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AvidXchange Holdings, Inc. Presents at 2023 UBS Global Technology Conference, Nov-28-2023.txt

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+AvidXchange Holdings, Inc. Presents at 2023 UBS Global Technology Conference, Nov-28-2023 04:55 PM
+11/28/23
+Unknown Analyst
+
+Okay. Welcome, everyone. Again, we are here at the afternoon session for the 27th Annual Global Technology Conference. It's great to have AvidXchange with us today. I want to thank and acknowledge Mike, Joel and also Subhaash, who is Head of IR, who is also with us here in Arizona. So, Mike and Joel, CEO and CFO. I think many of you in the audience know Mike and Joel.
+
+We're going to get started with some Q&A. And I think we'll -- hopefully, we'll have some time at the end to allow the audience to ask a few questions. So, Mike and Joel, again, thank you for being here.
+
+Michael Praeger
+
+You bet. So, first of all, I have to say, like, this is a great stage setup. I'm used to, like, 2, like, big blue chairs that you sink into. And now I feel like I'm, like, in Miami Beach or something. This is kind of -- this is a nice setup.
+
+Unknown Analyst
+
+It is nice up here. I would agree.
+
+Unknown Analyst
+
+All right. Great. We're going to talk about payments monetization, to get started here, and the future runway there. Let's talk a little bit about, just for recapping in front of the audience, the portion of your transactions that you're currently monetizing and talk about the 2 means that you have of doing that from a payments perspective, whether it be the virtual credit card or via AvidPay Direct.
+
+Michael Praeger
+
+Yes. So, great question. So, one of the things that has been kind of -- I'll refer to as kind of our secret sauce at AvidXchange is our ability to monetize payments. And this is something that we began leaning into in 2012 when we launched the AvidPay Network. In the start of, really on, it was -- actually, the catalyst was a discussion that Sachin Mehra and I had for Mastercard. At the time, Sachin was actually running B2B payments before he became the ultimate CFO at Mastercard.
+
+And kind of his coaching was, "Mike, everybody is trying to think that the only customer to have is the buyer. But if you're going to build a true network, you actually have to think that the supplier is also a customer." And that really kind of resonated with me, and we kind of launched the AvidPay Network. We said we're going to kind of declare that the supplier is a core customer along with our buyer.
+
+And it's easier said than done because if you're going to truly think of the supplier as a core customer, you have to actually build a value proposition for them. You have to actually build products for them. You have to create a sales organization that's dedicated to the supplier side, customer success in all the different functions. And that was expensive to do early on, but then today, we're seeing the benefits of it.
+
+To go back to kind of the question as part of that setup. So today, we're monetizing about 40% of all the transactions that are going through our platform. And that's typically what we see as kind of 2x, 3x, sometimes 4x, others that we see in the industry. And I believe it's because of that value proposition of thinking about the supplier as a core customer.
+
+So, what does that mean in terms of payment modalities? So today, we have 2 kind of big kind of categories of, what I would say, monetized payments, one, our virtual card-related transactions and the other ones are what I call AvidPay Direct, which is kind of our private network that we settle through ACH, but we wrap a data layer around that transaction.
+
+And so, one of the other kind of secrets to our success is our ability to create lots of different dynamic payment modalities. And we think about payment modality, it's kind of defined as a combination of a particular price point for the transaction, combined with the level of automation or straight through process, combined with the data, the remittance data, for that transaction. Then the last element is the timing and the speed of the payment. And so, we play around with the combination of those 4 elements to create different payment modalities.
+
+So, in the case of virtual card today, we're up to about 12 different virtual card payment modalities that have different combinations of interchange combined with different levels of straight-through process automation, combined with different levels of remittance data. And so, that's been part of our secret sauce of getting the monetization. And we do the exact same thing on the AvidPay Direct side, where we settle through ACH, but we combined different price points with data and timing and straight-through process.
+
+So, that's kind of been the secret of our success in terms of kind of go-to-market and working, really, with the supplier to determine how they want to receive their payments. Because everybody else in the industry thinks that the buyer dictates payment. Our belief is that works for enterprise. In the Walmarts of the world, they can dictate those type of things. But when you get the middle market, we don't think true market adoption happens that way, and it happens through value proposition.
+
+Unknown Analyst
+
+Excellent. And in terms of the unit economics on those 2 different types of payment methods, virtual card and AvidPay Direct, and you mentioned numerous forms and interchange rates and whatnot for the virtual card. On a net basis or maybe let's think about it on a gross profit dollars per unit of volume basis, are you relatively indifferent? Is one a little bit better than the other? And how do you think about that?
+
+Michael Praeger
+
+Well, what's kind of interesting about it is they kind of net to be equal. But do we think of it as, on average, we're generating about 200 basis points on a virtual card transaction at the different kind of price points we have on average. AvidPay Direct, we're averaging about 100 basis points.
+
+Now having said that, what we're finding is that the average ticket sizes for AvidPay Direct are about double those of virtual card. So, net economics, AvidXchange, were really indifferent because they end up being about the same.
+
+Unknown Analyst
+
+On a per -- on a transaction basis.
+
+Michael Praeger
+
+Yes.
+
+Unknown Analyst
+
+Okay. Great. Okay. Let's move on to -- and you kind of alluded to this in terms of a lot of the value being more in sort of the automation and the processes and less so in the payment method. But let's talk about some of the savings that are generated. So, at the Investor Day, you talked about the $12 number, the savings per transaction around workflow automation. Maybe just expand upon that and where that $12 of savings comes in, how it's so important to what you can deliver to the ecosystem.
+
+Michael Praeger
+
+Yes. So, I mean -- so, I think when we think out of that savings equivalent. So, first of all, for this business process, one of the things that benefited us from a new customer acquisition, this is a really rapid ROI, typically in-year very rapid ROI for our buyer customer. And that savings comes from we think of kind of just the labor and the paper handling expense. A paper invoice comes in, somebody has to open then the mail. They then have to determine, okay, this invoices related to this business unit or -- and then we have to send it to the field to get approvals.
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+We actually have customers in, like, some of the bigger cities like New York City who actually created their own courier service internally to take invoices around to the different property managers in New York City to get the right signatures for approval.
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+All these crazy things that they did. And it's a very manual, and then when it comes back to corporate after it has all these kind of approvals and coding on it, then somebody has the data entered into an accounting system. And then once it goes in an accounting system, that -- a paper check gets created, and then it goes through the same thing, a check signing process, a mailing process before the vendor actually gets paid.
+
+And so, in our world, we can eliminate both all the paper handling and all the labor. To have it be really intelligent, there's some AI incorporated, obviously, in terms of reading these invoices, determining how they get coded, how they get routed for approvals. Everything happens electronically based on the business rules of that particular customer. And then, when it comes to a fully approved invoice based on the business rules, all the data automatically flows right into the ERP system.
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+No one has to do any data entry. And then the ERP system, rather than creating a check file and paper checks being printed, that file comes back to our platform, and then we execute the payments based on the business rules of the supplier. And so, when you take an account, eliminate those labor steps, paper handling steps, you get to a very rapid ROI, typically kind of $12-plus per transaction.
+
+Unknown Analyst
+
+All right. Let's move a little bit towards your focus on the middle market. First, we'll do a little bit of a macro question, and then we'll move later into more of the verticals that you focus on. But macro-wise, the resiliency of your customer base, if you can comment on what you've been seeing, not necessarily quarter-to-date. If you'd like to make those comments, that's welcome, but in general, your customers' resiliency versus the broader macro economy?
+
+Michael Praeger
+
+Well, first of all, I'd congratulate, because usually these sessions start with the macro. So, it was good to start with something other than the macro as the first question. And Joel will probably out to say, Mike, I should comment on the quarter. But the macro for us, remember, we're a 23-year-old software company. We've been through multiple cycles in the past. And this cycle is playing out pretty much how we expected it to be based on our experience in past cycles. And what I mean by that is there's both headwinds and there's tailwinds related to kind of the impact.
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+So, first of all, in terms of our ability to add new customers, the current environment is actually really positive in terms of new customer additions, adding new volume to the platform. And the reason being is because it's actually easier to get the attention of CFOs and controllers, finance leaders in the current environment than it was a couple of years ago when it was all about revenue growth. And people are very focused on automating their back office expense controls, making their operations more efficient, all those kind of things. Yes, so, that's a big one.
+
+And then the second one is where we have some tailwinds, and that's on existing customer volumes, where we're seeing kind of the impact of kind of discretionary spend. So, one of the things that I tried to do in our last earnings call, and you guys will tell me whether it resonate or not was really some education on the differences between small business and the middle market.
+
+We're purpose-built for the middle market. Middle market customers are -- these are substantial companies, [ typically ] between $5 million and over $1 billion of revenue, typically a lot of more market leaders in their particular segments. And in a down market, these companies don't go out of business. What they do is they kind of curtail some of their discretionary spend.
+
+And we've seen that show up in our business over the course of the last year through. And I think the best kind of metric that we use to kind of measure it is what we call transactions retained on the network. And we think in a kind of normal state, that number should be about 104%, 105%. In the current environment, it's closer to 100%. And we think that's the impact of that discretionary spend.
+
+So, we also know that, from past cycles, when finance leaders start having confidence on the other side of the cycle, that discretionary spend comes back pretty quickly. And so -- but we're kind of -- we're pleased in terms of kind of managing through it. We think we've continued to demonstrate really strong financial results as we're navigating through some of the macro headwinds. And those are the things that we can control.
+
+Unknown Analyst
+
+All right. Great. Now we talked a little bit more -- or at least alluded that we'd get to the verticals. So, 9 major verticals for the company. They're all pretty well-penetrated. Maybe just talk about some of the newer ones that might even have the most runway, and talk about maybe what those penetration levels are.
+
+Michael Praeger
+
+Yes. So, you're right. So, look at the back up, what makes, built for the middle market, unique to us is I indicated that kind of our expanded definition of companies between $5 million and $1 billion. And with that, in the U.S., there's roughly 435,000 of these middle-market companies. However, what's interesting about it is we believe about 50% of that 435,000 companies actually highly align them to an industry vertical that has unique either business process or accounting system process to it that requires an industry-specific accounting system.
+
+So, these are different than like the NetSuite's or Microsoft Dynamics or Sage Intacct in the world that are considered what I call more horizontal. That 50% of the market is very vertically specific. And that's a really interesting dynamic in the middle market. And it means that when we go to market, we actually, today, have 9 verticals, as you referenced, that we go very deep in, and then we cover the -- kind of the horizontal lens, really, through our partnership channels.
+
+So, of those 9, we got started in real estate. That's our oldest one, still single-digit penetration. It's crazy, right? And yes, we're just excited. We talked about our new AppFolio partnership that we just announced at our last earnings call where they have, like, 19,000 customers within real estate, which we believe about 50% of them are actually kind of in our sweet spot. And here we are in a vertical that we started 23 years ago, and we're still single digits.
+
+And then you kind of contrast that to maybe our newest vertical, which is hospitality. And we talked about that a quarter ago. And one of our -- kind of our playbooks in launching a new vertical is -- full disclosure, we don't sit around in a conference room thinking about what verticals we should go into. We actually look at our platform and say where are we naturally organically attracting customers that have certain characteristics.
+
+And when we started getting about 50 hospitality companies coming to us, we took note of it. And then when we got to about 100 hospitality companies, we started saying, let's put some energy on this. What are the characteristics of these companies. Why are they coming to us. What's the value proposition. And then we kind of determined, okay, this has the characteristics of an industry that we want to have a dedicated go-to-market strategy for. And part of that playbook is we will be highly aligned with the top accounting ERP systems that support that vertical.
+
+And so, we were able to announce, not only moving into hospitality as a new vertical, but also our partnership with M3 is a great example of supporting that strategy. So, some of the other new verticals that we've launched in the last several years have been healthcare facilities. Our education, nonprofit verticals as well as hospitality. But then you look at even some of our most long-standing verticals being real estate, construction, financial services, as an example, we're still single-digit penetration.
+
+So, one thing I love about, not only AvidXchange but the market that we're in, is there are so many growth levers to grow this business.
+
+Unknown Analyst
+
+Excellent. Mike, I think we tackled some of the payment methods. We've tackled mid-market verticals. Let's move to gross margins. So, they've been expanding. So, gross profit growing faster than revenue.
+
+Michael Praeger
+
+It sounds like a great transition to Joel, too.
+
+Unknown Analyst
+
+I think it is a great one. Joel, I'll take this one over to you. So, gross margins, you talked about the 75%-plus long-term margin. You're on that pathway. Maybe you could just break down the components, the cash to -- sorry, the check conversion, some of the other scale benefits and how do we get to 75%?
+
+Joel Wilhite
+
+Yes, you bet. So, we've talked about this path to profitability coming out of the IPO, we've been focused on that since, obviously, early '22. We've talked about profitability starting with getting gross margins into the 70% ZIP code. We got there a little sooner than we expected and pleased in the second quarter -- in the third quarter, put up 70%. Gross margin number in the Investor Day, like you mentioned. We talked about this business as a 75-plus percent gross margin business and well on our way.
+
+We've talked about the way that we get there being a mix of the yield benefits coming through revenue and unit cost efficiencies, about roughly and, not necessarily in linear fashion, but about 2/3 of that expansion over time based on the yield opportunities we have through revenue. And then just consistent, the rest -- the other 1/3 being consistent unit cost discipline.
+
+If I click into that a little bit, you're asking about kind of really where is the yield coming from and how should we think about that. Probably the biggest yield opportunity ahead of us is that ePayment conversion. That should really add meaningful gross margin points even on constant volume. And that's the thing that Mike talked about, right, additional payment modes, additional inducement of moving from check to electronic.
+
+On top of that, we haven't talked much about Invoice Accelerator, but we're excited to have launched that this most recent quarter and gradually see that ramp, but that gives us an opportunity to add revenue and yield on existing volumes, so another gross margin enhancer.
+
+And then the unit cost is just blocking and tackling on the process on the invoice side, delivering AP automation increasingly in an automated fashion and where we have opportunities to outsource or optimize in various different ways. And then like fashion, on the payment execution side. So, no one thing to point to on the unit cost, just sort of discipline across all of those workflows.
+
+Unknown Analyst
+
+And going from -- down the income statement a little bit more. Let's talk about some of the operating leverage you'll see below cost of revenue and what that means for medium-term EBITDA margins?
+
+Joel Wilhite
+
+Yes, absolutely. I mean, we've -- again, on an almost $100 million quarter with 70% gross margins, we put up $11 million, 10% EBITDA margin. And so, we're hopeful that this is a proof point to sort of what we -- the target we painted for ourselves at Investor Day. And it's coming through some of the scale that we said we would see. So, first on the G&A line, right? So, we built sort of a leadership structure and a public company framework in order to shoulder a much bigger business. And so, there's really not need to grow that meaningfully going forward. So, we're starting to see that scale.
+
+Also in sales and marketing, though there were some timing dynamics between Q3 and Q4, but still good scale there. And over the course of '24, we'll see kind of some R&D scale as well. So feel good -- even in kind of the environment where the macro is somewhat impacted, but feel good about what we can control and with that, focus on being a Rule of 40 business in 2025.
+
+Unknown Analyst
+
+Very nice, Rule of 40, 2025. Okay. Let's move on to another topic that is an important one for the business in terms of a new growth driver. So, Invoice Accelerator 2.0. So, launched in October, started processing transactions. Maybe just talk a little bit about the goals for the mix of revenue that you've disclosed and also just to recap on what the main differences are versus the 1.0.
+
+Michael Praeger
+
+Yes. Maybe I'll start and you can fill in some of the details. So, Invoice Accelerator, when we are going to think of the value proposition for the supplier, one of the things that suppliers have told us is in addition to helping us manage our payment modalities and give us the remittance data, it would be great if we had some tools to help us manage our cash flow and hopefully accelerate the timing of getting paid.
+
+So, Invoice Accelerator is designed to do exactly that. And I was fortunate in that sense that I had Nigel Morris from QED original founder of Capital One, joined my Board in 2015. And at time, he's like, "Mike, you're sitting on this gold mine of data to actually provide a financing offering to the supplier because you have, structurally, some advantages that we could never have at Capital One," and that is it's really hard, at Capital One, to underwrite kind of the supplier -- small business suppliers because there's no really good financial data.
+
+And then the second thing, it's really hard to collect the money because you're kind of chasing these small business suppliers. And at AvidXchange, you actually have all the data to know the relationship between these buyers and suppliers to use a data analytics approach to underwriting versus financial analysis because you're actually getting paid by the buyer, who is a middle market company, and we have a lot of history with.
+
+And then the second thing is all the money flows through our network, so we don't have to chase receivables going to a supplier. And so, our first 1.0 offering been in the market the last couple of years and had really good learnings related to the data science, combined with our ability to recapture the invoices or the payments as they're flowing through our network, combined with the user experience.
+
+So, now with our 2.0 offering that we launched about a month or so ago, it's really designed to take what -- during 1.0, we only made it available to about 50,000 suppliers, and we'll be able to make it available to all million suppliers with our 2.0 offering. We're going a little bit slow this quarter to make sure it's working as designed, but then certainly be able to ramp it as we go into next year.
+
+And so, I've made the -- maybe it's a good transition to bring Joel into the discussion. This, I believe, is our next $100 million business at AvidXchange. But we've kind of made some commentary around how big we expect to be in the next several years.
+
+Joel Wilhite
+
+Yes. All I'll add is that at Investor Day, we painted sort of a 5-year target of this being about a $50 million component of a $1 billion top line business. And again, we feel like it has all the promise that Mike talked about.
+
+Unknown Analyst
+
+That 5% or so. Okay, great. All right. Why don't we move to -- I want to see if we can squeeze in a question from the audience, but let's get one more in if we have a chance here on acquisitions. So, you've done a handful over the years, right, BankTEL, Core Associates, FastPay, just to name a few. Maybe, Joel, you could remind us in just the criteria that you're looking at when you evaluate these, and then also kind of where you stand in terms of your ability to do more.
+
+Joel Wilhite
+
+Yes. Maybe on the second question first, right? Like, all options are on the table. We like that model as a growth driver. There's some value disconnects in the marketplace. We would make an acquisition only if it were accretive. And so, we're -- we continue to be watchful and look for opportunities, but haven't seen one since FastPay in the summer of '21.
+
+What's worked for us is seeing opportunities to acquire a software business offering similar value in a different vertical, so the opportunity to acquire a new vertical and potentially to get unmonetized payment flows with that acquisition. And that's -- that was sort of the Core Associates and BankTEL model, and those have worked very well for us. And so, that's maybe the sweet spot target.
+
+But we've done small tuck-ins around the edges. And so, it'll play a role in our growth going forward, but we're in sort of a season of some dislocation in value.
+
+Unknown Analyst
+
+Okay. Excellent. So, the main reason would be to add a new vertical, but there are others?
+
+Joel Wilhite
+
+Right. Add a new vertical and pick up an unmonetized payment opportunity. Yes.
+
+Michael Praeger
+
+Yes. We think it's a great playbook that, really, as you said, go deeper in the verticals already in with a beachhead of customers as well as launch new verticals. So, we intended that, that's probably can be a playbook we stick to.
+
+Unknown Analyst
+
+Perfect. Okay. Great. We have a few more here, and we have a few minutes. Would anyone in the audience like to ask a question of Mike or Joel? Okay. Well, maybe we'll circle back, but why don't we just keep going then.
+
+So, let's talk about the political spend. So, in terms of modeling the company, we need to think about how this will pick up in the second half of next year, think about it lapping the following year and then picking up again. But Joel, you can just help us out with that a little bit.
+
+Joel Wilhite
+
+Yes. Yes, I'll make some comments. I know Michael want to jump in as well. So, maybe just to step back and provide some context. So, when we bought FastPay, which is we entered into the media business. We acquired a media vertical through that acquisition. A portion of the FastPay business includes the political media business. And so, that was about an $8.5 million business in 2022 during the midterm elections. It's largely nothing this year, and then we'll -- we expect it to return in a meaningful way during a presidential election. What else would we add to that, Mike?
+
+Michael Praeger
+
+Yes. I think one of the things is today, we control about 30% of all the political media payments in the industry. And it's one of these businesses that's hard to forecast because purchasing decisions in political media, again, are very reactionary, based on kind of the circumstance of what a candidate may have done the day before on a particular issue.
+
+But what we find is that about 50% of the payments relate to candidates, another 50% relate to the ballot issues. And we expect next year to be probably a pretty robust political cycle on both fronts. And the industry is expected to be the first $10 billion kind of political spend cycle. So, we'll see. And it's one of those kind of businesses that we became -- we weren't necessarily focusing on that we can naturally organically became the leader in and certainly looking forward to next year's political cycle.
+
+Unknown Analyst
+
+All right. Excellent. And you'll continue to disclose what those contributions are, so that we can kind of back out the underlying…
+
+Michael Praeger
+
+Absolutely.
+
+Unknown Analyst
+
+Okay. Great. All right. I think we have time to squeeze in just one, one more. Let's just talk a little bit about international. So, oftentimes this comes up and people talk about cross-border payments, but there's domestic payments in other markets, and that's where more I wanted to hit, which is the business is currently U.S. What are the potential prospects for doing what you do, but in other countries?
+
+Michael Praeger
+
+Yes. Great question. We get asked that question a lot. And one of the challenges that we just -- we talk about internally is kind of focus and allocation of resources. Go back, today, we're pretty much exclusive to the U.S. and Canadian markets. And when we look at kind of that market opportunity today, within the middle market, still 70% of that market is using paper invoices and paper checks. So, with this massive built-in runway in the North American market that we're ready to leader in. And so, it makes us really efficient to add customers and execute our business in North America with a massive runway, especially in single-digit penetration across all 9 verticals.
+
+So, having said that, though, we do get asked by partners, especially the ERP partners to say, okay, Avid, you're the main AP automation payment platform for our customers in the U.S., why -- when will you be able to support our European customers or other international customers? And so, we think that's probably -- it's definitely part of our playbook.
+
+I wouldn't say it's something that we're going to execute in '24. But as we look to kind of '25 and beyond, absolutely. Especially I think we look at it as the international opportunity is more of a software opportunity than a particular payment, necessarily, opportunity. We launched our cross-border offering about maybe a year ago. And -- but one of the things I was trying to warn people about is our verticals today and where our customers are, these aren't industries that have large degrees of international payments, the markets that we're in today.
+
+But where we see it is in the horizontal lens supporting, for example, NetSuite channel, Microsoft Dynamics channel is where we see more international opportunities. So, I would expect that not in '24, but as we go into the kind of '25 and beyond, we'll be opportunistically looking to support some of our partners in -- with some of their overseas customers.
+
+Unknown Analyst
+
+Great. Thank you, Mike. All right, Mike, Joel, Subhaash, thank you for making the trip here to join us in Arizona. It's a pleasure having you on stage.
+
+Michael Praeger
+
+Thanks for having us.
+
+Unknown Analyst
+
+Thanks for being at the conference.
+
+Michael Praeger
+
+Thank you. You bet.

AvidXchange Holdings, Inc. Presents at 51st Annual J.P. Morgan’s Global Technology, Media and Communications Conference 2023, May-24-2023.txt

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+AvidXchange Holdings, Inc. Presents at 51st Annual J.P. Morgan’s Global Technology, Media and Communications Conference 2023, May-24-2023 12:00 PM
+5/24/23
+Tien-Tsin Huang
+
+We're ready for the AvidXchange part of the day so please come on in. We'll take questions as we have with the other sessions through the escalation portal. happy to take questions here as well. So of course, we have Mike Praeger, CEO, Co-Founder; Joel Wilhite, CFO. Thank you both for being here.
+
+Michael Praeger
+
+Thanks for having us.
+
+Tien-Tsin Huang
+
+So we've heard from some of your B2B peers. We just heard from Toast, they also talked about their supplier network as well. So it's very complex, right? It's what I've written down as my initial question, but just the problem that you're trying to solve here, we've gone through the pandemic. I think it drove a lot of interest in the space as well as activity amongst your clients now. Talk to us about the demand and how that's changed in your mind coming off of the pandemic? Mike, if you don't mind starts...
+
+Michael Praeger
+
+Yes, absolutely love being here. it's really -- it's an interesting question because certainly, the pandemic early on was a catalyst for our solutions when everybody -- every CFO realized overnight that how are they going to support a finance function working from home and having their core applications in the cloud was kind of a requirement for that.
+
+So [ flurry of COVID ] and kind of 2021 as we kind of really lead into supporting our customers and new customers in just the work-from-home environment. I think how that's going to translate to today is kind of after that in the last couple of years, it's been really probably more challenging getting the attention of CFOs as we are kind of more in a robust economic cycle, combined with being still in the work-from-home environment, getting their attention to do these type of projects.
+
+And I think what we're seeing in our top-of-funnel activity today, that's radically shifted and there's strong top-of-funnel demand caused by the current macro environment. People are trying to do more with less, trying to eliminate or curtail headcount growth and how do you scale a back-office function without adding headcount.
+
+And so similar to past economic cycles, we're seeing really strong top-of-funnel activity. So we've been -- and I usually get asked is are we seeing it across the board? Or is it particular industry verticals? And I would say we're seeing it really across the board and now all 9 of our industry verticals.
+
+Tien-Tsin Huang
+
+Yes. So you've been doing this for some time. We've been studying this space as well for a couple of decades. And you mentioned it, right? There are different cycles. And this is a little different with inflation and interest rates, but your optimism, you said top of funnel is fine, but does it make you want to change your go-to-market or sort of your approach in general here, Mike?
+
+Michael Praeger
+
+No, I think it kind of reinforces really the moat that we're building around the middle market. And what people don't realize, and then one of the biggest differentiator kind of characteristics of the middle market, is the verticalization of the middle market.
+
+And we define the middle market as companies between $5 million of revenue and $1 billion. And just in the U.S. market alone, it's about 435,000 middle-market companies. And we believe that roughly 50% of them highly align themselves to an industry vertical that has unique either business process or accounting system process for that vertical.
+
+And they're supported specifically by vertical-specific accounting ERP systems. And that dynamic is very different than, say, small business where if you're integrated to QuickBooks, you really have the small business market covered. An enterprise be integrated to SAP, Oracle, maybe some Workday, you have the enterprise market covered. But we're just -- we're in 9 verticals today in the middle market, and we have 225-plus different accounting systems and growing that we support. So I think what people really don't understand is the -- that nuance of the verticalization and specifically, the unique business processes that different verticals have that you have to accommodate for.
+
+Tien-Tsin Huang
+
+Yes. When I got to know Avid, I think the one thing that others had sort of shared with me that the differentiator was all the ERP integrations that you guys have done, right, all the work that you had done to get there. So that supports what you had talked about.
+
+So composition of growth was another question that I have for you and Joel here, just how it's different? And the float income has played a bigger role. But we've historically thought of you guys as a 20-plus percent grower, right, including M&A. So what does the growth look like this year versus the past in terms of composition?
+
+Joel Wilhite
+
+Yes. Great question. Maybe first, just generally, the way we think about growth, you mentioned that 20% number. We think about that as really the combination of 3 drivers: One, the degree to which we retain and expand the volume on our platform. So last year, that was about 103.5%. A little bit of a macro impact. We'll talk about that in a sec.
+
+But overall, the expansion of that platform volume. And number two is just consistently adding more and more buyers. And then number three is yield expansion that we get basically the expansion of revenue per transaction across the platform. We see those 3 working together kind of outside of this macro window is essentially giving us confidence about 20%. We think the opportunity ahead of us, the 435,000 buyers in the middle market where we're only at 8,000.
+
+Those 3 drivers give us comfort confidence about an organic 20% growth rate. Now just a shift to what we've seen and what we would say about the future. So for Q1, we are pleased with Q1 results, even though we did see a little bit of softness in that total transaction growth. We were at 22% revenue growth for the quarter. We did see about 8% transaction growth overall.
+
+That's all of the transactions of all the buyers across the network. But we were pleased by a couple of dynamics. One, we saw some yield expansion on the software line. So software revenue growth was about 12%. And then on the payment line, we had about 27% revenue growth in the quarter.
+
+Now a portion of that was float. You mentioned our interest revenue that we make off of the funds on their way between buyers and suppliers. So absent that, float impact, we're about 17% payments revenue growth, which is consistent with the overall TPV growth on the platform. Just thinking about what we were clear about in our expectations for the year, but maybe the other thing I should add before I move on is we are pleased with our first quarter of profitability in the quarter.
+
+And we still expect to be profitable this year. Our guidance contemplates that even in the face of some macro uncertainty around the total transaction volume that we're seeing. But like Mike said, we are seeing really strong demand and encouraged from a sales perspective. I guess the final thing that I would say is, it's important to be mindful, not just of the float contribution in the business, which we've called out to be roughly about a $30 million contributor to the year versus roughly $12 million last year.
+
+But this is also a nonpolitical year cycle. And so we generated about $8.5 million of revenue last year. We're looking forward to 2024, the presidential cycle, but we wouldn't have that political contribution in our media segment this year.
+
+Tien-Tsin Huang
+
+Got it. So let's dig in on the client spend side of it. I think that was one of the learnings for us, right? How cyclical is your client spend since you monetize that? And so we -- right or wrong, we benchmark it against commercial card spend, which I know is over-indexed to T&E, which isn't the best proxy. So -- so help us, how should we benchmark your client spend? How discretionary and nondiscretionary is that?
+
+Michael Praeger
+
+Yes. Maybe I can start by. For a little context, you kind of really have to -- it's hard to look at it as 1 bucket. You have to kind of look at it almost vertical by vertical, is at least how I look at it. And I think we have probably 2 verticals that are the most kind of impacted by discretionary spend. The first is the media vertical. So we think of maybe up to 10% head-type headwinds on kind of media-related spend.
+
+Now having said that, we had a strong Q4 last year because of the political side and we also expect to have a pretty robust '24, because of the political side. So it's also forecast to be the first $10 billion political ad spend cycle next year.
+
+So we'll see how that plays out. So media is one. And then the second 1 is maybe construction. And then outside, again, maybe up to a 10% head-type headwind outside of that across our other 7 verticals, it's really I would say, pretty consistent, maybe 3% to 5%-type headwinds.
+
+And -- but when you look at kind of the cost structure of these different verticals, we are fortunate that most of the cost structure is kind of fixed, right? I mean you look at real estate kind of management operations and HOA management, type of industries that a large portion of the cost structure is around service contracts, preventive maintenance-type contracts and things that are relatively fixed in terms of their expense. So not a big portion of discretionary spend across the majority of our verticals.
+
+Tien-Tsin Huang
+
+Got it. Mike, so the transaction yield, Joel, you alluded to it, transaction yield did surprise to the upside, right? So I know it's hard to unpack. There's a lot of moving pieces around monetization rate. But short term, what do we need to pay attention to?
+
+Joel Wilhite
+
+Yes. No, we were pleased with the yield in both overall transaction yield. Also, TPV yield was steady year-over-year and actually ticked up slightly versus Q4. If you look at that total transaction, if there's 1 metric that we'd focus on, that would be -- it was up meaningfully quarter-over-quarter, about $0.52, $0.53, about half of that float contribution.
+
+But even removing the impact of the political cyclicality and float, we see that continuing to expand. I think what we've said when we went years ago and what we've -- the drum we continue to beat is that we have a number of levers and opportunities to see that continually steadily expand, and we're seeing that prove out.
+
+Michael Praeger
+
+And I'd say probably at the top of the list of those levers is the whole paper check conversion dynamic. And for people that aren't as familiar with that dynamic on our payment network, about roughly over half -- over 50% of all the transactions today are still paper check.
+
+And on the payment network side, we generate a software subscription revenue on -- for every type of transaction from the buyer. But on the payment network side, if it's a paper check, we have 0 revenue and relatively high expense of $0.85, $0.90 per payment of a check.
+
+And when we flip it to electronic, it goes from $0.85 to $0.01 and 0 revenue to $10 plus in revenue per transaction. So that dynamic is really powerful for both the yield number, and I think that's where we've been leaning in as well as gross margin expansion and obviously, revenue growth.
+
+Tien-Tsin Huang
+
+Okay. No, good. So it was a good segue into what I was going to ask next, which is around real-time payments. FedNow was a popular question that I had from people submit to ask you guys. So tell us about the impact of real-time payments and some of these low-cost intelligent payment networks as I call them.
+
+Michael Praeger
+
+I wish I had like a $0.01 every time. Back in the day, people ask me about kind of the next evolution of ACH payments and then RTP and now FedNow, right? And so here's what I would say is, one is, internally, we really are leaning in as it relates to additional payment modalities for us.
+
+And so without our closed loop network, that today, we settled through basic ACH that typically has a 2-day clearing time to it in terms of good funds. We can actually use, whether it be RTP or FedNow is really a real-time offering that they can get the same day for maybe a different price point instead of 100 basis points for -- you have a pay direct transaction that we settled through ACH with the remittance data wrapped around it, we could do the same thing with a FedNow payment, maybe at 125 basis points as an example, right?
+
+So we like these new payment modalities as a way to kind of continue provide optionality to create more options for our supplier pool. Now having said that, I think the history lesson at least that I've learned in running AvidXchange over a long time, is I think the -- all these new payment types as it relates to the 1 sponsored by the Fed take a long time to adopt.
+
+And the reason being is you have to -- the banks have to invest in it. All these new payment types are significant development effort for the banks, IT effort that we prioritize on road maps. And the challenge that I think the adoption cycle has for banks wanting to adopt these payment modalities is that there's very few -- there's little economics in it for anybody.
+
+And I think what MasterCard and Visa and probably Amex got right is the interchange model, there's plenty of economics in the ecosystem for everybody to adoption, whether it be the bank, the merchant acquirer, the card processor. Companies like AvidXchange that have a software embedded experience, we're all trying to focus on driving adoption and there's economics in it for everybody.
+
+And then when you look at some of these FedNow-type programs, I think it challenges. In theory, it's a great offering, but there's not economics in it for anybody to invest in driving adoption. So I think that's one of the challenges that we see long term and why I think ACH has been a disappointment. RTP has certainly been a big disappointment. And I think one of the things that is a challenge, it's going to be a challenge for FedNow.
+
+Tien-Tsin Huang
+
+Yes. No, that's well said. Nothing moves that quickly. But if it benefits over time, the elimination of checks then it's a way.
+
+Michael Praeger
+
+Yes, absolutely. I think all these things kind of -- one of the things I learned, I don't think there's 1 silver bullet that kind of creates this massive adoption of getting rid of checks for electronic payments. It's going to be lots of different payment modalities that are all kind of chipping away at it.
+
+Tien-Tsin Huang
+
+Good. So let's dig back to the business a bit. We'll take some questions. So you talked up the hospitality vertical as a new one. And it sounded quite interesting to me. I know the -- again, you're leading with a pretty big partner from an ERP integration standpoint. So there's a lot of competition in general in that space. So how is this wanting for you in terms of other launches?
+
+Michael Praeger
+
+Yes. So we're really excited about it because it brings a couple of things together that are kind of core to our playbook on how we organically launch new verticals. And then the first 1 is where we are naturally seeing adoption of our platform today. And so typically, when we have a 50-plus customers particular industry vertical that's new to us, start adopting our platform. Our product team and myself, take notice. Why is that? And as that number's grown, grows from like 50 to 100, we really start studying why our -- in this case, hospitality companies adopting our platform and what business case are we solving for them.
+
+In the case of hospitality, it's interesting. Hospitality and the kind of the customers that have been adopting our program, typically are managing between, say, 30 to 100 hotel assets. And the business problem is that each one of these assets is really -- they get structured as its own independent legal entity as its own independent chart of accounts, its general ledger system and typically, approval, expense process that's based on the hotel.
+
+And so if you're managing 100 hotel app, you're literally -- it's like managing 100 individual companies running a bill payment process. And so that complexity actually is one that we support really well on our platform. So we actually had the functionality already because it's very similar to how I'll say, large multifamily real estate operator may manage their multifamily assets and some of our other verticals have similar characteristics.
+
+So that business problem was 1 that we added a lot of value to. And then the second element is that we like the launch highly integrated to the kind of the core ERP systems in their vertical. And in the case of hospitality, it just worked out timing-wise that we're in the form of strategic partnership with the leading really ERP system for hotels and lying for kind of that middle market and upper middle segment with M3.
+
+And with M3, we have kind of the best case type of partnership where it's a white label partnership. They're putting their brand on it, but they're embedding into their ERP system. So every customer will have access to it. And if you're going to make payments in the M3 system, this is how payments get made.
+
+They get made through the AvidPay Network. So it has the characteristics of things that we really like in terms of we learned over time is kind of the best way to launch a new vertical, and they've all kind of come together with hospitality. So we're really excited about the growth of the vertical and specifically now leveraging from an exclusive perspective, the M3 customer base.
+
+Tien-Tsin Huang
+
+Yes. No, it feels -- sounds compelling, and the fit is definitely there. So we'll keep asking for updates as we go, but it does sound so compelling. So let's talk about data for a second. I think when we first went through the IPO process, I know you sort of thought about longer horizon opportunities and data. Because you sit in the middle, we talked about this earlier.
+
+You see so much of it across all these different verticals. generative AI has been a big topic here at the tech conference, not surprisingly. I know we'll see if it's more hype than not. But this monetization of your data, does that influence it, Mike, in terms of your thinking and the vision around data and how to capture it?
+
+Michael Praeger
+
+So we think of our overall business in terms of -- we talked about the AvidXchange Flywheel. And the fourth gear of our flywheel, we have 4 gears. And the fourth gear is how we use data to increase the value proposition to both our buyers and suppliers as well as make our internal operations more efficient by driving gross margin.
+
+And so what's interesting is about -- it seems like everybody in the investment community will [ pop ] like a month ago around generative AI and everyone's talking about it now. But we've been leaning into it for the last couple of years related in a couple of areas. One is on the front end of our invoice process with a product that we call IDC, intelligent data capture, where we've did a unique partnership with Microsoft and their forms recognizer, which combines their Microsoft's OCR platform with the machine learning, with their AI platform on how to read invoice documents.
+
+And so we've been working with Microsoft jointly on this offering for the last couple of years. So that's kind of one element of it in terms of making -- kind of leveraging AI to make a customer facing. Then we have all kinds of use cases related to how we're using it internally in the business really to drive better customer delivery as well as kind of reduced kind of cost.
+
+And another kind of area that we've been -- kind of the second piece is around how we've incorporated into kind of our RPA functions of delivering payments for particular use case suppliers where we have to actually log into their either billing or AR systems to help them with the reconciliation and apply payments correctly and now being able to do that through more of an RPA, AI kind of technology to replace people that were doing that when we started.
+
+And so those are all examples of how I think we have a lot of confidence around our gross margin expansion and certainly kind of our long-term targets of which I had to give a plug here that we have our Investor Day coming up next Thursday. So we'll certainly be providing some updates to our kind of both midterm and long-term targets as it relates to learnings that we've had since the IPO.
+
+Tien-Tsin Huang
+
+My flight is booked, so I'll be there. Just to round out on the product side and data a little bit, just I know that we'll talk about profitability, too, and you've done a great job of focusing on that. But just thinking about product releases from here with R&D, especially with all this talk around data and everything you just mentioned there, what can we expect out of that?
+
+Michael Praeger
+
+Yes. So the first 1 is, we have a really robust kind of, I call it, kind of product road map payload, we delivered this year. That's really kind of a combination of 3 things. The first is kind of finishing kind of the next-gen in kind of our kind of current platforms. We're about 70% weighed through that process, and we're going to finish by some of the payment-related aspects of our payment platform to support more multiple payment modalities.
+
+And so that's kind of 1 bucket. The second bucket is continue to advance all kind of the feature sets and enhancements that customers want from our existing products, including more integrations. And so yes, we're integrated to 225 different accounting systems that support the middle market today. But there's probably a couple hundred more that the team has on the whiteboard.
+
+And then the third thing is new innovation. So I think the 1 big candidate that's going to be released later this year is our Invoice Accelerator kind of 2.0 product that be able to scale for all of the support, all million of our suppliers today. And we're super excited about that product, and that uses really a data science approach to how we think about the underwriting related to advancing invoices for next-day payment.
+
+So really excited about that. And clearly, I think that's going to be our next $100 million business over time. And then I must say that we're going to be talking about at our Investor Analyst Day next Thursday, kind of what's next after Invoice Accelerator. And kind of the only breadcrumbs maybe I'll give you is we get a lot of interest from customers who say, Mike, today, you guys are a system of record that you feed our general ledger for all our invoice-based expenses.
+
+And maybe that's 80%, 90% of expenses we have in our business, but we maybe have 10% or 20% that fall to that maybe in T&E, other expense management-type solutions. And is there a way that we can kind of get those transactions part of our platform. So I think one of the things we're going to be talking about is how we keep chipping away and bringing all those transactions into our platform by continuing to add more functionality and offerings to customers, leveraging us being the system of record for all their expense-based data.
+
+Tien-Tsin Huang
+
+Interesting. Good teas.
+
+Michael Praeger
+
+Yes, a few breadcrumbs.
+
+Tien-Tsin Huang
+
+Yes. So I won't -- I'll -- 1 follow-up. We'll wait for June 1, get people to tune in. So any questions from the audience? Happy to -- I get some hands raise. If you wouldn't mind using the mic again since we are...
+
+Unknown Executive
+
+I wanted to ask around pricing power. I know you talked about in the past that you feel as you added value, you have more pricing power, but trying to be very balanced about not price gouging and driving adoption. One question I wanted to ask on the transaction side. I know that some providers charge for checks. So I was curious if that's something you've thought through. I don't know if it's in the middle market that maybe it doesn't work as well, but just wanted to ask about that.
+
+Michael Praeger
+
+Yes, good question, and that's kind of expanding kind of our pricing model to kind of maybe charge directly for checks. And I think one of the things we're very concerned about is anything that would erode our momentum of adoption of the market. We're still in a market where 70% of the middle market is still processing paper and invoice paper checks. And so we don't want to give anything get in the way of that conversion cycle.
+
+Having said that, I think that there is some new ways that we will be incorporating a new pricing strategies over time that maybe get at pricing for checks in a nondirect way by more of maybe an increase in software fees and things like that, that kind of accommodate the same objective that we have is probably going to be our approach, but that's certainly something that we're looking at.
+
+Joel Wilhite
+
+Maybe one just clarification on the question for those who maybe don't fully understand the model. So we don't charge the supplier for a check, but the buyer pays a fee per payment regardless of the mode, just to clarify that.
+
+Unknown Executive
+
+I got two questions. One is you mentioned that, like even with companies on your platform, there are still like 50%, 60% of people using checks. What's the hesitation there for them to switch to digital payments? Can you push that even further? That's question number one. Number two is, I noticed that you just launched the hospitality vertical, congratulations to that. And -- so when you decide to enter a new vertical, how do you make that decision? Like what's the ROIC on that? How many years you need to prepare for that? And are you looking for like grow it organically or inorganically? Like so what's your thought on that?
+
+Michael Praeger
+
+Okay. So I'll take the -- we'll kind of start with the first 1 related to still today, we have 50% roughly paper checks flowing through our platform and why can't we convert that to electronic faster. One of the things that I think we've learned is the power of the existing business process, even though it may be manual and paper-based. It's really hard to change these processes for lots of companies.
+
+And so there's, unfortunately, lots of CFOs and Controllers out there who think they've perfected their paper-based process. And so I think one of the things that we've seen is the catalyst for moving is for a handful of things. One is fraud. If there's a fraud event that happens, they quickly say, we have to do something about this. And for B2B payments, roughly today, over 90% of fraud happens with a paper check. So if you limit the paper checks, that really helps.
+
+So there's a catalyst event or I call it kind of generational shift, and hopefully, we don't have too many near retirement CFOs in the room, but I think what we're seeing is when the kind of the current kind of older generation of CFO or finance leader kind of retires, moves on to the next phase of their life, and they're replaced by the next generation kind of younger profile who grew up digitally native in how they manage their personal expenses.
+
+One of the first things they say is like, why am I getting a stack of checks every Tuesday and Thursday to sign? I don't do this in my personal life. Why are we doing it here and there are a catalyst for change versus a lot of existing finance leaders. I believe it's just part of the job description of signing lots of checks.
+
+And so I think that is a very real dynamic. And we see it playing out every day that when there's a change in kind of finance leadership, whether it be Controller, CFO, finance leader, that's a natural catalyst for the next generation and to say, "Hey, there's a better way of doing this business process."
+
+And so we're leaning into that. And I think what we can do on our end is continue to do 2 things. One is provide payment modalities and make it really easy for them to move to electronic payments and get the reinstated to do the reconciliation really efficiently. And then the second thing is education is really kind of keep educating around the value proposition. And although they may think they perfected their paper-based process, our research supported by kind of the third-party research is that is still cost them like $19 a transaction, their current paper-based process.
+
+And they can significantly bring that down and save in the neighborhood of $12 per transaction by moving to electronic payments. So more education around that I find with some of the newer generation moving into leadership roles.
+
+Unknown Analyst
+
+My question is around Invoice Accelerator. Just curious what you guys have learned through the 1.0 sort of phase that you had. If you could provide any more detail around the data science that goes into the underwriting process and then the level of demand that you guys have heard from your clients?
+
+Michael Praeger
+
+Yes, great question. So we've been in the market for the last couple of years with our 1.0 offering of Invoice Accelerator. For those that aren't familiar with it, it's our offering where it allows for suppliers to advance eligible invoices for next-day payment rather than waiting, say, the traditional net 30-type terms. And so we've seen significant demand, as you can imagine, from the supplier community around this offering.
+
+Specifically, we've been in the market for a couple of years, trying to perfect really two main things. One is around the data science that we use to underwrite these transactions because we use more of a data science approach to understand the history the buyer and the supplier. Because although we technically may be buying the receivable from the supplier, we don't care as much about their financial wherewithals, we do the buyers who's actually paying the bill.
+
+So understanding kind of that dynamic is really important for our data science. And then the second piece, which is -- we've actually -- was more challenging than we probably originally thought was our ability to intercept those payments as they're flowing through the network. So one of the inherent benefits is we don't technically have to chase receivables when these things are paid because all the money flows through our network.
+
+However, we have to get really good at intercepting those funds. And if it's a 1:1 ratio, it's pretty easy, but there's lots of different nuances around how customers pay their bills in terms of bundling with other payments along with, say, they may be adjusting the amount of the payment for some service reason.
+
+There's lots of reasons where it makes it difficult to intercept. So we've been really working in the last 2 years getting really good at understanding all those use cases so we can automate those as part of our 2.0 platform. And so we're excited. The 1 breadcrumb I'll give you, we're certainly going to be showing a demo of the product next week at our Investor Day. But we have seen that for the 1.0 product when a supplier comes to make an initial advance within a 90-day period, over 80% of suppliers come back for ongoing advances.
+
+So we really like that kind of attachment and we think it's going to bode well for our 2.0 offering.
+
+Tien-Tsin Huang
+
+Yes. Again, the data is a big advantage, right, in terms of being able to offer that properly. Thank you for the questions. Anyone else? Yes. Let's do last question up here. The pressure of the countdown clock, 45 seconds.
+
+Unknown Analyst
+
+So it's been 2 years since the Core Associates acquisition, I'd love to hear from you, learnings on construction and kind of your view on the construction space?
+
+Michael Praeger
+
+Yes, so -- construction, so we had a kind of a growing vertical within construction. And then we -- as Core Associates, we really kind of turbocharged our kind of leadership role within the construction segment, focus on the middle market. Core Associates specifically was -- had a product called TimberScan, which was the offering for the Timberline Accounting System for construction.
+
+And we're pretty bullish on it. And one of the things that we've done is now is we've incorporated in the cloud SaaS version of TimberScan as the offering called Titanium, and we are now in the market moving that entire customer base to the SaaS-based offering. And one of the carats that we have for them is when they do that, they get AvidPay Network integrated into Titanium ring, which they don't have access to with the on-prem version.
+
+So we think there's a couple of thousand customers that are in construction that we're going to be able to convert to the Titanium SaaS-based offering in the coming years that the team is pretty excited about. And the -- what we're seeing in terms of top-of-funnel activity is really strong across the construction vertical as well.
+
+Tien-Tsin Huang
+
+Great. We should probably wrap it up there. Thank you both for being here. We'll se you all next week.
+
+Michael Praeger
+
+Thank you.

AvidXchange Holdings, Inc. Presents at Barclays Emerging Payments and FinTech Forum 2022, May-16-2022.txt

@@ -0,0 +1,213 @@
+AvidXchange Holdings, Inc. Presents at Barclays Emerging Payments and FinTech Forum 2022, May-16-2022 11:20 AM
+5/16/22
+Ramsey El-Assal
+
+Welcome back, everybody. I am very pleased to welcome Michael Praeger, Co-Founder and CEO of AvidXchange; and Joel Wilhite, CFO of AvidXchange to the conference today. Gentlemen, thank you so much for being here, really appreciate it.
+
+Michael Praeger
+
+Thanks, Ramsey. Thanks for inviting us.
+
+Joel Wilhite
+
+Great to be here.
+
+Ramsey El-Assal
+
+Cool. This is not necessary anymore. But just in case if there's anybody out there who's not familiar with the business, just to get everybody on the same page, why don't you do a real brief overview of what you guys do.
+
+Michael Praeger
+
+Yes. Perfect. Thanks, everybody. So first of all, AvidXchange, we're headquartered in Charlotte, North Carolina. And we're purpose-built for really automating the accounts payable and payment process for middle-market companies. So those are those companies that typically have between $5 million and $1 billion of revenue, and there's about 435,000 of those companies in the U.S. market. So today, we're considered the industry leader in the middle market, and we have 8,000 of those customers using our software to automate their accounts payable and payment process and 825,000 suppliers that are part of the AvidPay Network.
+
+And so what purpose-built for the middle market really means is that we're integrated to all the different accounting systems. And so today, it's a 220-plus different accounting systems that serve the middle market, along with the various different vertical segments of the middle market, as well as having very specific business process for these various different verticals that really define kind of what that middle market dynamic is.
+
+And then the last thing is our go-to-market strategy is using our direct sales team to focus on our 8 different vertical markets and then along with leveraging our 180-plus different channel partners that typically include our ERP, accounting system partners, bank channel partners to really support the horizontal segment. So that gives you kind of a quick snapshot and really like being considered an industry leader and the largest software company located in Charlotte.
+
+Ramsey El-Assal
+
+Great. One of the things that I think is a differentiator for you guys is your vertical market solution. I think it actually deepens the moat and provides a lot of kind of interesting advantage when you do go to market. Talk to us about that strategy, how it evolved, talk about the verticals you're in today and maybe where you might be tomorrow?
+
+Michael Praeger
+
+Yes. That's great. So first of all, I think one of the things to realize is middle market companies don't wake up and say, I'm a middle market company. They wake up and say, I'm, for example, a real estate company that has multifamily real estate in Southwest Florida, and they want solutions that are very specific to their business as well as integrate to their various accounting systems, other supporting systems that are very focused on what type of business they are.
+
+And so one of the things that we realized in the business in the middle market is that there's various vertical markets that have unique business process that are unique. And you typically know they have a unique business process when there's dedicated accounting systems or ERP systems that are focused on that particular industry vertical. That's kind of a telltale sign.
+
+So what we want to do is we go very deep within these 8 vertical markets. And so today those vertical markets are real estate; the HOA or home association management market; construction; financial services, which is really Tier 2, Tier 3 banks and credit unions; and then we have media, which is a new vertical that we got into last year through FastPay acquisition; along with emerging verticals that we have in health care facilities; social services and education. And so those are the verticals that we're in today that we cover with our direct sales team, and then we cover the horizontals through the partner channels that I talked about, which are typically focused on NetSuite, Microsoft Dynamics and Sage Intacct parts of the market.
+
+Ramsey El-Assal
+
+When we think about the next few years in your business, the contribution from existing verticals versus sort of future verticals, I guess how much room is there to run within where you're operating now versus adding kind of new channels, new verticals rather?
+
+Michael Praeger
+
+Yes. I think you're hitting on sort of, Ramsey, on kind of what keeps me up at night right is, we've been at this for 20 years. And you look across the 8 verticals, and we're still in single-digit penetration across all 8. And so that is kind of a really exciting place to be in as well as it makes it difficult for, I'd say, kind of investment management in terms of we have this major runway right in the U.S. domestic market. And then we have pressure in terms of how we expand in international markets, things of that nature.
+
+But we believe we can 3 to 4x our revenues just in the verticals that we're in today with a continued kind of penetration. But obviously, we're going to continue to expand the verticals that we're in, both through organic and acquisition strategy, which has been our playbook in the past, is the focus on both and continue to kind of expand our product suite in terms of the offerings for both our buyers and supplier customers.
+
+Ramsey El-Assal
+
+So plenty of opportunity with what you're sitting on right now relative to having to go out and hunt in new channels, interesting.
+
+Michael Praeger
+
+Just on that topic, we added about 1,000 new buyer customers last year to our platform to automate their AP and payment process. And I think like 991 of those were greenfield that they were doing this for the first time. So 99% of our customers are automating for the first time, and so that makes it really exciting in terms of that market opportunity we have.
+
+Ramsey El-Assal
+
+And talk about the product strategy here in your business, what are your investment priorities here? And how does that help you further penetrate the opportunity that you've got in front of you?
+
+Michael Praeger
+
+Yes. So what you're bringing up, kind of leading into which I love, is what I call the AvidXchange business flywheel. And that's kind of the flywheel that really makes our business work. And there's 4 really core gears to the flywheel, and I'll maybe share a little bit about what we're doing in each of those gears to kind of drive from a product perspective how we're growing the business.
+
+So the first one is delivering a great accounts payable automation experience through our software to those buyer customers. And I think a good example there in terms of that product evolution is what we just announced in our last earnings call related to our next-generation purchasing and purchase order management, procurement tools that we now have announced to really extend our platform kind of pre-invoice for those middle market customers that need to manage more controls around their purchasing process.
+
+The second gear is what I call maximizing the volume that we have in our platform. And a good example of our kind of innovation here is moving to what we call built-inside integrations, kind of those next generation, taking those API integrations that we have today and really expanding them to be, what I call, built inside. So it creates a seamless user experience. So users may not even know when they're in, for example, NetSuite versus AvidXchange because the user experience seems the same.
+
+And then the third one is what are we doing to kind of continue to facilitate those conversion of those paper checks to electronic payments, the holy grail of kind of B2B payments, how do we increase that adoption curve. And that's where we're continually focused on what can we do to drive a higher-value proposition to those supplier customers. And a good example of that is what we just announced in terms of straight-through process. The most expensive transactions is one that requires human intervention, which customer account do I need to apply this invoice to or which invoices is this payment covering? And through a straight-through process now we can deliver the funds directly to the merchant account as well as provide an automatic way for that data to be auto-reconciled for the supplier.
+
+And then the last one is Gear 4, which is how we're using the data to either increase the value proposition for existing products or create new offerings altogether. And I think the big thing here is Invoice Accelerator, which is the next biggest business for AvidXchange. It's going to be our third kind of leg to our revenue model in terms of being able to allow suppliers to get paid when they want to get paid and really deliver our form of supplier financing to the supplier base. So those are some good examples in terms of innovation that we're doing across the 4 gears of our flywheel.
+
+Ramsey El-Assal
+
+I want to double click on Invoice Accelerator here in just a moment. But Joel, I wanted to ask you a question, what kind of contribution from the newly launched products do you have in the full year guidance? How much optionality should investors think that we have here with some of these products?
+
+Joel Wilhite
+
+Yes. You bet. From a revenue contribution, Ramsey, little to none, de minimis contribution. Now we will certainly begin to see sort of the top of funnel light up for us and from a selling perspective believe that there'll be contribution thereafter, so in '23. But from a revenue perspective, not reliant on these new products to get to our numbers for the year.
+
+Ramsey El-Assal
+
+I see. So really, we should think of it as more of a starting to really scale in '23 and beyond.
+
+Joel Wilhite
+
+Exactly.
+
+Ramsey El-Assal
+
+Fair enough. Mike, talk a little bit more about Invoice Accelerator. Describe to us a little bit more what it is. And it's kind of more on the AR side, right, rather than the AP side. So talk about that journey to kind of moving into a fuller solution for your customers.
+
+Michael Praeger
+
+Yes. So great question. And so one of the things that we recognized when we launched the AvidPay Network back in 2012 is that if we're going to be truly successful in building a two-sided network, we need to deliver a value proposition for that supplier customer in a very similar way that we deliver a value proposition of software solutions to our buyer customers. And so that solution set is what we call cash flow manager for the supplier.
+
+And today, cash flow manager does a handful of different things, including giving visibility to those suppliers to their outstanding invoices, to their outstanding payments. In addition, they can manage all their business rules in terms of what type of payment modalities they want to get, how they receive their remittance data. And then the last thing is what I consider the killer feature, which is Invoice Accelerator, that they can raise their hand at any time and choose to accelerate any payment or any invoice for next-day payment.
+
+And so as I said, we think that's going to be kind of the next really big leg to our revenue model. And we've been using the data of our platform because we're unique in the sense that both the buyer and the supplier are both on our network that we have perfect visibility into the history of all these outstanding invoices and how they've been paid in the past. And we can use all that history to underwrite which invoices are eligible to be advanced for next-day payment as well as all the funds flow through our platform. So we don't have to worry about the collection issues that typically you would have in this type of business model. And so it makes us, puts us in a really unique position of using that data to make really smart kind of decisions on which invoices are eligible to be accelerated.
+
+Yes, a little bit of just the stats that we've kind of made available, and that is just in the last quarter alone, the suppliers that came to Invoice Accelerator to do a single advance, over 80% of them came back within a 90-day period to do ongoing advances. So that's one of the things that really gets us excited about the future of this offering.
+
+Ramsey El-Assal
+
+Yes. And you guys would seem to have tremendous visibility into your customers' business, which it's great to see it translating into innovative products because I think that's the inherent advantage that you have, the cards you have to play. Joel, let me ask you a question. There's 2 KPIs that you report quarterly, transactions processed and volume. Talk about the drivers of these lines and sort of the trends that we should expect over the medium term.
+
+Joel Wilhite
+
+You bet. Yes. So just to sort of ground in the metrics themselves, Ramsey, great question. So total transactions processed across the platform, that's the sum of transactions. And then total payment volume is the sum of all of the money moved between buyers and suppliers.
+
+So starting with the first one. Total transactions across the platform, we feel like is a really important kind of health metric and kind of value indicator given the two-sided network. Mike talked about our buyers and suppliers. And so those transactions are the sum of all the invoices, the purchase orders and the payments transacted across the platform. And that's an important metric. It's one that we focus on, the retention and natural growth of that. It is, if you think about it, given that it is the sum of all transactions, it includes all of the buyer volume and all of the payment. When I say volume, the buyer count of transactions and the payment transactions themselves.
+
+One thing to keep in mind as you think about that total transaction count is that AvidXchange started out as a software company. And so for the first 10-plus years wasn't in the business of moving money between buyers and suppliers and was purely automating AP processes. And so the base of transactions is much larger on the buyer side given there's a population of invoice-only transactions. So from a mix perspective, you have a large base of buyer invoice and PO transactions and a smaller subset, although growing faster, of payment transactions. So that hopefully, that gives you a little bit of sense of what the metric is and the growth dynamics there.
+
+From a total payment volume perspective, again, that's the dollar value of the money being moved between buyers and suppliers. Keep in mind that at the end of an AP automation process, the entire payment file is submitted into AvidXchange to be executed against suppliers. And so the supplier really controls how they get paid, and the buyer is basically agnostic to that. But total payment volume, obviously, is an important indicator. And its growth, a little faster than total transaction count given that the payment opportunity somewhat more recently in place 2012, 2013-ish, and we have a number of strategies where we also through partnerships and other relationships have essentially pay only payment execution opportunities.
+
+And so in the first quarter, for example, we grew total payment volume in the 40% range, and total transactions overall grew kind of in the mid-teens. And so we also, maybe I'll just wrap up by saying a couple of important metrics anchored on those fundamental metrics are the yield per transaction that we're able to generate across the platform. That's all the payment revenue, all the software revenue, essentially our total revenue over that total transaction count, and then the total payment volume related to the payment revenue to give a sense of that overall yield across that total payment volume.
+
+Maybe my final point, Ramsey, and then I'll give it back to you, is that within that total payment volume, again, keeping in mind that, that's the sum of all the value, all the money we're moving between buyers and suppliers, the monetization opportunity is the subset of that total payment volume that is electronic payments. There is a meaningful chunk of checks there, but obviously an opportunity for us as checks come out of the system over time, which is our Gear 3 monetization opportunity that contributes to yield expansion for us. So maybe I'll pause there and hopefully, that helps.
+
+Ramsey El-Assal
+
+Yes. That helps a great deal. That's a great segue to the follow-on question, which is what are the gears and levers you have to further capture the payment flows from the overall, well, further capture what is actually flowing through your pipes as payments rather than the overall volume opportunity.
+
+Michael Praeger
+
+Yes. So I think on that, that kind of leads into exactly where we've been innovating on our platform. And that is, we think, the long-term kind of adoption rates are going to be really nuanced, different payment modalities combined with different data sets. And so one of the things that we're doing is leveraging kind of our relationship with Mastercard and our various processing partners to create unique interchange structures for different, kind of either unique supplier relationship or segments of suppliers and then combining a data delivery for both those data elements they need as well as how they need to receive that data so they can complete that auto-reconciliation process. And I think those are some of the strategies that really allow us to continue kind of accelerating kind of that adoption curve.
+
+I think sitting here today, we would all say there's going to be significantly less checks in the system for B2B payments 20 years from today, but we probably have a lot of debate on what the adoption curve looks like between now and 20 years from now. And I think those are the things that we're working hard to impact and certainly believe that all the learnings from the COVID pandemic and the work-from-home environment, moving data to the cloud are really good levers for us to kind of leverage as we move out of the pandemic and these middle market companies are getting their staffs back to the office and beginning to embark on these automation projects.
+
+Ramsey El-Assal
+
+That's super helpful. Mike, can you comment on how you view the competitive landscape? I'm sure there's other fintechs out there like yourselves that you're normally competing with. On the other hand, like there's a lot of in-house legacy solutions that might even be the bigger kind of competitor out there. So how do you view the competitive landscape?
+
+Michael Praeger
+
+Yes. So first of all, going back to remember that we're built for the middle market, and that's our sandbox. And one of the things we've seen is, there hasn't really been any material change in that competitive landscape for the last several years. And one of the things, our #1 competitor continues to be the paper-based status quo process. And so that's our #1 competitor. And when we look at kind of who other third-party companies may be, it really hasn't changed. It continues to be probably very vertically specific software solutions that are focused on a particular vertical market and who don't have the payment capabilities. They're just purely focused on software, automating the AP process. And what we can do is bring not only kind of the AP automation piece but also the payment side that's fully integrated to their various accounting systems.
+
+And I think we feel really good about kind of that moat we're building. And I think we're really focused on ourselves on what we do to kind of increase the value proposition so we can make a dent in terms of that adoption curve and continue to provide a higher value proposition for these suppliers who want to convert sooner than later.
+
+Ramsey El-Assal
+
+I've been meaning to ask you this question for quite some time. What about crypto in terms of or blockchain technology? I mean, you guys are on the sort of B2B side. I think people sort of feel like that might be a little bit of an easier industry for this to be kind of an operative technology. Does that enter your radar now at all? Are your customers asking about it or is it really just super early days? How would you characterize it?
+
+Michael Praeger
+
+That's a great question. I'm kind of chuckling a little bit because I'm actually out here in Los Angeles because my son graduated from Southern Cal over the weekend, and he ended up with an emphasis degree in blockchain. And so we spend a lot of time kind of talking about kind of the implications of it. But what I would say is that crypto from a currency perspective is not factored into what we're doing. I personally haven't had a single customer ask us about crypto in terms of our platform. So in terms of B2B type applications for middle market companies, we have not gotten any kind of questions or interest level from a customer perspective.
+
+As it relates to blockchain, to me, this is the one that's actually kind of more interesting and probably has more use cases related to security, data, ledgering type of applications. However, the analogy that I'll use is that we're a technology company and we use a lot of different database technology across our business, whether it be Microsoft or Salesforce or others, but we're not in the business of building a database. And I think blockchain is very similar that there'll be companies that develop very specific use cases on how they use blockchain to solve a particular business problem or a use case problem, and it may be in the security side or some other relevant aspect of our platform that we're going to want to adopt. And we'll adopt these solutions that others develop related to what different use cases there may be that we think increases our value proposition.
+
+So I think we're going to be leaning in to continue to evaluate those opportunities. But I would say that we're going to be a consumer of different blockchain use cases rather than developing our own kind of blockchain type of applications.
+
+Ramsey El-Assal
+
+That makes a ton of sense. This one is for Joel. Talk about the longer-term drivers of gross margin in the business and how we should think about that?
+
+Joel Wilhite
+
+You bet. So Ramsey, I think the way I would answer that is just going back to the call and the way we've sort of talked about our path to profitability. A meaningful part in that is our gross margin expansion. And so what we've said is that we've sort of framed up, as we exit '24, we see that EBITDA kind of breakeven crossing. Again, we're really investing in the business and optimizing for revenue growth and margin expansion. And so at that time, we see margins from kind of the low 60s today, which has expanded pretty reliably and consistently over the past several quarters to continue to do so, and getting to that kind of high 60s number as we exit '24, high 60s, 70s ZIP code.
+
+And the way we get there, and we've talked about the way we get there is similar to how we've gotten where we are today. Again, what I'm projecting is organically. And so we have seen some inorganic contribution, but we've also consistently expanded margins on an organic basis. And what I would say from here to that point, we think of the way we get there as roughly kind of 2/3 contribution from sort of the yield or rate dynamic, and I can talk about that and then about 1/3 from just continued discipline and underlying operating efficiencies in the business.
+
+And so from a yield perspective, we've seen that metric we talked about, total transactions on the platform. We look at our total revenue over those transactions and we've seen good, steady improvement. And we would expect that, that yield for the per transaction that we see steadily inching up over time. And that includes contribution from all of the gears of the flywheel, notably kind of Gear 3 with that e-payment conversion. And also as we see Invoice Accelerator make more and more of a contribution, that's monetizing volume that already exists on the platform, which contributes to kind of yield. And that's really sort of good drop-through from a gross margin perspective.
+
+But we're also at work and have seen some expansion from and continue to see more headway into both the buyer and supplier side, again, just operating unit cost efficiencies. We've talked about on the buyer side something that actually enhances the buyer experience, but also decreases our unit cost is this intelligent data capture, the opportunity to sort of create a smarter and smarter engine to index all the millions of invoices on the platform, decreasing kind of the human touch rate on ingesting and indexing and then making available that data in the buyer experience through AP automation that actually gives us good unit cost benefits.
+
+And then on the payment execution side, continuing to automate the actual execution of those payments. We talked about straight-through processing as an interesting additional characteristic or offer to the supplier that enhances and could induce adoption away from check to digital payment, but also internally decreases our unit cost to deliver payments. And so hopefully, that gives you a little bit of a color on kind of how we see that path to the higher 60s to 70% gross margin towards the end of '24.
+
+Ramsey El-Assal
+
+Yes. That's super granular and super helpful. Mike, this could be a jump ball for either of you. But what are you seeing on, it's such a macro-sensitive stock market right now.
+
+Michael Praeger
+
+Right.
+
+Ramsey El-Assal
+
+What are you seeing out there in the marketplace in terms of, are there any signals that you're picking up on when you look at your business in terms of maybe some potential macro headwind? And then I guess, secondly, how should we think about your business in the context of the economic cycle? Is it a resilient business? And how has it played out in the past?
+
+Michael Praeger
+
+Yes. So the first I'll say is, one of the things that we have benefit of is that we're a 20-year-old software company that has lived through very similar cycles in the past, whether it be originally the dot-com era, to 9/11, to 2007-2008, to some of the more recent dynamics. And there's a couple of learnings that we have is one is that the middle market segment customer is actually a really resilient set of customers. These are substantial companies. Typically, over 85% of them grow each year with us. And so these are much different dynamic than, say, small business customers who may have more propensity to be more fragile and to not make it in a particular downturn. So that's one dynamic. The second thing that we have is more diversity than we've ever had before across the 8 different vertical markets as well as kind of our horizontal customers in terms of just kind of diversity across the business.
+
+And then kind of some of the learnings that we've had from historically is, inflation has an interesting factor in our business because it typically increases the average ticket sizes for both invoices and payments. And what that does is that an increase in average payment size actually has a positive impact on our revenue generation model as we're typically monetizing payments as a percentage of that payment transaction.
+
+The other dynamic that we've seen play out historically is that we've been able to use actually the recessionary environment as actually a catalyst for adoption because typically, CFOs, controllers and other finance leaders, they don't want to hire more staff. They're very sensitive in terms of their headcount. So they're like, okay, what else can we do? And typically, they can use technology as a way to automation. And so we're usually seen as a catalyst so they can do more with less and not have to add more headcount.
+
+And so those are some of the dynamics that we've seen kind of play out historically across our business and kind of certainly, we haven't had a higher interest rate environment in some time. And so we do have a significant amount of float that runs through our platform. Now our strategy is actually to drive that float down because the majority of the float happens with paper checks. And obviously, we want to convert paper checks to electronic. So certainly, we'll see some marginal impact in terms of just being able to monetize more of the float than we have historically. But again, it's not a big business focus or driver for us.
+
+Ramsey El-Assal
+
+Great. We're unfortunately out of time, although I liked your last point about the business actually having been battle-tested, which I don't think a lot of the more recent sort of IPOs can say.
+
+Michael Praeger
+
+I think we have some scars to prove it, too.
+
+Ramsey El-Assal
+
+Fantastic. Well, listen, thanks so much, gentlemen, for your time today. Super insightful as usual, appreciate it, have a great day.
+
+Joel Wilhite
+
+Thanks, Ramsey. You too.
+
+Michael Praeger
+
+We appreciate you inviting us to be part of this conference.
+
+Ramsey El-Assal
+
+My pleasure.

AvidXchange Holdings, Inc. Presents at Barclays Emerging Payments and FinTech Forum, May-18-2023.txt

@@ -0,0 +1,181 @@
+AvidXchange Holdings, Inc. Presents at Barclays Emerging Payments and FinTech Forum, May-18-2023 08:00 AM
+5/18/23
+Ramsey El-Assal
+
+Good morning, everybody. I am super happy to kick off Day 2 of our Barclays Emerging Payments and Fintech Forum with Mike Praeger and Joel Wilhite, CEO and CFO of AvidXchange, respectively. Thank you so much for joining us, gentlemen. Appreciate it.
+
+Michael Praeger
+
+Yes. Thanks for having us.
+
+Ramsey El-Assal
+
+It's been a recurring theme at the conference, but -- albeit some of the panels have started is just give us your latest view on what you're seeing in the environment in terms of macro. Obviously, you have a differentiated view with the data that you see from your customers. What are you seeing out there? What's going on?
+
+Michael Praeger
+
+I'll let Joe, why don't you kick off from a...
+
+Joel Wilhite
+
+Yes. Just hit the sort of the general financial, we had a great quarter, 22% revenue growth. We did begin talking in our year-end call on March 1 and then sort of reiterated the theme of kind of moderation in spending across the middle market. And so we see that showing up, and overall total transaction growth was up 8% for us quarter-over-quarter year-over-year. And so we think we've got a really resilient customer base, 8,000 buyer customers across many verticals in the middle market, but do see some caution given the uncertainty in the macro. But pleased with a great first quarter.
+
+Michael Praeger
+
+Yes. One of the things that is interesting is what we're seeing in kind of past cycles as well is as we have some kind of headwinds on discretionary spend volumes, at the same time, it's actually a pretty good environment for adding new customers. And we're seeing, as we kind of referenced here, a really strong top of funnel activity. And that's been kind of a dynamic that played out in past cycles as well.
+
+Ramsey El-Assal
+
+So it's a good environment to add new customers because they are concerned about expenses, they're concerned about efficiency and then that's how...
+
+Michael Praeger
+
+How do they grow without adding resources. And it's really kind of a really compelling labor and kind of manual work efficiency quotient for automating this process. It's like a 3:1 ratio. So very quick payback. And CFOs very focused on the current environment, how do you generate more efficiency in the back office.
+
+Ramsey El-Assal
+
+One of the interesting things about Avid is that you guys could -- your go-to-market strategy is really focused on very specific verticals. You entered the hospitality vertical, you announced this last quarter. Talk a little bit about sort of, I guess, one, the benefits of going to market that way, very vertically specific rather than sort of very horizontally. And then also just talk about how we should think about the evolution of the verticals you're in over time. Will we see you enter new ones? How does that process work?
+
+Michael Praeger
+
+Yes. So I love this question when I get it at conferences like this because it really -- it goes to the heart of why we're purpose built for the middle market. And what people don't realize is middle market companies are highly aligned to different industry verticals. And we've defined the middle market overall as companies between $5 million and $1 billion. And in the U.S. alone, it's about 435,000 of these middle-market companies. And we believe that at a minimum, 50% of them highly aligned themselves to industry vertical that has a unique accounting process or business operations process that's particular to that vertical. And you know kind of which verticals they are because they have vertical-specific accounting systems and ERP systems that support those verticals that are different from like the NetSuites and Microsoft Dynamics of the world that are more horizontal.
+
+And so if you're going to be in the middle market, you have to have a strategy on how you're going to attack these different verticals that are supported by lots of different accounting systems. And that's why today, we're integrated over 225 different accounting systems across middle market and growing. And certainly, we just announced hospitality, which is our ninth vertical that we go very deep in. And again, part of that strategy is to align ourselves with the industry-leading accounting ERP systems for that vertical, which is exactly what we did with M3 as our newest both partner as well as integration.
+
+Ramsey El-Assal
+
+And in terms of how you determine -- in terms of the future road map, how should we think about you guys getting to new verticals? How do you get there? Where do you -- how do you decide where to go?
+
+Michael Praeger
+
+Yes. It's -- people think there is kind of a black box of strategy that happens in terms of identifying which verticals to go into. And the reality is it's pretty simple. It's where we actually naturally attract customers. So our kind of simple formula is once we get past kind of 50-plus customers in a particular industry vertical that we're naturally organically attracting, we start to take notice. And we say, okay, let's -- what is it about why we're attracting these customers from this vertical? What is it about our product that works so well for them? And then we start to determine, okay, does this vertical make sense to have a dedicated go-to-market strategy for that vertical?
+
+And the same thing -- the exact same thing happened with hospitality. We kind of got north of 50 hospitality customers, kind of approaching 100. And we said, we think it has a lot of the characteristics that we like. It's an industry sector in itself that actually has hospitality-specific accounting systems that support it. And it kind of fit our playbook for what we'd like to do in terms of go-to-market deeply with a partner and attack that segment. And we believe that there's 10,000-plus kind of middle market hotel lodging operators that fit our kind of sweet spot that we're excited about.
+
+Ramsey El-Assal
+
+So it's really interesting. So you sort of let the existing flows, the existing volumes kind of guide you in terms of, hey, there's an opportunity and it is exactly such a great...
+
+Michael Praeger
+
+It usually looks better that way than a bunch of people sitting at the conference deciding which verticals to go into. It's like, yes, where are customers actually coming and using our product.
+
+Ramsey El-Assal
+
+Now let's talk a little bit about product. As time has passed, you guys have rolled out quite a few interesting products. Talk about that process and how you -- maybe somewhat similar in terms of how you decide to build a new product, and maybe give us an update on some of the invoice product and some of the other new products you've launched recently?
+
+Michael Praeger
+
+Yes. So first of all, we describe ourselves as a software company that automates the accounts payable and payment operations for our customers. So our kind of lens that we look at, our products are what are we doing to maximize the value proposition for both our buyer customers and our supplier customers within that equation? And so on the buyer side, we've been focused over the last couple of years in really kind of how do we kind of extend the front-end process to how an invoice gets created. And that is in kind of 2 forms. One is there's a growing actually interest across middle market of using purchase order management solutions and kind of, I'll say, kind of a light procurement kind of front-end focus for middle market companies. And we announced that functionality last year, kind of our next-generation purchase order functionality.
+
+At the same time, we've always been focused on how do we get all these, disparate kind of invoice forms, many of them that show up when we take on new customers in terms of paper and actually digitize those and get them into our system efficiently. And we've had multiple iterations of this over the years. And the newest one is called the IDC, intelligent data capture, where it's -- we partner with Microsoft and use their latest generation OCR technology, combined with machine learning, combined with our AI platform, which obviously is getting a lot of buzz these days. And then we've been kind of tuning it on how to read invoice documents. And so we're really excited about that offering in terms of making that front-end process more efficient. We released it kind of late last year, and we're ramping that offering across all of our customers this year.
+
+So that's on the buyer side. And what I would say that offering for IDC is not really necessarily a revenue kind of generating kind of product offering, it's more of an efficiency and how we're growing our gross margin efficiency type of strategy. But then if we flip to the supplier side, this is where we've also been working on how do we expand the value proposition. And here, we've been working on kind of the cash flow management tools of a supplier. So one of the things that's unique about our business model is that we think of the supplier as a core customer. And so we say, okay, we have to build a value proposition of why that supplier wants to be part of the AvidPay network other than just coming to receive payment, right? Because in our model, the buyers don't determine the payment type, the suppliers do based on the business rules. So we believe that value proposition is to give the suppliers visibility to their outstanding invoices, outstanding payments.
+
+In addition to that, then they can manage their business rules on how they want to receive payments under different circumstances. Like I want a 15 -- if it's under $1,500, I want a virtual card payments; over $1,500, I want a different payment modality type of rules. And then what's kind of probably the thing that everyone misses, the most important part in B2B payments that actually drives the payment type that suppliers want is the data. Because if they don't have the data, getting over any form of electronic payment is really expensive for them to figure out how to reconcile it.
+
+I know Joel and his finance team, when a customer who's not on AvidPay sends us an ACH payment, we hate it. Because it's like, okay, they have 10 invoices outstanding. It looks like they're paying 3. Which 3 of the 10 they pay? We don't know, right? So then someone has to research it, they have to call the customer and then it becomes really expensive. And so if you're doing this at scale, you can imagine how the reconciliation is a really big deal. So that's the real big value proposition as we give the data back to our customers so they can kind of do their auto reconciliation really efficiently.
+
+And then the last aspect that customers, suppliers have asked to help with is help manage their cash flow. And so when you look at our now about 1 million suppliers that we have in our network, we estimate that about 10% of those are enterprise, about 30% are middle market. But 60% of small business that really need help with their cash flow on the supplier side. And that's where we have our invoice accelerator offering that we've been in the market with the last couple of years with our Version 1.0 offering. Super excited about, now extending that to all of our suppliers as part of our 2.0 offering being released later this year.
+
+Ramsey El-Assal
+
+Joel, how should we think about the revenue contribution from -- I won't even -- Invoice Accelerator 2.0 would be great. But just in terms of the overall algorithm, sort of new products versus existing products? What's the contribution that we should expect over time?
+
+Joel Wilhite
+
+Yes. So the way we think about that is really kind of in 3 layers. First of all, there's the degree to which we're retaining the transactions on the platform. So one of our key metrics is total transactions processed. And that's the sum of all invoices and all payments across all the buyer, customers and their AP process. And so the degree to which we're -- we see natural expansion there, it was 103.5 last year. We think about that in a normalized environment outside of this macro conditions, something like 104%, 105% just natural expansion across that buyer base as the first layer.
+
+Number two, just adding new buyers. And so we grew our buyers to 8,800 this past year from 8,000 the year before. And then third, yield expansion. And so we think about the 2 yield numbers, the most important of which is sort of that overall total transaction yield, which is simply transacting revenue over total transactions. And we see that steadily expanding. So those 3 working together kind of give us confidence outside of sort of the macro conditions that we're in today that, that's a meaningful growth opportunity for us going forward.
+
+Ramsey El-Assal
+
+And how do you think about cross-sell? It seems like now you've got quite a few products. You got the AP side, you got point of connectivity in the business. Tell us about the cross-sell opportunity and maybe how do you go about executing on it.
+
+Michael Praeger
+
+Yes. So when you look at our overall base, what's interesting is still today, less than half of our overall customers use the AvidPay Network. So we still have a big opportunity within our overall customer base to extend the AvidPay Network. And you may ask, like, okay, why is that the case? A little history lesson is we were a software-only company for 12 years before we launched the AvidPay Network in 2012 and is one aspect of it.
+
+And the second thing is that we've done a handful of tuck-in acquisitions across the different verticals. And pretty much all of our acquisitions have been software-only providers that have not yet had payment that now we're starting payment to. So we have a really nice installed base of software customers that we are naturally kind of introducing to. And each one of our verticals has a little bit different strategy.
+
+So I'll take construction is a good example, where one of the strategies that we have there to kind of drive payment adoption is our new kind of SaaS offering for replacing kind of the original timber scan on-premise offering that we acquired as part of the acquisition of Core Associates and providing them the kind of the upgrade path to move to the cloud as part of that invoice automation piece. And the AvidPay Network is part of that Timber or that titanium offering moving to the cloud. So when they move to the cloud, they get the AvidPay Network with it. And we're trying to say, you don't get access to the AvidPay Network if you're still using the TimberScan product. So you have to kind of give them -- we like offering carrots rather than stick for the most part to our customers to try to, again, work on the value proposition of why they want to use the AvidPay Network and work on that. But I think I kind of simply think of the algorithm is about 2/3 of our customer growth comes from net new and about 1/3 comes from the cross-sell opportunities within that base.
+
+Ramsey El-Assal
+
+And there's a big contribution from net new. How about the broader market opportunity? I mean, is it -- who are you competing with, I guess, is an interesting question. And then how penetrated is the overall opportunity? .
+
+Michael Praeger
+
+Yes. It's funny as -- internally, we actually wish that we would have more kind of named competitors we compete with because a lot of times, the sales process is actually easier when you're competing with another company. The reality is the majority of our sales opportunities we're competing with, a piece of paper right there. Still today, 95% of our net new customers are doing this for the first time. And so it's replacing their existing paper-based process with a new process.
+
+And when we do compete with another company, I really can't think of an example where we have a competitor that crosses multiple verticals. They're very vertically specific. And in some verticals, like real estate, for example, we have different competitors that are software-only that are particular to the asset type. So a multifamily AP automation company versus an office AP automation company as an example. So it gets very granular within the industry segments. And again, the reason why is because these companies kind of grow up integrating to a particular industry-specific accounting system for AP automation.
+
+So that's what I kind of see the vertical side. And then on the horizontal side, we will see some of the more of the horizontal competitors. One that I get asked about on some frequency is like [indiscernible]. And we really see them more on the international side within kind of a channel -- like a NetSuite channel internationally. So we really don't see them in the U.S. domestic market.
+
+Ramsey El-Assal
+
+Because you brought it up, talk about the international opportunity.
+
+Michael Praeger
+
+Yes. So what's interesting about is we launched our cross-border offering last year, and that's really to kind of satisfy those U.S. companies that are, say, part of the NetSuite, Microsoft Dynamics channel, that have suppliers at overseas they needed to execute kind of those cross-border type payments. We have not yet begun marketing AvidXchange in terms of a core customer outside the U.S. market. And that's certainly something that's on a road map to come. But the challenge that we have internally is that we're in 9 verticals today plus the middle -- the horizontal layer in the middle market, we're already the industry leader and we're a single-digit penetration in all 9 verticals. And so we have massive runway in all 9.
+
+In fact, take the real estate vertical which is one -- the first one we started in over 20 years ago, and we're still single-digit penetration within the real estate vertical, right? So that's what makes it hard because we -- from a capital allocation and marketing efficiency, it's so efficient to grow in the U.S. market. And as well as we go overseas, you kind of have to take a country-by-country approach with the payment side of it because every country has a little bit of payment -- difference in payment dynamic.
+
+Ramsey El-Assal
+
+One for Joe. I wanted to ask about the quarter.
+
+Joel Wilhite
+
+About this quarter or last quarter?
+
+Ramsey El-Assal
+
+Any quarter. I wanted to ask about the spreads between transaction growth, volume growth, revenues. I know there were some puts and takes there, maybe you could review those with us and just help us think how that will trend for the remainder of the year.
+
+Joel Wilhite
+
+You bet, you bet. No, we were happy with the quarter. So 22% overall revenue growth, kind of beat expectations, top and bottom. But if you want to unpack that 22%, I would just take us back to kind of 2 of those most important metrics. So total transaction growth was 8%. Again, that's the sum of all the transactions across the platform; and TPV growth, which is the dollars moved between buyers and suppliers was about 17% growth.
+
+And so if you think about those spreads, how does that work? So I would tie that total transactions, that's really the sum of those transactions applied to a rate of how we monetize the software to the buyer. And so the buyer pays a fee per transaction. And so our software revenue growth was around 12% in the quarter on that 8% growth. So we saw a little bit of transaction or software transaction yield expansion just as a result of price. And then on the TPV side, which drives the payments revenue. Payments revenue was 27% growth on 17% TPV growth, the difference being a meaningful component of basically float revenue. So about $7 million in the quarter compared to around $1 million in the year ago quarter. So we get the benefit, obviously, in this rising rate environment. And so 27% payments growth, 12% software growth, 22%.
+
+So good quarter. Hopefully, that kind of breaks down some of the composition. A couple of things just to be thinking if you're thinking about, okay, so how do I take that forward and think about the full year? There's a couple of dynamics that we've shared just to keep in mind that underlies our guidance. We do expect in the neighborhood of $30 million roughly float revenue for the year. And last year, we had a very back-ended roughly $12 million of float. And also a dynamic this year that's different than last year is we're not in a political cycle this year. So we had about $8.5 million of political revenue in our media segment last year, essentially nothing this year and then setting up for hopefully a big 2024 in the presidential election.
+
+Ramsey El-Assal
+
+Okay. And how should we think about -- or how do you think about pricing? Is there an opportunity there? Are there leverage to pull? Is it...
+
+Michael Praeger
+
+Yes. I think it's a really good question because certainly, as the market leader already, we have significant kind of pricing power, I think, within the verticals that we're in for our offerings. At the same time, we're in an overall market dynamic that roughly only 30% of companies in the middle market have really truly automated this business process. So you have a 70% roughly greenfield market. And so I think pricing has to be very careful with at this moment in time because you don't want to have pricing be a deterrent for helping the adoption cycle, right, of automation.
+
+So we kind of balance that, I think, very carefully and we historically have kind of taken approach of more of a CPI cost of living type adjustments in terms of pricing increases. And so certainly past few years, we haven't had as much price increase. No more recently, we had some even with inflation. And I think that's a delicate balancing act that we're very thoughtful about, especially as we want to really -- the benefit to us is when we see greater adoption. And so it's a very delicate equation.
+
+Ramsey El-Assal
+
+I get asked this question sometimes about you guys. Longer term, is there a path to move upmarket? Or I mean -- or down market, although that seems a little less likely. But it seems like what you're doing pretty sizable mid-market companies, you guys will do for larger players.
+
+Michael Praeger
+
+Yes, no, I think it's a good question. And so what I think is, again, based on kind of the adoption characteristics of the middle market, our go-to-market strategies are very focused in the middle market. Having said that, we typically attract customers that are maybe outside of the middle market, much more so from enterprise than small business. So there is -- every year, we add a number of our enterprise-type customers that are naturally just coming to us organically. And so I think that's the natural kind of evolution of market more so than down market, for sure. And just the launch of our new purchase order management tools last year, again, kind of are geared more towards the upper middle market, maybe enterprise-type customers.
+
+Ramsey El-Assal
+
+You also touched earlier on some aspects of your product that relies on artificial intelligence, et cetera. Obviously, that's a big buzzword right now, they get of a topic of conversation. How do you work with AI? And how could advances like generative help the business?
+
+Michael Praeger
+
+Just it's so interesting in terms of just how fast the discussion is moving, right? And so I just want -- I was at the actually -- [indiscernible] Microsoft CEO Summit last week in Seattle. And I think there was like 12 sessions over like 2 days. And I think of the 12, like 10 of them were on AI, right? And so the -- how we think of it is there's kind of customer-facing and then there's kind of internal, right? And I think the one customer-facing piece that we've been leaning into over the last couple of years was through our partnership with Microsoft in terms of our intelligent data capture offering, of which the Microsoft AI tool set is kind of part of that offering in terms of how we read into documents.
+
+And that's not new. We've been working on this for 2 years, right? like someone who is like really kind of focused on the AI aspect of it until past month, right, it seems like. And then when we think about internally, and this is where I actually am really kind of excited, and probably driving kind of our internal team crazy because every time I go to a conference, I come back with like 2 more pages of use cases on how we can use one BAI or the ChatGPT internally in the business. In fact, I came back with like 2 pages of notes for Joel and how I spent some time with Amy Hood of Microsoft on the finance team and learned about like 6 areas that she is using ChatGPT through how for finance function. I'm like, Joel, here are the 6 areas that we need to be into.
+
+So -- but the reality is it has organically happened over the last, I'd say, a year or so across our business, across with whether it be marketing content, our sales support, onboarding. And I think what we're doing now is just kind of more organizing it more around creating the centers of excellence for, by automation, ChatGPT and how we can really foster those use cases that one team is using. And hey, what other teams across Avid can benefit from that same type of methodology? And so it's one of the things that we're leaning into, and I'm personally excited in terms of kind of what it means in terms of long-term margin expansion for us.
+
+Ramsey El-Assal
+
+Fantastic. That's about Avid. I appreciate it, gentlemen. Thanks so much for your interesting conversation.
+
+Joel Wilhite
+
+Thanks a lot, Ram. Appreciate it.

AvidXchange Holdings, Inc. Presents at Citi’s 2022 Global FinTech Conference, Nov-14-2022.txt

@@ -0,0 +1,243 @@
+AvidXchange Holdings, Inc. Presents at Citi’s 2022 Global FinTech Conference, Nov-14-2022 03:45 PM
+11/14/22
+Unknown Analyst
+
+Good afternoon, everyone. Thank you for joining us. My name is Andrew Schmidt. I'm Citi's Fintech research team. I have a focus on fintech software, particularly B2B payments and software. So it's my pleasure today to have AvidXchange.
+
+With us, we have CEO and Co-Founder, Mike Praeger; and CFO, Joel Wilhite. Thank you both for joining us.
+
+Michael Praeger
+
+Yes. Thanks for having us, you bet.
+
+Unknown Analyst
+
+Hopefully, good day so far?
+
+Michael Praeger
+
+It's been jampacked.
+
+Unknown Analyst
+
+It's great, keep you busy. So as we like to start many of this session, maybe we can start with a brief level set in terms of just the platform in terms of how it's evolved over time, the pain point to solve over time. And then maybe we can work in there also how you differentiate versus other platforms?
+
+Michael Praeger
+
+Great. So first of all, AvidXchange, headquartered in Charlotte, North Carolina, and we're a software company that automates the accounts payable and payment process for middle-market companies. And so the operative word is middle market. That's kind of the segment that we're. That we're built for. And I'd say, purpose built for the middle market. And what that means is the middle market is unique from the standpoint of that roughly 50% of middle market companies highly align themselves to an industry vertical that has unique business or accounting system processes. And you kind of know which verticals these are because they have unique accounting systems that support each vertical that are different from the NetSuites, Microsoft Dynamics of the world. And so simply speaking, we eliminate the paper invoice and the paper check for our customers. And what I would say, the secret sauce of AvidXchange, what really makes us unique is the level of monetization that we're generating on the payment side by the conversion of paper check to electronic of over 40% of all the transactions going through our platform, we're able to convert electronic payments, which is far in excess of the industry averages. And I think kind of behind-the-scene secret [indiscernible] stress there is early on in our rollout of the AvidPay Network, we quickly realized if we're going to build a true 2-sided network, we had to build a value proposition for the supplier in the same ways we built the value proposition for the previous 12 years for the buyer customer. And that means that we have a real product road map, dedicated engineering, sales force, customer success and really configure the business to support 2 sets of customers, which is in the early days was expensive and a little bit hard to do. But building a 2-season network is not easy. And -- but today, now that we're roughly 10 years into the launch of AvidPay Network, where have the benefit of not only having over 8,000 buyer customers that use AvidXchange to automate their accounts payable and payment process, we now have over 825,000 supplier customers that are depending on the AvidPay Network not only receive their payments but also go and gain visibility to their outstanding invoice and payment transactions, manage their business rules as well as have access to our cash flow management tools of which the killer feature is Invoice Accelerator.
+
+Unknown Analyst
+
+Got it. Okay. Very, very helpful. And you mentioned something important, which you focus exclusive on the middle market. And I think we think about B2B payments, it's important to understand the differences between different markets. So maybe you can expand on that a little bit. I think you quite in terms swim lanes. So how was a mid-market swim lane different than others?
+
+Michael Praeger
+
+Yes. So it's a great question, and I think I answered this question about 32 times already today. Because I think that's one of the most misunderstood parts of AvidXchange is kind of this notion of being purpose built for the middle market and what makes that unique. So what I would say is there's 3 very clear segments to the overall market. There's enterprise, there's the middle market, and there's a small business market. And if you think about the key players in each market. And I'd say, somebody like a Coupa has really kind of emerged as kind of one of the leaders in the enterprise side. On those small business markets, certainly, Bill has done a phenomenal job of capturing that segment. And then AvidXchange is the middle market leader. And so why don't all 3 of us kind of move out of our swim lanes. And the reason being is there's very unique differences from a product feature perspective, a go-to-market perspective, and then kind of an accounting system, what I would say, integration perspective. And then lastly, the payment network that's supporting the market. And so just take the product feature for perspective. In enterprise, it's really focused more on what I'd say, deep procurement spend management to support the underlying invoice process that most enterprise customers need. On the small business market, it's almost an extension of the consumer experience. It's a very -- and that's one of the secrets of Bill successes. It's a really easy product to use, right? But it doesn't -- it's not able to support more of the complex dynamic approval structures multiple general ledgers, multiple accounting systems, aspects that more of the middle market companies have. In the go-to-market strategies, what I would say for Bill, again, great job in terms of the digital nature of generating new customers. But in the middle market, they don't work as CFO is guys like Joel Wilhite here, they're not going to automate their entire back office through an online sales experience. What they're going to do is they want to see how this product is going to work with their various different business rules, support for different accounting systems. And so that's typically more of a 60- to 90-day sales cycle that more of a middle-market CFO goes through and then it even gets longer on kind of the enterprise side. So those are some of the key differences, but then we get to the accounting systems. And this is where it's really unique. On the enterprise side, to capture the market, you really integrate to SAP, Oracle, JD Edwards, maybe a little workday, right? And that's the enterprise market. Small businesses, basically QuickBooks, and then you have the middle market, and we've been at it 20-plus years integrating over 220 different accounting systems. And that's where it really becomes difficult and that's for that moat, really kind of comes in place. And then the last thing is the overall kind of payment network, again, being curated and kind of purpose-built for the middle market. and all the suppliers that support the middle market is what we've been in. So those are some of the difference of nuance. And so it makes it really hard for any -- in that case, the 3 of us to go outside our different swim lanes.
+
+Unknown Analyst
+
+Right? No, that's very helpful. It makes a lot of sense. Maybe just toss one over to Joel.
+
+Michael Praeger
+
+He's feeling left out.
+
+Unknown Analyst
+
+Exactly. We'll bring him in conversation. Maybe talk about just the average profile of the buyer customer on the platform, activity levels, size, things like that. Probably a range, but can you talk us through that?
+
+Joel Wilhite
+
+Yes, yes. I mean, there's a wide range. Again, we talk about being in 8 verticals that we've mentioned specifically and others that are sort of around the edges and developing. We have 8,000 buyer customers across those verticals. And so it really is a wide range. I would say if you averaged it out 500 to 1,000 transactions a month. And again, our -- and those transactions include the invoices, purchase orders and payments kind of made across the platform. So a wide range. And we -- our -- you didn't ask, but I'll go on to say that our sort of our monetization engine is we charge buyers for the transaction. So on a usage base usage basis, they enter into a SaaS software contract, but that's about 1/3 -- 30% to about 1/3 of our revenue and about 2/3, the 70% is really generated on the payment flows as we move money between buyers and suppliers.
+
+Unknown Analyst
+
+Right. Makes sense. And I think just -- as we think about the platform, when you think about the pure to pay process, I think you did make an acquisition, I think, in 2021 of a purchase order module, which moved you up a little bit, I think, in terms of the purchase. But in terms of the purchasing functionality. But where would you say you have the most expertise instead of across kind of the P2P spectrum? And how are clients like consuming this? Are they consuming modules? Are they consuming like more of a platform.
+
+Michael Praeger
+
+Yes. So I would say it's definitely kind of platform based. In terms of the new customer adds, we're seeing roughly 80% of our new customers adopt the entire platform from automating their invoice process all the way through payment. And so what I would say is it goes back to kind of our kind of core expertise of what we're the best at is the ability to monetize payments for the middle market and then providing really flexible accounts payable process that's highly integrated to lots of accounting systems, right? And so all those integrations make it really easy for new customers get up and running really quickly. And so that's been really kind of a secret.
+
+Unknown Analyst
+
+Got it. That's helpful. And one of the things that have plagued the middle market has been sort of over time has been necessary customization. How do you approach the customization versus configuration in terms of platform?
+
+Michael Praeger
+
+Well, first of all, we don't know what customization is. So that word has been permanently erase from our vocabulary. Yes, you can't scale a business that has our type of volume, our level of customers and deal with customizations. So we need to be highly configured and have lots of configurability to support the different middle market customers that we have, but it's all done through configuration, which is highly scalable.
+
+Unknown Analyst
+
+Absolutely. Understood. Very clear. And then if we think about the beyond picture to pay in order to have a successful network, you mentioned you need to add value on the OTC side, the AR side. So maybe you could talk a little bit about the value that's added on the AR side as well when you -- when customers join the network?
+
+Michael Praeger
+
+Yes. So I mean, when we kind of got into the payments business, as I said, we quickly realized that we had to build a value proposition for the supplier, right? In the same way we built the value proposition for the buyer. And that led to interviewing lots of suppliers in terms of how we think we could be helpful. And kind of the #1 thing they said was help us accelerate our cash flow. And so we've been kind of laser-focused around kind of tools to provide both visibility as well as the ability to them to advance their cash flow. So certainly, just by moving from paper check to electronic probably accelerates our cash flow of 7-plus states. Then you take an account invoice accelerator and that can take and add an additional 30 to 60 days of acceleration. And so those are the type of tools that we've been working on to provide that what we think is the value proposition for the supplier, which is on the AR side of the equation, right?
+
+Unknown Analyst
+
+Okay. That's helpful. Maybe I'll throw another one at Joel. Everyone's favorite question on macro. So I'll give him the macro question. I'm sure you guys love. Another question you've answered 32 times, 33. But obviously, there's a lot of benefits to an AP platform for businesses in terms of working capital, in terms of labor optimization and things like that. But typically, during cycles, sometimes businesses just stop and don't invest and payment volumes are affected and things like that. Maybe just talk us through just what you've seen in terms of both on the demand side in terms of new customer adoption than payment volumes as well.
+
+Joel Wilhite
+
+Yes. I mean, obviously, that's been a popular question as we entered '22, and we get it at every opportunity. And we stare at our volumes on a daily basis, right? What are our buyers doing across the platform, the transaction volumes and trends and total payment volumes we said on our call last week that we've not seen a discernible impact any sort of pullback or headwinds across our verticals and our current activity. We're up so we're cautiously optimistic and sort of carefully staring at it. But we also get the question of if you were to see an impact what would that look like, what shape would that take? And we think that you'd begin to see kind of average payment size per transaction maybe come off a little bit just as buyers think about spending more judiciously or whatever, potentially impacting the counts of transactions, but more likely the spend per payment. We haven't seen it yet, knock on wood, but cautiously optimistic.
+
+Unknown Analyst
+
+And then in terms of new -- like due vintages in terms of cohorts, how have those performed kind of more recently relative to historical cohorts?
+
+Joel Wilhite
+
+Well -- and I know, Michael want to comment on this, but what we talked about in the second quarter and then we add a little bit more color last week is that we have seen good return to top of funnel activities from a demand gen perspective and sales opportunities. After a fairly challenging kind of choppy period of time during COVID with both some headwinds and some tailwinds. And so I'm recently encouraged by top of funnel activity with a couple vertical that we both construction and financial services where we've seen some challenges. But all in all, certainly post COVID, we see great demand and good activity on the top funnel.
+
+Unknown Analyst
+
+Helpful. Anything to add?
+
+Michael Praeger
+
+Yes. No, I would say, both in terms of the in-person conferences. And a lot of these -- the user conferences across the 220 accounting system integration partners we have. A lot of those got canceled for a couple of years, right? Now they're back to the pent-up energy that is happening at these conferences has really been somewhat surprising, attendance is way up. And I think in a lot of ways, a lot of these finance leaders and CFOs feel like they need to get -- kind of get caught up. And so lots of really good energy across these in-person conferences, which has certainly had an impact on our top of funnel activity, as Joel has indicated.
+
+Unknown Analyst
+
+That's great to hear. Then I think part of your secret sauce when you think about your supplier network is supplier enablement. So maybe you can talk about how that's evolved over time and what you might be doing differently versus others and how you drive efficiency in terms of that outside of the equation?
+
+Michael Praeger
+
+Yes. So going back to -- it starts with the value proposition and actually building a value proposition and an offering that suppliers are interested in is one. The second thing is, along with that is how we're configured as an organization. And that is almost as big as our buyer sales force is our supplier sales force. So we have a big sales force that is engaging with our suppliers and walking through the value proposition, identifying the right payment offering for them to enroll in. And that engine and getting really good at kind of the sequencing of all the activities related to what I would say, kind of a high transaction sales model is something that we've really perfected and the volume of new suppliers have routing to the network, now that we're 10 years into it, is really still outstanding and really exceeding my expectations.
+
+Unknown Analyst
+
+And one of the things I think that often mid-market companies that are consuming AP mods look for us match rate, right? Like how quickly can you -- or what's the initial match rate, how quickly can you ramp up? Can you talk about how the initial matter is over time evolved over time?
+
+Michael Praeger
+
+Yes. I mean -- so I mean, obviously, today, we're monetizing about 40% of all the transactions going through Five years ago, that number was in the 20% range. So that continues to grow. And -- but what's interesting is that's around that's across all our customers from both mature customers to those that we just added to the platform. When you look at some of our mature kind of customers in our mature vertical segments, we have examples that number is approaching 70%. So it's really interesting in terms of kind of that monetization cycle. And that's one of the things going back to kind of the sales advantage and competitive advantage we have within the middle market is that we can just demonstrate an overall significantly higher monetization than really anybody else can.
+
+Unknown Analyst
+
+That's helpful. And as we think about sort of catalysts for adding more suppliers to network, one of the -- I think one of the things in my mind seems to be maybe the broader rollout and a voice Accelerator. So maybe talk about how that could sort of make the supplier side grow a bit faster and where you're at in terms of that rollout?
+
+Michael Praeger
+
+Yes. So great question. It's one of my kind of one of our new products that I'm really passionate about and thinking it's going to be probably the third big leg of our overall revenue model long term. And that is Invoice Accelerator, which is really our form of supplier financing. And what this does is it gives the supplier the opportunity to accelerate on an invoice-by-invoice basis, any invoice that they want to get paid immediately. And so today, we've been in the market for the last several years with what we call Invoice Accelerator 1.0, which is our first release of the offering. And Nigel Morris, who is here today over lunch, I worked closely with in terms of designing this product, and what he said, Mike, we have a phenomenal opportunity here because the 2 parts of kind of the model that we struggled the most of at Capital One as well as kind of in the industry, is one is, how do you underwrite the underlying invoice because there's not a lot of great financial data available for a lot of these suppliers, right? And then the second thing is it's really expensive to collect the money when you're chasing all these suppliers. But within a network, you have the data history between the buyer and supplier and all the money flows through the network. So you basically -- the 2 biggest, most challenging parts of it, historically, we've kind of taken off the table. And so that's exactly what we've done. So it's really a highly data science-driven underwriting process. Really -- although, we're technically buying the receivable from the supplier, we really care about the buyer being able to pay. And so having the visibility into our platform, to see these transactions in the history of them is really important. And then obviously, having the money flow through the platform. So we're right in the middle of what I call kind of our Invoice Accelerator 2.0 build, which is the first version of it, we only made available at about 10% of our suppliers as we are learning about all the kind of the nuances related to both kind of the determining eligibility of invoices as well as getting make sure that we do all the variations of how to capture payments as they're going through the platform. And with 2.0, we have now will be able to open it up to our suppliers to be able to take advantage of advancing obviously, invoices for next day payment. And as the economic market kind of worsens, we think this product is positioned really well.
+
+Unknown Analyst
+
+Very nice. And I assume you've taken the time to work out the data science [indiscernible] in reducing loss rates and things like that I feel comfortable with all the risk side as well.
+
+Michael Praeger
+
+Yes. We've been working on it for 3 years. So we feel pretty good about where we are and about what now the conversion 2.0 was going to represent in terms of our entire...
+
+Unknown Analyst
+
+Got it. As we think about networks, we had a B2B payment session earlier today. And it's interesting to talk about kind of -- there's been -- there's other B2B payment networks out there. And it's interesting to talk about kind of how these networks might evolve in the future. One avenue is just status quo in terms of everyone stays in the lane and kind of grows, and there's just opportunity near from that, another opportunity for consolidation and other opportunity for interoperability, which might be able to benefit everyone in terms of volumes. But what's your view in terms of like B2B payments networks and how that market structure may evolve over time?
+
+Michael Praeger
+
+So I think unfortunately, the interoperability of multiple networks working together is really challenging for lots of different reasons, right? And so I think that's one that the 2 big networks, Mastercard and Visa been kind of working on for a while, and we're a Mastercard partner. And we're -- we have an exclusive relationship with Mastercard and they select us in 2017 to be their exclusive partner for the middle market. And so we've been collaborating deeply with Mastercard over the years related to how we can help them kind of in some of this collaboration as part of their track's program. And so one, it's -- we have a lot of battle scars to product figure out kind of how to do it because it is not a [indiscernible]. And so what I think is what's -- how could easier is as the market evolves, I think you're going to get down to dominant independent players in the -- across different segments, and it's going to be a smaller number of companies. And then it becomes actually easier to collaborate. Today, still, I think there's too many players in the ecosystem that are doing too many different things. Some are licensed as money transmitters. Others are not licensed. So how do you process a payment for somebody that's not licensed, but then there's some new the transaction, all those kinds of things, right? So I think over time, it gets easier when you get bigger players have more scale. And then you have kind of fewer players kind of collaborating together in, more volume is right, is what I think is going to naturally happen.
+
+Unknown Analyst
+
+Makes a lot of sense. I appreciate that. Maybe one for Joel. In terms of wallet share, we talked about this earlier, maybe in terms of 40% kind of payment penetration. But is there any other way to think about sort of just wallet-share your existing customers and what the white space is there?
+
+Joel Wilhite
+
+Yes. I mean, a couple of things that we would point out. Again, we talked about being in 8 verticals and the business has been around for 20 years. But what a lot of people don't understand is we're still only single-digit penetrated in all those verticals, maybe slightly higher in financial services. So there's a lot of green -- a lot of sort of white space opportunity there. We've talked about sort of the competitive environment, a little bit of how we're sort of isolated to our swim lanes and not that we don't have competition from an AP automation standpoint, but the biggest competition is just the decision to change, right? The decision to move away from a paper process and the status quo. So we built a great company and a large company in our space, but it's still early days.
+
+Unknown Analyst
+
+Got it. And then I think switching gears to maybe go-to-market distribution, maybe talk about the channels, which are overall and then which ones are more productive than others today?
+
+Michael Praeger
+
+So we go to market, we call it a hybrid go-to-market strategy in which we use our direct sales force to be very deep within the vertical markets. So we have 8 different verticals that we focus on, that we have our dedicated sales force focused on. And then on the same side, we have a large partner ecosystem that we use to support the horizontal part of the market and deeply partnering with folks like NetSuite, Microsoft Dynamics, [indiscernible], Acumatica as examples on the horizontal side. And so we find that -- so today, we have roughly maybe 10% of our revenue is coming from our channels. We think at scale, that number grows to be maybe 30%, but still will always be a dominant and direct sales organization is what we believe. Related to kind of the verticals and which ones are kind of productive, across our verticals, what I would say that we have kind of probably kind of 5 that are more mature. And obviously, the more mature ones, that sales cycle and that core market strategy is a little bit kind of easier and more efficient, then I'd say there are 3 of our newer verticals that are more co-emerging, right? And so certainly, within kind of real estate, the home association or counter associated management market, construction, financial services and media are ones that are more mature. And then we have our emerging, which are health care facilities, nonprofit social services along with education. And so that's kind of how I think about kind of the go-to-market strategy, and we're constantly looking at where we're naturally attracting customers in, and that's how our organic new verticals have involved is saying, "Well, listen, looks like we added 100 long-term health care facilities in the last year or so. Should we create a separate vertical around that particular segment to go very deep within it. And so we're constantly looking at where we're naturally attracting customers to determine whether we should create a dedicated focus around it.
+
+Unknown Analyst
+
+And when you think about separate verticals, what's the distinction? Is it more about terminology and marketing? Is it about integrations, combination?
+
+Michael Praeger
+
+Yes. So I think when we think about verticals, it's 2 things. One is that there is a unique business process that's unique to that vertical. So when you look at kind of the 8 verticals they're in, there are some nuance related to the business process or the accounting system process. And then the second thing is that there's vertical-specific accounting systems that support that vertical. They're different than the NetSuites of the world as an example. So those are the 2 things that we look at, where then we think we can solve a unique problem through automation of software and great, really valuable value proposition back to that customer.
+
+Unknown Analyst
+
+I see. And Joel, just maybe just a question on the recent environment. We talked about kind of funnel normalizing a little bit, too, but maybe talk about the sort of the what the pipeline looks like, how win rates have trended? Anything of that nature would be helpful?
+
+Joel Wilhite
+
+Yes. I mean what I would say is that the pipeline has shaped up nicely through this year, where it was a little choppy. That was sort of the comments before on top of funnel and consistency. Close rates, strong, we haven't seen that shift. And again, we don't -- we know there's some sort of macro ahead of us. We don't really know how the middle market might respond to it, but so far, really strong.
+
+Unknown Analyst
+
+And how does the customer make a decision? Like, is it typically an RFP? Are you seeing more greenfield in terms of just Excel spreadsheets. There are fewer -- I mean there's fewer RFPs involved. We'll see them from time to time like...
+
+Michael Praeger
+
+Doesn't like RFPs.
+
+Joel Wilhite
+
+No one does. You'll get a curious Director of Finance Controller, CFO. Just want to see -- set up an initial meeting, see a demo. And like Mike said, it's not so much a digital experience. They'll really take time in that purchase process. But really, again, it's less about stacking up multiple players and thinking about a formal RFP process, more about just once the decision to change happens and they get connected with AvidXchange.
+
+Unknown Analyst
+
+It's free.
+
+Joel Wilhite
+
+It's downhill from there.
+
+Unknown Analyst
+
+Got it. And maybe -- sticking to, Joel, if you want to discuss this where you can switch to Mike. Just on the technology architecture, maybe talk about how your tech architecture has changed over time. And whether there are milestones left for greater efficiency?
+
+Michael Praeger
+
+Let me to start, yes, so we're talking about this a little bit kind of earlier today. And what's kind of interesting is, in the early days, being up -- we started the company in 2000 in a pure multi-tenant SaaS platform. And in the early days, that was the #1 sales challenge we had is CFO said, "Mike, love what you're doing, but unless it runs on-premise behind my firewall in my data center, I'm never going to trust my financial data in the cloud," okay? And then you had folks in addition to us, like the NetSuites, the sales forces, the world and others, solely can educate themselves now backwards, if we wouldn't today with an on-premise, they say, "Mike, nonstarter. It has to be in the cloud, multi-digit, right? And so that dynamic could happen really kind of quickly. But -- so yes, we're a pure SaaS, multi-tenant platform. And when we got started, you didn't have the public clouds that you have with Azure and with AWS as at today. So we had to form our own AvidXchange, private cloud. And so one of the things that we've done over time is we've worked to kind of continue to upgrade and migrate our software most recently moving to what we refer to as our next-generation micro services kind of framework across our platforms. And then the last thing is we actually -- today -- in today's world, we don't need to be in the hosting data center business. And so Microsoft is a new partner, and we've now moved all our applications, the [indiscernible], all the Microsoft Azure and we're focused solely on the customer experience.
+
+Unknown Analyst
+
+Got you. And with a few minutes left, maybe one near-term question then longer term, near-term, one, Joel, just as we think about FY '23, we talked about you having pretty...
+
+Joel Wilhite
+
+Are you asking about guidance?
+
+Unknown Analyst
+
+Wow, it would have sunk it. I don't -- right?
+
+Joel Wilhite
+
+We have done a lot of question...
+
+Unknown Analyst
+
+Yes, exactly. We'll call it visibility, okay, for the purpose of the conversation. Yes. But a few puts and takes, keep in mind for forward trends, lapping of media advertising and macro volatility. Obviously, it seems like underlying growth trends are pretty intact. But as we head into FY '23, how do you think about your visibility in terms of top line?
+
+Joel Wilhite
+
+Yes, that's -- without giving guidance, it's a great question we can sort of talk about it. The good news about, we have a highly recurring revenue model, right? We see the volumes and transactions across the platform, and we're able to do a good job of making that prediction. Super high retention rates. So again, it facilitates good sort of long-term insurance visibility. We did -- we've begun to break down subsegment of our media vertical, right? We acquired that media vertical via the Bass Pay acquisition last year. And we've been very specific about that because it is cyclical, and it does ride along presidential and so this year being an election year and next year or not, we would expect, obviously, headwinds mixture. We've talked in our recent call it we get interest revenue [indiscernible] customers a year ago didn't generate much in terms of a [indiscernible] more reasonable impact that has ramped. So that [indiscernible] next year. And then again, the uncertainty about what lies ahead [indiscernible] volumes and we're looking at that carefully and that factors into our caution as we manage expectations. But having not seen any activity so far, we're cautiously optimistic about '23.
+
+Unknown Analyst
+
+Got it. And then, Mike, the last word, long-term sort of ambitions for the platform and how you sort of view the platform longer term? And then any closing remarks you'd like to add?
+
+Michael Praeger
+
+Yes. So we think kind of long term that we have 4 really legs to our underlying business model and revenue generation. Being automation software for invoice and payments be number one. The second one being the payment network, be #2. So those are kind of the 2 that we have today. The third one is one that we just started talking about, which is our former supplier financing, which is Invoice Accelerator. We believe that's going to be a really big business for us long term. And then the fourth one that we're just scratching the surface on is data. We have massive amounts of invoice payment-related data that we're just kind of beginning to develop the different use cases around how we can make that data more valuable to both the buyers and suppliers. And so I think long term, we're going to have those 4 legs or spectrum and certainly have a lot more building to do in terms of launching our Invoice Accelerator 2.0 product next year and then continue to work on the data side of it. So we're extremely bullish and I believe this is just a long-term kind of a high-growth business that's very consistent.
+
+Unknown Analyst
+
+Very good. Good way to end. Thank you very much. Thank you, Mike. Thank you, Joel.
+
+Michael Praeger
+
+Thanks a lot.
+
+Unknown Analyst
+
+Thank you, everyone, for joining. Really appreciate it.

AvidXchange Holdings, Inc. Presents at Credit Suisse 26th Annual Technology Conference, Nov-29-2022.txt

@@ -0,0 +1,189 @@
+AvidXchange Holdings, Inc. Presents at Credit Suisse 26th Annual Technology Conference, Nov-29-2022 03:45 PM
+11/29/22
+Timothy Chiodo
+
+Okay. Great. Thank you, everyone, for joining us here this afternoon at our 26th Annual Credit Suisse Technology Conference. My name is Tim Chiodo, I'm a lead Payments, Processors and FinTech Analyst here at Credit Suisse. And we are very lucky to have with us today the CEO of AvidXchange, Mike Praeger. This is Mike's second time in our conference. We were just reminiscing about last year and coming back in person. So Mike, it's a pleasure to have you here again.
+
+Michael Praeger
+
+So yes. So first of all, thanks, Tim, and this is actually fun to be here because this a year ago was our first ever investor conference. And we're talking about it last night at the dinner, I remember showing up here last year and they're like, okay, Mike, there's a dinner, there's going to be like 15 investors at dinner. And I'm like, I've never done one before. I'm like, I had no idea what to expect and end up being a great experience. So excited to be back here this year.
+
+Timothy Chiodo
+
+All right. Awesome. Well, I think at this point -- to your point, it's your second conference, you guys have been a public company for some time now. I do think the vast majority of investors are familiar with your overall offering. But let's still hit it briefly, and then we'll get into some of the more specifics, but let's do the basic overview and some of the key verticals and your offering?
+
+Michael Praeger
+
+Yes. So first of all, AvidXchange, we're a software company that automates the accounts payable and payment process for middle market companies. So the operative kind of defining word is middle market, we're purpose-built for the middle market. And so simply speaking, we eliminate the paper invoice and the paper check for our customers. Now our go-to-market strategy for the middle market is, again, unique to take advantage of the middle market opportunity. And that is middle market companies, we estimate about 50% of them highly align themselves to an industry vertical that has either unique business or accounting system process. And so today, we have 8 different vertical markets that we go very deep in, in terms of our go-to-market strategy. And then we kind of also cover the horizontal lens mainly through kind of a partner strategy, either with accounting system partners or banking partners. And so the 8 verticals that we go very deep in today in terms of our direct sales force, our kind of real estate operations.
+
+The second one is financial services, really Tier 2, Tier 3 banks and credit unions. The HOA, homeowner association and condo association management market, construction, media. And then we have a few emerging markets that we really started in the last 24 months being kind of health care facilities, education and nonprofit/social services. So this is where we go very deep within those markets. They all have some uniqueness in terms of either a business process or accounting process for those verticals, and they're typically supported by unique accounting systems that are different from the NetSuites of the world. And then on the horizontal side, we leverage partners, either accounting system partners, where we're deeply partnered with ERP and become -- our different ERP partners really been an extension of their ERP system or in the case of banks being a bank channel, and that's -- today, we have about 35 banks that we partner with either from a referral, reseller or white label experience and some of the white label partners we have are Bank of America, KeyBank, Fifth Third as some examples.
+
+Timothy Chiodo
+
+All right. Excellent. I think that was a great intro. I want to hit on some of the specifics here in terms of the revenue model. First, we'll touch on something a little bit more near term, and then we'll get into the longer-term algorithm. So let's take floating come aside for a second. We'll come back to that later, but let's just take that out of the picture. And mathematically, if we took that out of the picture in Q3, your payments revenue yield was still up pretty nicely even ex the float. What are the drivers of this yield increase?
+
+Michael Praeger
+
+Yes. So first of all, I would say the people at AvidXchange that kind of think about float income are probably Joel Wilhite, our CFO and our treasury people. No one else in the business is focused on the float because our whole business is designed actually not the half float by having as many of these suppliers adopt electronic payments as possible because really the float happens with the paper checks components of our business. And so the revenue drivers when we kind of think about continue to increase kind of that yield, we describe our business really as a flywheel, and there's 4 gears to our flywheel. And the first is how do we continue to add more buyer customers and provide more kind of value to them that they're going to pay us more for our software every year. And so we're continuing working on the value proposition.
+
+Some recent examples of that. A couple of quarters ago, we talked about our next-generation purchase order procurement tools we added to the platform. Again, now we're generating an additional kind of $0.40, $0.50 per transaction for customers that are using those components. And then most recently, in fact, there's a press release today about our cross-border offering. Again, another example of how we're kind of extending our functionality now for customers who may have international-related suppliers that historically weren't able to support very well. So those are some examples on what I'd say the buyer software side.
+
+And then probably the big opportunity that keeps me awake at night is this whole conversion process of paper check suppliers to electronic. And so Tim, when I'm here in 10 years back, what is it the 36th Annual Credit Suisse Conference, there's probably going to be very few B2B paper checks in the system. So the question is, what does that adoption curve look like over the next 5 to 10 years. And so that's something that we lean into significantly. And our view of this world is that the reason why we have industry-leading adoption today, and that's only going to continue, is because we think of the supplier as a core customer, just like the buyer. And it means that we build a value proposition for the supplier on why they want to be part of our payment network. And that value proposition really has wrestled into kind of 3 core elements today.
+
+One is kind of giving them the data that they need to how they do reconciliation process. The second one is controls on how they manage the different types of payments they want to accept under different scenarios. And then the third is around cash flow management. And so here, we give them different tools to gain visibility into the status of their invoice, the status of their payments. But we also have kind of a new upstart offering that we're really excited about, which is called Invoice Accelerator that gives them that ultimate advantage of being able to accelerate any eligible invoice for next-day payment. And we clearly believe that's going to be the third major leg of our revenue model and excited about how big that business can be. But all these components really go to drive that yield.
+
+And just to give you a simple example of the leverage that we have is we generate on every transaction software revenue from the buyer. But on the supplier side, in our payment network, if it's a paper check transaction, we're generating 0 revenue and a relatively high expense of a paper check being approximately about $0.85. When we flip that supplier to be an electronic acceptance supplier, the revenue goes from 0 to $6 to $8 per transaction and the expense goes from $0.85 to pennies. And so that's a really powerful dynamic to drive that yield metric that you referenced.
+
+Timothy Chiodo
+
+Totally. It's a really important driver for the gross margin expansion over time as well and we've referred to it in the past as that double-whammy. So you're not just getting the revenue, but at the same time, you're removing the cost, which is a pretty unique set up.
+
+Michael Praeger
+
+Yes.
+
+Timothy Chiodo
+
+All right. That was really helpful, Mike. Let's move on to next one around your -- I mean, this is really important. I mean simply stated, AvidXchange has said you're going to grow 20% plus organic top line pretty much for as far as the I can see.
+
+Michael Praeger
+
+That's correct.
+
+Timothy Chiodo
+
+And that's really well received by investors. Oftentimes, investors want to break down the components of that we'll think about, okay, the same-store sales growth of your underlying payables customers or we'll think about essentially what you just talked about eating into those checks and more electronification of the payments, whether it's card or ACH. But the other part is adding new customers. Maybe a different way to cut this question is on the 20% growth longer term, what component of that or what portion of that comes from adding new customers? Said differently, what would you grow if you didn't add any new customers?
+
+Michael Praeger
+
+Yes. So good question. So when we think of kind of that growth algorithm or breaking down kind of that mantra around kind of that we feel really confident about that 20% organic growth number, roughly 1/4 of it, 25% comes from same-store sales. Last year, we use a metric that we talk about, which is kind of net transactions kind of retained on the network. And what that means is that we look at kind of transactions between a buyer and supplier from one period to another. And that number was 107% last year. We think on a normalized basis, it's probably in the kind of 105% range. We got some benefit last year from COVID. So that's roughly about 25% of kind of that growth. So about the 75% remaining number is really driven by this dynamic of the buyer-supplier relationship.
+
+And what's kind of interesting, I remind everybody is the key to this business is to continue to add buyer customers because although we generate less revenue per transaction on the software, you don't have the payment unless you are managing the invoice, right? And the buyers bring their suppliers with them to the network. So although, we generate more revenue per transaction on the payment side, you don't get those transactions unless you're automating the accounts payable process with our software. So they really work hand in hand together and it's really hard to think about one without the other from that perspective. But what we really like about this business is our ability to keep adding value and continue to monetize that single transaction multiple ways. So we're monetizing it through software with the buyer, that same transaction, then we're monetizing it through a different value proposition with the supplier, and we're only increasing those type of monetization efforts that we keep rolling out.
+
+Timothy Chiodo
+
+All right. Great. Thank you, Mike. Well said. Let's go to another one that comes up a lot with investors, which is inflationary impacts. So I think what investors would really appreciate is a recap of, all right, let's take the payments revenue. And then within that, some is maybe there's a cents per transaction element to some interchange components, but there's a portion of that, that is ad valorem that, in theory, benefits from inflation. How big is that as a percentage of overall revenue?
+
+Michael Praeger
+
+Yes. I mean it's really hard to kind of bifurcate it. We do think we're getting some benefit. But I'll give you an example. Where we see -- where we think we see it show up is in average payment sizes and so we've seen, over the course of the year, our average payment size is kind of slowly tick up. But at the same time, we've had significant kind of mix shift of transactions across the 8 different verticals that we're in. And each vertical has its own characteristic of average payment sizes. So for example, media has typically higher payment sizes than some of our other industries like real estate or the HOA industry. And we had a pretty robust year with all the political kind of advertising that's been going on. So it's hard to tell how much is kind of mix shift versus kind of inflationary. But what I would say is of maybe kind of the maybe 5% or so increase we've had in average payment sizes a couple of points of that is kind of probably inflationary impact is what I would expect.
+
+Timothy Chiodo
+
+Okay. Perfect. All right. We said we would circle back to this, and I don't want to spend a whole lot of time on it, and I don't think we should, but I do think it's worth just because investors are asking about it for not just for AvidXchange, for other companies as well related to this float income topic, right? So maybe just recap the mechanics in terms of where it hits, meaning the payments revenue and just the mechanics on what you're earning on that -- those balances.
+
+Michael Praeger
+
+Yes. So good question. So what's interesting about it is we launched the AvidPay Network in 2012. Well, 2012, up until really this past year, we haven't spent a lot of calories focused on monetizing the float because just where interest rates have been, right? So there hasn't been really a big opportunity to do that. Where it impacts our business is today, we have about $1 billion of float related to transactions running through our network. And really, it's driven by the paper check transactions. Electronic transactions typically get settled within 24 to 48 hours. But paper checks take 7 to 10 days for settlement. And so today, what I would say how we think about it is you take the federal funds rate less roughly 100 basis points and that's what we generate from it.
+
+What I would say also is because now float revenue actually means something, we're very quickly getting better at managing it than we ever have been. And taking a page out of maybe some of the payroll companies like the ADPs of the world who are probably best-in-class of how to manage float income and kind of quickly kind of learning that process. So I expect that we'll continue to get better at it and be able to kind of add some basis points over time as we just kind of keep, kind of increasing our capabilities around treasury management.
+
+Timothy Chiodo
+
+All right. Perfect. Let's move on to gross margins, which is kind of related to this float income topic because it has benefited your gross margins a little bit. So your gross margins this year have been great, right? They've been strong. And this is despite an underlying -- it's kind of hard to see it there, but there is a little bit of a headwind from migration to the cloud, right? And despite that, you're still expanding nicely. Maybe just talk about, if you can, frame how large that headwind is and talk about the other drivers, float income, clearly one of them, but there's others.
+
+Michael Praeger
+
+Yes. So what you're referring to is, again, we started out 20 years ago as a pure multi-tenant SaaS platform. And fortunately, 20 years ago, public cloud companies like AWS and Azure didn't exist. And so we're forced to build our own AvidXchange private cloud at the time. And so in today and [ down ] forward to today's world, clearly, we don't have to be in the cloud management business anymore. And so we've made the transition over the last year to, in our case, to Microsoft's Azure public cloud in terms of all our direct production applications as well as our DR activities. And so certainly, that cost is probably kind of certainly some basis points. At the same time, when we think of kind of that gross margin expansion, what we've kind of voiced is we have pretty good visibility to that 75% plus number over time. And so that's about kind of 10 percentage points above where it is today.
+
+When we think of how we get there, we think about 1/3 of how we get there is continued automation on both our invoice and payment execution process internally and making that process more efficient. And about 2/3 of it comes from both revenue scale and this dynamic of conversion from paper check to electronic is about 2/3 of kind of how we get there. And we've just kind of really kind of taken the kind of the rate of progress that we've already been achieving and kind of extending that out and that's how we get to the pretty clear visibility of operating at 75% plus as we continue to scale.
+
+Timothy Chiodo
+
+Well said, Mike. Okay, I think that really helps for the investors. Why don't we move to below gross profit, and let's look at some of your operating expenses. So the 3 buckets, sales and marketing, R&D and G&A.
+
+Michael Praeger
+
+Yes.
+
+Timothy Chiodo
+
+So I think what investors are really trying to model out is what portion of that is fixed, what portion of that is variable? And then the follow-up to that is, let's just say the macro economy were to take a further downturn, what are some of the areas where you might be able to pull back on some more discretionary spend?
+
+Michael Praeger
+
+Yes. So first of all, within those 3 buckets, I would say we're going to start seeing some of the leverage in our business as those buckets are growing kind of slower than our revenue growth. The first one is clearly going to be G&A. We made some big investments over the last year just to support being a public company, which we don't have to make any more, fortunately. We have those kind of behind us. And so I think that's going to be the first category that you're going to see us that number kind of remain fairly kind of level as we continue to scale. And then what I would say, the second one would be kind of the R&D line item.
+
+And again, we feel kind of really good about kind of the road map that we have and what the innovation that we're delivering to the market. Being the leader in the middle market, we do have a deep responsibility that we're the ones that are going to have to keep kind of pushing the adoption of the industry, and that's a responsibility that we take really seriously. And so we're going to be, I'd say, really what I'd say, judicious around those investments that we're making. They have a really high bar in terms of impact to customer, a higher bar than they ever have been. And I think that's going to be the second category that you see growing slower than our sales growth.
+
+And then on the sales side, I think over time, you're going to see kind of that growth slowdown. Today, I think we're being really careful to kind of make sure that we're taking advantage of the greenfield market that we have. For example, of our last 1,000 customers, we've added on the buyer side, 99% of them have been greenfield that they're doing this for the first time. And so we're really careful to kind of match our sales capabilities with the overall adoption of the market, not get ahead of it, but you really kind of match it. And so I think for the time being, we're going to probably see sales kind of probably grow at a level similar to our overall growth rate to take advantage of that opportunity.
+
+Timothy Chiodo
+
+Okay. Thank you for walking through all 3 of those. So now we've hit on the top line and the 20% longer-term growth, we hit on the gross margins getting to 75% to your point, about 10 points or a little more than that, higher than where they are today.
+
+Michael Praeger
+
+Do you want to talk about profitability?
+
+Timothy Chiodo
+
+Maybe that's where we're heading. So let's hit that. So let's say that near term in terms of your time line to break even, which you've discussed with the market, but then also your longer-term target for EBITDA margins?
+
+Michael Praeger
+
+Yes. I mean, I think we kind of voiced as part of our IPO that we saw this business clearly is a 20% plus kind of EBIT business. I think we'll kind of further refine that and get some updates on that as we both have our kind of Q1 Analyst Call as well as our Investor Day in June. But I think what we feel kind of good about is that kind of an accelerated path to profitability that we've been on. I think the words that we use that it's around the corner, so people can probably extrapolate what that means, and we'll provide a further update in February, March on that. But I think feel really good about kind of that long term. And when we talk about long term, we're talking about within our 5-year plan of achieving both 75% plus gross margins as well as north of 20% EBIT margins. And especially with some of the new innovations like Invoice Accelerator and other offerings like that, I feel really good about that plan.
+
+Timothy Chiodo
+
+Okay. Great. That's -- in the interest of time, I think we should move to that. That's a good segue. So Invoice Accelerator. So originally, the 1.0 and now moving to the 2.0, so just maybe talk about that evolution.
+
+Michael Praeger
+
+Yes. So first of all, I mean, I want to give kind of credit to you. I have a phenomenal Board member that was part of our 2015 investor group, Nigel Morris, is one of the co-founders of Capital One. And Nigel really partnered with me and he said, Mike, we have this incredible opportunity that's built into the network that we're building in which we have both the supplier and the buyer on the network. And the biggest challenge that we had at Capital One in lending to this group is for these small business suppliers, there's very little financial data around how to underwrite them.
+
+And then collecting the money from them is really expensive and it's hard and you have high losses. What we have built in here is we actually have all the data to look at historically how these buyer-supplier relations have worked. And although we care about the suppliers, financial wherewithal, we don't really have to underwrite them. We really have to make sure that we're underwriting the buyer because that's who's getting -- who's paying the invoice.
+
+So as long as we feel really good about the buyers' financial wherewithal and they're both on our network and we get -- and we can make sure that we intercept the funds as they're getting paid, so we don't have to chase anybody for the collections, this can be a really powerful high-margin business model and that's exactly what we built. So we've been in the market the last 2 years with what we call Invoice Accelerator 1.0, which we've purposely only made it available to maybe less than 10% of our overall supplier pool to make sure that we have the data science right in terms of how we're underwriting invoices to be eligible as well as making sure that we're intercepting the money in all the right ways.
+
+And we feel really good about all the learnings we've had there. And so we're in the middle of our 2.0 build to make it a scalable platform for our 1 million-plus suppliers when we launch next year and believe that it's going to be a great offering for roughly 60% of our overall suppliers that are considered small business that really want to accelerate their cash flow. So I think it's going to clearly be the third leg of our revenue bottle and grow very quickly to be a really big business for us.
+
+Timothy Chiodo
+
+All right. I'm glad we hit Invoice Accelerator. I want to make sure we have -- we have plenty more questions here. We won't have time to get to them all, but I want to make sure the audience has an opportunity to ask a question to Michael Praeger. If you'd like to just raise your hand, we'll bring you a microphone. Here you go. Thank you.
+
+Unknown Analyst
+
+So maybe particularly with a question about the Invoice Accelerator. How do you handle like partial payments if somebody only is going to pay part of the bill?
+
+Michael Praeger
+
+That is a really insightful question because people ask me for the last couple of years, Mike, why aren't you going faster with Invoice Accelerator. And the answer was, there's lots of nuance at how things get paid. And a supplier may have like, say, either to a buy or maybe 50 invoices outstanding. They're making a payment, say, on 20 of them, and maybe 2 of them are invoices that we accelerated, right? So how do you identify those and make sure we're capturing the right amount of funds, letting the rest pass through. And that's why it's taken 2 years with our 1.0 offering to make sure that we got all those scenarios and that capability right.
+
+And so you articulated really well is those are the type of things that we feel that we had to get really good at understanding before we can really operate this at scale across all our suppliers. And so once you start peeling back the onion on all the scenarios, believe me, it gets a lot much more complicated than it seems on the surface. And -- but those are the things that we've been working through over the last 24 months in our 1.0 offering to make sure that we have right.
+
+Timothy Chiodo
+
+All right. Great. Thank you for the question. Does anyone else want to hop in? Okay. We'll go back -- we'll try and squeeze one more in here, if that's good with you Mike.
+
+Michael Praeger
+
+You still have questions left?
+
+Timothy Chiodo
+
+Yes, we got quite a few, all right. Let's see if we can squeeze one in on penetration of existing verticals. So you mentioned earlier, you've got 8 verticals. Some of them you've been in for years. Some of them are a little bit new and that might correspond with the penetration rates. So maybe just talk about that opportunity.
+
+Michael Praeger
+
+Yes. So this is kind of the really kind of interesting one because at some level, I think there's a lot of interest by the public company investor community to say, AvidXchange, what are you doing to continue to expand your kind of new verticals, which is a good question to ask. At the same time, we're sitting here today single-digits on all 8 of our existing verticals, even the one -- the first vertical that we started in, which is real estate 20 years ago, we're still single-digit penetration. And so we have no shortage of customers to continue to go after within the 8 verticals that we're in. But at the same time, we are being smart about how we're growing it. And one of the natural organic ways that we're adding new verticals is by just paying attention to where we're naturally attracting customers.
+
+So within the last 18 months or so, we launched what we call kind of health care facilities as a dedicated vertical. And one of the things that we've learned -- that we saw it naturally happening is we had lots of long-term care center companies, diagnostic companies coming to us naturally to adopt our solutions. And we said, okay, why don't we create a dedicated vertical around this? And that's how these verticals happen in an organic way is where we're naturally attracting customers. So I think we'll continue to expand those over time, but we have this massive opportunity within the 8 verticals that we already are in.
+
+Timothy Chiodo
+
+Excellent. Okay. I want to give one last shot to the audience, if not try and squeeze one more in Okay. Briefly, just we only have about a minute or so here, but maybe you could just touch on capital allocation briefly. And if you don't mind, maybe make a twofer here, if you could work in a little bit. You alluded to it earlier with the Investor Day, but what should we be thinking about for that event in June of 2023.
+
+Michael Praeger
+
+Yes. So capital allocation, so one of the things I think we've -- one of the benefits of how we timed our IPO is, fortunately for us, we ended up with a really nice size balance sheet. And maybe the unfortunate piece is that just with the current private valuation kind of expectations, we really haven't been able to execute on some of the inorganic opportunities. But we think going forward, though, that will kind of reverse itself and we'll see more kind of inorganic things to work on, especially probably during the second half of next year. So that's kind of a, kind of, once lens of kind of that capital allocation. The other one is continue to, what I would say, make sure that we have kind of the right investments in innovation. And we kind of think that kind of current innovation level is kind of the right balance for us today and certainly be able to kind of continue to pay attention to the overall market adoption related to our investments and go-to-market strategies.
+
+Getting to your question about Investor Day in June, super excited about that because I think we'll provide some visibility into some of the more future realistic things about maybe what's after Invoice Accelerator. Some of the more deeper questions about how do we increase our penetration rates across the different verticals that we're in? What are some of the new verticals that are on the drawing boards that we expect to organically grow into. All those types of things are certainly things that we're going to be excited to talk about in June.
+
+Timothy Chiodo
+
+All right. Well, we're excited to be there, and we want to thank you again, second time here, and we appreciate you making the trip in for Michael Praeger and for the full team and AvidXchange for making the trip here to Arizona for our 26th Annual Tech Conference. Pleasure hosting you.
+
+Michael Praeger
+
+Thanks, Tim.

AvidXchange Holdings, Inc. Presents at Deutsche Bank’s 2022 Technology Conference, Aug-31-2022.txt

@@ -0,0 +1,289 @@
+AvidXchange Holdings, Inc. Presents at Deutsche Bank’s 2022 Technology Conference, Aug-31-2022 06:00 PM
+8/31/22
+Bryan Keane
+
+Okay. I think we'll get started. I'm Bryan Keane. I cover Payments and IT services at Deutsche Bank, and we're happy to have the management team from AvidXchange. We have both Mike and Joel, CEO and CFO. I guess Mike is CEO and Founder, probably, we've got to fix the agenda here to make sure we get founder on...
+
+Michael Praeger
+
+Exactly.
+
+Bryan Keane
+
+It's great to finally be back in person and I was thinking one of the only meetings I went to last year was the kickoff for your IPO process. I think it was August, right?
+
+Michael Praeger
+
+In Charlotte?
+
+Bryan Keane
+
+Yes, in Charlotte. So it's great that you kind of broke the fold and you wanted to hold meetings in person, and you're here today. So we appreciate that.
+
+Michael Praeger
+
+Yes, absolutely. So great to be here -- back here and glad we're not like outside, under tents, nice, air-conditioned room.
+
+Bryan Keane
+
+Yes, exactly. So people are getting more and more familiar with the B2B model. It feels like every day, I see a new press release, somebody saying, hey, we're doing B2B. The growth rates are great. We're -- everybody wants to be in it. You guys have obviously been doing this for a little while. Maybe you can just help us understand the thesis of the story, the background and how you got into the B2B business?
+
+Michael Praeger
+
+Yes. So first of all, we've been at this for a while. We actually got started in 2000. So we're 22 years into our story, and we're a software company that focuses on automating the accounts payable and payment process for middle-market companies. And that middle market theme is kind of key to us and we're -- what we call purpose-built for the middle market. And what that means is that, we're purpose-built related to the feature set of our offering, which is very specific to the needs of middle market customers, along with all the integrations that support the middle market. So today, we're integrated at 220 different accounting systems and growing.
+
+And then I would say also, the kind of feature set incorporates very kind of complex and dynamic business rules for both the buyer and the supplier, in terms of how they need to manage the accounts payable process for the supplier, the receipt of their payments, as well as their [indiscernible] data.
+
+The other kind of component that's unique to AvidXchange is our go-to-market strategy, which is what we call kind of a hybrid model, which we use our direct sales force to go very deep within 8 different verticals of the middle market. and then use our partner channels to really focus on the horizontal lens, which is really the NetSuite, Microsoft Dynamics, NetSuite -- I mean Sage Intacct, as well as Acumatica part of the market. And we are supported there by our bank channel partners, our accounting system partners, as well as just other industry resellers.
+
+And that kind of all equates to our focus on how we help our middle market customers limit their paper and voice and their paper checks. And the last thing I'll say, what it kind of really makes us unique and special, is our ability to monetize payments. And we launched the AvidPay network in 2012, and we quickly came to the thesis, that if we're going to be successful in building a true 2-sided network, we have to think of the supplier as a core customer, just like the buyer. And that means that we have to organize the sales force dedicated to the supplier, customer success, product [ award ], and actually have to build products and value proposition for the supplier, in the same way we've been doing it for the previous kind of 12 years for the buyer. And dial forward now to 2022, and we're starting to see the success in terms of that monetization and today, we're monetizing about 40% of all the transactions that go through our network.
+
+So we're kind of excited on the journey that we've had, but actually more excited about what's in front of us.
+
+Bryan Keane
+
+Joel, let me bring you in on the conversation about the macro, since that's no surprise is the...
+
+Joel Wilhite
+
+We never get that question nowadays.
+
+Bryan Keane
+
+Nobody is getting that question these days, right? So Joel, just curious on your thoughts on the macro situation? A, are you seeing any signs of macro weakness yet? And B, what might be some of the things you're looking for, that could be the first signs of macro weakness?
+
+Joel Wilhite
+
+Yes. A couple of things on that. We mentioned in our call, obviously, we expected that might be a question. And so we've been -- we look closely at the fundamental metrics in our business on a daily basis, right? We see invoices coming into the platform. We see payments coming to the platform. So we're watching carefully through the end of the second quarter.
+
+We sort of talked about the fact that we did not see indications of headwinds that might be associated with whatever is ahead of us. Certainly, that -- we're kind of eyes wide open and watching out for those indications. But through the end of the second quarter, hadn't seen it. We've also been asked the question, in the event there were a pullback, if there were recessionary pressures that did impact the quite resilient middle market sort of that we're focused on, how would that show up? And I think we would see it in the form of just kind of -- we'd see it first in the invoice ingestion side, right?
+
+So it's an invoice before it becomes a payment. But ultimately, from a business standpoint in the event that happened, we would expect kind of volumes, those invoice and payment volumes and TPV to be impacted. But we kind of weathered the storm during COVID pretty well and snapback pretty meaningfully. We also go back to sort of before my time, when Mike was running a software-only business and saw some cycles and really solved at our customer base across our verticals, was pretty resilient. But keeping an eye on it and staying focused on it.
+
+Michael Praeger
+
+One of the things that just to add on what Joel said that, we're really curious about is, what happens in maybe a more challenging economic environment on the supplier side and actually suppliers moving to adopt electronic payments faster, right? The U.S. Postal Service isn't getting any faster. And today, on the paper check side, the average supplier is probably waiting 10, 12 days to have a payment clear, versus receiving an electronic payment, which we think there'd certainly be an interest in accelerating that dicier economic environment.
+
+Bryan Keane
+
+Yes, because as you guys said, I think last time in the major recession or in the financial recession, you guys were pretty much software, weren't monetizing the payment side. Is there any more resiliency now that you got a big payments component to it that offsets that? But even -- I think if I remember correctly, and as you talked about, there was a little bit of a push towards more automation anyways, but also just thinking about the electronification of payment, that also could be a positive catalyst and not so much a negative?
+
+Michael Praeger
+
+Yes. I think we agree with that assessment. But we haven't lived through a downturn on the payment side yet. And so, we're kind of curious about some of those customer dynamics. But certainly, we saw on the buyer side historically, that there was a focus on accelerating automation. There's a very definitive value ROI related to automating their AP process and an average middle market company saves about $13 a transaction for -- through the automation. And so that's a lot more pretty compelling than adding more accounts payable staff for a lot of companies.
+
+Bryan Keane
+
+Joel, when you set the guidance for the second half of this year, did you have to put any conservatism, in case the macro weakens?
+
+Joel Wilhite
+
+What I would say is that, you don't have a presumed future correction in the back half. And so what we -- our projections in our July guidance is, the experience that we've seen through the second quarter. So that's kind of an important kind of clarification to the assumptions we're making there for the second half.
+
+Michael Praeger
+
+And remember, we have some insight related to, as Joel indicated before, a payment happens, it's an invoice and it's a purchase order. So we have some insights to what's coming in terms of future payment volumes, by just seeing the purchase order and invoice activity. And fortunately, we've not seen any headwinds today.
+
+Bryan Keane
+
+Mike, you've kind of coined the phrase at least for B2B on swim lanes, that everybody is kind of in their swim lane, and I feel that vocabulary quite a bit when I...
+
+Michael Praeger
+
+I'm glad that -- consistency is good.
+
+Bryan Keane
+
+When I describe the B2B markets to investors, can you just talk a little bit about the swim lane of the mid-market? What is the right growth rate of that business, and are you -- can you measure if you're taking share versus others in the mid-market?
+
+Michael Praeger
+
+Yes. So first of all, we define kind of that middle market segment, or companies between 5 and $1 billion in revenue. So it's kind of the expanded definition. There's about 435,000 of those companies just in the U.S. market alone, and we're considered the middle market leader. We're still single-digit penetration across all the verticals that we're in. And I think the question is a good one, because we asked ourselves that question about, the overall kind of adoption growth. And I think some of the -- triangling some of the other industry reports, has it pegged at kind of 8 to 10 kind of percent annualized adoption growth, what historically it has been.
+
+And where we see across kind of the verticals and the sandbox that we play in, actually, what I would say is, there's really been no new entrants in a while, in a couple of years within the middle market segment. We've had some transitions with some of the acquisition activity of MineralTree as an example. But we believe that the swim lanes are really defined because the solution sets are very different between middle market and big, small business and enterprise.
+
+And it kind of -- it's been really kind of a handful of different areas. The first is that solution set itself, beginning with small business, it's almost like an extension of a consumer-based experience. Once you get in the middle market, you're dealing with very complex routing approvals, multiple general ledgers, most of our customers use multiple accounting systems. And that's a different level of complexity.
+
+Then in addition to that, you have the integration lens to it, those 220-plus different integrations that we have and growing, that creates a real moat in terms of our ability to capture and grow customers across that middle market. And then the -- kind of the last kind of piece is, the go-to-market strategy. CFOs of the middle market are very deliberate around changing a key back-office function. They want to understand how their kind of manual processes are going to look in an electronic environment, how all their approval processes are going to manifest themselves. And they want to see some testing. They want to do deep testing on the different integrations that are involved to support their business process.
+
+And so that dynamic is very different than, say, a digital online [ setup ] process that's self-serviced. And so the go-to-market strategies are very different, where we use kind of our sales force to go deep within the different industry verticals. And what you find is that, the verticals that we're in today have unique business process that are very unique to each of those verticals. And that's why you have very specific accounting systems that are vertical in nature, that support each of these verticals.
+
+And managing that complexity is not easy. We've been at this a long time, and we're kind of encouraged about that moat that we keep building quarter in, quarter out.
+
+Bryan Keane
+
+Joel, I want to ask you, the organic growth has been 20% plus every quarter since you guys have been out. It's been incredibly consistent. The one question I always get is, looking at that monetizing 40% of transactions, and I'm sure you've heard that question once or twice, what are the levers there, or is there a restraint of moving that number up even higher?
+
+Joel Wilhite
+
+Yes, good question. And maybe just to sort of double back and set the stage. So yes, we've sort of talked about being a 20% grower organically on average over time. And we had a 30% growth quarter -- for the second quarter is about 22% and change from an organic perspective, and we've talked about that growth kind of algorithm, so to speak, as -- starting with a really sticky solution that grows with our customer base. And so we've talked about transaction volume retained sort of like a same-store volume metric of 104%, 105%. So there's that base underlying growth. There's obviously the adding new buyers to the platform, either direct or indirect methods. And then finally, that expanding transaction yield through that conversion that you're just referencing, right? We call it Gear 3. And then over time, increasingly opportunity to add transaction yields through Tier 4 opportunities. We've talked about Invoice Accelerator.
+
+So your specific question is, how do we think about growth going forward, as we take advantage of this sort of Gear 3, the shift from check to digital. We think that's one of the most meaningful opportunities, both from a growth and a gross margin and profitability perspective. And again, we're in the early innings of adoption across the middle market, and so we're really not sort of necessarily guiding to that 40%, meaningfully moving from a quarter-to-quarter basis. But over the long run, we feel like that's a really powerful revenue and profitability driver for us.
+
+Bryan Keane
+
+And you mentioned the other gear being Invoice Accelerator. Can you talk a little bit about that product? How far are we in the adoption curve, the appetite for some of your clients to pick that up?
+
+Michael Praeger
+
+Yes. So this is -- I can refer to it, as a startup with an AvidXchange. And when we think of kind of our -- at scale kind of revenue model, today, we have kind of 2 legs to our stool. Certainly, Invoice Accelerator is going to be that third leg. And so we launched a few years ago, and what it is, is it's our version of supplier financing, where we have unique insight to having both our buyer and supplier on our network and have views into the historical transactions and all the data that supports it, to be able to really use data science to determine eligible invoices that we feel comfortable accelerating for next-day payment.
+
+And so suppliers can raise their hand and accelerate on an invoice-by-invoice basis, those invoices that are eligible to get payment the next day. And on average, they pay about a 200 basis point acceleration fee for those transactions. But one of the carrots that we provide to it, is in order to give access to the Invoice Accelerator, they have to be an electronic payment supplier on our network. So it's again another reason to move from paper check to electronic.
+
+And so as we've kind of talked about, it's a young product for us today. We've launched it a few years ago. It's what we call kind of our version 1 product, and we're right in the middle of our build for the next generation version 2 product that will be in the market next year, which will allow us then to kind of scale the growth bit. So right now, as we're doing kind of the testing and all the learnings related to our data science, we've only -- we've kind of metered it, and made it available to less than 10% of our supplier pool. And so once we launch our version 2 of the product, we'll be able to grow that over time, and Joel will be proud of me here, and he'll say, Mike, be careful because we're going to release it next year, but also we're going to have probably a number of quarters of kind of learnings as part of that release, before it goes full scale, as we probably move more into '24 in terms of the growth of that product.
+
+Bryan Keane
+
+I mean, to me, this seems -- I mean, I don't want to say rather simple, but you see the recurring payments, you see -- absolutely, you have all the data on both sides of the ledger. Yes, it should be a pretty good transaction, like you'll not have to take a lot of losses, considering you have a full track record of these transactions.
+
+Michael Praeger
+
+And the key is all the money flows through us, right? So from a kind of a repayment perspective, all the money is flowing through our network. And so that gives us a really unique ability to not only underwrite the credit, but also to kind of recapture the funds. So we're really kind of excited about the growth of that product, and one of the stats that we have kind of talked about is that, in version 1 of the product for suppliers that use it once during the quarter, over 80% come back for ongoing advances. And so that tells us that, we've kind of triangulated around the right user experience, with the right business model. And now it's about getting our kind of version 2 out the door, and really scaling that offering.
+
+Bryan Keane
+
+Got it. And how would that -- you talked about the 200 basis points, how does that compare to some of the other electronic payment mechanisms that you guys have?
+
+Michael Praeger
+
+Yes. So one of the -- that 200 basis points is just kind of the fee to accelerate. So when we think...
+
+Bryan Keane
+
+And it will be on top of...
+
+Michael Praeger
+
+It's on top of incremental to the payment economic.
+
+Bryan Keane
+
+Right, right. Yes. And then just remind me the payment economics for those transactions?
+
+Michael Praeger
+
+Yes. So we have -- we have really 7 different payment types on the AvidPay network, really 4 of those types relate to monetized payments. So we have 2 different kind of versions of AvidXchange virtual card, and we have 2 different versions of AvidPay Direct, which is our version of ACH+. So the supplier has to be on one of those 4 payment methods. And so it's a virtual card, on average, we're generating about 200 basis points gross on the AvidPay Direct, it's about 100 basis points gross. And so then the 200 basis points acceleration is incremental on top of those revenues.
+
+Bryan Keane
+
+So this week, the Wall Street Journal did an article about FedNow. And so then obviously, every investor has got a question for every single payment company. How does that -- does it have any impact to you guys at all?
+
+Michael Praeger
+
+So there's -- so when I look at kind of all these different new payment types, there's kind of 2 lenses. One is, what can we use kind of internally on how we execute this business for our internal cost structure to be more efficient? And then the second piece is, kind of what's the customer impact. And so something like a FedNow or any kind of the forms of kind of RTP or real-time payments. What I would say, once you get into the middle market, it doesn't have as much of a customer impact. because middle-market customers, CFOs like Joel, they're not checking our account balances in our day and say, that I get a payment from a supplier or from a buyer by 10:00 in the morning or 2:00 in the afternoon, kind of -- companies operate kind of in an overnight process. And so I would say, it has less of a customer impact, but we could have a very dynamic impact in terms of how we continue to execute all the different payment types, in the most efficient way for us to continue to drive margin improvement and efficiencies.
+
+Bryan Keane
+
+Joel, maybe you could talk a little bit about the recent acquisitions, FastPay and PayClearly, and how they'll impact the model on an inorganic basis?
+
+Joel Wilhite
+
+Yes. So we acquired FastPay in July of last year, and a small book of business PayClearly in January of this year, both of which in sort of our media vertical. And again, that's -- when we break out the 30% growth in Q2 versus the 22%, that's really the FastPay and PayClearly contribution. The thing -- one of the things that we talked about in addition to the transparency around the inorganic-organic, we've introduced the notion of the composition. There's a subset of that revenue that we acquired, that is actually political-related advertising. And so that revenue contribution rides on presidential and midterm election cycles. And so while we'll lap the acquisition date and sort of stop breaking out inorganic and organic, what we will begin to make clear, is just that political composition given the fact that it has some cyclicality that the rest of -- sort of our first new vertical that introduces that sort of annual cyclicality.
+
+Bryan Keane
+
+And how many of these tuck-ins are there out there for these vertical plays? Is there dozens, hundreds of them, how many are there that you can add, and do you plan to add 1 or 2 a year to kind of expand the verticalization of the strategy?
+
+Michael Praeger
+
+Yes. I think we have a pretty defined playbook on these tuck-in acquisitions, and they have worked really well for us in the past. The challenge is, is that it's hard to predict when opportunities may present themselves. And -- but we think it's a great opportunity to develop new kind of vertical markets, where there's a kind of a software provider in that vertical that deeply understands the unique business experience, maybe some of the uniqueness of the accounting that happens within that vertical. And has the relationships with some of the vertical-specific accounting systems that support that market. But yet not as -- they have not yet adopted a payment solution. So we can provide some immediate synergy with our payment network, and really use it as a way to jump start with the beachhead of customers, our entry into that vertical and grow it much faster.
+
+And so that playbook has been -- worked really well for us in the past. And so we're very opportunistic. Fortunately, we have a big balance sheet from the IPO that we haven't spent yet, and we're looking for the right opportunities. I would say that we definitely have not seen some of the valuation adjustments in the public markets flow through to the private markets yet. But we think that will occur -- maybe as we end this year going into next year, we're going to see more of those -- more opportunities that are within kind of evaluation spectrum that makes sense for us.
+
+Bryan Keane
+
+And then the international time line for expansion, would that be -- how long will that take? Will that be organically or would you probably end up buying something to develop in the international markets?
+
+Michael Praeger
+
+So international is an interesting question. We look at it from kind of 2 components. One is supporting international transactions that U.S. companies have with suppliers that are based overseas. And during the second half of this year, and you guys will see the announcements when they come, we're going to be announcing our cross-border offering that we're really excited about, and this is going to be designed for those really kind of middle-market horizontal companies that are U.S. based, but they have a significant amount of overseas international payments. And today, we kind of opt out of those opportunities, because we don't have a good solution for them, and that will give us an opportunity to really be competitive with those opportunities, and really further develop our partnerships that we have with some of our horizontal accounting system relationships like the NetSuites, Microsoft Dynamics, Sage Intacct, Acumatica, who play kind of in those markets.
+
+So that's kind of step #1. And then step #2 is how do we address actually doing kind of international in-country payments, and I think the question is a good one. I would say that we're probably going to lean in hard to say, is there a way through an M&A strategy that we can jumpstart kind of that in-country international opportunity, probably based in Europe and really follow the footprint that a lot of our core partners have, like the NetSuites of the world in terms of where their customers are, so we can support them in the same robust ways we do here in the U.S. market.
+
+Bryan Keane
+
+Now I have to say I'm a little surprised the cross-border product wasn't rolled out sooner? Is there a reason why maybe it didn't -- you didn't roll it out, because cross border is where a lot of profitability is, in payments in general?
+
+Michael Praeger
+
+Yes. So it's a good question. And so the one thing about it is, if you look at our existing 8,000-plus customers today and the 8 verticals that we're in, we're not in vertical markets that really lend themselves to be international, like real estate, construction, HOA management. They're very kind of geographically central type industry. So we don't have a big demand within our existing base today for cross-border transactions. So that's the reason why it hasn't been prioritized. But where we see the opportunity is actually kind of playing the horizontal market for new customers. And we think there's an opportunity with that capability, combined with some of the new functionality that we released in the last couple of quarters, related to more robust purchase order, procurement-related tools, to combine that with the cross-border component, to actually maybe move into new verticals that we historically have not been in.
+
+So it's really more of a kind of an opportunistic growth perspective than monetizing a significant amount of existing customer transactions.
+
+Bryan Keane
+
+And you guys have always been more in the verticalized strategy, at least, and that's been wildly successful. Is there more to do in the horizontal strategy?
+
+Michael Praeger
+
+Yes. I wake up every day and say, like we've been at this for a while, and we're still in single-digit penetration in all of our verticals. And so a lot of runway -- and that will also a little bit, part of the debate that we have internally in terms of just capital allocation and investment is, it's so efficient for us to kind of grow our business within the verticals that we're in, versus some of the new -- planting some of the new seeds for international and things like that, that take more time and a little bit more of upfront expense. And so that's a little bit of the -- kind of the back and forth that we have, in terms of capital allocation, because it's so efficient for us to grow the business in the U.S. market.
+
+Joel Wilhite
+
+One thing just to add on to that, we recently announced the Acumatica relationship. And while that's an important kind of a construction vertical type of an ERP, they're really kind of considered potentially a really strong up and comer across the horizontal market. And so that's traditionally thought of as NetSuite, Microsoft 365, Sage Intacct. And so Acumatica, I think, is positioned to kind of give those guys a run for their money in the horizontal. So again, Mike said, it's -- we're focused on the horizontal and the verticals, and sort of see growth kind of with [ focus ].
+
+Bryan Keane
+
+Joel, I want to ask about pricing, in particular, some of the new solutions in your platform? Do you have any pricing power that you guys can use?
+
+Joel Wilhite
+
+Yes. Another popular question. So we think we do. We think we have really great kind of pricing power. We think the ROI is really compelling. We spend a lot of time internally talking about how we play that. So we have done in the past and expect we would, in the future, sort of increase that per unit cost to the buyer. What we're super mindful of, though, is to Mike's point, it's -- we're in the early innings, and we're very careful about making sure that we don't sort of increase any impediments to the adoption. But I do think that there's room there, and feel like we have good strong pricing power on the buyer side.
+
+Bryan Keane
+
+Have you guys done much in the history of increasing prices on an escalator basis or on an annual basis?
+
+Joel Wilhite
+
+We do. So our contracts afford annual price increases, depending -- it's a negotiation with a buyer, but the preponderance of our buyer contracts that are multiyear, 2-year to 3-year contracts, have anywhere between 3 and 5 annual price escalators. We execute on that every year on renewal, for every contract renewal. We also increased the unit price to the buyer on a per transaction basis. I don't know, 18 months ago, and we'll continue to do that sort of judiciously over time. We think there's more pricing power on the table. But again, we're just trying to focus mainly on inducing adoption.
+
+Michael Praeger
+
+Exactly. I mean the biggest lever for us is to accelerate that adoption curve. And so it's a delicate balance, because we don't create any impediments on our ability to see that increased adoption.
+
+Bryan Keane
+
+Got it. You guys have done a great job of kind of laying out the path to profitability. Joel, maybe you can just talk about longer-term gross margins and EBITDA margins. How long -- I know we've talked about 75% plus gross and 25% EBITDA margins. How long is the trajectory long term? And what are some of the things that you plan to scale?
+
+Joel Wilhite
+
+You bet. So just to sort of come back to the sort of the longer-term targets that we talked about at the time of the IPO, which we would still say we're focused on, our 75%-plus gross margins, I think there's probably upside to that over time and then 25% plus EBITDA margins. What we did in the first quarter, as the market shifted and we kind of sharpened our narrative about the path to profitability, we talked about -- and we've refined that in our second quarter call, such that we are projecting profitability in the full calendar year '24.
+
+And at that point, the way we've thought about that path is, going from -- just starting at the top and focusing on gross margins, right? So continued sort of that 20%-plus on average growth rate, bringing the gross margins from sort of the low 60s to that 70% ZIP code. We believe we achieved that for the calendar year '24. And then between now and then, seeing scale. First, on the G&A line, once we kind of get a year past our IPO, we see that opportunity and then also between now and that profitability point in '24, some scale on the R&D side of things.
+
+So again, short term, we're looking at profitability in '24 at that 70% gross margin ZIP code. What does that -- how -- what's the pace between then and 75 plus and the degree to which we flip to that 25% plus. We haven't really been specific about that, but not long after we see that -- again, seeing that -- seeing the Gear 3, the yield expansion and together with looking at the IA, the Invoice Accelerator opportunity, we feel like it's not too long after that first profitability year.
+
+Bryan Keane
+
+And the whole concept that you guys have talked about, with fiscal year '24 now being kind of the move towards profitability, was that always in the cards from the beginning of the IPO, or if you had originally a lot more investments planned, where did some of the cutbacks have to come from, in order to hit those targets?
+
+Joel Wilhite
+
+I mean what I would say is that, there's a little bit of just sharpening the narrative on a plan that we believe we could execute anyway, probably more of that and sort of taking out some of the conservatism when we came out of the gates, versus pairing investments. I will say that Mike's kind of sort of leading through this notion of efficient growth in the business, and we are just sort of double examining the -- sort of the experiments around the edges that help us get there, but we're really executing the plan that we contemplated when we came out last year.
+
+Bryan Keane
+
+Mike, any other things to think about, as this business continues. I still feel like you've been doing it 20 years, but I feel like we're still early on here. If we look at a longer, 3, 5, 7, 10-year outlook, is there even more additional products and things that you want to do, to add to the business model?
+
+Michael Praeger
+
+Yes, absolutely. I mean I think the big categories, we call it Gear 4, which is the data. And we are just scratching the surface in terms of how we're using the data to not only make existing products more valuable, as well as creating new products altogether. And just -- we talked about the Invoice Accelerator, which is we use the data of the platform, to determine eligibility for invoices that we can advance. But just other things where we're already capturing the data, but we now have -- we have a product called AvidUtility for our large kind of customers that have big footprints, lots of facilities, that how they can use the data and their utility bills to better manage their energy expense.
+
+So we actually serve to them this data back in a format that they can understand their average consumption, average heating-cooling days, benchmark their locations against each other for efficiency, just by providing them the data back in a useful way, on a very specific use case. And we think there's lots of those type of opportunities across the spectrum, in terms of how we can provide additional value. And so I think we're probably scratching the surface. But when it's all said and done, I expect there are going to be 4 legs to our stool, and after Invoice Accelerator, it's probably data that will be the fourth leg.
+
+Bryan Keane
+
+And I know we're out of time, but how do you monetize data, or how do you price that?
+
+Michael Praeger
+
+So I think it depends on the offering that's used by -- so in case of Invoice Accelerator, we're getting in an extra 200 basis points. In the case of the Utility, rather than charging, say, $1.50 for a software fee for a regular utility bill, we're getting $3 or $4 for a utility bill in a software fee. So it answers -- it depends on the value proposition and whether it's impacting the buyer or the supplier.
+
+Bryan Keane
+
+Got it. Well, with that, we'll keep it there. Thanks, Mike. Thanks, Joel.
+
+Michael Praeger
+
+Thanks, Bryan. Thanks for having us.

AvidXchange Holdings, Inc. Presents at Goldman Sachs Communacopia & Technology Conference, Sep-07-2023.txt

@@ -0,0 +1,199 @@
+AvidXchange Holdings, Inc. Presents at Goldman Sachs Communacopia & Technology Conference, Sep-07-2023 04:25 PM
+9/7/23
+William Nance
+
+All right. So next up is AvidXchange, closing up the conference, saving the best for last. Mike, thanks for joining us today.
+
+Michael Praeger
+
+Yes. Excellent. Excited to be here. Always good to be the bookend of the Goldman conference.
+
+William Nance
+
+So we spent a lot of the conference talking about traditional consumer payments. I think we're probably -- or late in the conference, very early on in B2B payments. Can you talk maybe a little bit about the history of AvidXchange, how it came to be, how you think about the market opportunity?
+
+Michael Praeger
+
+Yes. So first of all, we can describe ourselves, we're a software company that enables payments really. And so we -- our history is we're a 20-plus-year-old software company that actually started out focusing on automating the accounts payable process for middle-market companies. And then in 2012, based on customer feedback, we launched the AvidPay network, which got us into the payment execution side of the business. So today, we marry the software to automate the business process for accounts payable and for payments along with the AvidPay network, which is how we execute and settle payments as well as provide the [ remanence ] data that our supplier customers are looking for.
+
+And one of the biggest kind of pivots that we made as a business was, up until 2012, we had really one set of customers which are the buyer customers using our software to automate their business process. And we said if we're going to really build a two-sided network and get the type of adoption we want to see, long term, we need to think of the supplier as a core customer as well. And so we did that in 2012, thinking about the supplier as a core customer, which means that we knew that we need to build a value proposition of why they wanted to be on our network rather than just receiving a payment. And so we've been on that mission ever since.
+
+And so today, we are approaching 10,000 buyer customers using our software to manage their business process, along with over -- supported by over 1 million supplier customers that are receiving payments and submitting their invoices on a monthly basis.
+
+William Nance
+
+maybe -- and you operate distinctively in the mid-market part of the B2B payment space. Help us understand how that space differs when it comes to AP automation.
+
+Michael Praeger
+
+Yes. So I kind of like to say that we're kind of purpose-built for the middle market. And what I mean for that is within the overall market segment, there's 3 very clear segments of the market. There is enterprise, there's the middle market and there's small business. And what you find is really hard for companies like us to kind of both go up or go down. And part of the reason is because it starts with the feature set of the product. So in small business, for example, it's really one person that's making kind of decisions in terms of receiving invoices or sending out invoices, receiving payments, managing the accounting. So it's a fairly simple business process that's more kind of an extension, I would say, almost like a consumer experience.
+
+But in the middle market, there's lots of nuance related to approval structures, multiple general ledgers, supporting systems like budgets and job costing. And most of our customers actually utilize multiple accounting systems. And there's a lot of complexity related to more the accounting side, as well as one of the biggest differences is on the accounting system integration to support it. So in the middle market, we describe it as companies between $5 million and $1 billion of revenue. And we believe that over 50% of the middle-market companies highly align themselves to an industry vertical that has unique either business process or accounting system process for that vertical, and you know which verticals these are because you have unique vertical-specific accounting and ERP systems that support it that are different than the NetSuites, Microsoft Dynamics, Sage Intaccts, maybe like Acumaticas of the world. They're very industry-specific.
+
+So today, we're kind of integrated to over 200 of these different systems and our team has kind of a big list on the drawing board of more integrations to go. But that's a very different kind of dynamic than, say, small business where, if you integrate the QuickBooks, you pretty much have the core small business market covered. So those are some of the kind of functional differences.
+
+Then you also have the go-to-market difference. In small business, you can get a lot of new customers just through a digital experience. In the middle market, there's not a CFO or a controller that's going to automate their back office and change the business process through an online demo. These are traditional sales processes that take kind of, on average, about 60 to 70 days. And it's more of a traditional sales process. And as a result, these are customers that stay on the product a long time, they're very sticky, when you've kind of automated their core business process with the type of volume that middle-market companies have.
+
+William Nance
+
+And you have 2, the horizontal and the vertical market breakdown, between the business. Could you talk about some of the key verticals on the vertical market side?
+
+Michael Praeger
+
+Yes. So we kind of describe our go-to-market strategy as kind of a hybrid strategy between leveraging our direct sales force and, we call it, our partner channel. And so on the direct sales force, it's very focused in, today, 9 vertical markets that we attack and have a segregated sales force focused on each of these verticals. The first vertical we started in was real estate. And just to give context here because we've been talking about this, our real estate vertical is actually performing pretty well. And because within real estate, there's -- even today, there's really kind of 5 segments of the real estate vertical. And it's led by multifamily housing, student housing, industrial, retail and then commercial office. And probably commercial office is the one component that's a little bit stagnant in terms of not really growing in the kind of current environment. But overall, the segment is growing.
+
+And then some other examples are the HOA, condo association market, construction, financial services. One of the things that's kind of an interesting kind of fact is that we now have over 2,000 banks that use AvidXchange to manage the banks' accounts payable and payment processes for the bank. We also have media. That's one of our newer verticals. And our newest vertical is, what I call, hospitality, which we announced a quarter or so ago, and focused on kind of middle-market hotels and other kind of hospitality-related companies.
+
+And what's interesting in each one of these verticals, there is a partner of the business process that we're solving for in addition to just paying the bill. And two kind of examples of that is, in construction, there's a concept called the lien waiver that a general contractor wants to get a lien waiver from the subcontractor before he makes payment. And the subcontractor wants to have certainty of payment before they give the lien waiver. So our software kind of manages that process to give both parties the confidence of doing so. I don't know of another vertical that has a lien waiver concept to it. That's very specific to construction.
+
+Real estate is another one where each individual asset is its own legal entity and has its own chart of accounts, its own approval processes by asset, and that's kind of very unique to real estate. So each one of these verticals has some unique business process that you have to account for. And we like doing that hard work because it increases kind of that stickiness factor and really increases the value proposition that we're delivering to our customers.
+
+Flipping over to kind of the horizontal side, and that's where we use kind of our channel partners, whether it be bank channel or our accounting system partners, that we leverage in how we go very deep on the horizontal side. Bank channel, we have about 15 banks as partners, 3 of them are white label where they go to market with their brand on it with their sales force, and that's Bank of America, KeyBanc and Fifth Third Bank.
+
+William Nance
+
+Makes sense. So maybe we can talk a little about how macro impacts the business. We have seen macro drive lower invoice sizes. I think you've talked about a little bit lower transaction retention recently. That's coming off a really explosive period of growth kind of after the pandemic. How do you think about how macro impacts your business, the impact of rising rates and inflation? And then ultimately, how do you bridge between the past couple of quarters to how you deliver on that 20% revenue growth target?
+
+Michael Praeger
+
+Well, that's the first macro question I've had this whole conference. .
+
+William Nance
+
+That's surprising.
+
+Michael Praeger
+
+I think every meeting started with that question.
+
+William Nance
+
+Keeping it interesting.
+
+Michael Praeger
+
+Yes, exactly. No. So we're -- how the macro kind of shows up in a business, and the interesting thing is we have a long history here, 20-plus years, so we've been through these cycles before. The cycle is operating and behaving like other cycles we've seen. And we're -- in the middle market, we don't have customers that go out of business. They don't go bankrupt. That doesn't really happen. But what does happen is there's more pressure on discretionary spend around categories like advertising, marketing, professional services, consulting, tenant improvement projects, maybe preventive maintenance, capital projects. Things like that have more pressure on them to get pushed or get delayed. And so where that shows up in our numbers are, what we call, kind of transactions retained on the network. So this measures a transaction we have between a buyer and supplier from one period to another period.
+
+And historically, and I'd say in normalized times, we believe that number should be about 104% to 105%. And this year, we believe it's going to be closer to about 100%. And so that's where it kind of shows up in our numbers. We also have experienced that when CFOs or finance leaders have confidence in kind of seeing the other side of the cycle. That discretionary spend comes back pretty quickly. And usually, there's kind of a makeup period as well as they get caught up on their preventive maintenance and capital-type projects. So that's how we kind of see that impacting our business on a volume transaction basis.
+
+On the flip side, in terms of new customer acquisition, the current environment is actually pretty healthy. We've talked that our top-of-funnel activity is up about 17% over a year ago. And frankly, it's a little bit easier to get the attention of a CFO in today's environment than it was 2 years ago when it was more focused on kind of growth, right? So everyone is very focused on how they automate their back office, become more efficient, do more with less. And so from a new customer kind of acquisition standpoint, it's a pretty healthy environment.
+
+William Nance
+
+Makes a lot of sense. I think a big part of that 20% revenue growth is the continued adoption of electronic payments and the conversion of paper checks. How is the pace of that migration been going recently? And then how do you think about obstacles that consumers face to kind of moving more towards that electronic payment adoption?
+
+Michael Praeger
+
+Yes. So I mean that's a good question. One of our kind of mantras is, and we kind of talked about it at our annual Investor Day that we recently had in June, that our confidence was around consistent kind of 20% kind of annual growth. We knew this year '23 is going to be one of the toughest years in terms of having pressure on that just because of the macro environment as well as we don't have the benefit of the political cycle that we did a year ago, which we'll have next year. But having said that, one of the things that we control and what gives us a lot of long-term confidence is the continued migration of suppliers from paper checks to electronic. That's a big lever for us.
+
+Today, we're already leading our industry in terms of best-of-class kind of conversion numbers. Over 40% of all the transactions that go through our network, we're able to monetize. That's typically 2x or 3x, sometimes 4x, what we see against others in the market when we're competing. And -- but we're very focused on how do we take that 40%. And what we talked about during our Investor Day is take it to 50%, 60% plus over time. And we believe that the secret of that is a continued version of what we've already been doing, and that is continue to add new payment modalities along with kind of different price points combined with different data delivery sets that we're delivering to the suppliers. And that combination is what, we think, kind of drives that.
+
+We talked about a version of that just on our last earnings call where we talked about a real-time payment modality that we launched for the satisfaction of lien waivers, very specific to kind of a construction kind of use case. And we think those type of examples, and continuing to kind of replicate those, is part of that secret sauce. We're already up to maybe 6 different versions of a Virtual Card. As an example, leveraging our partnership with Mastercard, we're able to utilize different interchange structures for different supplier use cases. And so again, different interchange price points, combined with data that we're delivering to satisfy the need of a supplier, has helped us continue to kind of advance that conversion from paper to electronic.
+
+William Nance
+
+Maybe we can touch on go-to-market here. You sound pretty positive on top of funnel right now. What are the investments that you're making in the sales organization and customer success? And how do you measure the return on some of these investments?
+
+Michael Praeger
+
+Yes. So I think a lot of these for me start with people. And one of the things that we try to do during our Investor Day is really highlight kind of the talent of the overall team. And one component of that is James Sutton. We added James Sutton to our team almost a year ago, I think, in January of this year, as our Chief Revenue Officer. And so certainly, the impact that he's had in terms of thinking about how we operate at scale, and we can divide it is how do we go from kind of that approaching -- kind of going from $400 million to kind of $1 billion in revenue and managing a scalable sales process and go-to-market process. And so we've been really encouraged in terms of kind of that impact that he's had so far this year.
+
+And we have really attractive customer acquisition costs related to our business, both on the buyer side as well as the supplier side, because you can't forget, we also have a pretty sizable sales force on the supplier side that continues to build that network of 1,000 -- or 1 million-plus suppliers that we have today. So James is responsible for both sides of the equation, and we're pretty bullish about the impact he's already made.
+
+William Nance
+
+And maybe to talk about the drivers of buyer sales. You talked a little bit about the Investor Day of some of the momentum you have. What does that look like? I mean I think you said 7,000, 8,000, now approaching 10,000, buyers on the platform. What does the customer acquisition look like?
+
+Michael Praeger
+
+Yes. I mean so we're kind of very engaged on both the kind of the industry verticals, thinking about how we continue to expand those verticals. But one of the things I'd quickly point out to people is like we're still single-digit penetration in all verticals with the exception of maybe financial services that we're in double digits. So we're still kind of in the early days and then obviously, leveraging kind of our partners for that horizontal focus. We still are in an environment where 95% plus of our new buyer customers are automating for the first time. So we haven't even gotten to the part of the industry where we're displacing legacy solutions yet. So these are -- customers are going from a paper-based process to electronic. And so that's an exciting place to be.
+
+What keeps me up at night is how do we continue to evolve kind of these adoption trends. And there's kind of the macro trends, which are things that we necessarily don't control; and then those things that we do control, which are the value proposition that we're delivering to our customers and how do we continue to increase that value proposition to make it so compelling to automate this key process today rather than waiting 6 months or a year. And so that's what we're focused on and continuing to be encouraged with the results that we're seeing.
+
+William Nance
+
+Got it. Maybe we can talk a little bit about the data that you see as you build out that network. I mean you talked about the AvidXchange flywheel, more customers, more payments, more electronic adoption and then kind of keeping that flywheel spinning. What kind of data-driven insights do you have for your customers today? And what are some of the investments that you're making in things like AI?
+
+Michael Praeger
+
+Yes. So I'll answer the AI question last because it all makes me chuckle because everyone kind of thinks like it's a new phenomenon. In the last quarter, I've probably been asked by more investors and analysts about it than I have previously, and we've been doing it for a long time. So -- but one of the -- just going back in terms of the data, when we think of the AvidXchange flywheel, what makes our business work, there's 4 gears to it. And the first gear is about the engagement of the buyer customers, then we go about maximizing the volume on our network as the second gear. The third gear has about the conversion from paper checks to electronic, and the fourth gear is around data and how we use the data to either provide more value to customers or create new offerings altogether.
+
+And so two of them in kind of recent times that I'll talk about is, last year, we talked about AvidAnalytics that we launched, which now gives a lot of that data and insights directly to customers that they can self-serve and access. And then the second one is Invoice Accelerator. So Invoice Accelerator actually is a new product offering that we're creating because of the data and how we can use the unique data and insights between a buyer and supplier relationship and use it as an underwriting mechanism to know which transactions get paid in normal course, which ones maybe have issues related to disputes, things like that. And so now we're about to launch our Invoice Accelerator 2.0 offering, which advances -- gives a supplier the ability to advance invoices for next-day payment. And we use all the analytics and data of our network to determine if those invoices that are eligible to be advanced. That's a great example where the data allows us to execute that in a very unique way. And so we're continuing to look at all these different use cases and kind of continue to up the value proposition that we're delivering.
+
+As it relates to AI, we've been on the forefront of this for a number of years. And two big areas that impact our business from an efficiency kind of gross margin improvement is, one, on the front-end invoice process, which I would call intelligent data capture and which we're automating and using AI along with kind of machine learning to read invoice documents, to get those into a standardized form that can be managed within our system. And so that's on the front-end invoice side. We partnered with Microsoft about 3 years ago in this journey. And now we have Microsoft's latest generation OCR engine, along with their machine learning platform, along with our AI platform, integrated together to read AvidXchange invoices. And so that's a great example on the front-end process.
+
+On kind of the payment delivery process is another one where we started the journey, maybe 5-plus years ago now, maybe longer, with RPA technology. And now that's been enhanced with AI in how we deliver payments to customers because we have lots of different business rules that our suppliers ask us to do in order to receive electronic payments to us and utilize certainly AI to facilitate that. Those are kind of unique ones. Obviously, we have the ones that relate to every company in terms of being more efficient in terms of your support functions, your customer success and communications kind of with your customers that we're certainly leveraging as well.
+
+William Nance
+
+Yes. And I mean like a lot of companies talk about this, but I think for you guys, like the invoice ingestion process, you talked a little bit about it on Investor Day about the cost of goods sold being a lot of operations internally. I mean, is there more room for improvement there as you layer in more AI capabilities?
+
+Michael Praeger
+
+Absolutely. I mean we're -- so one, we continue to add lots of new customer sets, specifically buyers and suppliers, where suppliers really kind of magnifies the problem in terms of the different types of invoices that they may be sending us along with their business rules and how they accept payments. And so in a lot of ways, the work is never done because every time we add new buyer customers, it brings us a whole set of suppliers that we then have to automate.
+
+William Nance
+
+Yes, makes sense. So maybe we'll switch gears to payments a little bit. You were a pioneer in pioneering Virtual Cards in the B2B space. I think RTP is one area that's getting a lot of focus right now. Your ACH offering has been growing very rapidly. But how do you think about what RTP means in terms of new payment modalities and maybe what's the customer demand like in the mid-market?
+
+Michael Praeger
+
+Yes. So the first thing that I would say is that I think the use case for any kind of real-time payment or same-day payment is probably -- the use cases are probably best in the consumer side or small business. Middle-market companies don't really kind of operate in kind of a real-time payment environment. It's more of a batch process type of payments. But having said that, we think that within the small business supplier community that supports our customers, there's lots of opportunities to utilize those payment modalities. So whenever we think of kind of, say, FedNow or RTP, it's exciting in terms of there's a different payment modality then that we can create a different price point for. And the kind of the secret sauce and value that we bring to the transaction is the data, right? The data that's highly integrated to these -- to our supplier customers. And that's what kind of justifies kind of the pricing that we get and economics from our suppliers.
+
+So just -- so for example, within Invoice Accelerator, we're getting ready to launch our 2.0 offering. FedNow, for example, gives us an opportunity to have, say, a next-day advance of an invoice at one price point or we can get a same-day advance through FedNow at a different price point. And so it gives us that type of optionality, which we're excited about.
+
+William Nance
+
+It's exciting. Just on the Invoice Accelerator 2.0, how are you thinking about adoption trends and the ramp in that product over the next several years? And how does that fit into kind of the multiyear targets that you set out?
+
+Michael Praeger
+
+Well, one, I've been talking about it for a long time, so I've been -- I'm probably the most excited person to have it -- our 2.0 offering getting launched in the market here over the next couple of months. The -- to me, it's clearly going to be our next kind of $100 million business and going to be kind of that third leg of our overall revenue model that Invoice Accelerator is going to provide. One of the things that we're going to be doing is we have over 1 million suppliers in our version 1.0 offering. We only made it available to about 50,000 to get kind of the learnings that we wanted to advance our 2.0 offering. We're going to be smart about how we roll it out. It's not going to be a big bang in terms of all our million suppliers have access day 1. We got to be -- make sure that it's working as designed, and we're going to be measured about how we roll it out. So we believe that kind of '24 will be that kind of rollout year. And then we'll be kind of full force across all our supplier customers in '25 is what our expectation is.
+
+William Nance
+
+Makes sense. So when you take Invoice Accelerator, Virtual Card, the ACH product that you have, potential RTP products in the future, how do you think about the future long-term mix of your payment volume? I think, at the top of the hour, you talked about 40% of transactions already being electronic. What's that makeup look like in the future?
+
+Michael Praeger
+
+Yes. That is really interesting because what I've been surprised by personally is I would expect that, that price would drive more kind of payment modality selection than it has. And for example, today, for new suppliers joining our network today, Virtual Card is still our #1 selected payment method, even though it's our highest priced payment method. And yes, like we're offering that supplier payment modalities that are half the price of Virtual Card, why do they select the Virtual Card? And the answer is price maybe is a factor, but it's not the #1 factor that suppliers use. The #1 factor that suppliers use is where they've automated their existing process. Because the most expensive transaction they have is when they have to get human beings involved in applying payments and reconciling payments, then it becomes really expensive.
+
+And so if they can have an automated process -- and a lot of companies have automated their card acceptance, especially if they have a retail part of their business, right? And so what we -- especially in the current environment, we have lots of suppliers that say, yes, even though maybe it's more expensive than AvidPay Direct offering, it's -- with AvidPay Direct, in the acceptance of it, we still need human beings to do reconciliation. So we'd rather have a Virtual Card payment that's fully automated because that would be -- is the most efficient way for us to receive payments. And so what we found is that actually that business process drives the #1 decision point and then probably pricing comes after that.
+
+William Nance
+
+Yes, makes a lot of sense. So I guess you spent 20 years building this massive AP engine. How do you think about other products and services that might be applicable to the business like paywall and things like that?
+
+Michael Praeger
+
+Yes. We kind of think about kind of how we extend kind of our suite of services in terms of where we have kind of core competence. And so one of the things that we love to do is kind of twice a year, we bring customers to Charlotte for our customer Advisory Board meetings to gain insights about how we can be more helpful. And one of the things that came out, one of the most recent ones last fall, is around today, customers will say, "Mike, we have 90% of our expense transactions in AvidXchange," but there's like maybe 10% that are outside because they're in T&E or other kind of spend management type, it might be a card as part of a spend management program. And then it becomes kind of kludgy because when we do our reporting, we don't have 100% of our expense data in one place. And so we're in the middle of starting to -- in development now of the AvidXchange version of our T&E spend management integrated card.
+
+Think of it as the AvidXchange version of a Divvy or a Brex or a Ramp that's very specific to our customers, that brings 100% then of all their expending transactions in one platform with one consistent user experience, whether it be for approving an invoice or approving a T&E purchase. And so that's a good example where, kind of extending our platform with something that is kind of core to our business, I think is really smart. We're also thinking about then how do you extend for our buyer customers using kind of purchase order tools, maybe almost marketplace services on the front end where they can create marketplace experience with their existing supplier set. And so those are types of things that we're really thinking about in terms of kind of how we can add a lot of value to customers and also be very -- leveraging the deep domain knowledge that we have.
+
+William Nance
+
+Yes. Maybe switching over to the long-term targets a little bit. The 20% number, I think you've talked about that for a long time. Why is 20% revenue growth the right number? And what would be a scenario where you think about revising that in either direction?
+
+Michael Praeger
+
+Yes. So why do we think it? So I think that -- we feel we have a lot of confidence in that number based on kind of the macro influences of the industry adoption that we've been seeing. And so we think there's a lot of confidence there. One of the things is I think there's -- we have every kind of tailwind kind of a trend line with -- in our direction as it relates to the whole evolution of moving from paper to electronic, right? Companies aren't going the other direction. So we feel really confident about -- with that trend line with the things that we can control, the products that we have, our product innovation pipeline, around that 20% growth mantra for a very long period of time. What could change that is, I would say, on the downside, if we experience a macro environment that's significantly worse than it is today and we have more pressure on kind of discretionary spending than we have today, maybe that puts some pressure in the short term on those numbers. I don't think it changes the long-term trajectory at all.
+
+But what can really, I think, change the long-term trajectory is changes in that adopt -- net macro adoption rate. And one of the things I can bring Goldman into this discussion is because -- no, it's a great story -- I believe that one of the kind of biggest catalysts we have is, I call, the generational shift. And that's when we have, and I don't know kind of the political way of saying this is, but the current vintage of CFOs and controllers aging out and being replaced by the next generation that's more digital native. And Goldman actually did some work on this as part of our IPO. And their assessment was in the middle market, in roughly kind of the 2000 -- kind of '25 to 2027 range, we're going to approach -- about 50% of the CFOs and finance leaders and controllers in the middle market will be of the digital native kind of vintage. And I personally think that that's going to be probably one of the catalysts for kind of a step change in terms of adoption.
+
+William Nance
+
+Maybe just to close it out on capital allocation, you have done some deals in the past. You've also entered a lot of new verticals organically. How do you kind of weigh that decision? And how do you think about opportunities for inorganic capital deployment?
+
+Michael Praeger
+
+So we think that kind of continuing kind of acquisitions is core to our playbook. However, it's very -- we have a very defined playbook that we like around vertical market expansion. We do not -- we're not looking for acquisitions for product extension or to grow kind of our product set. We feel really comfortable with the kind of organic growth there as it relates to product evolution. But in terms of advancing into new vertical markets, we really like the idea of kind of acquiring a beachhead of customers, applying our payment network capabilities to monetize and create synergies really quickly and then using that beachhead to really grow that vertical. And we have now a track record of doing that 4, 5 times with great success. And so that's kind of the playbook that we think about.
+
+Unfortunately, we're -- we haven't seen that many things in the last year or so that have been exciting for us. So we've kind of been kind of waiting. We have a big balance sheet. But I certainly think that we'll see more opportunities here as we head into second half of this year as well as next year.
+
+William Nance
+
+Great. Well, I think we're just about out of time. Mike, thanks for taking the time to be here with us today.
+
+Michael Praeger
+
+Yes. Thank you.

AvidXchange Holdings, Inc. Presents at Goldman Sachs Communacopia + Technology Conference 2022, Sep-12-2022.txt

@@ -0,0 +1,301 @@
+AvidXchange Holdings, Inc. Presents at Goldman Sachs Communacopia + Technology Conference 2022, Sep-12-2022 10:00 AM
+9/12/22
+Unknown Analyst
+
+All right. I think we're going to get started here. We are very pleased to have Mike Praeger here, CEO of AvidXchange. Mike co-founded AvidXchange over 20 years ago with the goal of transforming the way that middle-market companies pay their bills. And since their successful IPO in 2021, Avid has grown payment volume by nearly 40%, I believe. So everyone, please join me in welcoming Mike to talk about the business today.
+
+Michael Praeger
+
+Yes. Excited to be here, and we're just starting. It's great getting back to these in-person conferences, and the energy here is great. So hats off to you guys leading the charge.
+
+Unknown Analyst
+
+Yes. No, it feels great. It feels lively. All right. So maybe we'll kick it off. For those in the room who are maybe a little more -- a little newer to the story, could you provide a bit of background on the company maybe before we dive into some Q&A?
+
+Michael Praeger
+
+Sure. So we describe AvidXchange as we're a software company that automates the accounts payable and payment process for middle-market companies. So the key was our middle market. We're purpose-built for the middle market and really designed to eliminate the paper invoice and paper check for our middle-market customers.
+
+So what does being purpose-built for middle market mean? There's really kind of 5 kind of characteristics that really kind of define being purpose built for the middle market. And the first is our vertical focus. We believe that over 50% of the middle-market companies in the U.S. market alone highly associate themselves to an industry vertical that has unique business process or accounting processes for that vertical market. That's one.
+
+The second thing is, there's unique accounting systems then that support the verticalization of these different industry verticals. And today, we're integrated in 220 different accounting systems that we support and growing.
+
+And then the third would be the feature set of the platform itself. Again, we're very focused on the needs of the middle market. This shows up in terms of very dynamic workflow approvals, support for integration to other systems, like job costing systems, how middle-market companies manage the complexity of multiple general ledgers, cost center allocations, things of that nature.
+
+And then the next element is what I call kind of the go-to-market strategies, right? And here is where we have our hybrid strategy of using our direct sales force to go very deep within different industry verticals. Middle-market companies' CFOs are not going to buy a key back-office transformation platform through an online sales experience, which you may, for example, in small business. These are multiple meeting kind of engagements. They have to understand how our platform is going to work in their environment, supporting their business process.
+
+And then the last element is what I call kind of our secret sauce, and this is the AvidPay Network, which again is purpose built around the middle market, supporting the -- our 8,000 buyer customers and the different industry verticals they're in with their suppliers. And this is where, today, we have kind of an industry-leading adoption rates. We're monetizing about 40%-plus of all the transactions going through our platform. And that's kind of typically 2 to 3x other folks in the industry. So those are kind of the 5 things that really make us how we define being purpose built.
+
+Unknown Analyst
+
+Got it. So maybe top of everyone's minds right now, Jan Hatzius kicked us off this morning with the state of the economy. Could you talk maybe a little bit about the resiliency of the customer base? Help us understand how the current macro environment is affecting your business and maybe what some of the direct impacts of rising interest rates and inflation are?
+
+Michael Praeger
+
+Yes. And so like I said, it's a common question we get answered -- or get asked that I get to answer. And the first thing I'll say is, remember, we kind of started by introducing that -- I founded the company in 2000. So we've been through a few cycles in the past, whether it be kind of the end of the dot-com cycle to 2007, 2008.
+
+And one of the things within the middle market, these companies are really resilient. These are significant companies that even in 2007, 2008, across our base at that time, we literally had 1 customer go bankrupt. And so the middle market is really resilient from that perspective.
+
+The second thing is we have pretty good visibility into potential headwinds. We look at 2 things. We look at volumes, both invoice volumes as well as payment volume. But remember, before payment occurs, it's an invoice. Before it's an invoice, it's a purchase order. So we have good pretty visibility into that cycle. And to date, we've not seen any headwinds within our middle market segment. And we're -- I think we keep looking as kind of the leading indicators, where we will, is obviously on the volume side as well as kind of on the top of funnel.
+
+And this is where we believe that what kind of transpired, both kind of at the end of the dot-com and as well as in 2007, 2008, is that we saw some tailwinds in terms of in the middle market, it was a reason for them to automate key processes. Instead of hiring those 2 extra accounts payable clerks, let's automate this business process. And it was kind of a catalyst for new buyer customer growth.
+
+But certainly, the #1 kind of factor that we're going to see in terms of inflation is -- and that's why there's so many different kind of competing dynamics that are happening right now. You have some kind of choppiness in the market. But at the same time, you have kind of the overhang of COVID and middle-market companies now getting back and getting caught up on their automation. At the same time, you have some inflationary factors that we believe are kind of impacting some of the average payment transaction sizes that we're seeing as well. So lots of different factors. They're watching closely, but we remain pretty confident, and we have pretty good visibility to what we're seeing.
+
+Unknown Analyst
+
+Got it. I guess any good interview question in terms of weakness into a strength. When you think about what your product offers to new customers, it could be a cost-saving tool, so...
+
+Michael Praeger
+
+Yes.
+
+Unknown Analyst
+
+So when you think about the macro environment that we're in, as you go to market, are the benefits, the ROI, the efficiency gains, are those clear to the customer base? And how are you kind of trying to capture it?
+
+Michael Praeger
+
+Yes. We really have -- we've been evangelizing it for a long time. And I think within the 8 different verticals that we're in, where we're considered kind of the leader in those verticals, the message is probably resonating pretty well. It's -- certainly, we define the middle-market segment of companies between $5 million and $1 billion of revenue. And just in the U.S. alone, it's about 435,000 of those companies, and we're the leader and we have 8,000. So I'm worried about kind of the other 400,000 and how do we get the message out.
+
+But there's what -- kind of third-party research as well as our own kind of work is validated. It takes the average middle-market company about $19-plus to process an invoice payment transaction through their existing kind of paper-based process. And when they automate with AvidXchange, that $19 go to roughly $5 or $6. So on average, they're saving about $13 per transaction in labor savings and some of the paper-handling costs. So what that translates to is a really rapid ROI and typically less than 1 year return on investment. And so that's kind of what we're evangelizing in the market.
+
+And I think one of the things we've seen historically is in kind of choppier waters, we have a choice where either I can automate with a very rapid ROI or hire 2 more full-time, permanent accounting clerks to do accounts payable. That's kind of the messaging that we lead into that the automation is the smarter decision and much more scalable for the future. So I think, in the industry vertical, that's working really well. And what keeps me up at night is how do we get that same message out to the other 400,000 middle-market companies so they can also adopt.
+
+Unknown Analyst
+
+Makes a ton of sense. And so when they finally do adopt, you bring that payment file over. Could you talk about driving adoption of electronic payments? So much of the business is still check and electronic.
+
+Michael Praeger
+
+Yes. So one of the kind of our strategies, and we call it kind of year 2 of the AvidXchange business flywheel, is -- which is geared to maximizing the volume on our platform. And what makes this a little bit unique is that we're really one of the few people that say, "Mr. customer, send us all your transactions, regardless of what, 4 million." And at the beginning, as we know, they're heavily based on paper-based check transactions.
+
+Others in the industry say, "Just send a subset of those that we know that we can send out electronically. And Mr. Customer, you keep the rest." And we believe by taking all the transactions, yes, may be a little more costly in the short term because we are managing some paper check transaction as part of that conversion, but we're in control of that conversion. And we're then able to drive, with our different strategies, moving suppliers from paper to electronic.
+
+And I think that's why we're at 40%, we've been able to convert to date of our volume. And that we're now over 50% of our overall supplier network of 825,000-plus suppliers, over 50% now has adopted one of our forms of AvidXchange virtual card or AvidPay Direct, which is our electronic pivot mechanism where we settled through ACH, but we wrap a data layer around the transaction that our customers can use to automate their reconciliation. And that's been really powerful and again, it's kind of our secret sauce, what makes us really unique in the market.
+
+Unknown Analyst
+
+Got it. You've talked in the past about 40% of transactions being electronic. Where do you think that can go over time? And then when you look at the payment methods underlying, what do you think that mix looks like between virtual card, AvidPay Direct, real-time or something else?
+
+Michael Praeger
+
+Yes. It's a good question, one that we spend a lot of time kind of talking about. Just give a little context, too. About 5 years ago, that 40% number was about 20%. And it's gone to 40%. And I've kind of voiced where we believe long term, that number can get to roughly the 70% range.
+
+But what's going to take to go from 40% to 70% is continued, I'll say, creation of new payment modalities that incorporate different price points combined with different data delivery element and ways to deliver the data. And so just a couple of examples of things that we're doing to facilitate that is now, as part of leveraging our partnership with Mastercard that we formed in 2017, we have a long term, at the time, was about a 12-year commercial agreement where we're exclusive of Mastercard as well as Mastercard is exclusive to us for the middle market, is that we're able to configure our own interchange structures for different subsets of suppliers using kind of, we call it, a multi-band structure.
+
+And so that gives us a lot of power in terms of that pricing component of identifying the value proposition a particular supplier may need in order to move from paper check and begin accepting, in this case, virtual card payments. So that would be one element. And now we have 5 or 6 different kind of pricing elements related to our virtual card offering.
+
+At the same time, we're also making -- doing what we can to create software tools to make the acceptance easier. And so we've been talking about, over the last couple of quarters, the rollout of our STP, Straight Through Process, for virtual card. Because what you find is that within typically the middle-market supplier, if they've not yet automated their card acceptance, accepting a virtual card is a really manual, painful process for them. They have large teams of human beings data entering card numbers into a merchant terminal as an example. And then they have to do the same thing into their accounting billing system to reconcile it.
+
+And through our STP offering, we've taken the human element out. We pushed the money right into their merchant account, and we push the data right into their reconciliation process so they can eliminate all the data entry required to it. And now we're seeing kind of that acceptance begin to take hold.
+
+So that's what we believe is going to continue kind of to keep moving the needle related to how does that grow. And certainly, some of the new payment modalities, one of the things I get asked a lot about is kind of real-time payments and some of FedNow stuff. And one of the things you have to remember is CFOs at middle-market companies or controllers, they're not checking their bank account balance like intraday. So like the real time payment modalities isn't really what I would say, as impactful to middle market as that maybe to either consumers or small business.
+
+But what is, I think, we're leaning into is how we can actually use some of these new payment modalities internally to make our process more efficient. So we can, for example, rather than settling AvidPay Direct transactions through ECH, can we settle them through an RTP and provide the same type of data and continue to charge the rates that we're charging? So we're looking at it from that perspective, but it's really the combination of price combined with the data delivery. That's the secret for that continued adoption.
+
+Unknown Analyst
+
+Got it. Makes sense. Maybe we can switch gears a little bit and talk about some of the distinctive elements of the middle market. I mean you guys have -- I think the competitive dynamics in B2B payments in general are just very misunderstood based on a lot of the questions that we get. So what is different about the middle market? Who do you kind of consider your biggest competitors? And how do you think about the barriers to entry in this place that you play in?
+
+Michael Praeger
+
+Yes. So first of all, hands down, across the entire kind of middle market segment, the #1 competitor is the status quo paper-based process. When I -- every month, every quarter, when I have our loss reports from our sales force automation system, the #1 loss code is, the customer is not ready yet, revisit in 6 months or 12 months. It's -- we typically don't lose opportunities to another company.
+
+When we look at kind of competition from other companies, what's interesting is across our 8 different verticals, we really don't have a competitor that crosses over multiple verticals. They're very vertically specific. And in the case of real estate, it's probably a poster child for some of this complexity, is within real estate, we'll have small competitors that are very asset-based. So you might have a competitor for real estate multifamily that's different from real estate office, that's different from real estate retail as an example. So that's typically who we compete with is very kind of vertically focused.
+
+In the horizontal market, we've seen some competitors kind of lead the market, like a MineralTree, who used to be -- used to see maybe 10% of our horizontal opportunities like with the NetSuite, Microsoft Dynamics-type channel, who really kind of disappeared from middle market. And where we see other forms of competition may be in international where a company may have, say, over 50% of their transactions relate to cross-border or international. We might see a Tipalti. But that's kind of the lens. And we haven't seen any new entrants in middle market actually in several years. And I think the reason is because, one, it's getting harder. The moat is getting bigger. Just being licensed as a money transmitter is harder.
+
+Now you have states like California and Texas that have $25 million to $50 million tangible net worth requirements. And so if you think about it as a start-up company, it's almost impossible. And it takes like 3 years to get licensed. So there's some structural things that have kind of made it more difficult for competitors to get into the middle market. And then probably the biggest thing, though, is just the amount of accounting systems that you have to support and integrate to, and it's taken us 20 years to build our library of 200-plus different accounting system integrations. And that's really hard.
+
+Unknown Analyst
+
+Yes. No. It makes sense. Yes, maybe you could talk about the vertical strategy. I mean you run this kind of dual vertical track and horizontal track kind of go to market. Within the verticals that you're in today, I mean, are there other adjacent or emerging verticals that you aren't in today that you're kind of focused on over the next couple of years?
+
+Michael Praeger
+
+Yes. So people think sometimes, it's a bit more complicated in terms of kind of what are the next verticals, and it's actually pretty simple because we actually look at where we're naturally attracting customers. And 1 of the 2 of the most recent organic verticals that we launched over the last couple of years have been health care facilities and education. And they directly resulted with we looked up and said, "Hey, in the last 12 to 18 months, we've attracted 70, 80 health care, long-term care facility-type customers." That's kind of interesting. There, we've been really successful. Let's create more of a specific vertical focus from a sales go-to-market for that segment.
+
+The same thing with education. We looked out and we said, "Hey, it's interesting, we've been attracting some colleges, universities, some school systems that are adopting our solutions and being successful. Let's create a focused effort." So we look at where we're naturally seeing customers coming to us, then we start getting a beachhead of customers, create more of a go-to-market focus around that. And we'll continue to do that.
+
+And people ask me all the time, what are some of the characteristics for some of the new verticals? But I would say one that kind of have a lot of the same characteristics of verticals that we're in, and one of those characteristics are any company that has multiple locations is a great candidate because the accounts payable complexity kind of goes up by a multiple for each different location that a company has, because of the approval structures, how you're routing invoices back and forth. So that's a good characteristic. So we are constantly looking for other industry verticals where a characteristic are that companies have lots of locations.
+
+Unknown Analyst
+
+Got it. No, that makes sense. We'll stick with newer verticals. I think media is one of the newer verticals of the business.
+
+Michael Praeger
+
+Yes. And that was one that we kind of got into through an acquisition of FastPay. So that's the other kind of lever. What I would say is that we're constantly looking at is, to organic growth, how can we opportunistically look at some of the smaller tuck-in M&A acquisitions like a FastPay, which we used to get into media.
+
+We looked at media, we really liked some of the characteristics of media around some of the acceptance of electronic payments. But because of industry relationships and things like that, it was very difficult to organically grow into. But we used the FastPay acquisition, and then we significantly accelerated that growth.
+
+And one of the questions that you're probably going to ask me about is we're in a kind of a political cycle that happens every 2 years. And one of the things that's emerged on -- within that -- our media verticals, we've become also the leader in political advertising payments. And so we're living through it kind of for the first time in this cycle, but excited about what we're seeing in terms of interim. And next year is actually going to be even more exciting -- I should say, in 2 years, in '24.
+
+Unknown Analyst
+
+Right.
+
+Michael Praeger
+
+So it's probably going to begin next year.
+
+Unknown Analyst
+
+Yes. Exactly. Okay. So maybe switching gears to some of the financials. I mean the market has obviously been much more focused on profitability over the last 12 months or so. You guys actually accelerated the path to profitability most recently committing to full year profitability in 2024 versus on an exit basis previously. So what levers are you pulling internally to position the company for that milestone?
+
+Michael Praeger
+
+Yes. So it's interesting because we haven't even hit our 1-year milestone in being a public company yet. And I think in our road show in -- last October, in 140 meetings, I think we had 2 questions related to profitability. So just kind of a great example of the sign of times exactly.
+
+But one of the things I'll say is, remember, we're going back to how we started this whole conversation is we're a 20-year-old software company. And so we actually ran the business being profitable for about 10 years before we did our big capital round in 2015 at Bain Capital and others led as part of that investment. When we really saw the market opportunity, we said, hey, now is the time that we're going to really build for scale and build to be -- at the time our mission was how do we scale to be a $1 billion business.
+
+And so the answer is we've been making those investments. And we feel that from the infrastructure, scalability, one of the things we recently talked about now, we've completed the full transition from our AvidXchange private cloud into Microsoft Azure cloud. That's another example of some of that transformation. And now that we've kind of made those investments, we kind of don't see how we're going to have to incrementally grow some of that OpEx and G&A expense, like it's grown in past years. And we're starting to see it show up in the numbers with gross margin improvement, we've been on a nice trajectory.
+
+And what I would say is we have pretty good visibility to our future margin profile. And so it's just a natural extension of some of those things that we're accelerating.
+
+Unknown Analyst
+
+Right. I think the biggest component of that is the gross margin taking that up to roughly 70% over the same time frame. You touched on a couple of the things from an efficiency perspective. I'm sure payments is also a contributor. Maybe you can hit on how that roughly breaks down from kind of where you are today to get to that...
+
+Michael Praeger
+
+Yes. I mean, so today, kind of low mid-60s to, we believe, that 75%-plus reaching scale. And there's -- I'll take in is there's 3 buckets. One is just scale that you get with revenue growth. The second one is kind of all our internal automation. And one of the things when we launched our AvidPay Network in 2012, we actually had a pretty big base of installed customers at the time who began -- really quickly begin using the AvidPay Network. And so we actually, in order to support volume, had to kind of probably invest in more manual, labor-based processes to support our volume ahead of automation. And now we're getting caught up in terms of that automation cycle. So that internal automation of big consumers of robotics and RPA technology to how we do the payment delivery.
+
+And then the other element is the lever of converting. Now we still have 400,000-plus suppliers that are paper check. And on the payment network side, let me kind of back up. Remember, we get a software fee on every transaction, whether it be a purchase order, an invoice, a payment, we get software revenue. But on the supplier side, for a paper check payment, there's 0 revenue and relatively high expense on the payment network. And it's $0.85 roughly of expense for a paper check and no revenue. When we convert that supplier, it goes to, an average, $6 or $7 of revenue per transaction and pennies of expense. That's a really magical lever in terms of driving both incremental revenue growth as well as gross margin expansion.
+
+Unknown Analyst
+
+Makes a ton of sense. Maybe we'll stay on the topic of products geared toward suppliers. Invoice Accelerator has been, I think, one of the longer-term initiatives the company has been focused on since the rollout. What's the progress so far? And what are some of the most important areas you think about for the future road map on the supplier side of the business?
+
+Michael Praeger
+
+Yes. So Invoice Accelerator is one that I've been super passionate. I kind of call it the start-up within AvidXchange. And when I think of kind of AvidXchange in kind of 10 years, the multibillion dollar revenue business is there's really going to be, I think, 4 legs to our overall kind of revenue model. And today, we have 2. Today, we have kind of our AP automation software and we have our payment network.
+
+The third to me is clearly going to be Invoice Accelerator, which is our form of supplier financing. We have a really unique position to execute this product because we have both the buyer and supplier on our network. So we have perfect visibility into all the history on every invoice, every payment, things that get paid on time, things that when an invoice gets -- go through maybe a correction process. And we have visibility in all that, and all the money flows through our platform.
+
+So if you think about the most -- the 2 biggest expenses of traditional people executing this business, it's been how do you underwrite the credit, right? There's not a lot of good financial data about for pure financial underwriting. Well, we take a data science approach to it.
+
+And then the second thing is how do you collect the money, and it's really expensive to collect the money. And in our case, all the money flows through our platform. And so we think we're in a really unique position to do this. And so we kind of started with our version 1.0 a couple of years ago and working to kind of perfect on the data science and how do we get the eligibility underwriting correct. And now we're in the middle of the build for our next-generation 2.0 offering that will be in the market next year. And on our first generation product that we are executing now, we've only made it available to less than 10% of our suppliers, because we're really trying to meter kind of the usage of it.
+
+But one of the things that was part of the catalyst, let's say, okay, now we're ready to kind of invest in version 2.0 and make it available to all our suppliers is that over the last certain number of quarters, when a supplier comes to take 1 advance, over 80% of the time, they come back for ongoing advances within the quarter. And so we think that now, we have the right user experience, and now is the question of kind of building the 2.0 platform and that will be in the market next year.
+
+Unknown Analyst
+
+Got it. Sounds exciting.
+
+Michael Praeger
+
+I'm excited because it's interesting because in 2015, along with Matt Harris, who led the Bain Capital ventures investment, we also had Nigel Morisson from QED. And Nigel is a former founder of Capital One. And I really worked closely with Nigel and his team on how we've kind of built and designed this product. And it's going to be fun seeing at scale.
+
+Unknown Analyst
+
+Got it. Maybe we touched a little bit on M&A earlier with the FastPay acquisition. You guys kind of have the organic approach or the M&A approach to get into new markets. With where valuations have gone, with the current market conditions, where does M&A kind of rank in your priorities or kind of opportunities for expansion, call it, next 3 years?
+
+Michael Praeger
+
+Yes. I'd say we continue to be kind of really after -- our corp dev team is as active as we've ever been kind of evaluating kind of the pipeline. Unfortunately, we've not seen the valuation adjustments that have happened in the public market kind of work their way through to kind of the private market. There's still a lot of guys and ladies that are running $5 million software companies in our market thinking they're going to get valued at kind of where the market used to be.
+
+And so my guess is that we're still early. And as these companies have to raise capital and as we move into kind of later this year into next year, I think we'll see some of those valuation adjustments. And then I think the M&A market will kind of accelerate. But our playbook is really to find -- we're looking for a smaller tuck-in acquisitions. And there's really no one else -- very few companies that have any kind of scale within our overall market. So within the different industry verticals, you're dealing with very small sub-$10 million revenue businesses typically. And our...
+
+Unknown Analyst
+
+These are with payments, right?
+
+Michael Praeger
+
+Right. Exactly. And our playbook is, let's identify those that are in industry verticals that we really are interested in, use it as a catalyst, their leverage, their beachhead of customers, their domain knowledge and relationships they have. And then we bring our payment network capabilities along with our go-to-market capabilities, and we can grow that vertical really quickly. And that playbook is -- we've run multiple times really successfully.
+
+Unknown Analyst
+
+Got it. Yes. So I touched on it a little bit with the interjection. But you've done a series of acquisitions in the past that brought on kind of software-only businesses.
+
+Michael Praeger
+
+That's right.
+
+Unknown Analyst
+
+You now have this asset that just increases the monetization of those relationships.
+
+Michael Praeger
+
+Absolutely.
+
+Unknown Analyst
+
+So what does that go to market look like with kind of the back book of customers? How have you guys been seeing the adoption of the AvidPay Network?
+
+Michael Praeger
+
+Yes. So one of the -- really, I'd say, almost all of our acquisitions we've done, with the exception of one, they've been software only, which means that they want -- we're inheriting a group of great software customers, but then they've not yet adopted payment. And so that, as you said, that gives us great a back book for us to kind of go to as well as kind of the ability to, what I'd say, kind of begin to see kind of a flywheel effect within these different verticals really start to begin to work.
+
+And what I mean by that is in a lot of these different verticals, the supplier base are very vertically focused. And we're starting to see it in different categories within real estate. And when we're adding, let's say, a new multifamily real estate customer, the majority of the suppliers are already on our network, day 1, right?
+
+And so getting these verticals and beginning that process of the onboarding of the suppliers begin really accelerating that flywheel effect, and that's a really kind of powerful dynamic. But when we think of our overall revenue growth, we have both the installed base opportunity that's pretty real. We're still single-digit penetration in each one of our 8 different verticals. And then we have the horizontal side that we're working hard to execute against.
+
+Unknown Analyst
+
+Makes sense. I think during the time of the IPO, you guys talked about international expansion as one of the growth drivers. I think you launched a cross-border payment offering. I know some of the verticals you're in are not particularly heavy in cross-border, but as you think about either international verticals, international operations or just expanding the cross-border offering, how big a priority is that? Where is that on the road map?
+
+Michael Praeger
+
+Yes. I mean -- so I'd say it's one of our priorities. However, I would say, as I kind of caution everybody, our business today in industry verticals that we're in are not really cross-border focused type verticals in terms of international. We do think our cross-border offering will allow us to move into potentially new verticals that historically we've not focused on because of that cross-border need.
+
+But most of the biggest opportunity is in the horizontal market, supporting some of our great partners like the NetSuites of the world, Microsoft thematic -- Dynamics, Acumatica are really some good examples where a big chunk of their customer base would love our tools, but they do have that cross-border need. And historically, we haven't focused on supporting those type of customers. And now we have the capability to support them. And so we're going to be at NetSuite in the coming weeks at their annual conference in Las Vegas, and really excited about kind of talking to customers about that cross-border opportunity.
+
+Unknown Analyst
+
+Awesome. You disclosed 2 key metrics, I think transactions process and TPV on a quarterly basis. So maybe you could help us understand some of the drivers of these metrics more recently? And then what sort of trends should we expect over the kind of the mid to long term?
+
+Michael Praeger
+
+Yes. So I mean, the transaction is going to measure all the transactions of our platform. So this would be kind of both invoice transactions as well as payment transactions. And then obviously, payment volume is specific to payments. One of the things that I think we are seeing is just, one, is what drives overall transactions are continued buyer customer growth, right? That's number one that drives all transactions.
+
+But on a payment volume perspective, one of the unique dynamics that we're also seeing is that we've had several, really, industry partnerships come to us and say, "Hey, AvidXchange, we'd like to white label your platform and really position it as the payment module of our system." And we've done this now with like RealPage, Concur and a handful of others, that we call kind of their pay-only partnerships where they don't use us for the AP automation, but they use our payment network to execute the payments. And so that's why you're seeing some of the payment volumes growing faster is because we have some of these kind of partnerships that are contributing to that.
+
+And I think that's a natural extension where we're building this really proprietary and substantial payment network in the middle market that others want to have access to and they're like, "I don't think we want to spend the money to replicate what AvidXchange has built. Can we partner with them and share economics and get access to their network?" And we're starting to see more of those opportunities come to life.
+
+Unknown Analyst
+
+Got it. And I think you said it before, it probably bears repeating that transaction, there's so many things that goes into payment volume, whether it's penetrating those back book to customers, whether it's inflation, whether it's some of the pay-only customers. Seems like the base case expectation is payment volume should continue to grow at an outsized rate relative to transaction.
+
+Michael Praeger
+
+Yes. That's what we believe, yes.
+
+Unknown Analyst
+
+Okay. Maybe switching gears. It's September, we're looking into the back half of the year into 2023, lots of uncertainty. As you look for the remainder of the year, how do you think about embedding some of the macro factors that everyone's seeing into the guidance?
+
+Michael Praeger
+
+Yes. So I think we've taken with my partner, Joel Wilhite, he'd be sitting right here, I think the word that he would use is we use a balanced approach. And we do have pretty good visibility into what we're seeing. And because before payment shows up as an invoice, it's a purchase order. And so I think we've taken a pretty balanced approach in terms of what we've seen historically, what we're currently experiencing within our guide. And so we feel really good about that. And I think we'll continue to take that type of approach as we go into next year.
+
+Unknown Analyst
+
+Got it. Makes sense. Got a couple of minutes left here. Something that's been top of mind for investors. Obviously, we touched on the profitability and some of the puts and takes of gross margin earlier being breakeven by 2024. The long-term targets: 75% gross margins, 25%-plus EBITDA margin. So maybe if you look out beyond 2024 multiyear journey, how do you think about the glide path to those longer -- to kind of the steady state of the business?
+
+Michael Praeger
+
+Yes. I mean I think we kind of look at the business in kind of a 3- to 5-year kind of increment. I know guys like you like to create 10-year models and -- but what's kind of really interesting is kind of our initiatives, our investments, things like that, we really think of more in kind of a 3- to 5-year basis. So we -- so I'd say we feel pretty good about that glide path. Continue to make incremental improvement every year. We said we pulled forward our path to profitability. And I think we're continuing to lean into that accelerated path.
+
+And we -- Invoice Accelerator is going to be a really big business for us. We're going to see that be in the market next year. But it's really going to kind of accelerate as we -- in '24 in terms of being really meaningful contribution. And so I think we're going to see those things start to really unfold.
+
+And then one of the things that we haven't talked about is kind of that fourth year, which is the data. And I think that's going to be the fourth way to our overall revenue model long term. And we're just scratching the surface on different use cases of all the data that we're generating. And I think, long term, that will be kind of the fourth, really, leg to our monetization.
+
+Unknown Analyst
+
+Got it. Makes a ton of sense. I think that's all the time we have today, but really appreciate the commendation, and thank you very much for being here.
+
+Michael Praeger
+
+Yes. Thanks for having me.
+
+Unknown Analyst
+
+You're traveling for the rest of the week. So thank you for making it.
+
+Michael Praeger
+
+Yes. No, I appreciate you fitting me in.

AvidXchange Holdings, Inc. Presents at J.P. Morgan’s 50th Annual Global Technology, Media and Communications Conference 2022, May-25-2022.txt

@@ -0,0 +1,307 @@
+AvidXchange Holdings, Inc. Presents at J.P. Morgan’s 50th Annual Global Technology, Media and Communications Conference 2022, May-25-2022 02:30 PM
+5/25/22
+Tien-Tsin Huang
+
+Great. I think we're live. My name is Tien-Tsin Huang. Thanks for being here with us. I cover the payments and the IT services sector at JPMorgan. We've got AvidXchange next up to bat. We're going to do a fireside chat, questions from the portal. So feel free to chime in through that. I'll be checking out. So Michael Praeger, Mr. Praeger, the famous Praeger, Chairman, CEO, Co-Founder of AvidXchange, welcome. Thank you for being here.
+
+Michael Praeger
+
+Yes. Thanks, Tien-Tsin. Excited to be here, and thanks for taking the leadership of having an in-person conference.
+
+Tien-Tsin Huang
+
+It's a big deal. Honestly, it's been great to see everybody. It's been -- just really happy to shake your hands for real. It's been a long time. So we're glad to do it.
+
+Tien-Tsin Huang
+
+I always like to start, Mike, if you don't mind, I think the founding of the company is really, really important, especially in your case, because you've been at it for sometimes, through some cycles, not trying to call you old.
+
+Michael Praeger
+
+Yes, yes. I started really young.
+
+Tien-Tsin Huang
+
+There you go. But you have had some pivots, too, right?
+
+Michael Praeger
+
+Absolutely.
+
+Tien-Tsin Huang
+
+And so I think it's important to go through that. So would you mind starting with that?
+
+Michael Praeger
+
+Yes, absolutely. So we actually are -- got started in 2000. So we've been at this for a while, seen lots of cycles along the way. But we're a software-only business for really our first 12 years. Folks exclusively at automating the accounts payable payment process for middle market companies up until 2012.
+
+And based on customer feedback and saying, okay, now we've automated the entire invoice AP process, but we're paying all these electronic invoices with paper checks. That doesn't make a lot of sense to us. Can you help us with that? And so that led to the launch of the AvidPay Network in 2012, which was one of the biggest pivots that we've made not only from another significant new product perspective, but also from a mind shift perspective of we said -- realized very early on, if we're going to really be successful in building a 2-sided network that we need to really think of the supplier as a core customer, just like we thought about the buyer as a core customer for the previous 12 years.
+
+And that means we need to organize the business to support the supplier as a customer in terms of having dedicated sales force, customer success and actually build products for the supplier that they would deem as valuable and create a value proposition for the supplier to want to raise their hand to be part of that network. And so that was obviously kind of been core to our growth over the years.
+
+And then we're also kind of in the early stages of delivering what we think will be kind of that third leg, which is around the supplier financing piece, which is today an emerging business for us, but we think it's going to be a really big business over time.
+
+Tien-Tsin Huang
+
+Good. We'll talk about that. But given you've been at this, like you said for a little bit, you've seen some different cycles. I'm sure you're getting a lot of questions around the macro in your meetings. How well built or suited or recession-ready is AvidXchange?
+
+Michael Praeger
+
+Yes. So we're -- Joe Wilhite and Subhaash, we talked about this earlier, and it's like when you get out of Charlotte, you come to conferences like this, it's a little bit of a doomsday kind of discussion regarding what may be coming. And it's like, holy cow, internally in the business, we don't see any of that.
+
+And what we do know is that being started in 2000, we have lived through, whether it be the dot-com, 9/11, 2007-2008, pandemic. And one of the -- there's a couple of things that we've -- that have been consistent for us across all those different kind of choppy waters is, one, is how resilient the middle market segment is.
+
+Our -- we have 8,000 buyer customers that are middle-market customers who have automated their AP and payment process with us. At an average, 85% of our customers grow every year, super resilient. In the kind of 2007-2008, we had literally 1 customer go bankrupt. And then we ended up getting a FedEx from the Bankruptcy Court because they couldn't afford to turn off their AP system because we had all the records for all the bills that this company had, right?
+
+And so the other thing, in addition to kind of resiliency in the middle market, we've also seen -- it's been a catalyst for what I would say, new customer adds. And maybe crazy, but it's actually easier to have the conversation with the CFO or Controller about making their back office more efficient when there's kind of choppier waters than when things are going really well, right? And it's all about then how do I do more with less, how do I make our back office more efficient. And so -- and we've noticed that consistently as well. So we think we're really kind of well suited. And -- but we haven't really seen any kind of indications of choppy waters to date across our customer base.
+
+Tien-Tsin Huang
+
+Good. So I'm curious, as you're sitting down and pitching to a mid-market is the lead to -- on cost savings to begin with? Of course, there's automation, there's benefits, et cetera. But is that typically where the conversation starts? And what's the moment where like, okay, we've got to do this?
+
+Michael Praeger
+
+Yes. So usually, there's a catalyst reason why they're having the conversation with us. So we try to kind of obviously make it about that catalyst reason. It could be a fraud event. It could be that in the pandemic was around, okay, like our entire office went to work from home but unless I'm going to send my AP staff home with preprinted check stock, they still have to come to the office. How do I manage this? And so that was certainly a catalyst.
+
+But what I would say is -- really just making the overall process more efficient and having visibility to where their -- the status of their invoices, status of their payments. For a CFO, in the old way, where they don't have any visibility to do real-time accrual management, they don't know what expenses are sitting in the field, sitting on someone's desk until it gets sent into corporate accounting, right? And to be able to basically have real-time views on all the expenses of the business through real-time accrual management, that is -- that efficiency gain is what really is, I'd say, the #1 feature and then solving kind of those unique problems. And then obviously, the ROI is kind of no-brainer. We've been at this for a while.
+
+It's -- for average middle market customer, to manage the invoice and the payment, it's a $19, $20 process, and we take it down to $6 or so. So $13, $14 cost savings per transaction. And so that's usually kind of the easy part for them to get their heads around. It's more about, okay, a lot of companies have developed a lot of nuance around their paper-based process. And they were trying to figure out, okay, how is my nuanced paper-based process going to work in an electronic environment? AvidXchange, can you support all my different business rules that I have around how things get coded, how things get approved?
+
+And so that's usually a little bit of mostly the sales processes, really having them visualize what their paper-based process is going to look like in an electronic world.
+
+Tien-Tsin Huang
+
+Okay. Good. I mean we spoke to a lot of your clients, they said the same thing around once they went through the process, they love it. It was a no-brainer from a cost savings perspective. So it's good to hear.
+
+So when we think about Avid, we think about it as a 20%, 25% revenue grower, including M&A. How do you build up to that? What's the visibility? What are the building blocks to get to that?
+
+Michael Praeger
+
+Yes. So first of all, the way we think about it is that we're focused on how to deliver that 20% organic growth number. And then inorganic is a little bit more opportunistic around what may be available, what comes around, has to meet the right strategic rationale for us. And so that's a little bit more opportunistic.
+
+So I think of it as the AvidXchange flywheel, what drives our organic growth. And we have 4 kind of gears to what I call the AvidXchange Flywheel. First of all, it starts with delivering a great software experience for our buyer customers, and that's where we're constantly thinking about, okay, how do we extend our platform. We just announced last quarter kind of our next-generation purchasing tools that now kind of extend that business process prior to an invoice getting created, allow us to move up market a little bit within the middle market.
+
+And especially for those industries that really require a more robust purchase order process. So that would be a good example of kind of how do we continue to kind of deliver more growth within those buyer customers.
+
+And then the second kind of gears around maximizing the volume and then converting all these paper checks to electronic. And that's one of the biggest levers that we have, both from a organic growth perspective as well as from a margin efficiency.
+
+If you think about it, we get paid for every transaction type by our buyer customer for software. But on the payment network for paper check, there's 0 revenue and there's relatively high expense, an average of $0.85 per payment. Well, when we convert it to an electronic monetized payment, it goes to $6 or $7 of revenue and like pennies of expense. Like that lever is really powerful from both organic revenue as well as margin expansion.
+
+And then we have what I call kind of our database products, which is we're using 20 years' worth of data to drive new offerings and extend the value proposition. And probably the poster child for this today is Invoice Accelerator. We're using all the data of our network, determine invoices that we can accelerate for next-day payment, which then really drives the value proposition for suppliers as well as gives us another monetization component, which drives that overall yield that we're very focused on.
+
+Tien-Tsin Huang
+
+Good. Since you mentioned it, let's go right into that payment side, e-payments. I'm a payments analyst, so we're always going to go to that. The monetizable payment piece clearly is moving higher. Where are we now versus where do you think the ceiling might be? And it's always a fun debate, and we get a lot of questions about it, right? There's tension between the buyer and the supplier. They have different motivations, cost savings, efficiency, timing, working capital. So how do you solve for that and get that penetration rate higher?
+
+Michael Praeger
+
+Yes. So first of all, I'll start with when we're back here, and you had me to come back and speak in about 20 years from now, where we both had a little more gray hair, I think we all agree that there's going to be significantly less paper checks in the system than there is today for a B2B payment.
+
+So the question of the debate all is, what does that adoption curve look like, right? And so what we believe today, we're monetizing about 40% of all payment transactions going through our platform. And we believe that moves to 50%, 60%, 70% over time. However, I think the trick is it's not like the consumer world where you have a small number of finite payment methods. The trick here is payment methods, different modalities at different price points with different aspects of data delivery bundled with it.
+
+And I think that's the trick because every different type of supplier needs something a little bit different. And so we've really been leaning into how do we create on electronic payment side these different type of offerings. And so today, just on virtual card, we have kind of our standard program. But then we have a variable program where we can create kind of a custom interchange model for a particular supplier that has a certain method of [ remits ] data bundled with it that we can pass directly into either their merchant account or their accounting ERP system.
+
+And so I think it's that combination of data with different price points that ends up driving the overall adoption curve and certainly looking forward to some of the new modalities as well. But one of the things that's important, I think, on the B2B payment side recognizes, the data is almost as important as the money because the most expensive transaction a supplier has is one that requires manual intervention to do reconciliation to figure out, okay, what customer accounts does this supply to. Okay, the customer has 30 invoices outstanding, but there's payments for 2, which 2 are those?
+
+And once they have to do that manually, then it becomes a really expensive transaction. So if we can eliminate that and pass the data so they can do auto reconciliation, then become big fans of the supplier. And actually, the economics then isn't a big deal. We're seeing suppliers in our -- straight through -- new STP, straight-through process, that are happy to pay full interchange on virtual card if they can have a straight-through process. And so I think identifying those value propositions and delivering them in an automated way is what we think is a secret sauce.
+
+Tien-Tsin Huang
+
+Yes. No, we've learned that. You'll pay for it if you get better data, better returns, better flow, that will come. Just one more on the payment modalities. More data traversing with the payment, networks coming up, perhaps. I think Visa, Mastercard have talked about that as well. Is there anything on the horizon that you're excited about or worried about that might change the...
+
+Michael Praeger
+
+Yes. So like everything else, we kind of -- we do really well as -- in working with our suppliers and managing their business rules, the different types of payments they want, along with how they need to get that data and have it be integrated. And so the new payment methods actually, we're excited about because it actually gives us more opportunity to create different value propositions.
+
+So in our Invoice Accelerator offering, for example, with real-time or RTP payments, now we can offer actually a new -- we can offer a new offering to say, you have your choice, either get paid like same day or you get paid next day and at different price points.
+
+Tien-Tsin Huang
+
+Yes. Yes. No. The flexibility of all that matters. It solves itself over time. So let's get out of the payments weeds a little bit. I don't want to be too nerdy on that. When I think about your moat, AvidXchange's moat, and I've heard this from the very beginning even before I got to know you, Mike, was that the integrations, the 200-plus integrations that you have with the ERP providers, that was your biggest moat. Do you agree with that?
+
+Michael Praeger
+
+I would say it's that, which is really an extension of our go-to-market strategy, which is around the verticalization of the middle market because it's the verticalization that actually causes all these different accounting systems to exist. And what people don't realize -- listen to some of these other fireside chats you've done, there's usually a question towards the end about what investors don't understand.
+
+Tien-Tsin Huang
+
+It's my go to.
+
+Michael Praeger
+
+Okay. And I'll say, for us, which gets to the heart of this question, it's understanding what makes the middle market unique? Why is it different than the small business market? Why is it different than enterprise? And what makes the middle market unique is you have all these different industry verticals that have unique business process. And you know it's a unique business process by the fact if there's a dedicated accounting system that's for that particular industry.
+
+That's different than, say, the NetSuites of the world or Microsoft Dynamics. And what we've done is we've understand the nuance of that business process within that industry vertical. So how a real estate company process accounts payable is very different than a construction company who has to deal with like a lean waiver and job costing, which is different than, say, media where 90% of every invoice is wrong and has to be corrected.
+
+Like every industry has its own business process across the middle market. And we understand the nuances of that business process cater very industry-specific solution and then integrate all the relevant accounting systems that support each one of these verticals that we're in. And that doesn't happen overnight. That's a 20-year process that we've built over time. And that's what really creates that massive moat.
+
+And when -- I love the competition question because over the last 2, 3 years, we've actually seen -- we haven't seen any new entrants, and we've kind of lost a few because of M&A. And so I think today, it would be very difficult for any new company to effectively compete in the middle market because of some of these dynamics.
+
+Tien-Tsin Huang
+
+Yes. Agreed, agreed. The -- so one of the companies that told me about the ERP integration as being important was Mastercard and Sachin and crew, I think they've -- they're a strategic investor. They're a partner. So what does Mastercard bring to the table for you?
+
+Michael Praeger
+
+So first of all, hats off for Sachin because at the time, he was running B2B payments at MasterCard prior to his current role. And so he was the one that we formed a relationship with. And a little bit history to this, Mastercard was looking for a partner for the middle market for B2B payments and went out and talked to about 40 companies worldwide and ended up selecting this company in Charlotte called AvidXchange.
+
+And the reason why is because they felt that we were doing something that was very unique in the middle market related to the monetization levels that we're achieving. This is back now in 2017 that was significantly above everybody else they talk to. And it all related down to is we had a unique value proposition that we're delivering to the supplier that drove this adoption.
+
+But what that partnership did for us is it really gave us a significant amount of credibility in the landscape. Before that, maybe not everybody knew who AvidXchange was, MasterCard certainly kind of raised that level up. And it gave us a lot of credibility for not only customers, but for partners. And then within the bank channel, which is the biggest benefit of Mastercard gave us is the credibility combined with distribution. And so Mastercard actually puts their brand, their name on AvidXchange, on our platform and delivers it as a Mastercard product. Well, that goes really a long way to getting banks like Fifth Third and Bank of America and others to adopt AvidXchange as their platform and put their name on it.
+
+And so without the Mastercard backing, those will probably be 5-year due diligence processes from a vendor compliance perspective. So that's the biggest benefit. And certainly having this exclusive relationship with Mastercard has been a big deal for us.
+
+Tien-Tsin Huang
+
+Good. So thinking about those partners, banks or you pick the type of partner, can you get into another [ gear ] with a certain channel in your mind, Mike?
+
+Michael Praeger
+
+Yes. So when we -- because our go-to-market strategy as we talked about the verticals, that's where our direct sales force is focused on these different vertical markets. But then you have this whole horizontal segment where you may have complexity regarding kind of the business process, but it's not unique to industry vertical. And that's where you see like the NetSuites of the world, Microsoft Dynamics, Intacct, Sage play. And we call that the horizontal market.
+
+And what we've -- our strategy there is we cover the horizontal market through a partner ecosystem. And today, we actually have 180 partners. It's up from 120 a year ago. And these partners include bank channel partners as well as software ERP partners. So just like we -- our go-to-market strategy in the bank channel, we do the same thing with different ERP partners where we almost become an extension of their ERP system.
+
+And then we have other just industry partners and consultants. And that ecosystem then is really kind of valuable. Again, it's taken us 20 years to create those 180 partner relationships. So that becomes kind of part of that moat that we built. But that's what I would say is really valuable in terms of kind of that go-to-market. And so I think we're always going to be led by direct sales. But certainly, the partner ecosystem and the horizontal market is going to be always a real big supporter for us.
+
+Tien-Tsin Huang
+
+Okay. Good. I'm just curious, you said you like the competition question. There doesn't seem -- it seems like you own this category on the mid-market side.
+
+Michael Praeger
+
+We do have one big competitor, and that's the status quo. And that's the big -- that's the -- when we -- I love it -- I don't love it, but it's -- I always get a chuck a lot when we go to our sales force system and you find out like what's the -- who's the biggest reason why we lose a deal, and it's always because the customer is not ready yet. Come back in 6 months, come back in 12 months. And it's not usually another competitor. And so that's what we're working really hard is how do we kind of lean in to drive that adoption curve because that's the #1 challenge we have across the middle market.
+
+Tien-Tsin Huang
+
+Do you see -- I think you've been very clear to say everyone, your competitors are sort of in their lanes, with Bill on the low end, Coupa is on the high end, you're in the mid-market. Then we've seen Global Payments buy MineralTree. And you mentioned Mastercard looked at 4 different players globally. But do you see room for more co-opetition or partnership across the different players? Or is there pressure to move up, down market in your mind?
+
+Michael Praeger
+
+So I don't see how there's any pressure. I'll take the middle market. We're considered the leader of the middle market. We define it just in the U.S. alone of companies between $5 million and $1 billion, and there's 435,000 of them, and we have 8,000 today as customers, right? So the amount of runway we have in our swim lanes is pretty significant. And I would say my friend, Rene at Bill.com would probably say something similar related to the small business market. Enterprise is probably a little bit more defined.
+
+But just within the 8 vertical markets that we're in, we're still in single-digit penetration in all 8. We could triple, quadruple our business without adding a single new vertical. And so I think that's what makes some of these expansion questions challenging, especially like the international one, is how do you balance these investments when you have this massive runway just in your backyard and it's really efficient for us to add new middle-market customers in the U.S. market.
+
+Tien-Tsin Huang
+
+Yes. Okay. So yes, I totally agree, big TAM within your space. The swim lanes got pretty fast current, which is good. But investing, balancing growth -- I know you've raised some capital, obviously, with the IPO. You've been hiring go-to-market, expanding product on some acquisitions. How do you balance that, Mike? You heard me ask the whole profit versus growth.
+
+Michael Praeger
+
+Well, I'd say I'd tell my executive team all the time, the hardest thing we do is priority management because, fortunately, we're in a business where we have no shortage of growth levers. And sometimes I wish we actually had less because it makes our jobs easier. But -- and there's usually -- most of the ideas are good ideas, especially the ones that are coming from customers, but we can't do them all.
+
+So the hardest job we have is to prioritize where we kind of invest our calories in the most impactful levers that we have. And so I think that's kind of the challenge of our team. Having said that, we also -- when you have the market opportunity we have, 99% of our new customers are greenfield doing this for the first time. We know when we add a customer, we pretty much have them for life.
+
+And so like we want to do everything we possibly can to keep growing the new buyer customers but in a strategic, prudent way, right? We want to do it efficiently. And we're not toned off to the current market situation. But the reason why we did the IPO when we did -- I was having a conversation with Matt Harris, my Lead Director. And we're talking about this a year ago. And where it's like, hey, 2021 is probably the right time for us to go public, really fortify our balance sheet so we can really just stay focused and take advantage of the market opportunity and not get distracted with what may happen in the overall market. Well, this is before we -- it happened, right?
+
+And so it's funny, now that it happened, we got all these questions, are you going to run the business differently? Well, that's kind of the reason why we have the balance sheet we have, at the same time is we're going to be smart, strategic and efficient in terms of how we invest our capital.
+
+Tien-Tsin Huang
+
+Good. No, look, it's a very stable business, has a lot of growth ahead of the company. So thinking of the levers, right, to get to breakeven plus profitability, it feels like gross margin is a pretty important part of that. So let me ask that before we open it up. So the gross margin piece, how much room and visibility is there?
+
+Michael Praeger
+
+Yes. So I think we're kind of roughly kind of low 60s today. And we've kind of referenced that we believe, at scale, we have visibility to be 75%-plus gross margin in kind of the more kind of near-term reference. As we exit '24, we should be in the kind of the -- approaching kind of that 70% kind of ZIP code.
+
+And so some of the levers that we have, certainly kind of the revenue scale is a piece of it. But the other kind of piece is kind of the -- kind of all the internal efficiency, really leaning into RPA technology and really a lot of those other kind of strategies to just make our overall operations, both in invoice delivery as well as payment delivery as efficient as it can get.
+
+And then the big lever that we have is this whole dynamic around paper check electronic. Just that element of taking a 0 revenue transaction and turning it into a $6 to $7 revenue transaction and eliminating this expense basically is almost like the trifecta of gross margin improvement. So those are a couple of -- 3 big areas that we're very focused on, and I think also that we have really good visibility to how to achieve it.
+
+Tien-Tsin Huang
+
+Good. Questions from the group here? We're happy to take them, if you don't mind waiting for the microphone.
+
+Unknown Analyst
+
+So I had a quick question about -- I understand that you have a partnership with WEX, and I believe you have one with FleetCor as well. To me, it seemed more like technology partnerships than distribution ones. So can you just kind of explain like how you work with those 2 players and if you do similar sort of partnerships with other fintech companies?
+
+Michael Praeger
+
+Yes. So very specifically, we leverage WEX, FleetCor/Comdata and KeyBank as our 3 main virtual card kind of settlement partners. And we kind of think of it as more of a wholesale relationship, and we're strictly using their platforms for card settlement. And we -- they don't do any of the service delivery. We do that all 100% ourselves. So maybe the question is, so why have 3 partners?
+
+Well, one, it's a redundancy. The second thing -- reason is it allows us to achieve kind of, we believe, best-in-class pricing for the card settlement. And the third is, it really gives us unique optionality in terms of configuring different BIN configurations for interchange across our different processing partners that we can be really strategic in how we settle card-based payments. So those are the kind of the 3 reasons. And it's strictly kind of related to virtual card settlement.
+
+Tien-Tsin Huang
+
+Great. Thanks for the question. Anyone else? All right. So I'll rapid fire a few more. I know data when we got together for the IPO you said was a critically important sort of horizon 3 element to take advantage of. What do you mean by that?
+
+Michael Praeger
+
+Yes. So we have 20-plus years now of data between invoice and payment data across our buyers and suppliers. So how can we take this data and actually use it to make our existing offerings either more valuable or create new offerings altogether. So Invoice Accelerator is a great way that we can actually use the data in terms of how we underwrite and make which invoices are eligibly advanced because we have perfect visibility into these transactions. So that would be one where we couldn't deliver Invoice Accelerator without the data.
+
+A second area that we developed a new offering is we call AvidUtility, and that is we recognize we have some big customers who have lots of utility bills. And if we made the data that we're already capturing and served it back to them in a way that they could actually use the data to better manage their energy spend, it'd be really valuable for them. So now we're delivering it back. They can see their average -- their consumption data, they can benchmark their different locations against the energy star program. And now it becomes a really value-added tool and creates incremental monetization for us.
+
+We also just announced last quarter a new buyer customer product called Avid Analytics, where now we're exposing some of these data elements that we have to our customers for them to do some of their own analytics on their data in a way that we've never opened it up before.
+
+So those are some examples how we're leaning in. We have a long drawing board that our team has of all different use cases on how we can make this data either more valuable or create new offerings over time. And when I think of -- hopefully, when we get to be a more mature company, we're going to have 4 legs of our revenue model. Today, we have 2, Invoice Accelerator will be that third. And I think that fourth leg will be our different data-related products.
+
+Tien-Tsin Huang
+
+Makes sense. Makes sense. So the Invoice Accelerator being a leg to the stool or the chair, how quickly do you think -- I mean I'm sure you'll be careful with the growth on this and you'll learn and price discover things like that. How ready do you think it could be to really scale this up?
+
+Michael Praeger
+
+Yes. So we've been -- so it's not like it's a brand-new offering. We've actually been at this for a few years. I have a great Board member and investor in Nigel Morris, and Nigel is the founder -- one of the co-founders of Capital One. And one of the things that he worked with me on is this was really a difficult segment of Capital One because you have no really good data on how to underwrite.
+
+And it's really hard and expensive to collect the money for this segment in terms of doing invoice acceleration. So the beauty is that we are using the data of our platform for the underwriting, and we have perfect visibility. And the second thing is that we're in the middle of the money. So the collection aspect of it is, it's already flowing through our network.
+
+So we've been in the process of really creating all the different algorithms, really a massive data science project in terms of understanding all the characteristics and when something becomes auto approved, when, say, an invoice gets modified for some reason, average payment days, all those type of things that now we can apply to the underwriting. And so we're in the middle of what I'd say, moving from version 1.0 that we've had available to maybe a small subset, less than 10% of our suppliers over the last couple of years, to Invoice Accelerator 2.0, which will incorporate all the kind of learnings that we've had combined with opening it up to all 825,000 suppliers like in an organized way.
+
+And so we're really excited about that because one of the things we do know is that we believe that of our 825,000 and growing suppliers today, about 25% of them are very interested in this offering. And kind of in that small segment, we've opened up to date, what we've seen for those suppliers that come and do their first advance, within 90 days, they come back and do ongoing advances.
+
+So we're really excited about what this may mean to opening it up to all our suppliers. And it's actually -- offering in choppy waters, it actually will be even more well received than in more growthy times.
+
+Tien-Tsin Huang
+
+Yes. So that's made possible by being a two-sided network?
+
+Michael Praeger
+
+Exactly. And we couldn't -- if we didn't have both constituents on our network, we won't be able to deliver it like we're delivering it.
+
+Tien-Tsin Huang
+
+So do you see -- and just to close it out, do you see more value or potential for the AR and the AP side to work more together in general? I know owning it on your fund is certainly more valuable. Is it a theme that we can expect?
+
+Michael Praeger
+
+So what seems kind of interesting is the AP, AR, if I had a $0.05 for every question I had related to that, we'd be a rich company over time. And -- but one of the things we really like is so when we look at the supplier side where kind of the invoicing piece is the most interesting for us, we have like big enterprise suppliers. We have big -- lots of multi -- or I mean middle market suppliers. And we have lots of small businesses. And each one of those use different types of invoicing solutions.
+
+So it makes it really hard to -- you can't deliver like 1 solution to our entire supplier customer base. They're very nuanced. And we kind of view that there's lots of people in the ecosystem that are working on that problem. And it's -- that's not a problem for us to solve. But it's a way that we can actually partner and work really closely. And Billtrust is actually one of those good examples, where we're really a close partner in being able to now they can deliver all the invoices electronically to the AvidPay Network across all the Billtrust billers. And we can send 1 payment file a day back to Billtrust of everything that we're paying related to all their billers in a very efficient manner.
+
+And so I think we'd rather take kind of the partner kind of approach to it than try to solve it ourselves.
+
+Tien-Tsin Huang
+
+No, it makes great sense. That's a perfect tee-up for Flint because he's coming in right behind you.
+
+Michael Praeger
+
+Right. And there he is.
+
+Tien-Tsin Huang
+
+Yes, there he is. I missed him coming in.
+
+Michael Praeger
+
+And no -- and I think one of the things is that it's a really big market and no one company can solve all the problems. So I think -- and what we've done in Billtrust and with Mastercard and others is this is -- the more collaborative we could be -- it's a big market. Everybody wins. And most importantly, we're delivering an increased value proposition to the customer.
+
+Tien-Tsin Huang
+
+Yes. So I won't get you out here with the misunderstood question because you already stole my thunder on that one. So I'll ask you the other easy one, which is, yes, what are you excited about? I mean, what are the next big milestones that we should be tracking? Is it M&A? Is it doing more of the same?
+
+Michael Praeger
+
+I think it's blocking and tackling and then certainly, the growth of our Invoice Accelerator offering over the next couple of years is going to be really exciting to watch. And exciting in terms of the -- what that does from a standpoint of, yes, it is a new offering. But what -- I'm really interested in seeing how much of a catalyst that is to drive the overall adoption and conversion from paper check electronic because one of the things we only make it available to suppliers if they are on our electronic network.
+
+So if they're paper check suppliers, guess what? You can't advance an invoice. And so it's a catalyst for them to make that conversion. And so it's going to be interesting to watch how big of an impact this has on that conversion.
+
+Tien-Tsin Huang
+
+Great. No, it looks to be fun watching you build and keep on building here, Mike. So thank you for being with us. Thank you for making the trip all the way from Charlotte.
+
+Michael Praeger
+
+Thanks for having us.

AvidXchange Holdings, Inc. Presents at Morgan Stanley US Financials, Payments & CRE Conference 2024, Jun-10-2024.txt

@@ -0,0 +1,233 @@
+AvidXchange Holdings, Inc. Presents at Morgan Stanley US Financials, Payments & CRE Conference 2024, Jun-10-2024 10:15 AM
+6/10/24
+James Faucette
+
+Thanks, everybody, for joining us and for those joining us on the webcast. I'm James Faucette of Morgan Stanley Senior Fintech analyst here at the firm. And very delighted this morning to have AvidXchange. We have both Mike Praeger, CEO; and Joel Wilhite, the CFO, here to talk about the company.
+
+Before we get started, I do have a quick disclosure to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So as I said we've got Mike and Joel here, thank you very much for joining us.
+
+James Faucette
+
+Maybe we'll just kick off with talking about maybe what's not an entirely new phenomenon, but we've seen a lot of volatility in the B2B payment space, particularly those with SMB exposure. Mike, I know you started the business fully dedicated to being purpose-built for the middle market. What excites you about the middle market exposure, either from a long-term growth perspective, competitive or otherwise? And how do you differentiate from what a lot of times people say is the SMID or SMB space.
+
+Michael Praeger
+
+Yes. So a really good question. So first of all, we -- kind of the definition being purpose-built for the middle market, we kind of define that as by the focus on the 540,000 companies just in the U.S. between $5 million and $1 billion of revenue. And -- but being purpose-built also means is that how do you attack that middle market segment. And we kind of think of it as that roughly 50% of the 540,000 companies highly align themselves to an industry vertical that has unique either business process or accounting system process that requires a unique vertical-specific accounting system to support their business. And we really kind of like solving those type of problems because it adds to the stickiness factor and also significantly adds to the value proposition that we can deliver to these companies when we solve whatever that uniqueness is for that vertical market along within the accounting system integration.
+
+So today, we're integrated to 240-plus different accounting systems and growing that serve that kind of middle market segment. And so we really like kind of that differentiation. In terms of -- we have been doing this a long time, been through a number of different kind of industry cycles, right? And this one is kind of behaving similar to what we've seen in the past that middle market companies are substantial companies, many that they're many times, industry leaders and kind of their businesses.
+
+And in the Dow market, they don't go out of business. What they do is they cut back on discretionary spending, right, pushing out discretionary spending, maybe pushing out preventive maintenance, capital projects, things like that, until they have more confidence into the other side of the cycle and then that spending usually comes back pretty quickly is kind of the characteristics that we've seen.
+
+So we -- what we believe it provides just an incredible stability that in our kind of customer base from the standpoint of how we measure what I would say, the same-store sales, which is transactions retained on the network is that a normal kind of cycle, probably we see about 104%, 105% growth or in percentages of transactions retained. In a market like today, it's more -- it's closer to 100%, right? So that's where kind of we see that impact of discretionary spend kind of creep in, but companies aren't going out of business. They're just managing their business a little closer.
+
+And so I think that's the advantage in a Dow market is you have a really stable kind of base. And then certainly in an upmarket, we see that discretionary spend come back and kind of the continued investment and growth of our customer base.
+
+James Faucette
+
+Got it. Got it. So that's high level. And there's just quite a bit there that I want to come back to, particularly as we talk about vertical exposure and customer decision-making, et cetera. But I want to talk about some of the financial metrics that a lot of investors focus on. And one of those is transaction retention. And that seems to be a key reason why maybe the revenue -- most recent revenue beat wasn't fully flowed through to the full year outlook.
+
+Clearly, there's a lot of uncertainty, and I want to recognize that in the general macro especially when it comes to interest rates, the upcoming presidential election, other factors. But can you talk us through some of the transaction retention metrics you're seeing now versus what you've seen historically?
+
+Joel Wilhite
+
+I'll take that one. Yes. So -- and Mike mentioned it just now. So transactions retained on the network is our transaction retention, public company metric, and that's something that whether same-store sales or otherwise kind of measures the transactions a year later. And normal for us has been in the 105%, 104%, like overall net organic expansion.
+
+And what we experienced in '23 was roughly 101.5%. And what we've said consistently in Q1 is no different than the previous quarters, it's been bouncing right around 100%. And so when you talked about -- what I would do is disassociate our experience and our performance in the first quarter, and what we did for guidance. What we did do for guidance a little different in the past is we didn't bring through fully the beat on the full year ranges for the reasons you actually just mentioned. A lot of uncertainties presidential election, kind of the continued sustained uncertainty around interest rates and such. And so we just took an approach of effectively reaffirming those ranges apart from a little bit of an increase associated with float. But I would disassociate that from the experience that we saw in Q1.
+
+James Faucette
+
+Got it. And I want to follow up there. How do you think about the organic profile -- growth profile of the business ex-political and float when transaction retention is effectively flat versus that 3% to 5% growth.
+
+I mean is it fair to assume that we should continue to expect mid-teens type organic growth overall? And if when macro improves, can we get as much to as high as 20% or better?
+
+Joel Wilhite
+
+Yes, for sure. I mean if you use that, when we talk about our growth algorithm and we talk about that 20% growth opportunity that we see ahead of us, it's really the 3 dimensions: First is this net overall retention on the platform that we've been talking about; the second is the addition of logos, new buyers buying the software and adding their volume; and the third is overall transaction yield on the platform.
+
+And so we're missing that, say, 5 points in the first of those 3, which leaves you with kind of mid-teens. And like Mike said, we don't expect that, that sort of suppression of discretionary spending persists forever. And so as that returns, we feel like that kind of puts us back in a situation where we're kind of around that organic 20% growth.
+
+Michael Praeger
+
+Yes. I'll jump in here in -- what I would say is -- so on the kind of the -- specifically kind of what gives us or me a lot of confidence related to that kind of long-term mantra is what Joel said is kind of that new customers being added. Just some of the new partnerships we're adding like AppFolio having 20,000 customers where we estimate that 10,000 of those are really good product market fit for our offering in just one channel that we have.
+
+And when you look at around our 9 verticals, we're still single-digit penetration in all 9 and we're the industry leader, right? So a lot of runway just in the existing verticals we have with a lot of the channel partners. So that's on the customer acquisition side. And then, kind of Joel referenced kind of the yield. Well, the biggest portion of the yield is the conversion from paper check to electronic. And still today, of our [ 1.2 million ] suppliers, 6000 of them are paper check suppliers.
+
+And when we convert a paper check supplier to be an electronic acceptor the -- although we generate software revenue from every transaction on the payment network, a paper check has 0 revenue relatively high expense of $0.85. When we flip at electronic, the $0.85 goes the $0.02 and the 0 revenue goes the $7 to $10 per [indiscernible]. That's a lot of yield leverage that we have.
+
+And then the last piece which I'm sure we're going to get to, it's got called the innovation bucket. And that is our payment accelerator offering. It's going to be our next $100 million business, going to scale really nicely as we go into next year, along with kind of the announcement of our spend management platform being released later this year to our initial set of customers. So that's what gives me a lot of the confidence. We have a lot of different levers.
+
+James Faucette
+
+So one of the questions we get a lot about related to AvidXchange is kind of your vertical exposures and integrations generally. Can you talk a little bit about where your customers are focused? And I guess I'm wondering to start off with back to some of these uncertainties from the general macro. Like how are your customers, are they disproportionately sensitive to interest rates? Or is there political implications? So how do we think about like those uncertainties affecting your customers and the way it impacts you?
+
+Michael Praeger
+
+Yes. So I mean I spend as much time as I can when I'm outside of conferences like this talking to our customers. And kind of the -- what I hear routinely from a lot of our CFOs are, Mike, there's just like a lot of uncertainty right now. So until we have -- and it's a combination of the presidential election, not knowing what policies are going to have, what's going on with interest rates. Just some easiness around kind of the economic market, I mean the business market.
+
+And so it's like, okay, we're going to kind of proceed cautiously until some of these things get more clear. And that -- where that shows up in discretionary spend. And what we're seeing is it's not vertical specific. It's really across the board. And so we're not seeing any one vertical operate any really differently than any of the other verticals related to this discretionary spend. So that's the first thing to say.
+
+The second thing that's on kind of volume. The second thing is on like new customer engagement. And that one is really interesting because people -- they reference real estate. And it's like, oh, that must be a hard vertical. And it's like -- it's actually right now one of our best-performing verticals. And the answer is like, why? Well, one, first of all, when you look at real estate, our real estate vertical, as we call it, there's really 5 segments, there's multifamily housing, there's student housing, there's industrial, there's retail, there's commercial office.
+
+Well, the whole multifamily housing, student housing, industrial have been performing extremely well, right? And then you have commercial office. Well, guess what? it's actually been pretty good from the standpoint of, well, there's a lot of pressure on these commercial office guys to get more efficient because like -- and so they're going to still operate with 3 AP clerks managing payables or are they going to automate this process.
+
+And so there's a lot of interest in the Dow market to say, how do we get more efficient, right? So it's a really interesting kind of the dynamic that we have related to kind of that new customer engagement because in a lot of ways and what we've seen historically as well is we have this type of market, it actually serves well for being a catalyst that somebody say, hey, now is the time that we need to automate.
+
+James Faucette
+
+Right. And how effective are -- when they look to automate, and that makes sense that they'd be -- particularly if you're in commercial real estate that you're trying to improve your automation, how well are they able to move their customers or their tenants along to changing their own processes? And how does that impact you?
+
+Michael Praeger
+
+Yes. So real estate, so remember, like we're on the AP side. So it's -- we're really not impacting anything at all on the tenant side [ margin ]. So these are commercial REITs that are paying their operating expenses. So it's the landscape. It's the janitorial, it's the HVAC maintenance, it's things like that. And what you'll find is that like you have to pay these bills whether your office building is half full or empty, right, type of thing.
+
+And so maybe the amount of the janitorial is a little bit less because the building is half empty, but you still have the bill, right? And so that's kind of the dynamic that we're seeing. And that's why I think the middle market segment is pretty resilient compared to maybe the small business segment in the Dow market.
+
+James Faucette
+
+And then let's talk about competition. Look, it's easy to -- and we should all recognize that the majority of what we call competition actually doesn't really stem from other B2B payments players. And it comes more from banks. It'd be great if you could talk more in depth about the breadth and depth of your integration and relationships with your software referral partners. And how that protects some of the competitive advantage you've built against the banking group more broadly?
+
+Michael Praeger
+
+Yes. So first of all, I get this question a lot. Hands down, our #1 competitor is still the paper base process, the companies have 70% of the middle market is still paper invoices, paper checks. 95% of our new customer adds are doing this for the first time. So we're not even displacing -- we haven't got to the point of displacing other systems yet, right?
+
+So that's -- #1 competitor is a status quo paper-based process. When we kind of -- so what we're doing to kind of advance this adoption is we want to kind of closely align ourselves with both the banking institution side as well as all the different accounting systems that we're integrated to and think of them as channel partners. So you heard me last quarter talk about 2 relationships: One was M3 on the hospitality side, and that's a great kind of we launch a new vertical. We really like to partner with the leader -- the leading kind of accounting systems for that vertical, which is the case of M3 for boutique hotels; and then in the case of our recent partnership with AppFolio, another great example of where now we're kind of the bill payment module per se for the AppFolio system and for their customers.
+
+So we really -- we think that really gives us kind of an embedded opportunity to attract more customers kind of quickly because typically, what we find is if you're going to embark on this journey of learning how to replace your paper, probably you're going to talk to your accounting system first. Then you may talk to your bank and then you maybe able to do a bunch of Google search or talk to your peers and what they're using. And so that's where the kind of vertical market base is so powerful because we're kind of the status quo leader in all 3 of those elements.
+
+The leading accounting systems are partners of ours, and they're going to refer them to us. And then we have about 35 different bank relationships, including a handful of white-label relationships with BofA, KeyBank and Fifth Third, and they're referring to us, all within that in the industry vertical. So we think that creates a lot of synergy. It also creates a lot of efficiency regarding our customer acquisition costs.
+
+James Faucette
+
+Got it. And so let's talk about -- and you mentioned that just a moment ago, but let's talk about the electronic payment penetration generally. So it sounds like you think that we're maybe 30% penetrated, roughly it's 70% paper based or how do we -- how should we think about that?
+
+Michael Praeger
+
+Yes. So today, we're kind of in the 40% range of electron of all the transactions going through our platform, those go out as electronic payments, about 40%. And we kind of talked to you last year Investor Day that we think that, that goes to 50%, 60% plus over time. So what kind of -- what's our belief is the secret on how we're doing that. So first of all, I think we've already proven that we're by far leading the industry in terms of that adoption rate today, and very different than consumer payments where you have kind of a single pricing offering like a card-based payment that you're able to capture the majority of the market.
+
+In business, our belief is that there's a value proposition required. And that value proposition is around 4 elements. It's around the speed of the payment, the price of the payment, the level and amount of remittance data that you're providing to ought to reconcile the payment, and then the last thing is level of automation. And so what we do is we define a payment modality as combinations of those 4 elements. And so we're leveraging our long-term partnership with Mastercard as an example, in which today, we're offering about 12 different levels of virtual card offerings at different interchange price points with different levels of remittance date and different levels of automation.
+
+And that is, we believe, is kind of the secret to this long-term adoption is to create a value proposition for subsets of suppliers to -- so it becomes really compelling to move from paper check to electronic. And we believe that's part of the kind of the long-term kind of a road map and strategic moat that we're building is the ability to manage all these different types of payment modalities on our platform.
+
+James Faucette
+
+Got it. And how do some of the -- like -- I think I'd be remiss this year if I didn't ask question that was AI-related. So how do some of the recent AI-related improvements for small dollar transactions potentially pull forward that penetration level?
+
+Michael Praeger
+
+Yes. I mean -- so first of all, I'll just chuck a little bit when I hear about AI because it seems like kind of last year, kind of everyone started talking about it overnight. Meanwhile, we've been working on this for a long time. And so what we -- you see the benefits of is what I'll call kind of the next generation of automation where it's started for us was a lot of kind of RPA type bots, of which now we're replacing with AI agents. And the benefit is that we've seen the kind of the cost to deliver this is significantly less than the bots.
+
+And so that's allowed us to take our kind of automation down to really small dollars, maybe all the way to 0, in some cases, where otherwise say transactions above $200, it wasn't cost effective for us to process the bot, right? And so that will help us with the actual transaction number certainly. But it won't have as big of impact on volume just because they're small ticket.
+
+So -- but it certainly is one of those things because certainly, there's real cost to deliver kind of paper checks at these small ticket items, which now is being eliminated, right? So one of the things you continue to see in our margin profile, whether it be gross margin or our adjusted EBIT is a really nice kind of incremental kind of escalation there. And it's all these different projects kind of combined that's driving that.
+
+James Faucette
+
+Got it. Got it. And let's talk about revenue growth and that algorithm. And we talked a little bit about revenue retention and that kind of thing. But I'm wondering if we can delve a little deeper there and look to disaggregate the key drivers of growth between new customer addition, software revenue per transaction, take rates and other factors.
+
+Michael Praeger
+
+Do you want to jump in?
+
+Joel Wilhite
+
+Yes. I'll just come back to kind of the 3 elements, and then we can sort of try to click into that, right. So remember, the 3 elements are first overall net expansion of transactions on the platform. Number two, adding logos. That was an 8% grower for us last year, and that working together with the yield expansion is kind of how we get to our growth rate. And again, we think 20% is kind of that reasonable run rate, absent the macro assuming the organic expansion is back to the 104%, 105%.
+
+So you're asking specifically in the drill down around yield. And so we talk about overall total transaction yield as kind of the most important yield metric, right? That's all the revenue over all of our transactions. But if you click into that, you have software yield per transaction, right, sort of yield to the buyer. That's been kind of steadily growing over time from the 140s up into the low 150s.
+
+And then there's TPV. So those 2 yields work together really to create that overall transaction yield. I mean, obviously, the big opportunity ahead of us is on that payment yield. So we talk about the transition away from checks to digital payment. We talk about payment accelerator, which we can sort of touch a little bit more about it as well, but that's an opportunity among others as we think about the future where we can create revenue streams on transactions that already exist on the platform.
+
+And so that's kind of -- we've seen good, steady expansion of overall yields, even removing the benefit that we received from float. And it's those levers that give us confidence that, that yield continues to expand. And so it's yield together with growing adding buyers to the network and seeing organic expansion that adds up to that growth.
+
+James Faucette
+
+Got it. Got it. So I want to -- I do want to talk on some of these other initiatives. But first, I want to hit on political. And it's obviously highly cyclical for AvidXchange. But on the political front, you've previously mentioned that you expect there could be about $10 billion in political spend this cycle, which given your historical exposure there, should translate to about $9 million of incremental revenue for the company.
+
+With that said, it seems like that assumption was formulated prior to some of the incremental take rate upside that we've seen in the events of the last several weeks combined, which seem to indicate we could see political spend this cycle that could be higher than preliminary expectations. Recognizing this is your first real site presidential cycle with FastPay. Do you think your assumptions for political could prove conservative? Or how are you thinking about that right now?
+
+Joel Wilhite
+
+Yes, I'll make a statement or 2 and Mike might add to it. So yes, we were clear about kind of that being transparent about the assumption of the political revenue on our overall guide. Again, $9 million out of $450 million. So it's a small overall percentage. But like you said, it is our first presidential cycle with the political media business component of the FastPay acquisition from back in '21.
+
+We've -- outside research has ranged in terms of expectations of the political ad spend this year, anywhere between $10 billion and $16 billion. And so yes, we picked a spend on the low end of that. And so that, in and of itself, could be somewhat conservative. But it's also -- it's a business, a spend cycle that works very differently than the super highly predictable [indiscernible] spend across our buyers. And so given those factors, we've just kind of chosen to identify $9 million of the expectation.
+
+James Faucette
+
+So let me ask the somewhat provocative question. So let's say, it comes in some number higher or halfway between $10 billion and $16 billion, it flows through to you. Obviously, that's good pickup for this year in terms of earnings. But how do you think about utilizing that potential extra income and cash flow? Does it make sense to bank it? Is there incremental investment you can get leverage on it? What's the right thing?
+
+Joel Wilhite
+
+I would say we don't think about that in isolation. We're optimizing for the growth that we know we have opportunity for and profitability and sort of delivering on the commitments we made last year at Investor Day. So we're really looking at the whole portfolio of profit, whether float, political, other highly profitable dynamics, some of which kind of turn around cyclically. We look at the whole thing as a investment pool to continue to grow and to see margin expansion and profitability.
+
+James Faucette
+
+And so let's talk about some of the newer initiatives. I mean, you've mentioned some of the products, et cetera, but can you rank order for us what you're most excited about what might -- what the growth -- how big they can -- you think they can be like the growth rates, et cetera? So I think it's helpful to level set so people kind of know...
+
+Michael Praeger
+
+Yes. So first of all, like this is a business that's a long game. We're still, I don't know, for baseball, I don't know if we got to the second inning [indiscernible]. But we're in a long game here. And so we're very focused on, okay, building the business for the next level of scale as we talked about Investor Day last year, the next big milestone of growth is to reach $1 billion of revenue over the next 5 years.
+
+And that's what we're building towards, And so when I -- and so we have a lot of conviction around that 20% kind of annualized growth rate, maybe in the current season, we have some pressure on that from some of the economic drivers. But it's like -- on a long-term basis, it doesn't change our opportunity at all, right? But what are those big levers that we're focused on.
+
+Certainly, on the new customer acquisition side, it's around kind of leveraging of the channels that we have as part of our organic growth, right? And I put our new channels like AppFolio, M3 at the top of that list. And then you turn to what I'd say, this massive kind of our [indiscernible] chuckles because unlike the stack of paper checks that we manage is like a pile of gold. And they're like, well, what do you mean? It's like expensive. But look at the opportunity we have to convert it.
+
+And so that conversion of all these paper checks to electronic is really exciting, and it's massive leverage in terms of that kind of yield for the business. And we're doing a lot of unique things there. We're already at 40% electronic payments and growing. And I think we're really excited about kind of what the next couple of years looks like in terms of all the new payment modalities that we're rolling out.
+
+And then you have the innovation bucket. And this is invoice accelerator is going to -- my belief is almost like this is a cash app kind of version of Square for AvidXchange in terms of making that product available to suppliers. And clearly, it's going to be our next big business. And then we have a spend management platform that will be rolling out later this year, and we have a handful of other innovation items after that.
+
+So we're -- so I think the part that gets me excited after 24 years is there's all these different, kind of, levers in the business for growth and what makes it hard is staying really disciplined in terms of where we're making our bets. Because there's like all these good ideas scattered throughout. And it's like, but we can't like spread the peanut butter too thin and say, okay, what's going to really move the needle and make our sizable bets on the things that really matter.
+
+And so that's my big challenge to our kind of leadership is that let's kind of maybe bring in the number of bets we're making. And let's go deeper in the ones that we have the highest conviction about, and really demonstrate kind of that long-term growth opportunity.
+
+James Faucette
+
+Got it. And then what about the partnerships from AppFolio and M3 still really early, but how are you thinking about magnitude and timing of those initiatives?
+
+Michael Praeger
+
+Yes. So I think just -- M3 is one where I think it's going to kind of behave similarly to our other kind of channel partners that we've kind of rolled out over the years. We have a very defined playbook for it. It's a new vertical. So -- but we know those challenges, and we've kind of executed that playbook before.
+
+AppFolio is actually really interesting because it's in a market that we're already the leader in. Every one of AppFolio's competitor is really a strategic partner of ours already. And so I think this has the characteristics of maybe accelerating faster. Now certainly, when we kind of built our plan, we expected some of that already. But I think it's -- and we're still kind of super early days, but really encouraged about the engagement and results that we may be able to achieve through those type of channels just because it's a market that we know so well.
+
+James Faucette
+
+Right. So we kind of spent most of the time talking about top line drivers, et cetera, but I do want to hit on margins and margin expansion. For those that are newer to looking at AvidXchange, there seems like there's still room on the margin side of the equation, but nevertheless, performance over the last couple of years has really been impressive with adjusted gross margins and adjusted EBITDA margins increasingly -- increasing virtually every quarter since first quarter '22.
+
+I think your gross margins were around 62% in the first quarter '22. And now they're 72%, just 2 years later. And adjusted EBITDA margins at the time were negative 8%, but now we're close to positive 17%. Talk us through the yield and unit cost dynamics that are driving that? And what gives you confidence in achieving that 20% EBITDA margin target for '25 and then scaling to even 30%?
+
+Joel Wilhite
+
+Yes. No, great setup. You covered kind of the important numbers, 10 points of expansion over a couple of years, and it's come through revenue yield expansion and unit cost discipline. This was sort of the plan all along. We came out of the IPO, pretty focused on our path to profitability. And with the 2-sided network and the investments we're making in our growth and supporting buyers and suppliers we were in the upper 50s and low 60s, but it was kind of just a matter of time. We also really especially proud on the work that we've done around unit costs.
+
+And so put a really kind of experienced team together that's very focused on every penny of that unit cost. And so the way I would just sort of break it down is we have sort of workflows on the buyer side, so from receipt of an invoice to payment, and then we have workflows once we receive that payment file to receive that payment file and then execute the payment. And in each of those cases, just investing in standardization, automation, optimizing kind of offshore sourcing. That's driving those costs down.
+
+So proud of where we are and how much ground we've covered, but we still have headroom to continue that. And so even just sort of removing the float benefit, which helps us that 72% in Q1 was still high 60s, so good -- still solid improvement. And so we think that high 60s gets to 75% plus through more of the same unit cost discipline and efficiencies and revenue yield.
+
+James Faucette
+
+Got it. And then capital allocation, you're targeting 10% free cash flow margins in '25, and you're already in a net cash position. How are you thinking about capital allocation from here? Does M&A make sense or do we do buybacks, say for a different opportunity set down the road? Like what's your capital allocation thoughts?
+
+Joel Wilhite
+
+I think the short answer is all options are on the table. We're spending time thinking about all of the above. We've grown -- it's been a couple of years since we've made an acquisition, but we think it's just a matter of time before that dynamic turns around, and we spend a lot of time thinking about assets that would make sense inside the business. So M&A is on the table and everything else you mentioned as well.
+
+James Faucette
+
+So on M&A, that pause or that period between acquisitions, is that a function of just your own prioritization and integration? Or is it valuations of potential targets? Or -- and what are you seeing evolve there?
+
+Michael Praeger
+
+Yes. I'd say -- so it's been a couple of years since we've done any other kind of tuck-in acquisition since the FastPay acquisition in '21. And so I would say that we really haven't seen anything that; one, strategic; and b, at the right price. And so I think certainly, there's been a dynamic that kind of the public company, private, multiples in our space upside down where you have kind of the privates being valued at like 2x the public.
+
+Like I don't know, something that's subscale, losing money, and it's getting twice our multiple. So -- but I think -- so that's made it a little challenging. But I think like that was a moment in time, and I think that gets corrected over time, right? And I think -- but there really hasn't been any that compelling either that we said, hey, we did something that makes a lot of sense for us. But what I do think is that we'll see more activity as we kind of -- as this year unfolds going into next year because I think you have a vintage of companies between kind of '19 and '21 that raise capital and now they're kind of getting ready to say either we have to raise more capital or do something more strategic.
+
+And so I think we're going to see more of those type of opportunities. And probably, they'll get a sense of valuation kind of get maybe updated when they have to go back to raise more capital. And so -- but we're continuing and our team is super active. We're having lots of discussions. And have a pretty big pipeline of targets that we like in the different industry verticals that were [indiscernible]. So I think that we're -- it's more of a season of timing than anything else.
+
+James Faucette
+
+Got it. Got it. Well, Mike, Joel, thank you very much for joining us today. I really appreciate having the opportunity to talk to you about AvidXchange.
+
+I think what I always as I sit here and listen to you and even just as I reflect on the time I've known the company, it's just the persistence in the grind and sticking to the plan has been really remarkable. And [indiscernible], but thank you very much. And if anybody has any follow-ups, please feel free to reach out to the company or to us here at Morgan Stanley. Thank you very much. Appreciate it.
+
+Michael Praeger
+
+Thank you.

AvidXchange Holdings, Inc. Presents at Morgan Stanley US Financials, Payments and CRE Conference, Jun-12-2023.txt

@@ -0,0 +1,247 @@
+AvidXchange Holdings, Inc. Presents at Morgan Stanley US Financials, Payments and CRE Conference, Jun-12-2023 01:45 PM
+6/12/23
+James Faucette
+
+Good afternoon, everybody. Thanks for joining us as we continue this afternoon in Morgan Stanley Fintech Conference. Really appreciate everybody joining us today, including Michael Praeger, CEO and Co-Founder of AvidXchange. I'm James Faucette, senior research analyst here at Morgan Stanley covering Fintech.
+
+And before we get started with Michael and my long list of questions, believe me, I do have an important disclosure to read.
+
+Please see the Morgan Stanley Research Disclosures website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to our Morgan Stanley sales representative.
+
+So with that, Michael, thanks for joining us. Appreciate...
+
+Michael Praeger
+
+Thanks for having us. So, it's conference season. So it's good to be back in New York.
+
+James Faucette
+
+Yes, absolutely. So, let's kick off with this, is that you've been public coming up on 2 years now, and you just hosted your first Investor Day. It was a great event down at your headquarters. Can you talk about the past couple of years, how that has gone in your eyes? And what are the key priorities you're thinking about on a forward-looking basis?
+
+Michael Praeger
+
+Yes. So certainly, we executed our IPO in October of '21. From a company perspective, we probably couldn't have timed it better, right? In terms of -- we raised over $700 million at an attractive valuation at the time. And so people ask all the time, well, Mike, it must be miserable the last couple of years being a new private/public company CEO. And I'm like, we have such a long-term kind of focus at AvidXchange growth from a Board perspective, management team, Board, investor, kind of our pre-IPO investors.
+
+And in terms of the overall opportunity we have, so we really don't get too caught up in kind of the day-to-day evolution of the stock price. Probably the folks in this room pay a lot more closely attention to it than we do.
+
+And so we just have a handful of principles in which we want to run the business, achieve long-term success for both our shareholders and our customers. And one of the things that we -- it was our first time since the IPO have actually been able to do a deep dive education and then pre-IPO was, I think, August of '21, right?
+
+And we kind of -- I think we are the first one actually to invite analysts to come to Charlotte and everyone thought we are crazy. And we pretty much had representatives from all our analyst coverage com. But this is the first time to include investors in that deep dive. And I think that was really important for us, because we're not a simple widget business. There's nuance in terms of being a software company as well as being a payments company along with kind of our growing invoice accelerator business.
+
+And so really to kind of understand all the different levers that we have in terms of our growth algorithm. And then, we also kind of incorporate a framework in terms of how we think of long-term kind of growth and profitability of the business in terms of kind of that traditional Rule of 40, of which we've kind of pointed at, it's the Rule 50 for AvidXchange, where this is kind of our objective.
+
+James Faucette
+
+So I think that's a great overview of kind of the objectives. But let's -- let's spend a few minutes here and maybe for people that aren't as familiar with AvidXchange. Kind of give us the mission statement like what the business does and what differentiates you? I mean, we published a big 80 pages to report on the space earlier today, but I'd like you to put a...
+
+Michael Praeger
+
+I'll say those 80 pages and just make it simple for everybody here in terms of a couple of paragraphs. ChatGPT, you could probably do that actually.
+
+James Faucette
+
+Yes. No. That's the role of that, right? That's the idea.
+
+Michael Praeger
+
+But we call ourselves, we're a software-enabled payments company. And simply speak, we really automate the accounts payable and the payment process for middle-market companies. And middle market companies is really important because we consider ourselves kind of purpose-built for the middle market. Right? And so what does that mean, right? And that means the purpose-built is, when you look at kind of the overall market, it's really important to understand there's 3 very different segments. There's small business segment, the middle market segment and then enterprise.
+
+And the feature sets that each one of those types of customers need is very different. The go-to-market strategies are very different as well as the integration to the accounting systems that you're supporting is very different. And so middle market is hard. And we at AvidXchange, we have a bad habit. It's -- we like solving.
+
+We usually start solving the hardest problems for -- sometimes I wish we'd start with easy problems. We always start with the hard ones, it seems like.
+
+And so the middle market, quite hard is because we define kind of the expanded definition of companies between $5 million and $1 billion of revenue. In the U.S. alone, there's about 435,000 of those companies. And we anticipate roughly about 50% of them highly align themselves to an industry vertical that has unique accounting or business process for that vertical and how they manage their expenses.
+
+And you kind of know which verticals these are because they have unique accounting systems that support these verticals that are different than the NetSuite, Microsoft Dynamics, Sage Intacct of the world, right? They're very industry-specific accounting system.
+
+And so, in that way -- so to grow, you kind of have to go one vertical at a time, one CFO at a time and you have to integrate to all these different accounting systems. Today, we're in a great, has the 220-plus accounting systems. And last Friday, participated in kind of a product road map update. And our integrations team has literally, I think it's 102 new accounting systems on the future drawing board that at some point in time, we're going to be integrated to.
+
+And so it's hard, right, in time. And you have to have industry domain knowledge around each one of these verticals. And so we like that because one is we do that, there's massive real value creation that you create for your customers in terms of just automating the process, eliminating the papers, eliminating the kind of manual process to it. And in our technical word is they've become really sticky. They're basically customers for life. And so we have -- we're headquartered in Charlotte and kind of our heads down, controlling what we can control, which is our quarter in, quarter out execution and continue to drive real value for not only our buyer customer, but also our suppliers.
+
+James Faucette
+
+So let me ask you, when we looked at, once again, just going back to our report, we found in our survey work and assessment of the market and decision cycles, et cetera, is that, that medium-sized business segment or middle market focus was probably where there's the best opportunity for B2B generally. But I'd love to hear from your perspective sitting between SMB and enterprise, how do you think about the pros and cons of that middle market exposure versus the SMB and enterprise segments?
+
+Michael Praeger
+
+Yes. Well, when you think of how the whole industry kind of adopted, not a big surprise, it started with enterprise just because the value proposition for customers to have mass volume is pretty substantial because in terms of cost efficiency, right?
+
+So they were the first ones. And then it kind of skipped the middle market and went to small business. And why did that happen? Well, because small business is just easy, one accounting system integrate, two, really simple business process. That's more that we have. And the go-to-market strategy, you get lots of small businesses, pretty easy.
+
+The middle market was kind of the hard part. And so we like the middle market because we're solving a really unique problem for each one of our industry verticals, but also the middle market customers are totally resilient.
+
+I mean, we've been at for 23 years. We lived through lots of different cycles. No one goes out of business. Maybe you get some kind of on discretionary spend, people are a little more cautious in kind of what they're spending. But it's more of a temporary state and then we have visibility to the other side of the cycle, that spending kind of typically comes back.
+
+And so it's a really resilient part of the market. But I think, when I look at today, we actually have less competition from other companies today than we did like 5 years ago, because it's some of the M&A work that happened that there's companies that have been acquired and then they've kind of left our market.
+
+And I think all the -- we haven't seen new entrants in a long time. And I think now it's gone to a point where the moat is pretty substantial. And then, you have other factors just licensing to be a money transmitter.
+
+Now you have to get licensed in all 50 states. That process used to take about 1.5 years, now it takes like 3-plus years. It's very expensive. Well, how many start-up companies are going to wait 3 years to get licensed or have the wherewithal spend, the capital required to get licensed.
+
+And then not to say the regulators now aren't big fans of licensing start-up companies, right? So there's a bigger, bigger moat being kind of drawn around kind of what we're doing in the middle market. And I think that's probably the biggest thing that probably investors don't appreciate is kind of that moat that we're building around the middle market and the uniqueness of the middle market and why it's different than small business or enterprise.
+
+James Faucette
+
+Got it. So back to -- you mentioned it eventually where you'd like to get to Rule of 50. So let's start to build that up. Where do you see the market growth and going over the medium to long term? And in particular, what is that -- like how do you start to quantify the growth potential of the B2B payments base in general?
+
+Michael Praeger
+
+Yes. So there's kind of -- the growth algorithm is, it starts with -- we have a concept called the AvidXchange Business Flywheel, how we think of the business. And it starts with adding new kind of buyer customers who automate their accounts payable process. Because they bring their suppliers with them. So I think that growth all we made, it all starts with kind of the adding new customers.
+
+Now having said that, we still have really only 30% of our customers of are roughly growing to be 10,000 customers, about 3,000 of them use us for both AP automation and payments today. So still 70% of our customers are future expansion opportunities just within our existing base.
+
+And if you're curious on why that is, a little bit history lesson is we're a software-only payment -- or a software-only company, automated accounts payable for 12 years before we launched our payment network. So we have a big installed base of software-only customers. And then some of the tuck-in acquisitions that we've done in different verticals have been software-only acquisitions where we're now kind of selling our the AvidXchange payment network to those customers of these acquisitions. So we have a built-in base for a continued market expansion.
+
+And then we have kind of new products that increase the monetization like Invoice Accelerator is a good example on the supplier side. And when you look across the 9 verticals that we're in, we're still single-digit penetration in all 9. So even some of the ones we've been in for 20-plus years. So it really gives you a context to still live into this for a long time. We're still in early market.
+
+James Faucette
+
+Got it. Got it. Got it. So let's talk about the growth -- the revenue growth component of that Rule of 50 is, over the past few months and looking at -- and being mindful of your 2023 guide, we've seen some growth deceleration across the business. I think our calculation is that you're probably mid-teens ex-flow, ex-political and those are important components. And clearly, on particularly election years, you will see a big uplift, et cetera. But how are you thinking about the key drivers to bring you back to that roughly 20% organic growth trajectory? And how should we be factoring in the political cycles and try to make sure that we're accounting for those or at least anticipating those well?
+
+Michael Praeger
+
+Yes. Well, there's a couple of questions there. So the first thing is that we've kind of internally if we mantra around, we want to deliver 20% plus organic revenue growth year in, year out. We knew this year was going to be the hardest of those years for a couple of factors. One is that we have the grow-over political. So if people are familiar to AvidXchange story, we've kind of grown within our medium verticals that we -- because of the feature set of our platform to be able to execute kind of real-time electronic payments for advertisers that we now have around 30%, 35% of all the political media payments flowing through our platform. And so in the last number of political cycles, the amount of spend continues to grow.
+
+James Faucette
+
+Yeah. You're right.
+
+Michael Praeger
+
+If the more candidates are participating in these elections, it's actually good for AvidXchange. So, we're big bleeders of lots of candidates on both sides of the equation. But the reality is that dynamic really occurs every other year, right? And so certainly, we don't have the grow-over from last year being a political cycle. That's kind of one element.
+
+Second one is we have some macro headwinds on existing volumes. So we will kind of voice that over has been kind of 3% to 5% across our kind of core verticals. So certainly construction and media driving the worst of those being impacted, and it relates to some of that kind of discretionary spend being tapered.
+
+And then the third one is, we have a big product delivery for customers early -- I mean, this year in '23, but it's which is going to impact '24. And in last year, in '22, a lot of the core -- we had a big payload of development get done. It was really focused, for the most part, on internal efficiency, scalability, we move from the AvidXchange private cloud to Microsoft Azure as an example and things like that, where we didn't get the benefit of end-user customer products being delivered last year, which drove -- which will drive this year, right?
+
+So we had really those 3 factors that we knew would be a tougher grow-over market this year. But we feel really good about that long-term 20% kind of growth algorithm organically. And again, the big levers are, the continued pace of adding new customers, I mean, reference to our top of funnel activity is actually really strong, best I've seen probably since 2019.
+
+And -- and so we've seen this in other down cycles as well as although you have some macro headwinds on volume, it actually is a really good environment to add new customers. And we're seeing that are playing out today.
+
+And then one of the biggest levers that we have, of our 1 million supplier is still top. Half of those are paper check suppliers. And although we have a software, we generate revenue on every type of transaction that goes through our platform. On the payment network side, if it's a paper check, there's no additional revenue on the network, we need to have expense of roughly, call it, $0.90 a payment for a paper check. And once we convert that to be electronic, that $0.90 goes to pennies, and the revenue goes from 0 to $10 plus per transactions. So that's a really big lever that drives both gross margin expansion as well as future revenue growth.
+
+So our ability to continue to convert paper check suppliers to electronic combined with just continue to add new customers. And then we're adding additional monetization events like Invoice Accelerator, where now we get an incremental 200 basis points on every transaction that gets accelerated.
+
+James Faucette
+
+So when you think about that kind of 20% organic and obviously taking out the -- every other year of political cycle, et cetera. How would you like to see or what's the best sustainable combination of new customers, additional capabilities and then just like converting a lot of that check to electronic, et cetera, and capturing that payment flow?
+
+Michael Praeger
+
+Yes. So I kind of think it is kind of maybe a little roughly in kind of the kind of 50-30-20. And 50% is kind of driven by net new buyer customers joining the platform. About 30% is kind of driven by net new products and service offerings along with that conversion from paper check to electronic. And then that remaining 20% is just continue mining the base of customers we have where there's expansion opportunities for them to use our whole platform.
+
+James Faucette
+
+Got it. Got it. Got it. I've got a lot of other questions here. Any questions from the audience though, just raise your hand, and we'll get you a microphone. I don't see anybody right. Oh, here's one right here. Sandy?
+
+Michael Praeger
+
+I thought you already gave you all of your questions.
+
+Unknown Analyst
+
+No, no. Just more on this one quick one. You guys have talked about ePay as a percentage of TPV, I think, around the 40s now, hoping to push that to 50% to 60% by 2025. Just while we're on electronic payments conversion, can you talk through some of the initiatives, some of the drivers just in continuing to drive that ratio higher?
+
+Michael Praeger
+
+Yes, absolutely. That's a great question.
+
+James Faucette
+
+I was thinking why you didn't take my question.
+
+Michael Praeger
+
+He's like our man. James might forget this one. But the question relates to today in our platform, we're monetizing either through one of our forms of virtual card or one of our forms of Avid Pay Direct, which is our ACH plus or enhanced ACH offering. That 42% remember, is kind of a macro number that we keep adding large volumes of paper check suppliers to it.
+
+If we look at individual cohorts, we see that number accelerating nicely from the 40s, 50s, in some cohorts up to 60% for different verticals. The other kind of piece of what -- in addition to just kind of the density of Flywheel impact is we have seen already, and we're going to continually leaning into, continue to add new payment types. And we have kind of recognized the secret with suppliers and adoption and why we've been so successful is that we consider that supplier our core customer. And so that means we have a dedicated product strategy for them, sales, customer success. But on the product side, the value proposition that we deliver for the supplier is visibility to their cash flow, which means they have access to visibility of invoices and payments.
+
+Second thing is we allow them to manage their business rules on how they want to receive payments. So this is a really important strategic differentiation from the standpoint of, I don't know anybody else that's in our business, that doesn't -- that executes the payments based on how the supplier wants them. Everyone tries to do it the way the buyer from a buyer's perspective.
+
+And we kind of flipped the wheels. And so our buyer customers, when they release payment, they don't know how any specific payment is going to be executed. We executed based on the business rules of the supplier and then we update their ERP system, kind of every payment got settled. And so that gives them the supplier's ability to manage their business rules.
+
+And then the third is access to the data. And the data is really important so they can then reconcile these transactions efficiently knowing exactly what invoices to apply them to. And then the last thing is we give them access to Invoice Accelerator so they can accelerate any invoice for next-day payment. And so that combination of that value proposition has really been a great catalyst to get more these paper check suppliers that want to be electronic that continues to grow that number, the 40s, 50s, 60 plus, combined with different payment modalities that combine maybe the payment modality with levels of data that they can use.
+
+One of the things that I've learned in this business, and this is a great learning. We created the Avid Pay Direct offering of ACH Plus we priced at about 100 basis points, which is about half the price of a virtual card transaction, thinking that, that was going to be the offering that kind of new suppliers would choose. Right?
+
+And what we've learned is that still 2/3 of suppliers choose card, even though it's twice the price. We're like, well, that doesn't make sense. Why? And what we learned is because actually, the efficiency of their internal process is what drives the decision more so than price. So if they've automated their internal receipt process to be if they highly automated their card process because maybe they have a retail part of their business, they want to maximize how many payments they can accept by card. However, if they've automated their ACH Plus then they want to maximize that channel.
+
+So it's really interesting. So what we find is that automation on their side actually drives the decision and then price is kind of a secondary factor.
+
+James Faucette
+
+So I want to follow up there. So if you sitting here today and imagining a world as you continue to push checks out of the payment process, where do you think we end up in terms of that mix between virtual card, ACH, other types of electronic?
+
+Michael Praeger
+
+Yes, I feel like a Mastercard economist here. So today, roughly speaking of our -- that 40% that we have monetized, card is like 30%, Avid Pay Direct is 105. I think what we're going to see is that, that 30% is going to grow, that card is going to grow probably close to 50% over time is what I expect. And again, it's going to be at different price points.
+
+One of the things that we have the ability to do. I learned something really actually interesting from Mastercard this year when we did kind of our annual review. We have a long time kind of strategic partnership with Mastercard. And then if we were a bank, we -- last year, we have been the #4 issuer card issuer in the country. So there's certainly a lot of volume that Mastercard kind of pays attention to. But they've given us the ability actually to manage our own bin structure.
+
+So we can actually create different interchange products attaching different bins within kind of the Mastercard kind of blessing to get certain subsets of suppliers to be able to adopt and move from paper check to electronic. Well, that's really important kind of flexibility mechanism. So we can create different price points with different levels of data that we're providing, just even within car transactions.
+
+One of the things we're excited about is some of the RTP or FedNow type of offerings where, again, the big challenge is the data and getting the data in an integrated way back to the supplier. So now we can have, okay, if you want kind of a regular 2-day settlement like an ACH, it's one price point. But if you want an immediate in day settlement, maybe it's 25 basis points or 50 basis points higher type of things. So we are excited about those type of offerings. Again, the combination of different price points, combined with different data delivery is what we think the winning formula is.
+
+James Faucette
+
+Got it. Got it. And let's talk about the business. And ultimately, like you guys have grown, as you said, consistently for a long time, but you're breaking into profitability now in a real way. And at your Investor Day a few weeks ago, you provided some helpful new targets surrounding that margin expansion. Let's go with gross margins to begin, really good progress over the last 12 months. And obviously, you have the expectation for continued expansion into 2025. What are the key drivers there? And what allows you to have confidence and visibility into the gross margin projections?
+
+Michael Praeger
+
+So the one thing I'll say, it's not just -- it's not one thing. It's not a silver bullet that's driving it. It's really maybe a dozen kind of different strategies that are all kind of working together and incrementally driving the margin. But when I think of overall, there's kind of falls into 3 buckets, just overall revenue scale that's helping us.
+
+The second one is our yield expansions within our existing offerings and continue to grow yield. And then the third one is our automation initiatives. I get kind of kick on it because we've had kind of been using kind of AI, both for customer-facing parts of our platform as well internally for years, right?
+
+It started off with RPA technology back a number of years ago. And it seems like everybody woke up like 60 days ago by playing out ChatGPT on their phone or something. And now, everyone is on this. AI band, this isn't new news here. It's just everybody is talking about it now. But we're -- but we have lots of different use cases in terms of both making it customer impacting the business from a customer interfacing perspective. And 2, kind of quick examples would be on how we take in invoices and efficiently apply both OCR, receive learning in AI and how it can read those invoices in a high confidence way and then subsequently codes them for our customers.
+
+And then the second piece is how we actually deliver payments. And so a good example is one of the reasons why we have such a high adoption rate of conversion of paper check electronic, is that we as suppliers that say, "Okay, I would exchange. We'll take a virtual card from you, but you have to log into our billing system or our collection system. And if you apply that payment to write invoices, so our team doesn't have to do work. We'll accept your electronic virtual card payment.
+
+Anybody else in the industry hears that, they say, "Geez, that's too much work. We can't do that ticket to check. And what we do -- those are good examples where we now have AI-driven bots in RPA technology and automate those type of transactions. So those are examples that we've been doing already for customers. And then certainly, internally, every functional area now has been kind of energized with some of the ChatGPT just in some of the lower-hanging fruit on making process more efficient.
+
+James Faucette
+
+Got it. Got it. So all right. So if that's the gross margin and some improvement in process, let's expand that to EBITDA margins. And I think the EBITDA margin expansion you're looking at is really kind of eye-popping for the next couple of years. This year, you're looking for, let's call it, low single-digit margins, but your 2025 target is 20% plus adjusted EBITDA. Like how much of that expansion is gross margin driven versus just being able to continue to grow the business with very little OpEx input? Like what are the drivers or components?
+
+Michael Praeger
+
+Yes. So first of all, I can say, we did our kind of big institutional pre-IPO round in 2015, Matt Harris from being Capital Ventures Lead. It was -- we saw the opportunity to build a $1 billion-plus business. We said, let's build the right scale, infrastructure, talent, we need to build a big business.
+
+So we feel that we're on kind of the other side of that now in terms of next-gen in our platforms, having the right team, hopefully, one of the benefits of -- I was excited for, for Investor Day is all these investors hear me speak at every conference, but probably we are a talented team that's back in Charlotte that's executing the business that typically people don't have visibility to. So hopefully, Investor Day kind of gave some of that visibility.
+
+And that's just kind of building the talent base, but we feel like we're kind of on the other side of that now. We have the right kind of platform scale for that next milestone of $1 billion of revenue. And so as we kind of go forward, yes, those -- some of the expenses will continue to slightly tick up, but it will be at a much slower pace combined compared to revenue growth. And so we'll get that efficiency certainly the continued uptick in gross margin as a side benefit to that. And we're just -- the opportunities to continue to be really efficient in across our business and certainly kind of AI is a small factor in that as well in some of the areas where we have the biggest expense base from a humanbeing perspective and some of the support kind of customer success areas of our business that we think we can be really efficient using -- leaning into some more automation and AI-related functionality.
+
+James Faucette
+
+Got it. Got it. So if we look at the things that you've put out, another thing that jumps out at me is, you've kind of detailed at the Analyst Meeting that your LTV to CAC, you expect to go from roughly 4x to 5x to around 8x in 2025. Now with that kind of incremental unit economics, what's stopping you from prioritizing growth over margin expansion, an -- especially particularly given what would be viewed as tremendous payback economics, especially if you're starting to really get to that 8x.
+
+Michael Praeger
+
+You sound like one of the analysts from like 2021. You're going to balance everything out. I think if we -- we look at it as kind of -- it's efficient growth strategy, right? And I think, believe me, what keeps me up at night is the overall market and the opportunity we have, and are we doing everything in our power to help the market adopt, right? And so we don't feel like we're -- like I get questions, hey, Mike, if you could double the sales force, what would impact?
+
+If we could double the sales force and have a high impact, we already have done it, right? So it's like we have a big balance sheet. We have a lot of capital. It's not -- that's not the constraint. So we're going to be really smart about how we grow the business. And we think there's this -- we really like kind of that Rule of 40, Rule of 50 formula for us. And it also provides, I think, a lot of discipline in the business. But when you look at any 2-sided network, they're really hard to build their expense in the early years. But then when you start to see the Flywheel work. The margin profile that they produce and just look at the best 2 examples we have, are probably Mastercard and Visa, right? Now those are totally different scale than where we're at. But we're starting to see some of that Flywheel effect place as part of our business model, and it gives us a lot of confidence.
+
+James Faucette
+
+So you mentioned kind of there in past saying the capital and, frankly, cash generation and as your margins start to expand, your business is likely to increase the amount of free cash flow pretty significantly beyond what you're already generating. How are you thinking about allocating that capital? What's the right use of it from your perspective? Does it include acquisitions? How should we be thinking about that?
+
+Michael Praeger
+
+Yes. So we definitely kind of inorganic M&A, we think is core to our playbook. We've done 7 kind of smaller tuck-in acquisitions to date. We haven't done any since being a public company. And as but no, we haven't been trying, it's just that we haven't seen really compelling opportunities as well as some of the valuation metrics have been a little bit, I don't know quirky maybe is the right word. And so, we're going to be really, what I'd say, cautious related to what we're spending, what we're investing in. But we think it's core to our playbook.
+
+We think the playbook that is really successful for us are smaller tuck-in acquisitions that help us both build the beach out of customers and existing verticals as well as enter new verticals. And we think that's a really excellent playbook for us, where we can monetize customers really quickly. We're only going to do things that are accretive. And we have a short [ VOV ] roughly a 24-month view for any acquisition to be accretive for us. So -- and we have a really good track record of executing those. So we're going to stick to what we know and those kind of bread and butter type of acquisitions. And we think later this year going to '24, we're going to see more of those opportunities as the market kind of comes back for M&A.
+
+James Faucette
+
+That's awesome. That's all the time we have today. Appreciative.
+
+Michael Praeger
+
+Double 0.
+
+James Faucette
+
+I appreciate all your time. Thanks for joining us everybody.
+
+Michael Praeger
+
+Thank you.

AvidXchange Holdings, Inc. Presents at The 52nd J.P. Morgan Annual Global Technology, Media & Communications Conference, May-20-2024.txt

@@ -0,0 +1,275 @@
+AvidXchange Holdings, Inc. Presents at The 52nd J.P. Morgan Annual Global Technology, Media & Communications Conference, May-20-2024 01:50 PM
+5/20/24
+Tien-Tsin Huang
+
+This is the AvidXchange session. My name is Tien-Tsin Huang. I cover payments and really happy to have the AvidXchange team with us. Mike Praeger, CEO and Co-Founder; Joel Wilhite, CFO. As well, we'll do a fireside chat. We'll take questions from the audience as well. Thank you both for being here.
+
+Michael Praeger
+
+Thank you.
+
+Joel Wilhite
+
+Thank you.
+
+Tien-Tsin Huang
+
+We were just saying, the only reason to come is to get another bag, Mike.
+
+Michael Praeger
+
+They're really good for the lake, for the boats, for the lake.
+
+Tien-Tsin Huang
+
+We need any merch to get people to come to the conference, right, in addition to the content. But thanks again for being here.
+
+We had Mastercard earlier. We talked a lot about AP, AR, B2B payments and the big potential there. So when we think about AvidXchange, of course, a big player in mid-market, you guys have that partnership with Mastercard. The question I get, and I always like to ask you upfront just as set the table is just your moat. How would you lead the conversation around AvidXchange's moat to serve B2B payments, which is a large -- I answer it with a lot of the ERP integrations, but I'd love to hear how you address it?
+
+Michael Praeger
+
+Well, that -- yes, that's a big part of it. So I'll start by saying, firstly, that we're purpose built for the middle market. We're a software company that automates the accounts payable and payment process for middle-market companies.
+
+Okay. So what does that mean? Being purpose-built for the middle market, and I think one is, it means that we're solving the business problem of companies in the middle market. And then the second thing is, it means that we're integrated to all the supporting ecosystem players like all the accounting systems and ERP systems that support the middle market.
+
+And so on the accounting system side, today, we're integrated at 240 different plus different accounting ERP providers and the majority of those support different vertical industries that we're in. So we're in 9 different verticals, and that's really important because it's also important because of our go-to-market process or focus, I should say, is around the verticalization of the middle market.
+
+So we define the middle market as companies between $5 million and $1 billion of revenue. There's over now 500,000 of those companies just in the U.S. alone. And [indiscernible] is that over 50% of them highly align themselves to an industry vertical that has unique either accounting process or a business process that a vertical that requires a unique vertical-specific accounting system to support the vertical.
+
+And we like that because it means that we can use our software to solve a very specific value proposition or business problem for those companies in that vertical. And it creates more complexity that we can do a really good job of creating a value proposition for.
+
+So that's very different than, say, Bill is doing a great thing with making a super easy user experience for small business customers. But what we're doing is we're solving very much more complex business workflow accounting process for middle market companies. And so that's what makes it unique is having purpose-built solutions for the 9 different kind of verticals to be able to handle those nuances along with all the integrations that support that middle market.
+
+So it's hard work. We've been at it a while. But every quarter that goes by, we keep building this moat around the middle market segment, and we like the middle market segment because just like in the current kind of economic times, these are companies that are really resilient.
+
+Middle market companies don't go out of business in a down market. They cut back on some discretionary spend, but they keep evolving their business, investing in their business. And so we like the segment. It's been really resilient for us, and we like the industry positioning and the moat that we've created for sure.
+
+Tien-Tsin Huang
+
+Great. No, that's good interest. So you've been at it for over a couple of decades.
+
+Michael Praeger
+
+Yes, it's hard to believe.
+
+Tien-Tsin Huang
+
+Yes. I mean, we've been following the sector for a while in B2B and some of the themes are still the same. How would you describe the demand environment for what you're describing now versus past cycles?
+
+Michael Praeger
+
+Yes. So it's really interesting because it's amazing kind of how short memories people actually have. And so examples is -- so today, we're talking about how do we really advance the payment acceptance for, say, middle market companies and their suppliers around electronic payments. And that's kind of the dialogue.
+
+Well, when I started this business in our first -- in 2000 of our first probably 8 years of existence, the #1 kind of problem or headwind that we are facing is that CFOs and CIOs and CTOs of our customers didn't feel comfortable having their financial data in the cloud. And they're like, Mike, unless this runs -- in our data center behind our firewall and on-premise software, we're not comfortable taking core financial data and putting it in the cloud.
+
+Well, that was our first 8 years of existence. Well, today, if I went to any of our customers said, "Good news, we have a new on-premise offering for you." They'd be like, Mike, nonstarter has to be in the cloud, right? Well, like everyone's forgotten about that already, right? And so it's really interesting.
+
+And so today, we kind of solved that problem. And now it's pretty much mainstream that people are comfortable with having cloud-based offerings for financial data. But at the same time, we're still in the early days of the whole acceptance of replacing the paper process of paper checks, paper invoices with [ electronic ].
+
+And still today in the middle market, 70% of customers predominantly use a paper-based manual process for accounts payable. And that's what our mission is kind of automated and today, still about 90% of every new customer we add to our platform is doing this for the first time. So still massive greenfield opportunity and despite being at it for 20-plus years. we still feel like we're maybe in the first or second inning.
+
+Tien-Tsin Huang
+
+Yes. So what's the conversation like now when you're talking to your sales team and the feedback that they're hearing, given it feels like we've been dealing with macro uncertainty for a while. I feel like I always tell the team it's like saying Happy New Year in February, we got to stop saying macro uncertainty. So what's the -- if you have to think about the backlog then in the pipeline in that context, Mike, what are you hearing from your sales teams?
+
+Michael Praeger
+
+I mean -- so first of all, what I would say is it relates to the macro, I think that's more of an existing customer, their volumes on our platform and just being more cautious around discretionary spend and it's showing up in our transactions retained on the network by in normal times, we think it's like 105% or 104%,105% today's season, it's probably more in the 100% range, right?
+
+So that's where we're kind of seeing that kind of the impact. But as it relates to kind of the go-to-market activity from the sales team perspective, I think we're still seeing really high engagement. We're seeing companies -- they want to eliminate paper, they want to eliminate manual process.
+
+And one of the kind of the drivers that I've talked about over time, to be a little careful with the audience that I mean is like when we get to the point of more kind of older legacy related professionals kind of retiring and being kind of replaced by the more up-and-coming digital native professionals, they're looking at and saying, why are we doing it this way, like and versus being kind of status quo, they're like, I haven't -- I didn't grow up with a paper-based environment. I didn't grow up with a checkbook. So why am I signing 1,000 checks on Tuesday and Thursday, right? And there must be a better way.
+
+And they're asking those questions that hysterically weren't being asked by the old regime. And so I personally think that that's going to be the biggest chasm crossing event is when we kind of get to that point. And then I think it's going to -- the adoption rate is going to really accelerate.
+
+Tien-Tsin Huang
+
+Can you rehash what you said about top of funnel activity on the call?
+
+Michael Praeger
+
+Yes. So one of the things we use -- we don't disclose kind of quarterly sales metrics. It's an annual metric that we disclosed, but we try to give some flavor of kind of customer engagement on a quarterly basis, and we use top of funnel activity as a way to message that.
+
+And so my message was, in Q1, it was flat with where it was a year ago. But I said -- but hold on a second, let me kind of explain why we're not nervous or worried about it. And one is we see some really kind of positive elements to some of our verticals performing really well, real estate being on led by the multifamily sector, education, nonprofit being to other ones that are performing really well in terms of new customer engagement.
+
+And I said, but also, we changed some of our strategies related to how we invest in marketing. And over the course of last year, I've added really 4 new leaders that have done a really nice job, really elevating kind of our kind of go-to-market processes and how we invest in marketing. And these leaders came back to me said, "Mike, Q1 last year, we did roughly 85 different marketing-related events, and we put those through our new kind of ROI type models, 30 of them don't make the cut anymore. So we're not going to do those and we're going to take those dollars, and we're going to allocate them to our highest yielding." I'm like, that sounds really smart, and it sounds like a good kind of ROI-based investment decision-making framework as it relates to marketing.
+
+So it just turned out that kind of that reallocation made it that we invested in less in Q1, and there'll be a higher allocation in the other quarters. And we're already seeing some of the benefit in Q2 with our top of funnel activity up nicely.
+
+Tien-Tsin Huang
+
+Okay. Good. Thanks for going through that. I know that the visibility for your business is good in the short run. We think of Avid as a 20-plus percent grower over a full cycle, including acquisition. So maybe, Joel, if you want to get into the conversation, what is the growth composition today? What's the algorithm tomorrow as we think about getting or building back up to that 20% growth?
+
+Joel Wilhite
+
+Great question. So again, for the quarter, we had a good top line result almost 22% growth year-over-year. But to your point, we also look at our business ex float as well. So the float composition created a Q1 growth around 15%.
+
+So if you think about our growth algorithm, we really believe that this business has the opportunity to grow 20%, even exclusive of M&A activity. But Q1 results is at 15%. So what's the difference? And so I'd just remind the group, the way we talk about the growth algorithm, that 20% is really broken down into 3 simple components.
+
+The first, Mike already talked about. That's the degree to which we are retaining the transactions on the platform. And before this macro kind of adjustment that we experienced a little over a year ago, that net expansion of transactions on the platform was between 104% and 105%.
+
+What we're experiencing now is it's bouncing around 100, a little below, a little high. And so there's roughly 5% of growth we're missing there in that, dynamic. The second component is just adding new logos, new buyers. So we added 8% growth last year, together with the third element, which is yield expansion.
+
+Those three dimensions, we believe work together, can work together and have in the past to give an overall 20% growth. So the key that we're missing is that retention dynamic that is tied to the caution and reduction in discretionary spending. That's kind of broadly how we get to the 20%. And that doesn't include yet what we're really excited about going forward, including spend management, payment accelerator, et cetera.
+
+Tien-Tsin Huang
+
+Right. Perfect. So I had to ask. So this quarter was uncharacteristic of Avid to not raise your revenue outlook? I know it's early in the year, but anything to read into that?
+
+Joel Wilhite
+
+Yes. No, that's an important question. And it is different a little bit than our MO since we went public and I've been sort of very deliberate to sort of point out that not pulling the beat through the year isn't connected to data that we're seeing in the quarter even as recently as April.
+
+And it is more sitting in what we see as an increasingly uncertain season, whether it's the general macro environment, questions around interest rates, GDP growth, and also to a meaningful extent, the way we see our CFOs and controllers across our buyers thinking about the presidential election and the uncertainty between now and then.
+
+And so we just said, it's early in the year, let's reaffirm those guidance ranges, nothing changing necessarily in the underlying data, but just an incremental level of caution and prudence on our part and maintaining the ranges.
+
+Tien-Tsin Huang
+
+Okay. Perfect. No, that's understandable. So how about your ability to catalyze growth, either on the product side or through your partner model with some of the verticals that you're in? I know you've mentioned a few new partners like AppFolio, M3, are those some potential catalysts that we could see for growth just to pick up here?
+
+Michael Praeger
+
+Yes. I mean I think when we think of that, the formula per se of how do we have confidence as being kind of a 20% kind of organic growth business on a long-term basis is, one is certainly the macro environment is going to improve at some point, right? And we know that's kind of causing today about a 5 percentage point headwinds to the business.
+
+The second thing is I'm really excited about our sales and marketing leadership and what we're doing with our kind of our approach to new buyer customer growth and adding new customers to our platform. One component of that is some new partnerships that we talked about. And certainly, that's just another example where we're just building our industry-leading kind of position across the different verticals that we're in by adding like the AppFolio partnership in real estate and multifamily, recently, we talked about the M3 partnership in hospitality. Those are all great examples of that and kind of leveraging those to get access to a greater customer base.
+
+At the same time, we have really some exciting investments in innovation, our Payment Accelerator product, which we used to call Invoice Accelerator. And then I turn it over to the general business, and the first thing marketing did was change the name. So it's now Payment Accelerator. And that's clearly going to be our next $100 million business, really excited about the evolution of it. We're going to be really careful this year to make sure that the product is scaling the way we want to scale at the different volume levels that we wanted to operate at.
+
+And then we have some exciting new products like our spend management product that will be ready for initial set of customers by the end of the year and then kind of an exciting develop new offerings that we have lined up after that. And it's all geared towards kind of the overall strategy our customers today tell us, Mike, we have about 80% of all our expenses running through your platform, pretty much 100% of all the expenses that have an invoice go through AvidXchange.
+
+But we have roughly 20% of our expenses that are in T&E, that are in other spend kind of programs that don't have an invoice and it's really hard to get overall consolidated reporting and spend analysis, things like that. We have to cobble together these other third-party solutions to get their data into your system and into the general ledger. Can you help us with that?
+
+And so that's the path that we're on is how do we create innovative products to keep chipping away at maybe that 20% of transactions that are not in our platform today. So users have one place where they can go and manage all their invoice transactions as well as their T&E transactions, other spend transactions and the customer has now kind of great global reporting. So that's kind of the mission that we're on in terms of really partnering with our customers.
+
+Tien-Tsin Huang
+
+Okay. Good. I think the spend management one, I know you talked a lot about Payment Accelerated, the new name. But the spend management one is definitely compelling in my mind. Is it fair to say that your existing client base is underpenetrated with the solution on spend management?
+
+Michael Praeger
+
+Yes. I would say yes. It's interesting because you have what I would say on T&E, if people have a formalized T&E program, probably concur is one of the best examples that our customers use. But even when you pull our customers, you'd be surprised that how many middle market companies still use Excel as their core T&E platform, right? And they actually don't have a platform.
+
+And then you have some of the new offerings around spend management like, say, Brex or a Ramp or an Airbase maybe. That's part -- you've been focused on kind of providing kind of a 30-day credit card to small businesses, right? But it will provide them an opportunity to kind of make spend that way.
+
+And again, I think there's no one platform that -- or one piece of the spend that's going to drive -- they go from 80% to 100% overnight, but it's kind of chipping away at different pieces of it. And so we think that our spend platform is going to really do a nice job of doing that for our customers. And yes, there probably is some really underserved customers that we have a nice market opportunity to penetrate.
+
+Tien-Tsin Huang
+
+Okay. Good. I know there's payments to penetrate. We certainly look at or measure that with transaction yield that's been surprising to the upside for quite some time even beyond flow. Where do you see the yield going in the short term versus the long term? There's always this concern that maybe pull forward? Or is this the normal trajectory or not? How would you answer that?
+
+Joel Wilhite
+
+Yes, maybe I'll make a comment or two and Mike can add. I mean we seem good -- we've pointed to overall total transaction yield is probably the single most important metric, right? It's all revenue over all our transactions. It combines the yield on both the buyer side where we're selling software and on the payment side. We've seen that even ex float kind of nicely steadily grow over time. I think without -- I'm reluctant to give sort of short-term guidance.
+
+I think what you can expect is that what we see and the opportunity that we have is that we can continue keeping steady expansion in non-float transaction over time. It won't be linear. And there may be times when imagine when payment accelerator begins to ramp or other things where we could see that inflect. But otherwise, steady expansion would be the near-term expectation.
+
+Tien-Tsin Huang
+
+Good. Now Payment Accelerator aside, there's a lot of talk about RTP and these alternative payment methods. Some of them are going to be used to address B2B and help drive penetration with a lower-cost solution. Is there anything there that you're watching that may change the growth equation?
+
+Michael Praeger
+
+Yes, I mean -- so one of the things that we've been on the forefront for a long time is to our belief and premises that in unlike consumer transactions where you have a single payment modality like say, card, where [ rack rate interchange ] on card offering works well for the consumer, right?
+
+In the case of business-to-business payments, there has to be a value proposition and different suppliers have different requirements related to what's important to them. Is it price? Is it automation? Is it remits data?
+
+And so we kind of take an approach where we believe that we have to be able to create really unlimited number of payment modalities on our platform that incorporate 4 elements. The speed of the payment, the amount of the payment, i.e., cost or interchange.
+
+The third being the level of [remittance] data that we're providing for reconciliation and the fourth being level of automation to create as much of an automated process or a straight-through process as possible for our suppliers. And so what we -- for example, just on virtual card, we're up to roughly about a dozen different virtual card offerings combining those 4 elements. And we're doing the same thing with AvidPay Direct, where we're combining those 4 elements to create different payment modalities.
+
+And I think that, to us, is the secret to long-term success and how we can already take our industry-leading kind of 40% monetization rates to 50% plus over time is by real time to supply the -- create suppliers need and what they're looking for is to configure these payment modalities to address those 4 elements.
+
+Tien-Tsin Huang
+
+Okay. Perfect. And let me stop and take questions from the audience if we have any, happy to take them here. If not, I can keep going.
+
+Unknown Analyst
+
+I wanted to ask somewhat related to the different ways you tweak pricing versus speed versus automation. I know you've talked in the past about your new payments platform. So I just wanted to ask how that maybe improves your speed to market or efficiency, things like that?
+
+Michael Praeger
+
+Yes. So I think the question relates to what we've been talking about is our next-generation kind of payments platform. And so this is more of an iterative kind of evolution of our platform that it's already been taking place. It's maybe 40% done and the rest will be done over the next 6 to 12 months through kind of iterative releases. But where we're going is they have the ability to manage unlimited number of payment modalities almost real time.
+
+So think of it as that you have a sales agent on the phone with the supplier, and they're able to configure almost real time within certain parameters a payment modality that incorporates the speed they're looking for, the price point that they're required at, that it would require them to move to electronic payment. The level of [ remittance ] data they need to have automatically sent to their billing system, and then a level of automation on how automated they want the process to be.
+
+And so that's, we think, is the holy grail is to get to the point where we can real time as we're on the phone or through another communication mechanism, with that supplier, build a real-time configure a payment modality and immediately start executing payments with that new modality.
+
+And so that's what we're working towards with our new platform and really excited about it. And before we get there, we're doing what we can by incorporating different payment programs like we have with virtual card as well as we have AvidPay Direct, which addresses a component of those by combining those 4 elements in a more static way for different supplier constituents.
+
+Tien-Tsin Huang
+
+Good anyone else?
+
+Unknown Analyst
+
+I know we -- I have some other financial questions. Before we get to that, just to build on Andrew's question, maybe on the data front. I know when we first -- you got all the analysts together. You talked about Horizon 3 stuff. Data was a big thing. You see a lot of data being on both sides of the network. But now you have this Gen AI tech that's out as well. So has that -- is that technology going to accelerate your planning to go after this data opportunity, Mike?
+
+Michael Praeger
+
+Well, definitely. I think it's else mile when we kind of hear about kind of the AI stuff because it seems like kind of everyone woke up like in the last year, right. The reality is we've been working on it for a long time and different pieces of it and different pieces of our business. But I think as it relates to the data story, we're still scratching the surface in terms of all the different use cases and how we can potentially monetize it over time.
+
+Certainly, just on the front end, I just got back from Saudi as Microsoft CEO Summit last week, and there was a lot of energy and discussion around just taking kind of data from free form type objects and be able to standardize it, right? And if you think about it, that's kind of the definition of an invoice is, and that's one of the biggest challenges everyone in this industry is always grappled with is you have all these kind of invoice documents that are nonstandardized and how do you get that data and be able to read it and digest it in a way that you can create standardization with it, which then able to really drive value that you can use it for all different types of use cases.
+
+And I think we're still in the early days of that. The good news is now through AI, we have a much more efficient way of actually capturing the data, right? And standardizing it for without -- historically, it was a very manual process to do that. And so I think there's kind of foundational work that's happening right today.
+
+And I think we're leaning into and really working with our customers on is how can we make this data valuable for them. And part of my litmus test that I use for everything with our team is it's one thing to say that they really want it. And then the second thing is, well, what's the price point they did actually pay for, because that to me describes the value that it really has for them.
+
+And so I think we're in the early days of that, but super excited about what that means. We think -- if I describe AvidXchange as our 4 years or 5 wheel and our fourth gear is around data. And I think the biggest use case we have today around data is how we're using all the data to really run and leverage our Payment Accelerator offering, by all the underwriting criteria that we have by using the data. And I think that's just one beginning use case that we'll build on.
+
+Unknown Analyst
+
+That's fun to hear. I know the fourth gear was always around data. But with not to get back to Gen AI, but just with the opportunity to automate and to take more people and labor out of the workflow of everything you do, has your view on that changed since a year ago or 2 years ago when we had you here?
+
+Michael Praeger
+
+Yes. I mean, so one is, I was telling somebody our office, I felt like we've made so much progress. We've had and last year developed like 12 different work streams around different parts of our business that we're incorporating AI type projects, and felt really good and then you go to like Microsoft CEO Summit and then you kind of have a real world reckoning that you still have a lot of work to do, and you may be behind where you want to be, right?
+
+But one of the things, just is really kind of exciting, I talked about on our earnings call a couple of weeks ago, is how we've incorporated really automate the IVR process. and executing IVR-based payments. And so we were kind of in the forefront of this many years ago through leveraging RPA bots to do this, and it worked.
+
+But it was a little bit expensive. And also, what you have is every time something change, you have to send your bot back to the maintenance department to get kind of retooled as like another decision tree was added to the IVR system, and things change. And what we have now is we've now replaced it with a peer AI and its self-learning.
+
+So as there's a nuance is incorporated into the IVR system. Our platform is learning those, and it's adding those, and we're doing it at lower price points. And so that's really exciting because it's interesting at the time I kind of thought, oh, when we kind of launched the RPA bots, it was like, hey, okay, we have that one solved.
+
+Okay, move on to the next one. But then you realize, well, actually, now there's a next generation that can solve it even better. And I think that's what AI is doing to us, and I'm sure others in a lot of ways is even those processes that you thought you had to automate it in a good way.
+
+Now there's even a better way and a more efficient way to automate them. So I think I made a comment, I think the new AI, just in that one business process, it's kind of a 10x leverage on humans and close to kind of over a 2x leverage on our previous RPA technology.
+
+Unknown Analyst
+
+Yes. No, I remember studying the RPA side as well. Same question, does it change your thinking on the opportunity set of companies that you would look to acquire, maybe buying some tools companies to amplify what you're trying to do? I don't know if your appetite has changed because of some of the changes around the technology.
+
+Michael Praeger
+
+I mean I think the -- we still, I think, are in a belief that in terms of from a product perspective, that we like our ability to organically build our own products just because everything is so tied to our core underlying platform that anything that we buy has to be kind of rebuilt anyway.
+
+And so -- but what we really like are acquisition opportunities that expands a vertical market or a customer base that we're focused on and building a bigger customer base faster. And I think as it relates to AI, now, I think, in terms of the culture of the business. We want to -- if a company out there was -- didn't have any AI projects going on. They really hadn't adopted it. It wasn't in the their forefront of how it's driving their strategies. We probably say that's not really the right culture fit for our business because we want people that are highly innovative that are helping us push the boundaries of kind of new innovation and new ways of doing things.
+
+And we think, certainly, part of what you get an acquisition is talent and culture that enables you to kind of foster that mission and grow it and maybe can grow it faster, and not be a detractor to it. So I think that's kind of one of the lenses that we're certainly looking at any new M&A opportunity that we're evaluating.
+
+Unknown Analyst
+
+So are there obvious verticals that you're interested in that you're not in today?
+
+Michael Praeger
+
+Other obvious verticals, I don't know there's obvious verticals in terms of how we think of new verticals for us. It's not like there's a bunch of guys or gals sitting in a room in Charlotte whiteboarding what these may be. We look at our platform and say, where are we naturally attracting new customers today that are maybe in different industry segments.
+
+And so that's how a number of our industry subverticals got created and hospitality was a good example of that. Our health care facilities was another one where we got to a point of -- we had maybe about 50 long-term care centers that came to us as customers.
+
+We said this is pretty interesting. Let's start studying it. It got to about 100 different health care-related facility companies, and we're like, let's create a vertical around this because we think this is a long-term really interesting subsegment for us to focus on, and there's some unique business process challenges that this vertical has. The same thing happened in hospitality.
+
+So I think what we're doing is we're constantly looking at all our customers on our platform and saying, where are the concentrations of kind of new sets of customers and why are they adopting AvidXchange, what business problem are we solving for them. And that's what leads to new verticals, and we're going to continue doing that.
+
+So I would say there's none today that we're kind of itching to kind of evolve. I think what we put in the stake in the sand at our Investor Day, a year or so ago that our next big mission is to be a $1 billion revenue business. And we can actually do that with the verticals that we're in today.
+
+So we're in 9 different verticals we're single-digit penetration in all 9. And so we're not even in a position where we have to add new verticals to hit our objectives, but we're certainly going to be opportunistic if it presents itself.
+
+Tien-Tsin Huang
+
+Okay. That makes sense. we have 20 seconds left. Last question from anyone. If not, maybe we should close it out then. Thank you both.
+
+Michael Praeger
+
+Thank you. Thanks a lot.

AvidXchange Holdings, Inc., Q1 2022.txt

@@ -0,0 +1,467 @@
+AvidXchange Holdings, Inc., Q1 2022 Earnings Call, May 05, 2022
+5/5/22
+Operator
+
+Good evening, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. First quarter 2022 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's Head of Investor Relations.
+
+Before we begin today's call, management has asked me to relay the forward-looking statement disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discuss its future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise any forward-looking statements.
+
+Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G of non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.
+
+With that, I'll now turn the call over to Mike Praeger. Please go ahead.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joel and I are excited to discuss AvidXchange's first quarter 2022 results and the continued momentum we are experiencing across our business, driven by our middle market focus and the 4 growth gears of our AvidXchange business flywheel that drives our business.
+
+Overall, we once again delivered a solid quarter of both operational and financial performance, with results coming in better than our forecast. This is the third consecutive quarter of over 20% organic revenue growth. These positive results reflect the middle market's steady demand for AvidXchange's industry-leading and differentiated business-to-business accounts payable automation software and our payment solutions that are purpose-built for middle market companies.
+
+We experienced a strong revenue performance of over $71 million, which is up 29% over the same period last year and higher non-GAAP gross margin exceeding 62% together with lower expenses which led to a reduced EBITDA loss of $5.6 million in the quarter. As a result, we are raising our full year revenue outlook while lowering our adjusted EBITDA losses relative to our previous guidance, which Joel will discuss later in today's call.
+
+Our first quarter 2022 results were very much a continuation of the trends we highlighted on our first earnings call back in November of last year. We're seeing our buyer customer demand be broad-based across the various vertical markets we operate in. The Homeowner Association management market, or HOA as we call it, which we highlighted in our last earnings call in March, continues to recover nicely. We also saw a healthy overall growth in both our buyer and supplier customer counts.
+
+Separately, we made a small tuck-in acquisition of new customers in the first quarter from PayClearly for a total cash consideration of $7 million. PayClearly operates in the media vertical with a focus on political segment and had a roster of over 40 politically focused media customers, which we acquired. This acquisition, coupled with FastPay in July 2021, cements our leadership in the media vertical.
+
+Continuing with our results during the first quarter, we're experiencing strong transaction volume growth, totaling $16.9 million, which was up almost 16%, with a total payment volume increasing by 41% to $15.2 billion this past quarter. Our new Homeowner Association management customer Worth Ross Management is a great example of what is driving our growth. As a leader in the luxury high-rise and Homeowner Association management segment with over 100 associations under management, Dallas-based Worth Management was drowning in heavy paper invoice approval and coding processes. Being responsible for the timely processing of thousands of monthly invoices and payments.
+
+AvidXchange's purpose-built AP automation software and payment solutions streamlined their manual and paper intensive AP process by eliminating their paper invoices and their paper checks, enabling their AP specialists to be more value added in providing business insights and analysis to their association property managers.
+
+The Worth Ross example is also significant in another way as they are also strategic cornerstone customer, given how influential they are in the HOA market. To build on our momentum in the HOA vertical, we also announced the hiring of HOA industry veteran, Michael Pizzico as Vice President of our HOA business.
+
+Another powerful example of what is fueling our growth continues to be our strategic channel partnerships. We are excited to have just signed another major preferred strategic partner agreement in the real estate vertical with ResMan, an industry-leading and rapidly growing multifamily property management and accounting system software company.
+
+ResMan targets middle-market residential multifamily property owners that manage a portfolio of real estate ranging anywhere from 500 to 5,000 rental units. ResMan today has a base of over 700 buyer real estate customers, utilizing their property management and accounting system features and views AvidXchange as a high-impact strategic relationship, which will enable ResMan to further move upmarket with more robust accounts payable and payment tools to help their highest-value customers manage their dynamic business rules for invoice approvals and payments more effectively. With this high profile ResMan strategic partnership, we are now deeply embedded with 5 of the top 7 real estate accounting system providers in the industry.
+
+In short, our operating and financial results demonstrated strong execution against our long-range business plan of being the de facto standard for accounts payable and payment automation across the middle market. It further validates the investments we have outlined and have made since our IPO.
+
+With that, let me provide you with an update on how we are executing against our investment objectives set at our IPO last October, impacting each gear of our AvidXchange business flywheel.
+
+In Gear 1, which is delivering a great AP and payment automation software experience to our buyer customers, we are excited to announce the launch of our next-generation procurement and purchase order management tools, which now includes 3-wave invoice matching capability. Let me provide some context to why this enhanced functionality for our next-generation purchase order management tools are both strategic to us as well as being high impact to customers.
+
+We estimate that a significant portion of the middle market businesses, particularly in the upper end of the segment, have some form of purchase order, or PO as we refer to it, business process already in place today. And many times, this is a paper-based process. In the real estate vertical alone, one of the largest industry verticals, for example, there is an upstream need to better control decentralized spending related to repairs and maintenance through a streamlined purchasing and invoice process.
+
+Our next-generation purchase order tools are strategic advancement and an appealing feature set for both new and existing customers, while enabling us to penetrate the horizontal ERP providers further and target new vertical industries, such as the middle market manufacturing segment. This offering, we believe, will further support the tailwinds for customer adoption and achieving our long-term growth objectives.
+
+Lastly, the benefit of this offering should also increase already strong customer close rates with key strategic partners who have also seen strong customer demand for this type of functionality across their middle market customer base.
+
+Now turning to the second gear of our flywheel, which is focused on maximizing overall transactions on our platform. A key aspect of our strategy is continue to expand and improve upon our integrations to accounting systems, especially those with large market share of those in key verticals. Remember that if we're not highly integrated with a customer's core accounting system and provide them a seamless user experience, it's very difficult to demonstrate the efficiency impact of a fully automated process.
+
+In combination with our recently released next-generation purchasing tools, along with our built-in side integrations with our top 4 highly strategic horizontal accounting systems and ERP partners, which include NetSuite, Microsoft Dynamics, Sage Intacct and QuickBooks Enterprise, these next-generation built-in side integrations provide us the ability to ensure that our systems are synchronized real-time with our customers' accounting and general ledger systems along with providing a seamless user experience.
+
+We believe that the combination of these Gear 1 and Gear 2 enhancements position us well to expand into new verticals, while giving us a broad beachhead to leverage with our future international expansion strategy, where these horizontal ERP systems have significant market share across the middle market.
+
+Under Gear 3 of our AvidXchange business flywheel, which is focused on maximizing the conversion of paper checks to electronic payments with our suppliers, we're excited to recently launch our straight-through processing offering or STP, as we call it. STP is a method of automating virtual card payment acceptance, along with its detailed remains data by integrating the payments directly to the suppliers merchant processor and being able to deposit the virtual card funds directly into the suppliers merchant account.
+
+In 2020, a survey conducted by the AvidXchange research team after adding automatic processing capabilities to our Mastercard virtual card process would increase their acceptance. The result was that approximately 75% of those supplier survey found additional value in a straight-through process, which would eliminate the need for any manual process on the supplier side for the processing of a virtual card payment and the receipt of their funds. In addition, 67% of suppliers stated that the only way to make virtual card acceptance more efficient is by eliminating the manual touch points and labor previously required to process card-based payments and helping to streamline their reconciliation process.
+
+In particular, our existing supplier customers who receive over 25 monthly payments today from the AvidPay Network, but presently do not accommodate receiving virtual card payments due to need for this manual intervention, saw the greatest value. This kind of supplier customer profile also represents over 20% of our check-based payment volume on the AvidPay network today.
+
+Of the numerous supplier testimonials that some of the benefits of STP the best is probably Bryce Clark of Capita Lock, which previously was receiving more than 25 checks a month. He stated, I've enjoyed the time-saving benefits so much that I'm willing to pay the regular merchant account rate on those payments. I wouldn't want to go back to manual check processing now that I've seen the benefits that STP provides.
+
+So our new STP offering in short provides an efficient and improved supplier experience, along with unrivaled scalability and reliability to drive further adoption of e-payment acceptance from our suppliers and is another tool to increase the conversion of paper check suppliers to e-payment acceptors.
+
+And finally, our Gear 4 is leveraging our vast spending and payment data to drive value across our networks. In the first quarter, we launched to a select number of early adopter customers, new functionality that we call Avid Analytics. Avid Analytics helps our buyer customers with ways to better manage and optimize their existing purchasing spend, along with driving additional operational efficiencies around the speed and quality of their dynamic invoice and payment approval workflows that support their business.
+
+Through our AvidXchange Customer Advisory Board, which spans across our vertical markets, we've gained intelligent and actual insights into what kind of data is valuable within each of our vertical markets to deliver increased value and improve business outcomes for our customers. In the real estate industry, for example, in just one use case is with a multifamily buyer customer operating in multiple states and regions now utilizing our Avid Analytics payment dashboard to identify which properties take the longest or shortest time to approve and clear payments based on actuals relative to contractual terms, thereby positively impacting either supplier relationships or increasing their working capital.
+
+This new information-rich and interactive analytics tool is built in an easily configured and customer managed user interface, driven by business intelligence capabilities, which creates a dashboard enabling various data filters, which allows our buyer customers to gain valuable insights to better understand their data, spending trends, and real-time measure their business benchmarks and KPIs.
+
+In closing, we delivered another set of solid across-the-board quarterly financial results and AvidXchange flywheel metrics, while continue to see strong customer transaction retention. These strong results further reinforce our conviction and plan to achieve adjusted EBITDA breakeven as we exit 2024, if not before, while we continue to take advantage of the significant middle market opportunity in front of us.
+
+We maintained a solid balance sheet as we exited the quarter and are well positioned to sustain our operating momentum given the pace of innovation across our platform and the strength of our product suite as evidenced by the 4 gears of our AvidXchange business flywheel. Overall, we're pleased with the results and ongoing progress and look forward to updating you on future earnings calls.
+
+With that, I'd like to turn the call over to Joel Wilhite, our Chief Financial Officer. Joel?
+
+Joel Wilhite
+
+Thanks, Mike, and good evening, everyone. I'm excited to talk to you today about our strong first quarter 2022 financial results, which reflect continued execution of our growth strategies as well as our upward guidance revision for full year 2022.
+
+Overall, we had a solid first quarter of financial performance. Our first quarter 2022 revenues came in better than our forecast, driven by higher total payment volumes and higher transactions. That, together with better operational efficiencies and lower expenses, contributed to a lower-than-consensus adjusted EBITDA loss in the first quarter of 2022.
+
+Total revenue increased by 29% to $71.2 million in Q1 2022 over the first quarter of 2021. Organic revenue growth, which excludes the contribution of our FastPay and PayClearly acquisitions, which closed in August 2021 and January 2022, respectively, was 22.6%. Organic growth is primarily driven by the addition of new buyer invoice and payment transactions, which increased e-payments to suppliers.
+
+It's worth pointing out to those that are new to the story that both FastPay and PayClearly, which are media advertising books of business, are more weighted towards both the midterm and presidential election cycles in the U.S. Our strong revenue growth also resulted in total transaction yield expanding to $4.23 in the quarter, up 11.6% from $3.79 in Q1 2021. Roughly half of the increase was associated with improvements in each of software and payments yields with the remaining half being inorganic.
+
+Software revenues of $23.9 million, which accounted for 33.6% of our total revenue in the quarter, increased 17.1% in Q1 of 2022 over Q1 of 2021. Software revenues include $100,000 contribution from FastPay. The increase in software revenues was primarily by the growth of total transactions of roughly 15.6% in Q1 2022.
+
+Payment revenue of $46.5 million, which accounted for 65.3% of our total revenue in the quarter, increased 36% in Q1 of 2022 over Q1 2021. Excluding FastPay and PayClearly, which together contributed $3.4 million in the quarter, organic payment revenue growth was 26%. The increase in payment revenues was driven by the growth in total payment volume of 40.5% and 35.6%, excluding FastPay and PayClearly.
+
+On a GAAP basis, gross profit of $39.1 million increased by 38.9% in Q1 of 2022 over the same period last year, resulting in 390 basis points improvement in gross margin for the quarter to 54.9%. Non-GAAP gross margin increased 300 basis points to 62.3% in Q1 of 2022 over the same period last year, with half of the increase driven by increased total transaction yield in the quarter, the other half from the previously discussed acquisitions.
+
+Moving on to our operating expenses. On a GAAP basis, total operating expenses were $63.7 million, an increase of 30.8% in Q1 of 2022 over Q1 of last year, driven by headcount additions to support our growth initiatives, increased expenses in preparation of our transition to become a public company and the recognition of noncash stock-based compensation costs.
+
+On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 27.5% or $10.8 million to $50 million in the first quarter of 2022 from the comparable period prior year.
+
+I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $2.9 million to $16.3 million in Q1 of '22 over Q1 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and suppliers as well as the consolidation of FastPay and PayClearly results.
+
+Non-GAAP research and development costs increased by $4.4 million to $18.2 million in Q1 of 2022 over Q1 of last year. The increase was due to continued investment in our products and platform, along with the inclusion of FastPay and PayClearly.
+
+Non-GAAP general and administrative costs increased by $3.4 million to $15.4 million in Q1 of 2022 over Q1 of last year, driven largely by expenses in preparation for our transition to become a public company, along with the inclusion of FastPay and PayClearly.
+
+Our GAAP net loss was $25.1 million for the quarter versus a GAAP net loss of $70 million in the prior year period, with the comparable reduction in losses primarily a function of expense associated with the amended FT Partners agreement impacting our prior year period results. On a non-GAAP basis, our net loss in the first quarter of 2022 was $14.5 million, down $1.2 million compared to the year ago quarter. On a non-GAAP basis, adjusted EBITDA was a loss of $5.6 million in Q1 of 2022 compared to a loss of $6.5 million in Q1 of 2021, both driven by solid organic revenue growth.
+
+Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the quarter with cash position of $523.6 million. The cash is split between cash and investments of $294.9 million, which is mostly in-demand deposit accounts. The remaining $228.7 million is in a basket of financial instruments, including treasury bills, money market funds and commercial paper with a weighted average maturity of roughly 100 days. The weighted average interest rate on our corporate cash position is roughly 30 basis points.
+
+Our outstanding debt balance at quarter end was $121.4 million out of our $133.5 million credit facility. And finally, restricted funds held for customers saw a drawdown of $310 million from the end of 2021 to the end of the first quarter of 2022. This reflects normal seasonality between year-end and Q1 ending balances where year-end holidays and seasonal mail disruption can delay some suppliers from processing payments. We think this dynamic was exacerbated somewhat by the further impacts on mail and time away from work caused by the Omicron variant around the year-end.
+
+I'll now move on to our updated full year 2022 guidance. We now expect total revenue for the year to be above what we previously provided and in the range of $303 million to $307 million for the year. We are also adjusting our non-GAAP adjusted EBITDA expectations lower to a loss between $35 million and $39 million. We still expect roughly 47% of 2022 revenues in the first half with the remaining 53% in the second half of the year. We expect around 50% of our EBITDA losses to occur in the first half versus second half of 2022.
+
+In summary, we delivered strong first quarter 2022 financial and operating results, and our momentum to date is very encouraging. I'd now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] Our first question is coming from Dave Koning from Baird.
+
+David Koning
+
+Congrats on a good quarter. I guess, first of all, are you seeing much divergence just with the macro conditions right now, just seeing divergence in different verticals just in terms of some doing really well, some starting to slow at all? And just how is that impacting kind of the way you're thinking of things going forward?
+
+Michael Praeger
+
+Yes, Dave, good to hear from you. So I would say what we saw in the quarter was really good strength across, I would say, a real estate and financial services vertical. Horizontals also performed really well. And really Brightspot also was our bank channel with both Bank of America and KeyBank really contributing nicely during the quarter. And then the 2 hardest hit verticals we had during COVID being the HOA and the construction verticals, we saw kind of bounced back nicely over the last 2 quarters.
+
+And so I would say that we're seeing continued improvement across all the verticals versus any headwinds related to the current economic environment and really seen strong both invoice and payment flows.
+
+David Koning
+
+Great. And maybe just a quick follow-up. Your transaction yield clearly continues to go up with payments volume being strong. But it was only up a couple of cents sequentially in Q1, do you expect that to continue to rise, I guess, through the remainder of this year sequentially each quarter?
+
+Joel Wilhite
+
+Yes. Dave, this is Joel. It's reasonable to expect that, that's a metric that we think is an important measure of the efficiency in the -- obviously, the yield across both sides of our -- both sides of our network. And we expect that to sort of steadily inch up over time. Keep in mind that we've had good contribution in the past several quarters from both inorganic and organic. And then to sequential, you don't have kind of that inorganic impact. So steady improvement would be the expectation I'd suggest.
+
+Operator
+
+Next question is coming from Ramsey El-Assal from Barclays.
+
+Ramsey El-Assal
+
+I wanted to ask about your kind of updated view on the path to profitability given the outperformance on gross margin EBITDA. I think Joel mentioned 2024 and then I heard a 'or sooner.' I'm just wondering what could kind of pull that moment of profitability quarter? Or is that something that you're now incrementally motivated to achieve maybe given market conditions? But any color you can give us around your thought process that would be great?
+
+Joel Wilhite
+
+You bet, Ramsey. So let me -- I'll take the start and then Mike may want to chime in as well. We were pleased with the results in the quarter. We didn't give guidance for the first quarter, but we did kind of exceed our internal forecast, top and bottom line and also as a result consensus. And so like in our last call, we sort of sharpened up our language around our path to profitability. I would just reinforce what we said before.
+
+As we exit 2024, we do expect to kind of be at that EBITDA breakeven point. We were encouraged by the first quarter results, we're continuing to invest. We pointed to the areas of scale that contribute to that breakeven point. Being continued gross margin improvement, G&A as we exit '22 should be kind of full bow public company invested and then R&D in that period of time afterwards. So we feel good about that guidance that we've given already.
+
+Michael Praeger
+
+Yes. Maybe my comment that you picked up on, Ramsey. We're actually seeing who'd pick up on that comment. But the -- I think it is -- we're just being really -- just is about where we're investing in the business and placing our bets on those items that we really are bullish about in terms of the future growth and probably be a little more streamlined in terms of how we're investing is what I would say just to wrap up to add on to what Joel said.
+
+Ramsey El-Assal
+
+Okay. And a broader question, is there an opportunity to move upmarket? I think down market might be kind of a different business, sort of a big software platform like Bill.com. But it feels like a lot of what you're doing would be just applicable to sort of the larger enterprise. Is there any roadmap, maybe medium-term thinking about moving into -- increasing the TAM by moving upmarket a bit?
+
+Michael Praeger
+
+Yes. I think that's a great question. And I think maybe we touched that out a little bit in terms of the impact that our next-generation purchase order and procurement tools have. What I would say, however, there's kind of a fine line between kind of deep functionality and enhance purchase order management versus kind of deep procurement spend management, which is more in the enterprise Coupa, Ariba type category.
+
+And I think we're naturally attracting bigger customers with some of the enhancements we made to our tools, and we're already having a number of enterprise customers. But I think what I would say is, especially those that are in the service-related categories, maybe non-direct -- with a heavy direct spend, where you need heavy deep procurement-related tools would be more of the flavor of enterprise that will naturally attract is what I would say.
+
+And what we're seeing is a number of our historical middle market company -- customers with their growth starting to be enterprise customers. So we do think that's a natural phenomenon. And that's one of the reasons why we were excited to release our new purchase order functionality to solve those business challenges that a more upper middle market or enterprise customer has related to purchasing.
+
+Operator
+
+Next question is coming from Darrin Peller from Wolfe Research.
+
+Darrin Peller
+
+Let me just start off quickly on the volume trends we're seeing, which did come in above our model. And when I look at the driving force, I mean, we know there's an element of inflation in the market that's been sustaining. But net-net, I mean, I think there's a -- it at least seems to be that the number of customers is driving more than that, more than the inflationary benefit in terms of upside.
+
+And so maybe just touch on what you're seeing in terms of customers' willingness to use your offerings more than before? And then if you can just revisit the cross-sell opportunity in terms of taking your existing customers, land and expand, which is something that I've always spoken a lot about the last 3 quarters?
+
+Michael Praeger
+
+Yes, probably. Maybe I can start to add some flavor, and then Joel can add to it as well. I think we -- as I indicated earlier, we certainly saw a handful of our vertical markets exceed our expectations over the course of the quarter, being in specifically real estate and financial services and then the bank channel being kind of the third one.
+
+And along with that, in terms of the cross-sell, we talked about construction coming -- really coming back to where it was pre-COVID. But with that, as part of the Core Associates acquisition that we did now a couple of years ago, yes, -- if you remember, that was really a software only. So we acquired a group of software companies that we've been cross-selling into. And we have some great examples with like Marcus Construction and Sorrel Development Corp. over the course of the quarter then along with many others that started to adopt our payment solution to go with their AP automation solution that we had purpose built for construction.
+
+So the answer is we're absolutely starting to see it. And probably construction was a real highlight in terms of that cross-sell opportunity during the quarter.
+
+Darrin Peller
+
+Okay. That actually -- that actually makes a lot of sense. I mean, so the vertical-centric reopening obviously is a factor, but there's obviously more traction within certain verticals is what you're saying from a product [indiscernible]?
+
+Michael Praeger
+
+Yes. Exactly. But I always explain to people, not all verticals are created equal and depending on what's happening -- and one of the benefits that we have of having now kind of 8 verticals is we see different types of behavior depending on what's going on in the market at different times across those 8, but it becomes pretty diversified.
+
+Darrin Peller
+
+Just quickly now on the guidance change. I mean if we talk about where we are today versus where you were, I mean, it's only been a quarter really. But when you think about the uptick and what assumptions are in there that you wouldn't have expected when you first gave that guide. So in other words, what's outperforming since and what's embedded in the assumption?
+
+Michael Praeger
+
+I'll let Joel take that one.
+
+Joel Wilhite
+
+Yes, I'll take that, Darrin. So yes, we were -- like I said, we were pleased with the results for the quarter. I think versus consensus around 4%, we certainly beat our expectations. And what's driving that? We really just saw strong fundamental transaction volume growth in the quarter. It's a bit greater than we expected. And so what we're really doing with that -- with our guidance revision is bringing up the top line, reflecting what we saw in the first quarter together with reflecting kind of the drop through from an EBITDA perspective and a little bit of a different pace of investment though continued investment in the business for the year.
+
+Operator
+
+Your next question is coming from James Faucette from Morgan Stanley.
+
+James Faucette
+
+I wanted to build on one of the questions around competition or market. And you talked about like where you're looking at potentially incrementally. But what about in your core market of the middle market? How much is that competitive intensity changed over the last little while? And are you seeing any direct competition and from home typically?
+
+Michael Praeger
+
+Yes. James, I appreciate the call and -- I mean the question. So what I would say is that really over the last -- certainly since we've been a public company and even a couple of quarters before, really no meaningful change at all in the competitive landscape. Our #1 competitor continues to be the status quo paper-based process that companies have. And when we do run into competition within the vertical markets, they're usually with vertical-specific software companies. And with some of the M&A activity, they continue to get less and less.
+
+I think we're generally in the segment overall in B2B payments, maybe automation where there has been new competition, it's typically bet at the small business level. And we really haven't seen any new entrants in certainly probably a couple of years in the middle market segment.
+
+In the horizontal, which we referred to is really being supported by the NetSuite, Microsoft Dynamics, Sate Intacct type of ERP systems. That continues to be pretty static as well in terms of the same players. And where it's U.S. domestic is where we usually dominate.
+
+And when we run into customers who have a significant amount of their transactions being cross-border and international, we may see additional players such like [indiscernible] as an example. But I would say the competition landscape has been consistent over the last year plus.
+
+James Faucette
+
+Got it. Got it. And then when you look at strategic opportunities, et cetera, especially as valuations in the market have changed. Are there things that you can do or that you're looking at from an acquisition perspective that could expand both either functionality or market reach, et cetera? Just kind of how you're thinking about that as a strategic priority, especially with the change in valuations we've seen over the last 6 months or so?
+
+Michael Praeger
+
+Yes. That's a real good question. In fact, one we talk about routinely here at AvidXchange. So M&A is a core element of our playbook, typically focused on vertical market expansion and where we can be a payment partner for some of these vertical software companies who have not yet adopted a payment solution. And unfortunately, there's not many, many players that have any scale. So the industry is kind of littered with lots of smaller kind of subscale companies that do provide that type of opportunity for us.
+
+However, I would say that based on the conversations we've been involved in the last 6 months, I don't think the kind of the valuation adjustments that we've seen in the public markets has made their way into certainly the private markets for the companies that are in our segment. So we -- my expectation is that we'll probably even see kind of more deal activity as we go into the second half of this year to '23 than we're probably seeing today.
+
+Operator
+
+Next question today is coming from Will Nance from Goldman Sachs.
+
+William Nance
+
+Wondering if we could talk about just kind of the inflationary environment that we're in and whether it's having any impacts on customers' willingness to kind of pull the trigger? Mike, I know you've talked a lot about sometimes a limiting factor. It's just pace of customer adoption in the middle market and needing that catalyst to get them over the edge. Wondering if there's anything in the market that you see as an opportunity to maybe push a couple of more customers over?
+
+Michael Praeger
+
+Yes. I think it's a good question. Typically -- and I would kind of bucket it maybe in the combination of kind of inflationary more kind of threat of the recessionary type environment. That usually puts caution in the CFO's mind in terms of wanting to add additional headcount to these back-office processes. And so historically, when we run into this situation in, I think 2007, 2008 as an example, we did pretty well in terms of CFOs wanting to use technology to automate and scale their business versus hiring more human beings. And so that's certainly a lever that we lean into.
+
+And so we expect that, again, as the kind of the economy goes, there's different messaging that we use that we know based on our experience has worked in the past, and that's certainly one of the levers that we expect to use if the economy does continue to erode.
+
+William Nance
+
+Got it. That's helpful. And then I was just wondering if you could talk about any trends that you've seen recently in the pace of electronic payment adoption? Anything that you guys have done? I know you've talked a lot about some of the things you've done with customer interchange rates on the virtual card side. What have you seen on kind of the enhanced ACH side? And what are your -- any expectations longer term about where the mix of payment trends and any levers that you guys have to accelerate that?
+
+Michael Praeger
+
+Yes, that's a great question. I mean, I think I'll start by piggybacking off some of the comments that I made during my opening statement related to our straight-through processing, or STP functionality that we've rolled out quarter. We think that, especially for higher volume type of suppliers, that this is a great tool to have them move to become card-accepting where historically, they haven't because of the manual nature of the process as well as the manual reconciliation.
+
+And so -- but I think, generally, what we've said is that we continue to grow aggressively our standard virtual card or our standard AvidPay Direct, which is our ACH plus programs. But where we're going to really get to accelerating that supplier adoption, I believe, is when we start -- and I should say, continue creating different types of value propositions with different payment methods, combined with different methods of distributing the remains data, combined with different pricing mechanisms to clearly create that unique value proposition for certain subsets of suppliers. And that's absolutely what we're doing.
+
+We've created some specialized sales teams on the supplier side to focus on those type of opportunities. And it's not one size fits all. It's going to be creating these kind of custom -- I should say, it's not custom by supplier per se, but really kind of customary payment modalities with data, with pricing for different subset of suppliers as we think is a winning strategy.
+
+Operator
+
+Next question today is coming from Andrew Bauch from SMBC Nikko Securities.
+
+Andrew Bauch
+
+Maybe to dovetail off of Will's question there. I mean in this type of environment, are you seeing any increased demand for Invoice Accelerator? And maybe the CFO has become more net working capital conscious. And just a broader update on where that offering is and your plans for the next year.
+
+Michael Praeger
+
+Yes. So first of all, your first part of your comment in sites that we're seeing kind of increased demand. I think the absolute -- the answer is absolutely. And that's one of the reasons why we're very focused on. As I kind of referenced kind of on prior calls, this year is about building what we refer to as Invoice Accelerator 2.0, which is kind of the next generation of our Invoice Accelerator offering which incorporates all the latest kind of data science and algorithms that determine eligibility in terms of how we use the historical data to really determine the underwriting eligibility of invoices and incorporating those components along with really a voice of the supplier customer in terms of additional feature sets that they would like to see in this type of offering.
+
+And we are on pace to deliver that over the course of -- or I should say, work on it over the course of the year. So we can really begin scaling that program as we go into '23 is what our expectation is. But the -- and probably the current environment is even kind of got us even more excited about the opportunity around Invoice Accelerator because of the value proposition of those subsets of suppliers.
+
+Andrew Bauch
+
+Yes, absolutely. And quoting in on the media vertical. I mean, I know the FastPay was a key asset in helping you gain penetration into that vertical? And ahead of this political cycle and really 2 to 3 months away from political ads starting to ramp up materially. I know you guys have been investing in that offering. And maybe you could just give us a highlight of the investments you've made and any shift in your expectations on what media can do for you?
+
+Michael Praeger
+
+Yes. I think as I talked about a quarter ago, we launched our new specialized kind of political -- call it, political plus payment offering for political media type customers. There's a different business process that political payments go through just because of the nature of having to be kind of real-time delivered to meet certain kind of production timing and things like that.
+
+And so yes, we're bullish about that segment. The PayClearly acquisition of kind of 40-plus customers was a nice tuck-in because you really saw PayClearly as the other player in the political side. And so we believe that we're not the standard as it relates to political payment management for media companies and certainly looking forward to the upcoming political cycle. Like everyone is -- probably the challenge is that it's really hard to kind of forecast what political spending is going to do in any particular year.
+
+But we're certainly kind of excited about the value proposition that we're delivering and the solution set that we have for political media companies, and we expect to see good adoption as we go into the upcoming political season.
+
+Andrew Bauch
+
+Yes. It's pretty rare to say that somebody is looking forward to the political cycle, but best of luck.
+
+Michael Praeger
+
+Yes, exactly. Probably, we're the opposite of when most people think about having a nice -- having everybody get along and like each other. Probably, we'll do better as the political season heats up for sure.
+
+Operator
+
+Your next question today is coming from Josh Beck from KeyBanc.
+
+Josh Beck
+
+I wanted to ask just a little bit about the return to in-person travel, certainly, that's one of the things that has really changed in the last 3 months and very likely is going to continue. How much has that helped sales productivity pipeline? Just curious on some of those intangible impacts that you're seeing.
+
+Michael Praeger
+
+Yes. I think you may win the gold star for tonight because that's one of the questions that I'm most excited about is one of the -- I think we've been referring to it is small business adoption really was pretty robust during COVID. But in the middle market segment, CFO, senior finance leaders, historically have liked to really have conversations. A lot of these happen at all the different industry conferences and trade shows related to the different user conferences of the accounting systems, for example. And during COVID, those type of conferences went to 0.
+
+Last year, we started seeing a rebound. We attended 30 roughly of these in-person events. And this year, we have in the calendar over 130. And so we've seen a significant ramp-up of kind of that lead generation coming from these in-person events. And so that's one of the things I think we're really excited about in terms of coming out of the COVID season, CFOs are getting back to attending these conferences. They're really focused on, as they're getting their teams back in the office, taking on additional automation projects. And so that's one of the things that we're excited about, and we're already starting to see that pipeline momentum occurring with many of these in-person events.
+
+Josh Beck
+
+Well, it's great to hear. And shifting gears maybe a little bit to the gross margins. They've really expanded nicely year-over-year. It's really in my mind, one of the more straightforward models when you think about expansion and certainly the digitization of electronification of payments. Just help us think through that trend, maybe if not quantitatively, just qualitatively as we move through this year and into the midterm?
+
+Joel Wilhite
+
+You bet, Josh.
+
+Michael Praeger
+
+Yes, I'll let Joel take that one.
+
+Joel Wilhite
+
+Yes, maybe I'll take that one. So great question. We've talked about maybe starting with just linking back to the way we've talked about the shape of the company as we sort of looking forward to that EBITDA breakeven point towards the end of -- the end of '24. That gross margin, sort of steady gross margin expansion is an important part of that. And we are pleased with the first quarter results expanding year-over-year margin 300 basis points. We've talked about the path from here to that breakeven point as sort of getting from low 60s to high 60s sort of that 70% non-GAAP gross margin ZIP code.
+
+When we talk about the way we get there is roughly 2/3 revenue yield, 1/3 unit cost improvement. Not necessarily linearly, not necessarily exactly in a quarterly sequence, but that's generally how we expect to get to our gross margin target at that breakeven point. I think, again, we're pleased with the first quarter. The one other thing that I'll remind you is that we have said that gross margin improvement that we've seen really nice quarter-over-quarter for the past several quarters.
+
+While we'll continue to see that gross margin expansion, we have sort of suggested that during 2022, that expansion might be a little bit more moderated than in the past in light of kind of that -- the move fully to the public cloud and some sort of duplicative costs running through the cost of revenue during the year, but excited about having put up good margin expansion in the quarter, and we'll expect to continue to do that going forward on the way to breakeven.
+
+Operator
+
+Your next question is coming from Bryan Keane from Deutsche Bank.
+
+Bryan Keane
+
+Joel, I just want to ask you on organic growth. It was up, I think, on my count, maybe 210 basis points over last quarter. I think last quarter was about 20.5% organic revenue growth. I think it was 22.6% this quarter. So a pretty good improvement there. How much of that is cyclical versus secular in the business model? Would you break it down that way?
+
+Joel Wilhite
+
+Yes, I really wouldn't place it that way. I think I'd just go back to what -- when I explained kind of what was behind the beat, what was behind sort of the strong quarter was really a broad-based across verticals fundamental underlying transaction growth. And so we did -- we did see that strong growth in the quarter. And so that's what I would attribute that kind of organic growth rate step up, too.
+
+Bryan Keane
+
+And then for the full year, what kind of organic growth is embedded in the guidance?
+
+Joel Wilhite
+
+Yes. So if you take our revised range is $303 million, $307 million. So basically, think of in that midpoint $305 million which is about 23% overall growth. If you take into account kind of the fast pace for a couple of quarters before we lap and then a little bit of PayClearly, you're right around 20% on an organic basis.
+
+Operator
+
+Your next question is coming from Tien-Tsin Huang from JPMorgan.
+
+Tien-Tsin Huang
+
+You guys have covered a lot already. I just wanted to clarify, I think, Darrin and Josh asked this. But just with the upgraded revenue outlook, and the narrowed EBITDA loss by more than the revenue change. How much of that larger EBITDA dollar improvement is a function of the higher gross margin? It sounds like it's going to be more moderate, but versus the operating expense efficiency or timing that you talked about, Joel, just trying to make sure I got all that.
+
+Joel Wilhite
+
+You bet. Like you said, the about -- at the mid, about a $6 million raise on revenue and then about $8 million at the midpoint EBITDA. So basically, you've got the revenue drop through. But also think about we've got to beat in Q1 and a different pace. And so like we're still investing across the business. And so I'm not suggesting that we're at that scale point, but we have seen sort of opportunities, as Mike mentioned, just be disciplined about our operating expense growth. And so taking that first quarter beat and looking at the shape of that operating expense growth throughout the year together with the revenue raise is really what you're seeing on the bottom line.
+
+Tien-Tsin Huang
+
+Understood. And then just a quick follow-up. Just I heard strength in bank channel and sort of the partner channel, given what we know about the macro and I know there's a lot of uncertainty and whatnot. I mean, do you see maybe that changing gears a little bit in terms of desire to push product more through here? Just curious how that gets influenced if at all, by the macro uncertainty?
+
+Michael Praeger
+
+Well, I would say that our channel partners are all pretty bullish. And if you think of it from a standpoint of -- on the ERP software side, we're a key element that allows them to sell more of their systems, right, because we're deeply integrated and embedded into their ERP system. So they view that we're kind of a key leverage point for them to sell more product. The same thing in the bank channel, as traditional treasury products get more difficult, this is really a differentiated product for our bank channel partners to sell to their middle market customers.
+
+And so I think we're seeing even more excitement about people wanting to get trained and understand how to sell more software-related solutions than other bank products than we've seen historically. And so I'm not sure if that's a sign of kind of economic times in terms of being harder to sell other more treasury products or not, but we're certainly seeing the interest from the channels to -- for sales reps to want to get more training, and to really lead into how they introduce more customers to our products.
+
+Operator
+
+Next question is coming from Timothy Chiodo from Crédit Suisse.
+
+Christopher Zhang
+
+This is Chris Zhang on behalf of Tim Chiodo from Crédit Suisse. You've discussed the percentage of monetized transactions potentially going up to 70% over time as you continue to penetrate your transaction base today. So what's the rough split of virtual cards versus AvidPay Direct in the incremental monetized transactions you're seeing? And if you think about the 70% to -- 60% to 70% level as a goal, what are you -- what's the rough split of virtual card and enhanced ACH you're thinking?
+
+Michael Praeger
+
+Yes. So maybe just there's probably a number of kind of subsets of a question you asked in that one question. So first, I have a good memory in terms of kind of what I said in terms of kind of long term at scale, were expected to be in terms of that 70% number and going from roughly 40% today to that number. I think it's going to be a lot of combination of things that we talked about. Darrin asked a similar question.
+
+And for example, what we recently launched in terms of our straight-through process is a good example. For now we've created a different value proposition for that supplier in terms of taking their labor components out of their card acceptance. And that now has opened up another segment of suppliers that we can convert the virtual card. So we haven't really seen any changes related to overall adoption. We're adding thousands of new suppliers in both virtual card and AvidPay Direct every month.
+
+And -- but we do continue to see probably the growth rate of AvidPay Direct continue to slightly outpace virtual card, but it's also starting at a smaller base. But I would say that we think that the -- having kind of all the arsenal that we have on the AvidPay Direct where we can really control the pricing, we can deliver it in a straight-through manner, all those type of things is one of those levers that really starts to create significant supplier adoption as we kind of move forward.
+
+Christopher Zhang
+
+All right. That makes a lot of sense. And just a quick follow-up related to the electronic penetration in new vertical market entrants. When you think about the potential new vertical markets, does the level and the type of electronic payments penetration factor into your consideration?
+
+Michael Praeger
+
+Does potential payment penetration impact our choices of verticals?
+
+Christopher Zhang
+
+Yes.
+
+Michael Praeger
+
+Yes. Yes. So I would say, yes and no. I mean the #1 thing that probably drives organic growth in new verticals is where we're naturally seeing influxes of customers coming to us. And so if you look at, for example, our last 3 organic verticals being health care facilities, education and social services have all been driven by 1 day, we realized that looking in the last 18 months, we've had 50, 60 long-term care centers come to us, be really successful with our product, let's look to actually formalize a vertical around that type of customer set.
+
+And so I think we -- that's kind of how organic verticals have been driven in the past. And then our -- through M&A, that's more opportunistic in terms of other verticals like we did with media, which certainly was a nice opportunity with the FastPay acquisition. So I would say it's more driven by those dynamics than kind of where we see kind of card acceptance because we pretty much have seen our ability to get good, both card acceptance and AvidPay direct acceptance has been across really all the verticals we've operated in. So we have kind of high conviction that we can have the right discussions with those suppliers regardless of the vertical.
+
+Christopher Zhang
+
+Congrats on the great quarter.
+
+Michael Praeger
+
+Thanks. We appreciate it.
+
+Operator
+
+Next question is coming from Brent Bracelin from Piper Sandler.
+
+Brent Bracelin
+
+Mike, you've operated this business for 20-plus years, lived through a few cycles. So I'd love to kind of pick your brain a little bit just as you think about prior cycles. The Fed tightening cycle in '04 to '06, the Great Recession cycle in '08, '09. Are there certain verticals that you serve that are more impacted? Is it -- should we think about it more as impacting pipeline, but TPV isn't impacted? Just love to pick your brain here as we think about the unknown, but we're getting questions unknown. But I'd love to understand like in your world, you've seen lots of cycles. How do you think these different portfolios play out?
+
+Michael Praeger
+
+Yes. I remind our team about that a lot, that we have the -- especially with some of our younger teammates, who never lived through one of these cycles try to give them a little history less than here what we've seen in the past at AvidXchange. Probably the first cycle that was the most painful one that you left out was kind of the dot-com cycle, which is kind of when we got started.
+
+But what I would say is that generally, in these cycles, we've done really well in terms of kind of customer adoption. Because usually, what happens is there comes really a tightening around adding headcount across -- it's really across all verticals. And that plays really well into using automation to do more with less. And -- and so that dynamic has played well for us.
+
+Where we've seen maybe some of the impact on flows is maybe changes in spending related to, let's say, average transaction sizes. Because typically, for most of our customers, the amount of payments and transactions as we made relatively static, especially in a lot of the industries that we're in. If you think about it in real estate, for example, you have the landscaping bill every month regardless, right? You have the utility bill, you have the window washing bill.
+
+Now the amount of those bills may fluctuate a little bit, but you still have those bills to process every month. And what's interesting about it is in the increase in inflationary environment, that's actually a positive in terms of helping us with average payment sizes as the general cost of goods and services go up, so due to the average payment sizes.
+
+So it's going to be interesting to see kind of how those 2 kind of play off each other in this particular cycle. But what I would say is that we've typically done pretty well utilizing the current environment in a more challenging economic environment to our advantage. And we expect to do the same thing in this cycle.
+
+And I think especially coming out of COVID, we're really seeing some kind of really strong interest just in the last 2 quarters with now CFOs attending these in-person conferences and really leaning into how do I use technology to move everything to the cloud to automate my back office, so I don't have to add headcount going forward. And that's a positive message for us.
+
+It's certainly an easier message in a challenging environment than when things are going really well because then it's just -- it's easier for these companies just to add headcount to support a business process and not do the hard work and try to change it.
+
+Brent Bracelin
+
+Totally makes sense. That's helpful color, Mike. I guess, Joel, just a quick follow-up for you. As you think about some of these inflationary pressures, we're now starting to see some technology components start to consider price increases. What's your thought? Is there a thought process around raising price at some point as your underlying cost lever go up? Remind us when the last price increase was and are you evaluating price increase kind of going forward?
+
+Joel Wilhite
+
+Yes. I'll take a quick crack at it. So we -- first of all, remember, we sell our software to buyers in kind of normal multiyear software contract. And most of those contracts afford routine CPI increases. And so that's been a part of our playbook all along. That said, we've also -- I think, the most recently, maybe 18 months, 2 years ago, sort of across-the-board unit increase for those transactions to buyers. I would say, certainly, in this environment, we're looking at all of our options, and we consider that balancing with making it just sort of a no-brainer ROI for a middle market CFO to adopt AP automation.
+
+Michael Praeger
+
+Yes. And along with that, the only thing I would add is we also believe we're consistently adding to the value proposition in terms of enhancing our offerings to further justify price increases. So it's not just that our costs are going up, we also believe we're delivering an increased value proposition to our customers.
+
+Operator
+
+Our final question today is coming from Michael Funk from Bank of America.
+
+Michael Funk
+
+Mike Funk on for Brad Sills at BofA. I appreciate the question tonight. I think one of the major concerns on the market right now is a visibility into revenue into profitability for 2022 and 2023. I mean, I assume when you model, you probably stress test your assumptions in that model. So how does that standard deviation look when you stress test for a more negative scenario, recessionary scenario versus a blue sky scenario, what does that boundary look like?
+
+Joel Wilhite
+
+Yes. I mean maybe the first thing, great question. And again, we've -- for those who are close to the story and following along with us, we have a highly recurring, highly visible revenue model, right? The underlying payment AP files that are coming from our buyer customers very predictable. I think -- look, I think we've got some good -- a few quarters under our belt, good track record of sort of running our forecast.
+
+And you're right, we look at a range of risks and opportunities across that forecast and so far feel good about kind of the machine that we predict the business. Again, remember, when we sell a buyer, there's a period of time, during which implementation occurs, there's a subsequent period of time during which full adoption occurs. And so when we're thinking about what it takes to deliver the guidance that we've put out there today, there's very little go get that needs to happen to get to that number for the year. And what we're really focused on selling is really building that revenue the next year to those 2 large degree. So feel good about kind of our forecasting methods.
+
+Operator
+
+We've reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.
+
+Michael Praeger
+
+Thanks. So first of all, I just wanted to thank everyone for your time today and for some great questions. We're passionate, as you probably heard in terms of helping our middle market customers every day and really excited to kick off the year with a great start and look forward to talking to you next quarter about our continued progress in executing the year. So with that, operator, you can end the call.
+
+Operator
+
+Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

AvidXchange Holdings, Inc., Q1 2023.txt

@@ -0,0 +1,319 @@
+AvidXchange Holdings, Inc., Q1 2023 Earnings Call, May 03, 2023
+5/3/23
+Operator
+
+Good morning, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. First Quarter 2023 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's Head of Investor Relations.
+
+Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call. Also please note that the company undertakes no duty to update or revise forward-looking statements.
+
+Today's call will also include a discussion of non-GAAP financial measures as the term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP. Please also note, today's event is being recorded.
+
+With that, I will now turn the call over to Mike Praeger. Please go ahead.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joel Wilhite and I are excited to discuss AvidXchange's first quarter 2023 results. We delivered another solid quarter of year-over-year financial results backed by healthy underlying metrics.
+
+First of all, I'm excited to report that we've delivered our first profit on an adjusted EBITDA basis since our IPO on October 13, 2021, and 2 years ahead of plan at the time of our IPO. Relative to our first quarter 2023 business outlook expectations, which Joel will discuss in his prepared remarks, our first quarter 2023 results also came in better than expected.
+
+As we stated in our March earnings call, we continue to see strong top of funnel activity with leading economic indicators moderating amid continued macro volatility, our value proposition of accounts payable automation and payment solutions fueled by our 2-sided network is a powerful lever for resource-constrained middle-market companies to gain significant cost structure advantages and savings by automating their accounts payable and disbursement processes.
+
+As evidenced by our continued strong top of funnel activity up roughly 20% year-over-year in Q1 in what is a large and un-penetrated addressable market is extremely encouraging. This current quarter is no exception as we are on track for another strong double-digit top of funnel growth quarter.
+
+Moreover, this growth remains largely broad based across our 8 verticals, driven by partnerships, integrations, product and feature launches in 2022 and year-to-date this year. This gives us further confidence that our value proposition and product portfolio aligns with our customers' needs even more deeply as we help them navigate an increasingly challenging macroeconomic backdrop.
+
+In summary, I believe our strong Q1 results were driven by the following 3 themes: One, the resiliency of middle-market companies as evidenced by our continued strong year-over-year top of funnel growth; two, our biggest competitive advantage in leading the middle market continues to be our ability to monetize payments through the AvidPay Network at a 2 to 3x advantage over our competitors and is a key ingredient in driving revenue growth and payment yield results.
+
+And third, the pace of new integrations, strategic partnerships, new product functionality and features, along with vertical market expansion, leaves us cautiously optimistic for 2023, while we're looking forward to a robust 2024.
+
+Let me now provide a quick summary of our year-over-year first quarter 2023 financial results. We delivered revenues of over $86 million, which grew at a rate of 22% compared to the same period last year. This now marks 7 consecutive quarters of exceeding our internal financial targets and delivering 20% plus comparable organic revenue growth.
+
+Non-GAAP gross margins expanded to 67.3% in the quarter, up 500 basis points on a year-over-year basis. We posted a non-GAAP adjusted EBITDA profit of approximately $400,000 in the quarter versus an adjusted EBITDA loss of $5.6 million last year. And we ended the quarter with 2.5% year-over-year increase in our total transaction yield to $4.76.
+
+On today's call, I want to highlight our execution on 3 key areas of strategic growth and innovation across our AvidXchange business flywheel. First, we're going to highlight the formal addition of an exciting new industry vertical. Second, we are excited to discuss new marquee partnership in the support of this new vertical.
+
+And third, we're discussing new integrations as well as innovation in our existing product suite. All 3 areas we'll discuss as part of our broader strategic and execution framework we committed to at the time of our IPO and we are delivering on all these commitments and more.
+
+Today, we're excited to announce our formal entry into the hospitality vertical under Gear 1 of our AvidXchange business flywheel. This expansion brings a total number of verticals we address to 9 overall industry verticals, where penetration rates are still largely in single digits.
+
+Our approach to vertical market expansion is a function of marketplaces push and pull dynamics. While the push dynamic is wholly bottoms up and targeted, the pull dynamic is more customer-led initially, a function of the networking effects driven by CFOs, controllers and finance professionals who champion our product leadership over their careers.
+
+As these internal champions target new industries, they become our brand and product ambassadors, creating industry awareness and building a critical mass of users within our various vertical and horizontal markets. Overlaying our marketing engine on top of the user cluster and gleaning insights for various factors, such as market fit, product fit, partnership and competitive landscape as well as testing and learnings, this enables us to stand up a new vertical where our position of strength leads to a deeper integration from leading ERPs and go-to-market partnerships focused on a particular industry vertical.
+
+The hospitality vertical ecosystem boasts roughly 10,000 middle-market customers, including subsegments such as recreation and country clubs. Already, we have amassed over 50 customers organically, which is similar to customer levels when we acquired our way into the media vertical as an example. And our top of funnel is seeing a very healthy level of activity and interest already.
+
+Our excitement in entering the hospitality vertical is centered on our M3 partnership, a marquee strategic ERP partnership that we recently won and we believe will further accelerate our momentum in the hospitality vertical. To illustrate the power of our value proposition and the traction we've already gotten in the hospitality vertical, I'd like to provide a case study of Island Hospitality Management. Managing over 170 hotel properties across the United States, West Palm Beach-based Island Hospitality is one of the largest independent hotel operators. The company's vendor base consists of thousands of suppliers from those with national reach to local operators.
+
+Under Brian Murphy, Director of JD Edwards Business Services at Island Hospitality, Island Hospitality adopted our invoice and pay solution and was able to completely transform its accounts payable department by cutting invoice processing time by over 80%. Whereas it would take an average of 18 days to historically approve and process a paper invoice, our AvidXchange system reduced their 18-day invoice approval process by over 80% down to averaging only 3 days.
+
+As a result, Island Hospitality was able to reduce and reallocate their accounts payable head count to more strategic positions while avoiding financial penalties on various nondiscretionary payables, including utility invoices and payments. Furthermore, the company was also able to have real-time visibility into an electronic audit trail for their invoices and payments that were easily digestible for their outside auditors.
+
+Brian Murphy said it best by stating, "Overall, it was really a no-brainer for us. My advice to any one is to take a look into automation and see if it will help your organization the way it transformed ours." This brings us to our new partnership under Gears 2 and 3 of the AvidXchange business flywheel.
+
+As part of our strategy in targeting leading ERPs in new verticals, we are excited to announce a new strategic partnership with M3 to embed our AvidPay Network inside of their ERP functionality to drive M3 customer payment transaction volume and monetization across our AvidPay Network.
+
+As a reminder, our strategy around API partnerships and integration playbook is to be deeply embedded with each accounting system and ERP provider who has a vertical leading market share of customers across our existing and new targeted verticals where there's an opportunity for significant transaction volume to be monetized.
+
+M3 is the hospitality market leader in cloud-based accounting solutions and data management platform, custom-tailored specifically for the hospitality industry. Today, M3 has a customer base exceeding 1,000 management groups and owner operators, including 50% of the top U.S. hotel managers and operators in United States.
+
+M3's accounting solutions work seamlessly with other critical back office hospitality systems and productivity tools for hotels of all sizes. This strategic partnership, which we expect to go live over the next 2 quarters, underscores the leadership of our payment and invoice solutions, including our industry-leading e-payment adoption levels, which lead our industry for B2B electronic payment monetization, coupled with our robust accounts payable automation software solutions.
+
+Similar partnerships in the past have yielded penetrations upwards of 50% of an accounting partner's customer base. We believe this opportunity is sized for similar levels of penetration over the next 3 to 5 years.
+
+We continue to innovate through these new integrations and deeper product functionality. On the integration front, we redoubled our penetration efforts into the nonprofit vertical with MIP under Gears 1 and 2 of our AvidXchange business flywheel. MIP is a major cloud and on-premise-based ERP focused on nonprofits.
+
+In addition, we already have integrations and partnerships in the nonprofit vertical market with Blackbaud. Our solid track record and reputation with Blackbaud has been a catalyst to create networking effects by stimulating the market demand and driving non-Blackbaud customers using MIP towards our solution.
+
+Through our robust invoice-to-pay API integrations built on our Avid Connect platform, MIP's 6,000 strong customers will see significant cost savings by digitizing their back office while enabling them to leverage our payment network to pay their suppliers.
+
+Embedding and integrating new industry-leading functionality into our existing vertically-focused accounts payable automation solutions continues to be one of the building blocks for Gear 1 of our AvidXchange business flywheel. We are also pleased to announce the introduction of a lien waiver management for the construction vertical. Our construction vertical products features our timber scan and titanium suite of playship accounts payable processing and content management software, which are so mission-critical to our customer operations that one customer recently proclaimed that they would actually to quote, "Crash and burn without AvidXchange."
+
+We believe the integration of lien waiver management takes our construction product suite to the next level of being critical application that construction customers depend on to run their business. Lien laws are state laws that ensures a subcontractor or supplier is paid for the agreed-upon service and/or materials that they provide to a project or job, and if not, they're allowed to file a lien on the property.
+
+Simply put, a lien waiver is a legally binding document that assures an owner or a lender that a subcontractor or a supplier has received payment for the agreed-upon service or materials and therefore, waives any right to file a lien on the property. On any given construction project, there can be anywhere between hundreds and thousands of these lien waivers being processed monthly.
+
+Currently, this is a highly manual process and the functionality around lien waivers exist as a stand-alone offering. We believe our solution is a game-changer for customers that is embedded, integrated and automated into our purchase of a software workflow.
+
+Currently slated for general availability this quarter, our Version 1.0 of our lien waiver management product starts with creating a lien waiver register. It then intakes and images the executed lien waiver, feeding the lien waiver data into a dashboard that tracks the status of the lien waiver while closing the loop with reporting capabilities.
+
+With a cohort of roughly 1,500 invoice-only existing buyer customers, we believe our lien waiver functionality will provide visibility and control within the entire purchase day process on 1 single platform for our construction customers, thereby increasing transaction volume across our AvidPay Network and accelerating the pace of our payment adoption within the construction vertical cohort, in turn, driving both Gears 2 and 3 of our AvidXchange business flywheel.
+
+In summary, we are off to a strong start in the year with a solid set of first quarter 2023 financial results, highlighted by delivering adjusted EBITDA profitability ahead of expectations. As stated earlier, these results were driven by the following 3 themes: First, the resiliency of middle-market companies as evidenced by our continued strong year-over-year top of funnel growth. Second, the biggest competitive advantage in leading the middle market continues to be our ability to monetize transactions through our AvidPay Network at a 2 to 3x advantage over our competitors and is a key ingredient in driving our revenue growth and payment yield results.
+
+And third, the pace of new integrations, strategic partnerships, new product functionality and features, along with vertical market expansion leaves us cautiously optimistic for 2023 while looking forward to a robust 2024. These achievements, combined with our expected accelerated path to adjusted EBITDA profitability for 2023, along with our strong balance sheet, positions us well to continue deepening our competitive moat as we have the financial wherewithal to reinvest in our core business to drive future growth.
+
+Of course, we are mindful of the volatile macroeconomic backdrop as it is manifested in some underlying volume headwinds with discretionary spending impacting middle-market companies across our various vertical markets. As always, we continue to run strategic and operational scenarios and are prepared to continuously adjust if any key trends and leading indicators meaningfully change direction.
+
+Ultimately, we believe our standing as a public company, coupled with our large balance sheet will enable us to capitalize on some of the macro volatility given the risk aversion among some clients to engage with smaller bootstrap or venture-backed competitors as evidenced by our strong top of funnel growth. We are also beginning to see increased activity inorganically through our M&A funnel as funding markets for venture-backed companies has become more constrained. The bottom line is that the execution of each gear of our AvidXchange business flywheel further reinforces our leadership status across the middle market, which we believe will unlock value for our shareholders.
+
+Before I turn it over to Joel, I wanted to mention that we are looking forward to seeing you at our upcoming Investor Day event on May 31 and June 1, where we'll be providing greater insights into our business. You can register to attend our Investor Day directly on our AvidXchange website.
+
+With that, I'd like to turn the call over to my partner, Joel Wilhite.
+
+Joel Wilhite
+
+Thanks, Mike, and good morning, everyone. I'm excited to talk to you today about our first quarter 2023 financial results, which reflect continued execution of our growth strategies amid continued macro uncertainty. Overall, we delivered another quarter of solid year-over-year financial performance.
+
+Relative to the implied first quarter 2023 business outlook, first quarter revenues came in better, driven largely by higher transaction volumes. That, together with higher gross margins driven by yield expansion, coupled with expense control led to our first profit on an EBITDA basis since our IPO. This adjusted EBITDA performance underscores the scope for operating leverage and resilience in our financial model.
+
+Total revenue increased by 21.9% to $86.8 million in Q1 of 2023 over the first quarter of 2022. Roughly 2/3 of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, which reflect increased e-payments to suppliers. The remaining 1/3 of our revenue growth this quarter is from contribution of interest revenues.
+
+Our strong revenue growth also resulted in total transaction yield expanding to $4.76 in the quarter, up 12.5% from $4.23 in Q1 2022. Of the 12.5% increase, roughly half of the increase was driven by yield improvement and the remainder driven by interest revenue.
+
+Software revenues of $27 million, which accounted for 31.1% of our total revenue in the quarter increased 12.8% in Q1 of 2023 over Q1 of 2022. The increase in software revenues was driven by growth in total transactions of 8.3% with the balance driven by price.
+
+Payment revenue of $59.2 million, which accounted for 68.2% of our total revenue in the quarter, increased 27.4% in Q1 2023 over Q1 of 2022. Payment revenues reflect the contribution of interest revenues, which were $7.1 million in Q1 of 2023 versus $1.2 million in Q1 of 2022. More than half of the 27.4% increase in payment revenues was driven by total payment volume, which was up 16.7% and the remaining portion driven by interest revenues.
+
+On a GAAP basis, gross profit of $52.1 million increased by 33.4% in Q1 2023 over the same period last year, resulting in 510 basis points improvement in gross margin for the quarter to 60%. Non-GAAP gross margin increased 500 basis points to 67.3% in Q1 2023 and over the same period last year, roughly half of which was driven by a combination of yield expansion and efficiency with the remainder driven by higher interest revenue.
+
+Now moving on to our operating expenses. On a GAAP basis, total operating expenses were $74.5 million, an increase of 16.9% in Q1 of 2023 over Q1 of last year. On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 16.1% or $8 million to $58 million in the first quarter of 2023 from the comparable prior year period.
+
+However, on a percentage of revenue basis, operating expenses, excluding depreciation and amortization, declined roughly 340 basis points to 66.8% in the first quarter of 2023 from 70.2% in the comparable period last year. This highlights the operating expense leverage across sales and marketing, R&D and G&A.
+
+I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased $2.6 million or 16.1% to $18.9 million in Q1 of 2023 over Q1 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and supplier customers.
+
+Non-GAAP research and development costs increased by $2.6 million or 14% to $20.8 million in Q1 of 2023 over Q1 of last year. The increase was due to continued investment in our products and our platform.
+
+Non-GAAP G&A costs increased by $2.9 million or 18.7% to $18.3 million in Q1 of 2023 over Q1 of last year, driven by a combination of higher expenses as we transition to become a public company.
+
+Our GAAP net loss was $16 million for the quarter versus a GAAP net loss of $25.1 million in the prior year period, driven by the combination of strong revenue flow-through and expense control, leading to lower operating losses, coupled with higher interest income and lower interest expense due to reduced borrowing costs and partial debt pay-down.
+
+On a non-GAAP basis, our net loss in the first quarter in 2023 was $3.4 million, an improvement of $11.1 million compared to the year ago quarter, driven by the aforementioned factors. On a non-GAAP basis, adjusted EBITDA was approximately $400,000 in Q1 of 2023 compared to a loss of $5.6 million in Q1 of '22, largely due to the aforementioned factors.
+
+Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the quarter with a strong corporate cash position of $431.7 million against an outstanding total debt balance of $83.3 million, including a note payable for $18.7 million. We had approximately $24 million on our credit facility undrawn at quarter end.
+
+Corporate cash meanwhile was split roughly 60% among money market funds, commercial paper and U.S. treasuries with the remaining 40% in demand deposit accounts. The weighted average maturity on the corporate cash was roughly 10 days while the effective interest rate on our corporate cash position for the first quarter was roughly 4%.
+
+Customer cash at quarter end was approximately $1.1 billion with an interest rate of roughly 3.2% for the quarter. We expect interest rate levels on customer cash in excess of 4% fully reflected starting in the second quarter, absent any further increases in the Fed funds rate for the remainder of the year.
+
+I'll now provide an update on our full year 2023 guidance. In light of our first quarter 2023 financial outperformance, balanced with further volume impacts from macro crosscurrents and based on all information currently available, we are raising our 2023 outlook and now expect total revenue for the year to be in the range of $363 million to $368 million. Our 2023 revenue outlook still reflects approximately $30 million of interest revenues from customer funds versus approximately $11 million earned in 2022.
+
+As a reminder, we do not anticipate any political media revenue contribution in 2023 versus having recognized $8.5 million in 2022. We expect roughly 48% of the projected 2023 revenues to occur in the first half with the remaining 52% in the second half. Similarly, we expect a higher non-GAAP adjusted EBITDA profit ranging between $2 million and $4 million for the year.
+
+With that, I'd now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] And today's first question comes from Dave Koning with Baird.
+
+David Koning
+
+Great job. Yes. And I guess a couple of questions. The first one, in the payments segment, the yield was up both year-over-year and sequentially, but I wanted to focus on the sequential progression, which was really good because interest revenue drove maybe a little bit of it, but sequentially interest revenue didn't go up that much. So it seemed like there was some core progression. I don't know if it's from political ad maybe being low-yielding coming off or what that was, but just really nice progression. What was that?
+
+Joel Wilhite
+
+Yes, great question, Dave. Just to kind of summarize the question a little bit. We were -- we've consistently maintained in that sort of 30 bps ZIP code in terms of TPV yield overall. And given kind of the choppy environment, we're really pleased to see that stable and even inch up a little bit. Overall, year-over-year for the quarter, we were up 2.8 bps and sequentially up a bit even removing, like you say, any impact from kind of flow. And so again, we are encouraged that it was steady during this environment, but wouldn't read too much into kind of a bit plus or minus quarter-to-quarter. So pleased with the outcome.
+
+David Koning
+
+And then just my second question. One thing investors have been a little bit concerned the guidance for the year, I think, up $19 million of interest revenue and then EBITDA guidance also up kind of in that same ballpark. And so some say there's not a lot of core improvement. Maybe just talk about that a little bit, what maybe the puts and takes within the core part of it are?
+
+Joel Wilhite
+
+Yes. No, great question. And just coming back to -- look, we were super pleased with the outcome in the first quarter. Another beat on the top line, first quarter of EBITDA profitability, in a period of time where we see buyers kind of moderating spend. And so given the choppy environment and looking at the trends that we've seen, which again started kind of partway through Q4, we're just sort of led to be a little cautious in that outlook. And so we've baked in the trends that we're seeing. So we have a modest raise, but maybe not to the full extent of the beat in light of current conditions.
+
+So the last thing I would say is we have a lot of optionality. As Mike mentioned in his remarks initially and we're really focused on continuing to focus on growth and driving more efficiency in the business and delivering a profitable year.
+
+Operator
+
+[Operator Instructions] Our next question today comes from Ramsey El-Assal with Barclays.
+
+Ramsey El-Assal
+
+I wanted to ask about the hospitality vertical. Congratulations on launching that or launching it soon. I was wondering if you could comment on the eventual kind of revenue impact from adding that vertical? And also just how should we think about the ramp after you guys -- I think you said you were launching over the next few quarters. How does that ramp at that point? Is it somewhat steep, or is it a very gradual build?
+
+Michael Praeger
+
+Yes. So great question. We're obviously excited about kind of formally declaring hospitality is a new vertical for us. And typically, how these verticals get started is we see a progression of existing customers that we have in the Avid platform developing beachheads and customers. And we saw kind of the hospitality customer base continue to grow. And once it gets to kind of 50-plus approaching 100 customers is when we typically start to really take notice, does it make sense to kind of create a specialized sales force with deep domain knowledge to attack the go-to-market in a particular vertical. And so that is very consistent with how we've created past verticals.
+
+With hospitality, one of the things that we think is kind of a great formula for kind of, what I'd say, kind of accelerating kind of growth is with key partnerships. And so the M3 partnership is certainly highly strategic related to the hospitality vertical. And typically, with any kind of new partnership, I would say there's certainly a learning as we go through the education and training process with the M3 sales force as well as how our team supports their team as part of this.
+
+And so I would say it's a gradual approach. And typically, we find that the second year of a relationship is always more robust than the kind of the first year as you have some of those kind of learnings as you launch the vertical. But overall, we think it has a lot of formulas versus SaaS, especially in terms of how we're thinking about having a highly built inside embedded payment offering for their ERP system. So lots of excitement by our sales and go-to-market teams as it relates to the new vertical.
+
+Operator
+
+And our next question today comes from Will Nance at Goldman Sachs.
+
+William Nance
+
+So I guess for my one question, I will ask on the macro impacts on spending that you guys have been talking about now for -- since last quarter, I guess you've had a couple more months to sort of get arms around and observe the spending trends. Anything changed in your expectations about -- or just any notable observations that you would point out in terms of the spending behavior of your customer base? And if there are any numbers that you can share around that? Or any color around where those pullbacks are most acute, that would be helpful?
+
+Joel Wilhite
+
+Yes. Thanks, Will. I'll take that. Look, we -- again, just going back to we're proud of the quarter we had in a time of caution in spending across our buyers. And I'd sort of go back and largely repeat the way we described it in our last call. We're seeing that fairly broadly across all of our verticals. So no real kind of vertical to call out. That's been fairly consistent. And again, the types of spending is these discretionary buckets. We talked about advertising, marketing, professional services type spending, tenant improvements, that kind of construction-related spending. And so that is consistent with the quarter having rounded out. And so I'm really -- I would really just kind of reaffirm the language we use and the way we characterize the environment in our previous call.
+
+Operator
+
+And our next question today comes from Josh Beck with KeyBanc.
+
+Josh Beck
+
+Thanks for taking the question with the macro one off the table, which was very helpful. Yes, maybe I have a little bit more of a higher level market question, just given that FedNow will be launching in a few months here. Just kind of curious on your high-level views on real-time payments and kind of what the puts and takes there are for your business and then kind of B2B in general?
+
+Michael Praeger
+
+Yes. Great question, Josh. And certainly from a kind of overall kind of industry perspective, it's something that we pay close attention to. One of the things that we believe is kind of core to our success is our ability to utilize multiple payment modalities, whether it be across the electronic payment spectrum, whether it be various former virtual card, various forms of our AvidPay Direct, which is our closed loop network as well as leaning into what I would say some of the kind of the new kind of real-time rails, whether it be RTP or kind of the FedNow. And so we expect that those continue to be that we will lean in related to certain use cases as we've done in the past.
+
+The one thing that I will say is that all these new payment modalities as we currently see and take much longer in terms of adoption cycles as probably people think on the front end, and we've been in this business a long time. And so it takes a while for kind of one bank infrastructure and then, b), the acceptance. But where we really lean into and the value that we provide across any of these new payment methods is the ability to get the reconciliation data that suppliers need to make these transactions really efficient to them in an integrated way so they can use it to auto-reconcile. And so I think that's one of the biggest value propositions that we deliver and control across our network of now approaching 1 million suppliers on the AvidPay Network is our ability to get them the reconciliation data in the format that they need.
+
+Operator
+
+Our next question today comes from Craig Maurer with FT Partners.
+
+Craig Maurer
+
+Two questions. One, are you seeing any lengthening in the contract process that is typical when you're going into a questionable macro backdrop? And second, the yield on TPV was up nicely year-on-year. Can you talk about if there's any shift in the proportionality of payments going over individual rails that might have helped that?
+
+Michael Praeger
+
+Yes. Great, Craig. I appreciate the question. So first of all, it relates to kind of the macro on what I'd say the sales/contracting process. As we've kind of talked about in our strong top of funnel, we're seeing pretty really robust engagement across really all now 9 of our verticals, plus the horizontal segment. We are seeing kind of consistent behavior as we referenced last quarter that sales cycles have been extended a couple of weeks over kind of what they've been historically. And that stayed consistent this quarter as well. So taking a 2, 3-month sales cycle and adding a couple of weeks to it is what we've seen over the last couple of quarters related to that contract process.
+
+As it relates to your second question around kind of changes in mix related to TPV, it's been very consistent. We continue to lean in to continue to increase the different forms of payment modalities, whether it be a different form of virtual card at different kind of price points related to suppliers as well as our close network. And one of the things that continues to kind of surprise us a little bit is that it's really the #1 driver of acceptance is relates to what their process is on the receiving side and how they can get the data electronically to process a transaction electronically and supporting their existing business process. And so that's been consistent that we've seen continue. So the mix between kind of virtual card AvidPay Direct, various forms of other electronic payments, whether it be ACH or other real-time combined with paper check has really stayed consistent that we saw in the past quarter as well.
+
+Operator
+
+And our next question comes from Bryan Keane with Deutsche Bank.
+
+Bryan Keane
+
+Congrats on the solid results here. Just kind of 2 high-level guidance kind of questions. Joel, it sounds like 48% revenue in the first half, 52% in the second. If I do the quick math on that, it looks like a little stronger growth than consensus expected for second quarter and then maybe a little softer growth in the back half. Just want to think about the cadence there of first half versus second half?
+
+And then, Mike, when you talk about a robust 2024, are you talking about the potential for an economic recovery there? Are you also talking about new launches, fundamental business catalysts that give you the confidence for robust '24?
+
+Joel Wilhite
+
+Yes, Bryan, let me jump in on that. So first, just kind of the guidance cadence. So we were -- in the first quarter, our practice has been to every quarter update our annual guidance, but not to provide next quarter guidance. We did in the Q&A in the first quarter to do so given the proximity to the end of the quarter and in light of kind of the choppiness that we were talking about. And so while we haven't given guidance specifically for Q2, we did characterize the front half, back half. And I would just say using -- backing in, using the math that you described, what you're probably seeing is a reflection of our fundamental assumption that supports our guidance forecast, which ultimately is consistent unevenness and choppiness. And so we haven't made an assumption that it gets meaningfully better or meaningfully worse. But we're excited with a good quarter behind us on this path to profitability that we saw for the year, so.
+
+And then the last thing maybe -- I'll let Mike jump in. Obviously, at this point, given the conditions that we're in now, we're not providing guidance for 2024 and we're not necessarily operating the business, assuming that conditions would be much different than what we see today.
+
+Michael Praeger
+
+And I think my robust comments really relate to doing the things that we know contribute to kind of strong customer growth as we continue to see in top of funnel activity. And it's really driven by our continued kind of vertical market expansion, certainly as we go into next year, seeing the hospitality vertical and some of our other sub-verticals that continue to progress is exciting, along with the new partnerships that support it.
+
+And then lastly, kind of the new features and offerings, whether it be the ones that we talked about on this call with lien waiver management and kind of new integrations. But we also are getting ready for our new Invoice Accelerator 2.0 offering to release the second half of the year. And so certainly that will have an impact related to continue to add new customers, both on the buyer and supplier side as we go into '24.
+
+Operator
+
+And our next question comes from Tien-Tsin Huang with JPMorgan.
+
+Tien-Tsin Huang
+
+Appreciate good update here. Just a clarification on the question. I think Craig asked it, but just with the top of funnel activity, I think, like you mentioned double-digit on track in this quarter. So I think it was 25% this in Q1. So I'm just curious if we should expect a little bit of a slowdown, if I'm interpreting that correctly? And then my question for Joel, on gross margin considerations for the rest of the year because that did come in quite strong in the first quarter, given some of the yield dynamics in float, so any thoughts on 2Q versus second half?
+
+Michael Praeger
+
+Yes. Good question, Tien-Tsin. So I'll take the first one. And I think my comments related to top of funnel. So certainly, we continue to see really strong top of funnel, as I talked about and north of kind of 20% plus on average over a year ago. And what we're seeing, obviously, we're just into the second quarter. But we're seeing activity that's very consistent with and what we see in and what we saw in Q1, but have kind of 1 month of data, but we expect to have consistent top of funnel. So I wouldn't characterize any slowdown related to top of funnel activity.
+
+Joel Wilhite
+
+And Tien-Tsin, maybe I'll take the second part of your question just on gross margins. Again, we've said that our path to profitability tracks kind of the consistent gross margin improvement. We are pleased with the outcome in the quarter in at 67%. And even removing the impact of float and political as we've done in the past, over 300 bps. So we feel good about the results. We feel like we're on track on that path to profitability even amidst a choppy environment. As we've said, I would sort of hold with and we're not meaningfully changing the guidance that we provided in the last call around the expectation that we see a couple of hundred basis points of overall margin expansion. Again, that obviously factors in some uncertainty about the rest of the year, but feel like we're making good progress and on track.
+
+Operator
+
+And our next question comes from James Faucette with Morgan Stanley.
+
+James Faucette
+
+Maybe I want to talk a little bit about the accelerated path to profitability that we've seen. Can you talk a little about the biggest drivers that you've been able to find from an OpEx and scaling perspective that allowed you to get there kind of ahead of time? And how can we be thinking about tens per incremental leverage on a go-forward basis?
+
+Joel Wilhite
+
+Thanks, James. Great question. And basically, what I would -- the way I would respond is we're seeing it where we expected to see it. We've been intentional about this focus on continuing to make investments in growth and you're seeing us do that, but also to be very intentional about the efficiency in our business. And it starts with that gross margin expansion on its way to the 70% ZIP code. We've talked about that being the result of improved revenue yield and also operating efficiencies. We're seeing both of those occur. Obviously the float revenue dynamic has helped expand that yield. And so that's benefited us.
+
+But in addition to that, we're seeing efficiencies like we said we would. And G&A, as we round out the post first year after being a public company, having built that infrastructure along with where we will continue to see it from a R&D perspective. So I'd say we're seeing it as we expected and really ahead of schedule on a couple of those dimensions as well.
+
+Michael Praeger
+
+Yes. And just so we may add a little bit of cover to you kind of take what Joel said and kind of related back to a product feature-type perspective of what we've launched in the last year is that we've talked about in the past, our intelligent data capture IDC initiatives in terms of handling the front-end process related to invoice more efficiently as well as our straight-through process, STP processes for virtual card. All those are kind of components of continuing to build that gross margin as well.
+
+Operator
+
+Our next question today comes from Tim Chiodo with Credit Suisse.
+
+Timothy Chiodo
+
+I want to follow up on a topic that came up earlier in the call and I believe this came up on the Jack Henry call this morning as well around that now. So the question is, you mentioned that there's an issue sometimes around adoption, acceptance, you mentioned reconciliation and that's a lot of the advantage that AvidPay Direct can provide. Could we just see more of a mix shift of instead of using traditional ACH that you could slot in RTP, FedNow into AvidPay Direct? And essentially, I guess what I'm getting at is can you reduce cost for the system overall by doing that, but at the same time maintaining your own unit economics?
+
+Michael Praeger
+
+Yes. So Tim, I would say that call falls in the category of a Gold Star question. So this is kind of a passion of ours is we believe that kind of the FedNow and other RTP gives us an opportunity to not only kind of grow our different payment modalities, but also you do so at unique price points around the timing and delivery of good funds to a supplier. And so we absolutely expect to leverage the different modalities that have timing to create different offerings at different price points. And we think that's an overall formula to drive acceptance and the reason why we have kind of the big 2, 3x advantage in the marketplace today in monetization.
+
+Operator
+
+And our next question today comes from Brent Bracelin with Piper Sandler.
+
+Brent Bracelin
+
+I actually wanted to drill down into technology, if I could here. Just as we think about how you're leaning into automation, AI, you've talked about some things you're doing with Microsoft on IDC with leveraging Azure AI and OCR. Can you talk a little bit more where you're at on those processes? How much cost savings are you seeing so far? And how much more is there to come?
+
+Michael Praeger
+
+Yes. So kind of that's a big bucket as it relates to kind of how we're thinking about what I'd say deploying AI-type technology. We already have leaned into it already with some of the products that we talked about in the past with Microsoft, developing our intelligence data capture product, lots of really kind of new technology that's incorporated into that offering. And certainly, kind of the perforation of ChatGPT is a good example, where we actually had recently a dedicated off-site meeting with our executive team in which to talk about all the different kind of use cases and strategies across every function of our business.
+
+And so certainly, historically, there's been key areas in operations that we've been focused on, how do we drive more efficiency through our gross margin. And I think the exciting part with some of the new AI opportunities or just say AI opportunities are really -- they impact every functional team. And I think that's the part that makes it exciting. And so we're very focused on really every team developing say the top 3 use cases and doing a lot of testing and learning as the year unfolds to really incorporate those into more of our efficiency strategies going forward.
+
+Operator
+
+And our next question today comes from Darrin Peller with Wolfe Research.
+
+Unknown Analyst
+
+It's Andrew on for Darrin. Just a quick one on the payment revenues. Relative to internal expectations, would you attribute the quarter's outperformance to more a function of higher payment penetration and engagement or more a function of greater volumes? And if the former, just curious, what kind of growth is coming from, again, the higher engagement with prior existing customers versus maybe net new buyers that ramp intra-quarter?
+
+Joel Wilhite
+
+Andrew, I'll take that one. Yes. So I'd really attribute kind of the beat in the quarter to the volume. We pointed out the choppiness, we pointed out the assumptions that we made and it has been uneven. We were -- we had some unevenness in the front end of the quarter and then a strong finish in March. And so that's really the key driver there.
+
+Operator
+
+Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.
+
+Michael Praeger
+
+Yes. Thanks, everybody. Again, we believe we delivered a strong Q1 and are cautiously optimistic for the remainder of the year. Also, as a reminder, we look forward to seeing all of you at our upcoming Investor Day event May 31 and June 1, where we will again provide greater insights into our business. And with that, we'll close today's call.
+
+Operator
+
+Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
+
+Active Watchlist: Wealth Management

AvidXchange Holdings, Inc., Q1 2024.txt

@@ -0,0 +1,337 @@
+AvidXchange Holdings, Inc., Q1 2024 Earnings Call, May 08, 2024
+5/8/24
+Operator
+
+Good morning, everyone, and thank you for joining us for the AvidXchange Holdings Incorporated First Quarter 2024 Earnings Call. Please note this event is being recorded.
+
+Joining us on the call today is Michael Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's Head of Investor Relations. Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make today. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call.
+
+Also please note that the company undertakes no duty to update or revise forward-looking statements. Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.
+
+Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP. [Operator Instructions]
+
+I would now like to turn the conference over to Michael Praeger. Please go ahead.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joel Wilhite and I are excited to discuss AvidXchange's first quarter 2024 results. This is our 11th reporting quarter since becoming a public company in October of 2021, and we now have delivered 11 consecutive quarters of financial outperformance relative to our expectations.
+
+Amid prolonged macroeconomic volatility, our results highlight the relative resilience of our financial model. With the continued choppiness we're seeing in customer transaction volumes, we remain steadfast in executing our strategic playbook. This includes driving our yield expansion to counter the impact of uneven transaction volumes, focusing on expanding our gross margin through unit cost productions and driving operating leverage through cost discipline and smart investments to expand our adjusted EBITDA margin.
+
+The drivers of our success continue to be our middle market customers and the impact of our purpose-built value proposition for middle market companies. More crucially, it entails engineering and executing our various product offerings, technology, go-to-market and operational value proposition that delivers quantifiable benefits of digitally transforming our customers back office by automating accounts payable and payments over the differentiated 2-sided network that we have today.
+
+The payback for our customers is rapid, impactful and quantifiable, and both the efficiency related to labor cost savings and supporting their ability to grow without adding incremental back office headcount. This, in turn, deepens our competitive advantage as we are a market leader in driving digital transformation strategy for middle market companies. Thanks to our dedicated and talented team members, the runway for value creation for both our customers and investors is still in the very early stages.
+
+On today's call, I will touch on the 5 key priorities we have for this year that we're using to gauge our path of financial and operating progress in addition to continue to widen our competitive advantage around the middle market. Our key priorities for this year include performance culture, customer obsession, innovation, growth and scale objectives.
+
+Kicking off, we believe that the quick shorthand measure on performance culture is our financial scorecard. In looking at the first quarter of 2024, we delivered solid financial results across the board. Joel will go into more detail on our results later in today's call, but here are some of the highlights.
+
+Revenue growth in the quarter was over $105 million, up over 21% year-over-year. The growth in the quarter was led by a combination of continued yield expansion coupled with transaction growth. Our success around yield expansion is a result of our value proposition related to our various e-payment modalities focused on converting paper check suppliers into electronic payment adopters, as well as continued efficiencies with our processes, automation and AI improvements around executing these various forms of electronic payments.
+
+Non-GAAP gross margins continued their upward trajectory coming in at 72.4% and crossing the lower band on the 72% to 75% non-GAAP gross margin target ahead of our 2025 gross margin expectations as we outlined during our Investor Day last June.
+
+Along with solid operating expense discipline, our adjusted EBITDA margins in the quarter exceeded 16%. Furthermore, our transaction yield, which is a metric that we focus on across our executive leadership team as it demonstrates the power and effectiveness of our AvidXchange business-wide role model, was up almost 15% to reach $5.47 per transaction.
+
+Moving on to our customer obsession metrics. One of the data points we track is our top of funnel prospect activity. The first quarter of 2024 saw some very encouraging trends as well as some adjustments to our marketing initiatives that we believe will be net positive for the year but negatively impacted us during the past quarter.
+
+Overall, the top of funnel activity during the first quarter of 2024 was unchanged year-over-year with certain verticals leading and some lagging. The real estate vertical, our longest standing vertical market segment, led the pack and was up high double-digit percentages on a year-over-year basis.
+
+The growth in the real estate vertical is very encouraging as we have not seen this level of growth in more than a year, led by very strong multifamily activity. We also saw double digit growth in our education and nonprofit verticals as well. Most compelling of all, our buyer customer close rates were up almost 50% year-over-year virtually across all of our industry verticals, further demonstrating our increasing sales effectiveness.
+
+However, in a handful of our verticals, we did see instances where our top of funnel performance lagged during Q1. In the quarter, those verticals included our new markets, homeowners association, or HOA management as we call it, construction and financial services. Let me briefly discuss the reasons for this lag and how the top of funnel has rebounded since.
+
+As we continue to onboard new leaders in our sales and marketing group designed to help us scale to our next milestone target of reaching $1 billion in revenue, they have brought greater discipline, alignment and allocation mix of our marketing and go-to-market investment dollars. As part of this evolution, we have prioritized our resource allocation mix to focus on slightly fewer but higher yielding industry user conferences and trade shows that meet our ROI and lead flow targets.
+
+As a result, we exited a number of the lower yielding conferences and trade shows during the quarter and prioritized greater investment in higher yielding conferences and trade shows occurring over the balance of the year. This resulted in a 30% year-over-year decline in trade show traffic during the quarter with a corresponding impact on our top of funnel metrics during Q1 as we implemented this strategy.
+
+We've allocated more of our investment resources for higher yielding trade shows in Q2 and for the balance of the year, which we believe still have an overall higher impact to our overall top of funnel engagement metrics. And the good news is that this strategy is already getting traction as our top of funnel activity is up nicely in the high single-digit percentages across the board so far in the second quarter.
+
+We believe that the strategic changes we're making to our marketing motions, notwithstanding the macro backdrop, are the right moves and highly aligned with our long term organic growth objectives. With our recent accounting system integration partnerships, we're cautiously optimistic about our top of funnel as we scale up for the remainder of the year.
+
+Now turning to our innovation priorities. I'd like to provide an update on Payment Accelerator, formally Invoice Accelerator 2.0. This product enables the small business supplier customers on our network frictionless access to improving their cash flow by leveraging our robust underwriting analytics, security and scalability protocols. We're extremely excited about the prospects for Payment Accelerator as it is expected to be a meaningful growth contributor in 2025 and beyond as we believe that supplier financing and cash flow management offerings will be the third leg of our overall revenue model in partnership with driving additional software and payment network revenues.
+
+Given that this is a credit product, we continue to meter the launch in order to better understand the user experience given that this next generation product has an entirely new digital front-end user experience complete with self-service digital enrolment capabilities.
+
+In addition, we also want to ensure that our various third-party integration that support Payment Accelerator are working and supporting our back office processes as designed at scale. These include enterprise grade features such as the data science analytics critical for successful payment interception and support for our new Subledgering Central Repository required for real time offsets and bifurcation of payments to properly execute the innovative money movement approach.
+
+This will enable us to seamlessly leverage multiple third-party financing partners in the future as well as open this offering to a large proportion of our 1.2 million supplier customer base, many of which fall into the small business segment, even including support for larger middle market suppliers looking to accelerate larger invoices.
+
+To put this new generation user experience in perspective, Payment Accelerator compared to its predecessor is designed to onboard a supplier in a matter of minutes versus several days. What makes this process frictionless is that we eliminate the need for a traditional financial review underwriting process which requires historical financial statements from suppliers. However, we leverage supplier and buyer history in transaction data as well as real time visibility into the transaction status and approvals inherent in our 2-sided network to underwrite and lower the credit risk as well as provide protective set of provisions across the entire flow of invoices that a particular supplier may have on our network.
+
+The rapid onboarding process is also the result of the platform's highly integrated back-end that is designed to simultaneously validate the supplier's bank account information along with know your customer and know your bank compliance regulations real time as the supplier completes an online questionnaire of legal entity data and beneficial ownership information.
+
+Once onboarded, a supplier is presented with multiple acceleration offers, with transparent pricing and various time-based funding options, including real time payments. In addition to the Payment Accelerator offering highlighting the eligible supplier invoices available for acceleration, we also provide an Auto Fund option, where an intelligent decision engine automatically identifies all the supplier's eligible invoices and funds them automatically, ensuring the fastest access to cash availability every time an eligible invoice is available on our network.
+
+We have a growing network of supplier customers currently live using this Auto Fund option. This includes Charlotte, North Carolina based supplier JW Home Improvement, which was looking for quick access to receipt of payments for their invoices to support their overall business expansion and found the simplicity of our Auto Fund feature to be a major plus in our Payment Accelerator offering.
+
+We're leveraging data science and user experience heatmaps to understand and analyze the user behavior as we intend to scale this offering fivefold over the next several quarters. We believe that our Payment Accelerator product will ultimately bring the intuitive front-end user experience for all of our B2B constituents similar to that of a best-in-class consumer payments application, with robust back-end instant decisioning and underwriting capability.
+
+Next, I'd like to provide a progress update on some of our major accounting and ERP partnerships that we announced in 2023 as part of our strategic growth priorities. Recall that we announced 2 marquee partnerships last year: AppFolio in the multifamily vertical industry and M3 in the hospitality vertical. Both of these partnerships are highly strategic in nature for very specific reasons.
+
+Let's start with AppFolio, whose strategic rationale stems from its size, scope and our vertical market experience. Recall the accounting system partnership with AppFolio is our biggest ever with a top accounting system provider focused on the multifamily real estate vertical.
+
+We are currently executing our initial go-to-market phase with AppFolio as we went live with our joint invoice and pay API integration a few weeks ago and is now broadcasted for general availability to all 19,000 AppFolio customers through AppFolio's stack marketplace. As part of our joint Go Live motion, AppFolio is deploying various marketing outreach initiatives across channels to steer its customers to our offering in its marketplace through email, landing pages, webinars, and joint pipeline reviews.
+
+What is truly exciting is the increasing top of funnel activity we have already seen in the lead up to the Go Live integration announcement, along with high customer engagement. Since the announcement of our partnership in the fourth quarter of 2023, we have tripled the number of new opportunities created in the first quarter. We believe this kind of ramp sets a nice tone for this partnership for 2024, with meaningful revenue build in 2025 and beyond as we believe that over 50% of AppFolio's 19,000 existing customers are a strong product market fit for our offering.
+
+Moving on to the M3 partnership in the hospitality vertical, where we're seeing similar opportunity dynamics unfold. M3, as you may recall, is the hospitality market leader in cloud-based accounting solutions, along with a data management platform tailored specifically for the hospitality industry. M3's customer base exceeds 1,000 hotel management groups and owner operators, including 50% of the top hotel managers and operators in the United States.
+
+M3 is highly strategic for us given that it accelerates our entry into the hospitality vertical through a player with a dominant positioning in the marketplace.
+
+We went live with our embedded pay integration with M3's Core Select accounting solution in the third quarter of 2023. Since our initial launch, we've seen robust opportunity creation with our joint marketing efforts, including dedicated M3 representatives evangelizing partners such as AvidXchange for our highly integrated and embedded pay offering.
+
+These opportunity creations are up 4-fold on a year-over-year basis compared to Q1 2023. Given the traction we are seeing, we have jointly decided to broaden our relationship and we just signed a contract extension with M3 to provide integration into its flagship Accounting Core solutions. This Accounting Core integration is slated to go live in the second half of 2024. We believe that both our AppFolio and M3 partnerships along with several others that are in the pipeline position us well for long-term growth within our large addressable and unpenetrated AP automation market for middle market companies.
+
+Finally, on our key priority related to business scale, I'd like to discuss the opportunities for sustained gross margin expansion, a major lever that we've relentlessly been addressing to great success. The success in gross margin expansion perfectly complements the operating expense and investment discipline that we have demonstrated since becoming a public company. To ensure continued expansion of gross margin, we believe that we have significant room to run as we work towards our long term 80% plus gross margin target.
+
+We have continued to engineer new innovative technology, automation and AI solutions that we believe could work at scale across every component and sub-component of our operational value chain across our business. The latest arrow in our quiver is our new AI-powered IVR payment automation solution. To put this particular use case opportunity in perspective, currently we employ both follow the sun sourcing strategies and chatbots to make payments across our various payment modalities. While the sourcing strategies optimize both unit cost and time zone coverage, our IP-driven bots optimize unit costs and time zone coverage at speed and scale.
+
+But RPA-driven bot methods of payment execution have certain limitations given that they need IVR to perform the exact path of execution every time or they break and need constant remapping work to be done along with requiring human beings to be inserted at critical junctures for the process to be successful.
+
+So any time anything changes or if there is a latency, bot automation fails and the payment becomes manual or potentially kicked to a paper check. With our new AI-powered IVR automation solution, which is self-learning and self-correcting, optimizing the functionality of what our existing bots currently do along with what our bots cannot do, such as adapting to changes and updates in a particular IVR decision tree, marks a major new innovation milestone for us.
+
+During Q1, our new AI payment execution solution, which is still in the early stages of deployment, already demonstrated a 2x the productivity of our prior bot technology and over 10x the productivity of humans executing this function. With this capability, we can increase our ability to scale across supplier payments and capture automation of low-volume suppliers where the cost versus benefit is disproportional due to the high cost of automation versus the lower volume and spend of many of these suppliers, driving increased electronic payment penetration rates even further in our business.
+
+And most importantly, we believe this solution will scale non-linearly as we double and triple our transaction volume on the payment network in the future.
+
+In closing, we're off to a very strong start in 2024, and I'm excited with the progress we are making across our 5 operating priorities for the year, which include continue to develop and recruit key talent to support our performance culture, our customer obsession and continuing to increase the value proposition for both our buyer and supplier customers, delivering on our innovation initiatives and offerings to support our durable long-term 20% organic growth objectives, along with continued scaling of our business towards our next $1 billion milestone in the coming years.
+
+We recognize that the macro backdrop has remained volatile and challenged over the past 2 years and creates a cautious approach towards discretionary spending across the middle market. However, we remain laser-focused on the operational rigor and execution along with controlling those elements of our business model that we can control directly, which includes our targeted innovation investments geared towards continued expanding the customer value proposition and impact we're having on both our buyer and supplier customers, increasing our competitive advantage across the middle market.
+
+As we remain on track to deliver our 2024 financial commitments, we believe the robust product payload and integration partnership that we've announced provide us with an important tailwind building for 2025 and beyond. I want to provide a special thanks to all my AvidX team members for their hard work, dedication and relentless focus on excusing our operational and strategic priorities. We believe we're still in the very early innings of penetrating what is a large and unpenetrated market opportunity, deliver business-to-business accounts payable and payment automation offerings to middle market companies.
+
+Given our product innovation, strong execution, competitive and financial strength, we believe we are well positioned to drive impactful value for customers, create future growth opportunities for our team members and unlock significant long-term value for our shareholders.
+
+With that, I'd like to turn the call over to my partner, Joel Wilhite.
+
+Joel Wilhite
+
+Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our first quarter 2024 financial results, which reflect continued execution of our growth strategies amid continued macro uncertainty.
+
+Overall, we delivered another quarter of healthy year-over-year financial performance relative to the implied first quarter 2024 business outlook. And excluding float and political revenue contributions, first quarter revenues came in higher due to payment and software yield expansion driven by ongoing e-pay conversion. That, together with higher gross margins driven by higher revenues, ongoing progress on unit cost initiatives, software and pay yield expansion, as well as sustained expense discipline led to significant adjusted EBITDA outperformance.
+
+It's worth highlighting that this is our second consecutive quarter of adjusted EBITDA profit, ex-float and political. Most notably, we more than doubled our adjusted EBITDA profit sequentially ex-float and political to $3.7 million in Q1 of 2024 from $1.5 million in Q4 2023 due to higher transaction growth, software and payment yield expansion, lower unit cost and operating leverage, leaving us incrementally more confident in achieving our financial targets rolled out during our June 2023 Investor Day.
+
+Now turning to year-over-year results. Total revenue increased by 21.6% to $105.6 million in Q1 of 2024 over the first quarter of 2023. It's important to note that the number of business days year-over-year remained unchanged at 63 days. Roughly 3/4 of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, coupled with software and pay yield expansion.
+
+The remaining revenue growth this quarter was driven by higher year-over-year float and political revenues. Our strong revenue growth also resulted in total transaction yield expanding to $5.47 in the quarter, up 14.9% from $4.76 in Q1 of 2023. Of the 14.9% increase, more than half of the increase was driven by paid and software yield, coupled with transaction mix skewed towards payments. The remainder was due to float and political revenues.
+
+Software revenue of $29.7 million, which accounted for 28.1% of our total revenue in the quarter, increased 10.1% in Q1 of 2024 over Q1 of 2023. The increase in software revenues of 10.1% was driven by growth in total transactions of 5.8%, which continues to be impacted by macro choppiness with the balance driven by growth in certain subscription-based revenues.
+
+Payment revenue of $75.2 million, which accounted for 71.2% of our total revenue in the quarter, increased 27.1% in Q1 of '24 over Q1 of '23. Payment revenue reflects the contribution of interest revenues, which were $13.1 million in Q1 of '24 versus $7.1 million in Q1 of 2023. Political media revenue in the current quarter was approximately $800,000, a negligible in the same period a year ago. Excluding the impact of float and political revenues, which represent 1/3 of the 27.1% increase, the remaining roughly 2/3 of the increase in payment revenues was driven by a combination of an increase in pay yield expansion, greater payment mix and payment transaction volume increase of 8.1%.
+
+On a GAAP basis, gross profit of $69.2 million increased by 32.7% in Q1 of 2024 over the same period last year, resulting in a 65.5% gross margin for the quarter compared to 60% in Q1 2023. Non-GAAP gross margin increased 510 basis points to 72.4% in Q1 of 2024 over the same period last year with the lion's share of the increase driven mostly by unit cost efficiencies and yield expansion.
+
+Now moving on to our operating expenses. On a GAAP basis, total operating expenses were $79.4 million, an increase of 6.6% in Q1 of 2024 over Q1 of last year. On a non-GAAP basis, operating expenses, excluding depreciation, amortization and stock-based compensation increased 1.4% to $58.8 million in the first quarter of 2024 from the comparable prior year period.
+
+On a percentage of revenue basis, operating expenses, excluding depreciation and amortization and stock-based compensation, declined to 55.7% in the first quarter of 2024 from 66.8% in the comparable period last year. The year-over-year percent decline largely highlights expense discipline and significant operating leverage across G&A, sales and marketing as well as R&D to an extent even after stripping out the contribution of float.
+
+I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs decreased by roughly $300,000 or 1.7% to $18.6 million in Q1 of 2024 over Q1 of last year, which reflects ongoing yet targeted investments in sales and marketing spend to support our continued growth.
+
+Non-GAAP research and development costs increased by $1.3 million or 6.5% to $22.1 million in Q1 of '24 over Q1 of last year. The increase was due to continued reinvestment in our products and platform, including spend management, pay offering and Payment Accelerator.
+
+Non-GAAP G&A costs decreased slightly by roughly $200,000 or 1.2% to $18.1 million in Q1 of 2024 versus Q1 of last year due to leveraging public company costs across a larger revenue base. They continued their annualized downward progression as a percentage of revenues as we indicated during our Investor Day.
+
+Our GAAP net loss was $1 million for the first quarter of 2024 versus a GAAP net loss of $16 million in the first quarter of '23, with the reduction in losses driven by a combination of strong revenue flow-through solid gross profit increase in expense control, leading to lower operating losses, coupled with higher interest income and lower interest expense due to reduced borrowing costs and partial debt paydown.
+
+On a non-GAAP basis, our net income in the first quarter of 2024 was $11.3 million versus a net loss of $3.4 million in the same period last year, a $14.7 million positive swing driven by the aforementioned factors. On a non-GAAP basis, Q1 2024 adjusted EBITDA was $17.7 million versus $400,000 in Q1 of 2023, largely due to the aforementioned factors.
+
+Turning to our balance sheet for a moment, I want to touch on a few key items. We ended the year with a strong corporate cash position of $443.6 million of cash and marketable securities against an outstanding total debt balance of $75.8 million, including a note payable for $13.9 million. We had $30 million on our undrawn under our credit facility at year-end.
+
+Corporate cash meanwhile was split roughly 2/3 among money market funds, commercial paper and time deposit instruments with the remaining 1/3 in deposit accounts. The weighted average maturity on the corporate cash was roughly 36 days, while the effective interest rate on our corporate cash position for the first quarter was roughly 5.2%.
+
+Customer cash at quarter end was approximately $1.2 billion with an interest rate of roughly 5% for the quarter. The sequential decline in customer cash was largely due to typical seasonal patterns related to disbursement and settlement of payments in flight from the prior quarter. This, along with average customer cash, balances intra-quarter and shifts in calendar days between weekdays and weekends of receipt and disbursement of that cash impacts float revenue.
+
+Turning to our updated 2024 business outlook. We now expect total revenue for the year to be in the range of $442 million to $448 million. Based on the midpoint, we expect approximately 47% of the '24 revenue distribution in the first half versus 53% in the second half. Our 2024 revenue outlook reflects approximately $45 million of interest revenue from customer funds, a $1 million increase from our initial '24 outlook versus roughly $41 million earned in 2023.
+
+We anticipate approximately 54% of the $45 million in interest revenue from customer funds in the first half of 2024, with the remaining approximately 46% in the second half of 2024. Also, we anticipate political media revenue contribution of approximately $9 million, given that this is our first presidential cycle under FastPay.
+
+Recall, we acquired FastPay in 2021. And for context, in 2022, during the midterm election cycle, the political arm of FastPay generated roughly $8.5 million in revenues. Similarly, we expect non-GAAP adjusted EBITDA profit ranging between $71 million and $75 million for the year.
+
+With that, I would now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] The first question comes from Dave Koning with Baird.
+
+David Koning
+
+Great job. And I guess my question, so it looks to me like this is the best growth quarter in maybe a couple of years when you exclude float and political, which is great to see, and it reflects a lot of what you talked about payments yield, which has been up now 7 -- I think, 9 straight quarters. What's the shape of that going forward? I know there's puts and takes between interest revenue, between Payment Accelerator coming on. Does that just step function just up every quarter still? Or how should we see that over the next several quarters?
+
+Joel Wilhite
+
+I appreciate your comments and I appreciate your question as well. I think what I would just say on the TPV in particular that's really been helping support that payment revenue line is, like we said before, you might see variability from quarter-to-quarter, but our track record is kind of steady expansion over time. And of course, the gear 3 of our model, checks coming out of the system, increasingly finding opportunities to monetize digital payment together with some of the initiatives that we've talked about and that Mike mentioned, Payment Accelerator, et cetera, give us kind of the tools and levers to continue to see that yield expand over time.
+
+Michael Praeger
+
+I mean just, David, to follow up on what Joel said is, across our team, we're laser-focused on kind of the one metric that I like talking about, which is the transaction yield. And certainly, that's up over $0.70 over last year and up slightly over last quarter. But that's the one that we kind of lean into in terms of all the different strategies we're executing across the business to continue to focus on what we can control. And one of the metrics there is that transaction yield metric.
+
+Operator
+
+The next question comes from Darrin Peller with Wolfe Research.
+
+Darrin Peller
+
+Guys, can we just expand a little bit more on the top of funnel comments? I know, Mike, you were commenting on earlier about conferences and changes to philosophy around it. And maybe what you're seeing in terms of bookings momentum, and just to add on to that, demand for some of the new offerings on the supplier side as well as a quick update there. I know it's still relatively early, but any further color would be grateful.
+
+Michael Praeger
+
+Yes. Darrin, I appreciate the question. You were breaking up a little bit, but I think it was around the top of funnel and commentary there. I think what we saw was different verticals certainly experiencing kind of different types of activity. On the positive side, we're really encouraged with what we saw in the real estate vertical that was best results in probably a couple of years related to top of funnel and then combined with education, non-profit being really strong. And certainly kind of the multifamily piece of -- multifamily and industrial pieces of the real estate were very strong for us. Not a big surprise considering that's a key area that we have strong industry domain knowledge, experience and also have lots of partnerships in that area.
+
+On the flip side, certainly, verticals like our [ H way ] management, [ Horizolty ] management vertical as we call it, combined with financial services and -- experienced some kind of lagged activity. And one of the things that -- in terms of peeling back the onion of reasons why, we also implemented a fairly large just kind of strategic shift in our approach to lots of different kind of industry conferences.
+
+And so just to give you a sense of it, last year in Q1, we attended about 85 different conferences and industry trade shows, and we were about 30 less this year. And so rather than spreading kind of the peanut butter pretty thin related to our investment dollars, the team has been much more strategic in terms of where do we invest, in terms of the highest yielding conferences and events that we can attend to drive both ROI yield as well as the activity from these.
+
+And so one kind of result of that is that we attended less in Q1, but also super encouraging about some of the segment that did not do as well in Q1, we saw bounce back and -- or bouncing back in Q2, and overall activity up 9% so far in the quarter. And so we think over the course of the year, those strategies will pay dividends for us, and we're going to be right where we expect to be in terms of driving our overall growth objectives. So that's maybe a little bit of flavor related to top of funnel.
+
+Operator
+
+The next question comes from Sanjay Sakhrani with KBW.
+
+Sanjay Sakhrani
+
+I guess I have a question just macro broadly. One is just on the float. I guess you had decent outperformance relative to the quarterly run rate, and it seems like you expect float contribution to come down over the back part of this year. What's the rate outlook in that? And then secondly, just macro in general. I know Mike kind of talked about it still being mixed. But maybe just elaborate a little bit more on sort of what you're seeing and if there's green shoots, I think you mentioned a little bit in real estate. But would love more elaboration around that.
+
+Joel Wilhite
+
+Yes, you bet. Great questions. I'll take float and macro. So on your float question, we did $13 million in the quarter. It's a little bit higher than our expectations. And one thing to keep in mind is that rate is a factor, but also customer balances are a meaningful factor. And in fact, in Q1, rate was not an impact whatsoever. And so those customer balances are really impacted by just the timing and whether the period end lands are weekday or weekend and such. And so that sort of beat in the quarter is kind of what led us to bump up the range for that float fee.
+
+In terms of your question about the expectations in the back half, we haven't really meaningfully changed from our initial guidance where we did anticipate a handful of rate cuts in the back part of the year, something like 75 bps. We'll see what actually shakes out, but that's kind of how we think about float revenue, just keeping in mind those customer balances being a huge driver.
+
+I think from a macro perspective, I would just kind of go back to the -- what we've been experiencing now for over a year is just some suppression in spending and transactions associated with our buyers on our platform. And we attribute that to, in particular, discretionary spending and no one particular vertical, just general caution and spending. And that's continued through the first quarter, even into through the month of April. And so that macro impact is something that continues to be baked into our guidance.
+
+Operator
+
+The next question comes from Craig Maurer with FT Partners.
+
+Craig Maurer
+
+So appreciate all the commentary around the macro. Is the bottled macro driving any changes in transaction mix between modalities, whether it's VCC, ACH or other?
+
+Michael Praeger
+
+So, Craig, I appreciate the question. What I would say, I think where we see macro impacting our business the most is on the discretionary spend volumes. So I would say having less impact on kind of the allocation across different payment modalities. Those are probably very specifically driven by supplier experience. And typically, we find suppliers think about a combination of timing of the payment, the price of the payment, combined with the level of data -- [ Roman's ] data provided in automation. And those things really drive kind of payment modality acceptance much more so than macroeconomic type issues is what we've experienced.
+
+So typically, in my conversations that I have, it's usually around discretionary spend on overall volume is where we're seeing the impact.
+
+Operator
+
+The next question comes from Andrew Bauch with Wells Fargo.
+
+Andrew Bauch
+
+I know you don't guide to a quarterly basis, but wanted to get a sense of your results this quarter relative to your internal expectations. Revenue came in $3 million to $4 million ahead of what our expectations were. And then on a full year basis, you had the guide come up $1 million. So just wanted to get a sense on how this all played out and what were the puts and takes around the quarter specifically.
+
+Michael Praeger
+
+Yes, it's -- I hear your question, and I think you kind of summarized it well. Just to repeat, we had relative to sort of the first quarter, let's just say, using consensus as the benchmark, it's about $3 million up. We attribute a couple of that to the float revenue and a couple of that sort of underlying outperformance in the business, particularly around yield. And our guidance, like I kind of mentioned in the last response, contemplate sort of the continued activity that we see from a volume trends perspective for the rest of the year.
+
+So we're excited about having another quarter under our belt where we're sort of beating revenue expectations, seeing yield consistently expand -- expanding gross margin and sort of doubling EBITDA profit ex-float quarter-over-quarter. So that's what we're focused on executing.
+
+Operator
+
+The next question comes from Bryan Keane with Deutsche Bank.
+
+Bryan Keane
+
+Mike, is there anything you can do on your end to try to drive faster transaction growth? Or is it just macro driven that there's not a lot you can do to move that number or grow that number?
+
+Michael Praeger
+
+Bryan, that's a great question. And it's one that I spent a lot of time asking my team about. And so when I think of that transaction number, there's kind of 2 buckets. There's existing customers that are already on our platform that are implemented and where we're seeing some of the headwinds on discretionary spend related to the CFOs across the middle market. That one is probably we have less ability to impact in the short term. And however, the other piece of it is new transactions that we're adding to the platform. And in that bucket, certainly, there are things that -- and strategies -- that we're deploying.
+
+One of the biggest things is kind of the evolution of our sales and go-to-market activity. And one of the things that I highlighted during the call that we're really excited about is the impact of some of the new partnerships that are just in the early stages of being launched, certainly, AppFolio being a big one combined with M3, and then just the continued execution of existing partnerships. So one of the things when it highlights the top of funnels in the last quarter was what we saw in real estate. That was certainly a big part of that activity, was from the kind of say, legacy partnerships that we've had. Companies like MRI, ResMen, RealPage, examples like that.
+
+And -- but we are really excited about AppFolio, M3 as a new partnership examples. And right now, we feel that we're kind of on pace to execute those. But certainly, I'm talking to my team every day about things that we can do to continue to accelerate those type of partnerships.
+
+Operator
+
+The next question comes from Ramsey El-Assal with Barclays.
+
+Ramsey El-Assal
+
+On the top of funnel headwinds, will we see more of a kind of a noticeable air pocket from the sales pivot that hits numbers in a specific quarter this year? Is there any type of cadence dynamic to be aware of? And then just on the M3 and AppFolio rollout, so I was just curious if you had any updated thoughts on annualized revenue contribution or how much you have embedded in guidance this year for those deals?
+
+Joel Wilhite
+
+Ramsey, I'll take the first part and Mike will take the second part. So I wouldn't really call out necessarily an air pocket. I mean we think we've got -- like there's puts and takes overall, but we like our progression of customer adds for the year and feel good about the guidance set up, and certainly then exiting for a strong '25. So I don't know, Mike, if you want to comment on the M3 and AppFolio.
+
+Michael Praeger
+
+Yes. What I would say, Ramsey, is these partnerships, they're different from the standpoint of one is in a vertical that we know really well and that we're a long-term leader in, being the multifamily segment of real estate, and we already have kind of the key integration partnerships with the other competitors in that segment, i.e., like the RealPage, the ResMens of the world. And so that was one that I think has the capability of ramping faster. Now having said that, we had kind of already plans in place that we expected to ramp faster to some degree.
+
+And then the M3 partnership is one that -- we have the same level of segment about, but it's just in a new emerging vertical for us, being hospitality that we announced last year. So we don't have the big existing name recognition and penetration within that vertical as we do in the real estate side.
+
+So I would say we're right on plan in terms of our internal expectations and certainly working hard to have those ramps throughout the year.
+
+Operator
+
+The next question comes from Jens Wang with JPMorgan.
+
+Tien-Tsin Huang
+
+Just a clarification on the question, if you don't mind. Just the 53% of revenue in the second half that's unchanged, so the implied second quarter revenue for calculating this correctly is suggesting it will be flat sequentially when it's usually up. Is that correct? And if so, why? And then just on the -- I know Ramsey asked it, just the real estate up high double digits. Is that a result of a AppFolio production, or is it more macro?
+
+Joel Wilhite
+
+Got it. Okay. Good question, Tien-Tsin. I'll go first, and Mike will come after me. So on your first question, yes, the back end is in our guidance, the back end of the year is slightly less back-ended with updated guidance, but largely consistent in that sort of 50-53-ish, 52.5, 53 range. And then your question about what is implied in Q2, of course, we don't guide the next quarter, but your math isn't wrong. And what we are doing is taking a fairly cautious posture here with guidance as we look out across the rest of the year.
+
+I wouldn't say that there's anything significantly different in terms of the activity that we're experiencing in terms of the macro getting better or worse, but we are exercising an additional measure of prudence as we're giving guidance. And so just kind of keeping the range changed just for that float beat in Q1.
+
+Michael Praeger
+
+And maybe to follow up on the second part of your question related to that top of funnel and the double-digit growth that we saw in real estate wasn't dominated by one particular partner like AppFolio. And the answer is no. It was really nice activity across the board within kind of real estate, specifically actually weighted towards multifamily. But within multifamily, we saw both more mature partners such as RealPage and ResMen contribute nicely along with MRI. And then on the kind of new partner side, certainly, we've seen the ramp of AppFolio.
+
+But it wasn't kind of heavily weighted or overweighted for at particular partner. We saw nice across-the-board activity within that sector.
+
+Operator
+
+The next question comes from James Faucette with Morgan Stanley.
+
+James Faucette
+
+I want to follow up on Tien-Tsin's question in terms of like seasonality and your indication that you're being prudent here. It sounds like in terms of how you're applying that to the political contribution that that's also the case. Is that fair? And it seemed like you were kind of laying out that this is the first presidential cycle with that business?
+
+Joel Wilhite
+
+That's right, James. We commented in the February call when we set initial guidance for that political revenue this year is $9 million. We're sort of holding to that. We're cautiously optimistic. It's our first presidential cycle. It's largely back-end weighted. And there could be a range of outcomes in terms of overall spend. So we're being conservative there as well.
+
+Operator
+
+The next question comes from Alex Markgraff with KeyBanc Capital Markets.
+
+Alexander Markgraff
+
+Mike, maybe one for you. Just on some of the comments around the improvement in automation with some of the bots and AI, I'm just curious -- I don't know if I'm doing it justice in describing that way -- but just curious in the context of digital transaction penetration, does that, in any way, sort of accelerate the path to the 55% to 60% range you laid out for 2025 in the most recent Investor Day?
+
+Michael Praeger
+
+Yes. That's a really insightful question, Alex, related to kind of does that increase in automation, especially around the AI tools, and I kind of referenced one of those being our IVR tool that we've now deployed. And the answer is it does have an impact. And where it has an impact is on small dollar transactions where we've had very specific ROI models where if a transaction fell underneath the threshold of what it would cost us internally to execute that transaction electronically through either a human being or a bot, then it got kicked out. And now with our AI tools, we're able to process those transactions down to a much smaller dollar amount than we've historically been able to do.
+
+And so that means that more those small dollar amount of transactions will be going out electronically. Now having said that, they are a small dollar amount of transactions. So it won't have a big impact on the overall volume. But it certainly is part of our overall strategy with customers on how we maximize moving transactions away from paper track electronic overall. And it's just one additional lever of all the strategies that we're deploying.
+
+Operator
+
+[Operator Instructions] The next question comes from Rufus Hone with BMO.
+
+Rufus Hone
+
+I wanted to come back to your comments on the EBITDA margin guidance. It looks like it implies just a small step down in margins from the first quarter level through the rest of the year, and I guess lower float income is a factor here. But I wanted to ask if there was some incremental investment spend that you're now looking to make that's adding to the margins leveling off or being just a touch lower through the rest of the year?
+
+Michael Praeger
+
+Yes, good question. So again, we were really pleased with the quarter and the progression of OpEx as a percentage of revenue keeps marching sort of down as we talked about at Investor Day last year where we're seeing increasing leverage in the business. I would say that there would be some potential variability quarter-to-quarter if you think about what's implied in the guide. So I could point to some investments, a couple of million dollars sequentially into Q2, particularly around R&D, sales and marketing. And so quarter-to-quarter, there will be some variability. But over the year and going forward, we expect to continue to see this operating leverage show up in the financials and contribute to EBITDA.
+
+Operator
+
+This concludes our question-and-answer session. I would like to turn the conference back over to Michael Praeger for any closing remarks.
+
+Michael Praeger
+
+Thank you, again, everyone, for your interest in AvidXchange. To wrap up, we delivered another strong quarter. Given our disciplined execution and strong financial performance amid the current macro volatility, we believe our portfolio of product innovations, industry-leading accounting system integration partnerships along with multiple monetization levers aligned with our customer needs, creating growth opportunities for our team members and driving long-term value creation for our investors.
+
+With that, we look forward to sharing our progress on our next earnings call. You can now close the call.
+
+Operator
+
+The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

AvidXchange Holdings, Inc., Q2 2022.txt

@@ -0,0 +1,399 @@
+AvidXchange Holdings, Inc., Q2 2022 Earnings Call, Aug 03, 2022
+8/3/22
+Operator
+
+Good evening, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. Second Quarter 2021 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange Chief Financial Officer; and Subhaash Kumar, AvidXchange Head of Investor Relations.
+
+Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call.
+
+Also, please note that the company undertakes no duty to update or revise forward-looking statements. Today's call will include the discussion of non-GAAP financial measures as that term is defined in Regulation G, non-GAAP financial measures should not be considered in isolation form -- from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided reconciliation of these non-GAAP financial measures to financial results in accordance with GAAP.
+
+With that, I would now like to turn the conference over to Mike Praeger. Please go ahead.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joe Wilhite and I are excited to discuss AvidXchange's second quarter 2022 results and the continued momentum we are experiencing across our business, driven by our middle market focus in the 4 growth years of our AvidXchange business flywheel that drives our business.
+
+Overall, we once again delivered on another standout quarter of both operational and financial performance. Results came in better than our expectations. This is now the fourth consecutive quarter of over 20% organic revenue growth. These positive results reflect the middle market steady demand for AvidXchange's value proposition of industry-leading and differentiated business-to-business accounts payable automation software and payment solutions that are purpose-built for middle market companies.
+
+Our solid customer transaction retention rate, supported by our middle market spending trend survey that we recently published, provides further validation and highlights why our value proposition takes on even greater significance as our customers look to AvidXchange in assisting them in driving improved productivity and efficiency across their operations as they battle the twin forces of a potentially slowing economy and inflation.
+
+Let me now provide a high-level financial recap of the quarter. We experienced strong revenue performance of over $76 million, which was up over 30% over the same period last year, coupled with increased operational efficiencies, as evidenced by our higher non-GAAP gross margin approaching 64%, which led to a lower adjusted EBITDA loss of just $4.7 million in the quarter.
+
+As a result, we are raising our full year revenue outlook, while lowering our adjusted EBITDA losses relative to our previous guidance by the Q2 outperformance, which Joel will discuss later in today's call.
+
+Let's take a moment to discuss the general business conditions. As we look at our business from the top of funnel perspective, we continue to have good line of sight into the underlying trends based on all the leading indicators we track, opportunities, deal size, close rates, et cetera, relative to our demand engine that generates new buyer and supplier sales opportunities, we are very encouraged by what we are seeing to date, which leaves us cautiously optimistic heading into the second half of this year and beyond.
+
+Specifically, we're seeing broad-based growth in terms of opportunity creation and opportunities closed across the real estate and HOA verticals as well as our horizontal channels. We have not seen any significant changes to deal size or slippage in close rates when measured on key markers of 30, 60 or 90 days. Similarly, onboarding, go-lives and our 90-day certification rates on invoice volume remain essentially right on target. In short, we're highly encouraged by the good visibility we're seeing into the underlying trends driving our business.
+
+Our story on the operational front is one we are also making the right strategic moves with our team doing a nice job of executing our playbook. We're clearly been delivering strong margin performance and cost leverage in Q2. One major milestone achieved was the migration of our infrastructure and hosting from the AvidXchange Private Cloud to Microsoft Azure public cloud. It was an undertaking that kicked off in June 2021. The migration to Azure, which is now complete, is expected to provide us with numerous benefits, including world-class security in conjunction with on-demand scalability.
+
+Across our operational value chain, including invoice intake, payment delivery, customer success, et cetera, we're employing various strategies to drive value realization through workflow standardization, sourcing, digitization and process automation, which; should drive significant medium- and long-term benefits in terms of cost, speed, quality and risk mitigation within our operations. And similarly, we are closely managing our expenses by better leveraging our OpEx spend and experience the early evidence of this in our second quarter 2022 results.
+
+All these efforts provide us with a glide path to continue on our gross margin trajectory, both in the near term and in the long term to achieve adjusted EBITDA breakeven, which we have accelerated and are now projecting for the full calendar year 2024 versus our earlier expectations around exiting 2024.
+
+Now as we've done in the past, I will use the 4 years of our AvidXchange flywheel to provide an update on some of our initiatives and metrics that we are excited to highlight for you. And Gear #1, which is delivering great accounts payable and payment automation software experience to our buyer customers, we announced the launch of our next-generation procurement and purchase order management tools, which also includes a 3-way invoice matching capability in the first quarter of 2022. I'm excited to report back that this offering is already off to a very strong start and is exceeding our expectations.
+
+We launched with a dozen clients in the later part of the second quarter and have already seen close to a threefold increase in our demand pipeline. What is really impressive about the launch is that over 85% of the clients that went live were net new customers, a major validation of the growing number of middle-market customers looking for these type of expense controls to better manage their purchasing.
+
+California-based Avanti Restaurant Solutions is one of the many new early adopter customers who has embraced our PO solution. As a provider of equipment, design and kitchen solutions to the food service industry across the U.S. and Canada, Avanti works with a large network of suppliers who provide everything from metal parts and ice machines to walk-in freezers and the ventilation systems. With multiple job orders being filled, Avanti needed to ensure information and amounts for orders were accurate. With our PO solution, it can now take the purchase order and make sure it matches not only invoice but also matches the payment to the vendor. This has reduced the manual work, saving them time and most importantly, allowed them to focus on what they do best, which is helping their customers build their food service operations.
+
+With customer references such as Avanti, our PO product launch is set to build on an already strong customer close rates with key strategic referral and reseller partners who have also seen increased customer demand for this type of functionality across their middle market customer bases.
+
+Now turning to Gear #2. The combination of delivering a great accounts payable and payment automation experience along with built inside integrations is a positive catalyst for new buyer customer acquisition, which drives new suppliers joining our platform, which in turn maximizes the number of transactions on our platform. It is because of gear #1 and the positive customer experiences we create that we're able to land new buyer customers through our direct sales strategy, which represents around 3/4 of our buyer customer acquisition channel mix.
+
+It is also because of Gear #1 that we're able to build on our already robust referral and reseller partnership ecosystem, further diversifying our efforts to win new buyer customers. An example of this that we've highlighted during our last earnings call was with a major preferred strategic partner agreement in the real estate vertical with ResMan an industry-leading and rapidly growing multifamily real estate property management and accounting system software company with a base of over 700 real estate customers. And this quarter, we're happy to report that KRI, a multistate, multi-location, full-service real estate company based out of Ohio, that uses ResMan's property management software and was exploring accounts payable automation and payment solutions has selected AvidXchange over a competitor's offering as a result of the company's trusted relationship with our business.
+
+As Founder and President, Ken Gee of KRI said, we wanted to go with a premier accounts payable player in the real estate space. And we chose AvidXchange because of the feature set of its offering, deep domain knowledge of our sector and overall industry leadership.
+
+Additionally, in light of our outstanding partnership efforts, I am pleased to announce that in the quarter, we executed several new and notable relationships with key players in the market, including Acumatica, a leading fast-growing horizontal cloud enterprise resource planning, or ERP software provider. Acumatica boasts more than 8,000 customers spanning a large total addressable market base.
+
+Through this partnership, we are positioned well to not only deepen our penetration in existing verticals, but also establish beachheads across other industries that Acumatica serves, which includes high tech, business services, retail and manufacturing companies.
+
+We also announced a referral partnership with member-driven Technologies, or MDT, to extend our leadership position into the credit union vertical market.
+
+Under Gear #3 of our AvidXchange business flywheel, which is focused on maximizing the conversion of paper checks to electronic payments with our suppliers, in the quarter, we grew electronic payments by around 20%, faster than the growth of our overall supplier network. This highlights the power of our 2-sided network and our value proposition around the supplier customers.
+
+I wanted to also underscore how our straight-through process supplier offering, or STP as we call it, effort is progressing. We recently launched our STP offering, and in fact, shortly after the launch, we doubled the number of suppliers on STP.
+
+At the same time, the number of monthly payments and spend facilitated by STP has also doubled. We are working on some big initiatives around STP and look forward to sharing the success of those initiatives with you in the future.
+
+As we said during our last earnings call, STP's scalability and reliability is almost transformational for our suppliers and should serve as a powerful catalyst for further conversion of paper check suppliers to become e-payment acceptors.
+
+And finally, our Gear #4 is leveraging our vast spending and payment data to drive increased value across our networks. The key to driving success here is listening to our customers. From the launch of our AvidPay Network in 2012, to cash flow manager, to invoice accelerator, and most recently with Avid Analytics, the voice of our customer has been an important ingredient in fostering targeted innovation.
+
+We recently held our annual Customer Advisory Board meeting in Charlotte with our most influential customers. Our first in-person CAB meeting since 2019 due to COVID, bringing together customers across our vertical markets, together with senior leadership and our product teams. This is a very important and special occasion for us to have these customers on site as they represent the top decile of our customer base, provide great references and do a nice job of evangelizing the impact of AvidXchange across the middle market and our key verticals.
+
+What we heard during these 2 days is worth sharing with you. These customers were absolutely excited about the launch of our STP offering for virtual card transactions, which allows them a faster and more secure way to pay their suppliers with our various forms of virtual card offerings. Another area was on our product road map, including all the initiatives that we've discussed on this call and in prior calls.
+
+What was particularly powerful and heartening was that so many of our customers view AvidXchange as an extension of their brands within the markets that they serve as we have a value proposition that makes our 2-sided network a powerful force and high-impact solution for both our buyer and supplier customers.
+
+In closing, we delivered another set of solid across-the-board financial results driven by the power of the AvidXchange business flywheel. I want to thank our team members for their hard work and dedication in driving these results. We are a mission and performance-based culture, which enables high employee engagement, retention and focused execution. It is also a reason why we're able to attract talent, and AvidXchange was recently certified by Great Place to Work, which is a global authority on workplace culture, employee experience and leadership behaviors.
+
+Taken together with our solid balance sheet and a large total addressable market exceeding $40 billion just in the U.S. alone, we are excited about our outlook as we exit the year and are well positioned to sustain our operating momentum given the pace of innovation across our platform and the strength of our product suite, as evidenced by the 4 years of our AvidXchange business flywheel.
+
+With that, I'd like to turn the call over to my partner, Joel Wilhite. Joel?
+
+Joel Wilhite
+
+Thanks, Mike, and good evening, everyone. I'm excited to talk to you today about our strong second quarter 2022 financial results, which reflect continued execution of our growth strategies, leading now to 2 consecutive quarters of positively revised 2022 guidance. Overall, we delivered another quarter of solid financial performance. Our second quarter 2022 revenues came in better than our forecast, driven by higher total payment volumes. That, together with better operational efficiencies and lower expenses, contributed to a lower-than-expected adjusted EBITDA loss in the second quarter of 2022.
+
+Total revenue increased by 30.3% to $76.6 million in Q2 over the second quarter of 2021. Organic revenue growth, which excludes the contribution of our FastPay and PayClearly acquisitions, which closed in July 2021 and January 2022, respectively, was 22.4%. Organic growth was primarily driven by the addition of new buyer invoice and payment transactions, which increased e-payments to suppliers.
+
+A quick callout related to FastPay and PayClearly, many of you who are new to the AvidXchange story, particularly those overseas, have asked us how to model these businesses. As a reminder, both FastPay and PayClearly are media advertising books of business but are disproportionately weighted toward both the midterm and presidential election cycles in the U.S. While we are not guiding to 2023 numbers, it's worth noting that 2023 has neither the U.S. midterm nor presidential election benefit. We believe that our transparency on organic revenue growth should better inform you on the strength of the underlying business.
+
+Back to Q2 '22 financial results. Our strong revenue growth also resulted in total transaction yield expanding to $4.42 in the quarter, up 15.1% from $3.84 in Q2 2021. Over half of the increase was associated with mix and payment yield expansion, with the remaining half being inorganic contribution. Software revenues of $24.2 million, which accounted for 31.6% of our total revenue in the quarter, increased 11.8% in Q2 of '22 over Q2 of last year. Software revenues include approximately $100,000 of contribution from FastPay.
+
+The increase in software revenues was driven primarily by the growth in total transactions of roughly 13.2% in the second quarter. Payment revenue of $51.6 million, which accounted for 67.4% of our total revenue in the quarter, increased 41.5% in Q2 of '22 over Q2 of last year. Excluding FastPay and PayClearly, which together contributed $4.5 million in the quarter, organic payment revenue growth was 29%. The increase in payment revenues was driven by the growth in total payment volume of 36% and 30.9%, excluding FastPay and PayClearly.
+
+On a GAAP basis, gross profit of $42.9 million increased by 37.6% in Q2 of '22 over the same period last year, resulting in a 300 basis point improvement in gross margin for the quarter to 56%. Non-GAAP gross margin increased 270 basis points to 63.7% in Q2 of '22 over the same period last year, driven by a combination of increased total transaction yield in the quarter, continued operational efficiencies and the contribution of previously discussed acquisitions.
+
+Moving on to our operating expenses. On a GAAP basis, total operating expenses were $68.8 million, an increase of 33.4% in Q2 of '22 over Q2 of last year, driven by headcount additions to support our growth initiatives, increased expenses and our transition to become a public company and the recognition of noncash stock-based compensation costs. On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 28.9%, or $12 million to $53.4 million in the second quarter of '22 from the comparable period last year.
+
+I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $4.7 million to $19.1 million in Q2 of 2022 over Q2 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and suppliers as well as the consolidation of FastPay and PayClearly results.
+
+Non-GAAP research and development costs increased by $4.5 million to $17.9 million in Q2 of 2022 over Q2 of last year. The increase was due to continued investment in our products and platform along with the inclusion of FastPay and PayClearly.
+
+Non-GAAP general and administrative costs increased by $2.8 million to $16.4 million in Q2 of '22 over Q2 of last year, driven largely by expenses associated with our transition to become a public company, along with the inclusion of FastPay and PayClearly.
+
+Our GAAP net loss was $25.7 million for the quarter versus a GAAP net loss of $22 million in the prior year period, with the comparable increase primarily driven by the recognition of noncash stock-based compensation costs resulting from our transition from a private to a publicly traded company.
+
+On a non-GAAP basis, our net loss in the second quarter of 2022 was $13.7 million, down $1.2 million compared to the year ago quarter on solid organic revenue growth, combined with ongoing operational efficiencies and expense leverage. On a non-GAAP basis, adjusted EBITDA was a loss of $4.7 million in the quarter of 2022 compared to a loss of $5.6 million in Q2 of 2021, due to the aforementioned factors.
+
+Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the quarter with a cash position of $511.1 million, the cash is split between cash and equivalents of $363.3 million, which is in a combination of demand deposit accounts and money market funds. The remaining $147.8 million is in a basket of financial instruments, including treasury bills and commercial paper with a weighted average maturity of roughly 75 days.
+
+The weighted average interest rate on our corporate cash position is roughly 60 basis points. Our outstanding debt balance at quarter end was $127.7 million out of our $133.5 million credit facility.
+
+I'll now move on to our updated full year 2022 guidance. In light of Mike's cautiously optimistic commentary about the opportunities and initiatives we continue to see and execute across our business, we now expect total revenue for the year to be above what we previously provided and in a range of $308 million to $310 million. We are also adjusting our non-GAAP adjusted EBITDA expectations lower to a loss between $27 million and $29 million.
+
+In summary, we delivered strong second quarter 2022 financial and operating results, and our momentum to date is very encouraging, particularly our accelerated path to adjusted EBITDA breakeven.
+
+I'd now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] And our first question today will come from Dave Koning with Baird.
+
+David Koning
+
+Great quarter. And maybe I'll kick it off. And maybe I'll kick it off with just the payment revenue accelerated so much. And just kind of wondering, the yield on volume looked like that really kicked up a lot, too. And maybe can you talk a little bit about just the sustainability of the strong payment growth? And then the yield looked like it was up 2% sequentially. Maybe talk to why that is, too.
+
+Joel Wilhite
+
+Yes. Maybe I'll just start it off. So Dave, I think you're -- on the payment volume, again, 36% overall total payment volume growth in the quarter. Really, a part of the overall 30% growth, we were pleased with that. Again, like Mike said in his remarks, 4 quarters in, beating and raising in a couple of quarters, increasing our expectations for '22.
+
+So yes, part of that obviously is driven by the payment volume growth and yield also slightly better. Again, we've said before, I think we were 1 basis point up. And what we would say is that really is industry-leading monetization overall and really where there's a huge opportunity for us going forward. So we're pleased with 1 basis point out, but really wouldn't read a lot into a basis point plus or minus quarter-to-quarter, but definitely happy with the outcome and a really powerful revenue driver for us.
+
+David Koning
+
+All right. And maybe just a quick follow-up. Just you made a comment about the political spending driving the acquisitions. I think you said acquisition contribution $4.6 million in the quarter. Maybe could you parse out, like how much of that is sort of nonrecurring year-to-year from political, just so we can kind of get a sense of how much of that $4 million to $5 million a quarter kind of goes away in next year?
+
+Joel Wilhite
+
+Yes. So let me answer it this way. So in the first half, I think Q1, Q2 were about $8 million in total inorganic. And we did talk about in my remarks, just sort of managing expectations that FastPay and PayClearly acquisitions results in media books of business, a portion of which is tied to political cycles. Of that $8 million in the first half, about $3 million is associated with political revenue in particular, and we would expect that to tick up in the back half of the year.
+
+Again, the thing that I would sort of add as I wrap up that answer is we're -- this is a new business for us, and we're kind of getting -- being careful and sort of prudent in how we manage expectations around the political cycle. This will be the first one owning the FastPay and PayClearly business. But hopefully, that gives you a little bit of color.
+
+Operator
+
+And our next question will come from Ramsey El-Assal with Barclays.
+
+Ramsey El-Assal
+
+I wanted to ask about gross margin. It came in quite a bit better than our model. I think you might have mentioned operational efficiencies as a driver in your prepared remarks, Mike. But can you comment on whether there were any sort of onetime items in there? Or that's the level we should kind of use as the baseline from here?
+
+Joel Wilhite
+
+Yes. Maybe let me just make a comment. Again, we've pointed to gross margin as just a really important metric that we see moving over time on our path to EBITDA breakeven. We did kind of exceed our own expectations. Again, one of the things that I would point to, we've talked about being really focused on those operational efficiencies and really focused on those unit costs.
+
+We also were clear, as we entered the year, that we had a really important data center migration to make, which we successfully completed, and really, really happy to see that in the rearview mirror and ended up with just de minimis kind of duplicative costs that we thought we might incur. And so a little bit of upside there. But we're pleased with the margin result and feel like we're well on our way to our path to that 70% ZIP code at the breakeven point.
+
+Operator
+
+And our next question will come from Andrew Bauch with SMBC Nikko.
+
+Andrew Bauch
+
+Just wanted to touch upon the comments around EBITDA and the outperformance in the quarter. I mean how much of what you beat relative to the Street expectations were things that are sustainable for the longer term? And if I heard you correctly, I think you said that you would be turning EBITDA positive sooner than we originally anticipated. Is that in part due to the outperformance in gross margin? Because I know a lot of that stuff falls to the bottom line.
+
+Joel Wilhite
+
+Yes. So let me just kind of -- I think I'm tracking, but let me just orient back to kind of the last time we spoke about our path to profitability. We talked about exit '24 in the first quarter. And what we've done is revise that now to be the full year calendar 2024 year. And remember, we described that the way we would get there would be really across all the sort of revenue and expense line. So continuing to grow revenue, expand that yield on revenue and then as well seeing gross margin expansion between where we are now in the sort of mid- to low 60s on the way to that 70% ZIP code.
+
+I think we also talked about seeing scale in the G&A line, followed by kind of R&D. And what I would say is that we're continuing to focus on the investments that we're making in the business for growth, all around the flywheel, both for buyers and suppliers, but we're also really focused on expense discipline and just being careful there. And so we're certainly seeing the benefit of that flow through to EBITDA, it gives us confidence in that breakeven guidance that we revised forward.
+
+Michael Praeger
+
+Yes, Andrew, this is Mike. To pick up on what Joel said is I'd say, there's certainly a renewed mindset that we're having in the current environment related to just raising the bar related to our ROI and every investment that we're making, being laser-focused on those initiatives that matter in terms of our growth levers for the future and as well as on the people side to make sure we're prioritizing those important people to drive our business.
+
+Operator
+
+And our next question will come from Will Nance with Goldman Sachs.
+
+William Nance
+
+Like you're growing the top line at 30%, Mike, I know you've talked about closer to 20% longer term. A lot of that is coming from payments. And it seems to be kind of rate and monetization and payment volume rather than kind of core customer growth. So just wondering, when you talk about sustaining the operational momentum that you guys have, to what -- how much room is there to go? What kind of gives you the confidence to say you can kind of sustain at more elevated levels? And should we think about something like 30% as more reasonable in the near term?
+
+Michael Praeger
+
+Yes. So Joe, yes, I think I'll provide maybe a little context to the kind of inorganic versus organic kind of growth rates. But what I would say is that we're really seeing the kind of the early stages of the flywheel really working. And it starts by the retention numbers that we have related to retaining those transactions on the network, and then it goes to the new customer, buyer customer adds. And that's where we're seeing some really encouraging top of funnel activity, probably the strongest top of funnel since 2019.
+
+And then the third element is that conversion, right, from paper check to electronic. And we had an all-time record quarter this past quarter in terms of new monetized suppliers that we added to the network. And then kind of the fourth year is around how we continue to monetize these transactions through our invoice accelerator offering, which is still at its very early stages.
+
+So when you look at kind of our flywheel, I would say that we have lots of room in all 4 gears of our flywheel and really highlighted by still that big opportunity of 55% of our payment transactions are still paper check and the opportunity to convert those to electronic. And then certainly, invoice accelerators is at still kind of start-up stage anxious to get out of the garage. And we're excited to really see that offering take hold next year and into the future.
+
+William Nance
+
+Got it. Super helpful. And just on the last one on payment monetization, I was wondering if you could give us kind of an update of what the penetration rates look like for virtual card and AvidPay Direct in the payment volume in the quarter?
+
+Michael Praeger
+
+Yes. I think we're still consistent that we're monetizing about 40% of the transactions that go through the network. Roughly 2/3 of those are through virtual card, about 1/3 through our AvidPay Direct offering. And I would say, that's consistent. We are seeing some growth there, but also we continue to add a large number of new buyer customers, which bring suppliers with them. So we continue to add to the backlog of paper check suppliers with every new buyer that we add. But as I indicated, I think in one of the prior questions, we had an all-time record quarter related to suppliers being added to the network in terms of monetized suppliers being both virtual card and AvidPay Direct.
+
+Operator
+
+And our next question will come from Bryan Keane with Deutsche Bank.
+
+Bryan Keane
+
+I just had kind of 2 clarifications. I know the software revenue growth slowed a little bit from last quarter. And then secondly, on the adjusted EBITDA beat, it was well above expectations at $4.6 million loss. If I just multiply that by 4, you're going to get to about a $19 million loss for the year. You guys are still guiding $27 million to $29 million loss, so is there some cadence in there that there would be -- we wouldn't stay on the same trajectory that maybe the loss would be greater in the second quarter? Or just trying to figure out the cadence of that.
+
+Joel Wilhite
+
+Yes. Thanks, Bryan. Let me take your questions in sort of reverse order. So just on the EBITDA, again, we were sub-$5 million EBITDA loss on $76 million. That was -- we were really pleased with that outcome and feel like that's the result of -- we're continuing to expand the transaction yield. We're continuing to take sort of unit cost out and just being super disciplined while also investing all around the flywheel.
+
+I think what I would say is in the guide relative to the math you're doing, one thing to keep in mind is we are meaningfully ahead, both top and bottom line, relative to kind of some incentive structure. So baked into the back half of the year guide, there's separately in box associated with getting that accrual squared away. And otherwise, we do have that kind of political book of business. We're being cautious about kind of how we think about the back half, but otherwise, well on our way to that path to EBITDA breakeven.
+
+Maybe the first question you asked was kind of software revenue growth. Again, we're pleased with the outcome, 30% overall revenue growth year-over-year. I wouldn't read a lot into the sort of quarter-to-quarter sequential movement, some variability based on kind of non-usage software revenue, remember, in a couple of our acquisitions. And then there's potentially some channel mix at play there as well, where, for example, some really big opportunities we have through the bank channel and otherwise. There is a sort of a per unit rate arbitrage there. So pleased with the overall result. I feel like we're really on track. Again, Mike talked about the strength of the top of funnel coming back since pre-COVID, so excited about the results and confident in the guidance.
+
+Operator
+
+And our next question will come from Brad Sills with Bank of America.
+
+Bradley Sills
+
+Just one clarification and then just one question on the business. What was the organic TPV growth rate this quarter and last quarter? I think you said 29% organic this quarter if I heard right. Curious what that was last quarter? And then my real question is just on the resilience of TPV heading into the macro slowdown, what are the puts and takes we should be thinking about of just customer spend volume as we go through some choppy quarters ahead?
+
+Joel Wilhite
+
+Okay. Got you. So let me take a crack at your first couple, and then maybe Mike will double team it with me here. So I think your question leading off was the organic, either TPV or transaction growth. I can give you the...
+
+Bradley Sills
+
+TPV.
+
+Joel Wilhite
+
+For this quarter, yes, it's about 30.9%. So right at 31% of that 36% is purely organic. I think you also asked for the -- what was it, last quarter?
+
+Bradley Sills
+
+Last quarter, yes.
+
+Joel Wilhite
+
+Maybe we'll get to that while I pull it up. Maybe, Mike, do you want to take the second question?
+
+Michael Praeger
+
+Yes. So the second one really is around kind of what I'd say, the resiliency, right, of continued results, perhaps heading into more kind of choppier economic times. And obviously, this is something that we continue to look really closely at. We recently released our middle market spend report, which is designed to sit at and make public trends that we're seeing. And I would say that consistently with -- across the middle market, we're seeing pretty healthy dynamics. Typically, the middle market has been more resilient than, say, the small business segment. And we typically see 80% plus of our customers grow with us each year.
+
+I think if you would ask, in the choppier times, where will we see kind of tailwinds as maybe -- as well as headwinds. And I think in the past, when were a software company, again, this is our first economic cycle with the payment network down the cycle of the payment network. But as a software company, we actually benefited in recessionary times from an increased demand for automation of their AP and payment processes. And we believe that we will also see an acceleration of supplier adoption in terms of that conversion from check to electronic payments, mainly because small business suppliers want to get paid faster.
+
+On the headwinds, I think where we would see potential headwinds first would be on payment volume and average payment sizes. Again, historically, as a software company, we've seen a relative consistent invoice volumes in past cycles. But we do have the benefit of having some great leading indicators, and that's on our purchase order and invoice volumes, which typically become payments in 30 to 60 days. So we have some great leading indicators to give a kind of advanced insight if we should see some headwinds facing the business, which today, we have not seen any today.
+
+Joel Wilhite
+
+And Brad, just to circle back on the Q1 organic TPV growth, that was 35.6% of our 40.5% last quarter.
+
+Operator
+
+And our next question will come from Brent Bracelin with Piper Sandler.
+
+Brent Bracelin
+
+Mike, trying to square the feedback from the Customer Advisory Board where you talked about virtual cards kind of standing out to them, particularly given just the overall mix of check is still very high. So I guess 2-part question. One, was the yield tailwind this quarter primarily driven by mix shift to virtual cards? And then 2, part 2, what's stimulating interest now in virtual cards in some of those customer conversations you had? And are there near-term catalysts that could accelerate and create a further tailwind on the yield side?
+
+Michael Praeger
+
+Yes. So maybe kind of the first part of your question, did we see kind of an increase in kind of virtual card acceptance. I would say that there's nothing that stands out as being a kind of an anomaly. It's been pretty consistent. In fact, our AvidPay Direct payment offering continues to be kind of the highest growth payment modality we have. but virtual card is continues to be really strong.
+
+The interest on the Customer Advisory Board is interesting one, and that is up until the release of our STP or straight-through processing offering to suppliers, we didn't really have any tools to give the supplier to make their life easier. It was mainly AvidXchange and our buyer customers trying to advocate and evangelize to the suppliers that it's a smart thing for them to take card, they get paid faster and it'd be the preference of the buyer.
+
+But other than the ask, there wasn't any tools that they could actually use to mid their light easier. With straight-through processing now for the first time, we actually can do a tool that they can take the labor out of the supplier side of the equation. They don't have to do double or triple data entry, and they can see the funds flow directly through their merchant account or into their merchant account and the data flow as well right into their either billing or their accounting system.
+
+So I think the exciting part is, is now, there's actually a value proposition, an increased value proposition that we can provide to that supplier and actually make the suppliers' life easier rather than just continue to elegantly ask them to take a virtual card payment from us.
+
+Brent Bracelin
+
+Got it. So it sounds like some of those new features are starting to resonate, both on the buyer and supplier side.
+
+Michael Praeger
+
+Yes.
+
+Operator
+
+Our next question will come from James Faucette with Morgan Stanley.
+
+Sandy Beatty
+
+This is Sandy on for James. Just a high-level question to start. Where do you most differentiate your product versus competition? So is that software-related, payments-related size of the network? How are you thinking about that? And I guess, the natural follow-on, are there any groups in particular that you've been seeing competitively in recent months or recent quarters that are worth calling out?
+
+Michael Praeger
+
+Yes. So I love this question. So this might be a gold star question. So first of all, related to the competitive landscape where we differentiate ourselves, it's clearly in 2 areas. One is around our software being purpose-built for middle-market companies, specifically with the vertical flavor and nuance that's required in the 8 verticals that we're in today. And for somebody that has a horizontal solution, they cannot very effectively compete just from a software business process standpoint within 8 verticals that we're in. So we're very nuanced and kind of purpose-built helping those companies that are in those 8 different verticals.
+
+The second kind of piece of it is the payment network. We're -- our secret sauce is that we get industry-leading monetization and conversion rates. There's no one else that we see that's anywhere close to monetizing 40% of the payment transactions that they have. And that's really been our secret sauce for a long time and really drives kind of our competitive advantage within the marketplace when we do compete.
+
+And so I'd say it continues to be kind of the software feature set that's very purpose-built for the middle market and specifically the verticals combined with the payment network.
+
+Related to competition, that landscape really hasn't changed in a long time. It continues to be the #1 competitor we have is the status quo paper-based process. Still today, 95% plus of our new buyer customers are doing this for the first time. And they move from paper process to electronic. And so that's our #1 competitor.
+
+And I would say related to other kind of third-party companies, maybe if anything, the competition side has gotten better from the standpoint of -- with some recent acquisitions, like a MineralTree as an example, we've seen them leave our core middle market and what we believe is moving to more of the upper small business market. But we don't see them within our core market like we used to. And we really haven't seen any new entrants in a very long time within the middle market.
+
+Sandy Beatty
+
+Got it. And then just a quick follow-on. Balancing margin expansion and then obviously a solid organic growth trajectory, can you just give us a sense as to how you're thinking about the trade-offs between profitability and then internal investments, how you're thinking about that? And then maybe anything attractive to call out or that comes to mind just on investments internally and what you've been looking at?
+
+Michael Praeger
+
+Yes. So I mean I would say the theme is around efficient growth, and that is how do we continue to grow as efficiently as we can, which I think you're seeing playing out in the numbers with the accelerated -- both gross margin and overall EBITDA margin. And while we're doing that, we're making -- continue to make very focused investments in the key growth levers that we feel are really going to continue our growth into the future in areas like Invoice Accelerator.
+
+Our integrations platform to continue to accelerate a number of new integrations that we're delivering every quarter. And then continue to expand our payment platform capabilities in terms of payment modalities, how we deliver data, being able to execute offerings like straight-through process.
+
+So those are the areas that we continue to be laser-focused and investing in. So very targeted investments in innovation that's led by voice of customer. And I think that overall led to what I call a more efficient kind of way to grow the business and efficient growth for us.
+
+Operator
+
+And our next question will come from Darrin Peller with Wolfe Research.
+
+Darrin Peller
+
+Nice job on the quarter. I just want to maybe revisit, I know it's been discussed, but if you can just touch a little more on the macro themes again. Just any comment on behavior, desire to spend you're seeing, changing insights on transactions or volumes per customer during the quarter. And then if you can give us any update on what you're seeing so far in July or what you saw in July versus June from a behavioral perspective that...
+
+Michael Praeger
+
+Yes. So Darrin, it's almost like you're sitting here inside the business with us because we're looking at the same things and asking the same questions that you just asked. And what I would say is starting with -- there's 2 things that we look at in the business. One is what are all the kind of transactional trends, both on invoice as well as on payments and what does that look like. And I would say that continues to look really healthy, and we haven't seen any either leading indications or any existing trends that point to any erosion of the volumes that we have.
+
+And the second piece that we look at is kind of what I'd say the leading indicators, and that is top of funnel activity and sales activity. And that's the part that's actually the most encouraging is our top of funnel activity is the best it's been since pre-COVID, since 2019. And not a big surprise, but certain kind of channels like our trade show, user conference channels have all come back, raging back with big demand. There's a lot of pent-up energy from CFOs that have not yet invested in these automation initiatives and have been sitting in the sidelines for the last 2 years or COVID. And now they're feeling like they're kind of behind and they're trying to get caught up.
+
+And then the second one is around the VAR reseller channel. In the last year, we went from $120 million to $180 million new VAR reseller partners. And during COVID, I would say that channel overall, their #1 focus was just retaining their customer. They weren't putting a lot of energy in trying to sell net new things through the VAR channel. They were just trying to retain a customer. And now that we're coming out the other side, they're laser focused on how they can now sell more solutions to their customers. And so we're seeing that channel really perform well.
+
+And so those are some examples of the top of funnel activity that's maybe more of a middle market nuance, trends that we're seeing. And it's relating to the sales activity is following the top of funnel activity that we're seeing.
+
+And so maybe, I don't know, Joel, do you have any other flavor that you would add for Darrin?
+
+Joel Wilhite
+
+I mean I think you said we look at 2 things. We look at lots and lots of things, and everything that we're seeing suggests that no kind of headwinds at the moment. We're cautiously optimistic, I think, and being watchful of what might be ahead of us, but so far, so good.
+
+Darrin Peller
+
+Guys, I may have missed it before, but I didn't hear if you commented on the progress of Invoice Accelerator. If you don't mind, just a quick update there.
+
+Michael Praeger
+
+Yes. I said we continue to -- the message is the same as it really has been for last quarter that we're currently operating with we call Invoice Accelerator 1.0, and we're in development with our 2 dot -- our next-generation 2.0 Invoice Accelerator offering, which were targeted to have out in the market sometime early next year and really believe that will allow us then to really kind of open up our -- more of our supplier base to that offering. And if you ask me today if -- where we are excitement wise, we're just as excited or even more excited in terms of the future of that product.
+
+Operator
+
+And our next question will come from Tim Chiodo with Credit Suisse.
+
+Timothy Chiodo
+
+I want to touch real quickly on AvidPay Network cross-border capabilities. So I want to talk a little bit about the portion of your customers' payables that you think are addressable. Is it sort of in the mid- to high single digits of volumes? And then if you could just add a little bit of context or recapping the monetization there, whether it's transaction fees, basis points, FX conversion fees, et cetera.
+
+Michael Praeger
+
+Yes. So good question, like the prior question with Darrin. You asked about Invoice Accelerator. It's a very similar answer to our cross-border offering, except this is one that is going to be released this year. And so during the second half of the year, you're going to see some announcements from us that we're super excited about.
+
+The one thing I will caution you with is, it's not like we're sitting on a pile of cross-border transactions today with our customers that we're not monetizing. Tim, if you look at across our 8 different vertical markets, they're not really markets that lend themselves to cross-border international payments. But where we see the opportunity is in opportunities that we're currently opting out of because we don't have a good product fit. And that's more in the horizontal market, working with the NetSuite channel, Microsoft Dynamics, the Sage Intacct as good examples where we believe that we're going to be able to compete very successfully in many more, both customer opportunities as well as get pulled into different new verticals that we historically have not yet been focused on.
+
+And that's really a combination of not only the cross-border product. But when you combine the cross-border product with our advanced purchase order and procurement tools that we released last quarter, it really becomes a powerful tool to move into different verticals that maybe lend themselves to more international, like manufacturing as an example. And so we're really excited about what it's going to do in terms of the new customer acquisition, where the real opportunity is versus monetizing existing comp-store transactions.
+
+Timothy Chiodo
+
+Excellent. And then in terms of the mechanic there in terms of the FX conversion fees or transaction fees or basis points, any context you could provide there?
+
+Michael Praeger
+
+We have not yet announced kind of the pricing structure with our customers, but I would say it's going to be fairly consistent with how others in the industry are doing it.
+
+Operator
+
+And our next question will come from Josh Beck with KeyBanc.
+
+Josh Beck
+
+Yes, I wanted to ask a little bit about this next-generation procurement PO management product that you got out in the market. It sounds like the reception has been good. I guess one of the things that stood out to me, as you mentioned, 85% of the adoption was net new. So was there anything in particular driving the net new interest, if there was maybe a feature that they were looking for and it addressed very squarely? Just what was behind that?
+
+Michael Praeger
+
+Yes. So what I would say, I think there was historically kind of a pool of customers who really wanted to work with AvidXchange because of our payment network and payment monetization capabilities and certainly like the aspect of the payment network along with our AP automation feature set, but they had a purchase order procurement requirement, of which we didn't have or we didn't have one that met their needs.
+
+And so I think, kind of going back to that group of customers who basically said, AvidXchange, we'd love to work with you if you had the right feature set that supports our business. And we're able to go back to them now and really check the box with that purchase order procurement feature set that they need to run their business. And then the rest of our feature set was really gravy for them. And so I think that's a good example where there's been a part of the market and customers we go to who not yet have really adopted solutions because they're waiting on the right feature set before they adopt.
+
+Josh Beck
+
+Good to hear. And I just wanted to kind of approach the macro question as well. Obviously, you've touched a little bit on some of the broader trends that you're seeing. We've talked about a few of the verticals. I'm kind of curious within real estate, obviously, that's a broad term, and I think you have some pretty diverse exposure there across construction, HOA. Just help us think through what type of exposure you have there? And what type of trends do your customers may be seeing?
+
+Michael Praeger
+
+Yes. So what's interesting is when we looking at kind of the top kind of 3 areas that we're seeing the greatest top of funnel growth in, it's real estate, it's our HOA and our construction and then our horizontal market. And so what's interesting about that, our top 4 areas of growth and top of funnel, it includes both real estate and construction.
+
+When you peel back real estate, it's interesting because it's a segment that's really made up of lots of subsegments. And so within the real estate, we're seeing multifamily, multifamily housing and industrial and actually retail performing extremely well. And the one segment that currently is not performing as well is commercial office. Not a big surprise. But it's a great example of our diversity that we have across our customer base because not only do we have 8 different overall verticals, but even within the real estate vertical, the vertical itself is way up over last year because of diversity within the vertical. And so I think that's a good example.
+
+Construction is also an interesting one from the standpoint of that there is -- again, we're looking at top of funnel new construction companies looking to automate their process. And I think they're looking at it and saying, hey, as we move into more choppier waters, what do we need to do to become more efficient and to run our business better. And the same thing there with our new titanium offering that we have within construction, we're seeing really growth trajectory that's exceeding our expectations.
+
+Operator
+
+And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mike Praeger for any closing remarks.
+
+Michael Praeger
+
+Yes. So this is -- I appreciate the time that everyone took today and certainly want to thank everybody. We are, as you can see, super passionate about helping our middle market customers every day, and we're excited to have the momentum that we see so far, and looking forward to talking to you next quarter about our continued progress in executing the year. And so with that, operator, you can end the call. Thank you, everybody.
+
+Operator
+
+The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

AvidXchange Holdings, Inc., Q2 2024.txt

@@ -0,0 +1,359 @@
+AvidXchange Holdings, Inc., Q2 2024 Earnings Call, Jul 31, 2024
+7/31/24
+Operator
+
+Good morning, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. Second Quarter 2024 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer, and Subhaash Kumar, AvidXchange's Head of Investor Relations.
+
+Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook, and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise forward-looking statements.
+
+Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.
+
+With that, I will now turn the call over to Mike Praeger.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joel Wilhite and I are excited to discuss AvidXchange's second quarter 2024 results. This particular quarter marks a milestone as we achieved our first-ever GAAP net income ahead of our third anniversary as a publicly-traded company, while already having delivered 4 quarters of positive free cash flow.
+
+Just as we accelerated our path to adjusted EBITDA breakeven and profitability meaningfully ahead of our expectations, we have now delivered GAAP and non-GAAP net income profitability in short order, highlighting the speed of our execution, the power of our new innovation delivery, our growing value proposition for both buyers and suppliers, along with the strength of our AvidXchange culture that has fueled our success and has been a key factor in attracting and retaining the critical talent required to execute our dynamic business.
+
+Without a doubt, the choppy macroeconomic backdrop continues to test us all. It has created near-term volume headwinds driven by reductions in discretionary spending across the middle market, impacting to some degree all of our various vertical and horizontal channels. However, we remain focused on capitalizing on the current environment by leveraging our financial strength to advance our new AI-based customer and internal-facing product offerings, executing continuous unit cost improvements, and operating leverage, as well as enhancing customer growth across our addressable market of middle market buyers and their suppliers.
+
+We believe we are still in the very early innings in the drive to digitally transform what is still today, for the majority of middle market companies, a highly manual, paper-intensive, and inefficient back-office procure-to-pay process. With over 2 decades of institutional knowledge, building features and domain functionality around our AP automation and payment network, no one better than AvidXchange appreciates the opportunity and the dynamic business processes inherent to middle market companies, which are complex, unlike the small business market, and unique across the various middle market industry verticals, unlike the enterprise segment.
+
+Our purpose-built value proposition, which has leveraged that institutional knowledge and has increasingly embedded artificial intelligence throughout the product development lifecycle, from our frontend intelligent invoice capture functionality to our backend payment execution capabilities and all the workflows in between, is extending our lead and strengthening our competitive position across our differentiated 2-sided buyer and supplier network. As such, we believe we are well-positioned through our investments to advance our future growth and fuel our profit potential by delivering rapid, material, and quantifiable value in both current cost efficiency and future scalability of our customers' back-office transformational initiatives.
+
+NAI Earle Furman is one of the many such customer success stories that highlight the power of our transformational value proposition. As a middle market commercial real estate brokerage and property management firm based in Greenville, South Carolina, NAI Earle Furman has been in business for over 30 years with multiple regional offices in upstate South Carolina and North Carolina's Piedmont Triad area, as well as partners worldwide. Having grown through acquisitions, the company's back-office processes around accounts payable and payment became very cumbersome and paper-intensive. Specifically, before automation, controller Robbie Smith's team would print out invoices and create separate books of invoice-supporting document information for each property manager to review, assign the proper accounting codes, and approve with a signature. That book would then go back to the AP team, who would then manually [ data and/or encode ] the invoices into their MRI accounting software, before cutting checks for the approved invoices and completing the PO matching process.
+
+Since automation, Smith's team has seen a step-function change in its invoice and payment processes with MRI Vendor Pay powered by AvidXchange. As Mr. Smith put it, "It is like night and day. Our old process took a week or so, now the whole process is completed in less than 2 days." This type of productivity transformation of NAI's invoice-to-pay underscores the power of our value proposition.
+
+Shifting our focus to our financial scorecard. We delivered healthy financial results while navigating an ongoing macro choppiness. The overriding theme impacting results for this past quarter was our focus on disciplined execution of our business in 3 areas. First, beginning with our sales and marketing prioritized go-to-market strategies and focusing on our highest yielding channels. Second, is our positive gross margin expansion driven by our automation aided by the impact of AI and continue to reduce our invoice and payment unit costs. And finally, third, is our continued overall operating expense rigor combined with the ROI decision-making process across every functional business group.
+
+Joel will go into more detail later in today's call, but here are some of our second quarter highlights. Revenue growth in the quarter was over $105 million, up over 15% year-over-year. The growth in the quarter was led by a combination of transactional volume and transactional yield growth. Non-GAAP gross margins, meanwhile, continue their upward trajectory, coming in at 72.6%, or up 430 basis points and crossing the lower band of our 72% to 75% non-GAAP gross margin target ahead of our 2025 gross margin expectations that we set over a year ago during our Investor Day. Our initiatives around automation, artificial intelligence, sourcing, and standardization, which are still somewhat in the early stages, continue to bear fruit. Along with solid operating expense discipline, our adjusted EBITDA margin in the quarter was 16.6%. Transactional yield, meanwhile, which is a metric that we focus on across our leadership team, as it demonstrates the power and effectiveness of our AvidXchange Business Flywheel was up more than 10% to reach $5.33 per transaction.
+
+With that overview, on today's call, I'm excited to cover 3 topics that will shed insights into our various initiatives that will drive our future growth and margin expansion. First, our top-of-funnel activity and other key sales metrics, which provides insights into the sales setup for 2025. Second, discussing 2 new strategic software integration partnerships, which will further drive both Gears 1, 2, and 3 of our AvidXchange Business Flywheel. And third, highlight innovation around strategies to automate the execution of electronic payments.
+
+Starting with our customer obsession metrics, I wanted to update you on our top-of-funnel and other underlying indicators driving our go-to-market motion. For the 6 months ended June 2024, the overall top-of-funnel was down around 4% compared to the same period last year. However, various key underlying indicators improved, which adds a nice plot twist to the top-of-funnel narrative and highlights our strong sales execution against a choppy macro backdrop.
+
+Before I discuss those, I'd like to call out areas of strength and weakness within the top-of-funnel. On the positive side, we saw our real estate, media, education, and not-for-profit verticals, which comprise almost half of our new opportunities, grow anywhere from high-single to mid-double digits on a comparable basis. HOA, construction, financial services, meanwhile, were down high double digits. The net decrease in our top-of-funnel was largely due to a more targeted approach we called out last quarter around our go-to-market motion, in addition to increasing our investment and focus on our various partner channels to drive new highly qualified sales opportunities versus a historically larger focus on electronic demand-gen programs, which we have seen softening over the last quarter and producing less qualified opportunities.
+
+As I referenced earlier, amid these puts and takes in our top-of-funnel, there have been some promising trends in other sales-related indicators that are trending positive year-to-date with the potential to continue for the remainder of this year. First, sales cycle time on average for the 6 months of 2024 versus 2023 on a comparable basis shortened by roughly 1/3. Second, close rates for the 6 months ended June 2024 on a comparable basis remain strong. Both sales cycle time and close rates reflect a higher quality pipeline with interest levels that are actionable, which are the fruits of our more disciplined and targeted go-to-market motion. And finally, our buyer-customer new logo customer count, a metric we furnish annually for the 6 months of 2024 outpaced levels comparable for 2023, leaving us optimistic on the potential for higher net new logo adds for 2024 relative to 2023.
+
+Now I'd like to talk about the 4 Gears of our Business Flywheel. We recently signed some notable new integration partnerships, which advanced Gears 1, 2, and 3 of our AvidXchange Business Flywheel. Starting with the real estate vertical, we deepened our competitive advantage further with Buildium. This AP integration partnership with Buildium extends our relationship with RealPage, one of our biggest ERP partners. As a cloud-based property management software company, Buildium targets various verticals such as condo association management and real estate, including sub-verticals such as multifamily, student housing, affordable housing, et cetera. With approximately 15,000 customers, roughly 3,500 of which are in our product fit sweet spot. What is just as significant about the Buildium partnership is that we leverage generative AI in building out the integrations. As a result, we are not only able to compress development cycle times by 30% to around 2 months, we believe that the end user experience will prove to be substantially better given that we're able to train the AI inherent within our existing library of integrations to simulate pain points and test various use cases, including [ edge ] cases that deliver the best user experience.
+
+This referral partnership, which is slated to go live in the third quarter of 2024, initially starts out with our AP automation invoice solutions. Additionally, it also represents a significant payments opportunity by potentially adding billions of new payment volume, driving the third gear of our AvidXchange Business Flywheel, which is the monetization of payment transactions and eliminating paper checks. We believe this partnership highlights not only the large total addressable market, but also how much runway for growth that still exists in just the real estate vertical alone, the initial vertical segment that we launched our business in, in 2000, and where, as the industry leader, our penetration rate is still in the single digits.
+
+Another ERP partnership of note showcases our first invoice solution for the media vertical under Gears 1 and 2 of the Flywheel. This integration highlights how we are extending our strategic advantage and success in media-related payments within the media vertical, which we launched through the FastPay acquisition into media AP automation. This AP automation solution leverages our existing tech stack and is built on our cloud invoice automation platform. Our target customer profiles are agencies that process several hundred invoices per month, and the first integration partners we have identified to go live with is Workamajig. Founded more than 3 decades ago, Workamajig is a leader in the project management software that [ they ] design specifically for marketing teams and creative agencies. Spanning a portfolio of over 3,500 customers, Workamajig is a dominant leader in the marketplace targeting those traditional agencies.
+
+Through our invoice automation solution, Workamajig's customers will be able to digitally transform their AP workflow with our robust end-to-end capabilities. These range from our AI-centric invoice ingestion in the frontend to intelligent workflow routing and approval engine to resolve invoice discrepancies, as well as leverage our broad payment modalities in our media payment network on the backend. This integration partnership went live and became generally available in the second quarter. Our end-to-end invoice and payment solutions we believe not only differentiate our market positioning, but also solidify our advantage in selling our payment platform to these targeted media agencies.
+
+Turning now to our operations. We continue to make strides on our automation initiatives by leveraging artificial intelligence as a way to further optimize existing automation processes with human agents in the loop. One area in which our success is very tangible and serves as an early win is around payment automation of virtual card payments. To name just one of many lanes of process automation initiatives we've embarked on. This is important as we position ourselves to deliver on our near-term gross margin target of 75% and set our sights on our long-term margin exceeding 75%, as outlined during our 2023 Investor Day. The latest initiative around payment automation is executing virtual card payments through online portals.
+
+There are 6 ways which we execute virtual card payments today for our suppliers. By a straight through process, direct API connections, online portals, IVR systems, email, and over the phone. Just as with email, where virtual card information is sent automatically to a supplier when a payment is created, there are many supplier customers such as plumbers, roofers, landscapers, et cetera, that have stood up online payment portals through their relationship with various merchant acquirers or third-party website developers to take in these payments. The challenge has been to automate the delivery and application of these virtual card payments to numerous supplier-specific online portals at scale, given the explosion of these online portals along with unique user interfaces that are costly and labor-intensive to scale. Currently we are doing over 1 million of these online portal payments, approximately 80% of which executed through humans and the remainder being RPA bots.
+
+We believe we're at a tipping point where we could transform this process through artificial intelligence and deliver virtually all these online payments without manual intervention, taking our current levels of overall electronic payment automation of around 85% today to well over 90%. What this should enable is not only lower unit costs, as we lower head count growth and lower overall software license fees, but better leverage around future costs as we grow our business, driving gross margins. But equally impactful, we believe, is the control, visibility, and certainty over virtual card payment execution this provides as we test this capability through the remainder of this year and look to scale it further in 2025.
+
+In closing, we are proud to deliver our first-ever GAAP net income profitability driven by our continued gross margin expansion along with disciplined execution across the operations of our business. However, we are even more excited about the future. We believe the innovation investments we have made across our product portfolio, coupled with the large and marquee integration partnerships we have executed, position us well to accelerate our growth, build on our margin expansion momentum, and achieve our Rule of 40 objective in 2025 and our Rule of 50 plus targeted by 2028. We recognize the choppy macro backdrop and believe the upcoming election certainly is not helping in the near term. However, those too shall pass as we work towards a significant long-term growth opportunity in front of us across the middle market.
+
+Furthermore, while overall top-of-funnel saw some softness, some of which was a function of our long-term strategic trade-offs, our stronger buyer-customer logo cadence year-to-date 2024, compared to the same time frame last year, leaves us encouraged around the sales and revenue trends for 2025. Meanwhile, we remain laser focused on our operational rigor and execution, controlling those elements of our business model that we can directly control, as evidenced by our ongoing unit cost reduction and operating leverage. Furthermore, with our new payment platform, Payment Accelerator 2.0 and our spend management offerings being sequenced for rollout over the next 6 to 18 months, as our new accounting system and ERP partnerships begin to gain traction, we believe we're set up for a nice growth trajectory for 2025 and beyond as we strive for a strong close in 2024.
+
+I want to provide a special thanks to all of our AvidX team members for their hard work, dedication, and relentless focus on executing our operational and strategic priorities that drive value for our customers, create scope for their professional growth, and unlock significant long-term value for our shareholders.
+
+With that, I'd like to turn the call over to my partner, Joel Wilhite.
+
+Joel Wilhite
+
+Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our second quarter 2024 financial results, which reflect disciplined execution of our growth strategies amid continued macro choppiness. Overall, we delivered another quarter of healthy year-over-year financial performance across the board. I will expand on that in a moment, but let's see how we tracked relative to implied expectations.
+
+Relative to the implied second quarter 2024 business outlook and excluding the float and political revenue contribution, revenues came in a touch below our expectations with slightly better total transaction volume, tempered by slightly lower transaction yield. Gross margin performance remained strong due largely to ongoing progress on unit cost initiatives, coupled with software yield expansion. Coupling that with sustained operating expense leverage, we drove significant adjusted EBITDA outperformance relative to expectations. It's worth pointing out that this continues our streak of delivering adjusted EBITDA profit expansion, excluding float and even political contribution. Most notably, as Mike mentioned, we achieved a significant milestone as we delivered our first ever GAAP net income since going public in 2021.
+
+Now turning to year-over-year results. Total revenue increased by 15.3% to $105.1 million in Q2 of 2024 over the second quarter of 2023. Most of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, coupled with software and pay yield expansion. The remaining revenue growth for this quarter was driven by higher year-over-year float and political revenues. Our strong revenue growth also resulted in total transaction yield expanding to $5.33 in the quarter, up 10.1% from $4.84 in Q2 2023. Most of the increase was driven by pay and software yield, coupled with transaction mix skewed toward payments, with the remainder due to float and political revenues.
+
+Software revenue of $29.9 million, which accounted for 28.5% of our total revenue in the quarter, increased 9.8% in Q2 of '24 over Q2 of 2023. The increase in software revenues of 9.8% was driven by growth in total transactions of 4.8%, which continues to be impacted by macro choppiness, with the balance driven by growth in certain subscription-based revenues. Payment revenue of $74.2 million, which accounted for 70.6% of our total revenue in the quarter, increased 17.3% in Q2 of 2024 over Q2 of '23. Payment revenue reflects a contribution of interest revenues, which were $11.8 million in Q2 of '24 versus $9.2 million in Q2 of 2023.
+
+Political media revenue in the current quarter was approximately $800,000 and negligible in the same period a year ago. Excluding the impact of float and political revenues from both comparable periods, payment revenues grew 14.6% with most of that increase driven by a combination of an increase in pay yield, greater payment mix, and payment transaction volume increase of 8.6%. On a GAAP basis, gross profit of $68.7 million increased by 23.6% in Q2 of '24 over the same period last year, resulting in a 65.3% gross margin for the quarter compared to 61% in Q2 2023. Non-GAAP gross margin increased 430 basis points to 72.6% in Q2 of '24 over the same period last year, with the lion's share of the increase driven mostly by unit cost efficiencies and yield expansion.
+
+Now moving on to operating expenses. On a GAAP basis, total operating expenses were $76.8 million, a decrease of 5.7% in Q2 of 2024 over Q2 of last year. On a non-GAAP basis, operating expenses excluding depreciation and amortization and stock-based compensation decreased as well by 0.6% to $58.9 million in the second quarter of '24 from the comparable prior year period, which was helped by the timing of headcount additions and certain third-party expenses across R&D and sales and marketing expense categories. On a percentage of revenue basis, operating expenses, excluding depreciation and amortization and stock-based compensation, declined to 56% in the second quarter of 2024 from 65% in the comparable period last year. Overall, absent certain timing factors, the year-over-year percent decline largely highlights expense discipline and significant operating expense leverage across G&A, sales and marketing, as well as R&D to an extent, even after stripping out the contribution of float and political revenues.
+
+I will now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs decreased slightly by $184,000, or 1%, to $18.5 million in Q2 of '24 over Q2 of last year, which absent the aforementioned timing benefits reflects ongoing yet targeted investments in sales and marketing spend to support our continued growth. Non-GAAP research and development costs increased slightly by $291,000, or 1.3%, to $22 million in Q2 of '24 over Q2 of last year. The increase, which was also helped by timing factors, was due to continued reinvestment in our products and platform, including spend management, our pay offering, and Payment Accelerator. Non-GAAP general and administrative costs decreased slightly by $455,000, or 2.4%, to $18.4 million in Q2 of 2024 versus Q2 of last year, due to leveraging public company costs across a larger revenue base. These expenses continue their annualized downward progression as a percentage of revenue, as we indicated during our Investor Day.
+
+Our GAAP net income was $436,000 for the second quarter of 2024 versus a GAAP net loss of $18.8 million in the second quarter of 2023, with the reduction in losses driven by a combination of strong revenue flow through, solid gross profit increase, expense control and timing of certain expenses leading to lower operating losses, coupled with higher interest income and lower interest expense due to reduced borrowing costs and partial debt paydown. On a non-GAAP basis, our net income in the second quarter of 2024 was $10.7 million versus a net loss of $500,000 in the same year ago period, approximately, $11.2 million positive swing from the year ago period driven by the aforementioned factors. On a non-GAAP basis, Q2 2024 adjusted EBITDA was $17.5 million versus $3 million in Q2 of 2023 largely due to the aforementioned factors.
+
+Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the quarter with a strong corporate cash position of $465 million of cash and marketable securities against an outstanding total debt balance of $76.5 million, including a note payable for $13.9 million. We had $30 million on our credit facility undrawn at quarter end. Corporate cash, meanwhile, was split roughly 2/3 among money market funds, commercial paper, and time deposit instruments with the remaining 1/3 in deposit accounts. The weighted average maturity on the corporate cash was roughly 22 days, while the effective interest rate on our corporate cash position for the second quarter was roughly 5.2%. Customer cash at quarter end remained unchanged sequentially at approximately $1.2 billion, with an interest rate of roughly 5% for the quarter.
+
+Turning to our updated 2024 business outlook. We now expect total revenue for the year to be in the range of $436 million to $439 million. Our 2024 revenue outlook reflects approximately $49 million of interest revenues from customer funds, a $4 million increase from our previous 2024 outlook versus roughly $41 million earned in 2023. Also, we anticipate political media revenue contribution of approximately $9 million, given that this is our first presidential cycle under FastPay. Recall we acquired FastPay in 2021, and for context, in 2022, during the midterm election cycle, the political arm of FastPay generated roughly $8.5 million in revenues. Similarly, we expect non-GAAP adjusted EBITDA profit ranging between $73 million and $75 million for the year.
+
+With that, I'd now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] The first question today comes from Dave Koning with Baird.
+
+David Koning
+
+And maybe just to kick off, so the guidance for the back half is about 5% lower, the revenue guidance, about 5% lower than before. And it seems like 2 components: you called out macro headwinds; and then you talked a little bit about yield in payments missing Q2. So are there some dynamics there at play, too? Maybe talk about those 2 components and how that's affecting your guidance this year, and then if those should have any impact on next year as well.
+
+Joel Wilhite
+
+Yes. Thanks, Dave. Great question. And you're reading it right. I think what we're pointing to in our guidance for the back half of the year at a high level is essentially projecting forward what we experienced in the second quarter. So we're guiding what we're seeing. And what we're seeing is a continuation, even maybe a tick worse on the overall total transaction volume. That was a 4.8% grower in Q2, down a little from that 5.8% in Q1. So really continuing that forward. And an incremental additional element that I'd point to, Dave, this quarter was something that we're seeing in our yield dynamic. So again, overall continued really strong TPV yield, certainly relative to the industry, and down 1 basis point if you think about the progression from Q1 to Q2. But I'd offer up a couple dynamics that we did begin to see and stand out for us in this quarter.
+
+And let me just go through them real quick to get it out there. So really 3 things I'd point to. First off, we have seen some larger payments with existing suppliers shift away from the higher monetized rates; number 2, we've seen a mixed shift with new suppliers as we're continually adding suppliers to the AvidPay Network through new buyers or new suppliers that show up in payment files. And we're seeing a shift to other payment modalities with variable take rates below the full rack rate interchange. And number 3, and finally, and I think I mentioned this in the first quarter a little bit, is we are seeing greater monetization of smaller payment sizes driven by the continued sourcing automation and standardization. We're able to monetize incrementally smaller payments to monetize, but on a weighted basis and taken all together, we are seeing a little lighter overall TPV yield, and we've extended both that volume and the TPV yield assumptions forward through the end of the year. While we're navigating this macroenvironment, we're not expecting that to get meaningfully better or meaningfully worse this year.
+
+David Koning
+
+And great EBITDA progress too, by the way.
+
+Operator
+
+The next question comes from Ramsey El-Assal with Barclays.
+
+Ramsey El-Assal
+
+I wanted to ask you to give us your updated thoughts on revenue visibility in this environment. I guess it's another way of asking the question about the degree to which you have confidence that your guidance is sufficiently risk adjusted here, maybe accounting for a range of macro outcomes. Is that something that you're confident you can see at this point?
+
+Joel Wilhite
+
+Yes. Again, I would just reinforce what I've said before. What we're guiding is what we're seeing now. I think we are running the same high-discipline, high-rigor process we do when we forecast our business. And we have a meaningfully consistent recurring visibility in our overall total transactions. And so, great question, Ramsey, one that I spend time thinking about. We feel good about the guidance that we've provided.
+
+Operator
+
+The next question comes from Sanjay Sakhrani with KBW.
+
+Steven Kwok
+
+This is actually Steven Kwok filling in for Sanjay. I guess I just want to drill down around the revenue slowdown. Could you just talk about the sequential change that we're seeing within the quarters? Was there any noticeable difference between when you started the second quarter to the end of the second quarter? And also, any color around was it from discretionary versus nondiscretionary?
+
+Joel Wilhite
+
+Yes. I would just point you back to, on the volume side, certainly whether year-over-year or sequential, we're seeing just continued pressure from a discretionary standpoint. We're still maintaining consistent and really high overall retention of our buyers and our suppliers, but we just see the continued caution and moderation on the part of buyers in their spending. And it is still limited -- we see limited to discretionary spend types, things like advertising, professional services, travel, significant capital projects, and improvements. And it hasn't really widened outside of that discretionary bucket, maybe just gone a little bit deeper relative to what we've seen in the past few quarters.
+
+Steven Kwok
+
+And then just touching around some of the key initiatives, such as Payment Accelerator and the spend management side. Could you talk about the progress around that? How much are they expected to contribute this year, and how fast they can spool up in 2025 and beyond?
+
+Michael Praeger
+
+Yes, this is Mike, And I can certainly comment on that. So first of all, Payment Accelerator 2.0 is a new version of our historic Invoice Accelerator offering. Really excited about the progress of that offering. As we indicated, this year, we're taking it slow to prove out all the different functionality of the product that we've improved on over the prior version. And we continue to scale it prudently, but certainly, 2025 will be the year that we're seeing the real scale take hold in that product as we make it available to all 1.2 million suppliers, of which remember, of that number that we estimate, about 60% of that 1.2 million fall in the category of small business suppliers of which we think the product is a perfect fit for.
+
+Turning to spend management. Spend management is 1 year or so behind that Payment Accelerator. We expect to introduce it to our first customers at the end of this year time frame, later in Q4. And again, we expect to initially have an opportunity to make that product available to our existing customers throughout 2025, as we also introduce it into new customers. The focus on spend management is really to capture the payment volume and transactions that we don't see today that fall outside of an invoice. So today, we do a really good job of capturing all transactions that have an underlying invoice related to them. That's typically where the system of record for all our customers in terms of all expenses that have an invoice as we feed their general ledger. But what we see is that transactions that don't have an invoice many times fall outside our system. And that number could be up to like 15% of a company's spend.
+
+So spend management is really designed to, how do we get all the spend that a customer has related to their expenses in our platform so they can have better reporting visibility to expense, cash flow management, all those types of things as part of our platform of which they're asking us to do. So that's a little bit of commentary around both Payment Accelerator and spend management.
+
+Operator
+
+The next question comes from Jamie Friedman with Susquehanna.
+
+James Friedman
+
+A lot of hard work here. I just want to ask, one for Joel and one for Mike, are you still comfortable with the 20% plus revenue CAGR through 2025 and, I think, 20% plus EBITDA margin, Joel? And then, Mike, maybe if you could talk about the Rule of 40 or 50 long-term that you'd articulated at the Analyst Day.
+
+Joel Wilhite
+
+Yes. Jamie, I'll start off. I guess the first way I would answer that question is, we still feel like we're in the early days of a really big opportunity. And we've got a lot of levers, both to grow revenue and to be a more efficient business. And the evidence is in the gross margin expansion, the profitability, et cetera.
+
+I would say that in the short run we need the macro to turn around back to that, whether you're talking about 20% or Rule of 40. We're operating in an environment of caution and moderation on the part of buyers. And so, I would temper short-term expectations, but I'd say that long-term opportunity is certainly still there.
+
+Michael Praeger
+
+Yes. Maybe to pick up on what Joel said, Jamie, related to that Rule of 40, Rule of 50. As Joel indicated, certainly, we need and expect that the discretionary spend from customers will rebound at some point in time. We're hopeful that once we get past the election cycle and customers just have more clarity on policies, including the rate environment, that we'll start seeing some return of their discretionary spend, preventive maintenance projects, things of that nature, as we've seen in other cycles. But the other -- there's 3 other things that give us a lot of confidence related to not only returning to that 20% growth number, but also delivering on the Rule of 40. And that's the innovation products we have driving future growth, being the Payment Accelerator adoption and then release of spend management that I just commented on.
+
+But that combined with our new buyer sales channels in terms of the partnerships that we've added over the last year, certainly, AppFolio is a big piece of that with their 40,000 -- I'm sorry, 20,000 customers, which we expect roughly half of those fit within our product market fit. M3, and then most recently, Buildium. So the new sales channels, we're really excited about in terms of driving new buyer sales. And then the last levers around that conversion of paper checks to electronic, as we've been commenting on that we believe that our ability to manage multiple payment modalities across our platform that combine combinations of speed of payment, price of payment, levels of remittance data along with levels of automation are the key in terms of continue to drive that conversion from paper check to electronic. And so, those are the building blocks for that 20% growth mantra that we have.
+
+And then as it relates to Rule of 40, we continue to have those levers, as Joel indicated, certainly AI has had a nice impact and will continue as we drive gross margin in our various other automation strategies, continue to build our gross margin. And then I think we've been able to demonstrate that we have strong and disciplined execution of the business, especially around the expense discipline that we have and how we run the business to achieve that objective of Rule of 40 and then longer-term Rule of 50.
+
+Operator
+
+The next question comes from Andrew Bauch with Wells Fargo.
+
+Andrew Bauch
+
+Just want to dig into the dynamics around the suppliers being more discerning around the higher monetized payment offerings. This is something that was called out by one of your closest peers, I think, in the middle of last year. And they basically chalked it up to the macro but said that when macro turns, those higher monetized payment methods should see greater adoption. And so, my question to you is, are you expecting the same thing, and what's the risk that we should be thinking about that each quarter that goes by where they're electing for lower monetized payment methods that those behaviors become more sticky?
+
+Joel Wilhite
+
+Yes. Let me start and Mike might add a little context. But what I would point to, maybe it's a little bit of a difference than the example that you referenced is, we've always been focused on suppliers as customers, and there's a value proposition and remember the speed, data, automation, and then the notion of price depends on that level of speed, data, and automation. So what I pointed to when we were talking about those yield dynamics is some mix shifts for sure, but not a wholesale retreat from monetized payments, just continuing to seek the speed and the data and the automation, but at some different price points.
+
+So we're encouraged about our yield today. Again, it's 30 bps on approaching $100 billion of TPV. We believe we have an industry-leading yield, and we'll continue to see that, but we'll also continue to meet suppliers where they are and to deliver the value that they're seeking at different prices. So Mike, you want to add anything to that?
+
+Michael Praeger
+
+Yes. Just to reinforce the key element is thinking of the suppliers as a core customer and building a value proposition around them. So one of the things that we're seeing is that we don't have suppliers leaving our network. We have super high retention rates in high 90% range related to our supplier customers, but what we do see, especially around, we continue to go deeper to convert those paper check suppliers to electronic, is that at the different price points that we have, it's a value proposition that meets what they're looking for to make that conversion.
+
+And so we continue to see high volume of new suppliers being added to the network. However, we think the key is on how we drive this over time to get to our next milestone of 50% of monetized payments and greater over time, is the continued delivery of new payment modalities that combine speed, price, remittance data, along with automation.
+
+Operator
+
+The next question comes from Darrin Peller, Wolfe Research.
+
+Darrin Peller
+
+I think there's a couple of things that we just want to dive into a little bit. One of them is just the transaction growth rates versus the overall volume growth rate, just on a more technical matter. Any way you can help us guide around what you expect there and transaction size. But more than that, I really want to understand a little bit more around what you're seeing in terms of the dynamic of top-of-funnel, customer adds. Mike, last quarter we talked about different strategy on conferences. So maybe just give us a little more update on what you're seeing in terms of net new additions and your strategy. And is it market -- where the market's coming to you with what -- how proactive you're being in different ways?
+
+Joel Wilhite
+
+Darrin, I'm going to take the frontend of your question and then Mike will take the back part. So just to add a little context, and I think your question is help us understand growth rates in overall total transactions and then overall total payment volume. Remember that our total transactions metric is the sum of all the transactions on the platform. That's all the invoices and all the payments. And the subset of the transactions that are payment is a smaller but incrementally faster growing. And I would just say that we still see pretty direct correlation between the growth in payments and the growth in overall total payment volume. And I wouldn't point to anything meaningfully different in terms of overall average payment sizes across our verticals.
+
+And so finally, I would just say, we're continuing to see that caution exercised by buyers. We talk about overall total transaction retention rate as a number that we provide annually last year in the 103% range, normally it's in the 104%, 105%. In this season we're in, we're right around the 100% zip code, even plus minus. And so, we're optimistic that as we get through this economic season that returns, but that overall total transaction growth rate is indicative of what we're experiencing.
+
+Michael Praeger
+
+Yes. And Darrin, maybe turning to your question on top-of-funnel activity. So I think there's 2 elements. One is, as I talked about last quarter, a more disciplined approach around our investments in the highest ROI marketing initiatives. And this has certainly been this practice we've put in place with how we think about all the tradeshow conference, user conference type activity around all our partners, making sure we're focused on the highest ROI initiatives.
+
+The second thing, which was probably more evident this quarter, is around also a change of mix in terms of how we think about historically maybe more investment in electronic demand gen versus supporting our partners, and certainly move that mix to our partner channels. Certainly, the new partnerships that we've added like AppFolio, M3, Buildium are good examples where we wanted to increase our investment as we're seeing really high-qualified leads coming from these channels versus maybe higher volume but lower qualified coming from the historical demand-gen routes.
+
+And we think that strategy is actually playing off as we see overall results. Our new logo growth is up over last year, combined with strong close rates. But one of the things we did see, which is really encouraging, our average sales cycle has been cut in by a third. So seeing nice improvement and faster close cycles combined with maintaining strong close rates. So I think that demonstrates that by executing these 2 strategies that we're seeing higher qualified leads coming through the top-of-funnel even though the overall volume may be slightly lower.
+
+Darrin Peller
+
+So you're saying when you're adding at a rate that's faster for a new logo growth that's overall new customer adds. In other words, the rate of growth of additions of new customers this year versus last?
+
+Michael Praeger
+
+Exactly. New logo growth halfway through the year compared to last year, we're up over last year.
+
+Operator
+
+The next question comes from James Faucette with Morgan Stanley.
+
+James Faucette
+
+Wanted to continue to work on the P&L. And given some of the top line softness, it was definitely constructive to see you flex OpEx down year-over-year in order to get to your projected adjusted EBITDA to protect that. And how are you thinking about the right level of OpEx growth for the business over the near to medium term, to the extent that revenue growth is a bit more muted?
+
+Joel Wilhite
+
+Yes, James, good question. And I'll just go back to some of the things that Mike talked about in his prepared remarks and reinforcing it in his commentary. We're really focused on running a disciplined business. We're also very focused on the growth opportunities ahead of us at the same time. So we continue to balance that. What I would say is that baked into our guidance, there is a little bit of an incremental investment that we're contemplating in our OpEx. And again, that's focused on finishing strong and getting launched Payment Accelerator, spend management, our overall pay platform, et cetera. So again, I don't know that there's an optimal number to give you, but we're very focused on profitability. You can see that in the gross margin expansion that continues. I'll tell you that even in the shift in our guidance in the back half, we're still really focused on the gross margin that's contemplated there. Maybe the rate of expansion moderates a bit, but we don't expect to go backwards. And so, we're continuing to focus on investing in growth and running a disciplined business.
+
+James Faucette
+
+Got it. And then from a business development standpoint, as the choppy economic environment continues to persist, are there incremental opportunities to further expand the reach and abilities of Avid through acquisition or looking at adjacencies? How should we be thinking about your -- what the right approach to investment is strategically in the current environment for you?
+
+Michael Praeger
+
+Yes. I think that's a really good question. Certainly, the inorganic and providing tuck-in acquisitions has been part of our historical growth as we've added new vertical channels. And many of them have happened through acquisitions. We believe that that's going to continue to be part of our future strategy. We've had a couple of years of not having any activity on the M&A side. I think that's really a combination of, number one, not really seeing anything that we felt was super strategic that could really move the needle for us strategically in terms of that growth. And the second thing is, I think the valuation spectrum of private companies versus public has been a little bit challenging.
+
+But I think those elements or that element, we're going to see -- we are seeing it change, and we're seeing more activity than we've seen in recent years in terms of opportunities to continue to do tuck-in acquisitions, move into adjacencies like you referenced, which is what we've done historically and have a really developed playbook on how we execute these effectively. So I expect that we will get back to having routine cadence around some tuck-in acquisitions as we go forward.
+
+Operator
+
+[Operator Instructions] The next question comes from Craig Maurer with FT Partners.
+
+Craig Maurer
+
+Yes. First, over the long-term, as perhaps your new origination volume shifts toward partners and away from self-generated leads or that mix shifts, how should we expect that to impact the yield as I assume you're sharing economics there? And second, I'm a little perplexed by the maintained guide on political revenue at $9 million, which was effectively what you did in 2022 during the midterms. All fundraising and activity points to a massive upswing in spend from certainly that midterm number. So I'm curious if you're forecasting share loss or yield compression or something that's keeping that guidance flat.
+
+Joel Wilhite
+
+Craig, I'm going to take the political question, and then I'll have Mike take care of the first part. Great question. And I think, let me reset the table around political. We're reaffirming the $9 million that we've talked about since the beginning of the year. We are seeing consistent patterns with the presidential election. Now, granted, we didn't own FastPay back in 2020, but when we look at the first half, second half distribution, we're very consistent. I'd also repeat, we don't have a lot of visibility there. It's meaningfully backended spend. And so, if there was an area that surprised us to the good, it could possibly be this political number.
+
+And so that said, we're also seeing the same dynamics that we're seeing across the business in our traditional media and political media business as it relates to volume and rate. So degree of uncertainty, not the same visibility we have in our normal business. And hoping, we're on the conservative side, and we really see it move in the back half, but we're not calling that in our guidance.
+
+Michael Praeger
+
+Yes, maybe to continue on what Joel says, remember we expect to see the majority of all activity happen after Labor Day. So it makes it harder to have visibility to what may happen. Certainly, we're encouraged with some of the forecasted spend levels for not only the presidential cycle, but all the ballot initiatives and the state-run elections.
+
+But Craig, I wanted to come back to you. I think your first question was related to long-term impact to some of the mix shift of leveraging -- having greater leverage within our partner channels. The way we think about it is we think the net contribution is consistent in terms of our direct sales efforts.
+
+Certainly, the majority of partnerships that we have are more referral partnerships where our direct sales force still leverages those partners. Although we're sharing some of that revenue, we look at it as it's an investment similar to what we make in marketing-related expense to drive our internal leads. So our models show that it's really a net-net equal type of opportunity in terms of overall net impact.
+
+And we think it's really the beauty of our demand-gen funnels, as we have lots of different sources that make it up. And so, as we're seeing softness, for example, in electronic demand gen and really high activity through our partner channels, we can make these type of adjustments. And I think from an execution perspective, we're happy to be working on high-quality leads that are having the impact that they have, and the net result is our net logo growth is up over last year and our team is working on higher-quality leads through that change in strategy.
+
+Operator
+
+The next question comes from Timothy Chiodo with UBS.
+
+Timothy Chiodo
+
+I want to talk a little bit about credit interchange rates in the industry. So the recently rejected settlement, the original agreement, was 7 basis points on a blended and 4 basis points for essentially every category. Clearly, that is in the process of being reworked. But I was hoping you could touch on what you think the implications could possibly be for: number one, commercial interchange rates in general for the industry; and then maybe more specifically, any of the more custom interchange rates that Avid has on the commercial side.
+
+Michael Praeger
+
+Yes. Tim, good question. And I think it was a quarter or 2 ago, we fielded a number of questions on this topic. So how we think about it, so first of all, I think the biggest impact is certainly [Technical Difficulty] consumer side where you typically have standardized interchange rates. One of the things that's the dynamic on the business-to-business side, and we've been leading the charge here, which is reflected in our industry-leading electronic payment adoption rates, is creating multiple payment modalities. In fact, even on virtual card today, we go-to-market with roughly a dozen different virtual card type offerings that combine, again, different interchange price points with different levels of remittance data, different levels of automation and speed of payment. So when we look at our AvidPay Network, we're actually very proactive in terms of providing the right structure to price product offering or payment modality to what suppliers are looking for in terms of that value proposition.
+
+And the second element is, I think, in our case MasterCard is our primary exclusive provider for execution of virtual card payments. With their different data rates, we've been on the forefront of supporting our supplier customers with all the remittance data they need so they can take advantage of the different data rates. And so we've already been on the forefront of helping our suppliers get the best economics they can get by providing them the data, making transactions more secure, less fraud, all those type of things. And we think long-term that adds to a sticky customer, and it certainly shows up in our industry-leading retention rates that we have for suppliers. So we view on the commercial side that we've already been proactive in terms of how do we get the right price product for our suppliers to be electronic acceptance on the long-term.
+
+Operator
+
+The next question comes from Alex Markgraff with KeyBanc Capital Markets.
+
+Alexander Markgraff
+
+Mike, maybe one for you first, just to expand on the top-of-funnel comments. I understand some of the comps you provided there. It sounds like some benefits to you from a sales cycle standpoint, maybe a win rate standpoint as well. Just curious what the net effect of all of this is versus what your expectations were prior to some of this resource reallocation. I'm assuming it's better, and I hear you on the net adds expectation for '24. So maybe just from a new customer revenue contribution standpoint, how does that compare to what you were expecting prior to this resource allocation?
+
+Michael Praeger
+
+Yes. So first of all, the objective of top-of-funnel is to hit our sales plan and our new customer add objectives for the year. So I think from that perspective, halfway through the year, we feel that we're running ahead of last year related to adding new customers. And so, we're trending towards that overall sales plan objective. But at the same time, we're not spending less on top-of-funnel. Our investment has stayed the same. It's just a different allocation.
+
+And so, I think the beauty of having multiple dynamics of our top-of-funnel that are driven by many different types of sources, as we see the strength and weakness of different sources, we can adjust our spend accordingly. And so, one of the adjustments that we made this last quarter is moving away from typically some of that electronic demand gen that produces lots of leads but lower quality, and we've seen softness in that particular channel, is to move to where we're seeing strength, which is around supporting our growing number of partners, and the higher-quality leads that partners are generating for us.
+
+Again, these are existing customers of our typically accounting system and ERP partners. So there's an existing customer relationship, and they're raising their hand, and they want to automate this business process in partnership with their ERP accounting system partner. And so, those are really high qualified leads, and we're seeing it show up in terms of shorter sales cycles while we maintain really strong close rates.
+
+So, I think, overall, I think we're being more efficient, and certainly we pay close attention to all the different lead sources we have. And we'll continue over time to make adjustments where we're seeing strength and weakness across that overall spectrum.
+
+Alexander Markgraff
+
+And if I could just squeeze one more in on yield. Just wanted to get a bit more color. The dynamic that you're seeing, is it occurring really across the entire supplier base? Is it more narrow in scope with certain suppliers or certain verticals? Any color there would be helpful.
+
+Joel Wilhite
+
+Yes, I think it's fairly broad across the vertical. I wouldn't call out anything specific there, Alex.
+
+Operator
+
+The next question comes from Rufus Hone with BMO Capital Markets.
+
+Rufus Hone
+
+Sorry if this is maybe covered in an earlier question. I joined a little bit late. But wanted to ask about the full year revenue guide. How much of the reduction is this macro getting tougher? And I don't know, any related incremental changes you're seeing in customer behavior? How much of the reduction in the guide was due to that? And then also, how much of the reduction was from incremental lead generation headwinds that you're seeing? I don't know if you can break it up into those buckets.
+
+Joel Wilhite
+
+Yes, let me tackle those, Rufus, one at a time. So the first question, I think I alluded to it, but I'll just revisit. Our guidance contemplates in the back half what we saw in the second quarter, both from an overall total transaction volume that continues to be impacted by moderation in our customer spending, and also the yield dynamic that we pointed to on this call and that we began experiencing in Q2. And so, think of it as roughly 50-50 balance in terms of what's driving it. It's those 2 dynamics that are driving the shift in revenue.
+
+And then from an overall sales top-of-funnel perspective, I think your last question, I would just say that we're selling for next year and the future, so not so much an impact on what we sell this year and this year's revenue. That would impact next year and going forward.
+
+Michael Praeger
+
+Yes. When we get to the second half of the year, really our new buyer sales activity drives next year, in this case, 2025 results. So we have had pretty good, I think, visibility to the activity of our existing customers, but certainly some of the macro discretionary spend has been some of the headwinds that we've seen.
+
+Operator
+
+The next question comes from Clarke Jefferies with Piper Sandler.
+
+Clarke Jeffries
+
+I wanted to ask about the raise to float revenue. And I suspect it's related to the customer preference on payment modality, but I wanted to clarify that and ask that. To say it another way, you're not expecting a change in the float yield or the volume as much as a change in the balance of those funds through the year.
+
+Joel Wilhite
+
+Yes, good question. Here's the way I would frame the change in the float. And so, just to recap, the last time we gave guidance for full year float revenues in the around $45 million, we've increased that to $49 million. And the things that I would point to are previously, we did have factored in rate reductions in the back half of the year. We've reduced the impact of that. I think we have one late year 0.25 point. And so there's an incremental lift there. We also have seen somewhat marginally higher customer balances, and we've experienced that throughout the year.
+
+We've just made an assumption in our projections that we would continue to experience that. Again, nothing underlying different in the customer experience and the operational funds flow, but just slightly higher customer balances are contemplated in the back half.
+
+Operator
+
+The next question comes from Tien-Tsin Huang with JPMorgan.
+
+Tien-Tsin Huang
+
+I know it's been asked a lot, but I just want to understand or get your view here on the payment monetization of suppliers choosing on the acceptance side the lower cost for solutions. Is that more cyclical or secular? Do you think that as the cycle shifts, that you'll see a shift back? Or are the suppliers just smarter around cost optimization?
+
+Michael Praeger
+
+Yes. I think it's a good question. I don't think it's really cyclical. I think it's really around a value proposition. And typically, when they make a decision on a particular payment modality, we see really strong retention of that payment modality for life of that supplier.
+
+Now, certainly, the big opportunity that we have is that roughly 50% of our overall suppliers are still paper check acceptors. So we're really working, Tien-Tsin, on providing a value proposition that's appropriate for that 50%. And again, combining speed of payment, the price, the remittance data, and the level of automation, and what we're seeing is certainly to get certain suppliers to move off of paper check to electronic sometimes the price is an element of it.
+
+And so, especially we believe that, again, with a strong value proposition at the right price point, we can get that supplier to be an electronic acceptor and be on our network for a long period. And so, I think that's part of our overall strategy that we'll continue to see is as we grow that percentage of 40% of monetized payments to 45% to 50% plus over time, it's going to happen at different price points.
+
+Operator
+
+This concludes our question-and-answer session. I would like to turn the conference back over to Mike Praeger for any closing remarks.
+
+Michael Praeger
+
+Thanks, everyone, for your interest in AvidXchange. Amid the current macro choppiness, I'm proud of our disciplined execution and healthy financial performance, along with strong profitability results. As I said before, I'm particularly excited about the future, given the pipeline of product innovations and the industry-leading ERP integration partnerships in progress that should propel all 4 Gears of our Business Flywheel and drive long-term value creation for our investors.
+
+With that, I look forward to sharing our progress with you on our next earnings call. Operator, you can close the call.
+
+Operator
+
+The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

AvidXchange Holdings, Inc., Q3 2021.txt

@@ -0,0 +1,387 @@
+AvidXchange Holdings, Inc., Q3 2021 Earnings Call, Nov 16, 2021
+11/16/21
+Operator
+
+Good day, and welcome to the AvidXchange Third Quarter 2021 Conference Call. [Operator Instructions] Please note, this event is being recorded.
+
+I would now like to turn the conference over to Ryan Stahl, General Counsel. Please go ahead.
+
+Ryan Stahl
+
+Good afternoon, everyone, and thank you for joining us for the AvidXchange Holdings Third Quarter 2021 Conference Call. With me today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; and Joel Wilhite, AvidXchange's Chief Financial Officer.
+
+Before we begin today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss financial guidance, operational outlook, future strategic initiatives and potential market opportunities during today's call.
+
+Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release and in the investor supplement, each found on AvidXchange's Investor Relations website. We have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.
+
+With that, I will now turn the call over to Mike Praeger.
+
+Michael Praeger
+
+Thank you, everyone, for joining us for AvidXchange's first earnings call as a public company. It's great to be connecting with all of you today. Our transition to a public company was a significant milestone for AvidXchange, and we were able to celebrate that occasion by ringing the NASDAQ bell from our campus here in Charlotte, North Carolina, just a few weeks ago. We achieved this through a lot of hard work, and I want to thank all my AvidXchange teammates for making this a reality. I'm so proud of all we've collectively accomplished in the last 20-plus years in building our business.
+
+Joel Wilhite and I are excited to share our third quarter results as well as an overview of our business, future growth strategies and where we are seeing momentum and continued success in driving our AvidXchange business flywheel. With that, I'll begin my remarks with our third quarter highlights.
+
+Total revenue for the quarter was over $65 million, an increase of 37% from Q3 of 2020. And we processed over 16 million transactions during the quarter, an increase of over 17% from Q3 of 2020. Overall, our third quarter results reflect continued strong demand for our software and payment solutions, along with solid execution against our key growth initiatives. The strong momentum we are seeing in the business gives us confidence in our full year 2021 financial outlook, which Joel will discuss in more detail later in the call.
+
+Now before I talk about some recent and exciting new business developments, since it's the first time we are discussing our quarterly results in a conference call format, I thought it would be helpful to drill down deeper into how our business works. AvidXchange is a software company that is purpose-built to help middle market companies automate their accounts payable and payment processes. In addition, I'd like to spend more time discussing our long-term growth plan through the lens of our AvidXchange business flywheel along with our strategies to capture the significant greenfield opportunity that we believe exists in the middle market.
+
+Approximately 42% of U.S. business-to-business payment volume is still paid by using paper checks, and we believe that number of middle market companies manually approving invoices and utilizing paper checks is actually much higher.
+
+With that, let me start off by articulating the market opportunity that we see in front of us. We believe that the middle market segment is the largest portion of the overall accounts payable automation and business-to-business payments market. In addition, this large and growing market is facing unique challenges such as: inefficient legacy solutions that are manual and paper intensive; complex integration requirements supporting various vertical industries; unique business process requirements and supporting ERP or accounting software solutions; high cost related to manual and complex accounts payable workflows; and finally, a status quo mindset of traditional long-tenured finance leaders being reluctant to change.
+
+As companies continue to automate complex accounts payable workflows and replace paper checks with alternative electronic payment methods, we estimate more than $20 billion in addressable annual revenue opportunities across both accounts payable automation solutions and business-to-business payment transactions for the middle market. In addition to providing B2B payments, we see a large unmet need in supplier financing, which we believe is an additional $20 billion of white space opportunity, bringing our total estimated addressable market to over $40 billion.
+
+To take advantage of this opportunity, we've created AvidXchange, which is purpose-built to deliver a significant value proposition by seeking to make inefficient and expensive paper-based B2B payments and invoices obsolete for middle market companies. We seek to deliver further value to our mid-market buyer customer by automating their accounts payable invoice and payment process, managing their complex business rules and supporting multiple general ledger systems and converting paper-based checks into intelligent electronic transactions. Simply speaking, our mission is to eliminate both the paper invoice and the paper check for our customers.
+
+We also seek to deliver value to our supplier customers by providing payments efficiently and securely managing their business rules for their preferred digital payment acceptance methods and providing Rich Forman's data along with visibility into their invoice and payment statuses. In addition, we provide value-added invoice financing services through our emerging invoice accelerator offering, which is a key feature of our AvidPay Network, designed to enable suppliers to better manage their cash flow through directly controlling when they receive payment.
+
+This 2-sided network that we built, serving both buyers and suppliers, generates a tremendous flywheel effect for our business. Our AvidXchange business flywheel shows how we work to create value for our buyer and supplier customers, and it reinforces and accelerates other value we generate, driving continued growth by delivering a great customer experience for our 7,000 buyer customers and over 700,000 supplier customers on the AvidPay Network. Our average age flywheel begins with Gear #1, which is delivering great accounts payable automation and payment software. We believe our ability to deliver a great software automation experience draws buyers to our platform. Our product removes the paper, automates business rules and workflows along with reducing payment fraud risk, bringing all invoices of payments into 1 cloud-based platform that can be accessed anytime, anywhere by all of our customers.
+
+To accelerate the first gear of our flywheel, we're working to maximize our go-to-market strategies horizontally across the middle market, along with focusing on 8 specific core verticals, which include: real estate; the Homeowner Association, or HOA market; financial services, which includes Tier 2 and Tier 3 banks, along with credit unions; construction; media; health care facilities; social services and nonprofit organizations, along with education. Through our hybrid go-to-market strategy utilizing both direct and indirect channels. Our direct sales force leverages our deep domain expertise in these verticals and over 120 referral partner relationships to identify and attract buyers that would benefit from our accounts payable software solutions, along with automating their payment process via the AvidPay Network.
+
+On the indirect channel side, our strategy is built on key accounting system integrations, reseller partners and other strategic relationships, such as our exclusive strategic partnership with Mastercard through their Mastercard B2B Hub, which includes Fifth Third Bank, along with Bank of America and other financial institutions such as KeyBank and third-party software providers such as MRI Software, RealPage and SAP Concur. New customers in the third quarter spanned across AvidXchange core verticals, including Good Winning Company within our HOA vertical, Casen Associates properties and Robert High development within our real estate vertical, along with Fusion Transport and BPS Supply Group, just to name a few.
+
+Customers across each of our verticals are looking to add both AvidInvoice to automate their accounts payable process, along with AvidPay to automate their supplier payment process. One recent example in current holdings, a Florida real estate firm had a history of incorrect and delayed payments to its vendors due to flawed accounts payable system that was costing them several thousand dollars a month. Using AvidXchange software, they're able to achieve 3 key objectives: first, they're able to customize their workflow approval functions to automate their invoices and payments; second, they wanted to reduce incorrect payments and non-improved payments; and third, they wanted to have real-time anywhere access to their accounts payable data.
+
+We're seeing good traction in our financial services vertical. As an example, the pace of credit union customer additions has expanded by 38% year-to-date with credit union additions more than doubling. By drawing buyer customers to our AP automation software platform, we enable to build a second flywheel gear, which is maximizing the number of transactions we manage on our platform. By combining our business model to be the system of record for all buyer AP transactions, along with an the entire payment file for their payments, we were able to maximize the overall number of invoice and payment transactions that we manage for our customers.
+
+Furthermore, we strive to provide a great customer experience through integrations between our buyer customers accounting systems and our invoice management platforms in our AvidPay Network. Today, we manage over 210 integrations with the most widely used accounting and ERP systems, and we support a variety of payment methods, depending on the suppliers' preference, including Virtual Card, or VCC; enhanced ACH, or our AvidPay direct offering; and physical checks, while delivering Rich Forman's data to streamline the reconciliation process, supporting the middle market and the various industry verticals that make up the middle market. We view these strategies and iterations as critical key differentiators for AvidXchange. Our competitors don't necessarily want all their customers' volume, whereby they focus on only specific transaction types, which we believe creates a real long-term advantage for us as we want both to own the buyer and the supplier customer experience and deliver an industry-leading and unique long-term value proposition to our customers.
+
+The development of channels and partnerships for distribution is also key to enabling the growth of transactions on our platform. Further proof of our continued progress in maximizing the number of transactions under management is that we processed over 16 million transactions in the third quarter, up approximately 17% year-over-year. Once a customer's invoice and payment volume is on our platform we seek to create additional value by utilizing the AvidPay Network to facilitate the conversion of paper checks to let intelligent e-payments, which is our third gear.
+
+We have over 700,000 suppliers that we paid through the AvidPay Network. We combine specifically designed business process with technology to dynamically manage the various business rules, along with managing the preferred payment methods for these suppliers. By managing their payment business rules, we also manage how they would like to receive their electronic remittance data so they can apply the payment to the correct supplier account and invoice number, along with enabling suppliers to more efficiently reconcile their outstanding invoices.
+
+We're excited to see continued growth in a number of enrolled e-payment suppliers receiving electronic payments from the AvidPay Network. E-payment suppliers that find as those suppliers that we've enrolled in 1 of our various AvidXchange virtual card payment offerings as well as our AvidPay Direct modalities. AvidPay Direct is our version of ACH+, where we settled through ACH, but wrapped transaction with electronic remittance data the supplier needs to automatically apply and reconcile each payment giving them the payment speed, security and reminisce data that they require. We consider our AvidPay Network to be our secret sauce and as a significant competitive advantage versus others who have primarily outsourced their supplier payment engagement and settlement efforts.
+
+We've made a large investment each year since we launched the AvidPay Network in 2012 and anticipate significant future return on our investment, given that we expect our AvidPay Network to be a long-term differentiator and driver of future margin expansion as we own the entire supplier experience from invoice submission through the payment acceptance by systematically automating each supplier's unique business rules for payment acceptance and delivery of reminisce data.
+
+Our AvidXchange business flywheel accelerant is a continued focus on automating key business processes to improve the speed and reliability of our payment offerings along with additional monetization features created for our fourth gear. Our fourth gear is designed to leverage the data of our network to further increase the value proposition we are delivering to both our buyer and supplier customers, which leverages the 20-plus years of data that we've captured detailing each buyer and supplier transaction.
+
+Our single cloud-based platform for invoices and payments enables us to abstract all the learnings from these buyer and supplier relationships and use it to target new verticals for expansion as well as new innovations such as advanced and management analytics as well as data related to specific invoice types such as utility bills, insights into the management of their cash flow and financing features for our customers. A great example of this today is our emerging invoice accelerator offering, in which we utilize the data of our AvidPay Network along with the historical payment trends between buyers and suppliers to underwrite specific invoices that are eligible to be advanced for next-day payment, creating a very unique and differentiating value proposition for our supplier customers, enabling them to get paid when they want to get paid. Focusing on how we can invest in accelerating our AvidXchange business flywheel not only provides us with increased transactional monetization opportunities but also serves as a source for continued innovation, growth and market leadership across the middle market.
+
+So to summarize, we believe that we built a powerful flywheel business model that is well positioned to capitalize on this massive growth opportunity and the adoption catalysts propelling our business by executing on our focused key strategic growth drivers, which include: number one, that driving the number of overall transactions processed by acquiring new buyers and suppliers, along with increase in the number of transactions went each of our existing buyers and their suppliers. Number two, increasing conversion of paper checks to electronic payments. We believe there is a significant opportunity to increase the penetration of electronic payments as paper checks still comprise over 42% of overall businesses, the business payments in the United States today across all sectors of the middle market, and we estimate that the number of companies predominantly using paper checks across the middle market to be significantly higher. AvidXchange is the leader in driving e-payment adoption through our innovative products and processes.
+
+Number three, innovation and delivery of new products. We'll continue to leverage the rich data and business insights that we've accumulated across buyer and supplier transactions, enabling us to strategically leverage this data to develop new innovations and capabilities. Number four, entering new vertical markets. We'll continue to supplement our organic growth by pursuing strategic mergers and acquisitions to expand new verticals and horizontal capabilities. For example, in Q3, we entered the media vertical by acquiring FastPay, a leading provider of payments automation solutions for the media vertical industry.
+
+Number five, cross-border and international expansion. We're currently developing a cross-border payments offering, targeted generally available for customers across multiple software leases over the course of 2022. On top of our unique market opportunity, flywheel effect and moat that we've already developed within the middle market, we're in the early days of seeing 4 catalysts unfolds that we believe will be accelerators across the middle market for our offerings, which include: first, the pandemic highlighted the importance of automation for business continuity and support work from home and hybrid workforce models. Second, there have been a growing concerns over fraud risk and data privacy with paper invoices and paper checks. In fact, the majority of payment fraud in the middle market occurs with paper checks. Third, familiar technology with users having the experience benefits of cloud-based solutions for automation and other back-office processes. And fourth, which long term may be the most impactful of all the catalysts, is the generational shift or millennial effect, as I like to call it, with tech savvy, younger generation finance leaders taking on increased leadership roles in middle market companies. We are certainly excited about the future of AvidXchange, and I look forward to updating you on our progress during future calls.
+
+So in closing, we delivered strong third quarter 2021 financial and operating results, and our momentum heading into 2022 is very encouraging. We continue to drive uses for AvidXchange and our customers by growing and enhancing our offerings, services and talent to help more businesses transform and automate their accounts payable and payment processes. We believe our results and continued progress against our key growth initiatives are indicative of our commitment and focus on creating long-term value for all of our stakeholders for many years to come.
+
+Now I'll turn the call over to Joel, so he can provide a review of our financial results from the third quarter and review our 2021 full year guidance. Joel?
+
+Joel Wilhite
+
+Thanks, Mike, and good afternoon, everyone. I'm excited to talk to you today about our strong Q3 financial results and provide guidance for the full year 2021. Given that this is our first earnings call as a public company, I'll briefly talk about our revenue model and drivers.
+
+We have a highly visible revenue model. Based on the durability of our buyer relationships and the recurring nature of the revenues we earn, our revenues are predominantly derived through software revenue from our buyers and revenue from payments made to their suppliers. We generate software revenue from our buyers through our focus on years 1 and 2 of our flywheel, delivering great AP automation, software and maximizing transactions on our platform. Software revenue comes primarily through fees that are calculated based on the number of invoices and payment transactions processed, which is why one of our key metrics is total transactions processed.
+
+To a lesser extent, we also generate some recurring maintenance and subscription fees. While our buyers are typically billed and paid on a monthly basis, they're usually under a multiyear contract with revenue recognized over the term of the contract. We generate payments revenue through the payment volume from Gears 1 and 2 noted previously, which is optimized by our Gears 3 and 4 of our flywheel. Gears 3 and 4 focus on delivering value to our suppliers through e-payments and leveraging data across our network.
+
+As we facilitate payments from our buyers to their suppliers, we offer electronic payment solutions to those suppliers. Our electronic payment solutions currently include virtual credit cards and an enhanced ACH payment product called AvidPay Direct. Therefore, total payment volume is also another key metric.
+
+Now let's turn to our results for the 3-month period ended September 30, 2021. Total revenue increased by 37% to $65.2 million in Q3 of '21 over the third quarter of 2020. The increase was primarily driven by the addition of new buyer invoice and payment transactions and increased e-payments to suppliers. Additionally, in recent months, we've been experiencing modest tailwinds from the increased average payment size, which we believe is driven at least in part by a recent uptick in inflation.
+
+Our strong revenue growth also resulted in our total transaction yield expanding to $4.05 in the quarter, up 17% from $3.46 in Q3 of 2020. Software revenue, which accounted for 34% of our total revenue in the quarter, increased 30% in Q3 of '21 over the same period last year. The increase was primarily driven by 17% growth in transactions processed in the quarter as well as the benefit of $2.1 million of revenue associated with the acquisition of Core Associates, which closed in December 2020. Payment revenue, which accounted for 65% of our total revenue in the quarter increased 40% in Q3 2021 over the same period last year, primarily driven by 40% growth in total payment volume in the quarter.
+
+Non-GAAP gross profit increased 48% in Q3 '21 over the same period last year to $39.5 million, resulting in a 450 basis point improvement in non-GAAP gross margin for the quarter to 61%. Non-GAAP gross margin improvement was driven by increased total transaction yield in the quarter as well as continued operational efficiency.
+
+Moving on to our operating expenses. These expenses increased by 38% in Q3 of 2021 over Q3 of last year. Sales and marketing costs increased 37% in Q3 of '21 over Q3 of last year, driven by continued investment in our direct and channel strategies as well as acquisitions. Research and development costs increased 42% in Q3 of '21 over Q3 last year. This increase reflects our continued investment in new and enhanced products for both buyers and suppliers, together with investments in our platform that will drive our growth going forward. General and administrative costs increased by $5.2 million in Q3 of 2021 over Q3 of last year and reflects the growth in our business and also includes investments associated with our preparation to operate as a public company.
+
+Overall, our GAAP net loss was $35.5 million for the quarter, driven by continued investments in our growth strategy as seen in sales and marketing and R&D as well as our preparation to become a public company. On a non-GAAP basis, adjusted EBITDA was a loss of $6 million in Q3 of 2021 compared to a loss of $6.2 million in Q3 last year. While we expanded our transaction yield and non-GAAP gross margins, our continued investments in our growth and our platform continue.
+
+We ended the quarter with cash and cash equivalents of $150.9 million. On October 13, we completed our initial public offering, in which we issued and sold 26.4 million shares of common stock at a public offering price of $25 per share. We received $620 million in net proceeds after deducting underwriting discounts and commissions of $39.6 million. We believe that we are well capitalized to execute on our growth strategies.
+
+I'll now move on to guidance. As we mentioned in our press release, we're providing the following guidance for the full year 2021. Total revenue for the year is expected to be in the range of $244.5 million to $245.5 million. At the midpoint, this would represent growth of 32% on a year-over-year basis. Adjusted EBITDA in the range of negative $30.1 million to a negative $28.1 million. In summary, we delivered strong third quarter 2021 financial and operating results, and our momentum heading into 2022 is very encouraging.
+
+I'd like to turn the call now back over to the operator and open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] Our first question today comes from Will Nance with Goldman Sachs.
+
+William Nance
+
+Congrats on the first quarter.
+
+Michael Praeger
+
+Thanks, Will.
+
+William Nance
+
+Maybe I'll just kick it off on some of the traction you're seeing on the AvidPay Network. Just wondering if you could help kind of flesh out people's understanding of the penetration of the network with your current customer set and then how that compares to kind of new business?
+
+Michael Praeger
+
+Yes. So as it relates to kind of the AvidPay Network, and I think your question is related to adoption, related to existing and how it maybe relate to new customers. So we kind of think of it on a transactional basis. And so today, across the entire network, about 40% of all transactions, we're able to monetize either through one of our forms of AvidPay Virtual Card or AvidPay Direct payment offerings. And that's pretty consistent across the different industry verticals that we're in.
+
+One of the things when we take on a new customer to get up to their kind of full adoption cycles, that period is typically a 6- to 9-month period for a new customer to get to their full adoption period. And I don't know if, Will, if you had any kind of follow-up to that question.
+
+Timothy Chiodo
+
+No. that's great. I appreciate the details. And then just maybe second, you mentioned Invoice accelerator a handful of times on the call. Just wondering if you could give us an update on kind of what the timeline is to roll that broadly out to the entire supplier network? And any signs of kind of demand coming from your client base from them?
+
+Michael Praeger
+
+Yes. Great question. Invoice accelerator is one of the areas that we're super excited about, and I certainly think it's kind of the next -- kind of the third leg of our kind of monetization model. So today, it's still kind of an emerging offering, kind of sub-$5 million of revenue but growing quickly. And we've been kind of metering it from the standpoint of today, it's only available for less than 10% of our overall supplier base.
+
+And that's really kind of due to 2 things: one is, yes, we can continue to perfect kind of the algorithms related to determining the eligibility of invoices that we choose to advance; the second thing is that we are executing on our balance sheet today. And so going forward, we expect to make it available to our full supplier base, probably kind of systematically over the next 18 months or so. And as part of that process also look to take it off balance sheet with one of our existing financing partners.
+
+William Nance
+
+Got it. It's helpful. Congrats again.
+
+Operator
+
+Our next question comes from Tien-Tsin Wang with JPMorgan.
+
+Tien-Tsin Huang
+
+I will say congrats on the first quarter out the gate here as a public company. Looks clean and solid here. Thinking about bookings and signings, guys, just how did that come in versus plan? How do you see the year closing out with respect to new sales? I did see that deferred revenue was up nicely. So must be a good sign there.
+
+Michael Praeger
+
+Yes. Great question, Tien-Tsin. I'll take it. And first thing I'd guide you, just given the way our revenue model works, I wouldn't necessarily correlate the change in deferred revenue to sales. But we're excited about the sort of the performance this year. We've seen great continued strong demand for our solutions. We've talked about kind of a mix of some really great tailwinds from COVID and then some sustained kind of headwinds in places, but we were pleased to sort of deliver better than our internal forecast from a sales perspective.
+
+We don't provide a bookings or ARR figure, but we do have good confidence in being able to deliver our long-term -- our guidance for Q4 and sort of our outlook for '22. So feel good about the production in the quarter.
+
+Tien-Tsin Huang
+
+Okay. Good. And then on the -- my follow-up quickly, just on the partner front, how are those conversations? And do you feel like you're closer to maybe securing a few more larger partners? Just curious how that's going.
+
+Michael Praeger
+
+Yes. So great question related to kind of the partners. So we think of partners, they follow in a kind of a handful of different buckets. One is within the bank channel. -- the others with kind of our software partners. And within each of the 2 categories, we have both referral partners, and we have, we call reseller partners and typically, reseller partners in a more substantial partners that are able to actually white label our platform and use their own sales force and go-to-market strategies to sell to their customers.
+
+And so within the bank channel, I think as we firstly message one of our newest partners is Bank of America, and they began onboarding customers earlier this year, and we're really excited about the evolution of that bank channel and believe that Bank of America has the capability to be one of our leading partners once they complete the ramp-up.
+
+The second kind of piece on the software partners, we continue to see good momentum across kind of a handful of partners, including kind of RealPage and SAP as well as MRI software within the real estate vertical. And what I would say is that we are very selective in terms of adding new reseller partners. So that number -- that base of we expect to grow by a small amount each year. But where we're adding more partners is on the referral side. And that, today, we're up to 120-plus different referral partners, and we continue to kind of grow that nicely. So that's what we're currently seeing and excited about the interest level that we're getting from both partners as well as customers.
+
+Operator
+
+Our next question comes from Ramsey El-Assal with Barclays.
+
+Ramsey El-Assal
+
+I wanted to ask about the transaction yields, which went up sequentially pretty nicely. Joel, what are the primary drivers there? It didn't look like it was a mix shift to software. Is there -- is FastPay a contributor there? Or what can you tell us about why that stepped up sequentially?
+
+Joel Wilhite
+
+Yes. Thanks, Ramsey. Great question. Yes, there's a handful of drivers that kind of contribute. A couple that I would point out, and I kind of mentioned in our prepared remarks, to some degree, we think there's a little bit of -- we're seeing an average payment size increase. We think there's a little bit of inflation driving that, and some mix impact as well. And then to a lesser extent, we do have inorganic contribution to that as well, as you mentioned, from FastPay. So kind of a handful of drivers there.
+
+Ramsey El-Assal
+
+Okay. And my follow-up is about longer-term strategy and is a 2-parter. The first part is and going forward, can you talk give us sort of your most updated thoughts on expanding your vertical mix? Are you sort of now focused on trying to penetrate the verticals you're in versus expanding into new verticals? And also over the longer term, would you contemplate either moving upmarket or down market more broadly?
+
+Michael Praeger
+
+Yes. Thanks, Ramsey. No, that's a good question, one that we get routinely. And so to remind you, within the 8 verticals that we're in today, we believe that we're still in kind of single-digit penetration across all 8, probably in the financial services vertical with the growth of kind of Tier 2 and Tier 3 banks as well as credit unions. We may be approaching kind of 20%, but still a big runway within the verticals that we're in today.
+
+And what we expect is to continue to focus and really penetrate those over the next 18 to 24 months as well as continue to be kind of aggressive as well as opportunistic in terms of adding to those verticals. And I think as we referenced, we'd like to add a handful of new vertical focuses each year as we evolve and expect that to be the case in the coming year as well.
+
+Ramsey El-Assal
+
+Great. And I offer my congratulations as well getting out of the gate here.
+
+Operator
+
+Our next question comes from Josh Beck with KeyBanc.
+
+Josh Beck
+
+My congrats as well on new life as a public company. I wanted to ask a little bit about the macro across other industries in calls, we've heard a little bit more about supply chain, labor shortages, these type of effects. I'm just curious across your base, if there's any chatter or any trend that you're seeing take shape on those fronts?
+
+Michael Praeger
+
+Yes. I think it's a great question. And certainly, within the macro environment, it's something that's kind of top of mind for a lot of our customers. Typically, what we've seen within especially kind of the 8 verticals that we focus in as well as some of our horizontals. They haven't been significantly impacted directly by supply chain, certainly, probably the labor component, especially customers that have a retail focus have been kind of impacted the most. But where we're probably seeing some of that impact is reflected in the yield number, and that relates to some of the what we believe is kind of inflation of just average payment sizes ticking up slightly. And we think that is kind of directly related to some of the kind of macro impacts of supply chain as well as inflation.
+
+Josh Beck
+
+Okay. Great. So it seems like maybe on the margin, it's perhaps a tailwind or at least what you've seen this quarter.
+
+Michael Praeger
+
+Yes. Exactly.
+
+Josh Beck
+
+Okay. And maybe a question for you, Joel, as well. Just with respect to the guidance philosophy, obviously, you had flashed your numbers prior to this report. So maybe you didn't get to see exactly how things come in versus your philosophy. But just help us understand maybe what you've embedded into Q4 level of conservatism, those types of things.
+
+Michael Praeger
+
+Yes. Great question, Josh. I mean we're -- if you compare the flash numbers and the S-1 relative to what we delivered, we were kind of at the nice beat across each. I think we are on the high end of the transaction count, which we see that volume as we sit at the end of the quarter. So obviously, now looking forward, we see we've seen a little bit of a volume activity.
+
+But honestly, it's -- there's things we control and there's things we don't control. And I think we're playing it kind of right down the middle. And so again, high confidence that we can sort of deliver those results from where we sit today.
+
+Operator
+
+Our next question comes from Darrin Peller with Wolfe Research.
+
+Darrin Peller
+
+When we look at the actual payments revenue growth rate, it was obviously very strong, but it really does look like it was driven by the volume growth underneath it, which is great to see, except I'm just trying to understand the dynamic of contribution from incremental monetization of payments. Obviously, we know you guys are decently along, although still having maybe 20% to 25% of your total volume really monetized in a sense or I think you've said maybe 40% of transactions when considering the AvidPaid Direct or BC, there's still a huge runway, I think, right?
+
+And so just curious how you're approaching that? How you think we should think about that over the next few quarters? And then more importantly, longer term, what you're doing to try to take advantage of that lever?
+
+Joel Wilhite
+
+Yes, Darrin, I'll take a shot first. Really, as we've talked about this and Mike talked about year 3 at the flywheel, right, the opportunity we see ahead of us over the long run for really continuing to increase the penetration we take that whole payment file at the end of an AP process and then we kind of optimize payment against the supplier network.
+
+So I wouldn't focus as much on the next couple of quarters, but I would really say over the long run, we have high conviction that there's really a great opportunity to provide expansion there. And again, we were pleased with volume growth overall, 37% growth in the quarter. So really see that as validation to the model and excited about that long-term opportunity.
+
+Michael Praeger
+
+Yes, maybe adding a little bit more color to what Joel said is we also expect that the percentage of monetized payments, both either transaction or volume to continue to grow over time as well as we institute new payment modalities into the market as well, one that we're currently under development, for example, is our cross-border capabilities. And we have a number of other payment modalities that we expect to incorporate with customers in the coming year.
+
+And so I think all those different strategies, combined with just our core virtual card and AvidPay Direct acceptance methods continues to drive ongoing supplier growth.
+
+Darrin Peller
+
+Got it. All right. That's helpful. When we think about the verticals you mentioned earlier, the 8 verticals and then obviously this deal recently getting you more into the media supplier side as well. I'm just curious, I mean, I think a barrier to entry for you guys is continued to be the differentiated connectivity into some of the industry vertical solutions. And you touched on this earlier, it's going well. Can we just -- can you just expand on that for a minute because I think we get a question a lot about competition in this. Like how much of a barrier has that been for you and touching on these integrations for a minute?
+
+Michael Praeger
+
+Yes. So great question, Darrin. So I think we think of kind of the different sections of the overall market, the middle market is just -- it's hard, and we like that dynamic. And yes, AvidXchange is really kind of purpose-built for the middle market. And so what does that mean? It starts with the feature set of our software. It's really designed to support the business rules of the middle market companies that we serve.
+
+There are multiple party complex invoice and payment approval structures, coding structures support for multiple general ledgers and job cost systems, which are all kind of characteristics of middle market companies.
+
+The second component is then all the different accounting systems that support each of the different verticals. So today, we spent over 10 different accounts our ERP integrations across the verticals that we serve. And then the kind of the third is really the payment network itself is really purpose-built to support all the suppliers of the middle market. So 700,000 suppliers, and it grows each week.
+
+And then what I would say the last one is really our go-to-market strategies. But related to -- we have direct sales teams that are focused on each of the different industry verticals that work directly with the CFOs of these prospects and taking them through a very deliberate sales process that is typically characteristics of CFOs within middle market companies. And so whether it be our kind of products, the integration of support of or our go-to-market strategies, they're really all geared around middle market companies hand up. And that's -- we believe that has created a big moat for us as most of the new competition, at least that we've seen, has not been in the middle market, it's been typically in small business.
+
+Operator
+
+Our next question comes from Timothy Chiodo with Credit Suisse.
+
+Timothy Chiodo
+
+I wanted to dig into the outbound supplier recruitment team. So we get this question often from investors, and I just thought it would be helpful to shed some more light on it during this call. When the outbound supplier recruitment team is speaking with the suppliers and offering them the various payment methods, clearly, there's a ton of check and paper-based forms of payment to eat into. But when the offering is virtual card versus the enhanced ACH, I realize there's different systems that have a card integrations, there's transaction sizes, they're different verticals. Maybe you could just dig into the value proposition of each virtual card versus the enhanced ACH? And when and why and why not various suppliers might choose one or the other?
+
+Michael Praeger
+
+Yes. Really good question, and it's pretty intuitive because it -- there's some art and there is some science related to it. But I would say, first of all, we today support different types of payment types or modalities as we call them, that are really geared towards the different supplier preferences within the business rules. So many of the suppliers actually have business rules that they will take one type of payment modality under a certain circumstance.
+
+For example, like maybe if it's under $1,500, as an example, they'll take a virtual car transaction. But it's over $1,500, they'll request a different type of payment modality as part of their business rules. And so the -- for both of kind of our main 2 kind of monetized payments, virtual card and AvidPay Direct, one of the key components of it is the data. And the data is really critical in terms of how they reconcile that transaction.
+
+But in terms of the preference and which -- why a supplier may select one or the other, today, it is typically not based on price. It's based on where the supplier has automated their internal process. And so if there, for example, a retail kind of have a large retail focus, they typically have spent a significant amount of both time dollars automating their card base is uptime with their accounting and with their billing systems. And so they typically want to maximize volume through that business process because the most expensive transaction that Aspire has is one that requires manual intervention or manual exception handling. And so if they have an automated process that they've invested in. They typically want to maximize volume. So that typically is the #1 decision factor that we see that suppliers have.
+
+Timothy Chiodo
+
+Excellent. That's a really, really helpful context. My quick follow-up is around the cost of goods sold item. We've touched on this in the past, but we often talk about sort of the double whammy that you have, meaning as you eat into that check volume and turn it into more monetizable forms of payment, either card or enhanced ACH, you also get to reduce the COGS from the check production mailing, et cetera. Maybe you could just talk a little bit about that opportunity and what that might mean in terms of the gross margin opportunity? In other words, how much of that COGS is really from check processing? Sorry about it Joel.
+
+Joel Wilhite
+
+.
+
+Yes. No, Tim, good question. And thanks for teeing that up. I think that is one of the huge opportunities for us. We talk about the opportunity, the revenue opportunity that we have in shifting payments from Check to electronic, but it does have that kind of double whammy effect. What we have an opportunity to do is actually take that check cost. And again, on a transaction basis, that's, Mike talked about, roughly the 40% that's electronic. The other 60% would be checks that we're fulfilling for our buyers as they pay their suppliers. And so as we shift to electronic, we take whatever, $1 plus and turn that the opportunity to turn that into pennies.
+
+And so an important opportunity for us, obviously, Gear 3 is on a revenue perspective, but also adds to the gross margin lift that we get over time. And that sort of supports the confidence we have in our long-term gross margin targets in the mid- to high 70s. So great question. Thank you.
+
+Michael Praeger
+
+Yes. And also, just to add to what Joel said, it does really good things in terms of our yield as well because certainly taking on the payment network side, taking a paper check, which is a 0 revenue transaction and adding revenue component to it, does really good things in terms of that yield expansion.
+
+Timothy Chiodo
+
+Excellent. Congratulations again.
+
+Operator
+
+Our next question comes from Brad Sills with Bank of America Securities.
+
+Bradley Sills
+
+Congratulations on the IPO, and a nice quarter here out of the gate. I wanted to ask about AvidPay Direct. It's a relatively newer offering relative to VCC. What efforts are you -- are underway to kind of drive penetration of that into the installed base?
+
+Michael Praeger
+
+Yes. So a really good question. And the reason maybe provide a little bit of history on why it was created originally back a number of years ago. It is our most recent kind of new payment modality. And the reason why it was created is because we had suppliers coming to us and said they wanted the same data capabilities that we were offering with our card-based virtual card-based offerings.
+
+But for one reason or another, they didn't accept card either they have a merchant account or they only accepted it under a certain limited number of scenarios. And -- but they wanted access to the data. And so we created it to -- we settled through ACH, but we wrapped that data layer around the transaction and send it to them. And we've now seen of our roughly 40% of transactions that we're able to monetize, AvidPay Direct now has grown to be contribute about 20% of that number. And we expect that to continue to grow nicely as well.
+
+And I think as it relates to our sales force related to it, we're really indifferent in terms of the different payment modality that a supplier needs. So the supplier has the choice on whether they want to receive a card-based transaction or an AVidPay Direct transaction.
+
+Bradley Sills
+
+Got it. And then one more, if I may, please. Just I understand the core associates and Bank tell are a couple of acquisitions of software-only assets, what efforts are you doing there to kind of convert those customers to transaction? And kind of where are you with that effort?
+
+Michael Praeger
+
+Yes. So Brad, a little bit of context, one of the parts of our playbook related acquisitions that we really like is to find software providers in different vertical markets that have deep domain knowledge of that vertical and have maybe a nuance solution related to the unique business process of that vertical market. And then we can kind of combine the AvidPay Network with their software offering and provide a really compelling value proposition that customer.
+
+And so that's playing out really nicely. And I think we are very pleased with kind of that conversion process. And in both our -- the ones that you referenced, Core Associates within construction and with BanK Tell within the financial services vertical, we are -- I'd say the team is very pleased with that conversion process.
+
+Operator
+
+[Operator Instructions] Our next question comes from Bryan Keane with Deutsche Bank.
+
+Bryan Keane
+
+I got 2. I guess, first, Mike, now with FastPay close, just interested in your thoughts on the acquisition pipeline. Are there a lot of opportunities out there? And then thinking about international expansion, will that be somewhere where you probably need to make an acquisition to get started?
+
+Michael Praeger
+
+Yes. So two kind of questions there, both related and acquisitions. But the first one, just an acquisition pipeline. So our corporate development team is active of tracking lots of companies across the different verticals. And typically, we like creating kind of long-term relationships with these -- the principles of all these companies.
+
+I think of course, Associates and Bank Tell are great examples of that where we had a multiyear relationship with these companies actually as a partner with them prior to the acquisition, and that really demonstrated a great working relationship across our teams as well as the trust building. between the 2 companies. And we look -- we like that dynamic.
+
+I think we've seen with companies that are out being sold that are being represented by banks and things of that nature. It's a more challenging process just because it's more competitive. And certainly, we see some of the pricing pressure in those types of scenarios. So we like developing kind of long-term kind of relationships with the big pipeline. The second question about international.
+
+What I would say is that we have a multipronged strategy and to kind of step 1 is by incorporating our new kind of cross-border payment capability, which we expect to roll out over the course of 2022. And the second component then is really to evolve the Canadian market. We have stood up 2 of our largest customers within the Canadian market currently, and we expect to kind of continue to expand that.
+
+And then the third would be kind of what I'd say, overseas expansion typically focused. We believe it's going to be within the European market. And I think we will be opportunistic related to do we jump start that process through an M&A effort. And I think we would be opportunistic in evaluating those type of opportunities as they make themselves available. But we do have a great set of existing channel partners that have been asking us to support them internationally for a number of years. And so we're going to be very focused on our international expansion by working closely with our existing partners to support them internationally with Europe as the main focus in very similar ways we support them here in the U.S. market.
+
+Bryan Keane
+
+Got it. Got it. That's helpful. And then, Joel, I just wanted to add on payment volume, it was up 40%. We were modeling 23%. Is that all explainable by inflation, you think? I mean that's a pretty big jump versus our expectations.
+
+And then does it stay elevated at these kind of levels up 40%? And do you expect that inflation to kind of persist?
+
+Joel Wilhite
+
+Yes. I mean there's a number of factors, Bryan, I wouldn't point to inflation as the sole driver. We think that had an impact. We also, to a lesser extent, had a little bit of FastPay volume in there. But again, sort of pleased with that level of volume growth and just kind of feel like that gives us some tailwinds going into the next quarter and next year.
+
+Bryan Keane
+
+Great. Congrats on the great start.
+
+Operator
+
+Our final question today comes from Brent Bracelin with Piper Sandler.
+
+Brent Bracelin
+
+Many questions have been asked and answered, Mike. Maybe I'll just drill down into cross-border. You flagged cross-border as a new payment type coming for 2022. Can you help frame the opportunity here? Obviously, the fee transaction fees are pretty compelling, but what portion of volumes, do you think are cross-border international for you today? Is it 10%, 20% of the volumes? Any color there, just given the opportunity and you flagged that a couple of times in the comments would be super helpful.
+
+Michael Praeger
+
+Yes. That's a really good question related to kind of cross border. So what I would say today is if you think of the 8 different kind of vertical markets that we're in, they aren't typically markets that lend themselves to cross-border being like real estate, HOA and help the facilities. They're very geographically centered industries here in the U.S. But where we do see it is in the horizontal market and working with some of our key partners such as NetSuite, Sage Intech, Microsoft Dynamics and even QuickBooks Enterprise, we're seeing kind of a growing interest in customers doing cross-border transactions.
+
+So we're still in the early days and evaluating kind of that opportunity, but we think it's going to relate in the future more towards our continued kind of horizontal expansion as well as some of the new verticals that we're targeting.
+
+Brent Bracelin
+
+Got it. Helpful color. And then last one here for Joel. You surprised us on the gross margin. I think it's above 60% for the second straight quarter in a row here. Was that check mix kind of going down? Were there other factors that contribute to the nice beat here on gross margins? Just trying to understand the durability of that number there, given you've got now 2 straight quarters here of 60% plus gross margin?
+
+Michael Praeger
+
+Yes. Great question. Yes. So we're proud of the 61% we turned in for the quarter. So 450 basis points better year-over-year. gives us confidence, again, like I said before, on our long-term targets of over the next several years getting to 75% plus. I'd really point to kind of a mix of factors, including continuing to be focused on our own operational efficiency, increase obviously, that revenue yield contribution and again, the power of the flywheel and Gear 3 in particular, and then year 4 as we add data just gives us more opportunities to expand that margin. So great question, and we're excited about continuing to see that expand over time.
+
+Brent Bracelin
+
+Helpful color. Great to see the moment of the business.
+
+Operator
+
+This concludes our question-and-answer session. I'd like to turn the call back over to Mike Praeger for some closing remarks.
+
+Michael Praeger
+
+I want to thank everyone for joining us on today's call. We really appreciate your participation, great questions, and of course, your ongoing support of AvidXchange.
+
+With that, operator, you may now end the call.
+
+Operator
+
+The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

AvidXchange Holdings, Inc., Q3 2022.txt

@@ -0,0 +1,361 @@
+AvidXchange Holdings, Inc., Q3 2022 Earnings Call, Nov 02, 2022
+11/2/22
+Operator
+
+Good morning, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. Third Quarter 2022 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange Head of Investor Relations. Before we begin today's call, management has asked me to relay the forward-looking statement disclaimer that is included at the end of today's press release. This disclaimer emphasizes in major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, consist or market opportunities, operational outlook and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise forward-looking statements.
+
+Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should be -- should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.
+
+With that, I will now turn the call over to Mike Praeger.
+
+Michael Praeger
+
+Thank you, everyone, for joining us here today. Joel Wilhite are excited to discuss AvidXchange's third quarter 2022 results and the continued momentum we are experiencing across our business, driven by our middle market focus and the 4 growth gears of our AvidXchange business flywheel that drives our business. As we anniversary our initial public offering, it is noteworthy that today's volatile economic backdrop is somewhat analogous to the one that existed during our founding back in 2000. Since then, and since our IPO, we have not only demonstrated our durability but also at thrive, laying the foundation for our relentless focus on driving customer innovation, value creation for both customers and shareholders and strong financial and operating performance.
+
+Today, I want to talk about 3 themes that are behind our strong performance for the third quarter and should set us up to continue delivering strong results in the future. These 3 themes are as follows: number one, our industry-leading electronic payment penetration remains a key lever in both differentiating AvidXchange and driving financial results. Two, our hybrid go-to-market sales strategy with a differentiated vertical market approach and integration strategy is driving customer adoption and sales momentum. And three, our focus on customer innovation is increasing our value creation along with extending our vertical market penetration and reach.
+
+Let's start by discussing the impact of theme #1 and how our industry-leading electronic payment penetration remains a key lever in differentiating AvidXchange and driving financial results as evidenced by our consistent operating and financial results we have delivered since our IPO. To appreciate the calculus behind our electronic payment penetration is worth recounting our driving force. We've taken a holistic approach to our customer base since launching the AvidPay network in 2012. Our value proposition extends not just the buyer customers through our AP automation but equally important to supplier customers through our offering, supporting various payment modalities, cash flow manager, Invoice Accelerator and Avid Analytics.
+
+Through these Batok offerings, we have driven industry-leading electronic payment penetration, strong payment volume, higher yield metrics and robust payments revenue growth, the third quarter of 2022 was no exception. We delivered revenues of over $82 million, which was up 26% over the same period last year. This now marks 5 consecutive quarters of exceeding our internal financial targets and delivering over 20% comparable organic revenue growth. Led by our robust payments revenue growth of 34%, we drove revenue performance and our non-GAAP gross margins, which approached 65%. Along with expense controls, the baseline levels of which we are proactively calibrating, the result was at almost -- we almost have our adjusted EBITDA losses to roughly $3.7 million in the quarter. A further upshot to our third quarter results, we are raising our full year 2022 revenue outlook while lowering our adjusted EBITDA losses further.
+
+This brings us to our second theme driving our results, which is our hybrid go-to-market sales strategy. With a differentiated vertical market approach and integration strategy driving customer adoption and sales momentum. The sustained progress on our demand generation is driven by our vertically differentiated and purpose-built solutions, creating our middle market value proposition. The value proposition includes dynamic automation and decisioning of manual and paper intensive workflows with sophisticated business rules supporting a middle-market company's accounts payable and payments life cycle. Through our 220-plus vertically and horizontally aligned integrations with different accounting systems intertwined with our referral reseller and white label reseller partnerships, these middle market customers are able to digitally transform their back office, thereby reducing the current and future costs in getting a rapid return on their investment.
+
+As these buyer customers adopt their solutions, our AvidXchange, flywheel and value proposition gains further momentum, creating a powerful 2-sided network as buyers bring their suppliers, thereby maximizing network density, scalability, transaction liquidity and electronic payment conversion and the information discovery to drive operational efficiencies for both buyers and suppliers. As the current economic backdrop remains volatile, where efforts to reduce costs and bolster productivity remain an imperative to offset inflationary headwinds and its knock-on economic growth. In my opinion, the benefits of our value proposition should continue to come in a sharper view and drive further market adoption. One powerful example supporting our vertical market integration strategy and our value proposition is with buyer customer Vets Pets.
+
+A veterinary hospital network as part of our health care facilities vertical. According to Blair Meyers, Vice President of Finance and Accounting at Vets Pets, prior to AvidXchange, Vets pets back-office processes were inefficient, costly, manual and a bottleneck to growth, including manual cutting paper checks to pay each invoice. After visiting an accounting systems conference in evaluating several AP automation companies, Blair chose AvidXchange for its full circle platform, which provides both AP and payment automation capabilities, which is highly integrated with their Sage Intacct accounting system, thereby turning a bottleneck into a profit center. Best of all, Blair recounted, honestly, this was probably one of the easiest new product implementations that I've been part of in my entire career.
+
+Another good example is with Saban Community Clinic. A nonprofit health clinic with multiple locations throughout Los Angeles, which is another success story within our growing not-for-profit vertical, highlighting the power of AvidXchange's AP and payments automation solution tightly integrated with their MIP fund accounting system. Contending with staff turnover in its accounts payable department, Saban Community Clinic found it difficult to maintain business continuity and struggle with processing their invoices and payments on time. With our combined AvidXchange invoice-to-pay solution, fully integrated into the clinics accounts payable process, Saban community is now able to process payments on time without worrying about negatively impacting the clinic's operations or their ability to serve their community.
+
+As staff accounted [ Michelle Toe ] states with the AvidXchange, I am now able to electronically approve invoices and payments in seconds. Given these very compelling customer testimonials, articulating the business problems that we are solving for our customers. I will now provide an update on our value proposition in driving market adoption of AvidXchange's industry-leading offerings, which are purpose-built for the middle market. In addition, I want to focus my directional commentary on demand trends year-over-year as it relates to our top of funnel sales activity. This commentary provides a line of sight into potential opportunities tied to new buyer customer logo wins and additional product attachments to existing buyer customers that are expected to convert, fully ramp and impact 2023 results.
+
+Furthermore, our pipeline analytics, which overlays the sales funnel tracks deal sizes, close rates, in addition to onboarding and new customer go-lives along with our 90-day certification rates for new invoice volume. To date, we are encouraged by the demand activity we are seeing, both the buyer and the supplier side of the equation in the face of the current macro backdrop. Our real estate Home Association and nonprofit verticals, along with our horizontal focus, all of which represent a greater weighting in our business mix continue to exhibit strength quarter-over-quarter and sequentially.
+
+Within the real estate vertical, we're also seeing strong channel demand partner support for driving new opportunities as evidenced by AvidXchange be named Partner of the Year by MRI Software at its Ascend user conference last week in New Orleans, along with a record year of rent Manager, another channel partner driving adoption in the multifamily sector of real estate. This is all more impressive considering this year's top of funnel activity was probably influenced by some COVID-related catch-up. Our construction and financial services verticals, meanwhile, have seen some unevenness, which we are also closely monitoring. Overall, net of puts and takes, we are pleased with the strength of our top of funnel sales momentum and remain cautiously optimistic as we position for a strong 2023.
+
+Finally, I want to share insights into our third theme of demonstrating our relentless focus on customer innovation to increase our value creation for both buyer and supplier customers, along with extending our vertical market penetration and reach. The investments we are making in our product road map are compounding our strong operating and financial results through 3 of the 4 years of our AvidXchange flywheel. During the quarter, we advanced our integration strategy with the launch of a new application programming interface integrations or APIs as we call them, for Blackbaud impacting Gears #1 and Gear #2 of our flywheel. Blackbaud is a vertical accounting solution provider, which we established a strategic partnership focused on expanding our non-for-profit education and health care verticals market footprint.
+
+In the third quarter of 2022, we introduced new API integrations with Blackbaud Financial Edge NXT, a cloud-based fund accounting solution built on our next-generation Avid Connect integrations platform, the seamless out-of-the-box integrations enable automatic syncing of general ledger codes, vendor lists, along with the invoice and payment data between Avid suite, which includes AvidInvoice and AvidPay and Blackbaud's Financial Edge NXT system. With roughly 6,000 Blackbaud customers currently on Financial Edge accounting system, we believe this integration when the first on Avid Connect should deepen our technical sales, marketing and organizational partnership with Blackbaud, thus enabling us to accelerate our penetration across Blackbaud's customer base.
+
+Furthermore, as more of our accounting system partners migrate their on-premise solutions to the cloud, our APIs built on Avid Connection enable faster customer acquisition, implementation and payment adoption, along with a better overall seamless buyer customer experience. Under Gear #3, which is the monetization of payment transactions, we recently launched our AvidXchange cross-border payment offerings at NetSuite's annual Suite World User Conference in Las Vegas, consistent with our delivery commitment at the start of the year. This capability will be embedded within NetSuite's ERP with the intentional of international money transmission and settlement component being powered by Wise, our international payments processing partner. The adoption of cross-border payments is an important product, not only in terms of broadening our payment modalities but also in advancing our international pillar of growth strategy but also deepening our relationships by leveraging this capability across all of our horizontal software channel partners.
+
+As we have stated in the past, cross-border payments currently comprise a very small component of our existing money flows. But the absence of it did, however, limit our historical participation in a subset of bundled opportunities that included both domestic and international payments. With our advanced 3-way purchase order matching functionality introduced in the first quarter of 2022, combined with our new cross-border payment offering, we believe we are well positioned to pick up both new buyer customer opportunities as well as extend our vertical market focus into new verticals such as manufacturing and others. In summary, we're very pleased with our results in the third quarter, along with navigating our first year as a public company, which we have been driven by the 3 themes we discussed, combined with our consistently strong execution, our strong balance sheet and our positive business outlook for 2022, we have much to be proud of.
+
+I want to thank all of our AvidXchange team members for their hard work and dedication in driving this strong financial outperformance amid a very volatile economic backdrop. As we celebrate our accomplishments during our first year as a public company, we are excited about the opportunities ahead and recognize the discipline needed to execute on them. To be sure, we have been tested many times since our founding. As the middle market industry leader, we expect to be tested as we build a highly durable growth business. Rest assured, we are focused on excelling and innovating to drive overall middle market adoption. With the investments we've been making across the 4 years of our AvidXchange business flywheel, we believe we are well positioned to advance our value proposition, enhance our industry-leading integrations, continue growing our proprietary 2-sided AvidPay network and expand our significant competitive moat and being the leader for middle-market companies in automating their accounts payable and payment processes while maximizing shareholder value creation.
+
+With that, I'd like to turn the call over to my partner, Joel Wilhite. Joel?
+
+Joel Wilhite
+
+Thanks, Mike, and good morning, everyone. I'm excited to talk to you today about our third quarter 2022 financial results, which reflect continued execution of our growth strategies, leading now to 3 consecutive quarters of positively revised 2022 guidance. Overall, we delivered another quarter of solid financial performance. Our third quarter 2022 revenues came in better than our forecast driven by higher total transactions, payment volumes and contribution of interest revenue from funds held for customers given the Fed induced change in interest rate levels. That, together with better operational efficiencies and expense control contributed to a lower-than-expected adjusted EBITDA loss in the third quarter of 2022. Total revenue increased by 26.4% to $82.4 million in Q3 of 2022 over the third quarter of 2021.
+
+Organic revenue growth, which excludes the contribution of our PayClearly acquisition, which closed in January 2022 was 25.6%. Organic growth was primarily driven by the addition of new buyer invoice and payment transactions, which increased e-payments to suppliers. As a reminder, to those who are new to the AvidXchange story, both FastPay and PayClearly are media advertising books of business that include a portion of revenue that skews to the midterm and presidential election cycles in the U.S.
+
+For the 9 months ended September 30, 2022, the revenue contribution from just the political segment of the media vertical was $5.4 million. While we are not guiding to 2023 numbers, it's worth noting that 2023 has neither the U.S. midterm nor presidential elections benefits.
+
+Back to Q3 2022 financial results. Our strong revenue growth also resulted in total transaction yield expanding to $4.57 in the quarter, up 12.8% from $4.05 in Q3 2021. The increase was driven principally by improvements in mix and payments yield.
+
+Software revenues of $25 million, which accounted for 30.4% of our total revenue in the quarter increased 12.1% in Q3 of 2022 over Q3 of 2021. The increase in software revenues was driven primarily by growth in total transactions of 11.9% in Q3 of 2022. Payment revenue of $56.6 million, which accounted for 68.7% of our total revenue in the quarter increased 34.3% in Q3 of 2022 over Q3 of 2021. Excluding PayClearly, which contributed approximately $0.5 million in the quarter, organic payment revenue growth was 33.1%. The increase in payment revenues was driven by the growth in total payment volume of 29.4% and 28.7%, excluding PayClearly.
+
+On a GAAP basis, gross profit of $47.6 million increased by 38.7% in Q3 of 2022 over the same period last year, resulting in a 510-basis point improvement in gross margin for the quarter to 57.8%. Non-GAAP gross margin increased 440-basis points to 65% in Q3 of 2022 over the same period last year, driven primarily by a combination of total transaction yield and operational efficiencies.
+
+Moving on to our operating expenses. On a GAAP basis, total operating expenses were $74.6 million, an increase of 34.5% in Q3 of 2022 over Q3 of last year, driven by headcount additions to support our growth initiatives, increased expenses and transition to a public company and the recognition of noncash stock-based compensation costs. On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 25.9% or $11.8 million to $57.2 million in the third quarter of 2022 from the comparable prior year period, highlighting the operating expense leverage on a comparable basis.
+
+I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $3.1 million to $19 million in Q3 of 2022 over Q3 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and supplier customers. Non-GAAP research and development costs increased by $3.8 million to $19.3 million in Q3 of 2022 over Q3 of last year. The increase was due to continued investments in our products and platform. Non-GAAP general and administrative costs increased by $4.9 million to $18.9 million in Q3 of 2022 over Q3 of last year, driven by a combination of an increase in performance-based bonus accruals due to continued strong operating and financial results, coupled with expenses and transition to a public company status.
+
+Our GAAP net loss was $25.4 million in the quarter versus a GAAP net loss of $35.5 million in the prior year period, which included the impact of a mark-to-market adjustment for convertible common stock liability prior to conversion upon our IPO. On a non-GAAP basis, our net loss in the third quarter of 2022 was $11.6 million, an improvement of $3.7 million compared to the year ago quarter on solid organic revenue growth, combined with ongoing operational efficiencies and expense leverage. On a non-GAAP basis, adjusted EBITDA was a loss of $3.7 million in Q3 of 2022 compared to a loss of $6 million in Q3 of 2021 due to the aforementioned factors.
+
+Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the quarter with a cash position of $50.4 million. The cash is split between cash and equivalents of $411.1 million, which is in a combination of demand deposit accounts and money market funds. The remaining $97.3 million is in a basket of financial instruments, including treasury bills and commercial paper with a weighted average maturity of roughly 71 days. The weighted average annualized effective interest rate on our corporate cash position for the third quarter was roughly 1.6%. Our outstanding debt balance at quarter end was approximately $128 million out of our credit facility at quarter end, which was $133.5 million.
+
+I'll now move on to our updated full year 2022 guidance. In light of our strong third quarter outperformance and Mike's cautiously optimistic commentary about the opportunities and initiatives we continue to see and execute across our business, we now expect total revenue for the year to be above what we previously provided and in the range of $314 million to $315 million. We are also adjusting our non-GAAP adjusted EBITDA expectations lower to a loss between $18 million and $19 million. With that, I would now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] Our first question will come from Dave Koning with Baird.
+
+David Koning
+
+Congrats on another really good quarter. And maybe for my first question, payments volume yield or I guess, revenue yield on volume has continuously gone up, I think, 3 quarters in a row sequentially. And maybe you can talk through kind of the different moving parts. I would imagine interest revenue probably helped out a little bit, but even maybe payment type or verticals. Kind of talk through kind of what's driven that continued improvement and then how maybe we should see that going forward.
+
+Joel Wilhite
+
+Yes, great question, David. This is Joel. You're asking about kind of our yield on total payment volume, right? So payment revenue over that TPV. We had good growth in the quarter. We were pleased with 29% overall. We've kind of exceeded our expectations from a volume and a total transaction count growth. TPV yield itself, again, we -- it remains kind of industry-leading and healthy. A couple of dynamics. We've said in the past a basis point up or down, would it be something necessarily to focus on. We do believe that over the long run, this yield is connected to Gear #3 for us and is one of the biggest opportunities that drives growth for us in the future.
+
+We don't break out the components in the puts and takes. A couple of things, though, certainly, our interest revenue, which grew Q2 to Q3, as mentioned in the prepared remarks. That is included in payment revenue. There is an incremental lift associated with that. Same to a lesser extent, given the inclusion of the political component of the revenue. But all in all, we're really pleased with the progression of that yield and expect that, again, that's really where there's a long-term opportunity for us as checks come out of the system, and we move more and more payments to digital.
+
+David Koning
+
+Yes, great. And then I guess my second question gets kind of back to the interest revenue. And I think just based on the 800 million or so of that float portfolio and rates being up a lot, we have that line up 2 million, 3 million sequentially, and it's probably all margins. So to us, it looks like your guidance, if we just put that through and no core improvement, you're going to hit your guidance even without any core growth, and I fully imagine you have core growth, too. So maybe kind of let me know maybe if I'm a little too aggressive, maybe on that interest revenue.
+
+Operator
+
+Our next question will come from William Nance with Goldman Sachs.
+
+William Nance
+
+I wanted to ask on the gross margin improvement. You guys have this plan to improve gross margin by 10 points, I think, by 2024. And so it seems like you guys are basically halfway there and seems to be running a little bit ahead of plan. So I just wanted to kind of pick that apart a little bit and understand how much of the gross margin improvement is coming from some of the elevated ad spending and higher float revenues this year versus if you kind of strip that back, do you guys feel like you're kind of running ahead of schedule on that plan as you look out over the next 1.5 years or so?
+
+Michael Praeger
+
+Got you. Good question, Will. Yes, we were happy with 65% margin in the quarter, meaningful step up sequentially. And we've talked about that being a part of our path to profitability. We've said before that kind of in the sort of full year calendar '24, we're committing to that this business will become a profitable business. We believe that happens in the 70% gross margin ZIP code along with good scale in G&A and then R&D. So we did -- just speaking about that 65% in the quarter, the preponderance of that benefit or that sequential increase is really continued operating efficiency that we're seeing. And we're seeing that top to bottom, but it certainly shows up in gross margins, also payment yields.
+
+It is true that, that incremental, that sequential growth in the interest revenue contributed to that gross margin to some degree. We're not breaking out the components. Also, the presence of political was a benefit. Removing both of those, we were pleased with the underlying expansion of gross margin from Q2 to Q3. The last thing I might just add to that question, Will, is as you think about, we're not certainly not guiding 23% now, and we don't guide to gross margin, but I would kind of balance the expectations of margins going forward for 2 things.
+
+One is, you already mentioned and I answered the political component, there's a bit of a benefit there just given the nature of that spend and margin. And so we've mentioned before that political is largely absent in the '23 year. And the second thing I would say is, I think we mentioned last quarter that we've more fully now moved our business into the Azure cloud. And so that transition is behind us. But we are making investments and making certain spend as we exit '22 associated with the security in the platform, the robustness of that. And so I would sort of mute expectations for that [indiscernible] over the next couple of quarters.
+
+William Nance
+
+Understood. That all makes sense. And then Mike, I thought the question or the commentary on top of funnel demand was interesting. One of the things I think you highlighted in the testimonials was turnover among AP staff. I mean, I guess, is that a trend that you're seeing? And as we think about the great resignation playing out and back offices across the country, is that a trend that you're seeing drive more demand for the product?
+
+Michael Praeger
+
+Yes. I think -- that's a good question. I think the overall trend that we're seeing is the question when people are forced to hire additional AP staff, do they want to invest in the labor component or now is the right time to invest in automation. Whether that need and staff is driven by the growth of their business or by kind of the resonation, kind of element I think it is a good question. We recently actually released our Q2 middle market spend index. And one of the things that we highlighted there as part of our survey is that in the last year of 4 out of 5 of our customers across middle market have grown their business.
+
+And so whenever you have a growing business, you also have a need for additional accounts payable staff. And I think in the current economic backdrop, what we've seen and what we're seeing currently is consistent with in the past, when you have choppier waters is it really kind of forces our buyer customers to look at is now the right time to automate this process rather than continue to invest in human labor. So I think that overall theme is certainly playing out and whether the increase in hiring is that we're seeing is due to kind of growth of their business or part of the turnover of their staff, I think, is a good question.
+
+Operator
+
+Our next question will come from Darrin Peller with Wolfe Research.
+
+Darrin Peller
+
+I want to follow up on the top of funnel again for a minute and just talk about what you think is truly resonating. I know a lot of it was post-covid being back out of conferences, but it kind of white space. And so when you think about what's sort of sustainable on the front of new customer adds? And then just a quick follow-up on volume trends. You talked about -- we saw the results and they continue to be very strong. I think you mentioned some differences in terms of verticals and some puts and takes. So can you just go into that again? Is it something you're seeing from a macro standpoint that's driving some changes in certain verticals versus others? But look, overall, in context of the strength we're seeing, I guess, is that new business? Is that some verticals that outweighing others? A little more color would be great.
+
+Michael Praeger
+
+Yes, that would be great, Darrin. Good questions. So certainly, so to kind of start with the question of kind of top of funnel activity that we're seeing. Certainly, the kind of conversion back to in-person conferences has been a positive element for us. Historically, that's been a key component in supporting kind of our digital top of funnel generation along with that of channel partners. And what we're seeing is, I was just at 2 of our partner conferences last week alone, and attendance was up above 50% over last year. So certainly, there's an interest in finance leader CFOs getting back to how do they catch up or really lead into some of the automation initiatives that maybe they haven't invested in during COVID.
+
+The second thing we're seeing is really some nice activity across some of our channel partners. Again, during COVID, many of our channel partners were more focused on just maintaining customer relationships rather than selling new products. And now they're getting back to how they grow their customer base. So that's certainly being a positive element in terms of top-of-funnel activity. As it relates to kind of the performance of our -- across our 8 verticals, first of all, the beauty of our business today is that we have -- we're super diversified across 8 different verticals plus we have the horizontal slice that's driven by some of our channel partners.
+
+And what I would say is we've had -- actually, in the quarter, had 4 verticals that really probably outperformed our internal expectations, being real estate of HOA or Home Association and condo association management market, nonprofits and then the horizontal market. And I made reference to 2 verticals that we're seeing some unevenness with being construction and financial services. However, I'd be careful there not to kind of equate it to maybe entirely driven by macro construction, for example, we have some internal strategies on how we're going to market related to the conversion of still a fairly large base of on-prem timber scan customers and how we're moving them to our new titanium cloud-based offering for construction. And so some of that evenness is based on some of our internal go-to-market strategies and how we're converting that base and not making the AvidPay network available to some of those on-premise customers as a catalyst for getting them to adopt.
+
+And then on financial services, we're also seeing somebody did in this across some of our channel partners that we rely on in terms of just not being as AvidXchange me not as directly involved in the sales process as we are in some of our other verticals. So those are some of the commentary that I would say. All in all, the puts and takes, we're very pleased across all the verticals in terms of how -- on balance are performing.
+
+Darrin Peller
+
+Okay. That's really helpful, Mike. Now, and then combine that with -- it sort of seems like at this run rate, you could be profitable a lot earlier than '24. So I guess I'm curious, any update there.
+
+Michael Praeger
+
+Yes. Maybe I'll just hit that in the 2 parts. Again, the levers being the first part and the path to profitability in the second part. So from a lever standpoint, we've talked about our path to profitability as being -- obviously, the gross margin improvement is a really core part of that in addition to scale and operating expenses. And we've talked about that gross margin progression being essentially made up of roughly 2/3 expansion of yield and roughly 1/3 of just steady, consistent operating sort of unit cost improvement.
+
+And that can sort of be zigzag across the quarters depending on various circumstances. But that's basically the way we see those gross margins expanding. And then from the second part of your question, again, what we're -- we're not giving guidance now, but certainly, we'll do so for '23 in the March time frame. So we're sticking with, and we still see that profitability point for us in the full year '24. And again, I'd just remind you that we're focused on really being super disciplined.
+
+We've talked about efficient growth being the focus of the team across the company and making sure that we're continuing to invest in growth. And so we do have -- we're expecting to continue to invest around the flywheel products for buyers and suppliers in our platform while seeing that steady progression of gross profit. So we do see profitability around the corner, Darrin, and we'll update you guys when we give guidance in March.
+
+Joel Wilhite
+
+And Darrin, just maybe just to kind of a reminder too, Joe, the good job of taking away about 2/3 of that expansion yield in terms of driving gross margins from expansion yield. And one of the biggest levers there, remember, is this large base of paper check suppliers that we have. And that conversion -- continued conversion from paper check electronic, does really good things for us in terms of taking cost out of this spectrum as well as increasing revenues related to those transactions. And the faster we add new buyer customers, it adds a bigger backlog to that paper check supplier base.
+
+Operator
+
+Our next question will come from Josh Beck with KeyBanc.
+
+Josh Beck
+
+I want to drill down a little bit around the political revenue. So certainly, I think we have a really good sense of how that trended in the first half and what it looks like in Q3. I guess my question is like moving forward, would the calendar Q4 generally be the strongest. Obviously, that's when a lot of the actual election activity is. So that's kind of part one. And then part 2 is just thinking about next year, is that something that really drops off or there's -- it's more of a maintenance spend? Just any further color on just how to think about that political piece would be great.
+
+Joel Wilhite
+
+Yes. Great question, Josh. Let me just kind of provide a couple of data points and perspectives, and then Mike, maybe just talk generally about that business. But we're just -- we just lapped our first year kind of owning FastPay kind of pleased to have just to increase the diversity of our verticals across the middle market, and so pleased with that business. Of course, a subset of that. Overall media business is political. And I think what we've -- year-to-date, I think, again, just we'll sort of sunset talking about FastPay separately as we lap the organic. We lap the anniversary. But year-to-date, we've generated about $13.5 million of total media revenue associated with that acquisition and about $8 million of that is nonpolitical.
+
+And so we've talked about the inclusion of roughly 2.5 million, 2.6 million of political in the third quarter. We've said before that even though the election in November, there is kind of a meaningful build of that revenue through the year. It is pretty tough to predict. And so from a guidance standpoint, we're being cautious. It's tough to predict what that Q4 could be. It could move depending on the way the election cycle plays out, runoffs and otherwise. And so that's about as specific as I get from a guidance standpoint.
+
+To answer your question a little bit about how should we think about '23, we've talked about that not being a presidential or midterm cycle. And maybe just to give it some color, that 2.6 that we mentioned, we generated political revenue in Q3. The comparable number in the prior year was around $700,000. And so kind of meaningfully different, and that should give you a little bit of color about how to think about '23. Mike, anything you'd add?
+
+Michael Praeger
+
+Yes. I would say that overall, the media vertical for us is fairly diversified, still the majority of the customers and the spend is from kind of corporate media. And on the political side, we're actually almost split 50-50 down the fairway between those customers who support the Republicans versus the Democrats. And the thing that's been interesting actually for me to seeing is a lot of the spend is actually driven by the issues, not even more so than the candidate political spending. And so the issue is one of the biggest drivers related to that category for us.
+
+Josh Beck
+
+Really helpful. And then I think a question that you've addressed and we're getting a lot is certainly with respect to the macro and the vertical commentary and certainly, your ability to help fight inflation is super helpful. But I'm also kind of curious like what signals or maybe macro indicators are you watching? Obviously, there's lots of B2C-oriented payments companies. It's pretty obvious. In B2B, it's a little bit trickier, I think, for investors to track. So maybe from the prior recession or just macro indicators, you found helpful would be great.
+
+Michael Praeger
+
+Yes. Certainly, what we've been talking about in terms of on the buyer side, it's top of funnel activity and the continued adoption of the overall market that's still managing paper and voices and paper checks in that conversion. So it kind of starts there. And then the second thing that we're being in the payments business, which is a little bit different than what we've seen in kind of the last economic downturns where we didn't have as big of a payments business as we do today. We're paying close attention to, say, average payment sizes and overall kind of payment volumes. And to date, those remain pretty healthy for us across the B2B spectrum. One of the biggest areas that we're also paying close attention to is on the supplier side is whether a more kind of challenging macro environment actually ends up being a bigger catalyst for us in those suppliers moving from paper check to electronic.
+
+Today, with a paper check transaction on average, it's taking the supplier 7 to 10 days to get kind of fully paid and settled when the U.S. Postal Service isn't making that any faster. And moving to electronics certainly provides them a significant advance in terms of their cash flow. And so although we don't have -- we've not forecasted really into any of our models, we are cautiously watching whether that's a positive impact for us in the current environment.
+
+Operator
+
+Our next question will come from Brad Sills with Bank of America.
+
+Bradley Sills
+
+I wanted to ask about TPV. Lots of puts and takes with the macro backdrop right now, you've got on one hand inflation, which could be a tailwind. And then on the other hand, we're heading into a recession and seeing some choppiness across different verticals and industries. You talked about some changes by vertical. If you could just kind of help us understand more kind of the puts and takes as to what you're seeing with regard to spend volume on a per customer basis, how that's trending? And any color on different verticals.
+
+Joel Wilhite
+
+Yes. Thanks, Brad. I'll take a shot, and Mike may add some context as well. Again, just stepping back, we were pleased with the results in the quarter. Top and bottom-line beat, but also beats on sort of the core fundamental health of the business, total transactions, TPV. On the macro, like we've said, we haven't seen a meaningful impact on an adverse macro environment. We're cautious and optimistic as we move through that. And we've also seen lots of puts and takes across the verticals. But I would say that the mix of those puts and takes is no different this quarter than we've seen in past quarters and sort of steady as she goes. So I don't know, Mike, if you want to add anything to that?
+
+Michael Praeger
+
+Yes. Maybe my last commentary, I kind of focused on some of the verticals. And one of maybe one other aspect of it is -- and our horizontal business, that was another area that we saw some outperformance based on our internal expectations in the quarter and really driven by some of our bigger channel partners like the NetSuite, Acumatica of the world and others. And I think we're seeing lots of overall demand on the horizontal side.
+
+The NetSuite user conference that was recently in Las Vegas was a very well-attended conference. And we did announce our cross-border offering at that conference for specifically Ford NetSuite that's highly integrated into the NetSuite payment process. And our expectation is that, that will continue to drive some nice performance in terms of new buyer customer adoption on the horizontal side of the market as well in addition to the commentary I made previously on the various puts and takes on the vertical markets that we're in.
+
+Bradley Sills
+
+Wonderful. And then one more, if I may, please. Just on the cross-border offering. Are there any verticals where you see a near-term opportunity? Have you taken a look at your kind of transaction volumes to kind of parse through where you see the opportunity for that? Are there certain verticals where there's just a heavier volume of international payments? Where do you see the initial success? And any color on just pricing for cross-border and what that might bring into the model in terms of monetization?
+
+Michael Praeger
+
+Yes. So it's a good question. I’m as probably anxious as you are, Brad, in terms of some of where the impact is going to be. As we've kind of talked about historically, we don't have a big demand for cross-border within the existing verticals that we're in today to the fact that they're very geographically centered type verticals. However, where we're seeing kind of the initial interest, i.e., just in the last 30 days or so is in the horizontal market. And specifically, probably in opportunities that we would have historically opted out of because we weren't a good fit for those type of customers. And so playing in those type of opportunities in the horizontal market within, say, NetSuite and some of our other horizontal accounting systems that we're deeply integrated with is going to be kind of that opportunity. We also think it's going to, over time, lend itself to us developing new vertical markets that incorporate cross-border type opportunities as part of that.
+
+And we have specifically perhaps the intersection of combining what we've previously released in the last couple of quarters related to our next-generation purchase order and procurement-related tools, combined with cross-border provides us for a nice solution, for example, potentially in the manufacturing vertical and some of those other verticals where there may be purchase order procurement centric combined with having an international supplier base. So those are some of the things that we're taking a look at, and it's going to be interesting to see where some of those kind of natural customer adds come from. But we expect, certainly, it's probably going to be driven by the horizontal market first and then followed up by perhaps pursuing new vertical markets based on our customer trends that we're seeing.
+
+Operator
+
+Our next question will come from Andrew Bauch, SMBC Nikko Securities.
+
+Andrew Bauch
+
+I just want to visit the comments you made, Mike, on the Blackbaud relationship. You said -- you think you said 6,000 customers currently on the accounting system and an opportunity to really penetrate that base. Can you give us a sense on what's addressable there from a buyer customer perspective? It could be a pretty big opportunity in the context of the 8,000 fire customers you had at the end of 2021.
+
+Michael Praeger
+
+Yes. I mean, first of all, I agree with you. And this is another good example of kind of our playbook in terms of that vertical market focus and going very deep within the verticals. And one of the biggest components of being in a vertical market is being deeply integrated to the core accounting systems that support that vertical. So Blackbaud is a great example of that. And having the next generation, what we call kind of built-in side integration with a partner like Blackbaud gives us a nice avenue to pursue that 6,000 customers. I think our team is -- obviously, we're still in the kind of the early days of ramping and going to market within that partnership. But I think it's very similar to some of the other verticals that we've seen with partners with similar customer sizes.
+
+At the end of the day, we're still subject to the adoption rates that we're seeing across the overall industry and continue to build on the value proposition. But having a deeply integrated AP automation, payment experience with Blackbaud certainly provides a great customer experience. And so we do believe that will be a lever in terms of increasing that adoption rate within the nonprofit vertical for those customers that are using Blackbaud. So I would say more to come, and we'll certainly kind of keep you updated. But I know the team and myself are really excited about what that opportunity presents long term for us.
+
+Andrew Bauch
+
+Got it. And then would it be a proper earnings call if we didn't discuss Invoice Accelerator. Any update there? I know that you talked about Accelerate 2.0 last quarter. So anything you can provide on that front on where that's going would be great.
+
+Michael Praeger
+
+Yes. No, I'm glad you're as passionate about invoice accelerators I am. So what I would say is that one of the things that we have launched over the last quarter is the development of Invoice Accelerator 2.0. And so I think our main focus is on development of that product and being in the market later next year with it. And so what I would say is probably the focus is going to be more on the getting invoices accelerated 2.0 in the market and then the launch of it in the market versus maximizing the opportunity on our 1.0 platform in the near term. However, we do see consistent growing demand for the offering, certainly the macro backdrop, we think, is a natural catalyst for more suppliers that want to take advantage of it.
+
+Just to remind people in the -- with our current 1.0 offering, we've really only made it available to a very small subset of suppliers while we get the learnings for both the qualification of invoices that are eligible to be advanced as well as all the business rules related to managing the offering and the recapture of the payment. And in the 2.0 offering, it will be made available to all our suppliers, and we believe that roughly 50% to 6% of our overall supplier pool of 25,000-plus suppliers fall into the kind of the small business category, which is really the category that didn't push Accelerator 2.0 is designed to serve. And so I'd say we remain really excited about that offering and anxious to be in the market with it next year.
+
+Andrew Bauch
+
+And just a quick follow-up. That 50% to 60%, that's relative to -- I think you said in the past 40% addressable within the 1.0 offering?
+
+Michael Praeger
+
+Much less than that. We've made the 1.0 offering available to less than 10% of those suppliers.
+
+Operator
+
+Our next question comes from Ramsey El-Assal Barclays.
+
+Ramsey El-Assal
+
+I just had one question for you. I was wondering if you could give us an update on the M&A pipeline and also just comment on the degree to which you've got all these great new products out there now cross-border invoice Accelerator STP. Is there a way now that you have those products out in the market to kind of accelerate their adoption via M&A? It seems like there might be some interesting kind of tuck-ins that would help the progress on traction.
+
+Michael Praeger
+
+Yes. Ramsey good question. So what I would say is that our playbook related to M&A continues to be very focused on how we accelerate vertical market expansion versus product expansion. I think we feel very confident and good about our product portfolio and the progress -- innovation progress that we're making. And sometimes on the product side related to acquisition, that actually can slow you down versus accelerate as you try to kind of integrate products and things like that.
+
+So we believe as kind of as the industry leader in the middle market and having our products purpose-built for the middle market, there's actually not a lot of opportunity for product-related type of expansion through M&A. We believe that our playbook has stayed consistent on kind of using it for vertical market expansion, and we love the profile of smaller software companies that are making headways in a particular vertical that we're not in that understand the nuances and the domain knowledge of that vertical market and also have some of the integration experience with the leading accounting systems that may serve that vertical.
+
+And they have not yet pursued adding a payment capability. And so those -- that's the playbook for us that we remain focused on. However, I would say that the current kind of environment we've not seen some of the valuation corrections filtered through to the private markets, it's taken probably longer than we've expected for that to occur. And so we remain fairly optimistic about kind of the future of M&A as we go forward and maintain a really healthy balance sheet and really award us to position ourselves in a really good way for when those opportunities arise.
+
+Operator
+
+Our next question will come from James Faucette with Morgan Stanley.
+
+James Faucette
+
+Just a couple of quick questions for me. I mean, obviously, everybody seems very excited and rightfully so around the improving profitability and moving into that profitability and what that road map looks like. But how are you thinking about kind of balancing that rate of profitability improvement with growth and the levers that you may need to pull or push one way or another there.
+
+Michael Praeger
+
+Yes. I think that your question related to kind of growth investment versus profitability. And I think the way we look at it is we kind of define it as efficient growth. We don't believe that our kind of accelerated path to profitability is impacting growth. We still believe that's a really important kind of component for us to take advantage of kind of the market adoption. And I think the biggest reflection on our growth there is just the rate of overall market adoption.
+
+And as that rate increases in the future, we expect our growth rates to continue -- did increase as well. And probably the biggest thing that we can do is continue to build the value proposition consistent with how we have been building it. And so that would be kind of my commentary related to that growth and certainly focused on internally, maybe more of a kind of a rural 40 type concept in terms of how we're balancing those 2 equations.
+
+James Faucette
+
+That's great. Encouraging to here and then I guess tied to that, can you just give a quick update on what you're seeing competitively in the market? How much you may be running into other players? Or is everybody staying pretty well in their consistent line or lanes, excuse me. And what do you think the key determinants are for wins right now for AvidXchange?
+
+Michael Praeger
+
+Yes. So on the competitive side, so first of all, I'll take the kind of swim lanes first. We have not seen any changes related to the swim lanes. We're -- within our core middle market, we don't see bill.com as an example within the middle market, certainly within the verticals and the horizontal focus that we have. In the same sense, we don't see people like Coupa and others in our core deals either, maybe around kind of the core edges, literally less than 20 deals a year. We may see those type of competitors. So our #1 competitor continues to be the status quo paper-based process.
+
+95% plus of all our new customer adds, our customers that are doing this for the first time, moving from paper invoices and paper checks to electronic. And so that continues to be our #1 loss reason continues to be that the customer is not ready yet. They're asking us to come back in 6 months, come back in 9 months to talk to them about it. As it relates to other competitive companies, third-party companies, I would say one of the interesting dynamics is we probably have less competition today than we had a couple of years ago. And M&A has been part of that. So for example, we used to see military historically in past years and maybe 10% of our opportunities. And they've really disappeared from our core market and really haven't run into them at all in 2022. So that would be kind of one example.
+
+And then the barriers to entry just continue to increase the challenges began with getting license as a regulated money transmitter. The bar continues to increase not only in terms of the cost to get licensed, the timing but also some of the tangible net worth requirements as some of the states have just makes it prohibited for startup companies to pursue that path. And so we've really seen probably a fairly stable kind of competitive landscape. And the #1 competitor that we remained laser-focused on competing with every day is the status quo process and how do we continue to build the value proposition to entice these controllers and CFOs to move to an electronic process sooner than later.
+
+Operator
+
+Our next question will come from Brent Bracelin with Piper Sandler.
+
+Brent Bracelin
+
+Mike, building on kind of the topic of, let's say, coopetition. Obviously, we've seen kind of the ERP vendors offer their own kind of modules over the last decade. You obviously have a best-of-breed module specifically to NetSuite, which just came out with an AP automation suite at the NetSuite world, you obviously are adding more functionality and embedding functionality in NetSuite. Could you just kind of remind us about that relationship? Is it a strong relationship? Is it kind of normal coopetition? Just walk us through changes if there has been any with that relationship and then a new product that came out with.
+
+Michael Praeger
+
+Yes. What you're hitting on is within NetSuite in particular. And this is a good example where I think how we kind of partner closely with our leading and biggest channel partners. And so one of the things that NetSuite has done recently is they've kind of pared back the number of participants in their kind of core partner deep integration ecosystem. Now it's only a handful of players, which we're the leading -- we're the largest AP automation partner that they have. We have the biggest installed base of NetSuite customers.
+
+And what we're kind of seeing as part of not only NetSuite but others is, yes, to be competitive ERP systems do have a baseline level of functionality in their kind of AP module. But at the same time, that only addresses a small subset and particularly with their NetSuite's new offering, it's really designed. What I would say is more kind of the small business side of the NetSuite customer base where they don't have business rules related to their approvals.
+
+It's kind of a one-step approval process, very simplistic type of AP management. And then for those companies that have more sophisticated business rules, which is where we're catered to, we have a very deep relationship with the NetSuite sales team. They bring us into those opportunities as really an embedded partner to solve those customer problems. So I would say one of the benefits actually that the NetSuite announcement has made, it's actually helping to increase the overall education and knowledge base around the benefits of AP and payment automation. So we're seeing an uptick of NetSuite customers now that are evaluating solutions solution for this business. problem for the first time.
+
+And then they're saying, okay, now that I am more educated about it, what is the best solution for me. And so we're clearly positioned for those customers that have a more complex business process around multiple general ledgers, more complicated coding, more dynamic approval workflows is our bread and butter versus more of a simplistic small business customer, which would be probably appropriate for the NetSuite offering.
+
+Brent Bracelin
+
+Perfect. Very helpful color there. I was getting some questions on that, and it's very clear the difference is. Joe, my follow-up here for you is just around just the transactional unit volumes. Growth there did moderate from, I think, 13% to just below 12% growth this quarter here. Obviously, completely understandable given the macro. Do you think that could stabilize in this 11% range this quarter based on the trends you see so far? Is there risk that starts to moderate a little bit closer to 10%? I know it's a specific question, but love to get any color around transactional unit trends that you're seeing here in Q4 relative to the slight downtick you saw in Q3.
+
+Joel Wilhite
+
+Yes, you bet. Great question and happy to address it. Again, I'll start kind of broad and then get right to your question. I mean broadly, again, really kind of proud of the performance we turned in for the quarter. Good TPV growth better than our expectations, good transaction growth better than our expectations. And we feel like the -- we're sort of pleased with where we are from a progression standpoint. And again, remembering the growth algorithm, expansion of our underlying buyer customers, adding new logos, new buyers and then expanding that transaction yield as we go. We think those things -- we do see those things working together that give us confidence in light of specialty opportunity that we see ahead of us for that kind of 20% organic growth on average over time. I think just with respect to the quarter, you're right, I mean, I think about 100 basis points different than last quarter, so 12 and 13 range.
+
+I do think it's reasonable to -- we sort of think it's reasonable that we're in the ZIP code that it would sort of kind of stay in. I think we mentioned last quarter, and I'd repeat this quarter that we did -- it's an interesting base comparison given '21 being a bit of the COVID recovery. And so there's some noise overall in quarter-to-quarter, but nothing other than that. So we feel good about the growth of the -- and the health of the network and the volume.
+
+Operator
+
+Our next question will come from Timothy Chiodo with Credit Suisse.
+
+Timothy Chiodo
+
+Great. I'll try and keep these on the quicker side since we're a little bit over here. But on the supplier network, the last update was a 2021 number, I believe, at about 825,000. We're deep into 2022, I was hoping you could maybe just give us a sense of where that number stands today, given it's an important part of your network effect and competitive advantage.
+
+And then as a brief follow-up, I know you mentioned that the construction vertical and financial services are the ones that you're just kind of monitoring, but everything is going well still. I'm sure we'll get this question from investors. If you could just recap what the portion of either volumes or revenue or gross profit is of those 2 verticals specifically. I'm sure that would be much appreciated.
+
+Joel Wilhite
+
+Thanks, Tim, I'll jump in real quick, and then Mike can add some context. So we kind of established a routine when we went public last year kind of updating our buyer and supplier accounts on an annual basis, and we'll certainly do so again this year and address that, obviously, and talk about it in the year-end call, but kind of happy with the overall growth across the business. Mike, anything you'd add?
+
+Michael Praeger
+
+Yes. What I would say is that, that supplier component is really the secret sauce of AvidXchange and the reason that provides us the competitive advantage in the marketplace is our ability to monetize the supplier side. And so as Joel said, we're pleased with that growth. And we certainly are looking forward to updating those numbers in March. As it relates to -- I think your second heart of your question related to kind of across our 8 verticals as they're kind of waiting across some of those verticals. I would say that overall, it's extremely diversified across our 8 verticals plus the horizontal part of the market.
+
+And the horizontal is actually one piece that's exceeding our expectations as well. But our -- within those, probably, again, our most mature and some of our largest verticals are the real estate HOA components of it just because those were our first verticals that we entered into. So we have really nice customer base and growing nicely within those verticals as well as just overall deep market presence.
+
+Construction and financial services are 2 of our newer verticals that we got into through acquisitions being construction with core associates and financial services with the bank tell acquisition. So the main a little bit of flavor there. But I'd say, overall, we don't have any outsized waiting on any one particular vertical or the other, and it's we have a nice diversification. And then the horizontal is actually adding another component of that diversification and the growth that we're seeing there.
+
+Timothy Chiodo
+
+Excellent. Mike and Joe, I think that context really helps, especially around the reminder on the recency. I'm sure people will appreciate that. And no set on the 825 number, we will wait for March, but agree that is part of the secret sauce.
+
+Operator
+
+Our next question will come from Tien-Tsin Huang with JPMorgan.
+
+Tien-Tsin Huang
+
+You've covered ground already, I know. So just a clarification. Has the operating expense outlook changed in any way since last quarter? I know the gross margin performance is better, including the lots you discussed, but I just wanted to clarify on the OpEx.
+
+Michael Praeger
+
+Yes. Good question, Tien-Tsin. And one thing that I haven't had a chance to mention is, again, from an operating expense standpoint, nothing significant apart from what I would say here. One, overall general operating discipline that we're applying in the business, balancing growth and our path to profitability.
+
+Specifically, the sequential step-up in operating expenses in the third quarter over the second quarter, the lion's share of that sequential growth is associated with our bonus accruals that we alluded to when we gave guidance last quarter that would be a little bit higher in the back half of this year as we are sort of exceeding our kind of internal incentive targets. And apart from that, we just -- we're seeing ahead of us and around the corner of really getting that operating expense leverage together with the gross margin expansion that takes us to the profitable business that we see ahead of us.
+
+Operator
+
+This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Praeger for any closing remarks.
+
+Michael Praeger
+
+Great. Well, first of all, I want to thank everyone for their time today. As you can see, we're really passionate about helping our middle market customers every day and excited about our year-to-date results. We look forward to talking to you in the New Year.
+
+And with that, operator, you can close the call.
+
+Operator
+
+The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

AvidXchange Holdings, Inc., Q3 2023.txt

@@ -0,0 +1,253 @@
+AvidXchange Holdings, Inc., Q3 2023 Earnings Call, Nov 08, 2023
+11/8/23
+Operator
+
+Thank you for joining us for the AvidXchange Holdings, Inc. Third Quarter 2023 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, Avidxchange's Head of Investor Relations. Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. [Operator Instructions]
+
+Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Today's call will also include a discussion of non-GAAP financial measures as that term is defined in the Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.
+
+With that, I'll now turn the call over to Mike Praeger.
+
+Michael Praeger
+
+Thanks for joining us this morning. Joe and I are both excited to talk about our third quarter results and milestones with you. We once again delivered another set of strong quarterly business performance metrics and financial results. I'll summarize these shortly, and Joe will provide further details and commentary later on in his section.
+
+Given the ongoing macroeconomic volatility, our unique AvidXchange value proposition continues to resonate in the marketplace with our middle market customers. We recently held our annual Customer Advisory Board meeting or CAB, as we call it here in Charlotte with over 25 diverse buyer customers attending across our various industry verticals who use our software to manage their accounts payable and payment processes. The cab is an in-person form subdivided into a series of vertical industry-focused groups where we dedicate time and resources for a deeper peer dialogue regarding their specific business and accounting processes unique to their vertical industry, updates on the key accounting systems that support their industry, as well as overall specific industry trends and observations they are seeing in operating their businesses.
+
+Specifically, as though leaders, we serve as our customers' key trusted technology and automation partner and are at the forefront in driving their transformational back-office initiatives. Through our domain expertise, we are helping them with the vision and execution to achieve benchmark level of excellence in automating their overall procure-to-pay processes in line with that of enterprise customers. The CAB reinforced the strategic importance of our value proposition and advancing our customers' invoice and payment automation initiatives with a rapid and quantifiable return on investment.
+
+As we digitally transform their key back-office procure-to-pay processes, driving speed, security, along with workflow efficiencies, catalyzed by our 2-sided network, they are able to optimize every cost lever to take pressure off of their income statement while freeing up increasingly scarce financial resources to support higher value and more strategic initiatives for their core business. This form also importantly underscored that there is a great alignment among our customers related to our recently introduced products, such as our construction lean waiver management software, our 3-way purchase order match functionality, but also the promise of new product pipeline, which currently includes our integrated spend management offering that is in development, new payment modalities, potential vertical marketplace purchasing capabilities, along with 8 areas that we've identified leaning into and utilizing artificial intelligence or AI across all segments of our business.
+
+As we open up more opportunities to drive increased value and impact to our customers, gain increased efficiencies in delivering our products and services along with continue to deepen our competitive moat that we have around delivering our unique solutions to our middle market customers and their suppliers.
+
+Before I turn to our quarterly key metrics and financial results for the third quarter, I wanted to take minute to remind everyone of the significance in being purpose-built to serve our middle market customers versus small business customers or SMB, as some referred to it. There are several key differences between middle market companies and SMB companies. Middle market companies are significantly larger in size and are typically in the range of $5 million up to and exceeding $1 billion in annual revenues, whereas SMBs are generally considered sub-$5 million in revenues. Similarly, the number of transactions per customer with middle market companies are many multiples of that of SMBs.
+
+In many cases, middle market companies are also the leaders of their various industry segments in which they operate. Moreover, the average light span of a middle market company is 31 years versus roughly 8.5 years for a small business. And finally, in an economic environment of rising interest rates and tightening financial conditions, while many small business bankruptcies tend to increase as access to capital grows scarce, coupled with the fact that a vast majority of SMBs are subscale and undercapitalized. We believe that middle market companies, by contrast, are much more resilient and better positioned to navigate a tough economic backdrop, given their scale and access to resources.
+
+As such, our competitive moat that we continue to build is purpose-built for serving middle market companies in supporting their more complex business and accounting processes continues to be a significant advantage for us, as highlighted by our vertical market industry approach across our 9 different industry segments, supported by over 220 accounting system integrations and unique accounting and business process support we deliver to our customers in these verticals.
+
+Now I am really excited to provide a quick summary of our financial and key metric scorecard for the third quarter. We once again delivered another quarter of solid operating results, achieving our ninth consecutive quarter of exceeding our financial targets relative to our implied outlook. Revenues of $98.7 million, up 19.7% for the quarter and 20.2% growth year-to-date, exceeding our implied Q3 '23 outlook, while our adjusted EBITDA profitability of $11.4 million was outstanding, driven by healthy revenue growth, continued gross margin expansion, unit cost reduction and continued scaling of our operating expenses.
+
+These results of delivering a rule of 40 quarter measurement exceeded 31 for the quarter versus demonstrates our balanced focus of delivering on both 20% organic growth mantra and our accelerating profitability as we see the scale in our business, reinforcing the confidence I have in our rule of 40 growth and profitability objectives, we introduced this past June during our Investor Day event. This balanced approach provides us additional levers to strategically invest in our business and further enables us to continue growing our industry-leading position in delivering accounts payable and payment automation software solutions to our middle market buyer customers and their suppliers.
+
+In addition, we ended the quarter with a transaction yield defined as total revenues over the total number of transactions of $5.15, breaking the $5 marker for the first time, and this is up 12.7% over the same period last year. These operating and financial results highlight both our strong market position and continued execution as we enter the final stretch of this year.
+
+On today's call, I am super excited to discuss 3 topics which do a great job of highlighting several of the growth strategies we have been working on related to the 4 years of our AvidXchange business flywheel that we articulated during Investor Day, which include: number one, our top of funnel activity, which is a reflection of our gear 1 in delivering a great user experience with our industry-leading accounts payable and payment automation software. Second, discuss a major new software channel partnership with an exclusive built inside integration and positioning that we just signed, which will further drive gears 2 and 3 of our AvidXchange business flywheel. And third, give you an update on the recent launch of the Invoice Accelerator 2.0, driving future growth under Gear 4 of our business slide wheel.
+
+Let's start with the first topic. From a top of funnel, new buyer customer sales opportunity perspective, we are highly encouraged by the continued healthy engagement trends we are experiencing given the volatile macroeconomic backdrop. Please recall there's roughly a full year lead time from the moment these opportunities enter the top of funnel to when they're closed, onboarded and achieved full adoption.
+
+So for the 9-month period ending September 30, our top of funnel new buyer customer opportunities are up 13% on a year-over-year basis. Although there may be some perceived moderation from levels compared to the first 6 months of 2023. This was largely due to timing related to several of our key industry trade conferences, specifically SuiteWorld, the largest NetSuite user conference at the end of the year, which was in the third quarter last year and shifted to the fourth quarter this year. Second, a portion of our quarterly spend around marketing initiatives along with some trade shows and user conferences also shifted from the third quarter to the fourth quarter of '23.
+
+And finally, our fourth quarter top-- 2023 top of funnel opportunities are off to a strong start across all of our vertical industries as we look to end the year on a very strong top of funnel position to drive our new buyer organic growth in 2024. Digging deeper into the fundamentals of our top funnel activity, it is very consistent with the trends that we called out in the second quarter of '23. Virtually all of our industry verticals saw double-digit growth, including construction, financial services, media, health care, HOA or home Association management, as we call it, education are examples. More encouraging, though we saw some initial indications of the sales cycle shortening by several business base.
+
+Equally, the growth in top of funnel activity for the 9 months ended September 30 sustained a slightly higher average deal size attachment. This healthy top of funnel growth was further backstopped by a sustained pace of win rates. The only top of funnel deviation continues to be within the commercial office subsector of our overall real estate vertical, which also consists of multifamily, student housing, industrial and subsegments of the real estate vertical remaining very strong. Overall, we're very pleased and remain confident with our underlying metrics driving our top of funnel and new buyer customer sales momentum.
+
+To better appreciate why our top of funnel remains healthy, is our ability to drive high-impact quantifiable business impact and outcomes for our customers such as PSI services located in Glendale, California. PSI services is an industry-leading provider of assessment and talent management solutions to the private and public sector organizations. PSI streamlines its back office with AvidXchanges accounts payable, invoice and payment automation solutions using NetSuite as its core accounting system. PSI has grown organically and inorganically to over 150 countries to support its growth, PSI was seeking ways to eliminate their legacy paper-based accounts payable system and standardize their processes across a worldwide group of corporate entities. Galen Bassler, Director of Accounting Systems and Treasury explains.
+
+We took the first steps towards streamlining and automating our accounting processes with AvidXchange for NetSuite. The configuration and setup process was very easy and everyone got on board the new automated process very quickly. Given the initial success in automating our accounts payable invoice processes, PSI shifted its focus and its energy on the payment side of their business, Basler stated. We are purchasing blank check stock, stuffing envelopes, applying postage and mailing a large volume of checks every week. With Avid Pay, our 1,500-plus paper checks, my team was printing the signing each month was reduced by over 99%, reducing our total payment-related costs by roughly 60%. The savings are tremendous and very impactful to our business.
+
+Now I'd like to discuss our AvidXchange business flywheel momentum that fuels customer testimonials, such as those from PSI services and our healthy top of funnel new buyer customer sales opportunities. Just as year 1 of our flywheel is around delivering great AP automation software and is foundational to our strategy. Gears 2 and 3 of our strategy are focused on forging new sales partnerships and deep built-in side accounting system integrations with leading accounting systems and ERPs within both existing and new target vertical industries. We believe these verticals have significant transaction volume to be monetized across our proprietary 2-sided AvidPay network.
+
+As such, I could not be more excited today to announce our new strategic partnership with AppFolio, which is now one of our biggest vertically focused integration partnerships in our 23-year history. With over 19,000 customers, AppFolio is a top provider of solutions focused in the real estate vertical. As the first accounts payable application partner in the AppFolio stack, our AvidXchange accounts payable integration includes our best-of-breed invoice automation and payment solutions. This partnership is planned to go live in the first quarter of 2024.
+
+Given our 20-plus year heritage in the real estate vertical and not to mention our ability to go deep in the customer base of these accounting system partnerships, that fully a partnership underscores just how large and unpenetrated the runway opportunity still remains in the first vertical we entered 23 years ago.
+
+Now I'd like to turn to year 4 of our AvidXchange business flywheel. I couldn't be more excited today to go live with our much anticipated Invoice Accelerator 2.0 offering designed for our small business suppliers. For those that are new to the AvidXchange story, Invoice Accelerator 2.0 is our much anticipated digital invoice financing offering. It's designed to accelerate the cash conversion cycle for the large segment of our $1 million-plus base of supplier customers we have today and growing every month.
+
+Monetization of these -- of this invoice acceleration offering is derived from both fee and interchange payment structures and is another lever in growing arsenal of our drivers for e-payment adoption, with roughly 60% of our supplier base consisting of small businesses, which represents the sweet spot for this offering as they serve our middle market customers. We are uniquely positioned to address this large market opportunity to finance our short-term funding in a highly automated and frictionless way.
+
+The key to executing this B2B invoice financing and payment modality offering at scale necessitates a very unique and competitive advantage in both underwriting risk and collections. What we believe gives us competitive advantage in eliminating the historical friction and scaling is our proprietary 2-sided network where we are the system of record for our buyer customer’s expenses and manage their entire payment file of payments to their suppliers. In other words, we have both the buyers and suppliers transaction data, history and capital flows across our two-sided network and our uniquely strong position to deploy this proprietary financing platform at scale.
+
+As many of you know, we've been in the market with our version 1.0 of our Invoice Accelerator offering for the last several years, which has fostered significant learnings, insights and linkages around the transactional, operational and functional service drivers of the supplier experience. Though domain knowledge and data science, we have amassed through the learning is incorporated directly into our software and foundation of our Version 2.0 of this new platform. As such, everything from supplier onboarding to transaction execution to customer support have been core focus areas in building our next-generation modern, digital first, feature-rich and real-time decisioning platform and we are -- and we'll be paying very close attention to the speed to transact and its scalability. Our plan is the meter of the initial launch over the next several quarters to make sure the offering is working as designed and then accelerate our Invoice accelerator 2.0 rollout, no pun intended to our largest supplier cohort of over 600,000 small businesses and growing.
+
+I believe that our Invoice Accelerator 2.0 offering, conservatively speaking, could reach over 5% of total revenues over the next several years and has the characteristics to ultimately become our next $100 million revenue business in the future. In summary, we are extremely pleased with the progression of our operating and financial performance, including our third quarter top line revenue growth and exceptional bottom line profitability results. We remain laser-focused on delivering on our extensive product road map, accounting system integration partnerships and e-payment penetration strategies while leveraging data to drive incremental customer value. Our recent customer advisory board experience was a great testament to our focus of being passionate to see our customers being successful in driving increased value to their organizations, which is further reinforced by our announcement of the AppFolio integration partnership, along with the launch of our invoice accelerator 2.0 offering.
+
+Meanwhile, we are continuing to make tremendous progress on unit cost reduction as well as leveraging our operating expenses to drive sustained EBITDA margin expansion as we close the year and prepare for 2024. We believe these strategic and operational initiatives, coupled with our strong balance sheet and talented leadership team that many of you met during our Investor Day positions us very well for value creation and strategic growth opportunities in the future. Of course, as always, we are mindful of the uncertain macroeconomic backdrop and are focused on controlling those elements of our business that we can directly control, which is our overall value proposition and business impact that we can deliver to both our buyer and supplier customers. That being said, it's hard to believe, but we're still in the very early innings of a significant long-term opportunity to drive impactful value for our customers, create future growth opportunities for our team members and unlock significant short-term and long-term value for our shareholders.
+
+With that, I'd like to turn the call over to my partner, Joel.
+
+Joel Wilhite
+
+Thanks, Mike. I'm pleased to talk to you today about our third quarter 2023 financial results, which reflect continued execution of our growth strategies amidst continued macro uncertainty. Overall, we delivered another quarter of healthy year-over-year financial performance relative to the implied third quarter 2023 business outlook and adjusting for float, political and onetime deferred revenue cleanup, third quarter revenues came in better, driven largely by higher transaction volumes and yield expansion as we continue to drive checks out of the system. That, together with higher gross margins, driven by higher revenues, progress on unit cost initiatives, yield expansion as well as a shift in the timing of certain operating expenses to the fourth quarter led significant adjusted EBITDA outperformance. We believe this adjusted EBITDA outperformance underscores the scope for operating leverage in our financial model.
+
+Now turning to year-over-year results. Total revenue increased by 19.7% to $98.7 million in Q3 of 2023 over the third quarter of 2022. Roughly 2/3 of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, coupled with yield expansion. The remaining 1/3 or so of our revenue growth this quarter was driven by higher year-over-year interest revenue, coupled with deferred revenue cleanup, partially offset by a year-over-year decline in political revenues. Our strong revenue growth also resulted in total transaction yield expanding to $5.15 in the quarter, up 12.7% from $4.57 in Q3 of 2022.
+
+Of the 12.7% increase, roughly 2/3 of the increase was driven by the aforementioned flux between interest and political revenues as well as the deferred revenues with the remainder driven by paid yield. Software revenue of $28.9 million, which accounted for 29.3% of our total revenue in the quarter increased 15.5% in Q3 of 2023 over Q3 of 2022. Excluding the contribution from onetime changes in deferred revenue, the increase in software revenue was 10.9% and was driven by growth in total transactions of 6.4%, with the balance driven by a combination of price increases and certain subscription-based revenues.
+
+Payment revenue of $68.5 million, which accounted for 69.4% of our total revenue in the quarter increased 20.9% in Q3 of 2023 over Q3 of 2022. Payment revenue reflects the contribution of interest revenues, which were $10.6 million in Q3 of 2023 versus $2.7 million in Q3 of 2022. Recall that a year ago, payment revenues also included contribution from political media revenue. Of the 20.9% increase in payment revenues, roughly 2/3 was driven by a combination of an increase in payment transaction volume of 9% and yield expansion with the remaining portion driven by the aforementioned flux between interest and political revenues.
+
+On a GAAP basis, gross profit of $62.3 million increased by 31% in Q3 of 2023 over the same period last year, resulting in a 63.2% gross margin for the quarter compared to 57.8% in Q3 2022. Non-GAAP gross margin increased 500 basis points to 70% in Q3 of 2023 over the same period last year, roughly 2/3 of which was driven by a combination of unit cost efficiencies and yield expansion with the remainder driven by higher interest revenue and the onetime deferred revenue cleanup.
+
+Moving on to our operating expenses. On a GAAP basis, total operating expenses were $77.5 million, an increase of 3.9% in Q3 of 2023 over Q3 of last year. On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 0.7% to $57.6 million in the third quarter of 2023 from the comparable prior year period. On a percentage of revenue basis, operating expenses, excluding depreciation and amortization, declined to 58.4% in the third quarter of 2023 from 69.4% in the comparable period last year. The year-over-year decline largely highlights the significant operating expense leverage, particularly across G&A as well as sales and marketing to an extent, even after stripping out the contribution of float and deferred revenue.
+
+I will now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs decreased by $1.5 million or 8% to $17.5 million in Q3 of 2023 over Q3 of last year, which was driven largely by a combination of efficiencies and marketing spend and a shift in the timing of event sponsorships related to trade shows and user conferences from the third quarter to the fourth quarter of 2023. Non-GAAP research and development costs increased by $2.4 million or 12.5% to $21.7 million in Q3 of 2023 over Q3 of last year.
+
+The increase was due to continued reinvestment in our products and platforms. Non-GAAP general and administrative costs decreased by $0.5 million or down 2.5% to $18.5 million in Q3 of 2023 over Q3 of last year, driven largely due to leveraging public company costs across a larger revenue base of net of various puts and takes. G&A costs as a percentage of revenues have now decreased 5 quarters in a row and are expected to continue their annualized downward progression as we indicated during our Investor Day.
+
+Our GAAP net loss was $8.1 million for the quarter versus a GAAP net loss of $25.4 million in the prior year period, with the reduction in losses driven by a combination of strong revenue flow-through and expense control leading to lower operating losses, coupled with higher interest income and lower interest expense due to reduced borrowing costs and partial debt paydown. Our GAAP loss in the third quarter of 2023 reflects $0.7 million of professional services and legal fees, net of insurance recoveries related to the cyber incident detected in April 2023.
+
+On a non-GAAP basis, excluding the cyber costs, our net income in the third quarter of 2023 was $5.8 million versus a net loss of $11.7 million, a $17.5 million positive swing from a year ago quarter, driven by the aforementioned factors. On a non-GAAP basis, adjusted EBITDA was approximately $11.4 million in Q3 of 2023 compared to a loss of $3.7 million in Q3 of 2022, largely due to the aforementioned factors.
+
+Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the quarter with a strong corporate cash position of $440.6 million against an outstanding total debt balance of $82.5 million, including a note payable for $18.7 million. We had $30 million on our credit facility undrawn at quarter end. Corporate cash meanwhile, was split roughly 60% among money market funds, commercial paper and U.S. treasuries with the remaining 40% in demand or in deposit accounts. The weighted average maturity on the corporate cash was roughly 20 days while the effective interest rate on our corporate cash position for the third quarter was roughly 4.95%. Customer cash at quarter end was approximately $1.2 billion, with an interest rate of roughly 4.42% for the quarter.
+
+I'll now provide an update on our full year 2023 guidance. In light of our third quarter 2023 financial outperformance balanced with further volume impacts from macro crosscurrents based on all information currently available, we're raising our overall 2023 guidance. We now expect total revenue for the year to be in the range of $374.5 million to $375.5 million. Our 2023 revenue outlook reflects approximately $38 million of interest revenues from customer funds versus approximately $11 million earned in 2022. Also, as a reminder, we do not anticipate any political media revenue contribution in 2023 versus having recognized $8.5 million in 2022. Similarly, we expect a higher non-GAAP adjusted EBITDA profit ranging between $22 million and $23 million for the year.
+
+With that, I would now like to turn the call back over to the operator to open up the line for Q&A. Operator.
+
+Operator
+
+We will now begin the question-and-answer session. [Operator Instructions]. At this time, we'll pause momentary to assemble our roster. Our first question will come from Dave Koning with Baird.
+
+David Koning
+
+Great job across the board here.
+
+Joel Wilhite
+
+I appreciate it, Dave.
+
+David Koning
+
+Yes. And maybe first, one of the biggest highlights from me was the sequential growth in yield in payments, you had it very consistently almost every quarter. But this was, I think, the biggest we can see on record sequential yield. And that's without quite as much interest revenue sequentially, like the growth sequentially wasn't quite as much. What's happening? Is there just a big shift to VCC right now? And how do you see that in the future?
+
+Joel Wilhite
+
+Yes. So Dave, great question. We were, again, super pleased with the results in the quarter and a good strong beat top and the bottom. Most of the underlying metrics were really strong, in some cases, meaningfully better than we expected. We've talked about -- I think you're asking about TPV yield, and we did see a sequential step up about 5 bps if you strip out the political inflow dynamic. And what we've said in the past is don't read too much into a bit or 2 top or bottom. This is a little bit more than that range, and we are pleased with the results. But I would just point back to what we talked about at Investor Day, the real opportunity for us is to continue to expand this with new payment modes going forward. But overall, pleased with the quarter.
+
+David Koning
+
+Great. And then just as a follow-up, incremental margin ex the interest contribution was also probably about the strongest we've ever seen. Is -- is that sustainable? Do you expect like a lot of the revenue growth, the core revenue growth to fall to the bottom line going forward now?
+
+Joel Wilhite
+
+Yes. So let me take that in 2 parts. One, as we said before, we're pleased with the gross margin results, even stripping out flow and political dynamics. We're seeing consistent incremental gross margin expansion through both yield and unit cost improvements. At Investor Day, we talked about being a 75-plus percent gross margin business. So we still have a ways to go, and we still have headroom to expand that gross margin again through both unit cost efficiencies and yield expansion.
+
+Operator
+
+Our next question will come from Ramsey El-Assal with Barclays.
+
+Ramsey El-Assal
+
+I'll echo that very solid results today. Mike, I had a question on the top of funnel dynamics discussion that you had with us. It sounded like macro headwinds are really more localized just in the sort of commercial office subsegments and pretty much everywhere else, it sounded like things that kind of are looking pretty good. Is it a fair characterization to say that there's kind of an improvement in the sort of demand environment out there, maybe the macro overlay to that as well. Is that what you're seeing?
+
+Joel Wilhite
+
+Yes. So maybe take a page out of Joel's book. I don't know if you don't read too much into any one particular quarter. But certainly, we're pleased with the top of funnel activity that we're seeing. As I said, one of the things I try to coach people over time on is the real estate vertical itself is actually a collection of many different sub verticals -- and certainly, we've seen within real estate, for example, multifamily, industrial, student housing, affordable housing, all those subcomponents performed really well in the market as compared to the one that's kind of static a little bit as the commercial office. But across all the new or other, I should say, kind of verticals that we have, the makeup of our collection of 9 total verticals, really across the board, healthy top of funnel growth. And I think it's a combination of a handful of things.
+
+Certainly, the leadership that James Sutton has brought to our sales organization now closing in on his first full year has been really terrific, along with building the team and kind of the mission that both the Andris and I had with James is how do we build the go-to-market sales organization to be a $1 billion business. And that's the lens that we've kind of looked and we've made a lot of progress on that side on the talent, particularly in the -- over the course of the year. And certainly, I think with some of the new kind of product features and the road map that we've been delivering, it's created a lot of excitement and engagement. So certainly, we saw a slight benefit in average time to close. And so we've been really encouraged what we've seen overall despite kind of the continued volatility of the overall market.
+
+Ramsey El-Assal
+
+Okay. So some internal contribution there as well. A follow-up question from me. I was wondering on Invoice Accelerator. Now that, that product is getting sort of imminent. What does the sales cycle booking conversion, implementation time line look like for that product? Is it the same as kind of the core middle market AP offering? Is there any difference in like the velocity of that product? Or is it a...
+
+Joel Wilhite
+
+Yes, that's a great question for your question, Ramsey. And so I would say it's like night and day different. Versus on the -- or the core buyer offerings for invoice and pay, there's certainly a setup configuration, onboarding process. In the case of Invoice Accelerate 2.0, this is really a seamless process. These are existing transactions that they have in our network. And through a simple user interface, they can just literally click a button to have an invoice be accelerated for next day payment if they're enrolled in the invoice accelerator program. And so it happens very quickly and it can happen real time as suppliers want to advance payments.
+
+One thing I will say is with any new product launch, we're now excited that we started processing our first transactions with invoiced 2.0 during the month of October. And we're in the first phase of any new product launch, working hard to make sure the product is working as we've designed it to work, making sure we've incorporated all the data analytics and understandings that we had during our 1.0 offering as well as to recapture elements to make sure that we're capturing payments as they're flowing through our network and then the user experience is working as designed. So that's the current focus as we roll the product out to more on a measured basis to our supplier customers, but super encouraged and excited about what this product is going to be in the future for us.
+
+Operator
+
+Our next question will come from Andrew Bauch with Wells Fargo.
+
+Andrew Bauch
+
+Nice results. I'm not sure how unintentional that pun was around invoice accelerator. But I wanted to ask about the macro environment and particularly in the middle market. I know it was just asked, but -- and we all heard some commentary from your closest peer last week to kind of discussed middle market businesses having more room in their cost structure to kind of scale down expenses? And is there something about the verticals that you guys are playing in that makes your mix a little bit more resilient to that?
+
+Joel Wilhite
+
+Yes. So first of all, I'm glad you caught the pun. Let's make sure our analysts stay in their toes. So good job there. The second part of the question related to kind of the, I'd say, the resiliency of the middle market and kind of the verticals that we're in. I don't think there's much with the vertical element of it. It's just, as I highlighted through my commentary, middle market customers are just very different than small business customers.
+
+These are substantial customers that have built out finance teams, accounts payable teams, they have longevity in their business, they have scale. And I think when you have scale and longevity, it allows you to really navigate through a down market more effectively. You have more levers to pull. You typically have access to different financing levers that a small business does.
+
+And so I think they operate very differently and the one thing I'll say is that we've been at this a while, and so we have quite a bit of history of operating through past cycles. And I think this cycle is no different and kind of the results we're seeing are kind of what we expected to see with the resiliency of our middle market customer base and how they've -- the same similar sets of customers have operated through past cycles. So we're really encouraged by that. And I think it really highlights -- I've been talking about it since our IPO in an upmarket, maybe it's harder to tell the difference. But when you get into a choppier market, I think it's really distinguish the differences between middle market and small business.
+
+Andrew Bauch
+
+Got it. And nice to see growth really kind of get back to that 20% algorithm that you guys have been calling out for in the medium term, albeit a considerable piece attributable to float. Just thinking about as we head into 2024, I know that fourth quarter implies a step down in growth. But with the AppFolio political in 2024, it seems like all the building blocks are in place for you guys to reaccelerate back to that medium-term algorithm. So I just want to get your confidence around that. And correct me if I'm wrong or highlight any points that we should be thinking about?
+
+Michael Praeger
+
+Yes. Perfect. And let me just jump in some of those business commentary and Joe will probably follow up as well. So yes, you hit the nail on the head. We're super confident related to kind of what we laid out at Investor Day. And I would think for next year, kind of -- there's 5 core things that kind of at least I look at that gives me that confidence. And the first one is where we started was top of sales, organic sales activity for top of funnel. That's a good barometer of what gets -- goes through kind of sell-through that shows up in our total sales over time. The second one is certainly, the new payment modalities that we're rolling out, Joel kind of highlighted earlier in the commentary, that's one of the components of our increase in take rate. And we expect those new payment modalities to continue.
+
+Third is what we're just talking about with Invoice Accelerator 2.0. Now we'll be in the market for the full year next year as kind of -- as we'll kind of slowly ramp that over the course of the year. And then we have the new partnerships. And certainly, we have a number of those, but AppFolio is one of those. And then the last piece, #5 is political. And certainly, both the political piece back. And it's probably anybody's guess on how that -- the confusion in the current political cycle will impact us, but we think we're positioned really well there. Joel, you may add some additional comments.
+
+Joel Wilhite
+
+Yes. The only thing I would add is we're really pleased with the Q3 results, see strength in the business. We're excited about the long-term opportunity. It's important to remember that we're in the middle of some really kind of choppy environment, I think, is the word that we view spending moderation on the part of our buyers. And so certainly, we're not giving guidance now for '24. We'll do that in February and update you guys on what we see. We need to finish the year strong, but we're really pleased with the results of the business in Q3 and excited about the future.
+
+Operator
+
+Our next question will come from Bryan Keane with Deutsche Bank.
+
+Bryan Keane
+
+Mike, I want to ask you one of your peers in the B2B payments landscape called out some caution in electronic payment adoption, given the higher costs associated with payments like VC or instant transfer and an economic slowdown. Do you see that in the mid-market? Or is that an SMB thing?
+
+Michael Praeger
+
+So here's what I would say is we're -- what I would say, it's a little bit of apples and oranges. And what I mean by that is, if you remember, one of the core business decisions we made when we launched the AvidPay network is to kind of deem and position the supplier as a core customer, just like the buyer. And what that's allowed us to do is create a value proposition for the supplier that's more than just coming to the AvidPay network to receive a payment. They're coming to gain visibility into their invoices.
+
+They're coming to manage their business rules and the types of payments they want to take under certain circumstances. And then they're coming to get tools like Invoice Accelerator to better manage their cash flow. And I think that strategy in the current environment is starting to really differentiate ourselves because it's not just about coming to receive a payment because when you come and receive a payment, it's typically then about price because there's no other value. But when you create a value proposition around it, it's not about price and it's about the total value proposition that we're delivering. And so we remain super encouraged on our ability to engage with suppliers and move them from paper check to various forms of electronic payment over time. And so we think that certainly, that strategy is even being heightened in the current economic environment.
+
+Bryan Keane
+
+Got it. And then just as a follow-up on AppFolio and partnerships like that, how many economics work? Is there a cut that goes to AppFolio -- is it lower margin or the same margin? How do we think about the...
+
+Joel Wilhite
+
+Yes. Good question. With all of our kind of core partnerships and not all partnerships are created equal. We have referral partnerships, reseller and then kind of white label type partnerships. But yes, there is compensation that goes to our partner in this case to AppFolio. However, we believe that the kind of the contribution of it is very -- is in the same ballpark as our direct sales as a lot of that sales and marketing expense is absorbed by the partner versus AvidXchange. So a very similar kind of net contribution as I look at it.
+
+Operator
+
+Our next question will come from Brent Bracelin with Piper Sandler.
+
+Brent Bracelin
+
+Joel, if you could just talk through visibility into further increasing yield, clearly, yield and float were big factors helping you insulate against a slowing TPV growth rate here? Do you have visibility you could continue to kind of drive improvement in yield, one? And then Mike, if you could just double click in that folio. Is that a white label relationship where they're going to be promoting this across their installed base? And could there be a quick ramp there or not?
+
+Michael Praeger
+
+Hey Brent, so I'll take a crack at your first part of your question. So the short answer is yes. And what I would do is just remind you kind of how we think about the overall growth algorithm in the business. Remember that we measure the degree to which we kind of retain and expand the overall transaction volume. And we were -- in the last couple of years, we're in sort of a 104%, 105% overall net organic expansion. That is suppressed somewhat this year, obviously, given the macro environment that we're in, but continuing to kind of maintain a solid base and still expand to some degree. So that first step is kind of the retention and expansion. Number two, adding buyers and adding the buyers' volume and then 3 yields. So you've asked about yield. We have seen good yield expansion. We've talked about that as the sort of third piece of our overall revenue model. And we've talked at our Investor Day about the opportunity we see ahead of us. And so long story short, yes, yield plays an important part in our overall revenue model revenue growth and gross margin and EBITDA expansion as well.
+
+Joel Wilhite
+
+Yes. And a little bit, I'll add on to the second part of your question regarding AppFolio. Yes, we're super excited about what that means. As I indicated in my remarks, I think in our 2 to 3 years, is the largest accounting system partnership we've ever done in terms of the sizable customer base that's applicable to our profile. We believe that over 50% of the AppFolio customers fit within our target profile. And typically, we see is that the first 36 months of any new partnership are the most critical as in this case, with our white-label relationships that they will be promoting it to their installed base. And we are working hard with the portfolio team to on that positioning and strategies, taking account all the learnings we've had across other strategies or examples that we've incorporated over the years such as MRI, RealPage, Rent Manager, ResMed are all examples of similar partnerships. We can take all those learnings and apply them to that full partnership. So certainly, 36 months will be the most critical in terms of kind of that ramp-up.
+
+Brent Bracelin
+
+Good. Sounds like a big win.
+
+Operator
+
+Next question will come from James Faucette with Morgan Stanley.
+
+Michael Infante
+
+It's Michael Infante for James. I wanted to ask about volume. Anything to call out in terms of how volume trends may have evolved throughout the quarter. I'm more curious as to how exit rates trended relative to the full quarter volume growth and perhaps what you're anticipating or embedding into the 4Q guide?
+
+Michael Praeger
+
+Okay. I'll take that. Great question. Again, TPV volume for us in the quarter was close to $20 million, up about 8% over the prior year period. And a couple of things maybe just to point out, speaking about overall TPV. Again, that metric for us drives payment revenue in a meaningful way. And it's also a metric that's been impacted by some of the caution that we've seen exercise by our base of buyer customers across the middle market. I think if I think about the results for this quarter and the volume trends that we've seen, we haven't really seen meaningful departure from what we've seen in the past couple of quarters. And it's hard to predict, but we're imagining something similar in the quarters to come. And obviously, hopeful for this temporary kind of macroeconomic condition to lift in '24.
+
+A couple of quick points. When you think about that growth in the third quarter of '23, you have to keep in mind not just that discretionary volume impact, but also the political dynamic contributed CPV in the prior year where it would not exist in the current year. So there's a little bit of impact there. Remember also that growth rates last year were impacted by sort of the COVID impact from prior year, so some distortion in those growth rates, together with potentially some impact from inflation. And then finally, we do see potentially lapping the year-ago period sometime in the middle of the fourth quarter when we began to see this moderation start and so we could see some benefit from that, obviously, when we -- when our comparables improve. So hopefully, that gives you a little bit of insight into the TPP volume dynamic.
+
+Michael Infante
+
+Yes. That's helpful. I wanted to ask mechanically on Invoice Accelerator. I think the intention there is to transition the funding mechanism to on versus balance sheet over time? How should we be thinking about the timing of that and sort of the financial impact?
+
+Michael Praeger
+
+Yes. Good question. You're exactly right. We believe our strategy is to transition Invoice Accelerator to be off balance sheet over time. We believe that in terms of those partners that we've already been in conversations with, that we ideally in order to get kind of the best structure and kind of rate for the program, I want to have about a year's worth of history with the 2.0 offering. So I think as we are at this time next year, we'll be -- have some pretty well developed strategies on moving it off balance sheet. And we've incorporated that into our economic model and believe that the yields to AvidXchange will be consistent with what they are now. And certainly, I believe that we'll be able to lower our cost of capital because we're up today, we're really using our equity of our balance sheet to fund the program. So looking forward to getting to that point certainly over the next year or so.
+
+Operator
+
+This concludes our question-and-answer session. I would like to turn the conference back over to Mike Prager for any closing remarks.
+
+Michael Praeger
+
+Thank you. Again, thank you for everyone for joining us to discuss our solid third quarter results and the sustained execution around product innovation, strategic partnerships and differentiated performance. We believe we are the only publicly traded pure-play accounts payable and payment automation investment that's purpose-built for the middle market, leveraging our 2-sided network of having both buyer and supplier customers. And given our sustained operational and financial performance since our IPO, coupled with our strong balance sheet, we believe we are well positioned to execute towards our goal of being a rural 40-plus company, as outlined in our recent Investor Day this past June.
+
+Operator
+
+The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

AvidXchange Holdings, Inc., Q4 2021.txt

@@ -0,0 +1,385 @@
+AvidXchange Holdings, Inc., Q4 2021 Earnings Call, Mar 07, 2022
+3/7/22
+Operator
+
+Good afternoon, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. Fourth Quarter 2021 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's Head of Investor Relations.
+
+Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call.
+
+Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation [ form ] or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.
+
+With that, I will now turn the call over to Mike Praeger.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joel Wilhite and I are excited to share AvidXchange's fourth quarter 2021 results and the continued momentum we are experiencing across our business, driven by our middle market focus and the 4 growth gears of our AvidXchange Business Flywheel. Overall, we delivered another solid quarter of both operational and financial performance. Furthermore, we outperformed nearly every key metric we use to measure the progress of our business, both in Q4 as well as for the full year relative to our previous guidance.
+
+These positive results reflect our middle market's steady demand for AvidXchange's industry-leading and differentiated business-to-business accounts payable automation software and payment solutions. As we advance our key growth initiatives, we are optimistic and excited about AvidXchange's future as we enter 2022 with a strong business outlook.
+
+With that, I'll begin my formal remarks and key highlights from the fourth quarter and full year 2021 results. Our total net revenue for the quarter was over $69 million, an increase of 31% over Q4 of 2020. And we processed over 16 million transactions for the quarter, an increase of roughly 15% compared to Q4 of 2020. Total payment volume was up in excess of 37% to over $15 billion in the fourth quarter of 2021 alone over the same comparable period. And our total transaction yield for the fourth quarter of 2021 increased more than 14% to $4.21 versus $3.68 per transaction in the comparable period last year.
+
+Turning to the full year 2021. Our total net revenue for the full year was over $248 million, an increase of approximately 34% from a year ago. And we processed over 62 million transactions during the year, an increase of over 18% from a year ago. Total payment volume increased approximately 38% to exceed $52 billion in 2021 versus roughly $38 billion in 2020. In addition, we processed over $180 billion of spend under management during the year, which was an increase of over 24% over 2020. And finally, in 2021, we saw a solid 13% increase in our total transaction yield of $3.98 versus $3.52 per transaction in the comparable period.
+
+As a B2B accounts payable automation software and payment solutions leader targeting the large middle market segment of over 435,000 companies just in the U.S. market alone, our competitive advantage is fueled by a strategic framework, encompassing our AvidXchange Business Flywheel. As a reminder, the first growth year of our flywheel outlines our delivery of great AP automation software solutions to our buyer customers.
+
+Proof of our gear one success can be seen in AvidXchange's continued dedication to enhancing our industry-leading vertical and horizontal accounting software integrations as well as our referral partnerships. In 2021, we increased the number of customer referral partnerships by 50% to have over 180 partners today versus 120 partners a year ago. Over the same period, we broadened our accounting software integrations to 220, up from 210 a year ago.
+
+The second gear of the Business Flywheel maximizes the transactions managed on our platform. In 2021, we reached $180 billion of spend under management, an increase of 24% from 2020. This was primarily due to increase in the number of AvidXchange buyer customers, which rose to over 8,000 in 2021, which is up from 7,000 in 2020 as well as our enrolled supplier customers, which increased to 825,000, up from 700,000 a year ago.
+
+The buyer customer growth was driven by the strength across all 8 of our industry verticals, highlighted by a strong performance in our real estate and financial services verticals, along with our bank channel partnerships, while we saw the green shoots of recovery in our homeowner association, or HOA, management market as we call it.
+
+The third gear of our AvidXchange Business Flywheel is focused on further maximizing our industry-leading e-payment monetization and converting suppliers to begin acceptance of one of our various forms of electronic payment on the AvidPay Network. In 2021, suppliers using e-payments on the AvidPay Network grew by 18%, which mirrors the growth of the addition of total suppliers on our network. This data highlights the rapid adoption of e-payments by supplier and deepens our overall value proposition of the AvidPay Network for our suppliers.
+
+The fourth gear of the AvidXchange Business Flywheel enables us to leverage data to drive increased value proposition of our existing products to both our buyer and supplier customers as well as develop new data-driven offerings altogether. Examples include existing products such as AvidUtility, which further enhances our clients' ESG initiatives through advanced energy consumption analysis along with the utilization of data analytics to deliver invoice accelerator and cash flow manager offerings for our supplier customers. In addition, we're really excited about the launch of our new AvidPay Network cross-border payment capabilities that we'll be releasing over the course of this year.
+
+Now let me take a step back and give you an idea of how uniquely purpose-built value proposition solutions address a significant pain point for our middle market customers. I'd like to highlight a few customer case studies from 3 of our newest vertical markets, which include health care facilities, education and our media vertical markets, about how our solutions have positively impacted our customers' accounts payable and payment processes through driving increased efficiencies, visibility and cost savings.
+
+In the health care facilities vertical, Risas Dental and Braces is a perfect illustration of the power of AvidXchange's AP automation software, coupled with our AvidPay Network. Risas Dental and Braces provides general dentistry and orthodontics for patients at more than 23 locations throughout Arizona, Colorado, Nevada and Texas. The controller at Risas historically executed a very manual accounts payable process by printing paper checks or creating PDF pay stubs in the company's accounting software before manually reentering each of these invoice and ACH payments into their banking portal. This cumbersome manual process took the controller and accounts payable specialist several days to complete. After implementing AvidXchange to automate and streamline their AP and payment processes, Risas was able to cut the time needed to manage its AP process by over 75%.
+
+In the education vertical, we support Mountainland Applied Technology College with an enrollment of over 3,000 students located in Orem, Utah. Mountainland uses AvidXchange for their supplier invoice processes and payment execution. The biggest driver for their automation was eliminating their use of paper, which dramatically reduced their paper handling, filing and storage costs. In addition, AvidXchange addressed one of the biggest challenges in the post-secondary educational space, which is compliance. As a state-regulated entity, the college was able to follow their purchasing and payment processing policies electronically through AvidXchange, thereby ensuring high compliance and audit standards.
+
+And finally, AL Media is a politically-focused media agency. As the consumption of media by voters continues to evolve, the challenge for AL Media was determining which media advertisements actually ran on air, with reconciling payments after the election was over, which historically was a very tedious manual and time-consuming process. The solution AL Media turned to was FastPay, an AvidXchange offering designed specifically for the media vertical, to help pave the way for the 2022 political season.
+
+FastPay Political+ was built specifically for political media agencies to better manage their reconciliation and refund process, providing an enhanced ACH or [ ACH+ ] payment solution and driving significant operational efficiencies by addressing the manual and time-consuming payment processes, which can significantly slow down the operations of running a political campaign and making timely payments.
+
+I would now like to discuss our long-term growth, margin expansion and future profitability of our business before I turn it over to Joel. Based on the size, growth, market leadership and long-term profit opportunities we see in the middle market segment, we believe we can compound our top line growth organically at a rate of 20%-plus over the next several years. With less than 1% share of the total addressable market of around $40 billion served by AvidXchange today, we're still in the early innings of tapping the overall market opportunity.
+
+Further accelerating our market penetration will require we continue to build out our horizontal software solutions and continued release of new integrations as well as we develop new industry verticals and international expansion. In addition, we plan to complement this organic growth sales strategy with the selective use of strategic acquisitions as we've been successful in doing in the past.
+
+Moving in lockstep with our investments, we're highly confident in our gross margin expansion levers along with our path to profitability. We believe that we'll achieve profitability by continuing to advance our invoice payment automation initiatives as well as continue to convert thousands of paper check suppliers to e-payment-accepting suppliers on the AvidPay Network. This will further be complemented by revenue scale and operating expense leverage, resulting in steadily improving of our EBITDA as we move towards our long-term EBITDA margin of over 25%.
+
+Starting with gross margin, we expect our non-GAAP gross margins to steadily improve from the low 60% range today to over 75% by continued reduction in unit costs through automation and expansion of our revenue yield. Given the current pace of progress, we're expecting to be approaching over 70% milestone by the end of 2024. Key levers in our unit cost reduction include the use of AI, machine learning and straight-through processing to reduce manual efforts in invoice processing and payment execution. For example, in 2021, we automated 75% of the delivery of e-payments, which was up from 60% in 2020 and have high confidence in our continued automation initiatives.
+
+Moving on to our operating expenses. Increased economies of scale will drive EBITDA margin expansion towards our targeted level of 25%. After 2022, our first full year as a public company, we also expect meaningful leverage on the G&A expense line. Our significant investments in R&D for future growth and product initiatives development will also taper off as a percentage of revenue as we enter in 2024.
+
+In wrapping up my prepared comments, 2021 was an extraordinary year for AvidXchange. Apart from solid financial and operating results, we completed our transition to be a public company, along with bringing a significant amount of strategic capital to fuel our future growth. We also completed a strategic acquisition that expanded our market coverage to include the media vertical while winning several different industry awards for our AP and payment solutions.
+
+2021 also continued our path of progress with strategic partnerships. We forged a new strategic commercial virtual card processing relationship with WEX to provide us with what we believe is best-in-class pricing and execution for virtual card processing. This relationship will enable our 2 teams to collaborate together in driving overall e-payment adoption and deployment of dynamic payment offerings to increase supplier acceptance of e-payments.
+
+Also noteworthy, we renewed our existing relationship with FleetCor, whose subsidiary Comdata has been a processing partner for us since 2013. Additionally, we formed several new partnerships which provide significant benefit to AvidXchange, including our strategic customer distribution relationship with Bank of America, which is now marketing a branded AvidXchange AP automation and payment solution to their middle market customers.
+
+Lastly, our AvidXchange culture continues to be a key competitive advantage for us in attracting and retaining the talent we need across the business to execute our growth and innovation priorities. This includes executive team leaders such as Joe Fox, our new Chief Product Officer, who we recruited in Q4 to lead our overall product strategy. In addition, we added 20 other senior leaders to our businesses -- in our business in 2021 as we prepare to become a successful public growth company. We believe this combination of talent, market opportunity and our balance sheet capital will further deepen our leadership position in delivering innovative accounts payable and payment automation solutions to middle market companies not only in 2022, but for many years to come.
+
+As always, I look forward to updating you on our progress during future earnings calls. I will now turn the call over to Joel to provide more detail on our financial performance, key metrics and our full year 2022 guidance. Joel?
+
+Joel Wilhite
+
+Thanks, Mike, and good evening, everyone. I'm excited to talk to you today about our strong Q4 financial results, which reflect continued execution of our growth strategies and to provide guidance for the full year 2022. Before I discuss Q4 versus last year, let me go over Q4 '21 actuals versus our guidance.
+
+The midpoint of our implied revenue guidance for fourth quarter 2021 was $65.9 million. We came in at $69.3 million, beating our guidance midpoint by $3.4 million or about 5%. We also exceeded the top end of the implied revenue guidance range. Higher total payment volumes and higher transactions contributed to revenue outperformance relative to our implied guidance. The higher-than-expected revenue growth largely fell through, contributing to a lower-than-anticipated EBITDA loss in the fourth quarter of '21 versus our implied guidance.
+
+Now turning to Q4 2021 versus Q4 2020 financial results. Total revenue increased by 31% to $69.3 million in Q4 of 2021 over the fourth quarter of 2020. Organic revenue growth, which excludes the contribution of our Core Associates and FastPay acquisitions, which closed in December 2020 and August 2021, respectively, was 20.5%. Organic growth was primarily driven by the addition of new buyer invoice and payment transactions, which increased e-payments to suppliers. Our strong revenue growth also resulted in total transaction yield expanding to $4.21 in the quarter, up 14.4% from $3.68 in Q4 2020. Roughly half of the increase was associated with improvements in each of software and payments yields and, to a lesser extent, a mix shift towards pay, with the remaining half being inorganic.
+
+Software revenues of $23.5 million, which accounted for 33.9% of our total revenue in the quarter, increased 31.3% in Q4 of 2021 over Q4 of 2020. Core Associates contributed $2.5 million of revenue to the quarter or close to half the software revenue growth rate. The increase in software revenues was driven primarily by the growth in total transactions of roughly 15% in Q4 of 2021. Payment revenue of $45.1 million, which accounted for 65.2% of our total revenue in the quarter, increased 33.4% in Q4 of '21 over Q4 of 2020, of which FastPay represented 9.2 points of growth or $3.1 million. The increase in payment revenues was driven by the growth in total payment volume of 37% or 33%, excluding FastPay.
+
+On a GAAP basis, gross profit of $35.2 million increased by 32.8% in Q4 of '21 over the same period last year. resulting in a 60 basis points improvement in gross margin for the quarter to 50.8%. Non-GAAP gross margin increased 400 basis points to 62.2% in Q4 of '21 over the same period last year, with 2/3 of the increase driven by increased total transaction yield in the quarter and continued operational efficiencies. The remaining 1/3 was margin contribution from the previously discussed acquisitions.
+
+Moving on to our operating expenses. On a GAAP basis, total operating expenses increased by 76.6% in Q4 of '21 over Q4 of last year, primarily driven by the impact of recognition of noncash stock-based compensation costs resulting from completing our IPO in Q4 2021. On a non-GAAP basis, operating expenses increased 35.5% or $13.4 million to $51.2 million in the fourth quarter of 2021 from the comparable period.
+
+I will now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $3.8 million to $16.2 million in Q4 of 2021 over Q4 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and suppliers as well as the consolidation of Core Associates and FastPay results.
+
+Non-GAAP research and development costs increased by $5.5 million to $17.7 million in Q4 of 2021 over Q4 of the prior year. The increase was due to continued investment in our products and platform, along with the inclusion of Core and FastPay. Non-GAAP general and administrative costs increased by $4.1 million to $17.3 million in Q4 of 2021 over Q4 of the prior year, driven largely by expenses in preparation and transition to become a public company, along with the inclusion of Core and FastPay.
+
+Our GAAP net loss was $72.1 million for the quarter versus a GAAP net loss of $32.6 million in the prior year period and was driven by a combination of the recognition of noncash stock-based compensation and deal costs associated with completing our IPO in Q4 2021, together with a mark-to-market adjustment for convertible common stock liability prior to conversion upon the IPO and the previously discussed investments and inclusion of Core and FastPay.
+
+On a non-GAAP basis, our net loss in the fourth quarter of 2021 was $17.7 million, up only $1.5 million compared to the year-ago quarter on solid organic revenue growth. On a non-GAAP basis, adjusted EBITDA was a loss of $8.2 million in Q4 of '21 compared to a loss of $7 million in Q4 2020. While we expanded our transaction yield and the non-GAAP gross margins, our investment in our growth and platform initiatives continued. We ended the quarter with cash and cash equivalents of $562.8 million.
+
+I'll now move on to guidance. As we mentioned in our press release, we are providing the following guidance for the full year 2022. Total revenue for the year is expected to be in the range of $296.5 million to $301.5 million. At the midpoint, this would represent a growth of over 20% on a year-over-year basis. Non-GAAP adjusted EBITDA loss in the range of $42 million to $48 million. We expect roughly 47% of 2022 revenues in the first half, with the remaining 53% in the second half. We expect almost 55% of EBITDA losses to occur in the first half versus second half of the year, skewed by the factors Mike stated.
+
+In summary, we delivered strong fourth quarter 2021 financial and operating results, and our momentum heading into 2022 is very encouraging. I'd now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] Our first question comes from the line of Ramsey El-Assal at Barclays.
+
+Ramsey El-Assal
+
+I wanted to ask about profitability. Profitability came in better in the quarter. The EBITDA guidance also exceeded our expectations. Give us your updated thoughts on the path to profitability. Do you think given how things are stacking up, you could get there sooner than you anticipated?
+
+Joel Wilhite
+
+Maybe I'll start off, and Mike, feel free to jump in. Ramsey, hopefully, you can hear me okay. Just do a quick audio check.
+
+Ramsey El-Assal
+
+Yes, I can hear you just fine, yes.
+
+Joel Wilhite
+
+Perfect. Yes, great question, and we were happy with the quarter from a profitability standpoint. I think in Mike's comments, we sharpened up kind of the outlook so that it's understood that as we kind of exit 2024, we're flipping that EBITDA breakeven point. And I think the key factors driving that includes our sort of steady consistent expansion of gross margins and the scale that we expect to see in G&A after the '22 year and then R&D on a go-forward basis as well. So altogether, we feel good about that path. And this past quarter was a good indication of our ability to sort of deliver that.
+
+Ramsey El-Assal
+
+Got it, okay. And a follow-up for me is what -- is there any contribution or can you kind of characterize the contribution from newly launched products that you have baked into your fiscal '22 guidance? I'm trying to get a -- form a better opinion about whether that would represent sort of upside those products kind of ramping faster than anticipated or how much is in there?
+
+Joel Wilhite
+
+Yes. Look, I'll start. Really, the '22 year for us is based on products we have in the bag today. And so -- and you know how our revenue model works. What we've sort of sold as we finished the year of '21 really constitutes that revenue growth in '22, so we feel like we've got good line of sight, highly recurring revenue model. And in terms of new products, we're at work investing around the flywheel. But in terms of revenue dependency in '22, that would be sort of de minimis.
+
+Operator
+
+Our next question comes from Will Nance of Goldman Sachs.
+
+William Nance
+
+I wanted to ask a question on payment volume. You've continued to kind of exceed our expectations. I think last quarter, you talked about inflationary impacts driving up payment volume beyond your expectations. I'm just wondering if you could talk about the drivers you've seen more recently. And have you continued to see higher average order values? And as it relates to the 2022 guidance, how much of an upside bias could that put on your numbers if you were to kind of continue to see a continuation of these trends?
+
+Joel Wilhite
+
+Yes. So let me kick it off, and Mike, feel free to sort of come behind me. But overall -- so you're right, Will. TPV for us was a good grower in the fourth quarter, 37%. Last quarter, we also had really strong TPV growth. There's a number of variability sort of drivers in that. We did -- we pointed to a little bit of a creep-up in average payment size in Q3.
+
+And what I would say is as we've kind of looked at the data, there's a wide sort of range of mix drivers across verticals, sort of the mix of payments as a percentage of that total sort of payment -- or the actual payment mode within there. And finally, there's a mix shift as payments grow as a percentage of total. So the -- I wouldn't rule out the possibility of inflation in certain pockets here and there, but it's -- we're sort of only a few months into this. Wouldn't really call it a trend and wouldn't really call that we've meaningfully changed our estimates around average payment size as it goes forward into '22.
+
+So I really wouldn't point to a sandbag per se, right, or purposeful conservatism. We really have a pretty predictable model based on the trends that we see in the business and we've used those trends to project '22. So I'm not sure, Mike, if you wanted to add anything to that?
+
+Michael Praeger
+
+Yes. Maybe add a little bit more color, Will, to get through Joel saying about the mix. We saw a different mix shift across the different verticals, and one of those being the media vertical, which, as you know, is a new vertical for us, and some of the increase in payment size related to some of the political spending that we've been seeing. So that would be an example of a little bit of a change in mix shift across the [ 2 ] verticals. And so it's hard to tell exactly how much of that is inflationary-based versus just mix across the different industry verticals that we have. But certainly watching it closely.
+
+William Nance
+
+Got it. Super helpful. And then just as a follow-up on the new questions I think was asked -- sorry, the new products question that was asked previously. As it relates to invoice accelerator, I think you guys were in the market with roughly 10% of the suppliers. How do you see that pilot progressing? And what sort of contribution do you think that could drive to the results over time?
+
+Michael Praeger
+
+Yes. Maybe I'll start, and I know Joel will probably try to add some context to it. So it's one of our fastest-growing parts of our business but still a small piece of the business. As it relates to kind of growing the number of suppliers, there's a couple of things that we're working on. One is overall, just what I'll say is the -- [ working ] across the different gears of our flywheel to look at kind of the scalability as well as how we're using the data across all the different ways that we generate invoices to really get good at the data science and the analytics related to how we determine the eligibility of invoices.
+
+And so that is -- continues to be kind of a work in process that we're testing on different pockets of suppliers. So we will anticipate increasing that pool across the -- over the course of the year. The other element that we're just really excited about is the impact of the FastPay acquisition from a talent perspective of bringing us more talent related to -- to have D&A related to factoring lending based on the historical FastPay business. And we're really excited to have the talent of those teammates deployed in our business. I think they're going to be value added to think about how we grow invoice accelerator over time.
+
+Operator
+
+Our next question comes from Brad Sills of Bank of America Securities.
+
+Bradley Sills
+
+Wanted to ask about the upsell motion. I know that BankTEL and Core associates were software-only businesses with an opportunity to upsell digital payments. How is that effort going over the course of the year? And just how would you classify that? And kind of go-forward basis, is that still an opportunity?
+
+Joel Wilhite
+
+Yes, yes. Maybe I'll just comment briefly and then pass it to Mike. We -- remember that there is an opportunity for us not just from the sort of the software-only customers that come to us via acquisition but also those legacy software customers that were acquired in the years before pay was introduced in 2012, 2013. So good opportunity for us and steady progression. So we're kind of pleased with the ability to continue to sell back to that base. So Mike, anything you want to add to that?
+
+Michael Praeger
+
+Yes. And I think just in the last quarter, we saw really good growth related to some of those upsell opportunities across both, continue to see in real estate as well as within the financial services vertical. And I think one of the green shoots, as we referred to it, from a recovery perspective is starting to see the acceleration of the HOA vertical, which really has been 1 of our 8 verticals, probably the #1 vertical impacted during COVID and now seeing more momentum across that vertical, and we expect that to continue throughout 2022.
+
+Bradley Sills
+
+Great to hear. One more, if I may, please. We're calculating a take rate here on payments around 30 basis points, which is right around where you've been tracking recently. With the introduction of cross-border coming, should that change that or could that change that? Could we see the take rate go up? Just any color you can provide on what cross-border could do to that take rate over time.
+
+Michael Praeger
+
+Yes. I think that's a great question, Brad. So one of the things, just to remind everybody, is today, across the value change business in our 8 verticals, we don't have large pockets of cross-border demand within our existing customer base. And so this has really positioned us for future international expansion as well as other verticals and attracting customers that do have that cross-border need going forward.
+
+So it's not like we're sitting on a large stack of transactions that we're not monetizing today. We expect that there will be some of that but not a meaningful number. So it's really about our future vertical expansion strategies where we'll see the benefit of having our cross-border product offering. And so the -- what I would say is that we expect to see -- continue to be kind of a slow buildup driver to our overall growth over time. But I would not expect the kind of a significant kind of onetime kind of monetization once we release the product as we're not expecting that.
+
+Operator
+
+Our next question comes from Darrin Peller of Wolfe Research.
+
+Darrin Peller
+
+Congrats on finishing up your first year as a public company. Mike, I want to touch on the customer adds going from 7,000 to the 8,000 number. And just maybe you can help us, first of all, be clear on what was organic versus any inorganic contribution of that. And then really the driving force between last year and this year and what we can expect going forward in customer adds. What's embedded in your guidance? And what are the biggest drivers in your mind and the value proposition that you're seeing the most traction with in terms of customers?
+
+Joel Wilhite
+
+It's Joel. Maybe I can [ talk through ] some of those numbers questions and then kick it to Mike. So yes, we did publish our update, which we plan to do on an annual basis. Our total count of buyer customers increased from 7,000 last year to 8,000 at the end of this year. And again, when we look back over the year, we saw strength in real estate, financial services, also our bank channel and beginning to see kind of green shoots in the HOA vertical as we kind of get on the other side of some of the caution exercised across the middle market, given the pandemic.
+
+Your question about inorganic/organic contribution, the core buyer count was included in the starting point and the FastPay, just given the nature of the size of the customers added, think of like less than 10% of that increase attributable to FastPay. Mike, anything else you want to add to that?
+
+Michael Praeger
+
+Yes. So I think in terms of kind of drivers, one of the things that we're just really excited about is historically, about 60% of our new prospect demand gen was driven by in-person events, pre-COVID, and these big industry trade conferences, user conferences, things like that. And then, obviously during COVID, it moved to 100% digital. But we do know that across the middle market, that CFOs have been probably more slow than the small business market to adopt new transformative technologies for their back office.
+
+And we are excited about seeing the return to in-person events again this year. Pretty much every one of the accounting systems that we're deeply embedded with is trying to have an in-person event this year. And so those are really positive for us in terms of kind of that demand gen focus. And so although we had a great year in terms of customer adds, we think that dynamic of demand gen of getting back to more of a normal cycle, of a balance between kind of in-person and digital demand gen is going to pay dividends for us as we come out of the COVID cycle.
+
+Darrin Peller
+
+All right. That's helpful, Mike. I just want to follow up with the algorithm that's embedded in your outlook. When we think about the forecast for your 20% revenue growth rate, the building blocks, including, again, going back to customer adds and maybe what you're thinking about from that perspective versus where you are now on payment monetization versus where that can be by the end of the year or any other major drivers you think worth calling out.
+
+Joel Wilhite
+
+Yes. Darrin, I'll start off, and Mike, feel free to mop up. But I mean, so the question about the growth algorithm. So we've talked about fairly consistently, we feel like this is a good solid 20-plus percent grower over time. We have a number of levers available to us. This past quarter, we expanded our revenue yield in addition to adding meaningful volume year-over-year.
+
+Keep in mind, I think we've laid the groundwork when we gave guidance that Q4 was a little bit more of a tough compare in the year-ago period because of kind of the COVID recovery. So if you're comparing kind of what underlying growth rates we're using for '22 versus what we saw in the fourth quarter. But I would just step back and say we've got great revenue visibility when we enter the year. Most of that business is already sold. We understand those volume characteristics and feel really good about the guidance we've put out.
+
+Michael Praeger
+
+Yes. And I think when we think of kind of at least the metrics that we're driving in the business, it starts with continue to increase that transactional yield number that Joel referenced and then combined with just focus on total spend under management. So that's a combination of both new buyer customers we're adding as well as the new supplier customers that we're adding that kind of make up that number.
+
+And then probably the last one is then just kind of that net retention number of ended up being 107%. And how do we [ continue ] to increase that number as we move forward. So those are the 3 kind of, I'd say, big metric drivers that we're focused on internally in terms of driving that growth up.
+
+Darrin Peller
+
+And it is a mix among them, I guess, and it's pretty balanced.
+
+Operator
+
+Our next question comes from Andrew Bauch of SMBC Nikko.
+
+Andrew Bauch
+
+Just wanted to check in on some of the underlying health of the verticals that you operate in or the verticals that you serve. Obviously, there's clearly some supply chain dynamics that they're probably facing. So anything you're hearing from your customers on the ground as far as economic trends as we enter a pretty uncertain period for inflation and the like?
+
+Joel Wilhite
+
+Yes. Maybe so let me just make sure I got the question. So just what's going on in our verticals? What conditions do we find here and how might that impact our business as we move into '22? I think if anything, one thing that comes to mind is sort of the -- to the extent that inflation is playing a role in these verticals and the need to kind of find ROI and efficiency in the back office that we think that could be a catalyst. But apart from that, Mike, anything vertical-specific that you'd comment on?
+
+Michael Praeger
+
+Yes. I mean I think each vertical has its own little kind of cycles that they operate in. But kind of going back, our 4 most mature verticals being real estate, HOA, construction, financial services. We expect these really solid contributors. And then really excited about media. And it's a new vertical for us through the FastPay acquisition. And one of the unknowns for us this year is the impact of kind of the political cycle and the impact that may have within that media vertical, which is going to be one that we're going to watch closely.
+
+And then our other 3 emerging verticals that are new in the last, call it, 12 to 18 months, being health care facilities, social services and education, I think we're certainly seeing some good growth opportunities but they're emerging verticals and they're new. So I think we have a healthy balance of going deeper within our mature verticals along with the opportunities that we see in the emerging verticals. And probably the most interesting 1 is going to be watching what happens in our media vertical and any impact that the political cycle has on the media spending they're going to see.
+
+Andrew Bauch
+
+Great. And then one more question. Operating in the middle market obviously requires a different level of sophistication than the SMB or customization for larger customers. Could you speak to how you guys are differentiated within those verticals and are able to help deliver a more robust and complete solution to clients that may need additional type of features?
+
+Michael Praeger
+
+Yes. So I kind of think of it as that we're purpose-built for the middle market. And what does purpose-built for the middle market mean [ as kind of to our ] firm, I got to think that it's kind of 5 buckets. The first is our feature set. And I think the feature set is different for middle market than for a small business or enterprise related to the dynamic kind of approval workflow, support for more sophisticated cost center allocations, geocoding. Most of our customers operate with multiple accounting systems as an example. So the feature set related to the product itself is different and, in many cases, it's somewhat nuanced for the different verticals of the middle market.
+
+The second big 1 is the integrations, right? And you guys have probably heard me say this before, but I like to kid around at different industry conferences with both the Bill.com and the Coupa team because they really have it easy from the standpoint of small business where they have to integrate to QuickBooks and Enterprise has to integrate to Oracle, SAP, maybe some JD Edwards and Workday. And meanwhile, in the middle market, we're supporting over 220 different accounting system integrations today and growing, focused on the different verticals.
+
+The third one being the payment network. And so the payment network is, again, very focused in the middle market of supporting really, what I'd say, supporting the buyer customers of the middle market and the suppliers that they use. So again, it's kind of custom purpose-built for the middle market. And then you have kind of the -- when I say go-to-market strategies. And within the middle market, CFOs want to understand how it works for their particular business process within their industry vertical and historically have attended user conferences and industry trade conferences to kind of interact with partners such as ourselves. And so that's a very different dynamic than, say, a small business where it's a virtually 100% digital process.
+
+Now our demand gen comes digitally and most of our sales process is virtually through an inside model, but you typically have more of a demo solution consulting type of sales process. And then the last one is just around the setup and configuration of the different dynamic workflow processes, testing all the integration in our base, things of that nature that are very different.
+
+So I think one of the best kind of stats or metrics that I think gets at the complexion between the different markets is just the average revenue per customer. And so within the middle market, we see an average of a little over $50,000 of average revenue per customer. And I think, [ Bill ] would say that number for them is about 1,500 and certainly for the enterprise side, the Coupas of the world, it's probably north of 500,000. So I think that gets at some of those differences between the middle market segment versus small business and enterprise.
+
+Operator
+
+Your next question comes from Tien-Tsin Huang of JPMorgan.
+
+Tien-Tsin Huang
+
+Just listening to your answers, everything has been really helpful. I was just curious thinking about the outlook, client growth, that kind of thing with inflation here, how does that -- or how might that change the buying decision for some of your prospects? Could it -- I'm just thinking about sales cycles and the sense of urgency for these mid-market companies to automate with Avid. Does it change the storyline at all in your mind, Mike? Just curious.
+
+Michael Praeger
+
+The -- I think it's a great question and one that we talk about a little bit internally. I think it actually helps our process from a standpoint of it puts more pressure on companies thinking about where they're adding people. And if they can eliminate future adds through automation, that's a positive driver. And so we believe that the increase of expense controls, things of that nature, specifically comes with more inflationary environment, we think, is going to be helpful in terms of evangelizing our story of doing more with less.
+
+And one of the best -- biggest characteristics that we have across our entire client base of now 8,000-plus customers is that they're able to grow without adding back office staff. And so that message is one that we're certainly evangelizing in the marketplace.
+
+Tien-Tsin Huang
+
+Yes, that makes great sense. I appreciate that. Just my quick follow-up, and just thinking about your own expenses and your thinking around investing here. I noticed that the EBITDA loss that you're projecting is a little bit wider than revenue. Are you contemplating some discretionary investing here? What puts you on the high or low end of that based on what you can control?
+
+Joel Wilhite
+
+Yes. Tien-Tsin, maybe I'll just add a little bit of color to what you're seeing in our guidance. And again, we were kind of pleased to deliver better-than-expected EBITDA results in the fourth quarter. We do have a little bit of a widening loss, a bit better than what we had previously anticipated.
+
+And really what we have in our first full year as a public company is a couple of dynamics. One, sort of that full first load of sort of public company readiness costs, whether it's the SEC reporting side, compliance side, a number of other things that we're sort of kind of put in place late in -- midway through '21, where there's really meaningful scale as you sort of leave '22.
+
+And the other thing that I would say is we really have a number of important investments that have been building from an R&D perspective, back to investing all around the flywheel for the buyer and the supplier, our platform readiness, for invoice accelerator and things that drive down operating costs or unit costs in support of that expanding margin. So hopefully, that gives you a little bit of sense of kind of the investments we have on tap for '22.
+
+Operator
+
+Your next question comes from Bryan Keane of Deutsche Bank.
+
+Bryan Keane
+
+Just want to ask on transaction yield, Joel. When we look at it for the first 3 quarters of the year, it accelerated really actually last -- at least the last 4 quarters, just looking at the slide. And then this quarter, the growth sequentially didn't grow as much. It just moderated slightly. And I'm thinking about next year as we build our models. How much can we expect -- what's a more normalized kind of growth rate for transaction yield? And any puts and takes when we look at it sequentially that move the numbers around, especially when we went from Q3 to Q4?
+
+Joel Wilhite
+
+Sure, Bryan. Let me kind of take a crack at that question from a couple of different angles. So we were pleased for Q4, to your point, sequentially, we saw a nice uptick in that yield as about $0.15 or $0.16 in the sequential period. Most of that was based on just continued steady improved organic sort of yield on the software and the payment side, so call it, $0.10 or $0.11 of those pennies and then a smaller contribution through the combination of overall mix and then an inorganic contribution as well. So that's kind of the sequential.
+
+On a year-over-year basis, we did have about 53 points of expansion, about half of that being mix and pay yield. Some of that is a little bit of recovery from the COVID year, keep in mind, as you're thinking about the outlook for '22. The other half of that would be inorganic contribution. So again, what we would guide is sort of steady transaction yield expansion over time. Just keep in mind, a portion of our expansion this year, a little bit of COVID benefit in the full year, year-over-year and then some inorganic but good, steady organic expansion, both on the software and on the payment side. Hopefully, that helps.
+
+Bryan Keane
+
+No, that's great. And just as a follow-up, I noticed that the suppliers jumped pay via the network. I think it's 825,000. I think the last time we saw that number was 700,000-plus. So just thinking about how much of that is organic and then growing that going forward, is that still something that can scale at the kind of rate we've just seen up to 825,000?
+
+Michael Praeger
+
+Yes. So Bryan, good question. I'm glad you asked that question because I didn't have a chance to comment on that earlier. It's all 100% organic. So one is the supplier growth is all organic. And I think it's a real testament to our strategies that we're using to how do we continue to penetrate the pool of paper check acceptance suppliers and to accelerate that conversion to have them begin accepting electronic payment methods.
+
+And so one of the things that we're really working to do this year, and it's a benefit of some of these new partnerships that we put in place with WEX, KeyBank, Comdata as it relates to giving us more flexibility to create new payment types as well as configurations of different forms of, say, virtual card as well as our AvidPay Direct to create unique value propositions that may be particular to a subset of suppliers that we can continue to dynamically manage.
+
+And so we're very focused on what's the right value proposition compared to -- along with the right price point to allow suppliers to make that move from paper check to electronic. And I think we're certainly seeing the impact of that in the growth of our supplier base. So we expect that we're going to have more tools in our arsenal going forward as part of some of these new partnerships and new marketplace.
+
+Bryan Keane
+
+No, that's great. Congrats on the execution.
+
+Operator
+
+Our next question comes from Josh Beck of KeyBanc.
+
+Josh Beck
+
+I wanted to ask a little bit about sales cycles and what you're seeing there. Mike, earlier, you mentioned that as you go back to in-person, that's been a really important lead gen in prior years pre COVID. So I'm just kind of curious if that could help the sales cycle, if you could bring in more leads. Just what could be some of the tailwinds from seeing more in-person?
+
+Michael Praeger
+
+So maybe I'll answer in kind of 2 buckets. One is when somebody raises their hands and says, "Hey, we want to be part of your sales process at AvidXchange." That has remained remarkably consistent across really a lot of verticals that's typically a 60- to 90-day sales process that we've seen be executed and that's been fairly consistent.
+
+Where the big opportunity is that we see going forward is getting back to the -- where the lead originally comes from and having it move more towards a balance of in-person events compared to being 100% digital. I think we delivered the results that we did last year in a 100% digital environment for the most part. And for example, pre COVID, we attended about 100 in-person events on an annual basis. And during COVID, that went to close to 0. And this year, the team anticipates covering about 80 of those type of events. So that return to kind of more of an in-person balance, we think, is going to pay dividends in terms of accelerating the top of the funnel and increasing our demand gen efforts by having a nice balance between digital and these in-person events.
+
+Josh Beck
+
+Really good to hear about the calendar for this year. I wanted to maybe a follow-up question for Joel. Just thinking about the '24 breakeven, it doesn't sound like this year has a lot of newer product contribution, if you will, when we think about invoice accelerator and cross-border. I think once we start to look out further, perhaps that's a bigger factor. So should we be thinking about those types of products as additive to the contribution margins, given that it's probably already an existing customer? Or any color you can offer us on those points?
+
+Joel Wilhite
+
+So here's the way I would sort of take a crack at answering that, Josh. We pointed to kind of exiting '24 on an EBITDA breakeven basis. We also talked about '22 largely good visibility and not meaningfully dependent on new products. But as we move from here through the next few years, we expect to see continued revenue yield and unit cost improvement as we move from kind of lower 60s to upper 60s, approaching that 70% gross profit.
+
+And some of that is driven by investments we're making around the flywheel. So for example, we do expect to continue to add value to both buyers and suppliers. We expect that e-payment mix to continue sort of step up. I think over the sort of multiyear view, we think of sort of a steady growth in that TPV yield is reasonable. Things like [ IA ], to your point, small today, but we expect growing in the next few years. So those things add -- continue to support revenue growth but also add kind of gross margin expansion as well. And those new products that you referenced play a more meaningful role as you get into '23 and '24.
+
+Operator
+
+Your next question comes from Brent Bracelin of Piper Sandler.
+
+Brent Bracelin
+
+I guess, Joel, we'll start with you here. Relative to the 20% growth outlook for the coming year, how should we think about the growth trajectory across payments versus software? I ask because I think software grew faster than payments in 2020. Payments grew faster than software in 2021. And so what are you kind of baking into the guide? It looks like slightly tougher comps on payments in the coming year ahead. But love any color you can give us as you think about what grows faster in 2022, just given the 2 different trends we saw in '20 and '21.
+
+Joel Wilhite
+
+You bet. Yes. No, that's a fair callout. And it's safe to say that we do expect to see payments growth to slightly outpace that software growth. Again, a number of opportunities to drive that, including some of the important partnerships that drove that shift, whether sort of RealPage, Concur and otherwise. And so we sort of see that continued sort of payment growth being slightly ahead of -- on the software side.
+
+Brent Bracelin
+
+Super helpful there. And then Mike, as a follow-up, you talked a little bit about one of the levers being this conversion from paper-based checks to digital e-payments. What are the levers that you're thinking about that could accelerate the conversion? I know in the past, you talked about the mid-market customer actually using the paper check as part of the workflow, part of the business process. And those are hard things to change, but was just curious. Are you thinking about the levers there that potentially help customers accelerate that conversion from paper to digital? Any thoughts there would be helpful.
+
+Michael Praeger
+
+Yes. No, that's a great question, Brent. And so first of all, within kind of our product investment area, we have kind of our new, we call it, cash flow manager tools that are being released this year. And with that, it provides a focus on increasing the value proposition for those supplier customers. And so that incorporates tools to provide better visibility to their both invoice and payment status as well as access to the invoice accelerator. So that will be a continued kind of focus for us.
+
+But the -- probably the biggest component is going to be us continuing to create new different types of payment modalities, both in virtual cards as well as our AvidPay Direct, where we have different types of delivery of remittance data in formats that suppliers are looking for at different price points. And I think you have that combination of increased number of payment modalities focused on finding that right mix of value proposition. So kind of a combination of those factors is what we are excited about, what we're seeing kind of the impact on growing the number of suppliers that we have on the network.
+
+Operator
+
+Our next question comes from Timothy Chiodo of Credit Suisse.
+
+Timothy Chiodo
+
+I wanted to touch on some -- you've mentioned this a few other times that might relate to some of the strong supplier growth that you've seen. You talked about with Mastercard, your relationship with them, and the ability to create more custom or more flexible interchange structures. I was hoping you could just talk around the mechanics of that. How does that come up? Is it a certain vertical of suppliers that maybe have really high ticket sizes? What does the discussion sound like? And then, of course, I'm assuming the result is more electronic payments volumes for you, more willingness to accept the interchange rate from the supplier and it's sort of a win-win all around.
+
+Michael Praeger
+
+Yes. I think you've got the punchline right. Kind of the tactics are looking at what would be the characteristics in which the supplier would move from kind of paper check acceptance to an electronic payment that they pay for and have it be offset with a value proposition. And one example is that we just recently worked with a large freight company who historically, the 250, 260 basis point standard interchange didn't work for their cost structure, but we were able to agree at 140 basis points to create a straight-through process that it was 100% kind of auto-reconciled, sort of straight-through process. It didn't require any human intervention on their end to accept the payment. And for that efficiency, they agreed to pay 140 basis points for it.
+
+And so that is a perfect example on how we're working to configure different interchange levels along with value proposition in terms of how suppliers need to receive their electronic remittance data to create an efficient process on their side. And we're seeing great examples of that across different segments of suppliers and believe it's going to be one of those levers that we use to continue to [ drive ]. Today, we're roughly at 40% of all the transactions that go through the AvidPay Network, where it will monetize and how do we continue to drive that upwards over time.
+
+Timothy Chiodo
+
+Okay, excellent. And if I could squeeze in just one last one. I know this topic came up numerous times around inflation. I just wanted -- did you guys put a finer point on just around your inflation assumptions for the fiscal 2022 guide? Or should we just assume that it's not much and if you continue to see inflation, then perhaps there's a degree of conservatism baked in?
+
+Joel Wilhite
+
+I would -- Tim, I would say the latter, maybe to the exclusion of that final phrase. So like -- again, it's -- we do see some variability in the average payment sizes and we have seen some very recently. We can -- there's a number of drivers. Mike mentioned the inclusion of FastPay, given the media segment with higher payments and some shift around payment modes, et cetera. So to some degree, it may be at play. And to that degree, it would be factored in our regressions that give us the projections for volumes for next year. So it's -- but I just wouldn't point out that it is meaningfully significant at this point.
+
+Operator
+
+And at this time, I'd like to turn the call back over to Mike Praeger for any closing remarks. Sir?
+
+Michael Praeger
+
+Thank you. I just want to say thanks to kind of our analyst community. Great questions, and we're excited to complete not only our second earnings call as a public company, but also our first full year. And looking forward to 2022 as we move out of the COVID overhang and starting back to more of a normalized business environment for our middle market customers. And excited to spend time with you on a quarterly basis going forward.
+
+So with that, operator, I think we're ready to close the call.
+
+Operator
+
+Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

AvidXchange Holdings, Inc., Q4 2022.txt

@@ -0,0 +1,473 @@
+AvidXchange Holdings, Inc., Q4 2022 Earnings Call, Mar 01, 2023
+3/1/23
+Operator
+
+Good morning, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. Fourth Quarter 2022 Earnings Call. Joining us on the call today are Mike Praeger, AvidXchange Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's Head of Investor Relations.
+
+Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties in mind -- risks in mind as the company discusses future strategic initiatives, potential market opportunities, optional outlook and financial guidance during today's call.
+
+Also, please note that the company undertakes no duty to update or revise forward-looking statements. Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to the financial results prepared in accordance with GAAP.
+
+I will now turn the call over to Mike Praeger. Please go ahead.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joel Wilhite and I are excited to discuss AvidXchange's fourth quarter 2022 results. We had another quarter of healthy financial and operating performance, leading to a strong finish in our first full year as a public company, and what a productive and successful year 2022 was, as highlighted by 3 core themes to our success, which include our talent, our products and our financial performance.
+
+Our first theme relates to the incredible talent we continue to assemble across all our key functions to support our objective of delivering profitable, long-term organic 20%-plus average revenue growth for our business. This is highlighted by the recent elevation of Dan Drees to his new role as President, along with the addition of James Sutton as our new Chief Revenue Officer, driving both buyer and supplier customer sales of our business.
+
+With this new organizational structure, I believe we will foster greater organizational agility and operational synergies by bringing sales, marketing, operations and product management under Dan. At the same time, this new structure will enable me to further focus on our longer-term strategic growth and operational efficiency efforts, along with leading our corporate development initiatives for future meaningful acquisitions and strategic partnerships. I cannot be more excited to partner closely with Dan in both driving and executing the future growth of our business.
+
+Secondly, we significantly advanced our product capabilities with new API integrations and partnerships built on our highly scalable Avid Connect integrations platform, along with key new product launches such as our new next-generation purchase order management and 3-way matching tools for purchase orders, invoices and receipts straight through virtual card and ACH processing capabilities, to aid in supplier reconciliation while eliminating their manual data entry of card information, along with cross-border payments in our new Avid Analytics offering.
+
+We also kicked off key new product initiatives related to our next-generation Pay platform and Invoice Accelerator 2.0 offerings, which we believe will drive meaningful revenue growth in future years as well as address a growing demand from our small business suppliers to have access to cash flow management and supplier financing tools to better manage their cash flow and run their businesses.
+
+Lastly, related to financial performance, we are capitalizing on our strong operational and financial results, including our continued acceleration towards profitability. I'm excited to share with you that we now expect to be EBITDA profitable for the full year of 2023, which is a pull forward of our previous 2024 breakeven target.
+
+The strength of our overall AvidXchange flywheel business model enabled us to generate growing float income as an embedded monetization lever for the management of our buyer customers full payment file and the management of the remaining paper checks.
+
+One of the key metrics that we focus on across our leadership team and that I believe is a good barometer of the strength of our business and demonstrates the power of our AvidXchange flywheel business model and the impact of our true 2-sided AvidPay Network is our transaction yield metric, which we've increased incrementally every quarter for the last 2 years from $3.52 to $4.51 per transaction.
+
+Our strong operational performance, combined with our accelerated path towards profitability this year in 2023 and our overall financial strength enabled us to recently renegotiate a new $95 million credit facility on favorable terms to substantially reduce our borrowing costs while partially deleveraging our already strong balance sheet.
+
+With a very productive 2022 behind us, we are entering 2023 with a fresh set of new product introductions and integration initiatives to help buyer and supplier customers leverage the power of our accounts payable and payments automation platform to drive digital transformation of their back office. We'll provide more details around our product momentum and technology road map for 2023 shortly after I touch on the highlights of this past quarter and the year that just ended.
+
+On today's call, I'd like to cover 3 topic areas, which include: number one, our perspectives on our fourth quarter results; number two, review of our year-end AvidXchange Business Flywheel metrics and our key initiatives for this calendar year; and number three, along with insights and trends we are seeing related to the macro impacts to our business and our middle market customers.
+
+Despite a year of mounting macro uncertainty across the general economy, we remain laser-focused on executing those things that we control. Specifically, we remain steadfast in our deepening of our competitive moat and advancing our proprietary 2-sided AvidPay Network. We did this through the disciplined execution of our playbook across the 4 growth years of our AvidXchange Business Flywheel. Our flywheel framework is designed to drive new software and partnership integrations, product innovation, operational execution and value creation for our buyer and supplier customers, along with our valued shareholders.
+
+We believe our solid year-over-year and quarterly financial performance is proof of our execution. For the fourth quarter ending December 2022, we delivered revenues of over $86 million, which grew at a rate of over 24% compared to the same period last year. This now marks 6 consecutive quarters of exceeding our internal financial targets and delivering 20%-plus comparable organic revenue growth. Non-GAAP gross margins expanded to almost 65% in the quarter, up 270 basis points on a year-over-year basis, and we further narrowed our non-GAAP adjusted EBITDA losses to $1.3 million in the quarter relative to our implied business outlook expectations.
+
+While numbers only tell part of the story, our customers and their adoption of our automation software products complete the story, and there are no better evangelists for our value proposition than our customers. Take Chief Financial Officer, Ken Oesch of Piedmont Service Group, a Raleigh, North Carolina-based heating, ventilation, air conditioning company, or an HVAC company.
+
+Piedmont specializes in providing energy efficiency, industrial HVAC solutions to help commercial, industrial and government organizations lower their operating costs. Ken manages an accounting team of 15 associates utilizing the Microsoft Dynamics Great Plains accounting system. Piedmont was drowning in thousands of paper invoices and struggling to match them with purchase orders to get their suppliers paid on time.
+
+Thanks to AvidXchange when auditors needed information and GMs ask about certain invoices and need quick replies, Ken immediately can access the key information and reports to get them their answers. We tell people all the time about AvidXchange, Ken said, and what it has done for our business, streamlining our accounts payable and eliminating the need to send paper checks, replied Oesch.
+
+The power and stickiness of our value proposition can be seen across many industry verticals, including one of our emerging subverticals of hospitality. Hampton Golf is another powerful story that speaks to our success in solving our customers' problems. Florida-based Hampton Golf is a premier golf course hospitality management company with 2,600 associates that manage 30 golf course and facility locations throughout the United States.
+
+Using QuickBooks Enterprise as his accounting system, Chief Financial Officer, Dede Franklin, manages a team of 16 associates overseeing the day-to-day processing of invoices and payments and onboarding new golf courses to the company's accounting system.
+
+Prior to adopting AvidXchange's accounts payable and payments automation solutions, Hampton Golf was scanning stacks of paper invoices and pulling them from e-mails while cutting paper checks. After adopting AvidXchange's full invoice-to-pay solution, which seamlessly integrates into QuickBooks Enterprise, Dede Franklin articulated our impact to their business pretty well by saying automated AP is no-brainer. AvidXchange's automated invoice and pay offerings are essential to our business and onboarding is such a simple process. It's the first of our critical systems that we train new hires on. I had no idea how truly exceptional automated AP can be along with the economic and efficiency impact to our business. Now I have no idea how I ever survived without it.
+
+Thanks to middle market customers such as Piedmont and Hampton Golf, we closed 2022 on a strong note as reflected in our year-end operating metrics. So let's take a closer look at those metrics in the context of our flywheel. During 2022, we increased the total number of buyer customers by 10% to 8,800 from 8,000 in the prior year, driving -- driven by delivering great AP automation software under Gear 1 of our flywheel.
+
+With a large and highly fragmented total addressable market of approximately 435,000 middle-market companies in the United States alone, representing $400 billion of untapped opportunity, growth in buyer customers was once again broad-based across all of our 8 core verticals. This growth in buyer customers was a result of our hybrid go-to-market strategy, contemplating our strong buyer growth with supplier customer growth of 17% in 2022. The networking effects of buyers bringing their suppliers to our 2-sided network culminated in us approaching 1 million suppliers on our AvidPay Network.
+
+The resulting addition of new buyer and supplier customers drove increased transactions onto our 2-sided network and our spend under management in Gear #2 of our flywheel. Transaction volumes on our network reached 70.2 million, were rising year-over-year 12.3% with our total payment volume increasing roughly 31% on a year-over-year basis to $68 billion in 2022. This increase in total payment volume was driven by growth in payment transactions, contributions from the FastPay and PayClearly acquisitions, coupled with some vertical mix impact.
+
+The increase in total volume reflected 19% year-over-year rise in spend under management to $215 billion. And given our growing transaction volume, we remain focused on maximizing our industry-leading e-payment monetization, which is the secret sauce as we refer to it, by converting suppliers to one of our various forms of electronic payment on the AvidPay network under Gear 3 of our flywheel.
+
+In 2022, e-payment transactions on the AvidPay Network grew by 16% from the prior year, roughly in line with our supplier growth numbers. We believe this underscores the overall value proposition of our AvidPay Network for our suppliers. The sum of execution and growth across the business flywheel encompassing buyers, suppliers and transaction monetization resulted in growing our all-encompassing transaction yield metric, which was up over 13% to $4.51 per transaction from $3.98 per transaction in 2021.
+
+And we ended the year with net transaction retention rate of over 103%. As we enter 2023, we are mindful of the macro crosscurrents related to the rising interest rates and inflation with their potential impact to our customers and our business. While we continue to be encouraged by our top-of-funnel sales activity, we have seen some moderation in transaction retention trends across several of our verticals.
+
+While we don't want to overinterpret the trajectory in volume trends and retention, we are paying daily attention to all of our key metrics and continue to run strategic and operational scenarios that preserve optionality should any of the macro headwinds markedly shift and have a greater impact on our middle market customers.
+
+That said, we plan to capitalize on the building blocks that we put in place throughout 2022, while continuing to invest in new product offerings and API integrations to deepen our significant competitive moat that we have across the middle market sector, along with enhancing our growth and scale of our operations.
+
+On the product front, in 2023, we are very, very excited to launch our proprietary flagship Invoice Accelerator 2.0 offering. This launch couldn't come at a better time for our large and growing base of small business supplier customers. For those that are hearing about Invoice Accelerator for the first time, IA, as we call it, it is a product that provides unique invoice payment acceleration, which functions as a short-term working capital financing tool for eligible invoices and bridges critical working capital funding gaps for our supplier customers.
+
+Our business model is purpose-built to leverage this product as it overcomes 2 of the most significant hurdles for traditional invoice financing products, which are around the underwriting risk of the supplier and collecting the money when it's paid by the underlying buyer. That's because in our unique 2-sided business model, both the buyer and the supplier are customers on our AvidPay Network. And we have visibility to all their historical transactions, including invoice and payment history, along with their timings.
+
+In addition, these transactions and the related payments flow through our network, which enables us to underwrite targeted invoices and automatically intercept the buyer payments related to these invoices. We've been testing and metering our initial 1.0 version of Invoice Accelerator with a limited cohort of suppliers to develop key learnings along with perfecting the underlying data science and determine how best to scale this offering efficiently.
+
+Invoice Accelerator 2.0 is designed to be an automated self-service supplier solution, underpinned by our next-generation technology architecture, incorporating real-time underwriting, credit analytics and credit decisioning targeted towards our growing small business-related suppliers utilized by our middle market buyer customers. Our Invoice Accelerator 2.0 offering is slated to be launched in the second half of 2023, and we expect that it will serve as a growth lever in 2024 and beyond.
+
+Second, 2023 is also a year that we're planning to launch our proprietary AvidXchange intelligent data capture product, or IDC, as we call it. This is an intelligent invoice digitization and indexing platform that we jointly designed and configured in partnership with Microsoft, leveraging artificial intelligence and machine learning to analyze a decade plus worth of historical invoice data sets. We have been engineering and partnering closely with Microsoft on this product since 2019.
+
+IDC digitizes invoice data sent by suppliers to our buyer customers before they go through our standard workflow approval process. Currently, we digitized a portion of the invoice data by deploying human capital assets worldwide who scrape data fields off paper and nonmachine generated PDF invoices. But with IDC, we will arm our data extraction team with a custom-built interface paired with real-time AI and machine learning capabilities, which together are projected to drive scalability by increasing productivity levels by almost twofold.
+
+We believe this scale change in productivity will further aid our gross margin expansion towards our long-term gross margin target exceeding 75% as we continue to leverage automation to markedly reduce our unit costs. And lastly, on the integration front, we have a robust portfolio of new integrations and partnerships on deck for 2023.
+
+Since our launch of our out-of-the-box integration APIs built on our Avid Connect platform last year, we've been deepening our penetration of the vertical and horizontal accounting systems and our ERP partners used by our buyer customers. Our strategy around API partnerships and integration playbook is to be deeply embedded with accounting system and ERP providers who have been leading the market of our customers across existing and new target verticals where there is an opportunity for significant transaction volume to be monetized.
+
+2022 was an active year with the launch of our next-generation APIs as we successfully launched our new API integration for QuickBooks Online, which alone boasts over 200,000 middle-market customers. Not to mention APIs for Blackbaud, Acumatica and ResMan, who combined pool of roughly 15,000 customers, are a multiple of our current total buyer customer base today.
+
+What's powerful about these API integrations is that they typically lead to a deepening of our technical, sales, marketing and go-to-market partnership with these accounting solution providers, which provides a catalyst for accelerating our share of middle market customer base. We are confident that 2023 will accelerate that activity with API integrations across our 8 vertical markets, along with planned development of several new subvertical focus areas while supporting growing horizontal in accounting system partners.
+
+In summary, we are very pleased with our results in the fourth quarter and our first full year as a public company. We believe that we significantly advanced our competitive moat serving the middle market, along with strategically, operationally and financially positioning our business to achieve our revenue and profitability objectives as we enter 2023.
+
+As I discussed at the beginning, our 3 themes of success in 2022, which included our talent, products and financial performance, will also help position us well in 2023 and beyond to deliver our product road map and achieve our accelerated profitability and free cash flow objectives. That's not to say that we won't be tested and we'll have to navigate potential bumps along the way as we successfully have done throughout our previous 22 years.
+
+We believe that the current macroeconomic backdrop will remain choppy throughout 2023, and we continue to assess the impacts to our customers, and we are adapting accordingly. That said, we believe that while the macro picture creates near-term uncertainties, it also creates new opportunities to strengthen and grow our business as customers tackle revenue and cost pressures.
+
+Among these opportunities, we see openings for new verticals and subverticals for our offerings across our large and fragmented addressable middle market, which is still in the early stages of digital transformation and shifting away from paper invoices and paper checks. Market dislocations can also unlock acquisition opportunities, which have been largely dormant for us for the last 18 months due to various market reasons.
+
+Finally, macro uncertainty can also play to our competitive strength as middle market customers gravitate even more towards proven market-leading, differentiated and well-capitalized providers such as AvidXchange, thus bolstering and even accelerating our overall market-leading position across the middle market. Overall, I am very excited about the level of innovation impact to both our buyer and supplier customers in 2023, along with reaching our profitability objectives for the year.
+
+With that, I'd like to turn the call over to my partner, Joel.
+
+Joel Wilhite
+
+Thanks, Mike, and good morning, everyone. I'm excited to talk to you today about our fourth quarter 2022 financial results, which reflect continued execution of our growth strategies and continued macro uncertainty. Overall, we delivered another quarter of solid year-over-year financial performance. Relative to the implied fourth quarter 2022 business outlook, fourth quarter revenues came in better, driven largely by higher interest revenue from funds held for customers.
+
+That, together with expense control, contributed to a lower-than-expected adjusted EBITDA loss in the fourth quarter of 2022. As Mike mentioned in his prepared remarks, we're once again pulling forward our path to EBITDA profitability to 2023 from 2024. More on that later. Total revenue increased by 24.4% to $86.2 million in Q4 of 2022 over the fourth quarter of 2021. Organic revenue growth which excludes the contribution of our PayClearly acquisition, which closed in January 2022, was 23.3%.
+
+Organic revenue growth was driven primarily by the combination of the addition of new buyer invoice and payment transactions, which reflect increased e-payments to suppliers and the contribution of interest revenues. Revenue related to our political media advertising book of business for the fourth quarter and full year 2022 was $3.1 million and $8.5 million, respectively. This revenue contribution stems from the 2022 midterm elections and associated runoffs.
+
+As a reminder, because 2023 has neither the midterm nor presidential elections, we are not factoring any revenue contribution from political advertising in our 2023 business outlook. Back to Q4 2022 financial results.
+
+Our strong revenue growth also resulted in total transaction yield expanding to $4.79 in the quarter, up 14% from $4.21 in Q4 2021. Excluding the $0.04 contribution from the acquisition of PayClearly in the fourth quarter of 2022, the transaction yield of $4.75 increased 12.9% with roughly half of the increase driven by yield improvement and the remainder driven by interest revenue.
+
+Software revenues of $26.4 million, which accounted for 30.6% of our total revenue in the quarter, increased 12.5% in Q4 of 2022 over Q4 of 2021. The increase in software revenues was driven largely by growth in total transactions of 9.2%. Payment revenue of $59.1 million, which accounted for 68.6% of our total revenue in the quarter, increased 31% in Q4 of 2022 over Q4 of 2021. Payment revenues reflect the contribution of interest revenues, which were $5.8 million in Q4 of 2022 versus $1.1 million in Q4 of 2021.
+
+Payment revenues also reflect the contribution of the PayClearly acquisition. Excluding PayClearly, which contributed approximately $0.8 million in the quarter, organic payment revenue growth was 29.3%, roughly 2/3 of the organic increase in payment revenues was driven by payment volume and the remainder driven by interest revenues.
+
+On a GAAP basis, gross profit of $49.9 million, increased by 41.8% in Q4 of 2022 over the same period last year, resulting in a 710 basis point improvement in gross margin for the quarter to 57.9%. Non-GAAP gross margin increased 270 basis points to 64.9% in Q4 of 2022 over the same period last year, driven primarily by the contribution of higher interest and political revenue.
+
+Moving on to our operating expenses. On a GAAP basis, total operating expenses were $78.7 million, a decrease of 22.2% in Q4 of 2022 over Q4 of last year. The year-ago period's operating expenses reflect the impact of IPO transaction expenses, termination fees related to a facilities development agreement and the recognition of noncash stock-based compensation costs resulting from completing our IPO in Q4 2021.
+
+On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 11.8% or $6.1 million to $57.3 million in the fourth quarter of 2022 from the comparable prior year period. However, on a percentage of revenue basis, operating expenses, excluding depreciation and amortization, declined roughly 750 basis points to 66.5% in the fourth quarter of 2022 from 73.9% in the comparable period last year. This highlights the operating expense leverage across sales and marketing, R&D and G&A.
+
+I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $2.3 million to $18.5 million in Q4 of 2022 over Q4 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and supplier customers. Non-GAAP research and development costs increased by $1.8 million to $19.5 million in Q4 of 2022 over Q4 of last year. The increase was due to continued investment in our products and our platform.
+
+Non-GAAP general and administrative costs increased by $1.9 million to $19.2 million in Q4 of 2022 over Q4 of last year, driven by a combination of higher expenses as we transitioned to a public company and an increase in performance-based bonus accruals due to continued strong operating and financial results.
+
+Our GAAP net loss was $25 million for the quarter versus a GAAP net loss of $72.1 million in the prior year period, driven by the impact of IPO transaction expenses, a mark-to-market adjustment for convertible common stock liability upon our IPO, termination fees related to a facilities development agreement and the recognition of noncash stock-based compensation costs resulting from completing our IPO in Q4 2021.
+
+On a non-GAAP basis, our net loss in the fourth quarter of 2022 was $7.4 million, an improvement of $10.3 million compared to the year ago quarter on solid organic revenue growth as well as interest revenues combined with expense leverage. On a non-GAAP basis, our adjusted EBITDA was a loss of $1.3 million in Q4 of 2022 compared to a loss of $8.2 million in Q4 of 2021 due to the aforementioned factors.
+
+Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the year with a strong corporate cash position of $461.5 million against an outstanding total debt balance of approximately $83.7 million, including a note payable for $18.7 million. The year-end total debt balance reflects debt paydown of approximately $44 million from 2021. The corporate cash meanwhile is split roughly 60:40 between money market funds along with commercial paper and demand deposit accounts, respectively.
+
+The weighted average maturity on corporate cash was roughly 13 days, while the effective interest rate in our corporate cash position for the fourth quarter was roughly 335 basis points. Customer cash at quarter end was approximately $1.3 billion with an interest rate of roughly 2.5% for the quarter. During the quarter, we established a new $75 million credit facility, which substantially reduces our borrowing costs. Subsequent to year-end, we increased our credit facility to $95 million from $75 million.
+
+I'll now move on to our full year 2023 guidance. In light of Mike's commentary about the opportunities and initiatives we continue to execute across our business, balanced with the macro crosscurrents and the potential for further volume impacts based on all information currently available, we expect total revenue for the year to be in the range of $359 million to $366 million.
+
+Our 2023 revenue outlook reflects approximately $30 million of interest revenues from customer funds versus approximately $11 million earned in 2022. Also, as a reminder, we do not anticipate any political media revenue contribution in 2023 versus having recognized 8.4 -- $8.5 million in 2022. We expect roughly 47% of the projected 2023 revenues in the first half with the remaining 53% in the second half. We expect our non-GAAP adjusted EBITDA to be between breakeven and $3.5 million positive EBITDA for the year. We expect EBITDA losses to occur in the first half and to reverse in the second half of the year.
+
+With that, I would now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] And the first question will come from Dave Koning from Baird.
+
+David Koning
+
+Nice quarter. And I guess my first question is kind of 2 parts. The software revenue grew sequentially at the fastest pace in probably 7 quarters. And I often think of that as that's what you can control. That's based on new sales. Am I right about that?
+
+And then the corollary to that is the payments business. I know you are guiding to deceleration, but is it fair to think of it the new sales part doing maybe a little better than normal, and it's really the stuff out of your control, the macro is really causing a deceleration. Is that a fair way to think about this?
+
+Joel Wilhite
+
+Yes, Dave, it's Joel. Broadly, yes. And just specifically, first off, on software revenue, we can control that. The impact in the fourth quarter has a light impact associated with just some routine price increase. I would guide you though to, we did have some kind of year-end one-time nonrecurring kind of catch-up around some revenue share, et cetera. So I wouldn't guide that level of software yield necessarily going forward, but pleased with the outcome on software revenue. And then broadly, yes, relative to the guide, certainly reflects some of the emerging caution we see in spending across the business.
+
+Michael Praeger
+
+Yes. And Dave, just to maybe add a little bit of flavor related to kind of top-of-funnel activity related to new customer adds. We continue to see really healthy engagement across really all the verticals of our business and see current really top-of-funnel activity up about 20% in that ZIP code over a year ago.
+
+David Koning
+
+Got you. And then just my second question. The way you're guiding 2023 incremental margins, it seems like you're guiding revenue up $40 million, $50 million, something like that, with about 35%, 40% incremental margin to drive that EBITDA profitability. Is that do you think kind of a normalized kind of go-forward incremental margin? Just wondering around that.
+
+Joel Wilhite
+
+Yes. I mean, good question, Dave. Like broadly, we're pleased with the steady expansion of gross margin across the business. Remember, our long-term target is 75-plus percent. And we said as we begin to approach that 70% ZIP code, we see the business turning profitable, which is reflected in the guide. We did certainly have some impact annually and quarterly depending on sort of the float and political contribution. But even stripping that out, we do see good, steady gross margin expansion going forward.
+
+Operator
+
+And the next question is from Will Nance from Goldman Sachs.
+
+William Nance
+
+I wanted to follow up on maybe some of the payment volume trends that you guys spoke about. I know both the software and the payment side are kind of largely volumetric driven. You mentioned lower -- seeing lower transaction retention trends. I'm just wondering, could you maybe touch on average transaction size? And how it's impacting payment volume as well?
+
+And then maybe just more of some market color. I mean when you talk about seeing a slowdown in transaction retention, is it more across the vertical, the vertical businesses, the horizontal parts of the business and any kind of noticeable trends or delineations across various parts of the business?
+
+Joel Wilhite
+
+Yes. Thanks, Will. I'll start it off just adding a little bit of color. Again, I kind of mentioned in the answer to the first question that we did see during the fourth quarter some emerging caution in spending across really all our buyers in all our verticals fairly broad-based. And what I would say about that is as we look closer what we see is customers adjusting largely their discretionary spending. So not necessarily vertical specific, but sort of spend type specific.
+
+And things like advertising and marketing, professional services, in some cases, tenant improvement projects, et cetera, but still pleased that in the face of these kind of macro crosscurrents, still retaining over 100% of the transactions year-over-year. But hopefully, that gives you a little bit of color in what we're seeing for the quarter and what's kind of baked into our guidance going forward. Mike, I don't know if you want to add anything from a market perspective.
+
+Michael Praeger
+
+Yes. I'd say maybe to follow up on my last comments to Dave related to top-of-funnel activity. When you look across kind of our -- all the different verticals, plus the horizontal maybe kind of current areas where top-of-funnel is kind of exceeding our expectations would be in the horizontal slice is one good example. We're driven by channel partners such as NetSuite, Acumatica and others like that, we're seeing really strong engagement.
+
+The other one being in some of the new, what I call kind of emerging vertical markets that we've talked about. I highlighted one of them on the call today within hospitality with Hampton Golf as a good example. And we're seeing some really kind of emerging trends related to the hospitality vertical as well as, I'd say, a subsector of our health care vertical being long-term care centers.
+
+So those would be some examples that are kind of probably exceeding our expectations. We really have one vertical that is kind of below expectations currently, and that's with our financial services and kind of Tier 2, Tier 3 banks. They've been more cautious related to taking on kind of new projects, initiatives related to digital transformation. And then we have a number of verticals that have been more kind of flat year-to-year. Real estate would be a good example of that. So -- but again, really good diversification and collectively across all verticals seeing top-of-funnel activity about -- up about 20% over a year ago.
+
+William Nance
+
+Got it. Super helpful. And then just maybe if I can ask a quick follow-up on the intelligent data capture. I was wondering if you could kind of size the pie of expenses that you guys are currently devoting towards like the invoice ingestion part of the business.
+
+And when you think about -- in the context of the 75% gross margin target and I think the 10 points of gross margin expansion, you guys have kind of outlined more over the near term. Like is this kind of -- was this something that was contemplated as part of that guide? And I guess, how much of that improvement can you guys attribute towards the rollout of the IDC?
+
+Michael Praeger
+
+Yes. Maybe I'll start by giving a little flavor to that particular kind of product offering and Joel can kind of follow up with some more details. So IDC stands for intelligent data capture, and this is a project we've been working on for the last couple of years in partnership with Microsoft and really excited about how one of the challenges we and everybody in this business has is invoices are non-standard documents.
+
+Every supplier has a different form, every accounting system has different forms of invoices. And they get delivered to the supplier in many different forms. Obviously, we're driving electronic receipt of invoices as much as we can. But what IDC does is enables to kind of read and capture the data elements across all these different forms of invoices in a standardized way.
+
+And so certainly taking Microsoft's new OCR capabilities combined with AI and machine learning and then training it on literally 20 years' worth of AvidXchange invoices, we think we're in a unique advantage of really driving automation in that front-end process. And I think that's embedded in our confidence level of getting to 75%-plus gross margins over time. Maybe, Joel, you provide a little bit of flavor on the contemplated components.
+
+Joel Wilhite
+
+Yes. Well, your follow-up was just the degree to which we've contemplated that -- the impact in the near term. I think we're excited to see that potentially -- again, I would guide that a more significant impact likely in '24, but we do expect in the back part of '23 to see some unit cost improvements and so some efficiencies as a result directly of IDC.
+
+Operator
+
+And our next question is from Ramsey El-Assal from Barclays.
+
+Ramsey El-Assal
+
+I wanted to follow up on, I think, Will's prior question and your response there. And just get a little bit more color from you in terms of the magnitude of macro pressure that sort of factored into your guide. Just trying to understand better whether your guide contemplates sort of like further deterioration in conservatism or just more sort of a steady state in terms of what you're seeing today?
+
+Joel Wilhite
+
+Yes. Great question, Ramsey. Let me just sort of hit that head on. So we talked about beginning to see over the course of the fourth quarter that sort of emerging challenge crosscurrents, whatever you want to call it. And we factored that together with everything we're seeing in the trends in the business into the guide. So it's certainly contemplated to the extent that we would be sort of beat that meaningfully. It would need to be a fairly abrupt reversal of those trends. And so we're expecting that to exist for the year in our guidance.
+
+Michael Praeger
+
+Yes. And maybe, Ramsey, just to give you a little longer-term view, remember, we've been at this for 20-plus years, and certainly, navigated through a number of cycles. And we're not seeing anything different than what we've necessarily seen in other economic cycles. The middle market is a pretty resilient group of companies related to very few companies go out of business, but they are -- they do manage their expenses and certainly are more cautious related to discretionary spend. And then we typically see our middle market [ companies ] that -- those type of expenditures snap back pretty quickly as we exit the cycle.
+
+Ramsey El-Assal
+
+Got it. And I also wanted to ask separately about pricing as a lever that you may -- potentially have deployed or could deploy. I'm just trying to think about that across your business, especially in this kind of context of macro distress. Is pricing a contributor to margin? Or how should we think about that?
+
+Michael Praeger
+
+Yes. So it's a really good question and one that we talk a lot about internally. Because based on our market leading position and just overall volume of customers across the middle market, we have significant pricing power. Having said that, the number one objective that we're focused on is in a market where still 60% roughly of the middle market has not yet adopted automated solutions, how do we create incentives for adoption? And we certainly don't want price to get in the way.
+
+So it's a delicate balancing act that we're following related to having some year-over-year kind of cost of living-type increases but are certainly sensitive to the amount of increases that we're passing through to knock in the way of our adoption objectives.
+
+Operator
+
+And the next question is from Andrew Bauch from SMBC Nikko Securities.
+
+Andrew Bauch
+
+Just want to think about the building blocks to getting this back to the 20% growth algorithm that you outlined in your prepared remarks. And in that context, I wanted to kind of hone in on the political cycle. I mean, Joel, the disclosure around the $8.5 million in 2022 is helpful. And maybe taking that number and thinking about where that goes in 2024, I mean, is there market research that you've done that can kind of directionally point people to where that could be and be either from a magnitude or timing perspective?
+
+Michael Praeger
+
+Yes. So I love that question, Andrew. That may be a gold star question that we get about thinking about those building blocks. And I kind of think of them as kind of base business that we have today and you hit a really good point around the political. Actually, I was in Washington, D.C. yesterday. We had our media customer advisory board meetings with our top media customers, including the political sector. And what's really interesting is just a couple of political cycles ago, that sector hit $5 billion of spend in the political sector, and in '24, the industry is expecting to break $10 billion of spend.
+
+Today, we have roughly 30% of the political payment transactions running through our platform. So certainly, we're going to benefit from the overall kind of growth in political advertising spend overall. So that's kind of inherent in our existing business. And then I kind of think of this. This is a really big year for us in terms of innovation and new product delivery. And product delivery kind of goes in cycles.
+
+And what we're delivering this year in kind of 3 big buckets, starting with Invoice Accelerator 2.0 offering, which has a lot of excitement, both within the 4 walls of AvidXchange as well as in the outer market, we're going to be in market during the second half of the year with our 2.0 version of that offering.
+
+In addition, we probably have the biggest payload we ever had in terms of new integrations, new accounting system, ERP integrations that we're going to be delivering this year for our customers. And then combined with our new payment platform. And so those are the building blocks from a product perspective to drive '24, '25, '26 kind of revenue growth and our confidence when you look at any kind of multiyear period, that will be north of our 20% organic growth targets.
+
+Andrew Bauch
+
+No, no, helpful to hear all that laid out like that. One other question, if I could squeeze in maybe there's nothing here, but I just wanted to touch upon what you're seeing on the supplier side of the world. I know that the buyer spend moderating in January and February is something that's contemplated in the guide. But is there any elements of macro weakness impacting the supplier side of the business that would also kind of influence the full year guide?
+
+Michael Praeger
+
+Yes. That's a really interesting question, one that we study a lot because there's multiple things kind of happening at the same time. So certainly, we've been active and very aggressively adding new suppliers to our network that our supplier customers were up over 16% last year. But while we're doing that, we're also noticing that more suppliers are taking advantage of some of the data rate tiers that in our case, Mastercard offers to get reduced interchange based on how they process the transaction with the data.
+
+And so we actually -- although in the short term, it's a headwind perhaps on revenue, if you think of that way, we actually think it's a very positive element because what it does is it's driving adoption, and it also drives retention of those suppliers continuing to accept cards. And they're using the data that we provide them is one of the key benefits of being on the AvidPay Network to be able to be eligible to use that data to get better rates by -- qualified for different rate tiers based on the data that we use in the process.
+
+So although it may be kind of negative in the short term related to a supplier using a data tier, long term, we think it's a really positive element for long-term retention as well as adoption for suppliers of electronic payments, whether it be a virtual card payment or even our AvidPay Direct.
+
+Operator
+
+And the next question is from Bryan Keane from Deutsche Bank.
+
+Bryan Keane
+
+Just was thinking about how to model this out in terms of cadence by quarter? Anything to think about, Joel? And then any high-level comments also just on the key metrics on transactions or yield or volume, how to model that out for the year? Any puts and takes or any direction you can give us?
+
+Joel Wilhite
+
+Yes, Bryan, I can tell you what -- with -- our typical guidance cadence is just to provide annual guidance and update that quarterly. But certainly, we're seeing some different trends in knowing what the political and float dynamics. What I thought I would share on this call is that we sort of see a range in Q1. I'll go ahead and sort of talk about our revenue expectation for Q1, kind of between $81 million and $83 million within that overall guidance.
+
+And there's a few things to remember when you're thinking about those quarters. One, there's no political in Q1 when there was roughly $1 million last year. And there was about $3 million in the fourth quarter, right? So if you think about the quarterly cadence. The other thing that I'd point out is float revenue, first quarter last year was about $1.2 million. And in the fourth quarter that we're reporting now is about $5.8 million. So hopefully, that gives you a little bit of color to think about the quarter.
+
+Bryan Keane
+
+No, that's helpful. And Mike, just on the M&A front, obviously, curious if there's any movement there since that's been a little bit stagnant as you mentioned for the last 18 months?
+
+Michael Praeger
+
+Yes. Well, it's one of the -- what I'd say kind of the -- internally, at AvidXchange, there's lots of activity in terms of our conversations that we're having with lots of kind of players in the market, especially those that are in smaller players and different industry verticals that we're targeting. I would say that we -- our expectation is that we're going to start seeing greater activity related to those type of providers looking at evaluating sale opportunities during probably the second half of this year going into next year.
+
+A lot of them were benefited from raising capital over the last 2 years. So they're not yet in a position of having to go back to the markets to raise capital. And we think that will be the natural catalyst for them then evaluating whether they want to go down that path or actually pursue a sale. So our current corporate debt activity is to stay in touch and have lots of conversations. So we have a really good sense of the market when those opportunities arise.
+
+Operator
+
+And the next question is from Josh Beck from KeyBanc.
+
+Josh Beck
+
+I wanted to double-click a little bit. I think it was Mike's comments around discretionary spend. So yes, I think what we've heard from some other companies in the B2B and general back office space has been customers have pulled back on advertising. They've pulled back on T&E. I'm just curious, like, are those the types of discretionary elements that you may be seeing a little bit of a pullback within? And does that really encompass all of your verticals? Or is it maybe more so certain ones? You obviously called out financial services. Some color there would be great.
+
+Michael Praeger
+
+Yes. So first of all, I would say -- we're seeing it kind of broad-based across all verticals, some of that discretionary spend pull back. And we kind of think of it as -- what we've been able to ascertain is really falling into kind of 3 buckets: number one being kind of advertising and marketing-related spend; the second one being kind of professional services, consulting, administrative type services; and the third being some kind of tenant improvement build-out projects for expansion.
+
+And the last one is probably geared towards more construction real estate, but really broad-based impact that we've seen across all the verticals. But again, what I would say though, we're not seeing any dramatic falloff of any particular spend. It's really slowing of these categories on a nominal basis, which is consistent with what we've seen in past economic cycles across the middle market.
+
+Josh Beck
+
+Okay. Yes. Certainly, it seems like a little bit of belt tightening, if you will, which is a pretty consistent theme that we've heard. The other question was with respect to the funnel, it does sound like the top-of-the-funnel activity has been encouraging. I guess I'm curious to hear about the conversion from the top of the funnel, the middle of the pipe to the later stages of the pipe, how is that progressing?
+
+Michael Praeger
+
+So really good question, Josh. So when we think of -- one of the things important to recognize, top-of-funnel activity is just as a design, it's top of the funnel, but a lot of things have to happen before it turns into revenue. So if you go through a sales cycle and then an implementation configuration cycle, and then once the customer is live, an adoption cycle.
+
+But on the sales cycle side, kind of the 2 metrics that we kind of focus on are, one is any changes to close rates, and then b, would be the timing, the sales cycle timing. And so there -- we've seen no changes to overall close rates. Those are consistent to what we've seen historically. And then the second one is related to timing. This is where we have seen -- what we historically saw is a 60- to 90-day sales cycle the -- across different verticals. We're seeing that being extended by maybe 5 to 10 days in terms of overall sales cycles. So that's where we are seeing some impact.
+
+Operator
+
+And the next question is from James Faucette from Morgan Stanley.
+
+James Faucette
+
+I wanted to go back quickly to your gross margin and the incremental margin that you're having there. I'm wondering if you can help strip out at least some of how we should think about like float benefit versus just natural leverage?
+
+And I guess, as importantly, is there any type of rule of thumb you can share with us about how that float could move around and at least in terms of your planning, operations in the event that interest rates move around, like if we move -- interest rates move 50 basis points or whatever metric you want to use?
+
+Joel Wilhite
+
+Yes. Got you, James. Okay. So good question. Let me -- I made a couple of comments on gross margin, but I'll unpack it a little bit further. Again, I think I mentioned already, good expansion year-over-year. Again, this is the sort of the march we're on to sort of steadily improve gross margin to the point of that long term target of 75% and sort of what we see ahead of us is getting into that 70% ZIP code.
+
+So 320 bps year-over-year for the quarter -- or for the year, 64%, up from 60.8%. And then on the quarter, a little less 270 bps. We did see float benefit, which is a positive feature of the model. But if I then let's take a look at gross margin and just sort of pull out the impact of both float and political advertising because we recognize that you've got some puts and takes.
+
+So just to give you a sense of the impact there, I would say that the political -- the inclusion of the political business added about 100 bps in '22 for the year and for the fourth quarter. And then float added about 100 bps to gross margin for the year and about 200 bps for the quarter as rates continue to ramp. And so taking out both, you're up about 160 bps for the year. And again, on improved yield, mix and efficiencies, that steady progression of gross margin expansion.
+
+But then for the quarter, we were down about 40 bps. And so we've talked before about, as we've managed expectations going into Q3 and then going into Q4, about our cloud cost ramp, including some incremental headcount associated with getting fully in the Azure public cloud, you see a little bit of that impact there, along with this spend softening that we called out separately in Q4. And so looking forward, stripping both float and political out, we see good margin expansion continued on our way to that profit that we're calling in guidance.
+
+And then your final question just around rule of thumb. I think what we've talked about is you should think about our float revenue as roughly 120 bps off of Fed fund rate on a lag. And our -- as I mentioned in our prepared remarks, our guidance calls for about $30 million of float revenue for 2023.
+
+James Faucette
+
+Got it. And then just -- I really appreciate that. And just as a quick follow-up to finish out that. You guys have the benefit of having run this business for quite a while. As rates increase, do you see a change in your customers and those that are participating in the networks behavior in terms of how they pay or other things that would affect the underlying deposit amount effectively?
+
+Michael Praeger
+
+Yes. So part of our business model is that we -- in terms of kind of how we manage the flow of funds, that's consistent in any scenario regardless of what kind of rates are related to deposits. And what I would say is that across the board in the middle market, our customers are trying to solve for a more efficient, automated process, and this is number one. And I think the -- probably what you're getting in terms of kind of managing float, cash flow, things of that nature, monetization of float is probably more of an enterprise focus of companies.
+
+Our customers are just trying to get their suppliers paid in an efficient way, reduce kind of the manual process and the paper process that they're going through today. And so we don't typically see that dynamic. And again, we -- our characteristics are in terms of how we manage the money movement, customers when they send a file directly from their underlying accounting system, and now we're up to over 225 different systems that we're integrated to, that triggers the flow of funds immediately into our platform as well. So the customers still control the timing when they pay their bills.
+
+James Faucette
+
+Right. No, that's great and great setup. I appreciate all that detail.
+
+Operator
+
+And the next question is from Timothy Chiodo with Credit Suisse.
+
+Timothy Chiodo
+
+Great. I appreciate all the extra color on IA 2.0. I want to hit a little bit on that just across the 3 areas. One being the credit risk, assuming -- and you've disclosed that you do assume that, but it's small and you have the data, so not an issue there, but just wanted to clarify anything you could comment there. And then in terms of the funding, assuming that you're funding that today, if that could change over time as the program expands?
+
+And then related to that, is there a rough percentage of TPV that you think about that might be addressable to the Invoice Accelerator program in terms of how much penetration the program could see over time? Would appreciate any of that context. Some of that kind of today and some of that might evolve over time.
+
+Michael Praeger
+
+Right, right. No, that's a good question, Tim. So first of all, on the credit risk standpoint, we have the benefit of having a true 2-sided network that both the buyer and supplier are both on the network. And we have the benefit of seeing all the historical transactions that they've done between the 2 parties. And so we believe -- and again, although we're launching our 2.0 offering, we've been in the market for the last several years with our 1.0 offering and have seen all the different examples of buyer and supplier behavior related to these type of transactions.
+
+So we feel really good about that element of it and that will be kind of a highly automated kind of credit process. Related to the underlying funding element, yes, today, we are doing it on our own balance sheet. However, that is something that we're -- in our business model that we're planning to change. We view that we're roughly maybe 18, 24 months away from having those balances in a way that it's exciting for probably one of our existing partners.
+
+We have a large stable of bank partners that have been talking to us for the last couple of years about being able to take this off balance sheet. And so we absolutely expect that, that -- we will do that, and that's part of our long-term model. As it relates to the last part of the question, how we think of it is that this product is really best suited to help the cash flow needs of our small business suppliers.
+
+We anticipate that roughly of our total supply pool, about 60% of our suppliers are small businesses. And so that's kind of the target market that we're making this offering available to. And I think one kind of inside stats that we've kind of shared routinely, which is really what makes us excited and what led to really kind of the building of our 2.0 offering is that over the last year or so, we did notice that when suppliers were taking advantage of our Invoice Accelerator offering, within 90 days, they came back for ongoing advances. So we're really excited about the impact that this is going to have long term for our business.
+
+Timothy Chiodo
+
+Michael, those are great clear answers and point well taken on the -- currently on the balance sheet, but as it scales and you have more of a time series of data could take it off. So thank you for all that and the context on the SMB penetration or the portion of TPV.
+
+Michael Praeger
+
+Thanks, Tim.
+
+Operator
+
+And the next question is from Brent Bracelin from Piper Sandler.
+
+Brent Bracelin
+
+Well, Mike, it sounds like there's a lot of optimism here top of funnel. It sounds like you got a lot of new products that could help growth going into next year. It sounds like the real near-term challenge is just the mid-market and belt tightening. Looking at past cycles, trying to assess here how bad does the mid-market get relative to TPV growth, I mean, are we talking prior cycles where you saw TPV go flat on a year-over-year basis? Does it go negative? Temporarily -- the good thing about recessions is they are temporary. But what can you tell us relative to past cycles within the mid-market on trying to assess near term where TPV growth could go?
+
+Michael Praeger
+
+Yes. So I think -- so first of all, we -- I particularly look at it in kind of 2 lenses. One is the underlying health of the -- our middle market supplier -- I mean, a buyer customer. And then the second one is the impact on their transactions. Within the last kind of negative cycle being kind of 2007, 2008 cycle, we had 1 customer go out of business and across the middle market through bankruptcy. And so we literally retained close to 100% of our customers from that perspective.
+
+So that really demonstrates the resilience in the middle market. I would say a kind of different transaction flows. What we've seen is, again, we were not in the payments business in 2007, 2008. We've launched the payment network in 2012. But extrapolating from invoice volumes, typically, we've seen in the past cycles is up to kind of a 5% headwinds across the different verticals within the middle market.
+
+And then it's usually geared across this discretionary spend, delaying improvement projects, capital expenditures, things like that. And then they usually get caught up and kind of snap back to those type of expenses pretty quickly, exiting the cycle. So that's what we've seen historically. And I think what we're seeing currently is consistent with what we've seen historically. There's nothing that's really an anomaly that we're saying, "Hey, we haven't seen that type of behavior before."
+
+Brent Bracelin
+
+Got it. And so it sounds like little to no churn impact. Do you expect some sort of 5%-ish headwind to transactions processed? And then, obviously, the variable is going to be how much discretionary spend is impacted. But that's super helpful. That's all I had.
+
+Operator
+
+And the next question comes from Darrin Peller from Wolfe Research.
+
+Darrin Peller
+
+Just a quick one. It's good to see that the profitability levels have been pulled up a bit. And I mean maybe just a reiteration or revisiting what you guys expect and what your plans are on expenses for the year and the next couple of years. And how you plan on managing that and balancing your growth investments versus profitability going forward now into '24 and '25? And how much of a dramatic uptick we can hopefully see in those levels of profitability as part of your story?
+
+Joel Wilhite
+
+Yes, Darrin, happy to take that one. So again, we were kind of pleased to bring forward by a year that profitability point in our guidance in the face of, obviously, some uncertainty. And so what that reflects is just a lot of discipline on the part of management to sort of be super prudent but to continue to invest in the growth we know lies ahead even on the other side of whatever this season is that we're in. And so maybe one thing to call out is we do see kind of EBITDA negative in the front half of the year, EBITDA positive in the back half. I'm not sure if I made that clear before.
+
+And then '24 and '25, it really depends on what the macro is doing. So I would need to underscore any comment I make about -- we know that there will be an endpoint. We don't know when that would be. But we're really focused on being a profitable business exiting '23 and thereafter. And -- but also, we have a huge market opportunity ahead of us. And so we're going to be disciplined and use the sort of the capital that we're able to generate ourselves to invest in the business going forward.
+
+Michael Praeger
+
+Yes. Maybe one thing that Darrin, I'd add to Joel's comments would be, again, we're in a long game here. I don't know it's spring training and baseball. So maybe we're in the bottom of the first, heading into the second, to give you a context. So it's really early in the overall game that we're playing. And still, we're seeing roughly 60% of the middle market have not yet adopted any solutions related to automating their accounts payable or payments.
+
+And so we're balancing that investment and what we can do to drive that incremental adoption each year as well as kind of that efficient growth to maximize profitability. So I would say, we continue to invest in what's kind of required for the adoption of the market. And maybe this also is a little opportunity to kind of advertise our upcoming June 1 Analyst Day. I think we'll be diving deeper in some of these questions as well as providing some updated long-term targets related to gross margin.
+
+Darrin Peller
+
+That would be really helpful.
+
+Joel Wilhite
+
+Yes. And just to cap it off there, I think the thing that I would say as we wrap that question is we do have a lot of optionality. So we have uncertainty relative to the macro, but we're focused on investing in that growth, but we kind of have a lot of levers available to us to do so. So great question.
+
+Darrin Peller
+
+Very quickly, I didn't hear an update on the number of new buyers added throughout 2022. Maybe I missed it actually. But I think it was 8,000 at the end of '21?
+
+Joel Wilhite
+
+That's right. Yes, we finished the year at 8,800. So 8,000 to 8,800 at the end of '22.
+
+Darrin Peller
+
+Okay. And you're still expecting some -- a decent number of net new? Or I know it's a tougher macro, but...
+
+Joel Wilhite
+
+Yes. I mean, look, Mike made a comment that we're really kind of encouraged by the top of funnel we see as we enter the year and so optimistic that we can continue to add buyers, along with continue to see good net retention expansion, yield expansion and deliver on the growth we've committed to.
+
+Operator
+
+And the next question is from Tien-Tsin Huang from JPMorgan.
+
+Tien-Tsin Huang
+
+Mike and Joel, I know you guys have answered a lot of questions already. I just have one more, just on transactions.
+
+Michael Praeger
+
+Yes, happy to take your questions.
+
+Tien-Tsin Huang
+
+Just on the transaction revenue retention, I think, it is 103%. Did you highlight or say what you're thinking for retention, that same metric for '23? But what I really wanted to hear was -- what has the historical rate look like? I think it's touched 107%. I think it's hovered around 103%, 104%, but if we go further back, how has that trended?
+
+Joel Wilhite
+
+Yes, great question, Tien-Tsin. And you're right, we've sort of said that we see -- and we have seen historically kind of pre-pandemic kind of at 104%, 105%-ish retention, just underlying growth across our buyers' volume.
+
+We saw that dip abruptly and then returned gradually over time that sort of gave rise to that 107% that you referenced that was higher even in the quarters post-COVID recovery. But we would expect kind of, I don't know, normalish in the 105%, 104% range. We don't guide that specifically in our forward guidance, but certainly do see a little bit of an impact there from some of the belt tightening we talked about.
+
+Operator
+
+Ladies and gentlemen, this now concludes our question-and-answer session. I would like to turn the conference back over to Mike Praeger for any closing remarks.
+
+Michael Praeger
+
+Thank you. Well, again, I wanted to thank everyone for joining us here today. We're excited about the opportunities ahead of us in that large opportunity that we're playing related to accounts payable and payment automation across the middle market. And we believe our leadership puts us in a strong position to capitalize on this opportunity. Finally, I want to remind everyone about our upcoming Investor Day on June 1 in Charlotte, North Carolina. With that, we'll close the call.
+
+Operator
+
+Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

AvidXchange Holdings, Inc., Q4 2023.txt

@@ -0,0 +1,307 @@
+AvidXchange Holdings, Inc., Q4 2023 Earnings Call, Feb 28, 2024
+2/28/24
+Operator
+
+Good morning, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Joining us on the call today is: Michael Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's Head of Investor Relations.
+
+Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make today. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise forward-looking statements.
+
+Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.
+
+I would now like to turn the conference over to Michael Praeger. Please go ahead.
+
+Michael Praeger
+
+Thank you, everyone, for joining us today. Joel Wilhite and I are excited to discuss AvidXchange's Fourth Quarter 2023 Results. This now marks our 10th consecutive quarter of exceeding our revenue and adjusted EBITDA expectations. This past quarter was also a great reflection of executing the strategies we articulated during our Investor Day this past June, in terms of balancing our growth and profitability objectives. Consistent with that, I am proud to announce that we delivered our first ever $100 million-plus revenue quarter, along with a $15 million-plus adjusted EBITDA profit quarter, thereby posting a 36 on our Rule of 40 construct, which combines our revenue growth rate of 21%, along with our adjusted EBITDA margin of 15% for the quarter.
+
+Overall, we saw 5 main themes emerged over this past year that was certainly magnified in Q4. First, our continued strong customer engagement. Second, our payment yield and supplier monetization strategies, which will continue to be our secret sauce showing measurable results. Third, our margin expansion and cost efficiency strategies, delivering continued reductions in our unit costs and driving our gross margin expansion and resulting adjusted EBITDA growth. Fourth, our continued focus on investment in new innovation continues to drive competitive differentiation, increased value proposition for our customers as well as create the long-term pathway to support our 20%-plus annual organic growth rate objective. And lastly, our fifth theme being the resiliency of our middle market customers, continue to show strong customer logo retention metrics exceeding 95% for our combined buyers and suppliers.
+
+I want to highlight our continued high level of customer engagement right off the bat because this success has been fueled first and foremost by our customers success, which in turn has been enabled by our value proposition that our product, technology, sales and operation teammates have engineered and executed. Our buyer and supplier customers have validated this lasting value proposition by viewing us as their trusted partner to drive scale, workflow efficiency along with confidence in managing billions of dollars worth of their invoices and payments over our 2-sided network. And we wouldn't be here where we are today and where we're headed in our growth and profit trajectory without them, as we seek to scale AvidXchange to be $1 billion revenue business in the coming years, in a still vastly underpenetrated $40 billion addressable market opportunity.
+
+Staying with the customer theme for a moment, let me just highlight the power of our value proposition with one of our buyer customers, Speedway Motorsports. Founded in 1959, Charlote Bay Speedway Motorsports is a leading player in motorsports marketing, promotion and sponsorship, specializing in events like NASCAR and IndyCar races. Similar to many of our clients, pre-AvidXchange Speedway was weighed down by a siloed yet decentralized paper-intensive accounts payable and payments process on its TRAVERSE Accounting system. Combined with the newly adopted shared services business model, the level of complexity faced by Speedway was overwhelming. In adopting our AvidInvoice and AvidPay solutions to streamline, digitize and automate their invoice processing and supplier payments, Speedway was able to reduce monthly accounts payable work hours, shorten its month-end accrual process to approximately 30 minutes from a couple of days previously, while driving an estimated cost savings of over $300,000 annually.
+
+Spurred on by the success of invoice and pay solutions, Speedway broadened its lens to other AvidXchange products such as AvidAnalytics, to review and analyze spending on a company-wide basis. Senior Vice President of Finance, Sara Grafals said it best, you'll be amazed at how AvidAnalytics streamlines tasks and allows managers to see things in real time. It provides us with the ability to give our staff the reporting mechanisms and [ matrixes ] they need on a timely basis. We are continuing to improve who we spend money with. Looking at our purchasing data and being able to negotiate give us buying power we can leverage. Those savings are then reinvested in other ways to enhance [ or attract ] fan experience and empowering the finance team to focus on other business initiatives.
+
+The ability to create this type of lasting value for our customers such as Speedway is at the center of our innovation and product strategies. There is a deep product pipeline for 2024 that further builds on the value proposition. We expect to further cement our leadership position in the marketplace. But before we lay out what new product offerings and platform innovations are in store for 2024, it's worth highlighting reflecting for a moment on 2023. Starting with our AvidXchange Flywheel metrics.
+
+During 2023, we increased the total number of buyer customers utilizing our accounts payable and payment automation software, excluding the decommissioned, Create-a-Check product offering, by 8.1% to 8000 customers from 7400 buyer customers in the year prior, driven by delivering a great AP automation software experience under Gear 1 of our AvidXchange Flywheel. A quick note on Create-a-Check, this offering was nonstrategic check printing solution utilized by our smallest customers to print paper checks on premise, that was one of the several products acquired approximately 10 years ago via our Piracle Payments acquisition and not consistent with our focus on middle market buyer customers along with our focus on eliminating paper checks. By contrast, we are still in single digit penetration across our 9 current verticals within our overall estimated addressable market of 435,000 middle market companies just in the United States alone.
+
+In addition to our strong buyer customer engagement, our supplier customer count was up 24% in 2023 versus 2022 and continues to be part of our secret sauce in our ability to monetize payments, which is fueled by innovative payment offerings and networking effects of buyers bringing their suppliers to our 2-sided AvidPay network. The resulting addition of new buyer customers and supplier customers drove increased transactions onto our 2-sided network and our overall spend under management under Gear 2. Transaction volumes on our network exceeded $75 million, rising 7.4% for year-over-year with our total payment volume increasing by over 11% on a year-over-year basis, to almost reaching $76 billion in 2023. This increase in total payment volume largely mirrored growth in our payment transaction count. The 7.4% year-over-year rise in spend under management to $230 billion tracks largely in line with the growth in our transaction volume.
+
+And given our growing transaction volume, we remain focused on maximizing our industry-leading e-payment monetization, which is our secret sauce as we refer to it. By converting suppliers to one of our various forms of electronic payment on the AvidPay network under Gear 3 of our Flywheel. In 2023, epayment-monetized supplier count on the AvidPay grew by roughly 10% from the year prior, largely in line with our payment transaction growth rate. We believe this underscores the overall value proposition of our AvidPay network for our suppliers. The sum of execution and growth across our AvidXchange Business Flywheel encompassing buyers, suppliers and transaction monetization resulted in nice growth in our all-encompassing transaction yield metric, which was up over 12% to $5.05 per transaction in 2023, compared to $4.51 per transaction in 2022.
+
+In addition, in the fourth quarter, we reached a record high transaction yield of $5.45, which is up 13.8% over the same period last year. We also ended the year with our net transaction retention rate at 101%, which has been impacted by the pressure of discretionary spend across the middle market as a result of the current macroeconomic environment, causing middle market companies and their CFOs to be more cautious with their discretionary spend.
+
+As we bid farewell to 2023, I want to take a moment to reflect on the financial and strategic accomplishments of the year. 2023 was a year of demonstrable financial resilience and strategic advancement as we delivered both 20% revenue growth and adjusted EBITDA profitability, driven by the impact of our various efficiency initiatives and scale of our operations. From resilience perspective, we delivered a healthy revenue growth up 20.3% to over $380 million for the year. This, in the face of ongoing macro choppiness impacting transaction volume around discretionary spend in the areas of marketing, advertising and professional services, which we are able to effectively counterbalance with continued yield expansion through our various innovation strategies with suppliers.
+
+Meanwhile, the pace of progress on unit cost reduction continued unabated through actions around standardization, automation and sourcing, including numerous work streams utilizing artificial intelligence across all areas of our business. This enabled us to deliver solid execution on our unit cost objectives, driving gross margin expansion of 540 basis points to 69.4% in 2023, and we continue to be excited about the expected long term impact on these unit cost reduction initiatives. We also continue to focus to optimize our resources in other functional areas as we [ hinder ] our OpEx and investment discipline, which led to a swing of over $45 million in adjusted EBITDA profitability in 2023 over 2022.
+
+I'm especially pleased to say that we exited the fourth quarter with our first-ever adjusted EBITDA profit, excluding the contributions of float and political-related media revenues. And finally, we finished the year with a solid balance sheet, including a net cash position of over $374 million. The combination of our strong balance sheet, combined with our scaling profitability provides us with significant optionality to continue investing in our targeted strategic initiatives, which we believe will drive shareholder value in years to come.
+
+On the strategic front, we believe we have positioned the business for a greater success in 2024. First, we inked a key transformational accounting system partnership with AppFolio, our biggest partnership ever with a top provider of solutions focused in the Real Estate multifamily vertical with roughly 19,000 customers, potentially half of those that meet our target customer profile. Also in 2023, we leveraged another accounting system in partnership with a cloud-based accounting solutions market leader, M3, as a springboard into our new Hospitality vertical with our M3 CoreSelect integration, which went live in November of 2023. Both of these integration partnerships should begin to contribute starting in the second half of 2024.
+
+Second, our top of funnel buyer sales opportunities increased around 15% in the 12 months of 2023 over 2022, demonstrating strong interest and engagement with buyers.
+
+Third, we advanced our payment product portfolio with several significant innovations, including the launch of our new payment modality such as our Lien Waiver payment modality for the Construction vertical.
+
+Fourth, we released our much anticipated digital invoice financing product, Invoice Accelerator 2.0 in October of 2023, now being branded as Payment Accelerator.
+
+And finally, we continue strengthening our executive talent team with key additions on our revenue and product teams with: James Sutton as our Chief Revenue Officer; and Doug Anderson as our Chief Product Officer, while elevating Dan Drees and John Feldman to the roles of President and Chief Operating Officer, respectively. Overall, I am very pleased with the leadership team that we have built and feel that we're well positioned as we focus on executing the next chapter of our journey to attain our goal of reaching $1 billion in revenues in the coming years.
+
+With those highlights, I want to spend the remainder of my remarks on our product and platform innovation initiatives in 2024, both of which fall under Gears 3 and 4 of our AvidXchange Business Flywheel. We're excited about the development of our new spend management platform. Currently, virtually all of our buyers customers invoice-based expenses are processed through our platform, as we are the system of record for our customers invoice transactions with the remainder of the noninvoice-based expense transactions being processed outside of our system, either through manual processes or through other third-party software applications.
+
+Our new spend management offering will tackle those remaining noninvoice expense transactions. However, our approach to spend management is highly differentiated and purpose built for the middle market. Whereas traditional spend management programs are focused mainly on travel and entertainment expenses, ours will be focused on managing functional team level procurement first, along with managing travel and entertainment expenses for our customers. It will also be managed at the point of purchase with real-time syncing, coding and approval status. And most importantly, our spend management module be highly integrated with our core accounts payable invoice suite, leveraging our GL coding and approval workflow capabilities along with having centralized expense and data reporting for all of our customers expenses in one platform, both invoice and noninvoice transactions, which is extremely important in the terms of driving adoption, cross-selling, interoperability and user experience.
+
+We expect that our spend management offering should result in high attachment rates and nonlinear growth contributed while driving higher TPV yield in future years. There are lots of different use cases for the product. One, for instance, could be a property manager employing the card to purchase a faucet and the transaction immediately synchronizes with our AP solution. This, we believe, will provide finance leaders a holistic view of virtually all expenses that occurs across the company, displacing either displacing either personal cards without proper controls or petty cash. With our offering, this ensures that their spend is -- would be in compliance with each customer's business rules, including budgets and expense categories, as we monetize transactions from both virtual and physical card volume. The platform is planned for initial rollout with select customers in the latter half of 2024, and then scaling in 2025.
+
+2024 is also the year when we plan to ramp key functionality of our new payments platform, which is the foundation of our AvidPay network. This is an effort that has been part of our product roadmap for the last several years. We believe the new capabilities of our payments platform are transformational in the way our customers experience managing their payments and the way we operate. A critical dependency in our ability to advance epayment adoption is to create new payment modalities through real-time configuration, combining pricing terms, speed of settlement, access to remittance data and payment acceptance automation as opposed to software development dependencies.
+
+Our new payments platform is designed to unify disparate systems and operational processes within a single platform to deliver the best supplier and buyer customer experiences. With our new platform, we'll be able to be well positioned to guarantee delivery of critical payments on time, despite potential delays of invoice approval by our buyer customers. Second, we believe that we can expand our payment footprint to noninvoice-based transactions such as loan, leases and various other tax payments. Third, we will be able to create new payment products real-time, based on speed, remittance data, pricing, automation, et cetera, and therefore drive greater epayment adoption for our buyers and suppliers. And finally, with our new payment platform, we believe we'll not only be able to enhance revenue through greater yield share of payments wallet, but also improve the cost structure in both hard and soft operational costs, including the reduction of paper check payments.
+
+In closing, we believe we are well positioned for 2024. With our 2023 building blocks in place, the 5 themes which drove our success in 2023 will continue to bear fruit for us in 2024 and beyond, coupling our industry leadership with highly differentiated foundations for our strategic and operating roadmaps in 2024. In particular, the success we continue to achieve in reducing unit costs and leveraging operational expenses, we believe we are setting up for delivering on our Investor Day targets. To be sure, we'll be tested along the way, given the macro volatility, and remain focused on controlling those elements of our business that we can directly control ourselves. But with the strategy and execution rigor, we have set in motion and are delivering on, we believe we're well positioned to drive impactful value for our customers, create future growth opportunities for our team members and unlock significant long term value for our shareholders.
+
+With that, I'd now like to turn the call over to my partner, Joel Wilhite.
+
+Joel Wilhite
+
+Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our fourth quarter 2023 financial results, which reflect continued execution of our growth strategies amid continued macro uncertainty. Overall, we delivered another quarter of healthy year-over-year financial performance.
+
+Relative to the implied fourth quarter 2023 business outlook and adjusting for float and political, fourth quarter revenues came in higher due to payment and software yield expansion driven by ongoing ePay conversion. That, together with higher gross margins driven by higher revenues, progress on unit cost initiatives, software and pay yield expansion, as well as sustained expense discipline led to significant adjusted EBITDA outperformance. It's worth noting that we delivered our first ever adjusted EBITDA profit, a major milestone even after stripping out float and political. We believe that by crossing this profit CASM on a core basis underscores not just the power of our business model and disciplined execution, but also our confidence in achieving our Rule of 40 target by 2025.
+
+Now turning to year-over-year results. Total revenue increased by 20.8% to $104.1 million in Q4 of 2023 over the fourth quarter of 2022. More than 3/4 of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, coupled with software and pay yield expansion. The remaining revenue growth this quarter was driven by higher year-over-year float revenue, net of year-over-year decline in political revenues. Our strong revenue growth also resulted in total transaction yield expanding to $5.45 in the quarter, up 13.8% from $4.79 in Q4 of 2022. Of the 13.8% increase, roughly 3/4 of the increase was driven by pay and software yield, coupled with transaction mix skewed toward payments. The remainder was due to the flux between float and political revenues.
+
+Software revenue of $29 million, which accounted for 27.9% of our total revenue in the quarter increased 10.1% in Q4 of 2023 over Q4 of 2022. The increase in software revenues of 10.1% was driven by growth in total transactions of 6.1%, which continues to be impacted by macro conditions with the balance driven by growth in certain subscription-based revenues. Payment revenue of $74.2 million, which accounted for 71.3% of our total revenue in the quarter, increased 25.5% in Q4 of 2023 over Q4 of 2022. Payment revenue reflects the contribution of interest revenues, which were $13.7 million in Q4 of 2023 versus $5.8 million in Q4 of 2022. Recall, our year ago payment revenues also included contribution from political media revenue. Of the 25.5% increase in payment revenues, more than 3/4 was driven by a combination of an increase in pay yield expansion and payment transaction volume increase of 9% with the remaining portion driven by the aforementioned flux between interest and political revenues.
+
+On a GAAP basis, gross profit of $67.3 million increased by 34.8% in Q4 of 2023 over the same period last year, resulting in a 64.6% gross margin for the quarter compared to 57.9% in Q4, 2022. Non-GAAP gross margin increased 650 basis points to 71.4% in Q4 of 2023 over the same period last year and was driven mostly by unit cost efficiencies and yield expansion.
+
+Now moving on to our operating expenses. On a GAAP basis, total operating expenses were $79.5 million, an increase of 1% in Q4 2023 over Q4 of last year. On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 2.6% to $58.8 million in the fourth quarter of 2023 from the comparable prior year period. On a percentage of revenue basis, operating expenses, excluding depreciation and amortization, declined to 56.5% in the fourth quarter of 2023 from 66.5% in the comparable period last year. The year-over-year percent decline largely highlights the significant operating expense leverage, particularly across G&A, sales and marketing as well as R&D to an extent even after stripping out the contribution of float.
+
+I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs decreased by $1.1 million or 5.7% to $17.5 million in Q4 of 2023 over Q4 of last year, which was driven by a combination of efficiencies in marketing spend, a decrease in performance-based compensation and realignment of resources, coupled with a delay in timing of certain investments. Non-GAAP research and development costs increased by $2.6 million or 13.1% to $22.1 million in Q4 of 2023 over Q4 of last year. The increase was due to continued reinvestment in our products and platforms, including spend management, pay offering and payment accelerator.
+
+Non-GAAP general and administrative costs remained unchanged at $19.2 million in Q4 of 2024 versus Q4 of last year due to leveraging public company costs across a larger revenue base. They continue their annualized downward progression as a percentage of revenue as we indicated during our Investor Day. Our GAAP net loss was $4.5 million for the fourth quarter of 2023 versus a GAAP net loss of $25 million in the fourth quarter of 2022, with the reduction in loss is driven by a combination of strong revenue flow-through and expense control leading to lower operating expenses, coupled with higher interest income and lower interest expense, due to reduced borrowing costs and partial debt paydown.
+
+On a non-GAAP basis, our net income in the fourth quarter of 2023 was $9.4 million versus a net loss of $7.5 million in the same year ago period, a $16.9 million positive swing from last year driven by the aforementioned factors. Similarly, on a non-GAAP basis, Q4, 2023, adjusted EBITDA was a $16.9 million positive swing from an approximately $1.3 million loss in Q4 of 2022.
+
+Turning to the balance sheet for a moment, I want to touch on a few key items. We ended the year with a strong corporate cash position of $451.6 million of cash and marketable securities against an outstanding total debt balance of $77.3 million, including a note payable for $13.9 million. We had $30 million on our credit facility undrawn at year-end. Corporate cash meanwhile, was split roughly 2/3 among money market funds, commercial paper and time deposits, with the remaining 1/3 in deposit accounts. The weighted average maturity on corporate cash was roughly 10 days while the effective interest rate on our corporate cash position for the fourth quarter was roughly 5.25%. Customer cash at quarter end was approximately $1.6 billion with an interest rate of roughly 5% for the quarter. The jump in customer cash was primarily timing related to funds in transit along with shifts in calendar days between weekdays and weekends of receipt and disbursement of that cash.
+
+Turning to our 2024 business outlook. We expect total revenue for the year to be in the range of $441 million to $447 million. Based on the midpoint, we expect approximately 47% of the 2024 revenue distribution to be in the first half versus 53% in the second half. Our 2024 revenue outlook reflects the revenue impact of decommissioning our on-premise check printing software Create-A-Check, the buyer customer base and revenue contribution of which was roughly $1,401 million in 2023, respectively. The outlook also incorporates approximately $44 million of interest revenues from customer funds versus roughly $41 million earned in 2023. Also, we anticipate political media revenue contribution of approximately $9 million, given that this is our first presidential cycle under FastPay. Recall, we acquired FastPay in 2021. For context, in 2022, during the midterm election cycle, the political arm of FastPay generated roughly $8.5 million in revenues. Similarly, we expect non-GAAP adjusted EBITDA profit ranging between $67 million and $71 million for the year.
+
+With that, I would now like to turn the call back over to the operator to open up the line for Q&A. Operator?
+
+Operator
+
+[Operator Instructions] The first question comes from Ramsey El-Assal with Barclays.
+
+Shray Gurtata
+
+This is Shray on for Ramsey. I was just wondering if you could comment a bit more on the magnitude of macro pressure that's factored into the guide. Is it contemplating any further deterioration or is it more of a steady state?
+
+Joel Wilhite
+
+Yes, great question. And just to be real clear, the sort of the macro dynamic that's causing buyers to sort of limit their spend, that subset of discretionary spending has really continued consistently through the year, even to now. Our guide contemplates no change. We're hopeful that that turns around and we expect those types of spending can't be put off forever. But our guide contemplates continued macro conditions that we experienced in '23.
+
+Operator
+
+The next question is from Craig Maurer with FT Partners.
+
+Craig Maurer
+
+I wanted to ask, if you can characterize your assumption on political spend, you said $9 million in political revenue in '24. In the past, you've outlined that you see 30% to 35% of all political advertising spend and forecasting a $10 billion spend cycle. So I'm trying to understand the level of conservatism built into that number?
+
+Joel Wilhite
+
+Yes. Great question. We were -- we are baking $9 million into the guide. We pointed out that this is our first presidential cycle with FastPay. And so it's possible that there's some upside to that in the back half. It's a little less predictable than our core fundamental recurring business. And so we felt like $9 million was a prudent guide.
+
+Michael Praeger
+
+Yes. Craig, I think, it's -- this is Mike, and I think it's a great question because, as Joel said, it is our first presidential cycle, ourselves managing through it. And I think, we usually take kind of a cautious approach to new things, and this is a good example of that. You're right. We do control about 35% of all the media-related payments in the industry, but one of the things that's inherited in the industry, although we have the leading market position, is there's not a lot of visibility and lead time to when particular advertisers may receive orders for advertising placement. A lot of it is very last minute and with short lead times. So there's not a lot of visibility we have to it. So that leads us to that dynamic combined with it's our first rodeo through the political cycle, just to take more of a cautious approach to it.
+
+Craig Maurer
+
+And could you perhaps talk about the take rate in political versus the rest of the business?
+
+Michael Praeger
+
+Yes.
+
+Joel Wilhite
+
+I think what we've said in the past is, it's slightly, but I wouldn't say meaningfully higher. It is a little higher given a higher mix of digital payment acceptance.
+
+Michael Praeger
+
+Yes. And one of the, just as a flavor there, the reason why we have our leading position in political is that we've been on the forefront of that conversion and creating specialized payment types for media-related payments in moving from paper check to electronic because of the short lead times. So certainly our innovation focus on different payment modalities for media has been kind of a key component of our market position there.
+
+Operator
+
+The next question is from Dave Koning with Baird.
+
+David Koning
+
+And maybe for my main question, your dollars of core payments growth was about the strongest we've ever seen. And you mentioned it was driven a lot by yield. More ePay -- shift to ePay. But within ePay, are there certain types that suppliers are asking for more? Like, is [ VCC ] just as a percentage, like drawing more and more? And if that's the case, maybe what's kind of driving all that?
+
+Joel Wilhite
+
+Yes. No, great question, Dave, and really strong kind of yield quarter and even excited about the things we have to come from a yield perspective. But to answer your question, we're continuing to sort of march down the path of taking checks out of the system, moving towards digital. We're also -- the discipline around operating is creating opportunities through just reducing exceptions, better offshore management of processes, those things we talk about that drive unit costs down also give us yield opportunities as well.
+
+David Koning
+
+And maybe just a quick follow-up. Interest revenue was up a lot sequentially, 25%, 30% with rates being, I think, pretty stable. Was there something to the amount of dollars you're holding? And is that sustainable?
+
+Joel Wilhite
+
+Yes. No, it's a great question. So you'll notice we finished the year with about $1.6 billion of customer funds on the balance sheet. So a nice uptick there. And it was really that that drove the rate in the quarter. So it was about $13.7 million float revenue in the fourth quarter. There's -- the drivers are really the timing of the funds moving between buyers and suppliers, including things like how much is in transit at a particular, whether it's a weekday cut off or a weekend cut off. So that's really sort of an expansion in customer funds as we finish the year is what drove float. And I would suggest, and what is historically kind of consistent, is that customer funds would level off over the course of the first quarter in '24.
+
+Operator
+
+The next question is from Andrew Bauch with Wells Fargo.
+
+Andrew Bauch
+
+Just looking at the incremental margins ex-float, I mean, really impressive that -- it looks like based on this guide 60% plus and relative to our estimate of, I think, 29 ex-float in 2023. So I'm just trying to understand the sustainability of that? And I know that you guys have been making efficiency investments in your cost of goods sold line, but trying to weigh that versus what you've seen on the ePay front? Just trying to figure out the magnitude of upside there.
+
+Joel Wilhite
+
+Yes. I mean let me just kind of remind you, I would just take us back to the targets that we set out at Investor Day. We said we would be in the 72% to 75% gross margin range in 2025. And we've had great kind of continued margin expansion by doing the things that we've been talking about consistently since the IPO. And so we said that the way we would get there is a mix of yield and unit cost efficiency; yield, call it 2/3; and unit cost, call it 1/3 though not necessarily linear. And we're just kind of continuing to execute that plan. And so if you strip out float in the fourth quarter, that's a 67% gross margin. And so 6 good solid points up year-over-year, but a ways to go, and we've got the levers and the opportunity to do that both on yield and unit cost.
+
+Michael Praeger
+
+Yes. Andrew, I'd say, I can simply look at it. It's really the blended combination of 2 things. That efficiency, as Joel says driving yield. And certainly, AI has been a nice component of that expansion as well. And we continue to see that scaling as we go forward. I think as we've talked about, we have roughly about a dozen different initiatives across the business related to AI, both customer-facing and kind of focus internally.
+
+And then, the second piece is on the yield. And that's where all our strategies and innovation related to monetization strategies, new payment modalities, our straight-through process, [ pay ] capabilities with suppliers, all those types of things are taking hold. And so I think it's the combination of those 2, and so we believe we're in early days of continue to drive that overall margin expansion and expected that to continue over time.
+
+Andrew Bauch
+
+Yes, that makes a lot of sense. If I can just squeeze one more in. The 2024 -- in the press release, you said the 2024 outlook reflects accelerating revenue growth. You did 20% in '23, and the initial guide is for 17%. So could you just clarify what that accelerating revenue growth language means?
+
+Joel Wilhite
+
+Yes, you bet. We're addressing ex-float and political.
+
+Operator
+
+The next question is from Darrin Peller with Wolfe Research.
+
+Darrin Peller
+
+Maybe we just start off, I just want to ask about the supplier growth. I think it was 24% in '23, which I thought was a great call out. Just if you could remind us how that compares to the change in prior years, the general timing for suppliers to be more monetized using different methods, whether it's Invoice Accelerator, AvidPay network, et cetera?
+
+And then I guess as a follow up to that, I know your goal is potentially going up to 70% monetization of your transactions over time, and I'm assuming that obviously is highly correlated with the supplier network growth and the implementations of different work there. So maybe help us with a split, if you can, on the kinds of tools between AvidPay Direct or virtual card or other kinds of payment modalities would be great?
+
+Michael Praeger
+
+Yes. Thanks, Darrin. Well, that was kind of a multifaceted question, so let me kind of chip away at it. So first of all, the supplier growth question, yes, we're super excited. We broke the 1 million threshold, and ended year to 1.2 million to suppliers on the network. That is -- that 24% growth is consistent to what we've seen in past years. So we feel like that we're at -- continue to be at nice rhythm in terms of growing the network on the supplier side.
+
+The -- and we see kind of a consistent mix of enrolled suppliers in terms of payment modalities. And so the 2 big buckets, categories that we have are those that accept a form of virtual card, and I'll come back to that in a second. And the second one is a form of our AvidPay Direct, which is our ACH+ offering. Back 10 years ago, we had 1 payment modality in each of those buckets. Today, in virtual card, we have a dozen different payment modalities where we have, partly because of our deep partnership with Mastercard, our ability to manage multiple forms of interchange.
+
+And the combination, what we do is -- we use the combination of price, which is interchange structure, combined with speed of payment, combined with the data, remittance and reconciliation data. And then lastly, combined with level of straight through process. And so those are like 4 variables that we have within a payment modality, and different levels within those 4 create different payment modalities across virtual card that will allow suppliers that maybe don't have acceptance of card from across the industry, to be able to accept a card and stay in a straight through process with high levels of reconciliation data provided directly to them. So it's a nonhuman touch accounts receivable function on their side. And those are all examples that we're using to continue to add suppliers to the network.
+
+On the flip side, on the AvidPay Direct, we're doing really the same thing except settling through ACH. But again, combining speed of payment, different price points, different levels of remittance data along with different levels of straight through process. And so I think you ended with kind of the reference to long term, we expect that we think we can take monetized payments to about 70% of transactions. And we still believe that, and -- but again, it's not going to be on one particular payment modality that kind of saves the day. It's lots of different pay modalities combining different levels of those 4 factors that we continue to believe is the secret sauce.
+
+Operator
+
+The next question is from Jamie Friedman with Susquehanna.
+
+James Friedman
+
+I wanted to ask, Michael, about the spend and expense management product launch. You had alluded to that, I believe, last quarter. And it seemed like you were pretty optimistic about the opportunity there. So any context on that or timing or significance would be helpful?
+
+Michael Praeger
+
+Yes. Thanks, Jamie. Yes, I'm glad you asked the question. Certainly, in the past, I was always excited to talk about our Invoice Accelerator, now Payment Accelerator offering. And now that that's in the market, I'm spending a lot of energy on our spend management up-and-coming platform. And so yes, we expect it to be leased to initial customers later in this year, but really have -- start having an impact in '25 and beyond.
+
+However, the reason for my excitement around it is when you think of all the transactions that we manage today, we do a really good job of managing close to 100% of all the expense transactions that have an invoice for our customers, because we're the system of record for all their invoice-related expenses and directly are the feed to their general ledger, get things paid. However, we think that we're managing overall in terms of a customer's expenses, probably in the 85% range of a customer's expenses relate to an invoice, and then you have 15% that kind of fall outside that which occur into, say, travel, entertainment expense or other kind of functional team level expenses that they need to make in terms of immediate payments.
+
+And so the mission of our spend management platform is to capture as much of that remaining 15% of a spend that a customer has. They haven't been our platform, but the real thing that makes it unique to AvidXchange is, which our customers are really excited about, is now having all their financial expense data in one platform for reporting. So one of the thorns in the side of lots of the CFOs of our customers is, Mike, we have 85% of our expense data. That's great for reporting, but then we have to piece together the remaining 15%. It's either a manual process or in third-party, other third-party applications that are not as well integrated to our general ledger. And it'd be great just to have one place that we can go and have all our expense reporting to better run our business.
+
+And so that's the mission that we're on. And we think the spend management product is -- long term, going to give us that capability and provide just a really great increase to the value proposition to our buyer customers.
+
+Operator
+
+The next question is from Bryan Keane with Deutsche Bank.
+
+Bryan Keane
+
+Congrats on these results. I wanted to go back to the revenue acceleration that you're expecting this year. I know that's ex-float and ex-political. Can you just talk about a couple of the drivers there? And then, what might make this guidance conservative or any risk to the top line number? And then just lastly, on EBITDA coming well ahead of our expectations and consensus for this year. Any thoughts on '25 -- the 20% plus EBITDA margin, does that also mean that you're maybe running ahead of kind of original targets for '25 on EBITDA?
+
+Joel Wilhite
+
+Thanks, Bryan. Yes, let me just kind of take those in order. So a couple of things we're excited about in the guide, particularly in the back half, our yield driven acceleration associated with -- we talked already about kind of beginning to see that curve in Payment Accelerator. Also in terms of kind of opportunities to offer increasingly more payment methods, and so to accelerate the digital acceptance there. We also remember have M3 and AppFolio that are sort of still ramping and so it could contribute from a volume perspective, so feel good about kind of how things are setting up in the back half.
+
+Your second question is like if we were surprised to the upside, what would that look like? I think, we already touched on the approach we took in guidance for the political cycle. I think the next thing I would point to is those new pay methods, like we're really excited about having invested in those, and those could potentially move the needle for us, not to mention Payment Accelerator. All that said, keep in mind the macro backdrop, right? We are continuing to guide and project assuming no change, and we're hopeful that there's change, but of course, that's not contemplated in the guide.
+
+And then, the final question on EBITDA, again, really kind of proud of how we finished the year and setting ourselves up to sort of turn the profitability corner and be meaningfully profitable in '24. Your question about '25. What I would say is that even in -- even with the macro backdrop that exists today, we feel like we've got sort of all the levers available to us as gross margin continues to expand, again, we see additional yield and unit cost opportunities to do so plus the leverage that you're seeing in operating expenses. So we feel good about that Rule of 40 target for '25.
+
+Operator
+
+The next question is from James Faucette with Morgan Stanley.
+
+James Faucette
+
+Great. I just wanted to ask generally, most of my questions have been answered in terms of where you're at right now. But I wanted to ask in terms of M&A. You guys have historically done a good job finding opportunities to add additional either end customers and markets or capabilities to the platform. And so just wondering how you're thinking about that, especially as your profitability improves? How should we think about capital allocation M&A within that? And are you seeing good opportunities in pipeline?
+
+Joel Wilhite
+
+Maybe first on capital allocation, then Mike can mention in context of what we're seeing in the M&A pipe. I think we are, again, sort of turning profitable, looking at sort of meaningful free cash flow in our future. I would say from a capital allocation perspective, M&A is really interesting to us and in terms of our balance sheet kind of looking at all the options that we have available to us.
+
+Michael Praeger
+
+Yes. Maybe a little bit of a pipeline. We think it's long term, it continues to be a part of our overall kind of growth expansion playbook. We think in addition to kind of our 20% kind of growth mantra that we expect to deliver consistently on a long-term basis, that there's an inorganic growth lever that we can add to that, should we find the right opportunities. So I think we're very focused on -- we're talking to lots of participants. Typically, they're smaller companies that are in the different 9 verticals that we're in. We also have some targets in terms of new verticals that we'd look for acquisitions in. And we're having lots of conversations. I think, are still -- have not seen the kind of private market valuations reflect those that are at the public company level yet. And so I think we're continuing to be cautious.
+
+And however, when the right opportunities present themselves, certainly, with our balance sheet and capabilities are in a great position to execute these. I think the core playbook, however, is around vertical market expansion. We feel really good about our product capabilities. And so that wouldn't be kind of a key focus for us. It'd be more -- continue to grow beachhead of customers within the 9 verticals that we're in as well as use it as an opportunity to expand those verticals even further.
+
+Operator
+
+The next question is from Tien-Tsin Huang with JPMorgan.
+
+Tien-Tsin Huang
+
+Really good results here. Just on the outlook, I wanted to ask if new product contribution is a meaningful or measurable contributor to fiscal '24 here relative to your past initial guides to just new product contribution?
+
+Joel Wilhite
+
+Yes, Tien-Tsin, great question. I think probably what I would just add is on the supplier side, we talked about the payment -- opening up new payment modalities, but otherwise kind of all the products in the bag.
+
+Michael Praeger
+
+Yes. And I think, even when we think of the new products that we have, Payment Accelerator and then spend management, as I alluded to earlier, those really are -- it really factors in, in terms of executing this year. They really set us up nicely for '25, '26 and beyond.
+
+Tien-Tsin Huang
+
+Got it. So really build up the momentum, and then we'll feel more of that in fiscal '25. Okay. Got it. Just on the -- just thinking about -- I know you got a lot of questions on FastPay and visibility. I'm just curious when will you get closer visibility on that? Is it really going to be in -- just in that third quarter in terms of how real or conservative that outlook that you're setting up will be? I'm just curious how quickly you might see that? What the lead time would be based on the past?
+
+Michael Praeger
+
+Yes. Remember, based on the past is the key word, it is -- this is our first political cycle. So in a non -- or I mean, presidential cycle, I should say, in the kind of interim cycles that we do have some experience with, we saw a smaller level or lower level activity occur earlier in the year, and then obviously it builds up and Q3 is the monster quarter for it. And so I think, we're taking a cautious approach and expecting a kind of a similar build to the year as we've seen in the non-presidential cycles. But we're probably as anxious to see how everything falls out as you are. We just take a cautious approach to it. But we think we've set ourselves up really nicely in terms of our market positioning. We've added some really nice political customers since the last cycle, and really like our industry positioning and being the leader in political payments.
+
+Tien-Tsin Huang
+
+Yes. No, it seems set up well.
+
+Operator
+
+Our next question is from Alex Markgraff with KeyBanc Capital Markets.
+
+Alexander Markgraff
+
+Just one for me. Quickly on some of these partnerships, AppFolio, M3. You mentioned the sort of contribution in the second half of '24 starting to show up. I'm just curious, is that sort of the time to benefit we should start to think of as you sign more of these? Or are there some early learnings from the first couple that might kind of accelerate that time to revenue as you add more partners here?
+
+Michael Praeger
+
+So first of all, we're super excited about our overall sales motion. I'd say the partnerships is certainly exciting. I'll talk about a second, but remember also that over the last year, it's been a phenomenal year in terms of building the talent in our go-to-market strategies. The addition of James Sutton as our Chief Revenue Officer earlier last year, and then the addition of Doug Anderson later in the year as our Chief Product Officer. That combination is really powerful in terms of how we kind of really accelerate that organic growth, kind of, formula. And then executing on the partnerships is a key piece of that. So I think like some of the new product stuff, we typically have a cautious approach to any new partnership until it really -- we begin to see the scaling of it.
+
+However, although AppFolio has the characteristics of being our largest partnership ever in terms of the number of customers that they have 19,000 customers, of which roughly 50%, we think, are right in our sweet spot of core customer profile. And we have lots of learnings from all the other partnerships that we've executed that we're certainly applying to both M3 and the AppFolio partnership. So we feel really good about our playbook related to executing these partnerships, combined with the talent level that we've assembled to position. So as Joel indicated, it'll certainly more noticeably begin impacting the second half of the year. But again, we feel really good about the setup for '25, '26 and the impact of these partnerships long term.
+
+Operator
+
+This concludes our question-and-answer session. I would now like to turn the conference back over to Michael Praeger for any closing remarks.
+
+Michael Praeger
+
+Thanks again, everybody, for your interest in AvidXchange. As the only publicly traded company with really critical mass in the automation of accounts payable and payment automation for the middle market, we believe we're in a really solid position to capitalize on the secular trend around digital transformation of the back office. And given our disciplined execution in the face of continued kind of macro challenges, along with our financial strength, we believe there's a significant runway for revenue growth, profitability and value creation for investors.
+
+With that, we look forward to sharing our progress with you in our next earnings call. Thanks again, everybody.
+
+Operator
+
+The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.