AvidXchange Holdings, Inc.

Good morning, everyone, and thank you for joining us for the Avid Exchange Holdings, Inc. Third Quarter 2024 Earnings Call. Joining us on the call today is Mike Prager, Avid Exchange 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 that the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook, and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Today's call will also include a discussion of non-GAAP financial measures As that term is defined in Regulation G, 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. Joel Willight and I are excited to discuss Avid Exchange's third quarter 2024 results. Our third quarter results were all around solid across all the key metrics, including revenue growth, margin expansion, positive gap, net income, free cash flow, and a solid balance sheet. In addition, we made good in our commitment to return cash to shareholders as part of our $100 million share repurchase program. Joel will talk more about the quarterly financial results in a moment, but one of the highlights of the quarter was the underlying trend data we are seeing. In particular, we saw our transactions retained on our network, or our transaction retention as we call it, a key same-store metric inflecting positively from a pattern of deceleration in the past two years over comparative sequential time periods. In addition, we saw our top-of-funnel activity strongly support our new customer buyer logo additions. I will further expand on these observations later during my prepared remarks. When talking about the large greenfield market opportunity that we believe is ahead of us, it is understandable to sometimes lose perspective given the noise and impact of the current macroeconomic dynamics. Judging the future trajectory of the business opportunity over the next five plus years within the accounts payable and payments automation space, Based on a fixed point in time, we believe undervalues the large and strategic value of both our market opportunity and competitive mode we are building, particularly on the B2B payments automation front for middle market companies. This B2B payments opportunity appears to have reached a pivotal point. In fact, it appears so mission critical that MasterCard, which is a strategic investor and partner of Avid Exchange, has re-architected its organizational structure across three vectors with B2B payments being one of the three directly purporting to their CEO, Michael Maybach. With the younger generation of CFO, treasurers, and controllers focused on productivity and profitability, especially more so given the cost of capital has reverted to more normalized future generations of finance leaders are looking for tools from domain experts to unlock the opportunity for buyer and supplier customers. As such, MasterCard remains bullish and committed to advancing card adoption across the B2B landscape. To paraphrase Michael Maybach, who recently opined on B2B invoice payments at a recent investor conference. As the leading middle market focused B2B accounts payable automation and payments player in the market, we believe Avid Exchange is sitting at the epicenter to capitalize on these trends referred to by MasterCard. We do not believe that there's another pure play publicly traded B2B accounts payable automation and payments company in the industry focused on the middle market segment that has the domain expertise as well as the technology, integration, and data, operational, and licensed stack honed over more than two decades, nor is there a pure play across the middle market that has a scale of revenues, the breadth of industry verticals, as well as the breadth and library of accounting system integrations, as Avid Exchange does today. This is due to Avid Exchange's early mover status in the accounts payable and payments automation space, and the realization early on that the success imperative in the space of building a true two-sided payment network driving industry-leading monetization penetration would necessitate a differentiated value proposition uniquely created for our 8,000 buyer customers and over 1.2 million supplier customers that we have today. Our Avopay network creates a virtuous cycle of not only buyer customers attracting supplier customers and vice versa, but also accounts payable automation customers adopting payment solutions and vice versa. Our talented team is delivering rapid, material, and quantifiable value in both current cost efficiency, productivity, and future scalability of our customers' back office, AP, and payment initiatives, which advances our future growth and fuels our profit potential. I believe the best way to make the narrative around the benefits of accounts payable and payment automation tangible is to continue showcasing customer success stories shared by middle market finance leaders seeking our solution to drive productivity for their organizations. One such is Orthodontic Partners, which is part of an emerging dental sub vertical within our fast-growing healthcare facilities vertical market. Based in Grand Rapids, Michigan, Orthodontic Partners provides accounting and administrative services to over 30 orthodontic practices across 15 states on its NetSuite accounting platform, allowing their back office staff to focus on their core competencies. Our solution set was perfect fit for their growing set of challenges in processing invoices manually, which numbered in the hundreds on a weekly basis. This created significant downstream challenges for orthodontic partners, leading to delays, lost checks, and challenges in routing approvals to remote and traveling approvers. Due to Avid Exchange's deeply embedded accounts payable integration partnership with NetSuite, orthodontic partners was able to streamline their invoice and payment processing without leaving the native NetSuite application and user experience. This resulted in increased productivity for orthodontic partners across its procure-to-pay cycle, making thousands of invoices easily available and speeding up the invoice approval workflow across their 30 offices. Matt Sanders, an accounts payable specialist with the orthodontic partners, put it best when he said, With Avid Exchange, we get more critical tasks accomplished, which gives us more time to focus on other strategic business initiatives that normally we wouldn't have the bandwidth for. Turning now to some of the performance highlights and metrics from the third quarter of 2024 that underscore our value proposition and demonstrate our continued strong execution. Revenue for the quarter was just under $113 million, or over 14% year-over-year growth. The growth in the quarter was led by a combination of quarterly rebound in transaction volume aided by transaction retention and transaction yield growth strategies. Non-GAAP gross margins, meanwhile, continue their upward trajectory, coming in at 74.5%, or up 450 basis points to close to the top end of our 72% to 75% non-GAAP gross margin target, ahead of our 2025 expectations that we set over a year ago during our last investor day. Our continued focus on automation, AI, Sourcing and standardization, which are still somewhat in the early stages, continue to bear significant fruit. Along with solid operating expense discipline, which led to 100% plus year-over-year increase in adjusted EBITDA profitability, adjusted EBITDA margins for the quarter reached roughly 21%. Our important transaction yield metric, which is total revenues over total transactions, was up more than 8% to reach $5.59 per transaction. It is worth reminding investors that transaction yield is a metric that we have consistently messaged since our IPO as a primary metric we focus on across our leadership team as it demonstrates the power and effectiveness of our Avid Exchange business flywheel. With that overview, I'm excited to cover key topics in two parts that will shed light into the various initiatives that we believe will fuel our future growth. Number one, the first part being our top-of-funnel activity and other sales key metrics, which provides insights into the sales setup for 2025 and beyond. And second, I will discuss strategic partnerships, which will further drive years two and three of our Avid Exchange business flywheel. Let's start with our top of funnel and other underlying indicators driving our go-to-market motion. The picture for the comparable nine-month period of 2024 versus 2023 by vertical was encouraging as we saw the HOA or homeowners association management market, construction, healthcare, et cetera, show moderate improvements while real estate, education, and media continue to exhibit strong growth momentum. Recall, earlier in the year, we highlighted that the strategic changes we had been making in our go-to-market motions, those changes encompass greater discipline around allocation of investment dollars, as well as changes in our mix of marketing channels and personnel. For instance, we mentioned that we would be more targeted in the selection of trade shows and industry user conferences that we attend, which would result in potentially fewer but much more highly qualified leads. The same framework was applied to lead and demand generation channels, including reallocating resources to partnerships to drive higher quality and more actionable leads versus broadly spreading our resources across digital marketing channels. The result of this go-to-market adaption has been what we believe is a favorable tradeoff between the quantity and quality of comparable top-of-funnel leads, which showed up in improved close rates, shorter sales cycles, and buyer-customer growth count, encouragingly pacing ahead of 2023 levels. Now shifting to the second part of the key topics I'd like to talk about, about the four gears of the Avid Exchange business flywheel. We recently signed some additional notable strategic partnerships, which we believe will advance gears two and three of our business flywheel, both of which drive transaction volumes onto our platform to be monetized. As you know, we have a verticalization go-to-market strategy given the structure of the middle market, which we believe that over 50% of middle market companies highly align themselves to vertical industries that have either unique accounting or business process that require them to use vertical-specific ERP accounting systems to run their business and financial operations. One of the emerging verticals in which we operate is healthcare facilities, which is around 5% of our buyer customer base today and is attractive in high-growth segment of the market. This vertical is comprised of many sub-verticals or sub-domains, including long-term and elderly care centers, dental centers, veterinary centers, and so on. In addition to the elderly care centers, we have been growing our portfolio of dental centers using our accounts payable and payment automation offerings. That effort has just received a major boost with the addition of a formalized referral partnership with one of the leading global distributors of healthcare products and technology solutions, which also happens to house a dental support organization practice, or DSO, as it's called in the industry. This large and rapidly growing player selected Abbott Exchange due to our marquee client list of DSO providers, proven track record in the DSO market space, and the strength of our purpose-built value proposition. A dental service organization provides back-office support function to dental offices ranging from staffing, procurement, and spend management to functions around the office of the CFO. The DSO market is large and fragmented, with some estimates putting the number of DSOs at over 3,000 and approximately 135,000 individual dental offices just in the U.S. market alone. Through our accounts payable and payment automation solution, we're positioned to capitalize in this growing DSO market in which DSO entities currently manage around 30% of the 135,000 dental offices under the DSO structure today. Given our proven track record in the DSO space, which is propelling the referenceable base of DSO clients in our portfolio, we are well positioned to capitalize on this market. As this national DSO provider ramps its sales headcount, around its DSO practice, Avid Exchange will be its preferred referral partner on invoice and payment solutions. Not only do we believe our value proposition has a strong product and market fit for the DSO industry, we believe that DSOs create a fertile ground to pursue other equally attractive opportunities around care adjacencies, such as ambulatory surgical centers, veterinary care centers, radiology centers, et cetera. Also under gears two and three of our business flywheel, we recently forged some strong strategic significant bank-seller relationships. For context, we've executed channel-led white-label reseller bank partnerships with super regional and money center banks, such as KeyBank, Fifth Third, and Bank of America. Leveraging this credibility and standing up these three major bank partnerships over the last decade, we've embarked on a sales strategy to broaden and deepen our bank partnership portfolio and recently signed three premier diversified regional and independently community banks, including Cadence Bank and Orange Bank & Trust, two of which we can announce publicly. These banks, with a footprint largely across the northeast and southeast quarters of the U.S., boast a combined total of roughly 50,000 commercial customers across these markets. With the reseller partnerships slated to go live over the next three quarters, we're excited to empower these banks with our suite of accounts payable and payment automation capabilities for their middle market customer base. Success with these new partnerships could be self-replicating by helping us penetrate the thousands of these other regional community banks in the coming years. In closing, we are proud of our strong third quarter operating and financial results. which is leading us to upwardly revise our 2024 business outlook. These results were strong across the board. The discipline we have demonstrated in executing the levers that are within our control are second to none. And having seen an inflection in our transaction retention trends, we are encouraged, granted that it's one quarter's worth of data, and retention trends are still sub-100% versus the 104% to 105% normalized range we've seen in the past. Our portfolio of new product innovation and enhancements, such as Payment Accelerator 2.0, our new pay platform, and spend management offerings are sequenced for scaling. There are sizable strategic partnerships that we've announced over the last 18 months, including Appfolio, Buildium, and M3. You couple that with the innovation pipeline that we have in leveraging AI across our vast library of integrations to celebrate the creation of ERP integrations as well as employing AI across the operational value chain. We believe we are well-positioned to deliver a heavy payload of greater value to our customers and improve growth outcomes for our business. Of course, we are mindful of the macro cross-currents and the potential for headwinds to test us. But we also strongly believe that our vision of a long runway of growth opportunity in the accounts payable automation and payments industry, which we consider to be in its infancy of adoption. We remain focused on closing 2024 on a strong note and believe we're set up for a strong trajectory in 2025. I want to provide a special thanks to all of our Avid Exchange team members for their hard work, dedication, and relentless focus in executing our operational and strategic priorities that drive value for our customers, creates opportunities for their professional growth, and builds long-term value for all of 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 strong third quarter 2024 financial results, which reflect disciplined operational execution, as well as a positive inflection in transaction retention trends, which have been decelerating amid continued macro choppiness. Overall, we delivered a solid quarter of year-over-year financial performance across the board. I'll expand on that in a moment, but let's see how we tracked relative to implied expectations. Relative to the implied third quarter 2024 business outlook and excluding float and political revenue contribution, revenues came in above our implied expectations, driven largely by higher total transaction volume, partly helped by better transaction retention trends. Gross margin performance remained strong due mostly to ongoing progress on unit cost initiatives and to a minor extent due to lower performance bonus accruals. That together with sustained operating expense leverage aided by slightly lower annual performance bonus accruals, we drove significant adjusted EBITDA outperformance relative to expectations. It's worth pointing out that this continues our streak of delivering adjusted EBITDA profit expansion, excluding the impact of float and political revenues. Equally noteworthy, we delivered our second gap net income quarter since going public in 2021. Before I walk through year-over-year financial performance, I want to point out that in the third quarter of 2023, we had a favorable out-of-period adjustment related to a deferred revenue cleanup of $1.5 million, which was favorable to third quarter 2023 revenues, gross profit, adjusted EBITDA, and net income. With regard to revenue specifically, the $1.5 million contribution was split roughly between software and services revenues of approximately $1.1 million and a half a million dollars respectively. Now, turning to year-over-year results, total revenue increased by 14.3% to $112.8 million in Q3 of 24 over the third quarter of 2023. Adjusting for the out-of-period adjustment, year-over-year third quarter 2024 revenue growth would have been 16.1%. More than three quarters of the revenue growth was driven by a combination of pay yield expansion and the addition of new buyer invoice and payment transactions. 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 $5.59 in the quarter, up 8.5% from $5.15 in Q3 of 2023. Without the out-of-period adjustment in the year-ago quarter, total year-over-year transaction yield growth would have been 10.2%. More than three-quarters of the increase was driven by software and pay yield and higher payments transaction mix, with the remainder due to float and political revenues. Software revenue of $30.7 million, which accounted for 27.2% of our total revenue in the quarter, increased 6% in Q3 of 2024 over Q3 of 2023. Without the out-of-period adjustment in the year-ago quarter, software revenue growth would have been 10.4%. The increase in software revenues was driven by a combination of growth in total transactions and certain subscription-based revenues. Payment revenue of $80.7 million, which accounted for 71.6% of our total revenue in the quarter, increased 17.8% in Q3 of 24 over Q3 of 23. Payment revenue reflects the contribution of interest revenues, which were $12.7 million in Q3 of 24 versus $10.6 million in Q3 of 23. Political media revenue in the current quarter was approximately $2 million and negligible in the same period a year ago. Excluding the impact of float and political revenues from both comparable periods, payment revenues grew 14.8%, driven by a combination of an increase in pay yield, greater payment mix, and payment transaction volume increase of 9.4%. On a GAAP basis, gross profit of $76.4 million increased by 22.5% in Q3 of 2024 over the same period last year, resulting in a 67.7% gross margin for the quarter compared to 63.2% in Q3 of 23. Non-GAAP gross margin increased 450 basis points to 74.5% in Q3 of 2024 over the same period last year and 500 basis points increase without a period adjustment, with the lion's share of the increase driven mostly by unit cost efficiencies and yield expansion, and to a minor extent, by lower annual performance bonus accruals. I'm pleased to say that the third quarter of 2024 non-GAAP gross margin was in the upper end of the 72% to 75% range targeted for 2025 as projected during the company's June 2023 investor day. Moving on to our operating expenses. On a GAAP basis, total operating expenses were $81.1 million, an increase of 4.6% in Q3 of 2024 over Q3 of last year. On a non-GAAP basis, operating expenses, excluding depreciation and amortization and stock-based compensation, increased as well by 5.3% to $60.7 million in the third quarter of 2024 from the comparable prior year period, with the increase driven by a range of investments in product, technology, sales initiatives, and headcount, partially offset by slightly lower annual performance bonus accruals. On a percentage of revenue basis, operating expenses excluding depreciation and amortization and stock-based compensation, or non-GAAP OPEX, declined to 53.8% in the third quarter of 2024 from 58.4% in the comparable prior year period. I'm equally pleased to say that third quarter 2024 non-GAAP OPEX as a percentage of revenues in the quarter was also in the 50 to 55% range targeted for 2025 as projected during the company's June 2023 investor day. Overall, the year-over-year percent of revenue decline largely highlights expense discipline and significant operating leverage across G&A, sales and marketing, as well as R&D, even after stripping out the contribution of float and political revenues. Now I'll talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $2.2 million, or 12.6%, to $19.7 million in Q3 of 2024 over Q3 of last year, with the increased investments in sales and marketing spend to support our continued growth partially offset by slightly lower bonus accruals. Non-GAAP research and development costs increased slightly by $374,000, or 1.7%, to $22.1 million in Q3 of 24 over Q3 of last year. The increase was due to continued reinvestment in our products and platform, including spend management, pay offering, and payment accelerator, partially offset by slightly lower bonus accruals. Non-GAAP G&A costs increased slightly by $481,000 or 2.6% to $18.9 million in Q3 of 2024 versus Q3 of last year, net of slightly lower bonus accruals. As a percentage of revenues, G&A costs continue to trend lower as we continue to leverage public company costs across a larger revenue base. Our GAAP net income was $4 million for the third quarter of 2024, versus a gap net loss of $8.1 million in third quarter of 2023, with the $12.1 million positive swing in net income driven largely by a combination of strong revenue flow through, solid gross profit increase in expense control, leading to a significant positive swing in operating income, coupled with higher net interest income due to reduced borrowing cost and partial debt pay down. GAAP earnings per share for the third quarter was two cents, a six cent positive swing from the same comparable period last year. Both third quarter 2023 GAAP net income and earnings per share reflect $1.5 million and approximately one penny respectively of previously discussed favorable contribution. On a non-GAAP basis, our net income in the third quarter of 2024 almost tripled the $15.7 million versus $5.8 million in the same year-ago period, with non-GAAP earnings per share more than doubling to 7 cents versus 3 cents in the same year-ago third quarter. Both third quarter 2023 non-GAAP net income and non-GAAP earnings per share reflect $1.1 million and approximately one penny, respectively, of previously discussed favorable contributions. All of the net income performance was driven by the aforementioned factors. On a non-GAAP basis, Q3 2024 adjusted EBITDA was $23.3 million versus $11.4 million in Q3 of 2023, largely due to the aforementioned factors. Third quarter of 2023 adjusted EBITDA also included a favorable out-of-period adjustment in the year-ago period related to deferred revenue cleanup of $1.5 million. Now turning to the 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 $394.3 million of cash and marketable securities against an outstanding no payable balance of $13.9 million. At quarter end, our new credit facility which consists of $150 million revolver with $150 million accordion feature as well remained undrawn. During the quarter, the company utilized $25.1 million of cash from its balance sheet to purchase 3.1 million of its own shares at an average price of $8.05 under its $100 million share repurchase program announced August 2024. Corporate cash, meanwhile, was split roughly two-thirds in deposit accounts and one-third among money market funds, commercial paper, and time deposit instruments. The weighted average maturity on the corporate cash was roughly 26 days, while the effective interest rate on our corporate cash position for the third quarter was roughly 5%. Customer cash at quarter end remained unchanged sequentially at approximately $1.2 billion, with an interest rate of roughly 4.9% for the quarter. Turning to our updated 2024 business outlook, we now expect total revenue for the year to be in the range of $437 to $439 million. Our 2024 revenue outlook reflects approximately $50 million of interest revenues from customer funds, a $1 million increase from our previous 2024 outlook, and versus $41 million earned in 2023. Also, we now anticipate political media revenue contribution of approximately $6.5 million versus our previous expectations of $9 million. As we've mentioned before, 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 now expect non-GAAP adjusted EBITDA profit ranging between $78 million and $79 million for the year, up from our previous range between $73 and $75 million. We also expect 2024 non-GAAP diluted earnings per share in the range of 24 cents to 25 cents. With that, I'd like to turn the call back over to the operator and open up the line for Q&A. Operator? Operator?

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