AvidXchange Holdings, Inc.

Good morning, everyone, and thank you for joining us for the Avid Exchange Holdings, Inc., second quarter 2024 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 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. With that, I will now turn the call over to Mike Prager.

Thank you, everyone, for joining us today. Joe Wille and I are excited to discuss Avid Exchange's second quarter 2024 results. This particular quarter marks a milestone as we achieved our first-ever GAAP net income ahead of our third anniversary as a publicly traded company, while already having delivered four quarters of positive free cash flow. Just as we accelerated our path to adjusted EBITDA breakeven and profitability meaningfully ahead of our expectations, we have now delivered GAAP and non-GAAP net income profitability in short order, highlighting the speed of our execution, the power of our new innovation delivery, our growing value proposition for both buyers and suppliers, along with the strength of our Avid Exchange culture that has fueled our success and has been a key factor in attracting and retaining the critical talent required to execute our dynamic business. Without a doubt, the choppy macroeconomic backdrop continues to test us all. It has created near-term volume headwinds driven by reductions in discretionary spending across the middle market, impacting to some degree all of our various vertical and horizontal channels. However, we remain focused on capitalizing on the current environment by leveraging our financial strength to advance our new AI-based customer and internal-facing product offerings, executing continuous unit cost improvements and operating leverage, as well as enhancing customer growth across our addressable market of middle market buyers and their suppliers. We believe we are still in the very early innings in the drive to digitally transform what is still today for the majority of middle market companies highly manual, paper-intensive, and inefficient back-office procure-to-pay process. With over two decades of institutional knowledge, building features and domain functionality around our AP automation and payment network, no one better than Avid Exchange appreciates the opportunity and the dynamic business processes inherent to middle-market companies, which are complex, unlike the small business market, and unique across the various middle-market industry verticals, unlike the enterprise segment. Our purpose-built value proposition, which has leveraged that institutional knowledge and has increasingly embedded artificial intelligence throughout the product development lifecycle, from our front-end intelligent invoice capture functionality to our back-end payment execution capabilities and all the workflows in between, is extending our lead and strengthening our competitive position across our differentiated two-sided buyer and supplier network. As such, we believe we are well positioned through our investments to advance our future growth and fuel our profit potential by delivering rapid, material, and quantifiable value in both current cost efficiency and future scalability of our customers' back office transformational initiatives. NAI Earl Furman is one of the many such customer success stories that highlight the power of our transformational value propositions. As a middle market commercial real estate brokerage and property management firm based in Greenville, South Carolina, NAI Earl Furman has been in business for over 30 years with multiple regional offices in upstate South Carolina and North Carolina's Piedmont Triad area, as well as partners worldwide. Having grown through acquisitions, the company's back office processes around accounts payable and payment became very cumbersome and paper-intensive. Specifically before automation, controller Robbie Smith's team would print out invoices and create separate books of invoice supporting document information for each property manager to review, assign the proper accounting codes, and approve with a signature. That book would then go back to the AP team who would then manually data enter and code the invoices into their MRI accounting software before cutting checks for the approved invoices and completing the PO matching process. Since automation, Smith's team has seen a step function change in its invoice and payment processes with MRI vendor pay powered by Avid Exchange. As Mr. Smith put it, it is like night and day. Our old process took a week or so. Now the whole process is completed in less than two days. This type of productivity transformation of NAI's invoice to pay underscores the power of our value proposition. Shifting our focus to our financial scorecard, We delivered healthy financial results while navigating an ongoing macro choppiness. The overriding theme impacting results for this past quarter was our focus on disciplined execution of our business in three areas. First, beginning with our sales and marketing prioritized go-to-market strategies and focusing on our highest yielding channels. Second, is our positive gross margin expansion driven by our automation aided by the impact of AI and continue to reduce our invoice and payment unit costs. And finally, third, is our continued overall operating expense rigor combined with the ROI decision-making process across every functional business group. Joe will go into more detail later in today's call, but here are some of our second quarter highlights. Revenue growth in the quarter was over 105 million. up over 15% year over year. The growth in the quarter was led by a combination of transactional volume and transactional yield growth. Non-GAF gross margins, meanwhile, continued their upward trajectory, coming in at 72.6% or up 430 basis points and crossing the lower band of our 72% to 75% non-GAF gross margin target ahead of our 2025 gross margin expectations that we set over a year ago during our investor day. Our initiatives around automation, artificial intelligence, sourcing, and standardization, which are still somewhat in the early stages, continue to bear fruit. Along with solid operating expense discipline, our adjusted EBITDA margin in the quarter was 16.6%. Transactional yield, meanwhile, which is a metric that we focus on across our leadership team as it demonstrates the power and effectiveness of our Avid Exchange business flywheel, was up more than 10% to reach $5.33 per transaction. With that overview on today's call, I'm excited to cover three topics that will shed insights into our various initiatives that will drive our future growth and margin expansion. First, our top-of-funnel activity, and other key sales metrics, which provides insights into the sales setup for 2025. Second, discussing two new strategic software integration partnerships, which will further drive both Gears 1, 2, and 3 of our Avid Exchange business flywheel. And third, highlight innovation around strategies to automate the execution of electronic payments. Starting with our customer obsession metrics, I wanted to update you on our top of funnel and other underlying indicators driving our go-to-market motion. For the six months ended June 2024, the overall top of funnel was down around 4% compared to the same period last year. However, various key underlying indicators improved, which adds a nice plot twist to the top of funnel narrative and highlights our strong sales execution against a choppy macro backdrop. Before I discuss those, I'd like to call out areas of strength and weakness within the top of funnel. On the positive side, we saw our real estate, media, education, and non-for-profit verticals, which comprise almost half of our new opportunities, grow anywhere from high single to mid-double digits on a comparable basis. HOA, construction, financial services, meanwhile, were down high double digits. The net decrease in our top of funnel was largely due to a more targeted approach we called out last quarter around our go-to-market motion, in addition to increasing our investment and focus on our various partner channels to drive new highly qualified sales opportunities versus a historically larger focus on electronic demand gen programs, which we have seen softening over the last quarter and producing less qualified opportunities. As I referenced earlier, amid these puts and takes in our top of funnel, there have been some promising trends and other sales-related indicators that are trending positive year-to-date with the potential to continue for the remainder of this year. First, sales cycle time on average for the six months of 2024 versus 2023 on a comparative basis shortened by roughly one-third. Second, close rates for the six months ended June 2024 on a comparative basis remained strong. Both sales cycle time and close rates reflect a higher quality pipeline with interest levels that are actionable, which are the fruits of our more disciplined and targeted go-to-market motion. And finally, our buyer-customer new logo customer count, a metric we furnished annually for the six months of 2024, outpaced levels comparable for 2023, leaving us optimistic on the potential for higher net new logo ads for 2024 relative to 2023. Now I'd like to talk about the four gears of our business flywheel. We recently signed some notable new integration partnerships, which advanced gears one, two, and three of our out-of-exchange business flywheel. Starting with the real estate vertical, we deepen our competitive advantage further with Buildium. This AP integration partnership with Buildium extends our relationship with RealPage, one of our biggest ERP partners. As a cloud-based property management software company, Buildium targets various verticals such as condo association management and real estate, including sub-verticals such as multifamily, student housing, affordable housing, etc. With approximately 15,000 customers, roughly 3,500 of which are in our product fit sweet spot. What is just as significant about the Buildium partnership is that we leverage generative AI in building out the integrations. As a result, we are not only able to compress development cycle times by 30% to around two months, we believe that the end user experience will prove to be substantially better, given that we're able to train the AI inherent within our existing library of integrations to simulate pain points and test various use cases, including edge cases that deliver the best user experience. This referral partnership, which is slated to go live in the third quarter of 2024, initially starts out with our AP automation invoice solutions. Additionally, it also represents a significant payments opportunity by potentially adding billions of new payment volume, driving the third gear of our Avid Exchange business flywheel, which is the monetization of payment transactions and eliminating paper checks. We believe this partnership highlights not only the large total addressable market, but also how much runway for growth that still exists in just the real estate vertical alone. the initial vertical segment that we launched our business in in 2000. And whereas the industry leader, our penetration rate is still in the single digits. Another ERP partnership of note showcases our first invoice solution for the media vertical under gears one and two of the flywheel. This integration highlights how we are extending our strategic advantage and success in media-related payments within the media vertical, which we launched through the FastPay acquisition into media AP automation. This AP automation solution leverages our existing tech stack and is built on our cloud invoice automation platform. Our target customer profiles are agencies that process several hundred invoices per month and the first integration partners we have identified to go live with is Workamajig. Founded more than three decades ago, Workamajig is a leader in the project management software that space designed specifically for marketing teams and creative agencies. Spanning a portfolio of over 3,500 customers, Workamajig is a dominant leader in the marketplace targeting those traditional agencies. Through our invoice automation solution, Workamajig's customers will be able to digitally transform their AP workflow with our robust end-to-end capabilities. These range from our AI-centric invoice ingestion in the front end to intelligent workflow routing and approval engine to resolve invoice discrepancies, as well as leverage our broad payment modalities and our media payment network on the back end. This integration partnership went live and became generally available in the second quarter. Our end-to-end invoice and payment solutions, we believe, not only differentiate our market positioning, but also solidify our advantage in selling our payment platform to these targeted media agencies. Turning now to our operations, We continue to make strides on our automation initiatives by leveraging artificial intelligence as a way to further optimize existing automation processes with human agents in the loop. One area in which our success is very tangible and serves as an early win is around payment automation of virtual card payments. To name just many lanes of process automation initiatives we've embarked on. This is important as we position ourselves to deliver on our near-term gross margin target of 75%. and set our sights on our long-term margin exceeding 75% as outlined during our 2023 Investor Day. The latest initiative around payment automation is executing virtual card payments through online portals. There are six ways which we execute virtual card payments today for our suppliers. By a straight-through process, direct API connections, online portals, IVR systems, email, and over the phone. Just as with email, where virtual card information is sent automatically to a supplier when a payment is created, there are many supplier customers, such as plumbers, roofers, landscapers, etc., that have stood up online payment portals through their relationship with various merchant acquirers or third-party website developers to take in these payments. The challenge has been to automate the delivery and application of these virtual card payments to the numerous supplier-specific online portals at scale, given the explosion of these online portals along with unique user interfaces that are costly and labor-intensive to scale. Currently, we are doing over a million of these online portal payments, approximately 80% of which executed through humans and the remainder being RPA bots. We believe we're at a tipping point where we could transform this process through artificial intelligence and deliver virtually all these online payments without manual intervention, taking our current levels of overall electronic payment automation of around 85% today to well over 90%. What this should enable is not only lower unit costs as we lower headcount growth and lower overall software license fees, but better leverage around future costs as we grow our business, driving gross margins. But equally impactful, we believe, is the control, visibility, and certainty over virtual card payment execution this provides as we test this capability through the remainder of this year and look to scale it further in 2025. In closing, we are proud to deliver our first-ever GAAP net income profitability driven by our continued gross margin expansion along with disciplined execution across the operations of our business. However, we are even more excited about the future. We believe the innovation investments we have made across our product portfolio, coupled with the large and marquee integration partnerships we have executed, position us well to accelerate our growth, build on our margin expansion, momentum, and achieve our Rule 40 objective in 2025 and our Rule 50-plus targeted by 2028. We recognize the choppy macro backdrop and believe the upcoming election certainly is not helping in the near term. However, those two shall pass, as we work towards a significant long-term growth opportunity in front of us across the middle market. Furthermore, while overall top of funnel saw some softness, some of which was a function of our long-term strategic trade-offs, our stronger buyer-customer logo cadence year-to-date, 2024, compared to the same timeframe last year, leaves us encouraged around the sales and revenue trends for 2025. Meanwhile, we remain laser-focused on our operational rigor and execution. controlling those elements of our business model that we can directly control as evidenced by our ongoing unit cost reduction and operating leverage. Furthermore, with our new payment platform, Payment Accelerator 2.0, and our spend management offerings being sequenced for rollout over the next 6 to 18 months as our new accounting system and ERP partnerships begin to gain traction, We believe we're set up for a nice growth directory for 2025 and beyond as we strive for a strong close in 2024. I want to provide a special thanks to all of our AvidX team members for their hard work, dedication, and relentless focus on executing our operational and strategic priorities that drive value for our customers, create scope for their professional growth, and unlock significant long-term value for our shareholders. With that, I'd like to turn the call over to my partner, Joel Wilhite.

Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our second quarter 2024 financial results, which reflect disciplined execution of our growth strategies amid continued macro choppiness. Overall, we delivered another quarter of healthy year-over-year financial performance across the board. I will expand on that in a moment, but let's see how we tracked relative to implied expectations. Relative to the implied second quarter 2024 business outlook and excluding the float and political revenue contribution, revenues came in a touch below our expectations with slightly better total transaction volume tempered by slightly lower transaction yield. Gross margin performance remained strong due largely to ongoing progress on unit cost initiatives coupled with software yield expansion. Coupling that with sustained operating expense leverage, we drove significant adjusted EBITDA out performance relative to expectations. It's worth pointing out that this continues our streak of delivering adjusted EBITDA profit expansion, excluding float and even political contribution. Most notably, as Mike mentioned, we achieved a significant milestone as we delivered our first ever GAAP net income since going public in 2021. Now turning to year-over-year results. Total revenue increased by 15.3% to $105.1 million in Q2 of 2024 over the second quarter of 2023. Most 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 for 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 $5.33 in the quarter, up 10.1% from $4.84 in Q2, 2023. Most of the increase was driven by pay and software yield, coupled with transaction mix skewed toward payments with the remainder due to float and political revenues. Software revenue of $29.9 million, which accounted for 28.5% of our total revenue in the quarter, increased 9.8% in Q2 of 24, over Q2 of 2023. The increase in software revenues of 9.8% was driven by growth in total transactions of 4.8%, which continues to be impacted by macro choppiness, with the balance driven by growth in certain subscription-based revenues. Payment revenue of $74.2 million, which accounted for 70.6% of our total revenue in the quarter, increased 17.3% in Q2 of 2024 over Q2 of 23. Payment revenue reflects the contribution of interest revenues, which were $11.8 million in Q2 of 24 versus $9.2 million in Q2 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 from both comparable periods, payment revenues grew 14.6% with most of that increase driven by a combination of an increase in pay yield, greater payment mix, and payment transaction volume increase of 8.6%. On a GAAP basis, gross profit of $68.7 million increased by 23.6% in Q2 of 24 over the same period last year, resulting in a 65.3% gross margin for the quarter compared to 61% in Q2 2023. Non-GAAP gross margin increased 430 basis points to 72.6% in Q2 of 24 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 operating expenses. On a GAAP basis, total operating expenses were $76.8 million, a decrease of 5.7% in Q2 of 2024 over Q2 of last year. On a non-GAAP basis, operating expenses excluding depreciation and amortization and stock-based compensation decreased as well by 0.6% to $58.9 million in the second quarter of 24 from the comparable prior year period, which was helped by the timing of headcount additions and certain third-party expenses across R&D and sales and marketing expense categories. On a percentage of revenue basis, operating expenses excluding depreciation and amortization and stock-based compensation declined to 56% in the second quarter of 2024 from 65% in the comparable period last year. Overall, absent certain timing factors, the year-over-year percent decline largely highlights expense discipline and significant operating expense leverage across G&A, sales and marketing, as well as R&D to an extent, even after stripping out the contribution of float and political revenues. 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 slightly by $184,000, or 1%, to $18.5 million in Q2 of 24 over Q2 of last year, which, absent the aforementioned timing benefits, reflects ongoing yet targeted investments in sales and marketing spend to support our continued growth. Non-GAAP research and development costs increased slightly by $291,000, or 1.3%, to $22 million in Q2 of 24 over Q2 of last year. The increase, which was also helped by timing factors, was due to continued reinvestment in our products and platform, including spend management, our pay offering, and payment accelerators. Non-GAAP general and administrative costs decreased slightly by $455,000, or 2.4%, to $18.4 million in Q2 of 2024 versus Q2 of last year due to leveraging public company costs across a larger revenue base. These expenses continue their annualized downward progression as a percentage of revenue, as we indicated during our investor day. Our gap net income was $436,000 for the second quarter of 2024 versus a gap net loss of $18.8 million in the second quarter of 2023. With the reduction in losses driven by a combination of strong revenue flow through, solid gross profit increase, expense control and timing of certain expenses 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 second quarter of 2024 was $10.7 million versus a net loss of $500,000 in the same year-ago period. Approximately $11.2 million positive swing from the year-ago period driven by the aforementioned factors. On a non-GAAP basis, Q2 2024 adjusted EBITDA was $17.5 million versus $3 million in Q2 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 quarter with a strong corporate cash position of $465 million of cash and marketable securities against an outstanding total debt balance of $76.5 million including a no payable for $13.9 million. We had $30 million on our credit facility undrawn at quarter 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 22 days, while the effective interest rate on our corporate cash position for the second quarter was roughly 5.2%. Customer cash at quarter end remained unchanged sequentially at approximately $1.2 billion with an interest rate of roughly 5% for the quarter. Turning to our updated 2024 business outlook, we now expect total revenue for the year to be in the range of $436 million to $439 million. Our 2024 revenue outlook reflects approximately $49 million of interest revenues from customer funds a $4 million increase from our previous 2024 outlook, versus roughly $41 million earned in 2023. 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 $73 and $75 million for the year. With that, I'd now like to turn the call back over to the operator to open up a line for Q&A. Operator?