M&A FILLER – PLAIN AND SIMPLE
Is this the kind of purchase you would expect from a company that is supposedly revolutionizing sales tax automation? This has nothing to do with innovation for the core engine; Compli-Beverage will remain running on its own software and not integrated into AvaTax, and the functionality only tangentially touches on the core business. Why buy it? Filler. We guess that this is what you have to do when the brain of your IP is...multiplication. But at least Avalara has had a problem with alcohol at corporate events in the past, so maybe this acq will help reduce party expenditure?
COMPLI-BEVERAGE PROVIDES:
- Wine Compliance. “Our wine compliance experts work with wineries every day. We process ABC/TTB permits, out-of-state licenses, federal and state tax reports, label approvals, and product registrations. We also specialize in compliance related to mergers and acquisitions, audit preparation, and training for in-house compliance departments.”
- Ditto Malt Beverage Compliance, and Distilled Spirits, etc.
- Software features include:
- “Create and track new compliance tasks, including [alcohol] licenses for wholesale, direct ship and direct to trade”
- “Integrate point-of-sale to automate reporting”
- “Monitor distributor appointments, prices, filing dates and approval codes”
- “[Process] New [alcohol] licenses and license renewals”
- “Monthly shipment reports, state agency sales and excise tax reports.”
- “License, product renewal and state agency reminders and deadlines.”
IT TURNS OUT THE COMPANY AVALARA JUST ACQUIRED IS INTO #S. GREAT! SO ARE WE. SOME BASICS:
- “Since 1997 we have provided compliance services for over 2,000 alcohol beverage businesses.”
- “In 2015, our team of compliance experts completed more than 97,000 brand registrations, licenses, and tax filings with a 99.6 percent accuracy rate.”
- “Our clients give us a rating of 9 out of 10 in overall customer satisfaction.”
- “We take pride in the professional relationships we have with our clients; as a result our clients stay with us for an average of 7 years.”
- “In 2017, we're celebrating 20 years as the industry’s beverage compliance leader.”
- “Due to our vast knowledge, we are referred by more industry professionals than any other compliance agency.”
- We have successfully processed more than 1,900 federal alcohol licenses.
That last one should be the highlight for us…
COMPLI-BEVERAGE LIKES NUMBERS SO MUCH THAT THEY DECIDED TO SHARE SOME NEW ONES (FOR US) ABOUT AVALARA:
- 8B+ transactions processed in 2018, up from 6.7B in 2017, or +19% growth, a key metric as revenues are driven by new customers, growth in transactions, and pricing. Note: in May 2018 Avalara closed on the acquisition of the assets of a business (and imported its customers) which processed 1B transactions in 2017, implying potentially 10-12% organic transaction growth for Avalara.
- 1,500 employees up from 1,495 as of the last official disclosure in March 2018. Our data indicates the company has significantly reduced hiring. In a sense this is good as it will provide healthier incremental fall through to profits. However, the last big hiring push coincided with the company’s push to grow bookings.
- 1MM tax returns submitted in 2018…up from 500k in 2011 (10% CAGR).
The thesis reminder: it’s not a tech company.
The secret sauce underlying the inside of the machine is…multiplication (tax % x quantity). The barrier to entry is the content, which are publicly available tax laws. There is a s-t accelerant in revenue which is mainly comps, and slower hiring creating better incremental fall through. But by 2H19 the growth falls off with tighter comps, and slower hiring will hasten that fall. Expect a lot more M&A to add inefficiency and lack of product clarity to an already inefficient and unclear product story and roadmap.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst