AvidXchange Holdings, Inc.

Good morning, everyone, and thank you for joining us for the Avid Exchange Holdings AIM second quarter 2023 earnings call. Joining us on the call today is Mike Frazier, Avid Exchange co-founder and chief executive officer, Chawal Wilhite, Avid Exchange chief financial officer, and Subhash Kumar, Avid Exchange end of interest relation. Before we begin today's call, management asked me to relay the forward-looking statement disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements that 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. NAN-CAA financial measures should then be considered in isolation from financial information presented in compliance with CAA. Accordingly, at the end of today's press release, the company has provided a reconciliation of these NAN-CAA financial measures to financial results preferred in accordance with CAA. With that, I will now turn the call over to Mike Frazier.

Mike, over to you.

Thank you, everyone, for joining us today. Joe Willight and I are excited to discuss Avid Exchange's second quarter 2023 results. But before I do that, I just wanted to thank all of those who participated in our recent Investor Day event on June 1st, held both in person and online. And especially for those of you that visit us in Charlotte, North Carolina for our Investor Day event, you experienced firsthand our performance-based Avid Exchange culture and how we have successfully transitioned to be back in the office three-plus days a week across our multi-office footprint. We are already seeing an impact on productivity, collaboration, and teammate development. With that, I want to now turn to our second quarter results. We delivered another quarter of solid operating results, achieving now eight consecutive quarters of exceeding our financial targets relative to our implied outlook. Revenues exceeded our implied Q2 2023 outlook, while our adjusted EBITDA results were a standout bright spot, driven by healthy revenue performance, continued gross margin expansion, unit cost reduction, along with operating expense leverage. These operating and financial results, coupled with the optionality we believe we have at our disposal, gives us further confidence in our progression towards our medium-term Rule of 40 objective of achieving both 20% organic revenue growth and 20% adjusted EBITDA targets by 2025, which we outlined during our Investor Day. As the macro backdrop remains somewhat volatile, where economic sentiment swings back and forth between hard landing and no landing, Our purpose-built value proposition of accounts payable and payment automation solutions is a proven capability with tangible and rapid ROI for middle market companies. By leveraging the force multiplier of our proprietary two-sided network, buyer and supplier customers reap enormous value benefits that we believe get particularly magnified during volatile economic times. Our buyer customers are able to automate their back office and significantly reduce costs. oftentimes by more than 60%, while enhancing scalability and security of their accounts payable and payment processes. While on the supplier side, our supplier customers get better visibility into their invoice and payments and are able to accelerate their cash flows and working capital while optimizing aspects of their own back office reconciliation functions. A good customer example of the power of our overall Avid Exchange business flywheel And the value we are delivering through our two-sided network is with Chicago, Illinois-based Remedy Medical Properties, the nation's largest private owner of healthcare properties. Remedy exemplifies the power of Avid Exchange's two-sided network. Before adopting Avid Exchange's invoice and pay solutions, Remedy accounts payable and payment processes were time-intensive with many manual processes. According to Senior Accounts Payable Manager David Bennett, several hours a day were spent opening the mail, scanning invoices, filing, and stuffing checks into envelopes. By adopting our API-based Avid Invoice and Avid Pay automation software solutions, which seamlessly integrate into Remedy's Yardi Voyager accounting system, Bennett's team shaved off one whole workday per week by no longer needing to sign checks, stuff envelopes, and file invoices. Without Avid Exchange, Bennett estimates that they would have had to hire up to three to four more people to process the growing volume of invoices and payments over time. As David Bennett stated, keeping track of AP statuses and conversations was challenging, but with Avid Invoice, there is now a central place for updates, notes, and answers, allowing us to work more efficiently and better communicate with property managers and our suppliers. While buyer customers like Remedy and other customers we have referenced over the past quarters highlight the customer value proposition, there are also broader market forces that are influencing the adoption of our solutions across the middle market, or the mighty middle, as I call it. These forces range from the continued mass shift to the cloud for the critical back office applications that support business continuity, along with enabling work from home models. for finance and accounting professionals along with changing demographics and high focus on payment fraud prevention. And speaking of payment fraud prevention, recently the U.S. Postal Service put out an urgent bulletin warning against sending checks through the mail due to a surge in mail theft. Nothing drives human behavior more than loss avoidance. And according to the Association of Financial Professionals, Roughly 70% of payment fraud for organizations occurs with paper checks. However, based on our data, payment fraud relates to checks in the B2B space is even greater at over 90%. While fraud is unfortunate, it adds another layer of uncertainty to our remaining paper check supplier customers while magnifying the value proposition of our various payment modalities. With roughly 55% of our payment mix still being checks, We're extremely well positioned to help our customers mitigate this risk while building on our industry-leading e-payment penetration. Let me now provide a quick summary of our year-over-year second quarter 2023 financial results. We delivered revenues exceeding $91 million, which grew at a rate of over 19% compared to the same period last year. Once again, our second quarter growth was led by double-digit revenue growth dynamics across most of our vertical markets. Non-GAAP gross margins expanded to over 68% in the quarter, up 460 basis points on a year-over-year basis. In addition, we posted an accelerating non-GAAP adjusted EBITDA profit of approximately 3 million in the quarter, which was close to an 8 million positive swing from an adjusted EBITDA loss of 4.7 million in the same period last year. We also ended the quarter with a 9.5% year-over-year increase in our total transaction yield to $4.84, which is now up 79 cents or roughly 20% since our IPO in October of 2021. On today's call, we'll touch on three topics. First, our top-of-funnel activity. Second, discuss innovations to our existing product suite around new payment modalities under Gear 3 of our Avid Exchange Business Flywheel. Quick reminder that Gear 3 incorporates all of our collective strategies to convert paper checks to electronic payments, along with an update of our pending launch of Invoice Accelerator 2.0. And third, explore several of our operational levers designed to accelerate automation that are key steps to driving continued gross margin expansion and accelerating our profitability so on to the first topic from a top of funnel buyer opportunity perspective we ended the first half of 2023 with a healthy growth up 70 percent on year-over-year basis Virtually all verticals saw double-digit growth, including construction, financial services, media, healthcare, our HOA, and educational as examples. Equally, the growth in the top of funnel came with a slightly higher average deal size attachment aided by our three-way PO match product. This healthy top of funnel was further backstopped by a sustained pace of close win rates. The only top of funnel deviation continues to be within the commercial office subsector of our overall real estate vertical. Just to be clear, when we talk about real estate vertical, we are largely talking about real estate commercial operating companies and not residential home builders. Although multifamily, student housing, and industrial subsegments of the real estate vertical remain very strong, commercial office real estate continues to soften. Meanwhile, product and integration partnerships launched over the last 12 months continue to play a solid role in the growth of our top of funnel prospect activity. For example, the launch of our three-way purchase order, or PO offering, in 2022, although off a small base, has seen triple-digit uptake. What's more exciting is how broad the adoption has been, spanning education, real estate, and our HOA Condo Association management verticals. across both vertical and horizontal ERP accounting systems. Furthermore, the average new buyer deal size in our top of funnel related to the three-way match is also larger than what we typically see in those verticals. In the education vertical, for example, we're seeing three-way PO use cases with individual schools and school systems for ordering supplies and managing their inventory. Equally encouraging, we're seeing strong top of funnel activity within our preferred strategic partnership with ResMed in the real estate multifamily subsector, which was launched last year as well. All in all, we are very pleased with the underlying metrics driving our top of funnel sales momentum. This underscores not only the large and unpenetrated 20 billion plus addressable market within the B2B middle market for AP and payments automation solutions, but also the long secular growth opportunities that we see despite some near-term pockets of macroeconomic softness. Topic number two is all about gear three of our Avid Exchange business flywheel, where we continue to accelerate ways to maximize our industry-leading e-payment penetration of converting paper checks to various forms of e-payments across our two-sided network by removing barriers to adoption. As an example of our STP offering, and introducing new payment modalities, which we believe is the secret sauce of our success and one of our biggest competitive advantages. We are excited to highlight new augmented payment modality in conjunction with just launched lean waiver management solution, which delivers critical automation functionality within our construction vertical. Currently, buyers and suppliers in the construction industry have to navigate a series of regulatory rules across various government agencies in order to set up and begin transacting. New and existing buyers in the construction vertical must have account validation and other customer due diligence requirements. While new and existing suppliers numbering in the thousands must also pass numerous bank account validation rules in order to be paid. Our new same-day payment offering for lien waivers compliantly and programmatically send same-day payments from general contractors, our buyers, to subcontractors, our suppliers. With the integration of this new payment modality, the system allows for the programmatic creation of suppliers, payments, and status reporting while incorporating a new specialized payment funding model. This augmented payment modality makes a great use case for the roughly 1,500 base of construction buyer customers. And finally, topic number three is related to optimization of operational levers where we continue to look at the linkages across our operational value chain, specifically around payment processes with the objective of further automating all of our remaining manual payment delivery processes. Currently, when making a virtual card payment, the process and time it takes between a wholesale processor generating a virtual card and getting that virtual card into a supplier's hands to complete the entry of card details into the merchant system typically requires multiple manual steps, translating into approximately two days of delivery time. Through our new virtual card delivery and distribution platform, which we plan to have fully rolled out by Q4, that processing time goes from two days to near real-time delivery of cards to our suppliers. This dramatic overhaul does not only improve the customer experience through faster speed, but it also drives scalability and efficiency for us. With virtual card issuance potentially numbering into the millions on an annual basis, this new capability has the potential of not only generating meaningful savings over time, but also extending the payment automation horizon significantly further beyond our current 80% payment automation level today. In summary, we are pleased with our strong second quarter top line and exceptional bottom line results. We remain focused on delivering on our product roadmap, integration partnerships, and e-payment penetration while leveraging data to drive incremental customer value. On today's call, we provided a progress update on some of those areas and look forward to further such updates around partnerships in the works, in addition to existing and new offerings we've been nurturing. This includes our flagship Invoice Accelerator 2.0 finance offering, which is targeted to be released in the fourth quarter and is just one example of many new innovation products in our product pipeline. Along similar lines, we're also rapidly broadening the use case for products just launched across our other verticals based on demand. Our new lean waiver management offering that we announced last quarter is a great example of this and we look forward to updating you on this offering along with other use cases in future quarters. Of course, none of the success we have achieved to date would be possible without the existing talent and new talent we continue to attract to be part of our team. So it is with great enthusiasm I take this opportunity to announce the promotion of John Feldman to the role of Chief Operating Officer from SVP of Operations. John has leveraged his formidable experience as Chief Operating Officer of Capital One's Retail Bank, Chief Risk Officer, as well as other roles overseeing product management around payments and various financial institutions to great effect at Avid Exchange. Thanks to John and his team, our efforts related to the service transformation strategy are yielding results as roughly 80% of our e-payments have now been automated with significant more gains to come. Also, I'm pleased to formally announce the appointment of Doug Anderson as our Chief Product Officer. Doug brings his forte of building products and other SaaS-based offerings at scale to Avid Exchange. honed from his experience at leading global tech companies such as SAP Concur. We believe these strategic, operational, and talent initiatives, coupled with our strong balance sheet cash, gives us further optionality to accelerate value creation opportunities. Of course, we are mindful of the volatile macroeconomic backdrop and the potential for further short-term impacts on our business. However, we believe we are still in the very early innings of a significant long-term opportunity to drive impactful value for our customers, create future growth opportunities for our team members, and unlock both short-term and long-term value for our shareholders. With that, I'd like to turn the call over to my partner, Joel Wilhite.