#1C O Avalara Virtual Analyst Day June 28, 2022 10#2Avalara Welcome JENNIFER GIANOLA VP OF INVESTOR RELATIONS#3Safe Harbor Statement This presentation contains "forward-looking" statements - that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "may," "might," "plan," "believe," "continue," "could," "estimate," "seek," "see," "likely," "potential," "predict," "project," "target," "should," "would," "will," or similar expressions. These forward-looking statements involve risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed or suggested by the forward-looking statements. If any of these risks or uncertainties materialize, or if any of our assumptions prove incorrect, our actual results could differ materially from the results expressed or implied by these forward-looking statements. These risks and uncertainties include risks associated with: our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth; our ability to attract new customers on a cost-effective basis and the extent to which existing customers renew and upgrade their subscriptions; the timing of our introduction of new solutions or updates to existing solutions; our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content; our ability to maintain and expand our strategic relationships with third parties; our ability to deliver our solutions to customers without disruption or delay; our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance; our ability to expand our international reach; and the other risk factors discussed in our most recent annual report on Form 10-K/A filed with the SEC under the heading "Risk Factors." Forward-looking statements represent our management's beliefs and assumptions only as of the date of this presentation. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons why actual results could differ materially from those anticipated in the forward-looking statements, even if new information becomes available in the future. This presentation includes certain non-GAAP financial measures as defined by the Securities and Exchange Commission (the "SEC") rules. These non-GAAP financial measures are in addition to, and not a substitute for or superior to measures of financial performance prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. For example, other companies may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. As required by Regulation G, we have provided a reconciliation of those measures to the most directly comparable GAAP measures, which is available in the appendix. PLEASE NOTE: • • We are in our quiet period today. Today's presentation will be focused on the longer-term, not current trends. We are not going to make any comments about the current quarter or year. AVALARA ANALYST DAY VIRTUAL | 3#401 TO SCOTT MCFARLANE Compliance Opportunity Agenda June 28, 2022 02 AMIT MATHRADAS Growth Priorities 03 ROSS TENNENBAUM Financial Review & 2025 Target Framework 04 Live Q&A with Presenters#501 SCOTT MCFARLANE Compliance Opportunity 02 AMIT MATHRADAS Growth Priorities 03 Scott McFarlane Co-founder & ROSS TENNENBAUM Financial Review & 2025 Target Framework Chief Executive Officer 04 Live Q&A with Presenters#6Why Avalara is a special company 1 Clear, unified vision to be part of every transaction in the world 2 Unrivaled leader in large global market with low penetration and low churn Avalara 3 Partner-based company with three powerful competitive moats 4 Expansion to multi-product platform enlarges market opportunity 5 Resilient business model that performs well in good and challenging times 6 Focus on sustaining high growth while driving operating leverage D AVALARA ANALYST DAY VIRTUAL | 6#7Best time to be in compliance (ՄՌ $ ՄՌ > Everyone adopts > 2nd wave of partners › Massive cross-sell opportunity > E-invoicing sparks acceleration of global opportunity بالا + AVALARA ANALYST DAY VIRTUAL | 7#8Everyone adopts AVALARA ANALYST DAY VIRTUAL | 8 Video Delivery Company has ordered Chargebee and AvaTax for a total booked value of USD 800.00 Online Shopping Company has ordered API, AvaTax, Returns, SST for a total booked value of USD 96,903.50 Scale Company has ordered NetSuite Basic, AvaTax, Returns, Business Licenses and CertCapture for a total booked value of USD 26,305.80 Equipment Sales Company has ordered Next for Windows by EBS Salesforce Sales Cloud, AvaTax, Returns, CertCapture and Tax Research for a total booked value of USD 56,762.00 Education Company has ordered WooCommerce AvaTax QuickBooks Desktop, AvaTax, Returns and CertCapture for a total booked value of USD 1,940.88#9OUR FINDINGS: > 15% of sales and use tax returns customers are single-state filers > We're winning point-of-sale > We're powering Returns for Accountants › Complexity is increasing › E-invoicing should accelerate international adoption اس AVALARA ANALYST DAY VIRTUAL | 9#10Strategic partner discussions across broad ecosystem SECOND WAVE OF PARTNERSHIP WINS SALE Global marketplaces POS platforms Payments & financial services eCommerce platforms $ shopify xero salesforce ⠀⠀⠀⠀ fabric GoDaddy AVALARA ANALYST DAY VIRTUAL | 10#11Multiple expansion opportunities to build a $multi-billion company $Multi-B Avalara for Enterprise Avalara for Small Business Avalara for Accountants EXPANDED CHANNELS & SEGMENTS Licensing Property Tax DIRECT TAX 1099 Approaching ~$1B run-rate Certificate Mgmt. Returns Calculation Remains low penetration today Insurance E-Invoicing Use Tax Point-of-Sale Tax Research Returns Cross Border VAT & GST Certificate Mgmt. Calculations GLOBAL INDIRECT TAX Expanded product suite offers more cross-sell opportunity and reach U.S. INDIRECT TAX AVALARA ANALYST DAY VIRTUAL | 11#12e-Invoicing represents Avalara's next global moat > Paradigm shift in how compliance will operate > Expands our TAM BY 2025: USD $20.5B Global e-invoicing and enablement market 80% Of organizations will be forced either by legislation or important trading partners to exchange invoices just in electronic format 2014 2015 2016 2017 2018 2019 2020 2021 Source: PwC e-invoicing and e-reporting CoE, September 2019 Billentis Report, The e-Invoicing Journey 2019-2025 AVALARA ANALYST DAY VIRTUAL | 12#1301 SCOTT MCFARLANE Compliance Opportunity 02 AMIT MATHRADAS Growth Priorities 03 ROSS TENNENBAUM Financial Review & 2025 Target Framework Amit Mathradas President & 04 Live Q&A with Presenters Chief Operating Officer#14Growth priorities LOGO 88 Everyone adopts Cross-sell Partners International AVALARA ANALYST DAY VIRTUAL | 14#158,000 7,000 Strong core customer growth Core Customers by Segment 7,194 6,000 5,000 4,744 4,474 4,000 3,000 2,000 Core Customer TTM Revenue 1Q22 ($millions) Average TTM Revenue per Core Customer $80 $8 Other $71 ESB $172 UMM + Enterprise Thousands $70 $60 $50 $40 $178 $30 2,272 SMB-M $24 $20 $17 $15 $170 SMB-S $10 1,000 477 0 Other ESB SMB-S SMB-M UMM + Enterprise 1Q19 1920 1921 1922 $40 $76 Other ESB SMB-S SMB-M UMM + Enterprise ■■ESB ■Other SMB-M SMB-S UMM + Enterprise ■1Q19 1920 1921 1922 AVALARA ANALYST DAY VIRTUAL | 15#16Y/Y GROWTH Q1 2022 + CORE CUSTOMERS 19,160 22% 0 0 + BILLABLE ACCOUNTS 33,500+ 24% DO END CUSTOMERS 95,000+ (105K+ including MyLodge Tax) 9% Note: Core Customers as reported and revised to include adjustment for SST revenue; see appendix for definition. Billable Accounts are the sum of Core Customers, direct EMEA customers of ~2,400, and non-core customers. We have excluded MyLodge Tax customers due to year-over-year flatness from COVID impacts to the hospitality market. End Customers is the sum of Billable Accounts and indirect active customers using our calculation solution through our Included program. All figures, unless otherwise noted, exclude our MyLodge Tax and recent M&A customers. AVALARA ANALYST DAY VIRTUAL | 16#17Healthy expansion and cross-sell Annual upsell* YOY Growth Quarterly upsell* YOY 35% 44% Growth 25% 43% 49% 49% 43% 47% 57% 51% 57% 51% 53% 2019 2020 2021 Expansion 1Q 21 1Q 22 Cross-sell** *Data is based on upsell sales that are invoiced through our primary U.S. billing system and represents >80% of total upsell sales in each period. Sales equates to annual contract value bookings which generally includes subscription contracts, usage, and one-time services. **Cross-sell includes addition of new products and services, SST, and new connectors to an existing account AVALARA ANALYST DAY VIRTUAL | 17#18Increasing strategic product cross-sell momentum Strategic Product - Pipeline Strategic Product - Sales $ Jan Feb Mar 2021 2022 Jan Feb Mar 2021 2022 Note: Sales equates to annual contract value bookings which generally include subscription contracts, usage and one-time services Strategic Products include: Use Tax › License Management TTR Tax Research Certificate Management Cross-Border Point-of-Sale AVALARA ANALYST DAY VIRTUAL | 18#19CASE STUDY: CROSS-SELL + N Battery Distributor Company DEAL VALUE $509,000 CUSTOMER SIZE >200 employees GEOGRAPHIES National PRODUCTS > Use Tax › TTR Tax Research > License Management › SST Program › Certificate Management CONNECTORS > NetSuite HISTORY › Current customer › Subsidiary purchased more products across our suite of offerings AVALARA ANALYST DAY VIRTUAL | 19#20CASE STUDY: CROSS-SELL L + Furniture Retailer PRODUCTS > Point of Sale › Returns › Certificate Management › License Management CONNECTORS › Microsoft DEAL VALUE $452,000 CUSTOMER SIZE >1,000 employees GEOGRAPHIES Global HISTORY > Long time Avalara customer that migrated to Microsoft Dynamics 365 F&O in 2018 > Won more cross-sell of products > Evaluating TTR Tax Research, Property Tax and 1099 AVALARA ANALYST DAY VIRTUAL | 20#21snowflake CASE STUDY: ENTERPRISE PRODUCTS > Sales Tax Calculation › Certificate Management › Returns CUSTOMER SIZE ~4,000 employees GEOGRAPHIES Global CONNECTORS > Workday › Salesforce > API HISTORY > Rapid global expansion > Need for automation to improve efficiency › Mitigate risk AVALARA ANALYST DAY VIRTUAL | 21#22CASE STUDY: FORTUNE 500, RIP AND REPLACE Industrial Company PRODUCTS > Sales Tax and Returns › Certificate Management > Enterprise Support DEAL VALUE $409,000 CUSTOMER SIZE >10,000 employees GEOGRAPHIES Global CONNECTORS › Oracle HISTORY › Oracle cloud ERP rollout › Mitigate risk > Rip and replace of incumbent AVALARA ANALYST DAY VIRTUAL | 22#23Large cross-sell opportunity Product attachment for Core Customers Average TTM product revenue per Core Customer $19,000 88% 72% 32% Calculation Returns Certificates Note: Blue line for strategic products is illustrative Just Starting $12,000 Strategic Products Calculation Returns $6,000 Certificates AVALARA ANALYST DAY VIRTUAL | 23#24Cross-sell existing customer opportunity algorithm Next best product revenue illustration Millions $1,200 $30 $1,129 $60 $100 $1,000 $110 $130 $800 $699 3% 2% 2% 2% 0% 7% 23% $600 $400 $200 $- 2021 Product 1 11% 13% Product 2 16% Product 3 ■VAT Reporting ■CertCapture Managed Returns Avalara Tax Research AvaTax ■License Management 21% AvaTax Cross-Border Consumer Use ■Sales Tax Registration Product 4 Product 5 Total Note: Analysis is believed to be conservative and excludes the cross-sell potential to end customers of our eCommerce partners and our international customers, attach of SST, and our recent acquisition offerings such as e-invoicing, Track1099, Insurance, and property tax. Analysis also does not contemplate customer expansions, pricing uplift, or our continued growing base of customers. AVALARA ANALYST DAY VIRTUAL | 24#25Winning the second wave of partnerships Becoming the standard for tax and broader compliance Marketplaces $ 1,200+ Signed partner integrations +47% YoY Growth in # of Marketplaces 3,500+ Resellers, software integrators, and accountants BI eCommerce M ERP & Billing Applications SALE POS AD AVALARA ANALYST DAY VIRTUAL | 25#26International update FY2021 geographic revenue breakdown as % of total 8% ୦ 92% Source: Public filings ■% of Total Revenue (U.S.) ■% of Total Revenue (Non-U.S.) Growth rate has waned since the peak in 2Q21 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 51% 59% 55% $6,000 $4,000 $2,000 20% 7% $0 117% 85% 140% 120% 100% 80% 64% 60% 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 -YoY Growth Total Revenue (non-U.S.) 40% 29% 20% 0% AVALARA ANALYST DAY VIRTUAL | 26#27Compliance is entering the next adoption cycle E-invoicing and real-time reporting Complexity / Software Spend HIGH Annual paper filings Annual electronic forms On Prem Hosted Real-time, transaction-level cloud reporting Cloud LOW Pre 2000 2000s Today / 2020s Source: HG Capital White Paper AVALARA ANALYST DAY VIRTUAL | 27#28International growth strategies Minimal tax automation penetration 88 Expand direct business > Build/launch managed returns product > Expand GTM footprint Build and win e-Invoicing › Changes the game in our space > Everything becomes transactional and requires software › Company that owns the network and most partners wins › Add-on opportunities beyond tax Build international partner moat > Integrate to any business app on one side and to any government on the other AVALARA ANALYST DAY VIRTUAL | 28#29What is e-invoicing? E-invoice Components commonly include Digital ingest Formatting E-signature Supplier G Buyer Encryption Delivery network Web portal Archiving Tax authority may dictate format and other requirements Real-time processing of an e-compliance function For government: anti-fraud > Audit model: Post-transaction reporting, can be near real time or on-demand Examples: France, Germany, UK › Clearance model: Pre-approval: Also known as Continuous Transaction Control (CTC) Examples: Italy, Turkey, Brazil For businesses: efficiency › Paper invoices are 30-50x as expensive as automated e-invoicing AVALARA ANALYST DAY VIRTUAL | 29#30E-invoicing complexity creates massive opportunity for Avalara E-INVOICING Post-issue Pre-issue clearance Periodic LIVE REPORTING Post-issue (audit) Andorra P Hungary Saudi Arabia Brazil Lithuania Australia P Ireland P Singapore P India P Norway Austria P Latvia P Slovenia P Italy Poland France P Greece Hungary Belgium P Lithuania P Spain Mexico Portugal Italy Croatia P Luxembourg P Sweden P Portugal United Kingdom Saudi Arabia Cyprus P Malta P Switzerland San Marino Spain Denmark Netherlands P UK P Saudi Arabia Finland P New Zealand P Turkey France P Norway P Germany P Poland P Greece Portugal Key: B2B mandate Sources: Inposia website. Inposia Country List B2C mandate B2G mandate P Peppol AVALARA ANALYST DAY VIRTUAL | 30#31Ecommerce ERP Ecommerce E-invoicing creates global moat Compliance clouds HCM, Finance & Payroll Online Marketplace Ecommerce % "XML-C" Protocol Plug-ins Shipping & Logistics Workflows Customers, suppliers, other participants « AVALARA ANALYST DAY VIRTUAL | 31#32From e-Invoicing to e-Compliance Avalara Third party applications ①= Audit response Credential wallet 96 Remittance/ split payments Trust Verify Vendor credit check ABC government connectivity Authorize Global iii banking e-Invoice SAF-T VAT Reporting Tax Calculation Customs Declaration Business License Risk Score Invoice Shipping Doc Avalara Avalara Avalara Avalara Avalara Avalara Government Government Government Business Business Business AVALARA ANALYST DAY VIRTUAL | 32#33Avalara best positioned to win > E-invoicing is big paradigm shift to beat the status quo > Expanding our partner moat internationally › Accelerates our vision to be part of every transaction in the world M + AVALARA ANALYST DAY VIRTUAL | 33#3401 SCOTT MCFARLANE Compliance Opportunity AMIT MATHRADAS 02 Growth Priorities 03 ROSS TENNENBAUM Financial Review & 2025 Target Framework Ross Tennenbaum Executive Vice President & Chief Financial Officer 04 Live Q&A with Presenters#35Highly diversified by partner revenue % TTM Revenue by Partner (1Q22) 3% 2% 5% 7% 3% 4% 4% 8% 11% 29% ■All other partners - ΑΡΙ ■ ERP #1 ■ ERP #2 ■ Ecomm #1 ■ Ecomm #2 › Successful direct sales model assisted by our partners > Majority are our direct customers on our paper > We generally control pricing and economics > Few partners that have more influence on pricing - accounts for ~12% of our 2021 revenues ■ ERP #3 ■ ERP #4 ■ ERP #5 ■ ERP #6 ■ Ecomm #3 23% * TTM 1Q22 Revenue. % of Revenue by partner assumes Revenue allocation for multi-connector customers. For example, revenue for a customer with connectors from three partners is allocated evenly to each Partner for the purposes of analysis. AVALARA ANALYST DAY VIRTUAL | 35#36Highly diversified by industry and segment ■ Wholesale & Distribution ■Manufacturing ■Retail ■ Software ■ Other Professional, Scientific & % Revenue by Industry 5% 6% Technical Svc 11% * TTM 1Q22 Revenue. 18% % Revenue by Segment 20% 11% ■ Medium 19% ■ Small ■ Enterprise & Fortune 1000 18% ■ SOHO & Emerging ■ Other 4% 33% 34% AVALARA ANALYST DAY VIRTUAL | 36#37Broad customer diversity 18% of revenue comes from Retail ~1/3 of revenue comes from Marketplaces or have a connector to Avalara Included Partners or ecommerce direct partners Note: See appendix for reconciliation of non-GAAP to GAAP financials. AVALARA ANALYST DAY VIRTUAL | 37#3860% Of U.S. subscriptions and returns revenue is from tax calculation products 40% Of U.S. subscriptions and returns revenue is from tax returns and compliance management products > Most compliance products fluctuate minimally with economic activity › Calculation products are insulated from economic activity because of our wide tiered pricing bands Note: Source data from Form 10-K filing. AVALARA ANALYST DAY VIRTUAL | 38#39Business model advantage: resilient pricing model Calculation subscription tiered pricing model FROM ΤΟ % CHANGE FROM MIDPOINT TO ENDPOINT 20% % CHANGE IN ANNUAL FEE 20% ANNUAL FEE 7,501 10,000 $5,457 10,001 15,000 $6,852 15,001 20,000 20% $8,671 27% Illustrative customer experiencing lower transaction volume CUSTOMER SALES BELOW SALES ABOVE EXPECTATION Actual transactions Avalara fees EXPECTATION EXPECTATION 12,501 $13,848 8,751 (30%) $12,453 (10%) 17,501 (40%) $15,667 (13%) AvaTax Purchased transaction tier 15,000 10,000 20,000 AvaTax fees $6,852 $5,457 (20%) $8,671 (27%) Returns Volume 159 159 Return fees $6,996 $6,996 (0%) 159 $6,996 (0%) Resilient pricing approach: › Transaction bands are designed to minimize frequent changes between tiers > Subscription revenue is not impacted at the same rate as the changes between transaction tiers Returns and other products are not as exposed to the volatility of the market AVALARA ANALYST DAY VIRTUAL | 39#40مهما Key framework assumptions ༥ཟླ Intermediate term growth target does not assume a further deteriorating macroeconomic environment or prolonged recession Intermediate term operating target assumes operating expenses and margin are within our control Expect to continue to leverage M&A to build the business and accelerate certain important growth initiatives We remain in the early day of penetration in a big market and still believe we are a growth story, where we can sustain strong growth for many years as we build a multi- billion-dollar revenue company AVALARA ANALYST DAY VIRTUAL | 40#41FY 2025E TARGET FRAMEWORK (NON-GAAP) Path to Rule of 40 METRIC 2019 2020 2021 FY25 TARGET DRIVERS Total Revenue Growth 41% 31% 40% Organic Revenue Growth 29% 29% 20-25% New customers & expansion Gross Margin 72% 74% 73% 76-78% Automation & Scale S&M as a % of Revenue 41% 37% 38% 34-36% Efficiency & balanced growth R&D as a % of Revenue 20% 21% 20% 16-18% Prioritization & scale G&A as a % of Revenue 15% 15% 14% 10-12% Economies of scale Operating Margin -4% -1% 1% 10-15% Scale & efficiency Free Cash Flow 3% 7% 2% 13-18% Economies of Scale Note: See appendix for reconciliation of non-GAAP to GAAP financials. AVALARA ANALYST DAY VIRTUAL | 41#42Unpacking gross margin Total Avalara Employees Total in Cost of Revenue ~4,700 1,900+ LEVERAGE FACTORS Compliance 500 Technology automation Customs & Classification 480 Technology automation Content 165 Technology automation Support 165 Scale Go Live 80 Technology automation Recent M&A 220 Integration and automation Hosting/SaaSOps 55 Platform evolution Other (PS, IT, Client Pay) 240 Automation, scale AVALARA ANALYST DAY VIRTUAL | 42#43Long-term target model (NON-GAAP) % OF REVENUE 2021 LT TARGET Gross Margin 73% 80-82% Peer differences dilute down over time › Compliance Sales and Marketing 38% 33-35% › Content research Research and Development 20% 14-16% › Partner commissions General and Administrative 14% 8-10% Operating Margin 1% 20-25% Note: See appendix for reconciliation of non-GAAP to GAAP financials. AVALARA ANALYST DAY VIRTUAL | 43#44Avalara Overview Product: People Planet Governance 7 We created a list of 19 topics based on external standards, trends, and frameworks; ESG investor outreach; strategic business priorities; peer benchmarking; and employee and stakeholder feedback. We used a survey and interviews to gather input from our stakeholders: MATERIALITY MATRIX Importance to Avalara's business success, Internal vs. External stakeholders ESG strategy While we have operated responsibly and are committed to prioritizing Product, People, and Planet, we recognize that we are just beginning our ESG journey. To ensure that our strategy meets the evolving needs of our stakeholders, we began our process by engaging people who impact and are impacted by our business through a materiality assessment process. Materiality & stakeholder engagement Through open and direct communica work to develop trusted relationship: stakeholders, including investors, em customers, and partners. Our ESG ma matrix illustrates how we identified a prioritize and take action on the topic stakeholders deemed most material t . Employees . Leaders . Board of directors Customers Institutional investors . Industry analysts . State governments . Partners. Avalara Importance to stakeholders Avalara Product governa At Avalara, we take our customer succ commitments seriously, which is why product governance is built around quality management systems and cor customer support post-sale. We reco that we have more work to do to impr customer support to ensure our long- business success. 2021 Environmental, Social, and Governance Report the process and allows me to concentrate on other issues." Construction Company, Customer D sorted for me. It is easy to understand the process with the help of Avalara. Thank you so much!" Garage Door Supply Company, Customer 08 Avalara ax compliar ne right 03 02 04 "I just wanted to reach out and let you know how much help Avalara has been for our team over the past few months. Having a partner resource to answer questions promptly, accurately, and is personable, has made worlds of difference for our projects." Compliance Advisory Firm, Partner: "I cannot express enough thanks to each and every one of you for making this one of the smoothest audits that I have ever been through. TTR will come highly recommended by me." Chemical Company, Customer, Avalara 2021 ESG Report ESG priorities: › Product People › Planet AVALARA ANALYST DAY VIRTUAL | 44#4501 TO SCOTT MCFARLANE Compliance Opportunity Agenda June 28, 2022 02 AMIT MATHRADAS Growth Priorities 03 04 ROSS TENNENBAUM Financial Review & 2025 Target Framework Live Q&A with Presenters#46Appendix: Financial definitions and reconciliations CCC#47Financial Definitions CORE CUSTOMERS We believe our core customer count is a key indicator of our market penetration, growth, and potential future revenue. We use core customers as a metric to focus our customer count reporting on our primary target market segment. We define a core customer as: > > > > a unique account identifier in our primary U.S. billing systems (multiple companies or divisions within a single consolidated enterprise that each have a separate unique account identifier are each treated as separate customers); that is active as of the measurement date; and for which we have recognized, as of the measurement date, greater than $3,000 in total revenue during the previous 12 months. Currently, our core customer count includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers that subscribe to our solutions through our international subsidiaries and certain legacy and acquired billing systems that have not yet been integrated into our primary U.S. billing systems (e.g., recent acquisitions and our lodging tax compliance solution). As we increase our international operations and sales in future periods, we may add customers billed from our international subsidiaries to the core customer metric. We also have a substantial number of customers of various sizes that do not meet the revenue threshold to be considered a core customer. Many of these customers are in the emerging and small business segment of the marketplace, which represents strategic value and a growth opportunity for us. Customers who do not meet the revenue threshold to be considered a core customer provide us with market share and awareness, and we anticipate that some may grow into core customers. In addition, we have numerous enterprise-level customers that only utilize our services for small segments of their business, providing opportunities over time for us to extend our relationship and make them core customers. In addition to customers with whom we have a direct relationship, some of our customers are business application publishers (including ecommerce platforms) that include automated tax determination powered by Avalara. While those platform providers may be core customers to Avalara, their end-user customers generally are not. AVALARA ANALYST DAY VIRTUAL | 47#48Financial Definitions NET REVENUE RETENTION RATE (NRR) We believe that our net revenue retention rate provides insight into our ability to retain and grow revenue from our customers, as well as their potential long-term value to us. We also believe it reflects the stability of our revenue base, which is one of our core competitive strengths. We calculate our net revenue retention rate by dividing (a) total subscription and returns revenue in the current quarter from any billing accounts that generated revenue during the corresponding quarter of the prior year by (b) total subscription and returns revenue in such corresponding quarter from those same billing accounts. This calculation includes changes during the period for such billing accounts, such as additional solutions purchased, changes in pricing and transaction volume, and terminations, but does not reflect revenue for new billing accounts added during the one-year period. Our net revenue retention rate includes only customers with unique account identifiers in our primary U.S. billing systems and does not include customers who subscribe to our solutions through our international subsidiaries or certain legacy and acquired billing systems that have not been integrated into our primary U.S. billing systems. AVALARA ANALYST DAY VIRTUAL | 48#49Reconciliation to Non-GAAP financial measures ($000) Reconciliation of non-GAAP gross profit Gross profit Stock-based compensation expense Amortization of acquired intangibles ASC 605 2018 ASC 605 2019 ASC 606 2019 ASC 606 2020 ASC 606 2021 ASC 606 Q1 21 ASC 606 Q1 22 $193,449 $1,665 $4,020 $267,478 $3,352 $4,854 $266,892 $3,352 $4,854 $356,780 $6,603 $5,166 $492,633 $11,715 $9,319 $109,105 $144,404 $2,032 $2,020 $3,759 $2,645 $199,134 $275,684 $275,098 $368,549 $513,667 $113,157 $150,808 Non-GAAP gross profit Reconciliation of non-GAAP gross margin Gross margin 71% 70% 70% 71% 70% 71% 71% Stock-based compensation expense as a percentage of revenue Amortization of acquired intangibles as a percentage of revenue 1% 1% 1% 1% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% Non-GAAP gross margin 73% 72% 72% 74% 73% 74% 74% Reconciliation of non-GAAP research and development expense Research and development Stock-based compensation expense Amortization of acquired intangibles $51,909 $(3,179) $ - $82,989 $(7,213) $- $82,989 $(7,213) $ - $121,578 $(15,094) $ - $171,016 $(27,968) $ - $39,274 $(5,404) $ - $50,852 $(9,463) $ - Non-GAAP research and development expense $48,730 $75,776 $75,776 $106,484 $143,048 $33,870 $41,389 Non-GAAP research and development expense (% of revenue) 18% 20% 20% 21% 20% 22% 20% AVALARA ANALYST DAY VIRTUAL | 49#50Reconciliation to Non-GAAP financial measures ($000) ASC 605 2018 ASC 605 2019 ASC 606 2019 ASC 606 2020 ASC 606 2021 ASC 606 Q1 21 ASC 606 Q1 22 Reconciliation of Non-GAAP sales and marketing expense Sales and marketing $168,817 $187,783 $169,118 $206,049 $298,462 $64,304 $86,447 Stock-based compensation expense Amortization of acquired intangibles $(5,492) $(9,220) $(9,220) $(13,706) $(22,757) $(4,055) $(6,711) $(1,951) $(2,271) $(2,271) $(4,664) $(11,082) $(1,540) $(3,606) Non-GAAP sales and marketing expense $161,374 $176,776 $157,627 $187,679 $264,623 $58,498 $76,130 Non-GAAP sales and marketing expense (% of revenue) 59% 46% 41% 37% 38% 38% 37% Reconciliation of Non-GAAP general and admin expense General and admin $39,603 $72,394 Stock-based compensation expense $(5,585) $(16,301) Amortization of acquired intangibles $(17) $(15) $72,394 $(16,301) $(15) $97,258 $(18,904) $(819) $140,093 $(36,042) $(3,574) $31,199 $42,194 $(7,366) $(12,717) $(816) $(854) Non-GAAP general and admin expense $34,001 $56,078 $56,078 $77,535 $100,477 $22,972 $28,628 Non-GAAP general and admin expense (% of revenue) 12% 15% 15% 15% 14% 15% 14% Reconciliation of Non-GAAP operating loss Operating loss Stock-based compensation expense Amortization of acquired intangibles Goodwill impairment $(76,054) $15,921 $5,988 $9,174 $(76,172) $36,086 $7,140 $ - $(57,607) $36,086 $7,149 $ - $(68,105) $54,307 $10,649 $ - $(116,938) $98,482 $234973 $ - $(25,461) $18,857 $4,421 $ - $(35,089) $32,650 $7,150 $ - Non-GAAP operating loss $(44,971) $(32,946) $(14,383) $(3,149) $5,519 $(2,183) $4,666 Non-GAAP operating loss (% of revenue) -17% -9% -4% -1% 1% -1% 2% AVALARA ANALYST DAY VIRTUAL | 50#51Reconciliation to Non-GAAP financial measures ($000) Reconciliation of Non-GAAP subscription gross profit Subscription gross profit Stock-based compensation expense Amortization of acquired intangibles Non-GAAP subscription gross profit Reconciliation of Non-GAAP subscription gross margin Subscription gross margin Stock-based compensation expense Amortization of acquired intangibles Non-GAAP subscription gross margin Free cash flow ASC 605 2018 ASC 605 2019 ASC 606 2019 ASC 606 2020 ASC 606 2021 ASC 606 Q1 21 ASC 606 Q1 22 $101,285 $1,661 $2,020 $136,789 $2,955 $2,645 $104,966 $142,389 73% 73% 1% 2% 1% 1% 75% 76% Net cash used in operating activities Purchases of property and equipment $(2,913) $22,150 $22,150 $42,618 $34,118 $(28,247) $(23,066) $(14,373) $(7,885) $(7,885) $(4,501) $(7,659) $(1,366) $(2,148) Capitalized software development costs $(1,110) $(2,295) $(2,295) $(4,159) $(13,764) $(2,311) $(5,905) Free cash flow $(18,396) $11,970 $11,970 $33,958 $12,695 $(31,924) $(31,119) AVALARA ANALYST DAY VIRTUAL | 51#52Reconciliation to Non-GAAP financial measures ($000) Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Q3 21 Q4 21 Q1 22 ADJ.1 ORG. CALC. BILLINGS Q1 21 Reconciliation of calculated billings Total revenue Add: Deferred revenue (end of period) $111,443 $116,487 $127,879 $144,760 $153,601 $169,067 $181,167 $195,142 $204,530 $(11,370) $193,160 Contract liabilities (end of period) $165,369 $6,330 $167,719 $6,195 $180,640 $7,673 $209,690 $10,134 $225,531 $12,466 $239,395 $11,406 $257,883 $8,597 $282,955 $6,918 $303,610 $897 $(2,015) $(263) $301,595 $634 Less: Deferred revenue (beginning of period) $(161,241) Contract liabilities (beginning of period) Deferred revenue assumed in business combinations $(5,197) $ - $(165,369) $(6,330) $ - $(167,719) $(6,195) $ - $(180,640) $(7,673) $(9,194) $(209,690) $(10,134) $ $(225,531) $(12,466) $(886) $(239,395) $(11,406) $(430) $(257,883) $(8,597) $(747) $(282,955) $(6,918) $ - $1,938 $177 $(381,017) $ - $(6,741) $ - Calculated billings $116,704 $118,702 $142,278 $167,077 $171,774 $180,985 $196,416 $217,788 $219,164 $(11,533) $207,631 (1) Adjustments relate to amounts attributable to acquisitions since April 2021. AVALARA ANALYST DAY VIRTUAL | 52#53C Avalara NYSE: AVLR 10