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.

Operator? Thank you. And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Management has asked that each participant kindly limit his or her initial question to 1. And at this time, we will pause momentarily to assemble the roster. And our first question today will come from Dave Koenig with Baird. Please go ahead.

Yeah. Hey, guys. Great quarter. And maybe I'll kick it off. Yeah, yeah, sure. 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 yesterday. you know, maybe talk to why that is too.

Yeah, maybe I'll just start that off. So, Dave, I think you're on the payment volume, again, 36% overall total payment volume growth in the quarter, you know, really a part of the overall 30% growth. We were pleased with that. Again, like Mike said in his remarks, you know, four quarters in, beaten in raising in a couple 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 a 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 were pleased with the basis point up, but really wouldn't read a lot into a basis point plus or minus quarter to quarter. But but definitely happy with the outcome and a really powerful revenue driver for us.

All right. Thank you. And maybe just a quick follow-up, just you made a comment about the political spending, you know, 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 non-recurring year to year from, you know, political, just so we can kind of get a sense of, you know, how much of that four to 5 million a quarter kind of goes away in next year.

Yeah, so let me answer it this way. So in the first half, I think, Q1, Q2, we're about $8 million in total in organic. And we did talk about, in my remarks, just sort of managing expectations that the fast pay and the pay clearly acquisitions result 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 this is a new business for us, and we're kind of 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.

Yeah, that's great, and great job.

Thanks, Dave.

And our next question will come from Ramsey LSL with Mark Lees. Please go ahead.

Hi, gentlemen. Thanks for taking my question. 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 one-time items in there, or if that's the level we should kind of use as the baseline from here?

Yeah, 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 break-even. We did kind of exceed our own expectations. Again, one of the things that I would point to you know, 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, you know, happy to see that in the rearview mirror and ended up with just, you know, the minimus kind of, you know, duplicate of cost that 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 break-even point.

All right, great, thank you.

And our next question will come from Andrew Bowe with SNBC NICO.

Please go ahead. Andrew, you there? Perhaps your line is muted.

Yeah, thanks for taking the question. I just wanted to touch upon the comments around EBITDA and the outperformance in the core. I mean, how much of what, you know, UB 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.

Yeah, 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 revised 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 lines. 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, gives us confidence in that breakeven guidance that we revised forward.

Yeah, Andrew, this is Mike. And, you know, the big, what Joel said is I'd say, you know, there's, you know, certainly a renewed mindset that we're having in the current environment related to just raising the bar related to our ROI on every investment that we're making, you know, being laser focused on, you know, those initiatives that matter in terms of our growth levers for the future. And as well as, you know, on the people side to, make sure we're prioritizing those important people to drop our business.

Understood. And congrats on a solid quarter. Thanks, Andrew.

And our next question will come from Will Nance with Goldman Sachs. Please go ahead.

Hey, guys. Good evening. Appreciate you taking all my questions. You've run the top line at 30%, Mike. I know you've talked about closer to 20% longer term. A lot of that's 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, you know, to what, you know, how much room is there to go or, you know, what kind of gives you the confidence to say, you know, you can kind of sustain at more elevated levels and, you know, should we think about something like 30% as more reasonable in the near term?

Yeah, so, Joel, yeah, I think it would provide maybe a little context to the kind of, you know, inorganic versus organic kind of growth rates. But what I would say is that we're really seeing the kind of the, you know, the early stages of the flywheel really working. And, you know, it starts by, you know, the retention numbers that we have related to retaining those transactions on the network. And then it goes to the, you know, the new customer buyer customer ads. And that's where we're seeing some really encouraging top of funnel activity, probably the strongest, you know, 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 the fourth gear 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 our flywheel, I would say that we have lots of room in all four gears of our flywheel and really highlighted by you know, 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 that, you know, still, you know, kind of, you know, startup stage, you know, anxious to get out of the garage. And we're excited to, you know, really see that offering, you know, take hold, you know, next year and into the future.

Got it. It's super helpful. And just on the last point 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 Avid Pay Direct and the payment volume in the quarter.

Yeah, I think we're still consistent that we're monetizing about 40% of the transactions that go through the network. Roughly two-thirds of those are through Virtual Card, about a third through our Avid Pay 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 brings 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 a virtual card and AvaPay Direct.

Got it. Appreciate all the color.

Oh, happy to.

And our next question will come from Brian Keene with Deutsche Bank. Please go ahead.

Hey, guys. Thanks for taking the question. I just had kind of two clarifications. I noticed 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 four, you're going to get to about a $19 million loss for the year. You guys are still guiding 27 to 29 loss. So is there some cadence in there that there would be a, you know, 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? Thanks.

Yeah, thanks, Brian. Let me take your questions in sort of reverse order. So just on the EBITDA, again, we were, you know, sub $5 million EBITDA loss on 76 million. We were really pleased with that outcome and feel like that's the result of, you know, we're continuing to expand the transaction yield. We're continuing to take sort of unit costs 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 several million bucks associated with getting that accrual squared away. And otherwise, you know, we do have that, you know, 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 break-even. 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, you know, for example, some really big opportunities we have through, you know, the bank channel and otherwise, there is a sort of a per unit rate, you know, arbitrage there. So pleased with the overall result. 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.

Great. Helpful. Thanks for taking the questions.

You bet.

And our next question will come from Brad Sills with Bank of America. Please go ahead.

Oh, great. Thanks, guys, for taking my question. 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 period. What are the puts and takes we should be thinking about of just customer spend volume as we go through some choppy quarters ahead?

Okay, gotcha. 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 those both for this quarter. Yeah, it's about 30.9, so right at 31% of that 36% is TPV. is purely organic. I think you also asked for the, what was it last quarter? Maybe we'll get to that. Yeah. Well, while I pull it up, maybe Mike, you want to take the second question?

Yeah. Um, so the second one really is around, you know, kind of, um, but I'd say the resiliency, right. Of, uh, you know, continued results, um, you know, um, perhaps heading into more, you know, kind of choppier economic times. And, um, it was obviously, this is, you know, something that we, um, you know, continue to look really closely at, um, We recently released our middle market spend report, which is designed to get at and make public trends that we're seeing. And I would say that consistently 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. You know, I think if you would ask, you know, in the choppier times, you know, where would we see, you know, kind of, you know, tailwinds as maybe as well as headwinds. And I think in the past, when we were a software company, again, this is our first economic cycle with the payment network or, you know, down the cycle of the payment network. But as a software company, we actually benefited in recessionary times from an increased demand for automation products. 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 relative consistent invoice volumes, you know, 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, you know, to give an advanced insight, you know, if we should see some you know, headwinds facing the business, which today we have not seen any today.

And Brad, just to circle back on the Q1 organic TPV growth, that was 35.6% of our 40.5 last quarter.

Thanks so much, Joel. Thanks, Michael. You bet. Yeah.

And our next question will come from Brent Braceland with Piper Sandler. Please go ahead.

Thank you for taking the question. Good afternoon. You know, 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 two-part question. One, Was the yield tailwind this quarter primarily driven by mixed shift to virtual cards? And then two, part two, what's stimulating interest now in virtual cards and 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? Thanks.

Yeah, so maybe kind of the first part of your question is Did we see an increase in virtual card acceptance? I would say that there's nothing that stands out as being an anomaly. It's been pretty consistent. In fact, our Abbott PayDirect payment offering continues to be the highest growth payment modality we have, but virtual card continues to be really strong. The interest on the customer advisory board is an interesting one, and that is up until the release of our SDP, 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 Avid Exchange and our buyer customers trying to advocate and evangelize you know, to the suppliers that, you know, it's a smart thing for them to take card, you know, they get paid faster and it'd be the preference of the buyer. But other than the, you know, the ask, there wasn't any tools that they could actually use to make their life easier. With straight through processing now for the first time, we actually can give 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, you know, directly, you know, through their merchant account or into their merchant account, and the data flow as well right into their, you know, either billing or their accounting system. So I think, you know, the exciting part is now there's actually a value proposition, an increased value proposition that we can provide to that supplier and actually make the supplier's life easier rather than just, you know, continue to elegantly, you know, ask them to take a virtual card payment from us.

Got it. So it sounds like some of those new features are starting to resonate, both on the buyer and supplier side. Thank you.

Yep. And our next question will come from James Falsete with Morgan Stanley. Please go ahead.

Hi, thanks. This is Sandy. I'm 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?

Yeah, 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 two 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 eight 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 the eight verticals that we're in. So we're very, you know, nuanced and kind of purpose-built helping those companies that are in those, you know, eight different verticals. The second kind of piece of it is the payment network. Our secret sauce is that we get, you know, industry-leading monetization and conversion rates. There's no one else that we see that's anywhere close to, you know, monetizing 40% of the payment transactions that they have. And And that's really been our secret sauce for a long time, and it really drives, you know, kind of our, you know, competitive advantage within the marketplace when we do compete. And so I'd say, you know, it continues to be, you know, 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, you know, that landscape – really hasn't changed in a long time. It continues to be the number one, you know, uh, competitor we have is the status quo paper-based process. Um, still today, um, you know, 95% plus of our, you know, new buyer customers are doing this for the first time and they're moving from paper process to electronic. And so, um, that's our, you know, uh, our number one competitor. Um, and, um, I would say related to, you know, other, you know, kind of third party companies, um, Maybe if anything, the competition side has gotten better from the standpoint of with some recent acquisitions, like a mineral tree 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.

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?

Yeah, so 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 continuing to make very focused investments in the key growth levers that we feel are really going to continue our growth car 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, be able to execute offerings like straight through process. So those are the areas that we continue to be laser-focused in 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.

Got it. Thanks, guys. Thank you.

And our next question will come from Darren Peller with Wolf Research. Please go ahead.

Hey, guys. Hey, Darren. Hey, nice job on the corner. You know, 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.

Yeah. So, Darren, 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 two things that we look at in the business. One is what are all the kind of – you know, transactional trends, both on invoice as well as on payments, you know, and what does that look like? And I would say that continues to look really healthy, and we haven't seen any, you know, either leading indications or, you know, or any existing trends that point to any erosion of, you know, the volumes that we have. And then 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 raged back with, you know, big demand. You know, there's a lot of, you know, pent up, you know, energy from CFOs that have not yet invested in these automation initiatives, been sitting on the sidelines for the last two years during 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, you know, the VAR reseller channel. You know, in the last year, we went from 120 to 180 new VAR reseller partners. And During COVID, I would say that channel overall, their number one focus was just retaining their customer. They weren't, you know, putting a lot of energy and trying to sell net new things to, you know, through the VAR channel. They were just trying to retain a customer. And now that we're, you know, coming out the other side, they're laser focused on how they can, you know, now sell, you know, more solutions to their customers. And so we're seeing that channel really perform well. And so those are some examples of, you know, you know, that top of funnel activity that's maybe more of a middle market, you know, nuanced, you know, trends that we're seeing. And it's, you know, relating to, you know, the sales activity, you know, is following, you know, 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 Darren?

I mean, I think, you know, you said we look at, you know, two things. We look at lots and lots of things and everything that we're seeing suggests that, you know, You know, 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.

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.

Yeah. I think we continue to – the message is the same as it really has been for last quarter. that, you know, we're currently, you know, operating with, we call invoice accelerator 1.0, and we're, you know, in development with our 2.0, our next generation 2.0 invoice accelerator offering, which, you know, we're targeted to, you know, have out in the market, you know, sometime early next year, and, you know, really, you know, believe that that will allow us then to really kind of open up more of our supplier base to that offering. And if you ask me today where we are excitement-wise, we're just as excited or even more excited in terms of the future of that product.

Great to hear. All right. Thanks, guys.

And our next question will come from Tim Chiodo with Credit Suisse. Please go ahead.

Great, thank you for taking the question. I want to touch real quickly on Avid Pay 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.

Yeah, so good question. Like the prior question with Darren, You know, you asked about Invoice Accelerator. You know, 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 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. If you look at, you know, Tim, if you look at across our, you know, eight 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 markets working with, you know, the NetSuite channel, Microsoft Dynamics, the Sage Intact. 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, you know, different verticals that maybe lend themselves to more international, like manufacturing, as an example. And so we're really excited about, you know, what it's going to do in terms of the new customer acquisition where the real opportunity is versus, you know, monetizing, you know, existing customer transactions.

Excellent. Thank you. 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?

We've not yet announced, you know, 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.

Okay. Excellent. Thank you for all those updates. Appreciate it.

Thank you. And our next question will come from Josh Beck with KeyBank. Please go ahead.

Thanks for taking the question. Yeah, I wanted to ask a little bit about this next generation procurement the 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 is you mentioned 85% of the adoption was net new. So, you know, was there anything in particular, you know, 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?

Yeah. So what I would say, I think, um, There was historically a pool of customers who really wanted to work with Avid Exchange because of our payment network and payment monetization capabilities, and certainly liked the aspect of the payment network along with our AP automation feature set, but they had a purchase order procurement requirement, 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, you know, basically said Avid Exchange, we'd love to work with you, you know, if you had, you know, the right feature set that, you know, supports our business. And we're able to go back to them now and really check the box with that, you know, that purchase order procurement feature set that they need to run their business. And then the rest of our feature set was really, you know, 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.

Good to hear. And I just wanted to kind of approach the macro question as well. Obviously, you've touched a little bit on you know, 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, you know, obviously that's a broad term, and I think you have some pretty diverse exposure there across construction, HOA. Just help us, you know, think through what type of exposure that you have there and what type of trends your customers may be seeing.

Yeah. So what's interesting is... You know, when we look at kind of the top, you know, kind of three areas that we're seeing, you know, 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 four 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, you know, the one segment that, you know, currently is not performing as well as commercial office. You know, not a big surprise, but it's a great example of, you know, our diversity that we have across our customer base because not only do we have eight different overall verticals, but even within the real estate vertical, the vertical itself is way up over last year because of the 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.

Very helpful. Thanks, Mike. Yeah.

And this will conclude our question and answer session. I'd like to turn the conference back over to Mike Prager for any closing remarks.

Yeah. 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. you know, 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.