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?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. In the interest of time, we would ask that you please limit yourself to one question only.

At this time, we will pause for just a moment to assemble our roster.

And our first question today comes from Dave Conning with Barrett. Please go ahead.

Yeah. Hey, guys. Great job. And maybe if I could just start off, the yield in the payment segment was up very nicely sequentially and I think calms a lot of fears on the supplier acceptance side. Is it fair to say, I guess, A, that maybe you're not seeing as much supplier acceptance pushback maybe as you have in the past, and then maybe as we kind of look forward, can this yield continue to grow kind of in the future?

Yeah, great question, Dave, and thanks for that. Look, here's what I would just say. I said before, be careful reading too much into kind of a BIP up or BIP down and TPV yield. Remember, we're really focused on the North Star metric for us of overall total transaction yield, simply total revenues over total transactions. We're comfortable with the monetization strategy and You know, suppliers are going to continue to make decisions around the optimal way to get paid, but we're pleased with the quarter, pleased with the overall, you know, yield and revenue results.

Thanks, guys.

And our next question today comes from Will Nance with Goldman Sachs.

Please go ahead.

Hey, I appreciate you taking the questions. You had some upbeat commentary on some of the trends you're seeing on top of funnel and some of the verticals that had been seeing some choppier performance. I was just wondering if you could kind of expand on that and the nature of some of the activity that you're seeing. And then just separately, just commentary on transaction retention. It's nice to see the acceleration in transactions this quarter. What are you kind of seeing kind of under the hood, and you know, what's kind of your latest thinking in terms of kind of where we are and the kind of reset and business spin that we've witnessed over the last year or so? Thanks.

Yeah, so, Will, I don't know if that's a two- or three- or four-part question, but we'll tackle it. So, yeah, first of all, on the kind of just top of funnel, to go under the hood on that one first, I would say, you know, kind of point to, you know, all the strategies that we've been talking about, you know, You know, executing over the last couple of quarters related adjustments and top of funnel, I think we're seeing paying off. And particularly this quarter, I would highlight, you know, kind of five areas of strength. One continued strong momentum in real estate, vertical, financial services, HOA, emerging markets led by kind of healthcare facilities. And then the fifth one being existing customers. And within existing customers, We've seen, you know, nice activity related to both construction and real estate. Construction, it's, you know, continued to be led by the movement to our titanium SAS offering within the construction protocol. And I would say, you know, within, you know, kind of those five areas of strength, you know, the results that we're seeing are paying off in terms of, one, you know, being really pleased with new logo growth as that, you know, continues to kind of trend ahead of last year. and the shortening of our average sales cycle and, you know, continuous draw and close rates. So that's, I think, kind of the under the hood related to top of funnel. And maybe Joe can tackle the second part.

Yeah, well, I'll just address super briefly your question around the overall transaction growth improvement. And we are pleased with that. Both invoice and payment retention levels improved modestly for us in the quarter. I just want to be clear, one quarter's worth of data, right? So one quarter doesn't necessarily make a trend, but we were encouraged. We did see that that improvement was relatively broad-based across the verticals. And just a reminder, we're still sub, you know, 100% overall total transaction retention, but very encouraged with what we saw in the quarter.

Got it. Appreciate it. Thanks for taking the multi-part question.

You bet.

You're welcome. And our next question today will come from Ramsey Elisal with Barclays. Please go ahead.

Hi there. Thank you for taking my question this morning. Can you give us any preliminary thoughts on 25, especially as it pertains to kind of grovers next year for things like political media, interest revenues? What are the key drivers that we should be thinking through as we try to tighten up our models next year?

Yeah, great question, Ramsey. And, you know, not surprised to take the question, but we're certainly focused on finishing the year strong and we'll provide, you know, more obviously specific guidance when we report the year in February. What I would say is that we still think like we're in the early days of a really big opportunity. The market's large and unpenetrated. That remains true. A lot of conviction and still see ourselves as a leader in the market with a really strong moat. But to your point, there's a couple things that we're looking at that would impact 25 growth. We need to get back to our net transaction expansion, that 104, 105% overall total transaction retention rate needs to be expansion. Today, it's still sub 100%. And then also, there's no political contribution next year. And with Fed cutting rates, we would expect to have headwinds from a float perspective. So a number of puts and takes. that'll play into 25 growth. We're focused on finishing this year strong, and we'll update you in February.

Got it. Thank you very much.

And our next question today comes from Sanjay Sakharani with KBW.

Please go ahead.

Thank you. Just wanted to get a little bit more color on the improving EBITDA margins, sort of, you know, what's driving some of those improved margins and how we should think about that going forward. Thanks.

Yeah, great question. I'll take that one. You know, we're pleased with, you know, the sort of 20 plus percent, you know, EBITDA margins that we're seeing in the business. And we just, you know, that to us just reaffirms the opportunity, even in the middle of this macro kind of choppiness that we're seeing impact our overall total transactions and revenue. We're actually ahead of schedule on our gross margin results, you know, in that 75% range. We think this business is a 80% gross margin business with 30%, you know, EBITDA margins. So you can see the operating expense leverage in addition to the gross margin expansion, and hopefully it's obvious that you see just good, strong operating discipline. That's what we're focused on.

And our next question today will come from Andrew Bao with Wells Fargo. Please go ahead. Andrew, your line is live.

Sorry about that. Thanks for taking the question. Just want to revisit the top of funnel comments that you made before. I know that in the past you'd mentioned that election uncertainty was kind of leading to some pent-up demand and some hesitancy in decision-making around AP automation. And how do you kind of anticipate this to play itself out? And if there's a way to kind of frame what has been held back that you think could kind of snap back now that we have this clarity?

Yeah, good question, Andrew. And, you know, you probably have as much of a silver ball on that as I do. But what I would say is that, you know, when I look at, you know, kind of that, you know, number one metric of transactions retained on the network, you know, we talked about, which is kind of the building block of our growth algorithm, you know, first of all, it's general concern about, you know, general economy and And second of all, what we hear about is just the unknowns related to, you know, the results of the presidential election, what that may, you know, result in terms of policies. The good news is, you know, that one I think is resolved and certainly that, you know, will take, you know, some of that risk off the table from the standpoint now people know, you know, where the president's going to be and what, you know, policies may result from that. And then the third element is just, you know, the rate environment. And I think, you know, we're getting more and more clarity on what that may look like. So I'm actually, you know, probably in the optimistic camp of, you know, the combination of those elements, you know, being positive catalysts for customers to return their discretionary spend, you know, back to the platform or begin, you know, kind of increasing their discretionary spend maybe is a better way of saying it. Historically, when we've seen these type of, you know, dynamics and when people start having, you know, confidence, CFOs, controllers, finance leaders having confidence in, you know, kind of the go-forward market, we've seen some of that discretionary spend return pretty quickly to the platform historically. So, you know, we're hopeful, but, you know, certainly, you know, it's kind of a watch and see as, you know, certainly Q4 plays out as we go into next year.

All right. Thank you, Mike. And our next question today will come from Brian Keene with Deutsche Bank.

Please go ahead.

Hey, guys. Congrats on the solid quarter here in progress. Joel, just thinking about the growth rate for the quarter was on the top line. It was up 14% in change, and even then included the $1.5 million adjustment from the deferred on third quarter, deferred revenue cleanup. So, I'm just trying to figure out the fourth quarter implied guide to us looks like 9% to 11%. And just thinking about the pluses and minuses going from third quarter to fourth quarter, maybe you could highlight for us. Thanks.

Yeah, you bet, Brian. Thanks for the question. Maybe first, just broadly to set a simple way to think about our revised guidance is we're really just taking the beat. If you take political and float out, we're really just taking the beat up on a full year basis at the midpoint a couple million dollars And then if you think about Q3 to Q4, I guess what I would just say is keep in mind there's a little bit of seasonality there when you think about that sequential shift from Q3 to Q4. And what you'll see is it's very consistent with what we saw in 22 and 23.

And our next question today will come from Craig Maurer with FT Partners.

Please go ahead. Hi. Good morning. Thanks for taking the questions. Just wanted to dig a little deeper into the transaction yield. You know, with your talk about inflection in terms of transaction retention trends, you know, that points to perhaps a stronger environment, you know, on the supplier side, has there been any change in terms of how suppliers are looking to get paid at all? You know, we talked about sort of caps at which suppliers are willing to accept, you know, sort of higher take rate payment options last quarter. So any change to that? And I know this is non-core, but what drove the lower political ad spend assumption for the year? Because that seems kind of counterintuitive to what we've seen in the environment. Thanks.

Yeah. So on the yield question, Craig, so certainly spent a lot of time, you know, last quarter talking about that. And what I would say is that what we've seen is no significant changes in supplier behavior. Again, we're within kind of one basis point up and down between the last quarter and this quarter. But we are encouraged with kind of our overall strategies being successful. And those strategies are that we make many different value propositions by creating, you know, payment modalities that are particular to either a group of suppliers or even, you know, a potential, you know, individual enterprise supplier. And a payment modality is a combination of the speed of the payment, the price of the payment, the level of remit data, and the level of automation. So certainly we're leaning into our STP or straight-through process tools as it relates to the enterprise segment and working on different value propositions. At the same time, we continue to see really robust growth of new smaller suppliers, small business suppliers being added to the network that are predominantly selecting virtual card as their primary payment acceptance method. So we're kind of seeing our strategies kind of play out And I think the key is having lots of different payment modalities. And as we indicated today, we go to market with roughly 25 different payment modalities and growing. So that's certainly been kind of a key strategy related to that modernization question. The second one, kind of maybe an extension of that, is on the political side. And as we indicated, this was our first political cycle ourselves. And so we certainly kind of had an extrapolation of what we've seen in the midterm cycle. And I think what we've seen, as you've indicated, is certainly lots of overall spending activity. However, the one thing that is the big driver as it relates to kind of our monetization is the mix of payments. So when you think of an immediate sector, because paper check is really not a very viable payment mechanism, you really are left with three main payment mechanisms. The virtual card, our Avid Pay Direct offering, and then what we call kind of basic ACH. And what we've, you know, seen compared to the, you know, midterm cycle is, you know, differences in mix between those three payment modalities that were slightly different than we, you know, had been, you know, kind of probably expecting based on what we saw, you know, two years ago and four years ago related to the mix. And what that, you know, and what those changes were were a greater percentage of spend being directed towards digital channels. You know, digital channels being, you know, Google, YouTube, you know, X, Meta, Facebook, TikTok as examples. And those typically fall into more of the, you know, non-monetizable basic ACH type categories. And we also saw some examples of actually increased activity on our Avid Pay Direct or within the media vertical, it's called our Fast Pay Direct offering. So just different changes of mix between different payment types is, I think, is what we see us all playing out in this particular cycle.

Thank you. And our next question today will come from Jamie Friedman with Susquehanna.

Please go ahead.

Hi. Good morning, and let me echo the congratulations. Mike, I was just wondering if you are still comfortable with those very, very long-term five-year type projections that you had put out in June of 2023, especially the rule of 40, 50-plus and the 30% adjusted margin projections. And, again, this is a very long-term question, nothing about next year. Is there anything structurally that would, at this point, think that you would vary from those long-term objectives? Thank you.

Yeah, so great question, Jamie. And what I'm going to do is I'm going to ask Joel to maybe provide the first part of the question, or the answer, I should say, and I can provide some commentary.

Yeah, maybe I'll just start. Look, I want to be balanced. We're really proud of the quarter that we had. And you can see the progress we're making on all the profitability and efficiency measures, even in the middle of this kind of macro period. And it's super encouraging to see overall total transaction growth inflect in the quarter, but it's just a quarter. And so if you think about what, you know, the 25 midterm targets that we set out, you know, at Investor Day, you have to think about that through a lens of, you know, the macro environment is an uncertainty, right? And not to mention, you know, kind of the sort of the interest rate dynamic. So we're super focused on operating this highly profitable, continuing to grow business through a macro environment that generates meaningful cash flow, we're still believed that the long-term targets, right, that 80% gross margin, 30% EBITDA, I think the shape and the timing could play out differently. It just depends on what we see from a macro perspective. And we'll get clearer on that when we give guidance in February.

Yeah, and maybe it's a good time just to remind everybody of kind of that growth, as well as the growth algorithm. It's really in three buckets, right? The first bucket is getting back to that transactions retained on the network. That's usually a 5%-ish, you know, same sort of growth, you know, benefit that we see year in, year out. The second one is our continued kind of new buyer sales, logo growth that we've, you know, benchmarked and needs to be kind of 10% plus. And then the third one is all our yield enhancements that relate to the investments we're making in new innovation. payment accelerator 2.0, spend management, our paid platform enhancements, and, you know, new marketplace. So, and that provides, you know, typically another five percentage points of kind of, you know, growth yield enhancements. So, those are kind of the building blocks that certainly will play out, you know, over that long-term period.

Thank you. Our next question today will come from Darren Peller with Wolf Research. Please go ahead.

Guys, thanks. Nice results. Can we just go back to the environment for a minute? I mean, when we think about just TPV and transaction growth trends you're seeing today, if you could just help frame if you think the market is one that's stable or improving or maybe healthy but still on pause. You know, Mike, I know we've talked quite a bit about how these customers always need the tech to help. But are you seeing any kinds of inflection in demand right now first?

Yeah. I mean, I want –

What I would say, certainly we had a positive quarter. We're encouraged by customer engagement activity. I don't know if I would call out any significant changes in demand that we've seen. I think it's been consistent to what we've seen. And remember, kind of our building blocks as we kind of go through the year, Q4 is always kind of our strongest quarter. And as we, you know, kind of, and a lot of that relates to that, you know, increased demand gen, you know, coming out of the summer. And, you know, and we continue to see that. So I wouldn't necessarily, you know, think there's been, you know, kind of a significant change. Certainly, I think we've, you know, seen on some of our, you know, transactions between the network, you know, some positive, you know, kind of rebound or, you know, activity there. And that's super positive as it relates to transaction volume. And I think we just really, you know, are encouraged by, you know, the addition of new buyer customers and engagement. You know, in particular, I've been on the field, you know, significantly over the last couple weeks in particular, you know, attending both the MRI and the AppFolio user conferences and just really encouraged with just the engagement of customers that we have related to these offerings. And just, you know, if you think about it, If you're the CFO of a real estate company, a multifamily real estate company, and using AppFolio to basically run your business, and now you want to expand your business process to include accounts payable and payment automation, and you raise your hand and say, okay, now I'm ready to kind of extend my platform, that's a very different kind of qualified lead than somebody doing a Google search. And so what we're seeing is, you know, really pleased with kind of that evolution of top of funnel, move more towards, you know, partner-led demand gen. And it's created, you know, higher quality, shorter sales cycles, you know, and slightly higher close rates. And so we think that's, you know, kind of a positive, you know, kind of evolution to the go-to-market motion that we've had. but I think it's more driven by us than it is maybe the macro economy. Okay.

Well, I guess just one quick follow-up in respect to the one-timers and some of the adjustments and deferred revenue cleanup. Maybe just help us with how we should think about what's an appropriate run rate growth or yield expansion to consider for fourth quarter 24 and then maybe even into 25 if possible at all, Joel.

Yeah, I mean, maybe first of all, just to kind of, you know, clarify, a year ago in the third quarter, we had a one-time $1.5 million deferred revenue benefit, okay? And so in some of my comments, I kind of removed that benefit in a year-over-year comparison. That's, you know, not in the run rate. That was a year ago. And so, and just to be clear, there was about a 50 bps last year gross margin impact to that and about 140 bps EBITDA margin impact to that last year. So two benefits last year, gross margin and EBITDA, but just one time non-recurring. Your question about what can we expect going forward, I would just go back to our long-term targets, right? We're ahead of where we thought we would be, 450, upwards of 450 basis points of year-over-year expansion. We continue to see headroom to continue to move that forward and closer to 80%, maybe not linearly and maybe not exactly the same level of expansion that we've seen so far, but continued improvement is what we see ahead of us in both gross margin and even out margin percentages.

All right.

Very helpful, guys.

Thank you.

Thank you.

Thanks, Eric. And our next question today will come from Dominic Gabriel with Compass Point. Please go ahead.

Hey, thanks so much for taking the question. I was just curious if you could talk about the average ticket size growth year over year and what you're seeing there. And also, if you talk about the pent-up demand, did you see that on the – is that potential on the investment for your products or is it more in restocking of inventories. Where would you expect that to play out? Thank you so much.

Okay, you bet. Maybe I'll take the first. I mean, you know, look, overall, we were really encouraged in the quarter. I wouldn't point to any particular dynamics around ticket size. I mean, just, you know, good inflection in that overall total transaction growth and pretty distributed across the verticals. And then maybe I'll, Mike, I'll let you take the second part.

Yeah, I think it relates to kind of that retention, transactions in the network, and that discretionary spend that drives, you know, getting back to that, you know, I think our normalized, you know, target of roughly 105%. What we see, you know, those categories are typically marketing-related expenses, professional services, consulting, preventive maintenance, you know, capital projects, type of activity. And so I think when getting back to those numbers, it means that our buyer customers are now kind of increasing that level of spend in those type of categories back to what I consider both normalized levels. And perhaps there might be a little bit of a catch up in some of the categories related to say preventive maintenance, things of that nature. And we've seen examples of that, you know, in historical cycles as well. But those are the areas that we expect to kind of see that rebound in terms of those transactions retained in the network. So these are existing customers that are on our platform today, and they're just, you know, over the last, you know, year or so or, you know, three, four quarters have been more aggressively managing their discretionary spend. And so that's what we're expecting to come back at some point. Great.

Thanks so much.

And our next question today will come from James Fawcett with Morgan Stanley. Please go ahead.

Great. Thank you very much. I want to touch on some of your partnerships and other applications, particularly like Appfolio, M3, Build Venom, et cetera. How are you thinking about potential growth contribution from them and where we may see those initiatives later this year and next? I mean, I'm just wondering – if we could get a point or two of growth upward from these initiatives in 25, or what kind of timing we should be thinking about?

Yeah, so good question, James. Related to, you know, kind of that, you know, partner growth, and I'll take, you know, kind of a couple of the ones that we've been talking about, you know, over the last few quarters, you know, at Folio M3 as examples. You know, this is going to, you know, directly, you know, target solely to our, you know, kind of partner-related strategy, driving higher-qualified leads through our partner channels. And we leave FFOLIO in particular, you know, really encouraging because if you think about it, really every one of FFOLIO's main competitors are is already a strategic partner of Abbott Exchange. And so this really puts them on par with, you know, on the strategic landscape front. We know that playbook really well. And our, you know, new to BandGen, you know, lead activity today is, you know, 2X plus what it was a year ago coming from that folio channel. When we, you know, take that same lens to M3, you know, we're seeing about 3X the activity on the M3 channel, you know, that we saw a year or so ago. So those are, you know, great, you know, kind of, you know, barometers related to, you know, the impact of these new, you know, partners and the resulting customers. Now, the one thing is related to, you know, kind of timing and when it impacts, you know, the year and the revenue generation of it. Remember, we still have to go through, you know, kind of typically on average a 30- to 60-day setup configuration process. And then on the invoice side, there's usually, you know, a two billing cycle adoption rate for the invoices to get to kind of our targeted 100%. And then the payment side to get to our kind of targeted kind of full adoption, and we see that takes probably another, you know, six months to get to the full adoption period. So when we get to, you know, certainly the second half of any calendar year, we're really building the book for the following calendar year. And so we look forward to, you know, the impact of both AppFolio and M3, you know, in our 25-year.

Great. I appreciate that. Our next question today will come from Ten Sin Huang with JP Morgan. Please go ahead.

Hey, thanks. Good morning. Good results here. I just want to ask on some of the new products. I know you mentioned in the release here Payment Accelerator 2.0, Payment 2.0 platform, and and SPED management, which we're really interested in. Any change, Mike, in expectation for these products and how they might layer into 25? For example, are they on time, change in excitement, that kind of thing?

Yeah, so when I think of, you know, kind of our innovation pipeline, you know, there's kind of four, you know, that I typically reference and, you know, What I would say is that, you know, kind of this is more, you know, kind of timing. I'll give you a rank of timing when we see, you know, begin to impact. But Payment Accelerator 2.0 probably leads the pack in terms of overall opportunity. It's in market today. We've been, you know, careful in how we've been scaling it and excited to have it be more of a material part of our financial profile as we go into 2025. The next one is our pay platform. And this is more of an iterative, you know, kind of process that we continue to advance. And the benefit of it is we continue to be able to add and manage more payment modalities, the combination of speed, price, remit state, and level of automation with different suppliers. and that, you know, we expect that to continue to, you know, support our strategies as it relates to continue to add new payment modalities, you know, throughout next year. The third one is spend management and I kind of My mental, you know, kind of picture for spend management is it's about a year behind the impact that, you know, our payment accelerator 2.0 product is having. So we're going to begin, you know, introducing it to our initial set of customers here probably, you know, over the next 90 days or so. And then use next year to really get some of those initial customer learnings and look for, you know, kind of it to begin to, you know, have more material impact as we go to 26th. And then right behind that is kind of our marketplace strategies initiatives that we're, you know, it's in its early stages that we're considering to work on in terms of how it may impact, you know, the different, you know, types of purchasing that happens across our nine different verticals. So that's kind of our, you know, our big innovation, you know, kind of roster related to where we're investing and, you know, kind of the time we've impacted we expect them to have. Great. Thanks for that. Yep. And our next question today will come from Rufus Hong with BMO Capital. Please go ahead.

Hey, good morning, guys. Thanks. I wanted to come back to the comments you made about the gross margin, and you mentioned a path potentially towards 80%. I guess where are you in terms of realizing the benefits from automation and AI that you referenced in the prepared remarks? Are you starting to see those gross margin tailwinds slow at all? or do you think there are additional levers for you to pull to keep driving down unit costs? Thanks.

Yeah, no, great question, Rufus. You know, we've talked about the way our formula for, you know, continuing to see gross margin expansion is a mix of, you know, steady continued yield expansion and discipline around unit costs. You know, year-over-year, if you look at simply take, you know, kind of back into non-GAAP cost of revenue per transaction, right, like looking at that high-level unit cost that you can see, you've seen that, you know, we've gone from 154 in the year-ago quarter to 143 this quarter. And the way we got there are the things that we've talked about, standardization of processes, you know, automation. AI has played a role even before it was, you know, necessarily referred to as AI. So we're sort of making good progress, I think, But we're not done, and I think you can continue to expect continued gross margin expansion. Again, maybe not at the exact same pace and certainly not linearly, but we feel good about those profitability targets that we've put out there.

Our next question today will come from Alex Markgraf with KeyBank Capital Markets. Please go ahead.

Hey, everyone. Thanks for taking my question. Mike, could you maybe touch on cross-border a little bit and some of the progress you've made here in the last couple of years, and then maybe just comment on the MasterCard Move commercial cross-border introduction as of recently and just in fact creates opportunities for you all.

Yeah, so it's good. We haven't talked about cross-border in a few quarters. What I would say is related to cross-border, it's a capability that we've added now you know, probably two years ago to our platform. And, you know, and WISE is our kind of integration partner that we had that we utilize related to our cross-border strategy. And what I would say is that I would say that we're seeing some of the, you know, results that we expected to see. One of the things I try to do at the time to remind everybody is Remember, we go to market in nine different industry verticals that if you look at each one of those nine verticals, they're not verticals that really lend themselves to large degrees of cross-border transactions. They're very localized to regional markets for the most part as our verticals are. And so we just don't have the type of, you know, large-scale demand for cross-border that we would have if we had, you know, maybe other types of verticals, maybe manufacturing B1 that would have more of a, you know, a cross-border type demand to it. And so it's not an area that we focus on from really a growth vector because it's driven really by customer payment demand and where their suppliers are located. And what we see is, you know, on average 95% plus of the suppliers that are in our network are U.S.

domestic suppliers. Our next count. Pardon me. And our next question today will come from Timothy Chiodo with UBS. Please go ahead.

Great. Thank you for taking the question. So, Mike, you were talking a little bit about some of the bank partnerships. Obviously, you've had the Fifth Third, KeyBank, Bank of America, and you talked about the three more that you just signed. But given this is such an important distribution channel and that there are 10,000-plus banks in the U.S., I was hoping you could just take a moment Just talk a little bit about the landscape and what the other 10,000 banks or so are doing.

Yeah, so one of the things I just want to make sure I clarify, Tim, when we talk about kind of our, you know, banks, we have two different, you know, kind of the, you know, strategies. One is we have banks actually as customers. We now are approaching about 1,500 banks that actually use Avid Exchange to manage their internal, you know, accounts payable and payments for the bank. And then we have the channel partnership, which I think is what you're referring to related to how we engage. And we feel that's an important part of our go-to-market strategy. We want to be both highly aligned with, you know, a customer's accounting system and we want to be highly aligned with where a customer may do their banking related to how we engage with those customers. One of the things that we did start out with, you know, back when we started the bank channel was going down a path of more of the white label type of experience. And what we've kind of learned is they're hard. They're hard to execute. It requires a big investment by both our partner bank as well as, you know, Avid Exchange to support them. and some of the change management that has to occur at a bank is pretty significant related to, you know, creating specialized sales forces to sell software versus traditional treasury-type products. And so what we've learned is that it's actually easier to go to market with more of a reseller type of structure rather than by label. And so we've seen, you know, nice growth of our reseller banks. you know, we're approaching. You know, we have north of, you know, 20-plus reseller, you know, type banks today. Highlighted, you know, three of them on today's call. Super excited about Cadence, Orange Bank, and Trust. And collectively together, the three new ones that I highlighted have, you know, roughly about 50,000 customers. So that, you know, is, again, a nice, you know, way to increase kind of our go-to-market TAM approach, the focus on, you know, customers that are already banking with these banks and have a certain level of engagement that's certainly similar to the engagement that we see on the accounting system side. So that's why we're kind of excited about it, and we've been focused on kind of the ERP partnerships in the last couple of quarters. But while that's been going on, we've been making nice progress on the bank partner side, and I thought it would be worth highlighting a few of those recent relationships on today's call.

Excellent. Thank you, Mike. This concludes our question and answer session.

I would like to turn the conference back over to Mike Prager for any closing remarks. Great. Well, thank you again, everyone, for your interest in Avid Exchange. Amid the current macro choppiness, I'm very proud of our disciplined execution and strong financial performance with the inflection of transaction retained trends being noteworthy. As I said before, I'm particularly excited about the future. Given the pipeline of product innovations, our industry-leading ERP and accounting system integration partnerships, along with the bank partnerships that we highlighted on this call, that progress should propel all four gears of our business flying wheel and drive long-term value creation for our investors. With that, we look forward to sharing our continued progress on our next earnings call.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.