AvidXchange Holdings, Inc.

Good morning, everyone, and thank you for joining us for the Avid Exchange Holdings, Inc. Third Quarter 2022 Earnings Call. Joining us on the call today is Mike Perger, Avid Exchange's co-founder and chief executive officer, Joel Wilhite, Avid Exchange's chief financial officer, and Subhash Kumar, Avid Exchange's head of investor relations. Before we begin today's call, management has asked me to relay the forward-looking statement disclaimer that was included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook, and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise forward-looking statements Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP. With that, I want to turn the call over to Mike Prager.

Thank you, everyone, for joining us here today. Joe Willight and I are excited to discuss Avid Exchange's third quarter 2022 results and the continued momentum we are experiencing across our business driven by our middle market focus and the four growth gears of our Avid Exchange business flywheel that drives our business. As we anniversary our initial public offering, it is noteworthy that today's volatile economic backdrop is somewhat analogous to the one that existed during our founding back in 2000. Since then, and since our IPO, we have not only demonstrated our durability, but also have thrived, laying the foundation for our relentless focus on driving customer innovation, value creation for both customers and shareholders, and strong financial and operating performance. Today I want to talk about three themes that are behind our strong performance for the third quarter and should set us up to continue delivering strong results in the future. These three themes are as follows. Number one, our industry-leading electronic payment penetration remains a key lever in both differentiating Avid Exchange and driving financial results. Two, our hybrid go-to-market sales strategy with a differentiated vertical market approach and integration strategy is driving customer adoption and sales momentum. And three, our focus on customer innovation is increasing our value creation along with extending our vertical market penetration and reach. Let's start by discussing the impact of theme number one and how our industry-leading electronic payment penetration remains a key lever in differentiating Avid Exchange and driving financial results as evidenced by our consistent operating and financial results we have delivered since our IPO. To appreciate the calculus behind our electronic payment penetration, it is worth recounting our driving force. We have taken a holistic approach to our customer base since launching the Avid Pay Network in 2012. Our value proposition extends not just to buyer customers through our AP automation, but equally important to supplier customers through our offering supporting various payment modalities, cash flow manager, invoice accelerator, and avid analytics. Through these bestowed offerings, we have driven industry-leading electronic payment penetration, strong payment volume, higher yield metrics, and robust payments revenue growth. The third quarter of 2022 was no exception. we delivered revenues of over $82 million, which was up 26% over the same period last year. This now marks five consecutive quarters of exceeding our internal financial targets and delivering over 20% comparable organic revenue growth. Led by our robust payments revenue growth of 34%, we drove revenue performance in our non-GAAP gross margins, which approached 65%. Along with expense controls, the baseline levels of which we are proactively calibrating, the result was that we almost halved our adjusted EBITDA losses to roughly $3.7 million in the quarter. A further upshot to our third quarter results, we are raising our full year 2022 revenue outlook while lowering our adjusted EBITDA losses further. This brings us to our second theme driving our results. which is our hybrid go-to-market sales strategy with a differentiated vertical market approach and integration strategy driving customer adoption and sales momentum. The sustained progress on our demand generation is driven by our vertically differentiated and purpose-built solutions, creating our middle market value proposition. The value proposition includes dynamic automation and decisioning of manual and paper intensive workflows with sophisticated business rules supporting a middle market company's accounts payable and payments lifecycle. Through our 220 plus vertically and horizontally aligned integrations with different accounting systems intertwined with our referral, reseller, and white label reseller partnerships, these middle market customers are able to digitally transform their back office, thereby reducing the current and future costs and getting a rapid return on their investment. As these buyer customers adopt their solutions, our Avid Exchange flywheel and value proposition gains further momentum, creating a powerful two-sided network as buyers bring their suppliers, thereby maximizing network density, scalability, transaction liquidity, and electronic payment conversion, and the information discovery to drive operational efficiencies for both buyers and suppliers. As the current economic backdrop remains volatile, where efforts to reduce costs and bolster productivity remain an imperative to offset inflationary headwinds and its knock on economic growth, in my opinion, the benefits of our value proposition should continue to come into sharper view and drive further market adoption. One powerful example supporting our vertical market integration strategy and our value proposition is with buyer-customer VetsPets. a veterinary hospital network as part of our healthcare facilities vertical. According to Blair Myers, Vice President of Finance and Accounting at VetsPets, prior to Avid Exchange, VetsPets back office processes were inefficient, costly, manual, and a bottleneck to growth, including manually cutting paper checks to pay each invoice. After visiting an accounting systems conference and evaluating several AP automation companies, Blair chose Avid Exchange for its full circle platform, which provides both AP and payments automation capabilities, which is highly integrated with their Sage intact accounting system, thereby turning a bottleneck into a profit center. Best of all, Blair recounted, honestly, this was probably one of the easiest new product implementations that I've been part of in my entire career. Another good example is with Sabin Community Clinic, a nonprofit health clinic with multiple locations throughout Los Angeles, which is another success story within our growing not-for-profit vertical, highlighting the power of Avid Exchange's AP and payments automation solution tightly integrated with their MIP fund accounting system. Contending with staff turnover in its accounts payable department, Sabin Community Clinic found it difficult to maintain business continuity and struggled with processing their invoices and payments on time. With our combined Avid Exchange invoice-to-pay solution fully integrated into the clinic's accounts payable process, Sabin Community is now able to process payments on time without worrying about negatively impacting the clinic's operations or their ability to serve their community. As staff accountant Michelle Toh states, With Avid Exchange, I am now able to electronically approve invoices and payments in seconds. Given these very compelling customer testimonials articulating the business problems that we are solving for our customers, I will now provide an update on our value proposition in driving market adoption of Avid Exchange's industry-leading offerings, which are purpose-built for the middle market. In addition, I want to focus my directional commentary on demand trends year over year as it relates to our top of funnel sales activity. This commentary provides a line of sight into potential opportunities tied to new buyer customer logo wins and additional product attachments to existing buyer customers that are expected to convert, fully ramp, and impact 2023 results. Furthermore, our pipeline analytics which overlays the sales funnel, tracks deal sizes, close rates, in addition to onboarding and new customer go-lives, along with our 90-day certification rates for new invoice volume. To date, we are encouraged by the demand activity we are seeing both the buyer and the supplier side of the equation in the face of the current macro backdrop. Our real estate, homeowner association, and nonprofit verticals, along with our horizontal focus, all of which represent a greater weighting in our business mix, continue to exhibit strength quarter over quarter and sequentially. Within the real estate vertical, we're also seeing strong channel demand, partner support for driving new opportunities, as evidenced by Avid Exchange being named Partner of the Year by MRI Software at its Ascend User Conference last week in New Orleans, along with a record year of rent manager growth. another channel partner driving adoption in the multifamily sector of real estate. This is all more impressive considering this year's top of funnel activity was probably influenced by some COVID-related catch-up. Our construction and financial services verticals, meanwhile, have seen some unevenness, which we are also closely monitoring. Overall, nets of puts and takes, we are pleased with the strength of our top of funnel sales momentum and remain cautiously optimistic as we position for a strong 2023. Finally, I want to share insights into our third theme of demonstrating our relentless focus on customer innovation to increase our value creation for both buyer and supplier customers, along with extending our vertical market penetration and reach. The investments we are making in our product roadmap are compounding our strong operating and financial results through three of the four gears of our Avid Exchange flywheel. During the quarter, we advanced our integration strategy with the launch of a new application programming interface integrations, or APIs as we call them, for Blackbaud impacting gears one and gear two of our flywheel. Blackbaud is a vertical accounting solution provider, which we establish a strategic partnership focused on expanding our non-for-profit education and healthcare verticals market footprint. In the third quarter of 2022, we introduced new API integrations with Blackbaud Financial Edge NXT, a cloud-based fund accounting solution built on our next generation Avid Connect integrations platform. These seamless out-of-the-box integrations enable customers automatic syncing of general ledger codes, vendor lists, along with the invoice and payment data between Avid Suite, which includes Avid Invoice and Avid Pay, and Blackbaud's Financial Edge NXT system. With roughly 6,000 Blackbaud customers currently on Financial Edge accounting system, we believe this integration, when the first on Avid Connect, should deepen our technical, sales, marketing, and organizational partnership with Blackbaud, thus enabling us to accelerate our penetration across Blackbaud's customer base. Furthermore, as more of our accounting system partners migrate their on-premise solutions to the cloud, our APIs built on Avid Connect should enable faster customer acquisition, implementation, and payment adoption, along with a better overall seamless buyer customer experience. Under gear number three, which is the modernization of payment transactions, we recently launched our Avid Exchange cross-border payment offerings at NetSuite's annual SuiteWorld user conference in Las Vegas, consistent with our delivery commitment at the start of the year. This capability will be embedded within NetSuite's ERP with the intentional international money transmission and settlement component being powered by WISE, our international payments processing partner. The adoption of cross-border payments is an important product not only in terms of broadening our payment modalities but also in advancing our international pillar of growth strategy but also deepening our relationships by leveraging this capability across all of our horizontal software channel partners. As we have stated in the past, cross-border payments currently comprise a very small component of our existing money flows. But the absence of it did, however, limit our historical participation in a subset of bundled opportunities that included both domestic and international payments. With our advanced three-way purchase order matching functionality introduced in the first quarter of 2022, combined with our new cross-border payment offering, we believe we're well positioned to pick up both new buyer customer opportunities as well as extend our vertical market focus into new verticals such as manufacturing and others. In summary, we're very pleased with our results in the third quarter. Along with navigating our first year as a public company, which we have been driven by the three themes we discussed, combined with our consistently strong execution, our strong balance sheet, and our positive business outlook for 2022, we have much to be proud of. I want to thank all of our Avid Exchange team members for their hard work and dedication in driving this strong financial outperformance amid a very volatile economic backdrop. As we celebrate our accomplishments during our first year as a public company, we're excited about the opportunities ahead and recognize the discipline needed to execute on them. To be sure, we have been tested many times since our founding. As the middle market industry leader, we expect to be tested as we build highly durable growth business. Rest assured, we are focused on excelling and innovating to drive overall middle market adoption. With the investments we've been making across the four gears of our Avid Exchange business flywheel, we believe we are well positioned to advance our value proposition, enhance our industry-leading integrations, continue growing our proprietary two-sided Avid Pay network, and expand our significant competitive mode in being the leader for middle market companies in automating their accounts payable and payment processes while maximizing shareholder value creation. With that, I'd like to turn the call over to my partner, Joel Wilhite.

Thanks, Mike, and good morning, everyone. I'm excited to talk to you today about our third quarter 2022 financial results, which reflect continued execution of our growth strategies, leading now to three consecutive quarters of positively revised 2022 guidance. Overall, we delivered another quarter of solid financial performance. Our third quarter 2022 revenues came in better than our forecast, driven by higher total transactions, payment volumes, and contribution of interest revenue from funds held for customers given the Fed-induced change in interest rate levels. That, together with better operational efficiencies and expense control, contributed to a lower-than-expected adjusted EBITDA loss in the third quarter of 2022. Total revenue increased by 26.4 percent to $82.4 million in Q3 of 2022 over the third quarter of 2021. Organic revenue growth, which excludes the contribution of our Pay Clearly acquisition, which closed in January 2022, was 25.6%. Organic growth was primarily driven by the addition of new buyer invoice and payment transactions, which increased e-payments to suppliers. As a reminder to those who are new to the Avid Exchange story, both FastPay and Pay Clearly are media advertising books of business that include a portion of revenue that skews to the midterm and presidential election cycles in the U.S. For the nine months ended September 30, 2022, the revenue contribution from just the political segment of the media vertical was $5.4 million. While we are not guiding the 2023 numbers, it's worth noting that 2023 has neither the U.S. midterm nor presidential elections benefits. Back to Q3 2022 financial results. Our strong revenue growth also resulted in total transaction yield expanding to $4.57 in the quarter, up 12.8% from $4.05 in Q3 2021. The increase was driven principally by improvements in mix and payments yield. Software revenues of $25 million, which accounted for 30.4%, of our total revenue in the quarter increased 12.1% in Q3 of 2022 over Q3 of 2021. The increase in software revenues was driven primarily by growth in total transactions of 11.9% in Q3 of 2022. Payment revenue of $56.6 million, which accounted for 68.7% of our total revenue in the quarter, increased 34.3% in Q3 of 2022 over Q3 of 2021. Excluding Pay Clearly, which contributed approximately a half a million dollars in the quarter, organic payment revenue growth was 33.1%. The increase in payment revenues was driven by the growth in total payment volume of 29.4% and 28.7% excluding Pay Clearly. On a GAAP basis, gross profit of $47.6 million increased by 38.7% in Q3 of 2022 over the same period last year, resulting in a 510 basis point improvement in gross margin for the quarter to 57.8%. Non-GAAP gross margin increased 440 basis points to 65% in Q3 of 2022 over the same period last year, driven primarily by a combination of total transaction yield and operational efficiencies. Moving on to our operating expenses. On a GAAP basis, total operating expenses were $74.6 million, an increase of 34.5% in Q3 of 2022 over Q3 of last year, driven by headcount additions to support our growth initiatives, increased expenses in transition to a public company, and a recognition of non-cash stock-based compensation costs. On a non-GAAP basis, operating expenses excluding depreciation and amortization increased 25.9% or $11.8 million to $57.2 million in the third quarter of 2022 from the comparable prior year period, highlighting the operating expense leverage on a comparable basis. I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $3.1 million to $19 million in Q3 of 2022 over Q3 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and supplier customers. Non-GAAP research and development costs increased by $3.8 million to $19.3 million in Q3 of 2022 over Q3 of last year. The increase was due to continued investments in our products and platform. Non-GAAP general administrative costs increased by $4.9 million to $18.9 million in Q3 of 2022 over Q3 of last year driven by a combination of an increase in performance-based bonus accruals due to continued strong operating and financial results, coupled with expenses in transition to a public company status. Our gap net loss was $25.4 million in the quarter versus a gap net loss of $35.5 million in the prior year period, which included the impact of a mark-to-market adjustment for convertible common stock liability prior to conversion upon our IPO, On a non-GAAP basis, our net loss in the third quarter of 2022 was $11.6 million, an improvement of $3.7 million compared to the year-ago quarter on solid organic revenue growth combined with ongoing operational efficiencies and expense leverage. On a non-GAAP basis, adjusted EBITDA was a loss of $3.7 million in Q3 of 2022 compared to a loss of $6 million in Q3 of 2021 due to the aforementioned factors. Turning to our balance sheet for a moment, I want to touch on a few key items. We ended the quarter with a cash position of $508.4 million. The cash is split between cash and equivalents of $411.1 million, which is in a combination of demand deposit accounts and money market funds. The remaining $97.3 million is in a basket of financial instruments, including treasury bills and commercial paper, with a weighted average maturity of roughly 71 days. The weighted average annualized effective interest rate on our corporate cash position for the third quarter was roughly 1.6%. Our outstanding debt balance at quarter end was approximately $128 million out of our credit facility at quarter end, which was $133.5 million. I'll now move on to our updated full year 2022 guidance. In light of our strong third quarter outperformance and Mike's cautiously optimistic commentary about the opportunities and initiatives we continue to see and execute across our business, We now expect total revenue for the year to be above what we previously provided and in the range of $314 million to $315 million. We are also adjusting our non-GAAP adjusted EBITDA expectations lower to a loss between $18 and $19 million. With that, I would now like to turn the call back over to the operator to open up the line for Q&A. Operator?