Avalara, inc (AVLR) Q3 2021 Earnings Call Transcript

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Avalara, inc (AVLR)
Q3 2021 Earnings Call
Nov 4, 2021, 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 Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jennifer Gianola, Vice President, Investor Relations. Please go ahead.

Jennifer Gianola -- Vice President of Investor Relations

Good afternoon, and welcome to Avalara's Third Quarter 2021 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 impacts of COVID-19 on our business and global economic conditions, expectations regarding the integration of acquisitions into our business and growth opportunities and synergies arising from such acquisitions; our expected future business and financial performance and financial condition; and our guidance for the fourth quarter and fiscal year 2021, 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 25, 2021, 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, Jennifer, and welcome to everyone joining our Q3 2021 earnings call. Q3 was another great quarter for Avalara, demonstrating the strength and durability of our business model. We reported Q3 total revenue of $181 million, representing an increase of 42% year-over-year, one of our strongest quarters in history. When combined with the first half, this was the best fiscal year-to-date performance in terms of revenue growth rate since going public. Our strong growth was driven by solid performance across the business and the addition of strategic acquisitions that we closed since Q4 2020. Even excluding acquisitions, organic revenue growth in the third quarter increased 29% year-over-year. Once again, I'm excited to see a very balanced quarter with success points coming from many key initiatives. Our success in attracting new customers across a wide range of industry, segments and geographies is very exciting. We are winning large multiproduct deals and cross-sell wins from our acquisitions. We also experienced strong customer retention and solid upsell activity. A great proof point is our revised net retention rate of 116% and our legacy net retention rate of 112%, which was the second highest since our IPO.

As part of our growth strategy to expand our international reach, we are very pleased with the attendance and the excitement at our annual international flagship event, Virtual Inspire-2021 in October. The event was a big success with more than 4,000 registrations from around the world, the largest in our history. The theme this year was Powering Global Commerce and was focused on empowering leaders with the knowledge they need to grow their business internationally. We believe that to dominate the future of global compliance and distance ourselves even further from the competition, we must have the best content powered by AI and machine learning, the largest number of partner integrations and the most robust technology platform, not to mention best-in-class onboarding. As you can see from our year-to-date results, customers are choosing Avalara to streamline their tax compliance at a brisk pace.

And our value proposition has never been more relevant. As further validation, we are honored to win significant independent third-party recognition from IDC, demonstrating the impact we are making in the industry. IDC recognized Avalara as a leader in three reports covering worldwide SaaS and cloud-enabled tax automation software for small and midsized businesses, enterprise and value-added tax. Being recognized as a leader across all three IDC MarketScape categories further validates the pioneering innovation our teams are delivering to best serve our customers around the globe. Stepping back, we started our journey in the SMB market with aspirations to dominate all segments. Today, we are a leader in SMB, a massive greenfield opportunity and minimally penetrated. And over the past few years, we have successfully invested in expanding our reach into the enterprise, small and international segments. As I've said before, it's a long-term journey, and we have a bold vision to be part of every transaction in the world

Our leadership recognition validates what we've been saying over the past few years, and we fully expect that our position in these industry analyst reports will continue to grow as we execute our vision. As I've mentioned before, Avalara is in a unique position to benefit from four major trends we are seeing impacting businesses of all sizes, including the fundamental shifts in the fabric of commerce and regulatory obligations along with rising adoption of cloud-based infrastructure and ROI expectations in the market. The growth of omnichannel commerce is a generational opportunity for Avalara. Business is adopting or expanding e-commerce and marketplaces, selling our excellent prospects for us as their omnichannel complexity and compliance exposure grows.

As more businesses of all sizes continue to replace on-premise applications with cloud services, the concept of cloud compliance has shifted from a novel approach to an expectation in the market. One of the drivers of this shift is the economic efficiency delivered by cloud services and automation. Even beyond COVID, we expect our cost efficiency and ROI messaging to continue to resonate and be a key driver for purchasing decisions with our prospects. Against this encouraging backdrop, growth remains our top priority, so we intend to increase our investments in problem and solution awareness. We know how this story ends. Compliance will be automated. Our goal and our obligation as a leader is to accelerate the process of helping companies around the world understand their exposure and how they can address it with the leading cloud compliance solution. Status quo has always been our most powerful competitor, and we intend to harness these catalytic trends and capture the future.

Our customer wins are proof points that we are executing our strategy, including expanding our moats and building out our portfolio of offerings organically and through M&A. Here are just a few examples. We won a large enterprise deal with an iron products company for a deal value of $224,000, which includes annual recurring revenue, onetime software and services. We won the deal due to our prebuilt integrations with several disparate systems, including a leading ERP application, a leading finance and operations application, an accounting software package and a business process management application. We also won an iconic American snack brand for a deal value of $75,000 due to our ability to integrate through their entire quote-to-cash process, including our integration with a leading finance and operations application and two separate commerce platforms.

Next, we won a large international multiproduct deal with a U.K.-based sporting e-tailer for a deal value of $295,000, including cross-border duty classification, sales tax determination in 40 states, VAT, GST determination for the new European Union VAT regime called Import One-Stop Shop, or IOSS, and the U.K. government's making tax digital as well as access to our SST program. We continue to see success winning deals with our Avalara and TTR go-to-market strategy. As one example, we won an auto services company for a deal value of $48,000, including AvaTax, CertCapture and our battery and tire content from TTR Tax Research. The competition under-delivered so we brought in our TTR experts and took the deal away. Additionally, we won several competitive wins and takeaways.

First, we won a competitive takeaway for a screen company for a deal value of $143,000, replacing an on-premise vendor. We won this deal by having all the required products, including AvaTax, TTR Research, registrations, CertCapture and consumer use TAP. Next, we won an e-commerce platform for a deal value of $97,000, including AvaTax, CertCapture and SST. The competition did not have an exemption solution, and the company had [AUD] exposure for not being registered yet in any state. We won a nail products distributor for a deal value of $86,000, including AvaTax, Returns and SST. We won this deal due to our prebuilt integration with an e-commerce platform and our AvaTax integration with SAP ERP. We won a digital design company for a deal value of $154,000, including AvaTax, VAT calculations and CertCapture.

We won the deal due to our integrations with Shopify and our AvaTax integration with SAP ERP. Finally, we won a parking technology company for a deal value of $134,000 including AvaTax, TTR and a future requirement for our SST program. The customer had a complex manual process for tax determination and couldn't find a vendor to fit until they met with Avalara and TTR. Among our cross-border successes was a deal with a commerce-as-a-services company for a deal value of $133,000, including our AvaTax cross-border and our Avalara-managed tariff classification offering. We won this deal by leveraging our strong partnerships with Shopify and one of the largest online marketplaces in the world. One of my favorite deals is with a vitamin company for a deal value of $78,000, including AvaTax, TTR Research and SST in 23 states.

The company was established only nine months ago and experienced rapid growth but was managing the process manually and for only one state. This is a great example where economic nexus thresholds were broached quickly, and a complex product with state-to-state nuances of taxability created the trigger to call Avalara to keep them compliant. We believe we've built one of the most defensible moats in all of software, with over 1,000 signed partner integrations and growing. In fact, a recent IDC report highlighted our moat by stating and I quote, "Avalara's experience gained from thousands of customers using these integrations for years has made it a no-brainer for buyers to pick Avalara in competitive situations." That's why our strategy from day one has been to offer far more integrations with business applications than any other tax software provider.

And we never stop working to add more. We are continuing to expand and deepen our relationships with partners at all levels of our ecosystem. We have put ourselves in a leading position to expand our partner relationships across industries and tax types, and we are seeing new opportunities. As one example, we are excited to announce that we recently signed a partnership with a leader in enterprise management software for convenience retail and petroleum wholesale markets. This is a major win for Avalara. The company has agreed to rip and replace their own native reporting and returns module with Avalara's returns for excise as their OEM reporting solution and be jointly named, marketed and sold to their enterprise customers in oil and gas. The company also intends to build a connector into our calculation and determination engine, with initial plans to make this available to enterprise customers next year, giving us a brand-new channel in which to sell our entire technology stack for energy into some of the largest enterprises in oil and gas.

Also at our Analyst Day in May, we announced that we entered into an agreement to assist Shopify in supporting their cross-border duties and tax solutions. I'm excited to share that as part of Shopify's recent Shopify Markets launch, the duties and tax solutions are now available in early access. This is scaling nicely with targeted plans to be generally available to all Shopify merchants in the coming months. This solution enables Shopify merchants to classify their product catalogs with international tax codes and calculate cross-border customs duties and taxes at the time of sale. Recently, Shopify declared that now every merchant is global by default, and we are excited to help Shopify enable the future of global commerce. This new relationship is a great example of what I call the second wave of partnership deals for Avalara.

These deals are with providers like e-commerce platforms, marketplaces and payment processes. And they are being accelerated by the generational shift in e-commerce adoption. It's really an exciting time for us because we have been building toward this watershed moment for years. It reminds me of when we are going after ERP vendors during the early days of the company. We knew we had to win those deals to solidify our position and lock out competitors. We are witnessing the same thing now in a second wave where e-commerce, payment processing and compliance converge. We saw this coming a long time ago and strategically prepared for this moment by building a track record of success and credibility over 17 years. We have used this strategy to get ahead and stay ahead of our competitors in the past, and we believe we are going to win with it again.

We also continue to advance our acquisition strategy. We are driving hard organically and through M&A to continue building our global cloud compliance platform and future-proof our leadership in this space. We leverage M&A to expand our tax content repository, add new capabilities and technology, inject talented new personnel into our business and extend our geographic expansion. At our May Analyst Day, we highlighted potential additions to our product family to expand our offerings. I'm pleased to announce that we have entered new areas of compliance automation, including 1099s, W-9s and property tax. We started with our roots in sales tax calculation and added returns and continue to expand into other indirect tax types over the last few years. Today, we are moving beyond indirect tax into areas of direct tax such as 1099s and property tax, increasing our TAM as we build the most robust compliance platform in the market.

To expand our range of compliance solutions, we acquired Track1099, a provider of online software and services for cost-effectively managing, e-filing and e-delivering IRS forms, including 1099s, W-2s, W-9s and more. Track1099 supported more than 40,000 customers with their filing needs in tax year 2020. By acquiring Track1099, we are adding technology, content and expertise to our platform and team. We are delighted to welcome founder Lindsey West and the team at Track1099 to the Avalara family. Next, we acquired the assets of CrowdReason, a developer of SaaS-based property tax compliance applications as well as their related property valuation and advisory service business to help solve property tax challenges. According to the U.S. Census Bureau data from 2018, state and local governments collected a combined $547 billion in revenue from property tax or 17% of general revenue. Property tax revenue as a percentage of state and local general revenue was higher than each of the general sales tax revenue, individual income tax revenue and corporate income tax revenue in 2018.

We are delighted to welcome founder Carl Hoemke and the team at CrowdReason to the Avalara family. Adding property tax content and software to our global compliant portfolio extends Avalara's footprint into a large and exciting new tax type. We believe our customers and partners will value our platform for end-to-end compliance automation and the consolidation of today's fragmented landscape of compliance products. We will continue to look for and close opportunities that we believe will improve and sustain Avalara and our growth objectives. We continue to bring talented leaders with diverse backgrounds onto Avalara's Board of Directors. I would like to welcome Global Finance Leader, Marcela Martin to our Board. Marcela is the Chief Financial Officer of Squarespace, where she oversees the company's finance and corporate development functions.

Marcela brings more than 25 years of global finance and leadership experience across consumer technology, software, SaaS verticals with high-growth companies to Avalara's Board. Her expertise in streamlining operations and M&A integration, combined with her experience guiding strategic operations during periods of growth will add tremendous value to Avalara's Board of Directors. I am proud that Avalara's Board is quite diverse. Today, more than 1/3 of Avalara's Board is made up of women. In addition, two out of three Avalara's Board committees are led by chairwomen. As we've always said, we believe we are a long and strong business with low penetration in a large addressable market and a long-term play based on automating statutorily required functions. We believe we are outpacing the competition and driving the future of global compliance, and we believe we can grow and scale Avalara into a multi-product, multibillion-dollar revenue company over time.

Thank you. And with that, I'll turn it over to Ross.

Ross Tennenbaum -- Executive Vice President and Chief Financial Officer

Thanks, Scott. Avalara posted another great performance in Q3 that exceeded our guided metrics and was again driven by balanced execution across the business. Q3 total revenue was $181.2 million, up 42% year-over-year or up 29% after excluding revenue from acquisitions since Q4 2020. Subscription and returns revenue grew 38% year-over-year to $164.2 million or up 30%, excluding acquisitions and represented 91% of our total revenue. Professional services revenue was $16.9 million, up 95% year-over-year. The high growth rate in services revenue was largely driven inorganically by the Q4 2020 acquisitions of business licenses and TTR. As a reminder, during the second quarter of 2021, we revised our core customer calculation methodology to include revenue from our SST customers, resulting in additional customers being included in reported core customers.

We also revised our net revenue retention rate calculation methodology to include revenue from SST that previously was not included and to exclude professional services revenue as these services tend to be more onetime in nature. We have included both the revised and previous key metrics methodologies for core customers and net revenue retention rate in a table at the end of our earnings press release. Our revised core customer count increased by 830 from the previous quarter to approximately 17,400 at the end of Q3 2021, a year-over-year increase of 22%. Our core customer count under our previous definition increased by 820. Our revised net revenue retention rate was 116%, unchanged compared to 116% last quarter, resulting in a 115% 4-quarter average. Our NRR under our previous definition increased to 112%, up from 110% last quarter, resulting in a 108% 4-quarter average.

We are very pleased with our NRR rates, which indicates strong sales execution among our existing customers, coupled with improving customer retention dynamics. Q3 revenue from revised core customers grew 27% year-over-year to $145.2 million. Q3 revenue from noncore customers grew 40% year-over-year to $19.3 million, primarily driven by strong growth in EMEA. Q3 revenue from acquisitions since Q4 '20 was $16.7 million. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and share count are on a non-GAAP basis and are reconciled to our GAAP results in the earnings press release that was issued just before this call. Gross profit was $133.2 million in Q3, representing a 74% gross margin.

This compares with gross profit of $95.5 million and a 75% gross margin in the same period last year. Subscription gross margins were 75%, down from 76% in the same period last year. We continue to focus on increasing our subscription gross margin over time through our ongoing investments in automation. However, any improvement in subscription gross margin may be offset by lower gross margins on some of our acquisitions and less mature products. Our total gross margin will also be impacted by the mix of subscription and professional services revenue. Sales and marketing expense was $67.3 million in Q3 or 37% of total revenue compared to 36% last year. As we discussed last quarter, this reflects our intention to increase our investment in sales and marketing in the second half of 2021. Q3 research and development expense was $36.3 million or 20% of revenue, down from 23% of revenue in Q3 '20, but included a higher benefit from capitalized software in the current quarter.

Absent the increased capitalization, Q3 R&D expense would be roughly in line with the year-ago comparable period. Q3 general and administrative expense was $26.1 million or 14% of revenue, down from 15% of revenue in Q3 '20. Q3 operating income was $3.5 million, which was better than our guidance, largely as a result of strong revenue and gross margin and some expense favorability from capitalized software and slower hiring than forecasted. Q3 net loss per share was $0.03 in the quarter based on 86.5 million shares outstanding. Total deferred revenue at the end of Q3 '21 was $257.9 million, up 43% from $180.6 million at the end of Q3 '20 and up 22% year-over-year, excluding acquisitions in Q4 '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 $196.4 million in Q3 '21, up 38% year-over-year.

We also produced 26% year-over-year organic calculated billings growth, which was impacted by a couple of growth points from lower new customer billings in the EU with our largest marketplace partner. As a reminder, we are a back-end compliance platform for VAT registrations and filings for this partner's marketplace. And the partner controls the flow of customers to our service. In addition, in Q4, we expect to enter into a new contract and pricing rate card with this partner that we believe will result in higher volumes at lower prices for existing and new customers serviced through this partner's platform. As a result of these changes, we expect to realize a small headwind on total company billings and revenue growth in 2022.

We remain excited about the global opportunity with this important partner and believe there are additional opportunities to expand our relationship by supporting them with a broader range of compliance offerings and in more jurisdictions. Revenues from this partner accounted for approximately half of Q3 international revenues, with the remainder coming from our EU direct business as well as international sales efforts in other regions, including Brazil and India. Free cash flow was $6.4 million in the third quarter compared to $25.9 million in the same quarter last year. As we have stated on past calls, our free cash flow will fluctuate from quarter-to-quarter caused by many factors, including the timing of working capital, the seasonality and levels of our billings and expenses as well as our overall level of investment in the business. Our cash and cash equivalents were $1.5 billion at the end of Q3 '21, an increase of $472 million from $1.1 billion at the end of Q3 '20. During Q3 '21, we closed a convertible debt offering and raised $959.9 million in net proceeds after deducting fees and expenses.

I will now conclude the call by providing guidance on revenue and non-GAAP operating loss for Q4 and for the full year 2021. We continue to expect the mix of professional services revenue in the range of 9% to 10% of total 2021 revenues. For Q4 2021, we expect total revenue between $183 million and $185 million, which represents a 27% year-over-year growth rate at the midpoint of the range or 23% year-over-year, excluding revenue from acquisitions closed since Q4 '20. We expect our Q4 non-GAAP operating loss to be in the range of $5 million to $7 million, reflecting a more aggressive ramp in second half spending, especially in sales and marketing. For the full year 2021, we expect total revenue between $687 million and $689 million, which represents a 37% year-over-year growth rate at the midpoint of the range or 28% year-over-year, excluding an expected $57 million in revenue from acquisitions closed since Q4 2020. We expect our full year 2021 non-GAAP operating loss to be in the range of $1 million to $3 million. We expect to produce positive free cash flow for 2021.

We are in the early stages of our 2022 budget process and plan to provide detailed guidance on our fourth quarter conference call. That said, I would like to share some early thoughts regarding 2022. Our thesis and vision have not changed. We are addressing a large, low penetrated market and believe that Avalara is well positioned to deliver durable long-term top line organic growth of 20% to 25% as we continue to pursue building a multibillion-dollar business. Please note that beginning next year, we don't expect to break out organic and inorganic revenue contribution as we will have lapped the closing dates of our two largest acquisitions, TTR and Business Licenses. We believe 2022 revenue from our other 2021 acquisitions will not make a material contribution to next year's revenue growth. We are currently at the center of four powerful forces driving our long-term opportunity and continue to believe the solutions we provide are in the early innings of market penetration. Beyond opportunities to expand our core business, we see new growth drivers from our partner ecosystem, international and our expanded platform story.

The acceleration of e-commerce, coupled with favorable regulatory changes, has increased awareness of the importance and complexity of tax compliance for businesses, marketplaces and e-commerce platform providers. For us, this is fueling an exciting wave of significant expansion opportunities with a number of industry-leading partners and is gaining the attention of businesses grappling with the complexities of both national and global e-commerce compliance requirements. The international landscape is also changing fast. We believe new regulations aim to make calculating a reporting transactional taxes more real time which will require software automation solutions. We also believe e-commerce is increasingly enabling even small businesses to be global merchants and thereby having to face a wide range of tax compliance complexities that also require our software solutions. And finally, our recent organic and inorganic product additions will help us transition to a platform company where we can offer a broader range of compliance solutions, thereby expanding the value we can provide our customers.

As we consider these great opportunities for additional investment, efficient growth remains important to us. We have demonstrated our ability to drive leverage in non-GAAP operating loss and, based on our 2021 guidance, expect to produce positive free cash flow for the third year in a row to complement our 36% three-year revenue growth CAGR. However, we believe the momentum in our business, compelling customer economics and unique position in a large market, all support more aggressive investment in 2022. Again, we plan to provide detailed guidance on our fourth quarter conference call in February, but our early 2022 investment plans result in a modest non-GAAP operating loss margin of just a couple of percentage points of 2022 expected total revenues. In closing, we have an exciting opportunity to continue building a durable growth compounding company.

We believe we are a leader in a large market that's still early to adopt tax compliance automation technology. We are seeing a demand transformation as businesses become omnichannel, operate in many jurisdictions and shift their business to e-commerce in the cloud. These changes, coupled with an ever-shifting regulatory environment, make it even more difficult to maintain tax compliance without automation. And at the same time, we are beginning to evolve to a platform company driving an increased supply of products and capabilities to increase the value we deliver to our customers. We also continue to invest to win additional segments and geographies so that we can continue to compound growth for the long term. Please note, we will participate in upcoming conferences, including Berenberg and Stephens in the fourth quarter.

Thank you for participating in today's call. At this point, we would like to open up the call for your questions.

Questions and Answers:

Operator

The floor is now open for your questions. [Operator Instructions] Your first question comes from Brad Sills of Bank of America.

Brad Sills -- Bank of America -- Analyst

Great. Hey guys, thanks for taking my question. Congratulations on a really nice quarter. I wanted to ask about the ERP end of the business. Obviously a key trigger e-commerce has been really strong for you all and that's clear. But we're seeing some evidence that ERP upgrades are starting to turn from some headwinds that we saw during the pandemic. What are you seeing in that end of the business? And what impact could that have going forward?

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

Hey Brad, this is Scott. I would say that, we're seeing the ERP world rebounding a bit. But having said that, and it's -- I think we're seeing that across all of our different ERPs. But I think sort of more important than that is it's just a reminder that for us, new ERPs, it's a great trigger, but there just aren't that many businesses that upgrades during the year and pick new ERPs. Where we -- where Avalara really has a lot of headroom in greenfields, it's in all those ones that have already in NetSuite or already in Sage or already in Microsoft and that one of the other triggers are pushing them to say, OK now is the time to adopt sales tax because we're low penetrated throughout the channel.

So I know it's important to focus on the new ERPs because it's such a great trigger for us and that's happening. But the real challenge, the real road ahead of us is how do we go deeper into the existing channels that aren't upgrading, but they're having one of the other triggers like they're moving into a different state or they're going global or they've had a change in their accounting department and the CFO -- new CFO or controller comes in. So that's really -- that's what I'm really looking for is how do we expand out into the base, but we're seeing a nice trend with the new ERPs as well.

Brad Sills -- Bank of America -- Analyst

Great to hear, Scott. One more if I may, please. Just on the international side of the business. Obviously, you're starting to see some real success there and it looks like it's outpacing the business overall. Could you remind us, what it takes to address international from a content standpoint? Are you there? Do you feel like you have that footprint already in place to really go after in a material way? Are there still some gaps there? Any color on that effort. Thank you, so much.

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

Sure, Brad. I remind everybody in our company this all the time. I mean, when we enter a market, you need certain things, right? You have to be able to do calculation. You have to be able to do returns. And then you've got special services like exemption certificate in the United States. It could be fiscal rep in the EU. So, it's not just one thing. It's all of those things combined and they all have their aspect of content, right?

So, you have to do the deep research around how calculations are done, how reports are filed, what return forms are used, how that information gets onto the forms and then all of those different special areas. So, I mean wherever we go, content is the basis of how you enter. I mean Brad you and I have talked about this a bunch where -- to be part of every transaction in the world, you need two things to take place. I mean, you got to execute really well, but two main things.

First of all, you have to be connected in with all of the major ERP and e-commerce and all the people who are creating invoices around the world. The second thing, you have to do is have all the right content, so when you do those calculations and when you are entering that information on forms. And when you're doing the remittances it's accurate. And so those are really the two combinations that Avalara focuses on the most. And we've always talked about those are two of our strongest moats that we have.

And Avalara has a content team around the world. Our content team is on four continents. We take that really, really seriously and now we're adding AI and machine learning in order to be able to do that. So, it's a real important aspect.

Brad Sills -- Bank of America -- Analyst

Great to hear. Thanks so much, Scott.

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

Thanks Brad.

Operator

Your next question comes from Siti Panigrahi of Mizuho. Hey guys. Congratulations. So Scott, when you -- when I'm looking at your acquisition strategy and even organic development, you're expanding your platform even now from tax direct to indirect business license and even e-invoicing. It appears like you're becoming a platform where you're a intermediary between government agency and businesses. So when you think that approach, where do you see other remaining opportunity? How big is that opportunity? Help us like the area you could expand? And then, as you are expanding, how do you see, -- is it more displacing smaller solutions there? Or is it more Greenfield businesses are managing manually? And you can come in and bring automation. Help us understand that opportunity.

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

Sure. Early on we'd always had this vision about being a, compliance -- about a compliance platform. And we focused -- our beachhead was on sales tax, knowing that it wasn't just sales tax because it was VAT.

And if you want to service the Internet anything anywhere any place anytime, you have to be able to do that in 208 NATO countries. I mean that's just table stakes for being in the business. So I mean it's a big -- that's a big, TAM in and of itself. And it's largely Greenfield.

But having said that, I mean the basic strategy that I've always had and that we have in the business today is you've got to take care of the here and now and sales tax, VAT all the expansions that we've done into the international and its doing well is fantastic.

But you need to lay the groundwork for future-proofing the business. And the way I see expanding our TAM, expanding our reach is using our really dynamic moat with partners.

And how we interconnect especially with ERPs and the like to allow us to expand into other areas, other areas where you become a trusted resource of them in indirect tax, in this case sales tax and VAT and all of the other services that we do.

You can then take that trusted relationship and solve other enormously complex areas of compliance for your customers. I mean, it's just a natural extension. And much of the information that you need for one is information that you need for the other.

So there's a synergy. Which is developing the further we go with the platform and it really is a powerful tool for making the customers sticky, adding more revenue to the business and driving penetration throughout the market.

Siti Panigrahi -- Mizuho -- Analyst

That's great. And a quick follow-up Ross, when you think of 2022 investment -- areas of investment could you help us understand your priorities? Is it more on R&D side integration or more tuck-in acquisition or like go-to-market enterprise sales? Could you help us a little bit on that?

Ross Tennenbaum -- Executive Vice President and Chief Financial Officer

Yeah. Yeah, Siti and if anyone missed the prepared remarks, we talked -- we gave some color in 2022, when we talked about just the great investment opportunities we see and that we're thinking early thoughts and we're still in the budget process around a couple percentage points non-GAAP operating loss as a percent of revenue.

And so where does that investment go is the question. And the first area I think about is research and development. We've been running in the low-20s, as a percent of revenue in R&D. We expect that to remain in a similar area for next year. So continue to invest heavily in that area as we look to build out the platform that Scott talked about expanding in indirect and beyond.

There's, new products we've been launching. There's new M&A that we're integrating. And really just -- we've always said we think we can outrun the competition and build a really special platform in indirect and beyond, so continuing to make those investments are important to us. Second in sales and marketing, I think we'll see a little bit of deleveraging in the sales and marketing as a percent of revenue next year. Since IPO we've been bringing sales and marketing percent of revenue down and getting some really good efficiency around there. Long-term there's plenty of opportunity for efficiencies. But as we find ourselves at the center of these four forces that are really putting tax as one of the front-and-center things in that magic moment of commerce we just see a lot of opportunity.

And we've got new M&A to market and sell with and just a lot of good opportunities on the sales and marketing side. So we'd like to de-leverage a little bit there, invest a little more in sales and marketing.

G&A, I -- we still have a lot of infrastructure things to put in place. I'd hope to see a little bit of improvement in G&A as a percent of revenue. And then on gross margin, we'll build that out a little more in February as well as all of these when we provide formal 2022 guidance. Gross margin as we've been saying we're getting improvements in gross margin through automation. You've seen that over the last couple of years, but we've also talked about new products and M&A as they come in or start at a little bit sub our corporate margins and so they put some weight on that. So we got to figure out how the mix will play forward and how that will affect 2022 gross margins, but -- so we'll provide more color on that but same commentary on gross margin I've given in the prior call.

Siti Panigrahi -- Mizuho -- Analyst

Thanks, Ross for that colors. Great.

Operator

Your next question comes from Brent Bracelin of Piper Sandler.

Brent Bracelin -- Piper Sandler -- Analyst

Thank you and good afternoon. I guess maybe we'll start with Ross and finish with Scott, if I could. Ross, can you remind us what the SST kind of revenue mix is in the quarter? And I know that that contract was renegotiated entering the year? And just remind us what the potential headwind from that contract renegotiation was in the quarter?

Ross Tennenbaum -- Executive Vice President and Chief Financial Officer

Yes. So SST and we're trying to get away from calling it out because we've I think done a nice job of talking about it since last year to give everyone a true understanding of what was going to happen and walking you guys through what did happen and how it's affected the year. And I think it's been a great year, overall even with that so I think we managed through it quite nicely. You'll see in the 10-Q, it will talk about SST. Q3 SST increased by $2.7 million. So you guys can do the math. And you'll see it's slightly below corporate revenue growth.

So consistent with our commentary over the last several quarters, we said coming into this year it's going to grow fast. It's going to start to come down throughout the year because of the pricing change, which is offset by volume additions. And as we go into next year we won't have that pricing headwind anymore, so things will normalize next year.

Brent Bracelin -- Piper Sandler -- Analyst

Yes. Great. Well good to see that this is still growing healthily even with the price adjustment there that you talked about before. I mean shifting gears to Scott here, I'd love to get your view on Stripe/TaxJar. Curious to see, if you've seen them in the low end of the market at all with the Calcon solution. Would love to also get you to address kind of Shopify the partnership there. It seems like you're strengthening the partnership with some new functionality announced this week as well. So walk us through that Stripe/TaxJar relationship and some of the new developments that you're winning some new business at Shopify as well. Thanks

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

Sure. There I don't really see the Stripe/TaxJar acquisition playing out in the marketplace at least anything that we can see that changes differently from what was in -- what was happening in the past. I understand -- I mean I say it's the same thing I've always said. I understand what they're thinking. They want -- they would love to build out that platform. I think it takes a lot in order to make that happen. A lot of connectors, a lot of content, a lot of expertise in upmarket and you have to be able to serve customers of all sizes. I'll say it again I fundamentally believe that tax is complicated. It needs -- in compliance in general needs to be centralized.

And Avalara will be that sort of back end for many many of the different larger vendors. And I think you're starting to see that as I called it out in my prepared remarks, the second wave of these players coming along, whether it be eBay Square, Shopify some of those. And I just think for 17 years, we put ourselves in a place where you have SST, you have cross-border, you have the ability to take care of all their customers across their entire markets.

You have all the connectors in place. I think it's a formidable moat, as to how those play out. I think in our press release yesterday with our -- explaining our new Shopify relationship I think that's a portion of it. We build out cross-border, which I think is a natural for e-commerce providers. I love what Shopify said. It's -- every business is global. I've always believed that. I think it's -- people need to deal with duties and all of that at the front end not down the road so right at checkout. So I think it's a natural play and it tightens our relationship with Shopify. And I think it shows off our strengths.

I think the IDC report, it really captured the way I'm thinking about it. We put ourselves in a position with our deep partnerships and all of the customers that we have in those that we become a no-brainer when people go to choose a solution. And we're the easy one to do or we've got all the modern capabilities and so it's a natural for us. And that's just the way we think about it how do we improve our position to be able to take on these larger and larger customers and earn the ability to do that? We did that with ERPs, we did that with the ecosystem. And now with the second wave we're in the process of doing it and I like where we're standing at.

Siti Panigrahi -- Mizuho -- Analyst

It's great to see the partners validating the strategy here. Thank you so much.

Operator

[Operator Instructions] Your next question comes from Matt Stotler of William Blair.

Matt Stotler -- William Blair -- Analyst

Hey, guys. Thanks for taking the question. So I guess, just one in the interest of time. So would love to get an update on the accounting firm channels, specifically and how that kind of partner ecosystem is building out both in terms of kind of the interest you're seeing and the investments you've made in product specific to that channel and any kind of early traction there, as well as thoughts on kind of the road map for continuing to enable that channel going forward?

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

Sure. I've always been an enormous fan of this initiative. I think it's really important just to remind everybody, what we've done is -- I mean in Avalara's history, when we started doing returns in 2006, we've built out a fantastic platform for ingesting information and getting it on to tax forms and getting those tax forms filed and have the ability to follow that up with the payments.

And we always thought that -- back in the day we always thought that we would be able to just build it and they will come. And as we became more mature in our thinking of the space, it's why should we fight with the big [Technical Issues] Let's just take what we have and provide that to the accounting firms and allow them to use what we've already built and charge that as a revenue source.

So rather than competing with the accounting channel let's use the accounting channel and help them make money and build them. It's just part of our strategy of how do you always look to partner first and do that. And so with that in mind, I'm pretty pleased with where we are.

We started out with a group of beta users already built in. I think we're proving out the concept every single day. And we're starting to see the uptake. These are big changes for many of these firms so it's not something that happens overnight. But I know that this is an area that will pay huge dividends for Avalara next year and the year going forward.

Operator

Your next question comes from Scott Berg of Needham.

Michael Rackers -- Needham -- Analyst

Hey, everyone. This is Michael Rackers. I'm on for Scott Berg. Thanks so much for taking my question and congrats on the quarter. Just one quick one for me. It sounded like content was really picking up a lot of steam for you guys. And I'm just kind of curious on that side. Are there any other areas of content that you think you might need or would be beneficial to really excel in the enterprise market if there are any? Thank you.

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

Sure. I mean I wouldn't characterize it as content is eating up because the way I would say it is the man that we started this company content was on the front burner. Because the reality is right, if you don't have the right content, it doesn't matter how many partnerships you have, it doesn't matter what you do, you cannot calculate for them. And so we've made a real effort over the years to build out what I would consider a world-class content team that spans many, many areas from cross-border to sales, to VAT all over the world. So we're on a long-term journey of content.

So having said that, content does play a huge role for us. But not so much I would say is it in enterprise or is it in mid-market because you can be -- if you're doing candles -- I've always said this, if you're doing candles, you can do it out of your home and the taxability and the -- and all the content is the same if you're a big producer selling candles all over the world. So the content has to be there for big and small. That's just a general statement. But content for us right and where it does play with multi-nationals and where it does play throughout the world is when we want to go international, the biggest thing that we have to solve is content. You move into Asia.

You have to have all of the appropriate content. You move from Brazil, which we're entrenched in and you want to go to Mexico or Argentina, it's all about content. And so content plays an important role for us and all your acquisitions are really acquisitions about doing -- getting bigger and better and the right content. So as we look at M&A, as we look at all sorts of things, content is always at the core of what we do.

Operator

Your next question comes from Stan Zlotsky of Morgan Stanley.

Brandon -- Morgan Stanley -- Analyst

Hi, guys. This is Brandon [Phonetic] on for Stan. Thank you so much for taking my question. Can you please provide details around FX impact on the quarter?

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

Hey. I didn't get the name, but FX very minimal, very minimal right now. I don't think FX given international 80% of revenue there is a little bit of impact but it hasn't been enough to be calling it out. So I would just say it's a minimal thing that we don't -- that does boil up to call out at this point.

Operator

Your next question comes from Peter Levine of Evercore ISI.

Peter Levine -- Evercore ISI -- Analyst

Great. Thanks for taking my questions. Congrats on a good quarter. The first one -- actually the only one. Within the Shopify big commerce channel, are you seeing an uptick in conversions upsell? I think the trend you've seen with e-commerce, so we'd assume the usage would pick up. So I mean maybe help us understand what is the take for these customers to kind of trigger a certain threshold of usage for you all to kind of being able to go back to them direct upsell them to really just want to understand how the conversions upsell among that channel have been trending? Thanks.

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

Sure. I will just see at the front end and I will let Ross to jump in and talk a little bit about the numbers and trends and things like that. What I would say is that our relationships with these partners are always strengthening. And we've been seeing -- I would say -- I would characterize it as we are seeing really good progress in our ability to work with them and get the messaging out to their partners. And I'll just refer to Shopify and how they've jumped on the bandwagon and started to tell their customers that they need to deal with this threshold, they need to take sales tax very upfront and they need to deal with it in their own rights.

And really the minute they do that, it generates an enormous amount of calls and how do -- where do I go to and being on their platform being the provider that's there we've seen a nice uptick, so I'm pleased with that. And our conversion has been improving as well. And so I'm pleased with the direction that we're going. I'm pleased that we're able to add cross-border to it as well, because I think that that's an important aspect of it. So I'd just remind everybody, the way you win this market, it's just so important.

The way that you deal with it is you must win that partner first. And so getting in there and dealing with calculation and being their back-end support for that, allows you then to come along and work with them to monetize things like returns to do cross-border and to expand the relationship with all of these. And so the first thing to do is win the deal. You just must win the deal and Avalara has been doing that in a significant fashion. Ross, you got anything to add to that one?

Ross Tennenbaum -- Executive Vice President and Chief Financial Officer

No. I mean I think you covered it. I just think -- I was going to say what you said at the end, which is, it's all about winning the partners that are aggregators of these e-commerce merchants. And these e-commerce merchants are their omnichannel. They've got e-comm. They've got -- they often have ERPs. Sometimes they have stores. So they have multiple systems. They're doing business in multiple channels. And we tie into all of those. And if you can do that and if you can box out other competitors you're built in.

And now you've got that private hunting ground to go target them and sell them other things over time. And so, what I've been saying is like last year you had the surge of e-comm and everyone was like, well, Shopify is growing faster. Why aren't you growing faster as well? It's like all these people that just became e-commerce providers in 2020, some of them expanded and used more of our services. They needed returns. They needed certain other things and we convert them to core customers of ours and we sell them more.

But there's many of them that haven't bought any more that they just have calc in the Shopify cart or another partner's cart. And they haven't yet fully realized the complexity and the destiny of their tax complexities. And over time we have the opportunity to sell them returns and certs and if they're doing cross-border, now they can do it natively on Shopify and many other products that we -- licensings, registration, TTR content subscriptions, all the stuff that we brought to bear we can now sell them.

So that's the key. That seeds this consistent long and strong growth picture that we have is just on the partners have that beyond -- have those people calculating on your platform and then have the opportunity to sell much more over time. That's the strategy and I think that that's what we're trying to do very consistently.

Operator

Your next question comes from DJ Hynes of Canaccord.

Luke -- Canaccord -- Analyst

Hey, guys. This is Luke on for DJ. Thanks for squeezing me in here. So you mentioned last quarter that you had maybe turned the dial a little bit too far on efficiency around sales and marketing and that you're looking to find a better balance in the second half this year. It sounds like this is playing out based on your commentary. Maybe you could just double-click for me there, just to discuss sort of how that shift is going and maybe expand on some of the initiatives you're making within your sales org to accomplish that.

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

It's really true. I think we demonstrated that we can really turn the dials and really make sales and marketing extremely efficient. I think that for me personally, as the leader in the space or one of the leaders in the space, we have an obligation I think to really talk about the problem and bring more people to the party if you will.

And our CMO Jay Lee, I just -- he gave me the greatest analogy at one of our meetings was, he said, today Avalara has been aspirin for sales tax or transactional tax problems, right? I've got a problem. I'm being audited or I'm one of the trigger events. So therefore, I'm going to go take aspirin and I'm going to go solve that problem with Avalara.

What I think what we're trying to signal to everybody is that we don't any longer want to be aspirin. We think we have an opportunity and sort of an obligation is in our position to be able to teach people that, be like vitamins or preventative medicine for them. So moving out of, I have a problem right now, take the pill and solve the problem. Let's get everybody going. Let's get everybody to understand the problem. Let's get everybody focused on what we can do to prevent the medical emergency. And I think that that's what we're going to do. So I think you'll see us dial up awareness spend. I think we're going to double down on what we're doing with our partners and really engaged with them to get to the next level.

I think we'll work with our CAM team, our customer account managers to really sell the multiple products that we have. And I think we'll organize around being able to do that both domestically and internationally. So I mean I think it's a challenge for us. I think stepping up into that role will be very, very exciting for the company. And I think it's a real opportunity for us to grow.

Operator

Your next question comes from Alex Sklar of Raymond James.

Alex Sklar -- Raymond James -- Analyst

Great. Thanks. Scott as we think about the broader compliance platform do you see any opportunity to expand in the ESG reporting compliance at all? I know in the past you've kind of talked about environmental compliance as a potential expansion area. I'm just curious what that vision looks like? Thanks.

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

I don't -- I mean, I love that concept right? I mean being able to -- and we do it to a degree right today. And I've said this before when we move-when we tax fuel and fuel moves from one state to another state there's lots of compliance documents that have nothing to do with tax. They're just compliance documents that have to be filed when you move goods around.

Having that experience there are lots of environmental documents that we can get involved in. And although it's not something that's on my radar screen right now it's something that is there and we continue to think about how we can build that out because in our platform in my platform vision and the platform vision that we have for the company being able to deal with documents and environmental documents in particular is just a fantastic way to prove that out.

Operator

Your next question comes from Andrew DeGasperi of Berenberg Capital Markets -- Management

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

Thanks for that. Just have one in particular. I know you're still finalizing your 2022 guidance giving that out on Q4 earnings. But I was just wondering you brought up the couple of percentage points headwind in next year in terms of the new marketplace contracts.

I was just wondering if that is just a function of you being conservative given that the price will probably apply on day one and the volume benefits don't come until later on and so we could see some improvement to that number.

Ross Tennenbaum -- Executive Vice President and Chief Financial Officer

Yes. Andrew, it's Ross. So I just want to correct. I didn't say a couple of percentage point headwind next year. We said when we're talking about op loss we talked about a couple of percentage points of revenue non-GAAP op loss. What we were explaining is on the organic billings growth for Q3 it was 26%.

When you unpack that you look at the US first and that was close to 30% in the US. So it feels like where we all want it to be. And then there was some -- when you go then you look international and within international you look at one specific very important partner.

We had -- that's what caused the delta between that US number and the 26%. And that is just -- I was reminding everyone that there's -- it's a very important large partner. We've got many opportunities with them over time to expand geographies expand what we sell with them. And I think it's just a great partner to have and there's a lot of future opportunities and we're diversifying beyond that partner.

But where the market -- where the VAT registration and filing solution on their marketplace and they're the front end and we're the back end so they control the flow of customers. So in Q3 there were less customers flowing into us than in prior quarters. It's been growing really fast. And I just wanted to call out that we're going through a revised contract. And with that contract there's going to be -- we're going to go from annual billing to monthly next year so there'll be a little bit of duration change and there will be a bit of a pricing change.

But I don't want people to over-index on it. I mean this is smaller than SST. Again it's contained to a partner in international. It's really the spirit of transparency. We called out organic inorganic growth rates. We've called out SST. I think we did a really good job with all -- navigating all that. And so this is a smaller than SST thing that we just wanted to give some transparent color. But we haven't -- we said it may have a small headwind on 2022. We'll talk more about it in the Q4 call if need be. But again I would put it in that context and not over-index on it.

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

Yes, it's a small headwind for that particular part.

Operator

This concludes the question-and-answer session for today's call. I will now turn the floor back over to Scott McFarlane for any additional or closing remarks.

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

Thanks. I'd like to take this opportunity to thank all of our employees, customers, partners for all of their hard work and support during trying times for certain. We look forward to talking to you on the next call. Thanks everybody. Take care. Be safe.

Operator

[Operator Closing Remarks].

Duration: 72 minutes

Call participants:

Jennifer Gianola -- Vice President of Investor Relations

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

Ross Tennenbaum -- Executive Vice President and Chief Financial Officer

Brad Sills -- Bank of America -- Analyst

Siti Panigrahi -- Mizuho -- Analyst

Brent Bracelin -- Piper Sandler -- Analyst

Matt Stotler -- William Blair -- Analyst

Michael Rackers -- Needham -- Analyst

Brandon -- Morgan Stanley -- Analyst

Peter Levine -- Evercore ISI -- Analyst

Luke -- Canaccord -- Analyst

Alex Sklar -- Raymond James -- Analyst

Andrew DeGasperi -- Berenberg Capital Markets -- Analyst

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