AvidXchange Holdings, Inc.

Good morning, everyone, and thank you for joining us for the Avid Exchange Holdings Inc. Third Quarter 2023 Earnings Call. Joining us on the call today is Mike Prager, 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 statements 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 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 the Regulation G non-GAAP. 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 a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP. With that, I'll now turn the call over to Mike Prager.

Thanks for joining us this morning. Joel and I are both excited to talk about our third quarter results and milestones with you. We once again delivered another set of strong quarterly business performance metrics and financial results. I'll summarize these shortly, and Joel will provide further details and commentary later on in his section. Given the ongoing macroeconomic volatility, our unique Avid Exchange value proposition continues to resonate in the marketplace with our middle market customers. We recently held our annual Customer Advisory Board meeting, or CAB as we call it here in Charlotte, with over 25 diverse buyer customers attending across our various industry verticals who use our software to manage their accounts payable and payment processes. The CAV is an in-person forum subdivided into a series of vertical industry focus groups where we dedicate time and resources for a deeper peer dialogue regarding their specific business and accounting processes, unique to their vertical industry, updates on the key accounting systems that support their industry, as well as overall specific industry trends and observations they're seeing in operating their businesses. Specifically, as thought leaders, we serve as our customers' key trusted technology and automation partner and are at the forefront in driving their transformational back office initiatives. Through our domain expertise, we're helping them with the vision and execution to achieve benchmark level of excellence in automating their overall procure to pay processes in line with that of enterprise customers. The cab reinforced the strategic importance of our value proposition in advancing our customers' invoice and payment automation initiatives with a rapid and quantifiable return on investment. As we digitally transform their key back-office procure-to-pay processes, driving speed, security, along with workflow efficiencies catalyzed by our two-sided network, They are able to optimize every cost lever to take pressure off of their income statement while freeing up increasingly scarce financial resources to support higher value and more strategic initiatives for their core business. This CAF forum also importantly underscored that there is a great alignment among our customers related to our recently introduced products, such as our construction lien waiver management software, our three-way purchase order match functionality, but also the promise of new product pipeline, which currently includes our integrated spend management offering that is in development, new payment modalities, potential vertical marketplace purchasing capabilities, along with eight areas that we've identified leaning into and utilizing artificial intelligence or AI across all segments of our business. As we open up more opportunities to drive increased value and impact to our customers gain increased efficiencies in delivering our products and services. Along with continue to deepen our competitive mode that we have around delivering our unique solutions to our middle market customers and their suppliers. Before I turn. to our quarterly key metrics and financial results for the third quarter, I wanted to take a minute to remind everyone of the significance in being purpose-built to serve our middle market customers versus small business customers or SMB as some refer to it. There are several key differences between middle market companies and SMB companies. Middle market companies are significantly larger in size and are typically in the range of 5 million up to and exceeding 1 billion in annual revenues. Whereas SMBs are generally considered sub 5 million in revenues. Similarly, the number of transactions per customer with middle market companies are many multiples of that of SMBs. In many cases, middle market companies are also the leaders of their various industry segments in which they operate. Moreover, the average lifespan of a middle market company is 31 years versus roughly eight and a half years for a small business. And finally, in an economic environment of rising interest rates and tightening financial conditions, while many small business bankruptcies tend to increase as access to capital grows scarce, coupled with the fact that a vast majority of SMBs are subscale and undercapitalized, We believe that middle market companies, by contrast, are much more resilient and better positioned to navigate a tough economic backdrop given their scale and access to resources. As such, our competitive moat that we continue to build is purpose-built for serving middle market companies in supporting their more complex business and accounting processes, continues to be a significant advantage for us as highlighted by our vertical market industry approach across our nine different industry segments supported by over 220 accounting system integrations and unique accounting and business process support we deliver to our customers in these verticals. Now, I am really excited to provide a quick summary of our financial and key metric scorecard for the third quarter. We once again delivered Another quarter of solid operating results, achieving our ninth consecutive quarter of exceeding our financial targets relative to our implied outlook. Revenues of $98.7 million, up 19.7% for the quarter and 20.2% growth year to date, exceeding our implied Q3 23 outlook, while our adjusted EBITDA profitability of $11.4 million was outstanding, driven by healthy revenue growth, continued gross margin expansion, unit cost reduction, and continued scaling of our operating expenses. These results of delivering a Rule of 40 quarter measurement exceeded 31 for the quarter versus demonstrates our balanced focus of delivering on both 20 percent organic growth mantra and our accelerating profitability as we see the scale in our business reinforcing the confidence I have in our Rule of 40 growth and profitability objectives we introduced this past June during our Investor Day event. This balanced approach provides us additional levers to strategically invest in our business and further enables us to continue growing our industry leading position in delivering accounts payable and payment automation software solutions to our middle market buyer customers and their suppliers. In addition, we ended the quarter with a transaction yield defined as total revenues over the total number of transactions of $5.15, breaking the $5 marker for the first time. And this is up 12.7% over the same period last year. These operating and financial results highlight both our strong market position and continued execution as we enter the final stretch of this year. On today's call, I am super excited to discuss three topics, which do a great job of highlighting several of the growth strategies we have been working on related to the four gears of our Avid Exchange Business Flywheel that we articulated during investor day, which include number one, our top of funnel activity, which is a reflection of our gear one in delivering a great user experience with our industry leading accounts payable and payment automation software. Second, Discuss a major new software channel partnership with an exclusive built-inside integration and positioning that we just signed, which will further drive gears two and three of our Avid Exchange business flywheel. And third, give you an update on the recent launch of Invoice Accelerator 2.0, driving future growth under gear four of our business flywheel. Let's start with the first topic. From a top-of-funnel new buyer customer sales opportunity perspective, we are highly encouraged by the continued healthy engagement trends we are experiencing given the volatile macroeconomic backdrop. Please recall there's roughly a full year lead time from the moment these opportunities enter the top-of-funnel to when they're closed, onboarded, and achieve full adoption. So for the nine-month period ending September 30th, our top-of-funnel new buyer customer opportunities are up 13% on a year-over-year basis. Although there may be some perceived moderation from levels compared to the first six months of 2023, this was largely due to timing related to several of our key industry trade conferences, specifically SuiteWorld, the largest NetSuite user conference event of the year, which was in the third quarter last year and shifted to the fourth quarter this year, Second, a portion of our quarterly spend around marketing initiatives, along with some trade shows and user conferences, also shifted from the third quarter to the fourth quarter of 23. And finally, our fourth quarter top 2023 top of funnel opportunities are off to a strong start across all of our vertical industries as we look to end the year on a very strong top of funnel position to drive our new buyer organic growth in 2024. Digging deeper into the fundamentals of our top of funnel activity, it is very consistent with the trends that we called out in the second quarter of 23. Virtually all of our industry verticals saw double digit growth, including construction, financial services, media, healthcare, HOA, or homeowner association management as we call it, education are examples. More encouraging, though we saw some initial indications of the sales cycle shortening by several business days. Equally, the growth in top of funnel activity for the nine months ended September 30th sustained a slightly higher average deal size attachment. This healthy top of funnel growth was further backstopped by sustained pace of win rates. The only top of funnel deviation continues to be within the commercial office subsector of our overall real estate vertical, which also consists of multifamily, student housing, industrial, and subsegments of the real estate vertical remaining very strong. Overall, we're very pleased and remain confident with our underlying metrics driving our top of funnel and new buyer customer sales momentum. To better appreciate why our top of funnel remains healthy is our ability to drive high-impact quantifiable business impact and outcomes for our customers, such as PSI Services, located in Glendale, California. PSI Services is an industry-leading provider of assessment and talent management solutions to the private and public sector organizations. PSI streamlines its back office with Avid Exchange's accounts payable, invoice, and payment automation solutions, using NetSuite as its core accounting system. PSI has grown organically and inorganically to over 150 countries. To support its growth, PSI was seeking ways to eliminate their legacy paper-based accounts payable system and standardize their processes across a worldwide group of corporate entities. Galen Bassler, Director of Accounting Systems and Treasury, explains, We took the first steps towards streamlining and automating our accounting processes with Avid Exchange for NetSuite. The configuration and setup process was very easy, and everyone got on board with the new automated process very quickly. Given the initial success in automating our accounts payable invoice processes, PSI shifted its focus and its energy on the payment side of their business, Bassler stated. We were purchasing blank check stock, stuffing envelopes, applying postage, and mailing a large volume of checks every week. With Avid Pay, our 1,500-plus paper checks my team was printing and signing each month was reduced by over 99%, reducing our total payment-related costs by roughly 60%. The savings are tremendous and very impactful to our business. Now I'd like to discuss our Avid Exchange business flywheel momentum that fuels customer testimonials such as those from PSI services and our healthy top of funnel new buyer customer sales opportunities. Just as gear one of our flywheel is around delivering great AP automation software and is foundational to our strategy, gears two and three of our strategy are focused on forging new sales partnerships and deep built inside accounting system integrations with leading accounting systems and ERPs within both existing and new target vertical industries. We believe these verticals have significant transaction volume to be monetized across our proprietary two-sided AvidPay network. As such, I could not be more excited today to announce our new strategic partnership with Appfolio, which is now one of our biggest vertically-focused integration partnerships in our 23-year history. With over 19,000 customers, Appfolio is a top provider of solutions focused in the real estate vertical. As the first accounts payable application partner in the Appfolio stack, our Avid Exchange accounts payable integration includes our best-of-breed invoice automation and payment solutions. This partnership is planned to go live in the first quarter of 2024. Given our 20 plus year heritage in the real estate vertical, and not to mention our ability to go deep in the customer base of these accounting system partnerships, that folio partnership underscores just how large and unpenetrated the runway opportunity still remains in the first vertical we entered 23 years ago. Now I'd like to turn to gear four of our Avid Exchange business flywheel. I couldn't be more excited today to go live with our much-anticipated Invoice Accelerator 2.0 offering designed for our small business suppliers. For those that are new to the Avid Exchange story, Invoice Accelerator 2.0 is our much-anticipated digital invoice financing offering. It is designed to accelerate the cash conversion cycle for the large segment of our 1 million plus base of supplier customers we have today and growing every month. Monetization of this invoice acceleration offering is derived from both fee and interchange payment structures and is another lever in growing arsenal of our drivers for e-payment adoption. with roughly 60% of our supplier base consisting of small businesses, which represents the sweet spot for this offering as they serve our middle market customers. We are uniquely positioned to address this large market opportunity to finance our short-term funding in a highly automated and frictionless way. The key to executing this B2B invoice financing and payment modality offering is at scale necessitates a very unique and competitive advantage in both underwriting risk and collections. What we believe gives us competitive advantage in eliminating the historical friction and scaling is our proprietary two-sided network, where we are the system of record for our buyer customers' expenses and manage their entire payment file of payments to their suppliers. In other words, we have both the buyer's and supplier's transaction data, history, and capital flows across our two-sided network in our uniquely strong position to deploy this proprietary financing platform at scale. As many of you know, we've been in the market with our version 1.0 of our invoice accelerator offering for the last several years, which has fostered significant learnings, insights, and linkages around the transactional, operational, and functional service drivers of the supplier experience. The domain knowledge and data science we have amassed through the learning is incorporated directly into our software and foundation of our version 2.0 of this new platform. As such, everything from supplier onboarding to transaction execution to customer support have been core focus areas in building our next generation modern, digital-first, feature-rich, and real-time decisioning platform. And we are and will be paying very close attention to the speed to transact and its scalability. Our plan is to meter the initial launch over the next several quarters to make sure the offering is working as designed and then accelerate our invoice accelerator 2.0 rollout no pun intended, to our largest supplier cohort of over 600,000 small businesses and growing. I believe that our invoice accelerator 2.0 offering, conservatively speaking, could reach over 5% of total revenues over the next several years and has the characteristics to ultimately become our next 100 million revenue business in the future. In summary, we are extremely pleased with the progression of our operating and financial performance including our third quarter top-line revenue growth and exceptional bottom-line profitability results. We remain laser-focused on delivering on our extensive product roadmap, accounting system integration partnerships, and e-payment penetration strategies while leveraging data to drive incremental customer value. Our recent customer advisory board experience was a great testament to our focus of being passionate to see our customers being successful in driving increased value to their organizations, which was further reinforced by our announcement of the AppFolio integration partnership, along with the launch of our Invoice Accelerator 2.0 offering. Meanwhile, we are continuing to make tremendous progress on unit cost reduction, as well as leveraging our operating expenses to drive sustained EBITDA margin expansion as we close the year and prepare for 2024. We believe these strategic and operational initiatives, coupled with our strong balance sheet and talented leadership team that many of you met during our investor day positions us very well for value creation and strategic growth opportunities in the future. Of course, as always, we are mindful of the uncertain macroeconomic backdrop and are focused on controlling those elements of our business that we can directly control, which is our overall value proposition and business impact that we can deliver to both our buyer and supplier customers. That being said, it's hard to believe, but we're 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 significant short-term and long-term value for our shareholders. With that, I'd like to turn the call over to my partner, Joel.

Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our third quarter 2023 financial results, which reflect continued execution of our growth strategies amid continued macro uncertainty. Overall, we delivered another quarter of healthy year-over-year financial performance. Relative to the implied third quarter 2023 business outlook and adjusting for float, political, and one-time deferred revenue cleanup, third quarter revenues came in better driven largely by higher transaction volumes and yield expansion as we continue to drive checks out of the system. That, together with higher gross margins, driven by higher revenues, progress on unit cost initiatives, yield expansion, as well as a shift in the timing of certain operating expenses to the fourth quarter, led to significant adjusted EBITDA outperformance. We believe this adjusted EBITDA outperformance underscores the scope for operating leverage in our financial model. Now turning to year-over-year results. Total revenue increased by 19.7% to $98.7 million in Q3 of 2023 over the third quarter of 2022. Roughly two-thirds of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions coupled with yield expansion. The remaining third or so of our revenue growth this quarter was driven by higher year-over-year interest revenue coupled with deferred revenue cleanup partially offset by a year-over-year decline in political revenues. Our strong revenue growth also resulted in total transaction yield expanding to $5.15 in the quarter, up 12.7% from $4.57 in Q3 of 2022. Of the 12.7% increase, roughly two-thirds of the increase was driven by the aforementioned flux between interest and political revenues, as well as the deferred revenues with the remainder driven by pay yield. Software revenue of $28.9 million, which accounted for 29.3% of our total revenue in the quarter, increased 15.5% in Q3 of 2023 over Q3 of 2022. Excluding the contribution from one-time changes in deferred revenue, The increase in software revenue was 10.9% and was driven by growth in total transactions of 6.4%, with the balance driven by a combination of price increases and certain subscription-based revenues. Payment revenue of $68.5 million, which accounted for 69.4% of our total revenue in the quarter, increased 20.9% in Q3 of 2023 over Q3 of 2022. Payment revenue reflects the contribution of interest revenues, which were $10.6 million in Q3 of 2023 versus $2.7 million in Q3 of 2022. Recall that a year ago, payment revenues also included contribution from political media revenue. Of the 20.9% increase in payment revenues, roughly two-thirds was driven by a combination of an increase in payment transaction volume of 9% and yield expansion with the remaining portion driven by the aforementioned flux between interest and political revenues. On a gap basis, gross profit of $62.3 million increased by 31% in Q3 of 2023 over the same period last year, resulting in a 63.2% gross margin for the quarter compared to 57.8% in Q3 2022. Non-GAAP gross margin increased 500 basis points to 70% in Q3 of 2023 over the same period last year, roughly two-thirds of which was driven by a combination of unit cost efficiencies and yield expansion, with the remainder driven by higher interest revenue and the one-time deferred revenue cleanup. Moving on to our operating expenses. On a GAAP basis, total operating expenses were $77.5 million, an increase of 3.9% in Q3 of 2023 over Q3 of last year. On a non-GAAP basis, operating expenses excluding depreciation and amortization increased 0.7% to $57.6 million in the third quarter of 2023 from the comparable prior year period. On a percentage of revenue basis, operating expenses excluding depreciation and amortization declined to 58.4% in the third quarter of 2023 from 69.4% in the comparable period last year. The year-over-year decline largely highlights the significant operating expense leverage, particularly across G&A, as well as sales and marketing to an extent, even after stripping out the contribution of float and deferred revenue. I will now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs decreased by $1.5 million or 8% to $17.5 million in Q3 of 2023 over Q3 of last year, which was driven largely by a combination of efficiencies in marketing spend and a shift in the timing of event sponsorships related to trade shows and user conferences from the third quarter to the fourth quarter of 2023. Non-GAAP research and development costs increased by $2.4 million, or 12.5%, to $21.7 million in Q3 of 2023 over Q3 of last year. The increase was due to continued reinvestment in our products and platform. Non-GAAP general administrative costs decreased by $.5 million, or down 2.5%, to $18.5 million in Q3 of 2023 over over Q3 of last year, driven largely due to leveraging public company costs across a larger revenue base of net of various puts and takes. G&A costs as a percentage of revenues have now decreased five quarters in a row and are expected to continue their annualized downward progression as we indicated during our investor day. Our gap net loss was $8.1 million for the quarter versus a gap net loss of $25.4 million in the prior year period with the reduction in losses driven by a combination of strong revenue flow through and expense control leading to lower operating losses coupled with higher interest income and lower interest expense due to reduced borrowing costs and partial debt pay down. Our gap loss in the third quarter of 2023 reflects $0.7 million of professional services and legal fees, net of insurance recoveries related to the cyber incident detected in April 2023. On a non-GAAP basis, excluding the cyber cost, our net income in the third quarter of 2023 was $5.8 million versus a net loss of $11.7 million, a $17.5 million positive swing from a year-ago quarter driven by the aforementioned factors. On a non-GAAP basis, adjusted EBITDA was approximately $11.4 million in Q3 of 2023 compared to a loss of $3.7 million in Q3 of 2022, largely 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 strong corporate cash position of $440.6 million against an outstanding total debt balance of $82.5 million, including a note payable for $18.7 million. We had $30 million on our credit facility undrawn at quarter end. Corporate cash, meanwhile, was split roughly 60% among money market funds, commercial paper, and U.S. treasuries, with the remaining 40% in deposit accounts. The weighted average maturity on the corporate cash was roughly 20 days, while the effective interest rate on our corporate cash position for the third quarter was roughly 4.95%. Customer cash at quarter end was approximately $1.2 billion, with an interest rate of roughly 4.42% for the quarter. I'll now provide an update on our full year 2023 guidance. In light of our third quarter 2023 financial outperformance, balanced with further volume impacts from macro crosscurrents, based on all information currently available, we're raising our overall 2023 guidance. We now expect total revenue for the year to be in the range of $374.5 million to $375.5 million. Our 2023 revenue outlook reflects approximately $38 million of interest revenues from customer funds versus approximately $11 million earned in 2022. Also, as a reminder, we do not anticipate any political media revenue contribution in 2023 versus having recognized $8.5 million in 2022. Similarly, we expect a higher non-GAAP adjusted EBITDA profit ranging between $22 million and $23 million for the year. With that, I would now like to turn the call back over to the operator to open up the line for Q&A. Operator?

We will now begin the question and answer session. The management team asks that you please limit yourself to one question. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we'll pause momentarily to assemble our roster.

Our first question will come from Dave Koning with Baird.

You may now go ahead.

Yeah. Hey, guys. Great job across the board here. Thanks, Dave. Appreciate it, Dave. Yeah. And, you know, maybe first, one of the biggest highlights for me was the sequential growth in yield in payments. You've had it very consistently almost every quarter. But this was, I think, the biggest we can see on record, sequential yield. And that's without quite as much interest revenue sequentially, like the growth sequentially wasn't quite as much. What's happening? Is there just a big shift to VCC right now? And how do you see that in the future?

Yeah, so Dave, great question. We were, again, super pleased with the results in the quarter and a good strong beat top and bottom. Most of the underlying metrics, you know, were really strong and in some cases, you know, meaningfully better than we expected. You know, we've talked about, I think you're asking about TPV yield, and we did see a sequential step up about five bips if you strip out the political and float dynamic. And You know, what we've said in the past is don't read too much into a BIP or two, top or bottom. You know, this is a little bit more than that range, and we are pleased with the results. But I would just point back to what we talked about in Investor Day. The real opportunity for us is to continue to expand this with new payment modes going forward. But overall, pleased with the quarter.

Great. Thanks. And then just as a follow-up, incremental margin X, the interest contribution, was also probably about the strongest we've ever seen. Is it? Is that sustainable? Do you expect a lot of the revenue growth, the core revenue growth, to fall to the bottom line going forward now?

Yeah, so let me take that in two parts. One, as we've said before, we're pleased with the gross margin results. Even stripping out float and political dynamics, we're seeing consistent incremental gross margin expansion through both yield and unit cost improvements. You know, at Investor Day, we talked about, you know, being a 75-plus percent gross margin business, so we still have a ways to go, and we still have headroom to expand that gross margin, again, through both unit cost efficiencies and yield expansion.

Great. Great job, guys. Thanks.

Thanks, David.

Our next question will come from Ramsey Elisal with Barclays. You may now go ahead.

Hi, guys. Good morning. And I'll echo that. Very, very solid results today. Mike, I had a question on the top of funnel dynamics, you know, discussion that you had with us. It sounded like macro headwinds are really more localized just in a sort of commercial office subsegments and pretty much everywhere else. It sounded like things that kind of are looking pretty good. Is it a fair characterization to say that there's a kind of an improvement in the sort of demand environment out there and maybe the macro overlay to that as well? Is that what you're seeing?

Yeah. So maybe take a page out of Joel's book. You know, I don't know if, you know, read, you know, too much into any one particular quarter, but certainly we're pleased with, you know, the top of funnel activity that we're seeing. As I said, you know, one of the things I try to coach people over time on is, you know, the real estate vertical itself is actually a collection of you know, many different sub-verticals. And certainly we've seen within real estate, for example, you know, multifamily, industrial, student housing, affordable housing, all those sub-components perform really well in the market, you know, as, you know, compared to, you know, the one that's kind of static a little bit is the commercial office. But across, you know, all the new or other, I should say, you know, kind of verticals that we have, you know, to make up our collection of nine total verticals, you know, really across the board, you know, healthy, you know, top of funnel growth. And I think it's a combination of a handful of things. Certainly, you know, the leadership that James Sun has brought to our sales organization now closing in on, you know, his first full year has been, you know, really terrific along with, you know, building the team and kind of the mission that, you know, both Dan Dries and I had with James and, is how do we build the go-to-market sales organization to be a billion-dollar business? And that's the lens that we've kind of looked, and we've made a lot of progress on that side, on the talent particularly, over the course of the year. And certainly I think with some of the new kind of product features and roadmap that we've been delivering, it's created a lot of excitement and engagement. So certainly we saw slight benefit in average sales you know, time to close. And so, you know, we've been really encouraged on, you know, what we've seen overall, you know, despite, you know, kind of the continued, you know, volatility of the overall market.

Got it. Okay. So some internal contribution there as well. A follow-up question for me. I was wondering on invoice accelerator, now that that product is getting, you know, sort of imminent.

Yes.

What does the sales cycle, booking conversion, implementation timeline look like for that product? Is it the same as kind of the core middle market AP offering? Is there any difference in like the velocity of that product?

Yeah, that's a great question, Ramsey. And so I would say it's like night and day different, you know, versus on the core buyer offerings for invoice and pay. There's certainly, you know, a setup, configuration, onboarding process. In the case of Invoice Accelerator 2.0, this is really a seamless process. These are existing transactions that they have on our network, and through a simple user interface, they can just literally click a button to have an invoice be accelerated for next day payment if they're enrolled in the Invoice Accelerator program. And so it happens fairly quickly. And it can happen real time as suppliers want to advance payments. And one thing I will say is with any new kind of product launch, we're now excited that we started processing our first transactions with Invoice Exciter 2.0 during the month of October. And we're in the first phase of any new product launch, working hard to make sure the product is working as we've designed it to work. making sure we've incorporated all the data analytics and understandings that we had during our one-point offering, as well as to recapture elements, make sure that we're recapturing payments as they're flowing through our network. And then the user experience is working as designed. So that's the current focus as we roll the product out to more on a measured basis to our supplier customers, but super encouraged and excited about what this product is going to be in the future for us.

Fantastic. Thank you so much.

Thanks, Ramsey.

Our next question will come from Andrew Bao with Wells Fargo. You may now go ahead.

Hey, good morning, guys, and nice set of results. Not sure how unintentional that pun was around invoice accelerator, but wanted to ask about the macro environment, and particularly in the middle market. I know it was just asked, and we all heard some commentary from Your closest peer last week, they kind of discussed middle market businesses having more, you know, room in their cost structure to kind of scale down expenses. And is there something about the verticals that you guys are playing in that makes your mix a little bit more resilient to that?

Yeah, so first of all, I'm glad you caught the pun. You know, let's make sure, you know, our analysts stay on their toes. So good job there. The second part of the question related to the resiliency of the middle market and the verticals that we're in, I don't think there's much with the vertical element of it. It's just, as I highlighted through my commentary, middle market customers are just very different than small business customers. These are substantial customers that have built out finance teams. you know, accounts payable teams. They have, you know, longevity in their business. They have scale. And I think when you have kind of scale and longevity, you know, it allows you to really, you know, navigate through a down market more effectively. You have more levers to pull. You typically have access to different, you know, financing levers that a small business does. And so I think, you know, they operate, you know, very differently. And, you know, the one thing, you know, I'll say is that, you know, you know, we've been at this a while. And so we have, you know, quite a bit of history of operating through past cycles. And, you know, I think, you know, this cycle is no different. And kind of the results we're seeing are kind of what we expected to see, you know, with the resiliency of our middle market customer base and how, you know, they've, these same, you know, similar sets of customers have operated through past cycles. So we're really encouraged by that. And I think, it really highlights, you know, I've been talking about it since our IPO, and, you know, in an up market, you know, maybe it's harder to tell the difference, but when you get into a choppier market, I think it's really distinguishable, the differences between middle market and small business.

Got it. It's nice to see growth really kind of get back to that 20% algorithm that you guys have been calling out for in the medium term, you know, albeit a considerable piece attributable to float. Just thinking about as we head into 2024, I know that fourth quarter implies, you know, a step down in growth. But, you know, with the ad folio political in 2024, it seems like all the building blocks are in place for you guys to reaccelerate back to that medium term algorithm. So we just want to get your confidence around that and, you know, correct me if I'm wrong or highlight any points we should be thinking about.

Yeah, perfect. And let me just jump into some of the business commentary, and you'll probably follow up as well. So, yeah, you hit the nail on the head. We, you know, super confident related to, you know, kind of what we laid out at Investor Day. And I would say, you know, for next year, you know, kind of there's five core things that, you know, kind of at least I look at that gives me that confidence. And, you know, the first one is, you know, where we started was Papa Sales. you know, our organic sales activity for top of funnel. That's a good barometer of what, you know, goes through, you know, kind of sell through that shows up in our, you know, total sales over time. The second one is certainly the new payment modalities that we're rolling out. You know, Joel kind of highlighted, you know, earlier, you know, in the commentary that, you know, that's one of the components of, you know, our increase in take rates. And we expect those new payment modalities to continue. Third is what we were just talking about with invoice accelerator 2.0. Now, you know, we'll be in the market for the full year next year as, you know, kind of as we'll kind of slowly ramp that over the course of the year. And then we have the new partnerships, you know, and certainly we have a number of those, but, you know, portfolio is one of those. And then the last piece, number five is political. And certainly we'll have the political piece back and, you know, You know, it's probably anybody's guess on, you know, how, you know, that, you know, the confusion in the current political cycle will impact us, but we think we're positioned really well there. Joel, you may have some additional thoughts.

Yeah, the only thing I would add is we're really pleased with the Q3 results, see strength in the business. We're excited about the long-term opportunity. It's important to remember that we're in the middle of some really kind of choppy environment, I think is the word that we've used, spending moderation on the part of our buyers. And so certainly, you know, we're not giving guidance now for 24. We'll do that in February and update you guys on what we see. We need to finish the year strong, but we're really pleased with the results of the business and Q3 and excited about the future.

Great. Thanks a lot, guys.

Again, we please ask that you limit yourself to one question. If you have a question, please press star then 1. Our next question will come from Brian Keene with Deutsche Bank. You may now go ahead.

Hi, guys. Good morning. Mike, I want to ask you, one of your peers in the B2B payments landscape called out some caution in electronic payment adoption given the higher costs associated with payments like VC or instant transfer and an economic slowdown. Do you see that in the mid-market, or is that an SMB thing?

So here's what I would say is, what I would say, it's a little bit of apples and oranges. And what I mean by that is, if you remember, one of the core business decisions we made when we launched the Abbott Pay Network, is to kind of deem and position the supplier as a core customer, just like the buyer. And what that's allowed us to do is create a value proposition for the supplier that's more than just coming to the AdvoPay network to receive a payment. They're coming to gain visibility into their invoices. They're coming to manage their business rules on the types of payments they want to take under certain circumstances. And then they're coming to get tools like Invoice Accelerator to better manage their cash flow. And I think that strategy in the current environment is starting to really differentiate ourselves because it's not just about coming to receive a payment. Because when you come to receive a payment, it's typically then about price because there's no other value. But when you create a value proposition around it, it's not about price and it's about the total value proposition that we're delivering. And so we remain super encouraged on our ability to engage with suppliers and move them from paper check to various forms of electronic payment over time. And so we think that certainly that strategy is even being heightened in the current economic environment.

Got it. And then just as a follow-up on Appfolio and partnerships like that, how does the economics work? Is there a cut that goes to Appfolio? Is it lower margin or the same margin? How do we think about that?

Yeah, good question. With all of our core partnerships, and not all partnerships are created equal, we have referral partnerships, reseller, and then kind of white label type partnerships. But yes, there is compensation that goes to our partner, in this case to Appfolio, However, we believe that kind of the contribution of it is the same ballpark as our direct sales, as a lot of that sales and marketing expense is absorbed by the partner versus Avid Exchange. So a very similar kind of net contribution as I look at it. Got it. Thanks so much, and congrats. Yeah, thanks, Brian.

Our next question will come from Brent Brasselin with Piper Sandler. You may now go ahead.

Good morning. Joel, if you could just talk through visibility into further increasing yield. Clearly, yield and float were big factors helping you insulate against a slowing TPV growth rate here. Do you have visibility? You could continue to kind of drive improvement in yield. One, and then Mike, if you could just double-click in that folio. Is that a white-label relationship where they're going to be promoting TPV this across their install base? And could there be a quick ramp there or not? Thanks.

Hey, Brent. So I'll take a crack at your first part of your question. So the short answer is yes. And what I would do is just remind you kind of how we think about the overall growth algorithm in the business. Remember that we measure the degree to which we kind of retain and expand the overall transaction volume. And we're In the last couple of years, we're in sort of a 104%, 105% overall net organic expansion that is suppressed somewhat this year, obviously given the macro environment that we're in, but continuing to kind of maintain a solid base and still expand to some degree. So that first step is kind of the retention and expansion. Number two, adding buyers and adding the buyer's volume. And then three, yield. So you've asked about yield. We have seen good yield expansion. We've talked about that as the sort of third piece of our overall revenue model. And we've talked in our investor day about the opportunity we see ahead of us. And so long story short, yes, yield plays an important part in our overall revenue model, revenue growth, and gross margin and EBITDA expansion as well.

Yeah, and a little bit I'll add on to the second part of your question regarding AppFolio. Yes, we're super excited about what that means. As I indicated in my remarks, I think in our 23 years, it's the largest accounting system partnership we've ever done in terms of the sizable customer base that's applicable to our profile. We believe that over 50% of the Affolio customers fit within our target profile. Typically, we see is that the first 36 months of any new partnership are the most critical as in this case with our white label relationships that they will be promoting it to their install base. And we're working hard with the portfolio team on that positioning and strategies, taking account all the learnings we have across other strategies or examples that we've incorporated over the years, such as MRI, RealPage, RentManager, ResMed, are all examples of similar partnerships. We can take all those learnings and apply them to that folio partnership. So certainly 36 months will be the most critical in terms of kind of that ramp up.

Sounds good. Sounds like a big win. Thanks.

Yep.

Next question will come from James Fawcett with Morgan Stanley. You may now go ahead.

Hi, everyone. It's Michael in Fontana for James. Thanks for taking our question. I wanted to ask about volume. Anything to call out in terms of how volume trends may have evolved throughout the quarter. I'm more curious as to how exit rates trended relative to the full quarter volume growth and perhaps what you're anticipating or embedding into the 4Q Guide. Thanks.

Okay, I'll take that. Great question. Again, you know, TPV volume for us in the quarter was, you know, close to $20 billion, up about 8% over the prior year period. And a couple of things maybe just to point out, speaking about overall TPV, again, that metric for us drives payment revenue in a meaningful way. And it's also a metric that's been impacted by some of the caution that we've seen exercised by our base of buyer customers across the middle market. I think if I think about the results for this quarter and the volume trends that we've seen, we haven't really seen meaningful departure from what we've seen in the past couple of quarters. And, you know, it's hard to predict, but we're imagining something similar in the quarters to come. And obviously hopeful for this temporary kind of macroeconomic condition to lift in 24. A couple quick points. When you think about that growth in the third quarter of 23, you have to keep in mind not just that discretionary volume impact, but also the political dynamic contributed to TPV in the prior year where it would not exist in the current year. So there's a little bit of impact there. Remember also that growth rates last year were impacted by sort of the COVID impact from prior years. So some distortion in those growth rates together with potentially some impact from inflation. And then finally, we do see potentially lapping the year ago period sometime in the middle of the fourth quarter when we began to see this moderation start and so could see some benefit from that, obviously, when our comparables improve. So hopefully that gives you a little bit of insight into the TPP volume dynamic.

Yep, that's helpful. I wanted to ask mechanically on invoice accelerator. I think the intention there is to transition the funding mechanism to on versus off balance sheet over time. How should we be thinking about the timing of that and sort of the financial impact? Thanks.

Yeah, good question. You're exactly right. We believe our strategy is to transition Invoice Accelerator to be off balance sheet over time. You know, we believe that in terms of the, you know, those partners that we've already been getting, you know, conversations with, that we, you know, ideally in order to get kind of the best structure and kind of rate for the program, you know, want to have about a year's worth of history with the 2.0 offering. So, You know, I think, you know, as we are at this time, you know, next year, you know, we'll be have, you know, some pretty well, you know, developed strategies on moving it off balance sheet. And we've, you know, incorporated that into our economic model and, you know, believe that the yields to Avid Exchange will be consistent with what they are now. And certainly, you know, believe that we'll be able to lower our cost of capital because today we're really using our equity of our balance sheet. to fund the program. So looking forward to getting to that point certainly over the next year or so.

That's great. Thanks, guys.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mike Prager for any closing remarks.

Thank you. Again, thank you for everyone for joining us to discuss our solid third quarter results. and the sustained execution around product innovation, strategic partnerships, and differentiated performance. We believe we are the only publicly traded pure play accounts payable and payment automation investment that's purpose built for the middle market. Leveraging our two-sided network of having both buyer and supplier customers. And given our sustained operational and financial performance since our IPO, coupled with our strong balance sheet, We believe we are well positioned to execute towards our goal of being a rural 40 plus company as outlined in our recent investor day this past June.

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