Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Avalara, Inc. (NYSE:AVLR)
Q2 2020 Earnings Call
Aug 4, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Avalara Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Jennifer Gianola, Vice President, Investor Relations. Thank you. Please go ahead.

Jennifer Gianola -- Vice President of Investor Relations

Good afternoon and welcome to Avalara's second quarter 2020 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, Ross Tennenbaum.

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, the impact of COVID-19 on our business and global economic conditions, 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 28, 2020, 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 -- Co-founder and Chief Executive Officer

Thanks, Jennifer and welcome to everyone joining our Q2 2020 earnings call. Q2 was another strong quarter that exceeded our expectations amid a challenging business climate. Our revenue was $116.5 million, up 28% year-over-year. I was pleased to see our momentum accelerate throughout the quarter, with June representing our best non-December total bookings month ever.

Our Q2 results validate the resiliency of the Avalara team, our business model and our value proposition, which we believe is resonating well with prospects in this difficult time. ROI and efficiency have always been compelling aspects of our solutions, but they're even more critical in tougher times as businesses look to reduce costs and reallocate people or reduce their headcount. Automating with software is an effective way to facilitate that kind of efficiency. I'm more confident than ever in our ability to build a lasting company with durable growth characteristics.

I'm so proud of the team, and we'd like to thank our employees for their hard work and their commitment to our customers. The adaptability of Avalarians during this crisis has been nothing short of amazing. I've said it before, and I'll say it again. Not all SaaS businesses are created equal. And in my view, Avalara has structural advantages that allow us to thrive in both good and challenging times.

The COVID-19 pandemic has either created or enhanced four macro trends that we believe will produce multi-year tailwinds for Avalara. The first is the acceleration of e-commerce adoption. Globally, every business is becoming an e-commerce business. In the past, many businesses have been able to get by managing sales tax compliance manually. If you have a few stores in a few fixed locations, you can probably manage sales tax without us. But today, so many businesses are moving to e-commerce, which means they are selling across multiple channels, stores, websites and one or multiple marketplaces.

In this format, businesses become omnichannel and national or even international e-tailers. This exponentially increases their tax compliance complexity, which amplifies our value proposition and makes our solutions much more compelling and stickier.

The second trend is the acceleration of cloud adoption. The COVID-19 crisis is forcing businesses to modernize their systems to facilitate digital and remote workforces. We believe this will accelerate the adoption of cloud solutions as businesses shed legacy, inflexible on-prem systems. We see this trend play out daily as companies move to the cloud. We believe we offer the industry-leading cloud compliance platform to address these needs.

The third trend, as I mentioned before is related to the growing emphasis on ROI and efficiency. As businesses look to reduce costs and become more efficient, it only makes sense to look at software solutions that help them automate their business. Avalara facilitates efficiency and provides a compelling and demonstrable ROI for our customers.

As an example, a global technology services company selected Avalara due to the ROI of integrations with one of our key partners. Rates are kept up-to-date automatically, and automated tax jurisdiction information is transferred directly into the application, resulting in a reduction in the Company's IT budget and applying these same costs toward revenue-generating projects.

And lastly, we think that increasing regulatory enforcement may become a tailwind for us. State and local governments face a tremendous fiscal challenge, and we believe stricter enforcement of tax loss is on the horizon. As you may know, Avalara is one of the original Streamlined Sales Tax, SST certified service providers. SST makes the process of selling into multiple states a lot easier by lowering the cost of compliance and reducing audit risk for participating businesses.

Created in 2000, the SST program is a cooperative arrangement among 24 US state governments for the collection and payment of retail sales tax when the seller and the purchasers are located in different tax jurisdictions.

In the first half of 2020, our revenue from the SST program grew year-over-year by more than 100%. And SST is a big differentiator for Avalara as some of our primary competitors are not currently certified as providers by the SST organization. Being part of this program helps widen our moat and has been a great growth engine for us.

We are seeing these trends play out. So let me spend a moment and share a few customer examples. One of our largest and recent logo deals was with a Fortune 500 global leader of electrical, industrial and communication products and services. The customer evaluated other solutions on the market but ultimately chose Avalara for the strength of our cloud exemption certificate management solution. This is a type of deal that would have been tougher for us two years ago. But because we have invested in enhancing our platform and enterprise product suite, we feel good about our ability to continue to win upmarket.

At the other end of the spectrum, let me share an emerging small business win. A leading provider of medical supplies to federal health facilities selected Avalara over the competition. This Company selected Avalara because of, one, our prebuilt integration with QuickBooks; two, our ability to offer SST; and three, our robust product suite, including exemption certificate management and our managed return services.

Our largest deal in the quarter was $310,000 in total contract value. I'm particularly excited about this deal because it's an international deal sold to a UK based multichannel retailer that purchased our solution mainly because of our cross-border product suite. The Company selected Avalara because we are a platform provider that can support their global compliance needs, including Cross-Border classifications, calculations of custom duties and import taxes, and US sales tax calculations and returns filings.

Additionally, we are proud to have won a deal with a large and prestigious West Coast University that selected Avalara for our new consumer use product, which became available on June 1. This product is brand new, and we're already winning large deals as a result. We've also had new business success in the e-commerce marketplace arena. As we discussed at our recent Analyst Day, in 2019, we dedicated a sales and account management team to focus on 350 global marketplaces, and that investment has paid off. Today, a 136 of those 350 global marketplaces leverage Avalara's determination, compliance and/or cross-border services. In addition to new logo wins, we're also focused on deepening our relationship with existing marketplace customers.

For example, a fast-growing apparel marketplace who has used our AvaTax solution through US sales tax calculations since 2019 expanded their relationship with us by selecting our cross-border calculation solution. The above examples are indicative of the strategy we are pursuing to maximize Avalara's opportunity and sustain healthy growth rates. Whether it's supporting new tax sites such as consumer use and cross-border, moving into new industries or new geographies, building more muscle across customer size segments or securing additional partnerships with marketplaces and e-commerce platforms, we are finding ways to build stronger relationships with new customer prospects, existing customers and partners. We are building a global cloud compliance platform Company and are backing this effort with a product portfolio that is rapidly growing and a product development cadence that is accelerating.

At our Analyst Day, we told you we are transforming into a product machine, and you heard a lot about our investment in products. But I want to reiterate on a few key product initiatives. Prior to our Analyst Day, we announced the availability of Avalara consumer use on June 1. After our Analyst Day, we announced enhanced capabilities for Avalara's cross-border solution. The next big milestone is Avalara's return to small business, which is expected to be generally available in a few weeks. We also continue to move forward with the foundational elements of our business, acquisitions that expand our content, solutions and international presence has always been an important part of our success. M&A has been in our manifesto since we founded the Company, and nothing has changed on that front.

It's been longer than I like since our last deal, but we have a robust pipeline. We will continue to look for and close opportunities that we believe will improve Avalara and sustain our growth objectives. We are continuing to build out our world-class global corporate development team, including a new Executive Vice President who will expand the team to include additional expertise in deal execution and integration.

And of course, I can't fail to mention our partners. As you know, Avalara has been a partner-center company since our founding, and our partner strategy has created a competitive moat that also drives growth. The result of this long-term strategy is that Avalara offers far more prebuilt integrations into applications companies use to run their business than any competitor.

In today's omnichannel world, this creates a significant differentiator for us. The strength of our offering and long-standing partner relationships play nicely to our advantage when working with prospects using the largest traditional business systems. But our advantage is even greater in the long tail, the hundreds of smaller or specialized applications where we are one of the few automation providers within integration. Each quarter, we add new partners and new integrations to our moat, and we will continue to do so as we drive toward our vision of becoming the global cloud compliance platform. This combination of breadth and depth is incredibly difficult to replicate and represents a key strategic differentiator as we acquire new and grow with our existing customers.

Q2 was a strong quarter for Avalara. The early quarter rebound in our marketing funnel continued to improve and drove sequentially improving bookings that resulted in a very strong June. The results exceeded our expectations amid this precarious time. We saw solid results from the efforts we took to rapidly revamp our customer messaging to an ROI story, embrace our partners with mutually beneficial market strategies, reach our prospects in new and innovative ways and support our customers.

We are cautiously optimistic based on the encouraging data we are seeing, but the COVID-19 crisis remains a very fluid situation with headlines suggesting continued uncertainty. We intend to keep our heads down and remain maniacally focused on expanding our cloud platform, extending our content and increasing our partnerships, both through organic and inorganic means, to take advantage of our large opportunity and the levers we have to sustain our cloud compliance platform leadership.

Our strong Q2 results also included improvements in gross margin. We have previously discussed our intense focus on improving gross margin over the long term and that hasn't changed. The improvement in Q2 was largely driven by our Q2 hiring slowdown amid COVID-19. We continue to make investments in automation that we believe will drive gross margin efficiencies in the future. We are just beginning to see encouraging efficiencies from investments in our customer support processes and technologies that will enable us to scale with less additional headcount as well as investments in compliance automation that are increasing returns filed per employee.

Now I'd like to make a brief comment on a significant legal win for Avalara. On May 27, the US District Court dismissed all the remaining claims against Avalara in the 2018 case brought by PTP OneClick. The court's decision was a complete victory. Not only did the court dismiss all the claims and invalidate PTP's patent, the court also admonished the plaintiff for its conduct and found he submitted a sham declaration in an attempt to avoid summary judgment. We always knew the claims were without merit, and we are delighted to have this distraction behind us. Thank you to our legal team.

On the leadership front, I'm pleased to share that Kathleen Weslock recently joined Avalara as Chief Human Resources Officer. Kathleen has overseen human resources for publicly and privately held companies of all sizes across several industries, including Cisco, Deloitte, FIS, formerly SunGard Data Systems and more. Kathleen is carrying on our ongoing mission to cement Avalara as one of the best places to work in all of SaaS by scaling our talent programs and building the most inclusive workplace culture in the country. Welcome, Kathleen.

I'm also pleased to announce that Jayme Fishman recently joined Avalara as Executive Vice President of Corporate Development. Jayme brings 20 years of experience in corporate development across the tax technology and consulting industries to Avalara. He ran sales, business development and professional services at Taxware, now a subsidiary of Sovos. And most recently, he served as President of the Software division for Ryan & Company, one of the largest tax withholding firms in North America. Jayme is a true industry expert and will be working to expand our global compliance footprint as we continue to add new content, technologies, geographies and customers. Welcome, Jayme.

Marshal Kushniruk, our outgoing Head of Corporate Development and one of our founding employees, who has, in the past, led nearly every aspect of our business, will remain at Avalara helping to transition the corporate development role to Jayme, providing his unique industry expertise throughout the organization and working on various special global projects with me.

As you know, we've continued to bolster the leadership team since becoming a public company. The talent of our executive team was on full display at our virtual Analyst Day in June. I hope you had a chance to watch it. I'm so fortunate to be surrounded by executives that I believe will take us to $1 billion in revenue and beyond.

I will now turn the call over to Ross to talk through our financial results.

Ross Tennenbaum -- Chief Financial Officer

Thank you, Scott. It feels like a long time since our early May earnings call, my first call as Avalara's CFO, when we were grappling with the many questions around COVID-19 and in what ways will it impact our customers and business. We provided visibility on the impact to new sales demand through a glimpse into March billings growth and caution that April will likely look a lot like March. We noted that our April lead funnel was improving, and we were hopeful these leads will begin to turn into bookings in May and June.

Fast forward to today, and I'm very pleased with our Q2 results. Our team worked tirelessly day and night to market our ROI value proposition and enhance our digital demand generation to evolve and innovate how we go to market with our partners, to launch valuable new products and to become trusted advisors to our customers. And we are pleased to see these efforts drive meaningful sequential increases in bookings reflected in stronger May and June year-over-year billings growth.

We proceed from here with cautious optimism. We have proven our business is strong in good and in challenging time and that we can produce positive free cash flow and non-GAAP operating income when needed. We remind investors that we are a leader in a very large global market that we believe remains single-digit penetrated.

June's performance include a pent-up demand and can't yet be called a trend. And therefore, we are not modeling the second half based on June and nor should you. We will continue to work tirelessly to capitalize on all our opportunities and build a sustainable business that compounds revenue at high rates of growth for the long term.

Now let's get into our second quarter results. For the second quarter, total revenue was $116.5 million, up 28% on a year-over-year basis. Subscription and returns revenue grew 28% year-over-year to $108.5 million, which represented 93% of our total revenue. We are very pleased with our subscription growth rate given the COVID-19 pandemic and that Q2 '19 at the time reflected the strongest year-over-year subscription revenue growth since going public.

Professional services revenue was $8 million, up 27% year-over-year. Professional services revenue included approximately $1 million in onetime adjustment. Our core customer count increased by 590 from the previous quarter to approximately 13,300 at the end of Q2 2020, a year-over-year increase of 28%. As a reminder, core customers is a lagging indicator for Avalara, and the increase was expected to be moderate in Q2 as a result of the impact of COVID-19. We have not previously included in our core customer count, customers that terminated services with Avalara that we later won back. We are revising our core customer disclosure to include these win-back customers when they meet the definition of a core customer. This change results in approximately 13,560 core customers at the end of Q2 2020. For transparency, we have provided both numbers in our earnings press release.

Our net revenue retention rate was 107%, resulting in a 110% four-quarter average, which is what we previously stated is the percentage that you should think about on a longer-term basis. As a reminder, our net revenue retention rate is calculated using total revenue, which is subject to the impact of non-recurring professional services. In addition, the calculation currently excludes our Streamlined Sales Tax, or SST business, which has been growing significantly in 2020 through upsell to existing customers as well as sales to new customers. Despite the current macro environment, our customers may still calculate taxes and file returns, and our business model and customer base so far has shown the resiliency we expect. To illustrate, I'd like to provide you with more details on our stable customer base.

In Q2, the number of logos that churned out of our business again remains immaterial and was down year-over-year as a percentage of our renewal base. Our gross revenue churn, which, in the past, we have said, has been meaningfully lower than 4%, remained in line with our last quarter. We define gross revenue churn as the annual revenue contribution associated with billing accounts that cancel all their agreements with us, divided by the total annual revenue recognized during a measurement period. As a reminder, our gross revenue churn does not include downgrade.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and per share results 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. We told you on our Q1 earnings call that given COVID-19's uncertainty and potential impact on our business, we would be responsible with our expenses and cash flow. We spent considerable time modeling scenarios to ensure we were making only the most important investments. Our actions resulted in strong expense savings that resulted in positive non-GAAP operating income and free cash flow. While we are proud of these results and believe they demonstrate our ability to control expenses and deliver profitability, we believe our leadership position in a very large market warrants the resumption of a more aggressive level of spend versus Q2.

Gross profit was $85.7 million in Q2, representing a 74% gross margin. This compares with gross profit of $65.9 million and a 72% gross margin in the same period last year. We are pleased with the gross margin improvement we've been able to show, with 74% representing our highest gross margin rate in 10 quarters. That said, we believe Q2 will represent our highest gross margin for the year as we resume investments to support our growth. Sales and marketing expense was $42.5 million in Q2 or 37% of total revenue, an improvement of 630 basis points year-over-year. Sales and marketing expense was lower than normal due to slowed hiring, reduced marketing program spend and reduced travel and sales-related events. As we have seen a pickup in end customer demand, we have started to more aggressively invest in sales and marketing.

Q2 research and development expense was $23.8 million or 20% of revenue, up slightly from 19% of revenue in Q2 '19. This increase was consistent with our expectations as we continue to invest in our global cloud platform, including in new products, content and features to drive sales growth and cost efficiency. Q2 general and administrative expense was $15.6 million or 13% of revenue versus 14% of revenue in Q2 '19. Q2 non-GAAP operating income was $3.8 million, which was better than our previous guidance and exceeded our expectations as a result of stronger-than-expected revenue, lower hiring and reduced travel and event expenses. Non-GAAP diluted net income per share was $0.04 in the quarter based on 83.4 million diluted shares outstanding.

Turning to our balance sheet and cash flow statement. Our cash and cash equivalents were $474.4 million at the end of Q2 '20, an increase of $23.9 million from $450.5 million at the end of Q1 '20. Total deferred revenue as of Q2 '20 was $167.7 million compared to $165.4 million at the end of Q1 '20. 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 was $118.7 million in Q2 '20, up 22% year-over-year. April year-over-year billings growth was similar to that of March at around 10%, while we saw an acceleration to above the mid-20% area in each of May and June.

We were very pleased with our billings results given the COVID-19 pandemic and a difficult 41% Q2 '19 year-over-year comparison. It is difficult to predict our future quarters' billings, and we are currently not modeling forward our June results. As a reminder, as we saw in Q2, due to our strong performance in 2019, we will continue to face a difficult year-over-year comparison both in Q3 and for the full year.

Free cash flow was $6.2 million compared to $7.2 million in the same quarter last year. Q2 free cash flow was negatively impacted by the launch of a special sales promotion that included net 90 payment terms versus our normal net 30, but was positively impacted by our deferral of US employer payroll tax payments under the CARES Act.

I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q3 and for the full year of 2020. Our guidance assumes a modest improvement in the economic environment in the third quarter. We are further assuming that economic conditions will more broadly open up by the end of the year. Clearly, significant variation from these assumptions could cause us to modify our guidance higher or lower. For Q3 2020, we expect total revenue to be in the range of $115 million to $117 million and expect professional services revenue to be flat year-over-year.

Moving to non-GAAP operating loss. We did curtail and delay non-essential operating expenses in the early stages of the COVID-19 crisis. But due to our momentum and better demand conditions, we have resumed more aggressive hiring. Therefore, we expect our Q3 non-GAAP operating loss to be in the range of $7 million to $9 million. For the full year 2020, we are raising our total revenue guidance from a range of $455 million to $465 million to a range of $465 million to $470 million. We are also raising our full year non-GAAP operating loss from a range of $18 million to $22 million to a range of $16 million to $20 million. Our views on cash flow for the year have not changed, and we continue to expect a modest level of cash burn in 2020.

In closing, I would like to emphasize a few points that Scott touched on in his prepared remarks. While our business is not immune from the COVID-19 crisis, our Q2 results validate the resiliency of our business model and value proposition. I believe we are well positioned to take advantage of the large opportunity based on the four macro trends that are driving our business.

Finally, after market closed today, we announced that Avalara has commenced a public offering of our common stock. Please note that due to requirements of the securities laws, we will not be able to answer questions regarding our proposed public offering or our July results during the Q&A.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Sterling Auty from JPMorgan. Your line is open.

Jackson Ader -- J.P. Morgan -- Analyst

Great. Thanks for taking our questions, guys. This is Jackson Ader on for Sterling tonight. Scott, if we can start with you. The comment on M&A, I think you said it's been longer than you'd like since your last deal. What do you think has been the main driver there? Has it been the size and potential transactions? Has it been price? Is it fit, your execution in organization? Can you just give us a little bit of color as to why that would be?

Scott McFarlane -- Co-founder and Chief Executive Officer

Sure, Jackson. Thanks. What I would say is, look, M&A is in our DNA. I mean it's been around since we started the Company. We've done 21 tuck-in acquisitions to expand our IP and expand content and all of those things. And so we're always looking to do deals, and we know a lot of the people in the space. And so there's lots of -- there's discussions that go on all the time around this. We brought on a new executive team. We've been focused on really doing things internally, getting everybody settled in their jobs, focusing on what we can do around efficiency and growth. And I think that the deals took a backseat to that organization. And as I've said, we're always continually looking to do acquisitions. So nothing has changed on that front.

Jackson Ader -- J.P. Morgan -- Analyst

Okay. Great. And then a follow-up for you, Ross. Without getting into what happened in July, and what you see in June, did you feel like there was any actual demand pulled forward? Or does it all pent-up from previous deals that didn't hit maybe in April and May that came into June?

Ross Tennenbaum -- Chief Financial Officer

Yeah. Thanks, Jackson. I don't think it was pull forward. I think it was probably more pent-up demand. As you know, March and April were the height of the COVID situation, and everyone grappling with how to deal with that. And so I think that there was some pent-up demand as our business and our customers were trying to figure out how to progress forward, and that started to fall out in May and June. And we saw a nice increase in our billings growth rate and end market demand. So I think it was more pent-up than any pull forward.

Jackson Ader -- J.P. Morgan -- Analyst

Got you. All right. Thanks, guys.

Scott McFarlane -- Co-founder and Chief Executive Officer

Thank you.

Operator

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

Patrick Walravens -- JMP Securities -- Analyst

Great. Thank you very much and congratulations. Scott, my ears perked up when you were talking about the win that had a cross-border element to it and customs duties. A long time ago, I covered a company that did this. And I remember there's some real opportunities in terms of the ROI and people getting their money back from the government if you track all the stuff right. Can you just lay out what the opportunity is on the cross-border products?

Scott McFarlane -- Co-founder and Chief Executive Officer

Hey Pat, thanks. We -- I've said this before. I am such a huge proponent of cross-border. I mean I think it -- I mean it's one of those kinds of things that in the world of commerce and especially e-commerce, people ought to know -- both buyer and seller ought to know exactly what the cost is at the time of the purchase, right? I mean this concept of having it segregated in the marketplace where you place an e-commerce order, then you go to a third -- then they have to go to a third party and deliver it. And when it gets to the consumer, they have to pay another bill is really absurd. I mean in today's digital world, it should all happen right at the moment of clicking to buy and acquiring that product.

And so I've always fundamentally believed that it was this, I mean, important aspect to add that to all transactions at the time of the magic moment of commerce. And so I think as e-commerce goes -- and I think it's just a huge benefit to the e-commerce publishers because they don't have to deal with people saying I don't want the product. I didn't -- I don't need that product, especially if I have to pay this extra duty and this extra cost, ship it back, right, or take it back. I don't want it. And so abandonment is a huge issue for our e-commerce manufacturers, and we do away with all of that. We help the consumer do the classifications. We help the manufacturer make sure that all of the rates and everything are right. And it's a huge competitive advantage for us because nobody in the space actually does this other than Avalara at the time. And so we think it's a huge advantage for manufacturers and a great benefit to the customer.

Patrick Walravens -- JMP Securities -- Analyst

Great. And if I can ask just sort of quick follow-ups. Is that an area where there's M&A to do? Like, is there more content that you could acquire that would help? Or do you have everything you need today?

Scott McFarlane -- Co-founder and Chief Executive Officer

So we started that internally, started building it, then we announced the acquisition of Tradestream. And then we did an acquisition of Portway around classification and making sure that all the HS codes are aligned to the product codes in our system. And so we've made two acquisitions in that area, and we're always looking for more content and more IP that will help improve the service. So I mean I think the answer is, yes, we're always looking for that.

Patrick Walravens -- JMP Securities -- Analyst

Great. Thank you.

Scott McFarlane -- Co-founder and Chief Executive Officer

Thanks, Pat.

Operator

[Operator Instructions] Thank you. Your next question comes from Brad Reback from Stifel. Your line is open. Brad Reback, your line is open.

Brad Reback -- Stifel Nicolaus -- Analyst

Sorry, was on mute. Ross, as you guys become more of a multi-product company, much like we were just talking there on cross-border trade compliance, how should we think about that impacting net revenue expansion rates going forward?

Ross Tennenbaum -- Chief Financial Officer

Yeah. Thanks, Brad. I think that as you guys know, net retention is based on churn. One factor, which, as we talked about on the call, has been really healthy. It's based on upsell. And on our sort of new bookings side, upsell is really healthy. And then down-sell, which in COVID has been a little bit higher. Normally, it's a non-issue. It's been a little bit higher, but nothing to be concerned about.

I think as we go forward with these new products, and they -- most of them have just been launched. We talked about them a little before Analyst Day and at Analyst Day in June. As we go forward, our goal is to not only use them to land new customers but to use them to expand our existing customers. And so the cross-border is a great example going back to companies that are e-com companies and by definition, international e-tailers, calling them back and saying, how are you doing, cross-border, you should add this on, and it's built into the connector. Or going back and saying, how are you doing, consumer use? We should be going back to our customers. So I think over time, we should -- it should be a benefit to -- we should be expanding our customers more.

I still said -- we've always said that net retention revenue to think about it, 110% plus or minus. And so right now it's been a little bit south of that due to some of the down-sell from COVID. I expect that will improve over time. And I expect in the long term, we'll see more out of expansion from our existing customers.

Brad Reback -- Stifel Nicolaus -- Analyst

Great. Thanks very much.

Operator

Your next question comes from Chris Merwin from Goldman Sachs. Your line is open.

Christopher Merwin -- Goldman Sachs -- Analyst

Hey, thanks very much for taking my question. You talked in the prepared remarks about a $300,000 deal, which was really exciting to hear, and I imagine this is an enterprise customer. So going forward, can you talk about any changes we might see to the go-to-market motion to reach more customers like that? Obviously, it sounds like you landed this customer, the go-to-market motion you have today with the 750-plus partner integrations. But as you think about further broadening out the product suite and solving more and more problems for large businesses, just curious how you think about that go-to-market motion evolving in time as well. Thank you.

Scott McFarlane -- Co-founder and Chief Executive Officer

Sure, Chris. I mean you know as well as anybody, because we've talked about it, which is, I mean, Avalara has always been selling to enterprise customers, but we've always called that we're doing it opportunistically, that we use our existing sales motion to find the customers that want to move from on-prem to the cloud. And that's typically the impetus that we see when people start to make that transition. And I don't see that changing for us.

I mean we're going to continue to push that envelope around being opportunistic. But I've also said that we have not had all the product features in our salespeople's bag that they need to sell at that upper level to everybody. And we said that by the end of 2020, we would have all of those things there for them. And so advanced rules, adding consumer use, adding the cross-border, these are all the things that enterprise customers want to talk about. And now we have those or will have them in a very short period of time. So I would say that we would be stepping up our approach to opportunistic, but I don't think it's going to be a huge change in the way we go to market, at least not for the foreseeable future.

Christopher Merwin -- Goldman Sachs -- Analyst

Thanks a lot, guys.

Scott McFarlane -- Co-founder and Chief Executive Officer

Thanks, Chris.

Operator

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

Scott Berg -- Needham & Company -- Analyst

Hi, Scott and Ross, thanks for taking my questions today. Congrats on a good quarter. I guess to switch gears a little bit in an area I haven't heard you guys chat about recently. Can you comment on contributions or momentum that you're having with either the different e-commerce platform vendors or the marketplaces? We've seen some of those vendors report GMV volumes up nearly 100% year-over-year due to the current pandemic. Didn't know if your revenues or the opportunities from those partners are kind of in line with that, with those substantial growth rates or not.

Scott McFarlane -- Co-founder and Chief Executive Officer

I'll start out on this one, and then I'll turn it over to Ross because he gets all fired up about this top-of-the-funnel program. But -- so look, I mean from e-commerce, e-commerce has been around for Avalara since our beginning, right? In the beginning of Avalara, we did ERP, and we really nailed that moat, and we really got all of the mid-market ERPs tied up. Back in the day, there weren't as many e-commerce platforms, but they all called it API. So we were selling our SDK, and we had a robust business around that. Then e-commerce platforms came out, and we started seeing a huge uptick in that. So we do a significant portion of our business with e-commerce and marketplaces today.

And I guess what I would say, before I turn it over to Ross is, is that the first thing that you have to do, the only thing that really matters is you must win these partners because, I mean, it's the same thing that happened in ERP. You must win the Sages and the Epicors and the NetSuites and all of those in order to protect the moat. And so the first thing that we have focused on more than anything is winning the Shopify, winning the Wixes, winning the BigCommerces, winning all of those kinds of deals because that's the first prospect -- process in monetizing these relationships. Ross, I'm going to turn it over to you because I know you love talking about this.

Ross Tennenbaum -- Chief Financial Officer

Yeah. I mean Scott, it's a great question. And we're really happy with Shopify, BigCommerce, and our e-com platforms are doing great. And we've all seen the stats about the acceleration in e-commerce in three, four months versus the last 10 years. The way I would think about it is they're top of the funnel for us. We love it because they see it right away, GMV model. They've got to move e-commerce, it shows up right away. And as they add like Shopify Plus, as they add more customers that enroll on our platform, as you know, Shopify pays us a fee for each one. So we get nice growth from that, and we really like that. But then our game really takes hold.

We then -- they're on our platform, calculating. We know who they are. We can then market to them returns and search and consumer use and cross-border and all our other products, converts them to a direct customer of ours and grow them into core customers, etc. And so I would just really think about it as these are our future customers. They're top of funnel. But for us, as we've always said, it's quarters and years that they will evolve, and we will convert them and enlarge them on our platform with more products.

Operator

Your next question comes from Brian Peterson from Raymond James. Your line is open.

Brian Peterson -- Raymond James -- Analyst

Hi. Thanks for taking the question. So Scott, you mentioned some commentary on enforcement that might be on the horizon. I know 2020 has been an interesting year. I'm just curious what you've seen or heard that maybe, I guess, in the near term, that maybe gives you confidence in that? And how you think about that unfolding over the next few years? Thank you.

Scott McFarlane -- Co-founder and Chief Executive Officer

Well, I've got a few anecdotes that I will share. But I think that -- what I always tell everybody here in our Company is reality will impose itself. And I mean the reality of all of the deficits, all of the relief programs that states, countries are coming up with will have to be paid back in some way, shape or form. So I don't think it's a stretch to say that more enforcement is coming. It's just a continuation of the trend that was already there, whether it's Wayfair or it's marketplace rules or e-invoicing in the EU and around the world.

I mean these are all programs that are designed to ensure that people are paying what they are supposed to be paying and that there are no free lunches out there. And I mean this has played out around the world, even more so than in the US, where people are looking for the companies that are not paying their fair share and doing e-invoicing, that live reporting, Nota Fiscal are all programs to ensure that the government knows transactions are happening real time. And that is going to continue in earnest once this -- once we -- once this pandemic sort of plays itself out a little bit.

Brian Peterson -- Raymond James -- Analyst

Well said. Thanks, Scott.

Operator

Your next question comes from Brent Bracelin from Piper Sandler. Your line is open.

Brent Bracelin -- Piper Sandler -- Analyst

Thanks. [Indecipherable] for Scott or Ross to weigh in here. A little surprised to hear the SST contribution, I think, was up over triple digits year-over-year this quarter. I mean we're two years off of Wayfair. Could you just talk a little bit about the drivers of that? Was there some pent-up demand? Was it just off-line to online e-commerce tailwinds? Is there some sort of new state programs promoting SST? Just any color on two years after Wayfair, why SST contribution is triple digits here would be helpful. Thanks.

Scott McFarlane -- Co-founder and Chief Executive Officer

Well, I'll start out. SST is really disassociated from Wayfair in -- at least in practice, right? There are theoretically things that they do the same things. But SST was set up pre-Wayfair. So it was a program whereby the states would pay the CSPs, which would be Avalara to get customers to sign up and to drive revenue. So -- but -- so -- but Wayfair has actually obviously put this at the forefront. Everybody is thinking about it. But I have to give huge kudos to the -- to our sales and marketing team who have really dialed in the message, right, the message, you can save money in doing your transactions with Avalara, because the governments are paying for it.

And so it's a win-win for everybody. The states get paid. The customers get a break on the cost, and Avalara can benefit as well. So just one of those things that's just really worked out well. We've dialed in the message. We know how to make that work, and customers are taking advantage of it because they see a real cost-effective aspect to the program.

Brent Bracelin -- Piper Sandler -- Analyst

Got it. The cost benefits seem to be helping there. It's very helpful.

Scott McFarlane -- Co-founder and Chief Executive Officer

Absolutely. And we're very good at articulating it now.

Ross Tennenbaum -- Chief Financial Officer

Yeah, Brent, the execution has really been great there. We really dialed it up last year. And I want to make a point because I'm sure someone's going to ask about net retention. And we called out in the remarks, SST is currently not included in that net retention rate. All the revenue from SST is not included. So what's happening is the upsell that we're getting to existing is not getting counted. And sometimes when an existing customer adopts SST, they may downgrade other services to get into the SST program. So we pick up the downgrades, but we don't pick up the upsell. So it's something we're going to look at in Q3, take a look at the metric. Not promising we're going to change it. I'm not saying it's going to be higher or lower. I just think it's something we're going to go look at.

Brent Bracelin -- Piper Sandler -- Analyst

Helpful color. Thank you.

Operator

Your next question comes from Matt Stotler from William Blair. Your line is open.

Jake Roberge -- William Blair -- Analyst

Hey, everyone. Congrats on the good quarter. This is actually Jake Roberge on for Matt. But I'm just curious in terms of establishing enterprise-focused partnerships, which relationships do you think are most crucial to the success in your move upmarket? I know you've kind of talked about the various products in Europe in these cross-border transactions. So just curious if you could provide more color on that.

Scott McFarlane -- Co-founder and Chief Executive Officer

Sure. We've been doing SAP in Oracle and all of the upmarket that will connect us. I mean that's the first and most important aspect of starting to do that. And so we need to -- I mean we're closer with SAP. We're closer with Oracle. I mean I'm on the phone with them. I'm constantly trying to promote that aspect. But the area that I think that would really benefit Avalara the most as we move forward is developing an even better relationship with the Big 4 accounting firm. I mean that's not something that -- I mean we have a nice relationship with them, and it's opportunistic, but we need to be the go-to people that they're using in their pitches to customers as we move forward. And that's something that we're really keen on focusing on. And I think that, that will develop even more over time.

And I guess I would say one of the most interesting aspects of that relationship is the feature around complex custom rules. Complex custom rules allows an SI firm or Big 4 to be able to take content and build it into an SAP or Oracle system, and that's different in sort of the motion Avalara has always had in the past, because we provide content to all of our customers. So this concept of you don't have to provide content because they're getting it someplace else is something now that this new functionality that we're releasing second half of this year will allow us to do it. And it will allow us to have a much more meaningful relationship with these big SI firms, because they can actually take their content or somebody else's content and put it into the bigger implementation.

Jake Roberge -- William Blair -- Analyst

Sounds good. Thanks for the color. And congrats again on the great quarter.

Ross Tennenbaum -- Chief Financial Officer

Thanks, Jake.

Scott McFarlane -- Co-founder and Chief Executive Officer

Appreciate it.

Operator

Your next question comes from David Hynes from Canaccord. Your line is open.

David Hynes -- Canaccord Genuity -- Analyst

Hey, thanks, guys. So Scott, we heard it at the Analyst Day, and we heard it again in your prepared remarks today, really a renewed focus on kind of ROI-driven selling, right, which, I guess, is maybe a bit of a change from what's been more of an event-driven model in the past. Can you just talk a little bit about how you're communicating and delivering that ROI message to the market? And does it feel like a real change in the sales measure?

Scott McFarlane -- Co-founder and Chief Executive Officer

Yeah, it does, actually. I mean when you're event-driven -- because I think that's a fantastic way of describing that, David. When you're event-driven, talking about, you're upgrading your ERP, why don't you think about sales tax? We know that you know that you're not doing sales tax right. So let us help you at this momentous time when you're doing ERP. It's, as you say, event-driven. You've had an audit, event-driven.

ROI is actually the best and most meaningful message that we have, because when this is really -- what this is really all about is efficiency. It's about doing something automated that you have no business doing in a manual format. I mean, look, a sales tax creates no benefit for the end user, for the customer. It has no benefit. It only creates liability. So when you have the ability to talk to them, and the best time to talk to them is in these uncertain times about their ability to produce results with minimal effort and the decreased liability and to outsource this kind of functionality. It is absolutely the perfect time to do it.

And it's way easier to talk about efficiency and outsourcing in the times like we're seeing right now than it is when the market is just going crazy, because nobody wants to face into that. And so what we have to develop is the muscle memory to do this in the difficult times and continue that even in the best of times and using the other trigger events when they're appropriate, because, I mean, everybody is doing all -- or having those trigger events as well. So it's a combination of both.

Operator

Your next question comes from Michael Berg from Mizuho. Your line is open.

Michael Berg -- Mizuho Securities -- Analyst

Hi, there. Congrats on a great quarter. I wanted to ask on competition, specifically Vertex. They recently went public, and I was wondering if you -- as you guys move upmarket, are you seeing them or any other competitors more or less often?

Scott McFarlane -- Co-founder and Chief Executive Officer

I was wondering when the Vertex question would come up today. I -- really, seriously, I want to just wish Vertex the very, very best. We've known them forever. When we started our business, they're the 900-pound gorilla that we were chasing all of the time. The family that has been running that business is a dear friend of ours, and it's been fantastic to see what they've done.

Look, we have designs on moving upmarket. We do. We're doing it optimistically -- I mean, opportunistically, as we move forward, because I think that, that's the right way to do it. I've always said it's a fool's errand to try to run in and displace Walmart POS system and put something else until they're ready to do it. The key is if they have your product, your team, your company in a position where when those things happen, when those events happen, you can be in the conversation, you can jump on it and move forward. And we've done that in a variety of ways. I mean we're certified in SAP. We're certified in Oracle. We have the basis for doing this. I mean we have a team that's experienced in doing it. We have a SaaS model, the leader in doing that. We're strong internationally. We're strong in cross-border, consumer use.

I mean we have all of the pieces in place, and we have relationships with a lot of these players through different means. Whether it be our exemption certificate business, our fuel business, our telecom business, I mean, we have surrounded many of these enterprise customers in our approach. So we're just going to continue to do what we've done and add the features that I've talked about, and we will just gradually move upmarket.

Ross Tennenbaum -- Chief Financial Officer

Yeah. I mean, the only thing I'd add, Michael, because I think when we say opportunistic, some people hear it different from what we mean and feel like we're half in, half out. And I would just say, we are in the enterprise business. We have an enterprise sales team. We have an enterprise marketing team. We win enterprise deals every quarter. It's Scott's point of optimistic is, it's a displacement market, and it's hard to convince Walmart or pick your favorite company, hey, now is the time to go change out your systems and reevaluate your tax technology along with it, but they all -- we believe they all will, as we've always said, at some point.

Especially as they're trying to deal with COVID, as they're trying to deal with e-commerce, their back-end systems are news, and they're going to reevaluate them, and that will include the tax technology. And we just want to be there in all those conversations to have that at that because we think with the work we've done over the past few years on the platform, we can now deliver an end-to-end suite, and we have a lot of great capabilities to deliver for what their requirements are. So we expect to be in those conversations, and we think we can win our fair share.

Operator

Your last question comes from Brett Huff from Stephens. Your line is open.

Brett Huff -- Stephens -- Analyst

Good evening. Thanks for taking my question. I'm glad to see the value proposition really resonating in a COVID world. Question, somebody asked about going upmarket. I want to ask about going down market. One of the questions we always have in great business models like this in the middle market is always making sure that we're defending our flank on the very low end with good enough products. And so I'm thinking, I know you guys are going after some of that, but how have those conversations changed either directly with some of the folks? I think you gave an example directly with the QuickBooks customer, but also with the distributors you're working through there. How is that resonating? And are we seeing just what -- give us some examples of that value prop resonating? Thanks.

Scott McFarlane -- Co-founder and Chief Executive Officer

That's, I mean, a great question, Brett, because for me personally, right, I mean, focusing on the upmarket, we've talked about being opportunistic. The mid-market is sort of where our bread and butter as we dominate that. But I'm always fearful of the innovator's dilemma. I'm always fearful of being displaced by something from below. And the only way to really protect yourself in this world is through partnerships. And it's one of the things that Avalara just, I mean, exceeds that, right? I mean we are very, very good at that partner model. And what I mean by that is it's also a fool's errand to try to win the low end of the market on a one-off basis.

So your relationships with the Shopifys and the Big Commerces and the Wix, in particular, and all of those kinds of players is what your barrier is to entry. And that's why I've said it's so important that you win those. Ross talked about how we're going to monetize those in the future, but the most important thing is to protect yourselves and to deliver things like returns for small businesses. Returns for small businesses, which we -- I said in my -- Analyst Day, we've come out in the next couple of weeks, I'm proud to say that they got it out a little bit early. And it's on the market now, which allows some of these e-commerce and marketplace sellers to be able to sell a returns package, along with the calculations that they're already doing.

So there -- so what you have is you have to win these, and then you monetize them with something like returns or exemption certificates or other things that registrations, other things that they need. But the key, the key, key, key is to win those deals, to grow those deals, the zeroes, and the fresh books and all of those kinds of things. That's how you win the -- and that's how you defend yourself at the low end of the market.

Operator

We have no further questions. I'd like to turn the call back over to Avalara's Co-Founder and CEO, Scott McFarlane for closing remarks.

Scott McFarlane -- Co-founder and Chief Executive Officer

Well, thank you all for your interest in Avalara, and we look forward to taking -- talking to you on our next call. Thanks for everybody joining in. Thanks for the Avalarians. We all appreciate the support. Thank you.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Jennifer Gianola -- Vice President of Investor Relations

Scott McFarlane -- Co-founder and Chief Executive Officer

Ross Tennenbaum -- Chief Financial Officer

Jackson Ader -- J.P. Morgan -- Analyst

Patrick Walravens -- JMP Securities -- Analyst

Brad Reback -- Stifel Nicolaus -- Analyst

Christopher Merwin -- Goldman Sachs -- Analyst

Scott Berg -- Needham & Company -- Analyst

Brian Peterson -- Raymond James -- Analyst

Brent Bracelin -- Piper Sandler -- Analyst

Jake Roberge -- William Blair -- Analyst

David Hynes -- Canaccord Genuity -- Analyst

Michael Berg -- Mizuho Securities -- Analyst

Brett Huff -- Stephens -- Analyst

More AVLR analysis

All earnings call transcripts

AlphaStreet Logo