course, never lose them. And so in terms of macro headwinds for our long-standing and more tenured customers, no, as you asked the question, but again once we have their business and as long as we do a good job and serve them well, they're very satisfied but there's not a lot of expansion opportunity at that point.

Brad Reback -- Stifel, Nicolaus & Co., Inc. -- Analyst

Great. Thanks very much.

Operator

Your next question comes from the line of Scott Berg from Needham. Your line is open.

Scott Berg -- Needham & Co. LLC -- Analyst

Hi, Scott and Bill. Great looking quarter here. I guess I got two. Scott, we'll start off with sales capacity and kind of where you guys are for the year. We looked at your results in the first half. They're clearly much better than our expectations. Not sure about maybe all of your own internal expectations, but are you able to actually process and manage all the leasing [Phonetic] and opportunities out there today or you're finding yourself maybe trying to hire ahead of the curve?

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Well, no self-respecting CEO would say that they ever have enough opportunities. We're always out there in search of the opportunities and converting opportunities into sales, qualified leads is really the big issue for any business that's out there, for Avalara, for anybody. And so we're always trying to hire in advance to have the right number of people that are qualifying them because I think that that's where the big numbers actually take place. The sales team is really pretty good and pretty adept and we are keeping it up with the hiring of the salespeople to be additive when we see that it can be beneficial to us. But we're out there really pushing what we call the STR team and the ADR team to find more opportunities, and we're expanding that definitely in advance because it takes time to get people trained up and the like.

William D. Ingram -- Chief Financial Officer

I'd make a comment, Scott. The sales team and really the sales leadership, in my view, have those just done an outstanding job in terms of capacity, efficiency, as I mentioned earlier, close rates, professionalism. And so while I agree with Scott, we can always use more opportunities. Boy, the organization in the last couple years has really stepped up -- I've seen as the CFO, really stepped up to operate at a higher level. And I give all the credit to the team and the leaders that have put that in place. We're operating with really a very professional team.

Scott Berg -- Needham & Co. LLC -- Analyst

Got it. Helpful. And then from a follow-up perspective, Bill. On the Portway acquisition, any commentary maybe on how the products and the services are priced? I don't know if -- I assume it's not all subscription, but maybe there is, maybe there's something transactional. Just trying to understand how it can hit the P&L as you're able to leverage it. Thank you.

William D. Ingram -- Chief Financial Officer

Sure, Scott. Right now it's very transactional. As Scott said, majority of the activity is HS classification. And from my view, this is very similar if not virtually identical to what we do in the sales tax and that world. It's taking a product description, a geographic set of conditions, and applying a code or a classification to that item so then it can be rated in effect for any sort of economic activity.

And so this is really just in my view -- in our view just scratching the surface. We needed to get this key capability in-house. As Scott said, we've been working with Portway for quite a while. There are some great future opportunities out there in terms of going after new adjacent markets, but right now, day in and day out it's to pick up this capacity and this capability for classifications is going to be a key foundation in our expansion internationally into e-commerce worldwide. So the revenues right now are transaction-based, but over the next year or two, I'm sure our brilliant product teams will figure out how to position and price it and organize it such that we'll bring it into the kind of the SaaS subscription world.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

I would add to what Bill said is, is that just like content for determination of sales tax, classification is a precursor for international transactions. And it's really interesting because in sales tax and classification and all of the content that we've got, we had the build and we didn't charge people to do that. It's really interesting in cross-border transactions and the classifications that we're doing with the Portway is we get paid to do that, and then they turn into subscriptions for us.

So it's actually a bonus, because it's so difficult to do. And Avalara has been able to do that classification at a very much lower rate, because of the automation and the things that we've brought to it than what some of the truth traditional vendors out there are doing this, and that would be your big carriers that are doing that today.

I'll just take this opportunity to do a plug. I really fundamentally believe and we believe here at Avalara that this concept of doing cross-border with a third-party is really not the proper way to do it. Cross-border should be done at the moment invoices are calculated, not by some other person. And so bringing that in and automating it in, it'll allow us to expand our subscription services in the cross-border area as well. And we're getting paid for the classification. So I hope that that clarifies it a little bit.

Scott Berg -- Needham & Co. LLC -- Analyst

Wonderfully. Thanks and congrats again.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Thank you.

William D. Ingram -- Chief Financial Officer

Thanks, Scott.

Operator

Your next question comes from the line of Terry Kiwala from First Analysis. Your line is open.

Terry Kiwala -- First Analysis Securities Corp. -- Analyst

Hey, good afternoon and congratulations on a great quarter. My question, Scott and Bill, is in light of what you said, Scott, about Kansas and states watching what Kansas is doing with not really having a threshold, are you seeing a trend, either with SST states or elsewhere, that states are actively lowering the thresholds or changing them one way or another, either from a transaction volume or a gross receipts for remote sellers?

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Terry, thank you for the question. Nice to have you. So what I would say is this is the thresholds that we're seeing in what 43 states plus the District of Columbia, and I think are really an offshoot of just adopting what South Dakota did. And what South Dakota did was say, hey, listen, we're going to do these thresholds, and the Supreme Court liked that. It was one of the key decisions that -- the key things that made the decision easier for the Supreme Court to do that.

I think overtime, the pressure will be to reduce that. That is what's going to happen. Now how long that takes, obviously none of it is happening today, but what Kansas did really I think is like, whoa. It caught people by surprise. And I think that it will continue to put pressure over time to always reduce the threshold. And I think over time you will see it go away. That's my prediction. I have nothing behind it other than human nature.

Terry Kiwala -- First Analysis Securities Corp. -- Analyst

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Bhavan Suri from William Blair. Your line is open.

Bhavan Suri -- William Blair & Company LLC -- Analyst

Hey, Scott, Bill. Thanks for having the call. And congratulations on a really nice job there. I guess I just wanted to touch on pricing power. You discussed about benign competitive environment in the legacy carriers there. As you guys strategically think about pricing power, kind of, what did it look like in the market? And then as you think about the product, you've seen SaaS companies now that out of the benign competitive environment start to raise pricing as well as adding feature functionality. I guess strategically are price increases kind of at all a part of the business strategy? How do you think of just adding more feature functionality given the price kind of -- the platform at stable sort of level? But just talk to us on how you think about that.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

What I'll do is I'll kick this off and talk about future products and the like. So I mean Avalara I think has had a -- I mean a really pretty balanced strategy around raising prices, and I'll let Bill talk about pricing power and the like. But we also combine that with new products, and it's gone all the way back to the beginning of our company. When we started the business, we were determination only but knew that we could add on returns. And now the returns is 30% plus of our business and we added CertCapture, which is exemption certificates, you've got Consumer Use, you've got cross-border, and our platform is built such that we can do all sorts of different compliance kind of products.

We talk about being part of every transaction in the world, but we also what we believe is to have a global SaaS platform for compliance. And so it gives us this ability, if you tell us the rules and rates, we have the engines and the technology to be able to deliver multiple products. So we will be always adding products and services around our platform, which will continue to grow when we grow the business. And whether that's 1099s, W-8s business -- broader businesses' licenses and registrations, a whole host of things will continue to do that. So it's really a combination of adding new products and then your ability to do pricing. And I'll turn that over to Bill to deal with that one.

William D. Ingram -- Chief Financial Officer

Yeah, thanks. Thanks, Bob. Technically, as we've reported in the past, in our standard terms and conditions, we have the ability to raise prices every year up to a maximum of 5%, but we don't actually do that, and that may sound strange to some people, but we're trying to roll up a big market here. As you've heard us talk at our Analyst Day and other times, we believe there's over 500,000 mid-market customers, there's about 20,000 enterprise larger customers, and about 5 million very, very small emerging business customers.

And so you have to be very careful when you do have pricing power. And I believe we do have pricing power. You don't want to gouge your customers. You don't want to take advantage of them because. Yeah. That leverage when you're trying to roll up a big market and build the big business. And so we could probably arm-wrestle about what the exact correct price is. But given our performance here, I think we're on the right track and you just got to be very, very cautious about raising prices in a market that is converting from manual, automating, is adopting this solution, and where, of course, we want to be the winner in it.

So to answer your question, we do have the ability to raise prices, both contractually in our terms and conditions and we also do believe we have leverage. But we want to be very careful and conscious of treating our customers properly so that we can build a big business here.

Bhavan Suri -- William Blair & Company LLC -- Analyst

No, that's really helpful, and thank you for the explanation. I guess a longer-term product question here. So let's fast-forward and expand into the very large businesses, expand into very large businesses globally, and you think about the automation you've built for this platform, do you think there's a point in time where you let folks define their own custom automations on the platform, or is it still the process where you take it in, sort of manually absorb it, and then every day work to automate for them. As you think about that, obviously there's a great way of owning it. But there's also the sort of, hey, there's going to be a whole bunch of stuff that's done slightly differently by everybody, and there's configuration, there's also sort of custom workflows. I'd just love to get your thoughts on sort of where you think that evolving, again not the next two, three, five years where that might evolve, especially as you start capturing some of the very, very large [Indecipherable] but have incredibly complex and unique sort of reporting, filing, et cetera, processes. Thank you

Scott M. McFarlane -- Co-founder and Chief Executive Officer

It's a really great question, interesting question, one that I think about a lot. One of the features that is really important when you're in the enterprise space, it's doing complex customer rules, right, so allowing people to enter their own rules to be able to override what's happening. And I think that that's just a precursor for things to take place, right. We'll be using lots of data and insights. As a matter of fact, we were just talking about a data and insights team, how do you provide that. And then once you've provided that, how do you allow customers to be able to do that themselves, but not give them so much leeway that you start to make wrong calculations, but you give them data to say, this is where I need to be doing business, transfers and the like, and all that I think will be absolutely part of what we do. And that will be I think an important demarcation for inflection point for us, right. Now you're not only just doing the transactions, but you're helping them run their business with the information that you know. And so I do see Avalara moving in that direction in the coming years.

William D. Ingram -- Chief Financial Officer

Hey, Bhavan, I just want to make a correction or clarification to something I said. We technically are not limited to a 5% price increase. I just used that as a proxy to make my point about being cautious with price increases and rolling out a big market, but I want to be very clear that we're not limited to that number. That was just a reference point I put out.

Operator

And there are no further questions at this time. I will turn the call back over to Mr. Scott McFarlane, Co-founder and CEO for closing remarks.

Scott M. McFarlane -- Co-founder and Chief Executive Officer

Okay. I just want to take this opportunity to once again thank our employees, customers, and partners for their hard work and the support. As you can see, we're very excited about the market opportunity and the momentum that we're building in the business. So thank you for your interest in Avalara. We look forward to speaking with you again next quarter. Thanks, everybody.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Greg McDowell -- Managing Director

Scott M. McFarlane -- Co-founder and Chief Executive Officer

William D. Ingram -- Chief Financial Officer

Christopher Merwin -- Goldman Sachs & Co. LLC -- Analyst

Bradley Sills -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

Brent Bracelin -- KeyBanc Capital Markets, Inc. -- Analyst

Patrick Walravens -- JMP Securities LLC -- Analyst

Brad Reback -- Stifel, Nicolaus & Co., Inc. -- Analyst

Scott Berg -- Needham & Co. LLC -- Analyst

Terry Kiwala -- First Analysis Securities Corp. -- Analyst

Bhavan Suri -- William Blair & Company LLC -- Analyst

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