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AvidXchange Holdings, Inc. - Analyst/Investor Day |
6/1/23 |
Michael Praeger |
All right. So welcome, everybody, to AvidXchange into Charlotte. So it was [indiscernible] again to be interact with lots of you last night. So we're pretty excited. AvidXchange is the largest software company in Charlotte. And this building, we call the foundry building for the all the hard work it's done. And it's ex... |
So a couple of objectives I have for everyone for today. There's only 4. And the first one is to really get a better understanding of our business. We're -- in a lot of ways, we wish it would be more of a simple business, but it has a little bit of complexity to it, but have a really good understanding of what our busi... |
The second one is our growth strategies. We have our mantra, as you guys know, about we're going to deliver 20% annual organic revenue growth year in year out and our strategies of how we're going to do that. And hopefully, you'll walk away with confidence related to those strategies and our ability to deliver long-ter... |
Third one, driving profitability. So this will be a little bit of a new framework that you're going to hear for the first time and not only all of our kind of execution strategies that we've been focused on how to drive gross margin, but also applying that to what -- some of you are familiar with is the Rule of 40 fram... |
And then the last one is our team. We have an incredibly talented team. When you guys see me out on -- the conference circuit usually see me, see Joel, a little bit of Subhaash, but there's whole team behind us, it actually executes the business, and you're going to see hopefully a good dosage of the AvidXchange team o... |
Okay. So let's start with kind of the mission. And this is actually outside of our kind of front parking lot door here. We have a big gear that kind of symbolizes the hard work that gets done within the walls of AvidXchange. But our mission is to really transform how middle market companies manage and pay their bills, ... |
And then the second piece is the purpose and say, hey, you're in an investor meeting, why talk about the purpose. But this is actually the heart of one of the things that we're going to talk about in the course of the day today, which is our performance culture. And we have a deep purpose on why myself and the rest of ... |
So when I think about what's made us successful to date and really what's going to be the key ingredients for being successful in the future, I kind of think of it as there's 5 ingredients for that. The first one is our performance culture and DNA and hopefully, over the course of the day to day and interacting with ou... |
The second one is being customer-obsessed. And when I look back at kind of our 20-plus years of history and all the key innovations that have occurred, they've all been directly from customer input. And we're very focused on how do we continue to engage with customers, help them drive our road map and make sure that th... |
We have a kind of slogging around, we want customers for life. And one of the things that we've had a great track record of is not only we keep customers for a long time, but also when CFOs and finance professionals leave and they go to other companies, the first thing they do is to call us to engage putting AvidXchang... |
Innovation. If you didn't see it when you came in this morning downstairs over the course of the day or when you leave, we have a mural from floor-to-ceiling of Steve Jobs talking about the responsibility of being an industry leader is also to lead the industry in innovation, whatever industry you're in. And we take th... |
The next one is this efficient growth. And yes, we're going to deliver our mantra of our 20% annual growth every year. But along with that, how do we think about continued margin expansion and now this new Rule of 50 construct that we think about in terms of how to run the business. |
And then last one is scale and talent. This is one that I've been working really hard on along with the rest of the team in terms of building the team for that next milestone of growth. And you're going to hear about what that next milestone of growth is for us in a little bit, but making sure that we have the right ta... |
And those 5 ingredients are what really is the recipe for this long-term kind of Rule of 40 growth and profitability for the business long-term. Okay. So that's the kind of the 5 ingredients that kind of make up our success, and we're putting together the details around that over the course of the day today. So my job ... |
The second one is kind of that scaling and operational strategies, making sure now that we're achieving the right kind of margin trajection as well as kind of our Rule of 50 objectives that we have in how we just scale and run the business. |
Third one, capital allocation. And I work very closely with Joel, the corporate development function, we call it the office's strategic initiatives, reports directly to me. And this is where we evaluate all the strategic opportunities. So we're very focused and disciplined about how we use our capital. We raised a lot ... |
And then the last one is around managing our talent. I'm personally involved in -- continue to interact with and help our team recruit all the senior leaders of the business. We actually have our newest member here today, [ Doug Anderson ], who kind of said yes over the weekend as our new Chief Product Officer. So [ Do... |
Okay. Let's talk about the team. The one thing I'll say about the team is I've really hand curated really an extremely talent team. This is a phenomenal team to work with. I have the most fun in probably my career -- in any time of my career as I'm having today. And it's all about coming in and working with this team a... |
One thing I'll say about this team is we do a really good job of arguing together, debating, but there's deep mutual respect that we have about our, both experiences and skill sets, that really make this team work. An extension of that team, and again, I kind of think of it as a great game of business and assembling th... |
And the only thing I'll say to this Board is one, they're incredibly supportive. They listen really well. But they're also really good at sharing their feedback in really constructive ways and that's the most important thing in terms of their past experiences, which are really rich in terms of what they've been able to... |
Okay. So what we do. If you can leave with just understanding kind of 2 things, the first one is that we're purpose-built for the middle market, okay? That's going to be a theme throughout the day, purpose-built for the middle market. The second thing is that we've now been able to build a 2-sided network of both buyer... |
Okay. Why can't I sleep at night? The #1 reason I can't sleep at night is I wake up every day and saying, we've been at this 20-plus years, we're the industry leader, but still 70% of the middle market hasn't made a decision yet to automate this business process. And we're sitting right in the middle as the industry le... |
Over 95% of the new customers that we're adding, James Sutton will talk about, they're doing this for the first time. We haven't gone to the important part of the market, we're actually displacing legacy systems yet. They're doing this for the first time, moving from paper to electronic. And so we're the company that's... |
Okay. So when we talk about we're automating the accounts payable and the payment process for companies, what does that actually mean? Okay. So in a simple way, there's a handful of steps. The first one is it starts with the suppliers sending us an invoice or executing an invoice of a purchase order that they've receiv... |
We're highly integrated to over 225 different accounting systems that support our customers today. And so being a highly integrated piece of the core accounting ERP system is part of the value that we deliver. And then once the data is in their accounting system, then they manage the payment process. Typically, within ... |
That's really unique differentiation because most people think of executing in -- a payment based on how the buyer wants that payment to go out. We actually flip it around and we think the secret of our success to building a 2-sided network is we actually execute the payments based on how the suppliers want to receive ... |
Okay. So that's the simple explanation of what we do. Team is going to give you a lot more details over the course of the day today. Okay. So the AvidPay Network, this is that 2-sided network. The one thing that I'll say is I now recognize why there's so few true two-sided networks in the industry. Certainly, hats off ... |
And so that network begins with our buyer customers now approaching 10,000 buyer customers on the network and then supported by now over 1 million supplier customers. And this is what we've been able to build over the last 10 years, and we're starting to see that Flywheel effect. And you're going to hear from both Jame... |
So what are the results of this network? And as you see here, kind of the growth of the network in terms of suppliers over time, the result of this is that we actually deliver a value proposition that no one else can touch. It's like 2x, 3x and sometimes 4x in any of other competitors in terms of number of transactions... |
The other interesting thing about the supplier side, although we're 100% dedicated to middle-market customers on the buyer side, the supplier side is actually -- supports our customers through all different types of suppliers, including enterprise suppliers, middle market and actually small business suppliers. And the ... |
Okay. So I touched on it. I want you -- the #1 thing I want you to walk away with is understanding that we're built for the middle market. What does that actually mean? So the first thing is it actually -- our feature set and our software tools actually support the business rules that a middle market customer has, whic... |
So one of the things that's important to recognize is in the middle market today and how we define it as companies between $5 million of revenue and $1 billion of revenue, there's 435,000 of those companies in the U.S. market alone. And we estimate that roughly 50% of those companies highly align themselves to an indus... |
Okay. So that's what purpose-built for the middle market means. So the other thing that's kind of interesting and just a little bit of compare and contrast to give you more context between the different parts of the market. It's really important to understand, there's really very -- 3 different very specific segments o... |
And the reason why it started with enterprise customers is because of their volume, the value proposition and cost savings and labor reduction they could get by automating this process was so significant that they were the first group that made these investments. But then they move from enterprise and it moved -- skipp... |
And the business process that small businesses have is pretty simple. They don't have very complex business process. It's usually one person that does the accounting, one person sends out invoices, one person receives invoices. They're doing it at night or on the weekends, and it's a pretty simple business process. And... |
Well, the middle market is actually the largest part of the market, but it's the hardest. And the reason why it's the hardest is, one, there's new business process that's much more sophisticated than you need for a small business that we talked about. The second thing is that it's verticalized and there's vertical acco... |
And so it's not a digital online sales experience. Certainly, we get leads and demand gen from digital, but the sales experience is of one of our sales team walking through how this business process is going to work in their environment. So that's what makes the middle market different. So with that as a backdrop, we h... |
So we think of what that total market size is just in the U.S., okay, that middle market sizing for AP automation and payment automation is about $20 billion. And then we have the supplier side in and what we're doing to help them manage their cash flow and their data needs, that market grows by another $20 billion. So... |
So fortunately, we've been at this a long time, but we have some really good tailwinds. And some of those tailwinds, I think, that are kind of impacting the overall market adoption or the whole movement to the cloud. COVID was a great catalyst for this because people quickly figured out that they didn't have their core... |
But one of the best analogies I have for this is back when I was running sales in the first kind of 8 years of our existence, the #1 sales challenge that we had is we go to companies and they say, Mike, love what you're doing, but unless it can run on-premise behind our firewall on our network, I don't feel comfortable... |
Fraud risk, a great catalyst that we get lots of calls on every day. When somebody has a fraud event, the first thing they say is we have to get rid of our manual process. The other thing is that over 90% of payment fraud in B2B payments occurs with the paper check. So if you get rid of the paper check, your propensity... |
The third one is generational shift. And no offense to the older generation kind of finance professionals, they're here, but one of the biggest catalysts that we see is when kind of the older generation decides to retire, and they're replaced by the next-generation digital native professional and they say, why do we do... |
And then lastly is the compelling ROI. At the end of the day, we demonstrate that there's a compelling ROI for a new customer to do this. And ROI, our perspective is, it has to be an in-year payback. It has to be very rapid in-year payback, and we have a very compelling ROI proposition. And that's pretty simply their e... |
Okay. So let's move to how we go to market. And you're going to get a lot more context from Dan and James Sutton as a course of the day today. But one of the things that makes, again, purpose-built for the middle market is you have to attack the vertical segments. And so here is a good example of the 9 verticals that w... |
Okay. So we have over 200-plus different vertical specific integrations that we support today. And then the second layer and the other 50% of the market is the horizontal part of the market. So this is where you have the NetSuite to the world, Microsoft Dynamics, Sage Intacct, Acumatica, that support that horizontal se... |
So we grew up as a direct sales organization. That's where the majority of our revenue comes today, roughly 85% of our revenue comes from direct. But the channel is a growing segment. And that channel really got turbocharged in 2017 when we did our deal with Mastercard. So why was the Mastercard deal important for us? ... |
And they had a global search, actually diligenced about 40 companies and selected AvidXchange. So we're their exclusive long-term partner for business-to-business payments for the middle market, and they actually white label our product and then they take it and they -- with Mastercard, we've been able to create the ba... |
So that partner program today is focused on 2 areas. One is the bank channel. And we have really 3 flavors of bank partners, referral bank partners, resellers and white label partners. And white label partners are the ones that actually put their brand and they actually sell it to their customers. Those include banks l... |
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