AvidXchange Holdings, Inc.

Good day and welcome to the AVID Exchange third quarter 2021 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ryan Stahl, General Counsel. Please go ahead.

Good afternoon, everyone, and thank you for joining us for the Avid Exchange Holdings third quarter 2021 conference call. With me today is Mike Prager, Avid Exchange's co-founder and chief executive officer, and Joel Wilhite, Avid Exchange'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 Avid Exchange's investor relations website, we have provided 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 Prager.

Thank you everyone for joining us for Avid Exchange'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 Avid Exchange, 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 Avid Exchange 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. Joe Willight 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 Avid Exchange 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. Avid Exchange 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 Avid Exchange 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 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 Avid Exchange, 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 for men'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 two-sided network that we built, serving both buyers and suppliers, generates a tremendous flywheel effect for our business. Our Avid Exchange 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 Avid Pay network. Our Avid Exchange flywheel begins with gear number one, 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 and payments into one cloud-based platform that can be accessed anytime, anywhere by all of our customers. To accelerate the first year of our flywheel, we're working to maximize our go-to-market strategies horizontally across the middle market, along with focusing on eight specific core verticals, which include real estate, the homeowner association or HOA market, financial services, which includes tier two and tier three banks, along with credit unions, construction, media, healthcare 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 Concurb. New customers in the third quarter spanned across Avid Exchange's core verticals, including Goodwin & Company within our HOA vertical, Case & 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 Avid Invoice to automate their accounts payable process, along with Avid Pay 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 a flawed accounts payable system that was costing them several thousand dollars a month. Using Avid Exchange software, they're able to achieve three 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-approved 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 the second flywheel gear, which is maximizing the number of transactions we manage on our platforms. By combining our business model to be the system of record for all buyer AP transactions, along with managing the entire payment file for their payments, we're 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 AvaPay 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 supplier's preference, including virtual card, or VCC, enhanced ACH, or our avid pay direct offering, and physical checks, while delivering rich for mince 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 integrations as critical key differentiators for Avid Exchange. 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 the 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 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 Avapay network to facilitate the conversion of paper checks to intelligent e-payments. which is our third gear. We have over 700,000 suppliers that we pay through the Avipay 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 the number of enrolled e-payment suppliers receiving electronic payments from the AvaPay network. E-payment suppliers are defined as those suppliers that we've enrolled in one of our various AvaExchange virtual card payment offerings, as well as our AvaPay Direct modalities. AvaPay Direct is our version of ACH+. where we settle through ACH but wrap the transaction with electronic remits data the supplier needs to automatically apply and reconcile each payment, giving them the payment speed, security, and remits data that they require. We consider our Abbott Pay Network to be our secret sauce and is 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 Abbott Pay Network in 2012 and anticipate significant future return on our investment given that we expect our Avid Pay 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 remittance data. Our Avid Exchange 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 spend 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 Avid Pay 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 Avid Exchange 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 we built a powerful flywheel business model that is well positioned to capitalize on this massive growth opportunity and the adoption catalyst propelling our business by executing on our focus, key strategic growth drivers, which include, number one, the driving the number of overall transactions processed by acquiring new buyers and suppliers, along with increasing the number of transactions processed between 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 is still comprised over 42% of overall businesses to 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. Avid Exchange is the leader in driving ePayment 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 releases 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 four catalysts unfold 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 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 experienced benefits of cloud-based solutions for automation in 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 Avid Exchange, 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 success for Avid Exchange 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?

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 gears one and two 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 multi-year 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 Avid PayDirect. Therefore, total payment volume is also another key metric. Now let's turn to our results for the three-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 2021 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 gap net 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-gap 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 continued. We ended the quarter with cash and cash equivalents of $150.9 million. On October 13th, 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?

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Will Nance with Goldman Sachs.

Hi, everyone. Good afternoon. Congrats on the first quarter. Hey, thanks, Will. Maybe I'll just kick it off on some of the traction you're seeing on the AvaPay network. Just wondering if you could help kind of flesh out people's understanding of, you know, the penetration of the network with your current customer set and then how that compares to kind of new business.

Yeah. So as it relates to kind of the AvaPay network and I think your question is related to adoption and related to existing and how it may 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 AvaPay virtual card or AvaPay 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 six- to nine-month period for a new customer to get to their full adoption period. And I don't know, Will, if you had any kind of follow-up to that question.

No, that's great. I appreciate the details. And then just maybe second, you mentioned invoice accelerator a handful of times on the call. Yep. I'm 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 that?

Yeah, great question. Invoice accelerator is one of the areas that we're super excited about and 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 you know, kind of sub five million in revenue but growing quickly. And we've been, you know, kind of metering it from the standpoint of today it's only available to less than 10% of our overall supplier base. And that's really kind of due to two things. One is, yes, we continue to perfect kind of the algorithms related to determining the eligibility of invoices that we choose to advance. The second thing is that, you know, we are executing on our balance sheet today. And so going forward We expect to make it available to, you know, our full supplier base, you know, probably, you know, kind of systematically over the next, you know, 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.

That's helpful. Appreciate you taking my questions. Congrats again. Thanks, Will. Thanks, Will. Appreciate it.

Our next question comes from Jinjin Huang with JP Morgan.

Thanks so much. I'll echo what Will said. Congrats on the first quarter out the gate here as a public company. It 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 it must be a good sign there.

Yeah, great question, Tenjin. I'll take it. And, you know, first thing I'd guide you is just given the way our revenue model works, because I wouldn't necessarily correlate, you know, the change in deferred revenue to sales. But we're excited about the sort of the performance this year. We've seen great, you know, continued strong demand for our solutions. You know, we've talked about kind of a mix of, you know, some really great tailwinds from COVID and then some sustained kind of headwinds. you know, in places. But we were pleased to sort of deliver better than our internal forecast from a sales perspective. You know, we don't provide a bookings or ARR figure, but we do have, you know, good confidence in being able to deliver our long-term, you know, our guidance for Q4 and sort of our outlook for 22. So it felt good about the production in the quarter.

Okay, good. And then on my follow-up quickly, just on the partner front, how are those – those conversations, and do you feel like you're closer, maybe securing a few more larger partners? Just curious how that's going.

Yeah, so great question related to the partners. So when we think of partners, they fall into kind of a handful of different buckets. One is within the bank channel. The other is with kind of our software partners. And within each of the two categories, we have both referral partners And we have what we call reseller partners. And typically reseller partners are the 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've personally messaged, one of our newest partners is Bank of America. And they began onboarding customers earlier this year and were really, you know, excited about, you know, the evolution of that bank channel and believe that, you know, Bank of America has the capability to be, you know, one of our leading, you know, partners once they complete their ramp up. The second, you know, kind of piece on the software partners, we continue to see good momentum across you know, 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, you know, we are very selective in terms of adding new reseller partners. So that number, you know, that base of, you know, we expect to, you know, grow by, you know, a small amount each year. But where we're adding more partners is on the referral side. And that, you know, today we're up to, you know, 120 plus different referral partners and we continue to kind of grow that nicely. So that's, you know, what we're currently seeing and, you know, excited about, you know, the interest level that we're getting from, you know, both partners as well as customers.

Very good. Thank you both. All right. Thanks, Jason.

Our next question comes from Ramsey Elisal with Barclays.

Hi, gentlemen. Thanks for taking my question this evening. 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 FastPay a contributor there? What can you tell us about why that stepped up sequentially?

Yeah, thanks, Ramsey. Great question. Yeah, 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, you know, we're seeing an average payment size increase. We think there's a little bit of inflation driving that. And, you know, some mix, you know, some mix impact as well. And then to a lesser extent, you know, we do have inorganic contribution to that as well, as you mentioned from FastPay. So, you know, kind of a handful of drivers there.

Okay. And my follow-up is about longer-term strategy and is a two-parter. The first part is, going forward, can you 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 up-market or down-market more broadly?

Yeah, thanks for having me. No, that's a good question, one that we get routinely. And so, you know, to remind you, within the eight verticals that we're in today, we believe that we're still in kind of single-digit penetration across all eight, 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, you know, big runway within the, you know, the eight verticals that we're in today. And what we expect is to continue to focus to really penetrate those, you know, over the next, you know, 18 to 24 months, as well as continue to be, you know, 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, you know, a handful of new vertical focuses each year as we evolve and, you know, expect that to be the case in the coming year as well.

Great. Thanks, and I offer my congratulations as well, getting out of the gate here.

Great.

Thanks, Ramsey. Thanks, Ramsey.

Our next question comes from Josh Beck with KeyBank.

Thanks, team, for taking the question, and my congrats as well on new life as a public company. I wanted to ask a little bit about the macro across other companies. industries and 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 trends that you're seeing take shape on those fronts.

Yeah, I think that'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 eight 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, you know, where we're probably, you know, seeing, you know, some of that impact is reflected in the yield number, and that relates to some of the, you know, what we believe is kind of inflation of just average payment sizes ticking up slightly. And we think that, you know, it's kind of directly related to some of the, you know, kind of macro impacts of, you know, supply chain as well as inflation.

Okay, great. So it seems like maybe on the margin it's It's perhaps a tailwind, or at least what you've seen this quarter. Yeah. Okay.

Exactly.

And, you know, 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, you know, exactly how things come in versus your philosophy. But, you know, just help us understand maybe what you've embedded into your Q4 level of conservatism, those types of things?

Yeah, great question, Josh. I mean, if you compare the flash numbers in the S-1 relative to what we delivered, we were kind of at the nice beat across each. I think we were 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 You know, we've seen a little bit of the volume activity, but honestly it's, you know, 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, you know, again, high confidence that we can sort of deliver those results from where we sit today.

Very helpful team. Thank you both. Thanks, Josh. Thanks, Josh.

Our next question comes from Darren Peller with Wolf Research.

Hey, guys.

Thanks. Hey, Darren.

Hey, Darren.

Hey. You know, 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 modernization of payments. Obviously, we know you guys are decently along, although still having maybe 20% to 25% of your total payments volume really monetized in the sense where I think you've said maybe 40% of transactions when considering the avid paid direct or, or VC, 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.

Yeah, Darren, I'll take a shot first. Really, you know, as we've talked about this, you know, and Mike talked about gear three of the flywheel, right? The opportunity we see ahead of us over the long run for really continuing to increase the penetration, you know, 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, you know, I wouldn't focus as much on the next couple 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, you know, we were pleased with, you know, 40%, you know, volume growth overall, 37% growth in the quarter. So, you know, really see that as validation to the model and excited about that long-term opportunity.

Yeah, maybe adding a little bit more color to, you know, what Joel said is we also expect that, you know, the percentage of monetized payments, both, you know, either transaction or volume to continue to grow over time, as well as we institute new, you know, payment modalities into the market as well. You know, one that we're currently, you know, under development, for example, is our cross-border capabilities. And we have a number of other, you know, payment modalities that we expect to incorporate, you know, with customers in the coming year. And so, I think, you know, all those different strategies combined with just our core, you know, virtual card and Avid Pay Direct acceptance methods continues to drive, you know, ongoing supplier growth. Got it.

All right. That's helpful. when we think about the verticals you mentioned earlier, the eight verticals, and then obviously this deal recently getting you more into the media supplier side as well. I'm just curious. I mean, you know, I think a barrier to entry for you guys has continued to be the differentiated connectivity into some of the industry vertical solutions. And you touched on this earlier, it's going well. You know, can we just, can you just expand on that for a minute? Cause I think we get a question a lot about competition and it's like, how much of a barrier has that been for you? And, touching on these integrations for a minute. Thanks again, guys.

Yeah, so great question, Darren. So I think, you know, when we think of, you know, kind of the different, you know, sections of the overall market, the middle market is just, it's hard. And we like that dynamic. And, yeah, Avid Exchange is really kind of purpose-built for the middle market. And so, you know, what does that mean? It starts with the feature set of our software. It's really designed to support the, you know, the business rules. of the middle market companies that we serve. They're 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 split over 210 different accounting system or ERP integrations across the verticals that we serve. And then kind of the third is really the payment network itself is really purpose-built to support all the suppliers of the middle market. So, you know, 700,000 suppliers, and it grows each week. And then, you know, what I would say, the last one is really our go-to-market strategies related to, you know, we have direct sales teams that are focused in each of the different industry verticals. I 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 integrations that support them, or our go-to-market strategies, they're really all geared around middle market companies. And 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, you know, typically in small business.

Right. That's what I thought. All right. Thanks guys.

Our next question comes from Timothy Chiodo with credit suites.

Great. Excellent. Thanks for taking the question. 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, realize there's different systems that have card integrations, there's transaction sizes, there are 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?

Yeah, really good question. And, you know, it's pretty intuitive because it, you know, there's some art and there's some science related to it. But I would say, you know, first of all, we today support seven different types of payment types or modalities, as we call them, that are really geared towards, you know, the different supplier preferences within the business world. 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 card transaction. But if it's over $1,500, they'll request a different type of payment modality as part of their business rules. And so for both of kind of our main two kind of monetized payments, virtual card and advocate direct, one of the key components of it is the data. And the data, you know, is really critical in terms of how they reconcile that transaction. But in terms of the preference in which, you know, 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 they're, for example, retail, kind of have a large retail focus, they typically – have spent a significant amount of both time and dollars automating their card-based acceptance 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 a supplier 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 number one decision factor that we see that suppliers have.

Excellent. That's a really, really helpful context. We really appreciate that. My quick follow-up is around a 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 virtual card or enhanced ACHs, 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 that, Joel.

Yeah, 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, a dollar plus, and turn that, we have the opportunity, to turn that into pennies. And so, you know, an important opportunity for us, obviously, gear three is on a revenue perspective, but also adds to the gross margin lift that we get over time. And, you know, that sort of supports the confidence we have in our long-term gross margin targets in the, you know, mid to high 70s. So, great question. Thank you.

Yeah, and also, just to add what Joel said, it does really good things in terms of our yield as well. Because, you know, certainly taking a On the payment network side, taking a paper check, which is a zero revenue transaction and adding a revenue component to it, does really good things in terms of that yield expansion.

Excellent. Thank you, Michael and Joel, and congratulations again. Hey, thanks, Tim.

Our next question comes from Brad Stills with Bank of America Securities.

Oh, great. Hey, guys, thanks for taking the question. Congratulations on the IPO and a nice quarter here out of the gate. I wanted to ask about Avid PayDirect. It's a relatively newer offering relative to VCC. What efforts are underway to kind of drive penetration of that into the installed base?

Yeah, it's a really good question. And the reason, you know, maybe provide a little bit of history of why it was created originally back a number of years ago. It is our, you know, most recent, you know, 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, you know, one reason or another, they didn't accept card. Either they didn't have a merchant account or they only accepted it under, you know, certain limited number of scenarios. 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 sent it to them. And we've now seen, you know, of our, you know, roughly, you know, 40% of transactions that we're able to monetize, Avid Pay Direct now is, you know, grown to be, you know, contribute about 20% of that number. and we expect that to continue to grow nicely as well. And I think, you know, as it relates to, you know, our sales force related to it, we're really indifferent in terms of, you know, the different payment modalities that a supplier needs. So, you know, the supplier has the choice on whether they want to receive a card-based transaction or an avid pay direct transaction.

Got it. Thanks so much, Mike. And then one more, if I may, please. I understand that Core Associates and Banktel 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?

Yeah. So to provide 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 nuanced solution related to the unique business process of that vertical market. And then we can kind of combine the Avapay network with their software offering and provide a really compelling value proposition to 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, you know, the ones that you referenced, core associates within construction and with Banktel within the financial services vertical, you know, we are, I'd say, you know, the team is very pleased with that conversion process.

Thanks so much.

And again, if you have a question, please press star and one. Our next question comes from Brian Keene with Deutsche Bank.

Hey, guys. Thanks for taking my questions. I got two. I guess first, Mike, now with FastPay closed, 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?

Yeah, so... So two kind of questions there, both related to acquisitions. The first one is just an acquisition pipeline. So our corporate development team is active, tracking lots of companies across the different verticals. And typically, we like creating kind of long-term relationships with the principals of these companies. I think, of course, Associates and Banktel are great examples of that, where we had a multi-year 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 a trust building between the two companies. And 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 type of scenarios. So we like developing kind of long-term kind of relationships with a big pipeline. The second question about international, what I would say is that we have a multi-prone strategy. And kind of step one 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 two 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, you know, kind of what I'd say, you know, overseas expansion, typically focused. We believe it's going to be within the European market. And I think we, you know, will be opportunistic related to, do we jumpstart that process through an M&A effort? And I think, you know, we would be, you know, opportunistic, you know, 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, you know, internationally for, you know, a number of years. And so we're going to be very focused on, you know, our international expansion by, you know, working closely with our existing partners to support them, you know, internationally with Europe as the main focus in a very similar way as we support them here in the U.S. market.

Got it. That's helpful. And then, Joel, just want to ask on payment volume, it was up 40%. You know, 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?

Yeah, I mean, there's a number of factors, Brian. I wouldn't point to inflation as the sole driver. We think that had, you know, that had an impact. We also, you know, to a lesser extent, had a little bit of a, you know, a little bit of fast pay volume in there. But, again, you know, 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.

Great. Congrats on the great start. Thanks, Brian. Great. Thanks, Brian.

Our final question today comes from Brent Braceland with Piper Sandler.

Good afternoon. 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 transaction fees are pretty compelling, but what portion of TPV volumes do you think are cross-border international for you today? Is it 10%, 20% of the volumes? Any color there, just given the and you find that a couple times in the comments would be super helpful.

Yeah, that's a really good question related to, you know, kind of cross-border. So what I would say today is if you think of the eight different kind of vertical markets that we're in, they aren't, you know, typically markets that lend themselves to cross-border, you know, being like, you know, real estate, HOA, health care facilities. They're very geographically centered, you know, 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 Intact, 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, you know, in the future more towards our continued kind of horizontal expansion as well as some of the new verticals that we're targeting.

Got a helpful color. 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 contributed to that? The nice beat here on gross margins, just trying to, you know, understand the durability of that number there, given you got now two straight quarters here of 60% plus gross margin. Thanks.

Yeah, great question. Yeah, so, you know, we're proud of the 61%. We turned in for the quarter. So, you know, 450 basis points, better year over year, you know, 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, you know, our own operational efficiency, you know, increasing, you know, obviously that revenue yield contribution and, again, the power of the flywheel in gear three in particular, and then gear four as we add data just gives us more opportunities to expand that margin. So great question, and, you know, we're excited about continuing to see that expand over time.

Helpful color. Great to see the momentum of the business. Thanks.

Thanks a lot, Brett.

Thank you, Brett.

This concludes our question and answer session. I'd like to turn the call back over to Mike Prager for some closing remarks.

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 AVID Exchange. With that, operator, you may now end the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.