AvidXchange Holdings, Inc.

Good evening, everyone, and thank you for joining us for the Avid Exchange Holdings Inc. Second Quarter 2022 Earnings Call. Joining us on the call today is Mike Prager, Avid Exchange Co-Founder and Chief Executive Officer, Joel Wilhite, Avid Exchange Chief Financial Officer, and Supash Kumar, Avid Exchange 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 four 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 the or revise four 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 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 Prager. Please go ahead.

Thank you everyone for joining us today. Joe Wilhite and I are excited to discuss Avid Exchange's second quarter 2022 results and the continued momentum we are experiencing across our business, driven by our middle market focus in the four growth years of our Avid Exchange 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's steady demand for Avid Exchange'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 Avid Exchange 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 leads us cautiously optimistic heading into the second half of this year and beyond. Specifically, we are 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're also making the right strategic moves with our team doing a nice job of executing our playbook. We're clearly delivering strong margin performance and cost leverage in Q2. One major milestone achieved was the migration of our infrastructure and hosting from the Avid Exchange 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 four years of our AVID Exchange flywheel to provide an update on some of our initiatives and metrics that we are excited to highlight for you. In gear number one, which is delivering great accounts payable and payment automation software experience to our buyer customers, we announced the launch for our next generation procurement and purchase order management tools, which also includes a three-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 types of expense controls to better manage their purchasing. California-based Avante 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 US and Canada, Avante 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, Avante 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 Avante, 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 number two, 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 number one and the positive customer experiences we create that we're able to land new buyer customers through our direct sales strategy, which represents around three-quarters of our buyer-customer acquisition channel mix. It is also because of gear number one that we're able to build on our ready, 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 Resmin, 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 multi-state, multi-location, full-service real estate company based out of Ohio that uses ResMed's property management software and was exploring accounts payable automation and payment solutions, has selected Avid Exchange 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 avid exchange 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 number three of our Avid Exchange 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 two-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 SDP and look forward to sharing the success of those initiatives with you in the future. As we said during our last earnings call, SDP'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 number four 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. For the launch of our avid pay 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. Bring 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 Avid Exchange across the middle market and our key verticals. What we heard during these two 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 roadmap, 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 Avid Exchange as an extension of their brands within the markets that they serve, as we have a value proposition that makes our two-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 Avid Exchange business flywheels. 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 Avid Exchange 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 four gears of our Avid Exchange business flywheel. With that, I'd like to turn the call over to my partner, Joel Willight. Joel?

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 two 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 Fast Pay and Pay Clearly 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 Avid Exchange 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 benefits. 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 payments yield expansion, with the remaining half being inorganic contribution. Software revenues of $24.2 million, which accounted for 31.6 percent of our total revenue in the quarter, increased 11.8 percent 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 percent 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 fast pay and pay clearly. On a gap 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 in our transition to become a public company, and the recognition of non-cash 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 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 fast pay and pay clearly. 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 a comparable increase primarily driven by the recognition of non-cash 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 to $310 million. we are also adjusting our non-GAAP adjusted EBITDA expectations lower to a loss between $27 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.