AvidXchange Holdings, Inc.

Good morning, everyone, and thank you for joining us for the Avid Exchange Holdings Incorporated first quarter 2024 earnings call. Please note this event is being recorded. Joining us on the call today is Michael 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 today. 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 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. If you require operator assistance, please press star then zero. I would now like to turn the conference over to Michael Prager. Please go ahead.

Thank you, everyone, for joining us today. Joe Willight and I are excited to discuss Avid Exchange's first quarter of 2024 results. This is our 11th reporting quarter since becoming a public company in October of 2021, and we now have delivered 11 consecutive quarters of financial outperformance relative to our expectations. Amid prolonged macroeconomic volatility, our results highlight the relative resilience of our financial model. With the continued choppiness we are seeing in customer transaction volumes, We remain steadfast in executing our strategic playbook. This includes driving our yield expansion to counter the impact of uneven transaction volumes, focusing on expanding our gross margins through unit cost reductions and driving operating leverage through cost discipline and smart investments to expand our adjusted EBITDA margins. The drivers of our success continue to be our middle market customers and the impact of our purpose-built value proposition for middle market companies. More crucially, it entails engineering and executing our various product offerings, technology, go-to-market, and operational value proposition that delivers quantifiable benefits of digitally transforming our customers' back office by automating accounts payable and payments over the differentiated two-sided network that we have today. The payback for our customers is rapid, impactful, and quantifiable on both the efficiency related to labor cost savings and supporting their ability to grow without adding incremental back office headcount. This in turn deepens our competitive advantage as we are a market leader in driving digital transformation strategy for middle market companies. Thanks to our dedicated and talented team members, the runway for value creation for both our customers and investors is still in the very early stages. On today's call, I will touch on the five key priorities we have for this year that we're using to gauge our path of financial and operating progress, in addition to continue to widen our competitive advantage around the middle market. Our key priorities for this year include performance culture, customer obsession, innovation, growth, and scale objectives. Kicking off, we believe that the quick shorthand measure on performance culture is our financial scorecard. In looking at the first quarter of 2024, we delivered solid financial results across the board. Joel will go into more detail on our results later in today's call, but here are some of the highlights. Revenue growth in the quarter was over 105 million, up over 21% year over year. The growth in the quarter was led by a combination of continued yield expansion coupled with transaction growth. Our success around yield expansion is a result of our value proposition related to our various e-payment modalities focused on converting paper check suppliers into electronic payment adopters, as well as continued efficiencies with our processes, automation, and AI improvements around executing these various forms of electronic payments. Non-GAAP gross margins continued their upward trajectory, coming in at 72.4% and crossing the lower band of the 72% to 75% non-GAAP gross margin target ahead of our 2025 gross margin expectations, as we outlined during our Investor Day last June. Along with solid operating expense discipline, our adjusted EBITDA margins in the quarter exceeded 16%. Furthermore, our transaction yield, which is a metric that we focus on across our executive leadership team as it demonstrates the power and effectiveness of our Avid Exchange Business Flywheel model, was up almost 15% to reach $5.47 per transaction. Moving on to our customer obsession metrics, one of the data points we track is our top of funnel prospect activity. The first quarter of 2024 saw some very encouraging trends as well as some adjustments to our marketing initiatives that we believe will be net positive for the year, but negatively impacted us during the past quarter. Overall, the top of funnel activity during the first quarter of 2024 was unchanged year over year with certain verticals leading and some lagging. The real estate vertical, our longest standing vertical market segment, led the pack and was up high double digit percentages on a year over year basis. The growth in the real estate vertical is very encouraging as we have not seen this level of growth in more than a year, led by very strong multifamily activity. We also saw double-digit growth in our education and nonprofit verticals as well. Most compelling of all, our buyer-customer close rates were up almost 50% year-over-year virtually across all of our industry verticals, further demonstrating our increasing sales effectiveness. However, in a handful of our verticals, we did see instances where our top of funnel performance lagged during Q1. In the quarter, those verticals included our new markets, homeowners association or HOA management as we call it, construction and financial services. Let me briefly discuss the reasons for this lag and how the top of funnel has rebounded since. As we continue to onboard new leaders in our sales and marketing group designed to help us scale to our next milestone target of reaching one billion in revenue, they have brought greater discipline, alignment, and allocation mix of our marketing and go-to-market investment dollars. As part of this evolution, we have prioritized our resource allocation mix to focus on slightly fewer but higher-yielding industry user conferences and trade shows that meet our ROI and lead flow targets. As a result, we exited a number of the lower yielding conferences and trade shows during the quarter, and prioritized greater investment in higher yielding conferences and trade shows occurring over the balance of the year. This resulted in a 30% year-over-year decline in trade show traffic during the quarter, with a corresponding impact on our top of funnel metrics during Q1 as we implemented this strategy. We've allocated more of our investment resources for higher yielding trade shows in Q2 and for the balance of the year, which we believe still have an overall higher impact to our overall top of funnel engagement metrics. And the good news is that this strategy is already getting traction as our top of funnel activity is up nicely in the high single digit percentages across the board so far in the second quarter. We believe that the strategic changes we're making to our marketing motions notwithstanding the macro backdrop, are the right moves and highly aligned with our long-term organic growth objectives. With our recent accounting system integration partnerships, we're cautiously optimistic about our top of funnel as we scale off for the remainder of the year. Now turning to our innovation priorities, I'd like to provide an update on Payment Accelerator, formerly Invoice Accelerator 2.0. This product enables the small business supplier customers on our network frictionless access to improving their cash flow by leveraging our robust underwriting analytics, security, and scalability protocols. We're extremely excited about the prospects for Payment Accelerator as it's expected to be a meaningful growth contributor in 2025 and beyond, as we believe that supplier financing and cash flow management offerings will be the third leg of our overall revenue model in partnership with driving additional software, and payment network revenues. Given that this is a credit product, we continue to meter the launch in order to better understand the user experience, given that this next-generation product has an entirely new digital front-end user experience, complete with self-service digital enrollment capabilities. In addition, we also want to ensure that our various third-party integrations that support Payment Accelerator are working and supporting our back-office processes as designed at scale. These include enterprise-grade features such as the data science analytics critical for successful payment interception and support for a new sub-ledgering central repository required for real-time offsets and bifurcation of payments to properly execute the innovative money movement approach. This will enable us to seamlessly leverage multiple third-party financing partners in the future, as well as open this offering to a large proportion of our $1.2 million supplier customer base, many of which fall into the small business segment, even including support for larger middle market suppliers looking to accelerate larger invoices. To put this new generation user experience in perspective, Payment Accelerator compared to its predecessor is designed to onboard a supplier in a matter of minutes versus several days. What makes this process frictionless is that we eliminate the need for a traditional financial review underwriting process which requires historical financial statements from suppliers. However, we leverage supplier and buyer history and transaction data, as well as real-time visibility into the transaction status and approvals inherent in our two-sided network to underwrite and lower the credit risk, as well as provide protective setup provisions across the entire flow of invoices that a particular supplier may have on our network. The rapid onboarding process is also the result of the platform's highly integrated backend that is designed to simultaneously validate the supplier's bank account information along with Know Your Customer and Know Your Bank compliance regulations, real-time, as the supplier completes an online questionnaire of legal entity data and beneficial ownership information. Once onboarded, a supplier is presented with multiple acceleration offers, with transparent pricing and various time-based funding options, including real-time payments. In addition to the payment accelerator offering highlighting the eligible supplier invoices available for acceleration, we also provide an auto-fund option where our intelligent decision engine automatically identifies all the supplier's eligible invoices and funds them automatically, ensuring the fastest access to cash availability every time an eligible invoice is available on our network. We have a growing network of supplier customers currently live using this auto fund option. This includes Charlotte, North Carolina-based supplier JW Home Improvement, which was looking for quick access to receipt of payments for their invoices to support their overall business expansion and found the simplicity of our auto fund feature to be a major plus in our payment accelerator offerings. We are leveraging data science and user experience heat maps to understand and analyze the user behavior as we intend to scale this offering five-fold over the next several quarters. We believe that our payment accelerator product will ultimately bring the intuitive front-end user experience for all of our B2B constituents similar to that of a best-in-class consumer payments application with robust back-end instant decisioning and underwriting capability. Next, I'd like to provide a progress update on some of our major accounting and ERP partnerships that we announced in 2023 as part of our strategic growth priorities. Recall that we announced two marquee partnerships last year, Appfolio in the multifamily vertical industry and M3 in the hospitality vertical. Both of these partnerships are highly strategic in nature for very specific reasons. Let's start with Appfolio, whose strategic rationale stems from its size, scope, and our vertical market experience. Recall the accounting system partnership with Appfolio is our biggest ever with a top accounting system provider focused on the multifamily real estate vertical. We are currently executing our initial go-to-market phase with Appfolio as we went live with our joint invoice and pay API integration a few weeks ago. and is now broadcasted for general availability to all 19,000 Affolio customers through Affolio's Stack Marketplace. As part of our joint go-live motion, Affolio is deploying various marketing outreach initiatives across channels to steer its customers to our offering in its marketplace through email, landing pages, webinars, and joint pipeline reviews. What is truly exciting is the increasing top of funnel activity we have already seen in the lead up to the go live integration announcement, along with high customer engagement. Since the announcement of our partnership in the fourth quarter of 2023, we have tripled the number of new opportunities created in the first quarter. We believe this kind of ramp sets us up nice tone for this partnership for 2024 with meaningful revenue build in 2025 and beyond, as we believe that over 50% of FOLIO's 19,000 existing customers are a strong product market fit for our offering. Moving on to the M3 partnership in the hospitality vertical, where we're seeing similar opportunity dynamics unfold. M3, as you may recall, is the hospitality market leader in cloud-based accounting solutions along with data management platforms tailored specifically for the hospitality industry. M3's customer base exceeds 1,000 hotel management groups and owner-operators, including 50% of the top hotel managers and operators in the United States. M3 is highly strategic for us given that it accelerates our entry into the hospitality vertical through a player with a dominant positioning in the marketplace. We went live with our embedded pay integration with M3's core select accounting solution in the third quarter of 2023. Since our initial launch, we've seen robust opportunity creation with our joint marketing efforts, including dedicated M3 representatives evangelizing partners such as Avid Exchange for our highly integrated and embedded pay offering. These opportunity creations are up four-fold on a year-over-year basis compared to Q1 2023. Given the traction we are seeing, we have jointly decided to broaden our relationship and just signed a contract extension with M3 to provide integration into its flagship accounting core solutions. This accounting core integration is slated to go live in the second half of 2024. We believe that both our AppFolio and M3 partnerships along with several others that are in the pipeline position us well for long-term growth within our large addressable and unpenetrated AP automation market for middle market companies. Finally, on our key priority related to business scale, I'd like to discuss the opportunities for sustained gross margin expansion, a major lever that we've relentlessly been addressing to great success. The success in gross margin expansion perfectly complements the operating expense and investment discipline that we have demonstrated since becoming a public company. To ensure continued expansion of gross margins, we believe that we have significant room to run as we work towards our long-term 80% plus gross margin target. We have continued to engineer new innovative technology, automation, and AI solutions that we believe could work at scale across every component and subcomponent of our operational value chain across our business. The latest arrow in our quiver is our new AI-powered IVR payment automation solution. To put this particular use case opportunity in perspective, currently we employ both follow-the-sun sourcing strategies and chatbots to make payments across our various payment modalities. While the sourcing strategies optimize both unit cost and time zone coverage, Our IPA-driven bots optimize unit costs and time zone coverage at speed and scale. But RPA-driven bot methods of payment execution have certain limitations, given that they need IVR to perform the exact path of execution every time, or they break and need constant remapping work to be done, along with requiring human beings to be inserted at critical junctures for the process to be successful. So anytime anything changes or if there is a latency, bot automation fails and the payment becomes manual or potentially kicked to a paper check. With our new AI-powered IVR automation solution, which is self-learning and self-correcting, optimizing the functionality of what our existing bots currently do along with what our bots cannot do, such as adapting the changes and updates in a particular IVR decision tree, marks a major new innovation milestone for us. During Q1, our new AI payment execution solution which is still in the early stages of deployment, already demonstrated a 2x the productivity of our prior bot technology and over 10x the productivity of humans executing this function. With this capability, we can increase our ability to scale across supplier payments and capture automation of low-volume suppliers where the cost versus benefit is disproportional due to the high cost of automation versus the lower volume and spend of many of these suppliers. driving increased electronic payment penetration rates even further in our business. And most importantly, we believe this solution will scale non-literally as we double and triple our transaction volume on the payment network in the future. In closing, we're off to a very strong start in 2024, and I'm excited with the progress we're making across our five operating priorities for the year, which include continue to develop and recruit key talent to support our performance culture, our customer obsession and continuing to increase the value proposition for both our buyer and supplier customers, delivering on our innovation initiatives and offerings to support our durable long-term 20% organic growth objectives, along with continued scaling of our business towards our next billion-dollar milestone in the coming years. We recognize that the macro backdrop has remained volatile and challenged over the past two years and creates a cautious approach towards discretionary spending across the middle market. However, we remain laser-focused on the operational rigor and execution, along with controlling those elements of our business model that we can control directly, which includes our targeted innovation investments geared towards continuing to expand into customer value proposition and impact we're having on both our buyer and supplier customers, increasing our competitive advantage across the middle market. As we remain on track to deliver our 2024 financial commitments, we believe the robust product payload and integration partnerships that we've announced provide us with an important tailwind building for 2025 and beyond. I want to provide a special thanks to all my AvidX team members for their hard work, dedication, and relentless focus on executing our operational and strategic priorities. We believe we're still in the very early innings of penetrating what is a large and unpenetrated market opportunity to deliver business to business accounts payable and payments automation offerings to middle market companies. Given our product innovation, strong execution, competitive and financial strength, we believe we're well positioned to drive impactful value for customers, create future growth opportunities for our team members, and unlock significant long-term value for our shareholders. With that, I'd like to turn the call over to my partner, Joe Wilhite.

Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our first quarter 2024 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 first quarter 2024 business outlook and excluding float and political revenue contributions, first quarter revenues came in higher due to payment and software yield expansion driven by ongoing e-pay conversion. That, together with higher gross margins driven by higher revenues, ongoing progress on unit cost initiatives, software and pay yield expansion, as well as sustained expense discipline, led to significant adjusted EBITDA outperformance. It's worth highlighting that this is our second consecutive quarter of adjusted EBITDA profit, ex-float, and political. Most notably, we more than doubled our adjusted EBITDA profit sequentially, ex-float and political, to $3.7 million in Q1 of 2024 from $1.5 million in Q4 2023 due to higher transaction growth, software and payment yield expansion, lower unit costs, and operating leverage, leaving us incrementally more confident in achieving our financial targets rolled out during our June 2023 investor day. Now turning to year-over-year results. Total revenue increased by 21.6% to $105.6 million in Q1 of 2024 over the first quarter of 2023. It's important to note that the number of business days year-over-year remained unchanged at 63 days. Roughly three quarters of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, coupled with software and pay yield expansion. The remaining revenue growth this quarter was driven by higher year-over-year float and political revenues. Our strong revenue growth also resulted in total transaction yield expanding to $5.47 in the quarter, up 14.9 percent from $4.76 in Q1 of 2023. Of the 14.9 percent increase, more than half of the increase was driven by pay and software yield, coupled with transaction mix skewed towards payments. The remainder was due to float and political revenues. Software revenue of $29.7 million, which accounted for 28.1 percent of our total revenue in the quarter, increased 10.1% in Q1 of 2024 over Q1 of 2023. The increase in software revenues of 10.1% was driven by growth in total transactions of 5.8%, which continues to be impacted by macro choppiness, with the balance driven by growth in certain subscription-based revenues. Payment revenue of $75.2 million, which accounted for 71.2% of our total revenue in the quarter, increased 27.1% in Q1 of 24 over Q1 of 23. Payment revenue reflects the contribution of interest revenues, which were $13.1 million in Q1 of 24 versus $7.1 million in Q1 of 2023. Political media revenue in the current quarter was approximately $800,000 and negligible in the same period a year ago. Excluding the impact of float and political revenues, which represent a third of the 27.1% increase, the remaining roughly two-thirds of the increase in payment revenues was driven by a combination of an increase in pay yield expansion, greater payment mix, and payment transaction volume increase of 8.1%. On a GAAP basis, gross profit of $69.2 million increased by 32.7% in Q1 of 2024 over the same period last year resulting in a 65.5% gross margin for the quarter compared to 60% in Q1 2023. Non-GAAP gross margin increased 510 basis points to 72.4% in Q1 of 2024 over the same period last year with the lion's share of the increase driven mostly by unit cost efficiencies and yield expansion. Now moving on to our operating expenses. On a gap basis, total operating expenses were $79.4 million, an increase of 6.6% in Q1 of 2024 over Q1 of last year. On a non-gap basis, operating expenses excluding depreciation, amortization, and stock-based compensation increased 1.4% to $58.8 million in the first quarter of 2024 from the comparable prior year period. On a percentage of revenue basis, operating expenses excluding depreciation, amortization, and stock-based compensation declined to 55.7% in the first quarter of 2024 from 66.8% in the comparable period last year. The year-over-year percent decline largely highlights expense discipline and significant operating leverage across G&A, sales and marketing, as well as R&D to an extent, even after stripping out the contribution of floats. I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs decreased by roughly $300,000, or 1.7%, to $18.6 million in Q1 of 2024 over Q1 of last year, which reflects ongoing yet targeted investments in sales and marketing spend to support our continued growth. Non-GAAP research and development costs increased by $1.3 million, or 6.5%, to $22.1 million in Q1 of 24 over Q1 of last year. The increase was due to continued reinvestment in our products and platform, including spend management, pay offering, and payment accelerator. Non-GAAP GNA costs decreased slightly by roughly $200,000, or 1.2%, to $18.1 million this in Q1 of 2024 versus Q1 of last year due to leveraging public company costs across a larger revenue base. They continued their annualized downward progression as a percentage of revenues as we indicated during our investor day. Our gap net loss was $1 million for the first quarter of 2024 versus a gap net loss of $16 million in the first quarter of 23 with the reduction in losses driven by a combination of strong revenue flow through solid gross profit increase in 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. On a non-GAAP basis, our net income in the first quarter of 2024 was $11.3 million versus a net loss of $3.4 million in the same period last year, a $14.7 million positive swing driven by the aforementioned factors. On a non-GAAP basis, Q1 2024 adjusted EBITDA was $17.7 million versus $400,000 in Q1 of 2023, 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 year with a strong corporate cash position of $443.6 million of cash and marketable securities against an outstanding total debt balance of $75.8 million, including a note payable for $13.9 million. We had $30 million undrawn under our credit facility at year end. Corporate cash, meanwhile, was split roughly two-thirds among money market funds, commercial paper, and time deposit instruments, with the remaining third in deposit accounts. The weighted average maturity on the corporate cash was roughly 36 days, while the effective interest rate on our corporate cash position for the first quarter was roughly 5.2%. Customer cash at quarter end was approximately $1.2 billion, with an interest rate of roughly 5% for the quarter. The sequential decline in customer cash was largely due to typical seasonal patterns related to disbursement and settlement of payments in flight from the prior quarter, This, along with average customer cash balances, inch recorder, and shifts in calendar days between weekdays and weekends of receipt and disbursement of that cash impacts float revenue. Turning to our updated 2024 business outlook, we now expect total revenue for the year to be in the range of $442 million to $448 million. Based on the midpoint, we expect approximately 47% of the 24 revenue distributions percent in the second half. Our 2024 revenue outlook reflects approximately $45 million of interest revenue from customer funds, a $1 million increase from our initial 24 outlook versus roughly $41 million earned in 2023. We anticipate approximately 54 percent of the $45 million in interest revenue from customer funds in the first half of 2024 with the remaining approximately 46% in the second half of 2024. Also, we anticipate political media revenue contribution of approximately $9 million, given that this is our first presidential cycle under FastPay. Recall, we acquired FastPay in 2021, and for context, in 2022, during the midterm election cycle, the political arm of FastPay generated roughly $8.5 million in revenues. Similarly, we expect non-GAAP adjusted EBITDA profit ranging between $71 million and $75 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?