AvidXchange Holdings, Inc.

Good morning, everyone, and thank you for joining us for the Avid Exchange Holdings Inc. fourth quarter and full year 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 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 update 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 described 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. Please go ahead.

Thank you, everyone, for joining us today to discuss Avid Exchange's fourth quarter and full year 2024 results. We finished the quarter and the year on the strongest financial footing since we began our journey of delivering industry-leading accounts payable automation and payment solutions to our middle market customers 25 years ago. Our fourth quarter 2024 results exceeded implied expectations across all of our core financial metrics. This includes better than expected revenues, gross margin, EBITDA margin, and non-GAAP diluted earnings per share, despite what has been and remains a challenging macro backdrop impacting our middle market customers. Our better than expected fourth quarter financial results were augmented by our strong free cash flow generation and disciplined capital allocation. Notably, we repurchased an additional $25 million worth of Avid Exchange shares during the fourth quarter of 2024, underscoring the long-term confidence we have in our business. This brings the total shares repurchased in 2024 to $50 million, the maximum allowed within a calendar year under the $100 million share repurchase program we announced in August of 2024. The common denominator underlying our strong financial results this past quarter and since our October 2021 IPO, particularly around gross margins, EBITDA margins, and operating cash flow generation is our operating discipline around the levers within our control. This operating discipline coupled with our multiple innovation work streams, including our AI initiatives within our products and payment delivery, as well as service automation has enabled us to counter much of the macro headwinds impacting our margins. This has resulted in another quarter of non-GAAP gross and adjusted EBITDA margin expansion since our IPO, and also achieving our 75% targeted margin milestones outlined during our June 2023 investor day. And 2024 was no exception, in which we saw more than 4 percentage points of gross margin expansion over 2023 alone, and greater than 10 percentage points of EBITDA margin expansion over 2023. What has overshadowed the strong execution on margins is the macroeconomic environment, which remains mixed. This is particularly the case in the instance of our top-of-funnel customer engagement in buyer logo growth metrics. On the positive side in 2024, we saw pockets of modest but positive growth in the top-of-funnel across three of our largest and many cases strongest tenured verticals by revenue, transactions, and total payment volume. including our real estate, financial services, and our media verticals, as well as declines moderating in the HOA vertical. While the overall top of funnel opportunities were down roughly 2%, some of which was due to changes in our go-to-market motion over the 2023 and 2024 period, and some due to the macroeconomic environment, the growth in the buyer-customer logo count for 2024 was better on a relative basis, up over 6%. driven by higher quality opportunity lead generation across our ERP partner-related channels. This compared to buyer customer logo count growth of 8.1% in 2023 with a top of funnel that grew in double digits. Given the impact of the macroeconomic dynamics across the middle market customer base, we are steadfast in the belief of solidifying our growth foundation and the future growth levers of our business remain a key priority to drive our business flywheel and create a durable growth business along with increasing our competitive moat around the middle market for many years to come. Middle market finance leaders remain focused on productivity and profitability, and they are looking for business process domain experts with scalable solutions, such as Avid Exchange, to unlock the opportunity for themselves and their suppliers. This is where Avid Exchange shines. As an industry leader with the best of breed scalable AP automation and payment solutions to address the large opportunity set, Recently signed and highly strategic ERP integration and reseller partnerships, of which I will provide an update later in my prepared marks, should underscore our confidence in the future organic growth trajectory of our business. Similarly, customers such as DRM also highlight how we are well positioned across the middle market and are rapidly unlocking tangible benefits and costs and time savings for them. DRM is a major player in the hospitality industry, which is a relatively new formal vertical for us and has been seen healthily growing momentum. DRM is one of the largest franchisees for Arby's, the world's largest second sandwich brand with over 3,400 locations worldwide. Upon joining DRM, CFO Mike Swoop immediately turned his focus to revamping and streamlining their accounts payable process. Given that it's both manual and paper intensive, with immensely inefficient approval workflows, which pose challenges to DRM's ability to scale their back office, to keep up with their overall growth. With NetSuite as its core accounting system, Mike adopted Avid Exchange's invoice and payment solution, given our deep integration with their NetSuite software. With our solution, DRM was able to support its double-digit growth objectives without any additional accounts payable headcount, which translated to over $60,000 in annual cost savings and created a great user experience with his team of AP specialists leveraging our built inside NetSuite integration and user experience. As Mike Swoop stated, I took a leap of faith when I joined the DRM team and asked them to change the way they work by automating accounts payable with Avid Exchange. And I couldn't be more pleased with the outcome. Turning now to some of the performance highlights and metrics from the fourth quarter of 2024 that underscore our value proposition and operational execution in action. Revenue in the fourth quarter was approximately $115 million, up roughly 11% year-over-year. The growth in the quarter was led by a combination of increased transaction volume and transaction yield growth. Non-GAAP gross margin, meanwhile, hit a milestone, coming in at almost 75%. We're up 350 basis points over last year at the top end of our 72% to 75% non-GAAP gross margin target. ahead of our 2025 objective we set over a year ago during our last investor day. Our continued focus on automation, implementation of AI across significant work streams, sourcing, along with standardization, which are in various stages of the maturity curve, continue to bear fruit. Along with solid operating expense discipline, adjusted EBITDA margins on the quarter, reaching almost 23%, once again hitting the milestone we committed to during our investor day. Our important transaction yield metric, which is the total revenues over total transactions, was up more than 6% to reach $5.80 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, and it demonstrates the power and effectiveness of our Avid Exchange business flywheel. With that overview, I'm going to highlight the four operating priorities for 2025, which we believe will help us deliver our long-term growth potential while continuing to expand our margins even further. I will use the four years of the Ad Exchange Business Firewheel to describe and highlight some of the initiatives that are in flight that will support these priorities. Our four operating priorities for this year are as follows. Number one, continue building the foundation of future growth through ERP integrations and embedded partnerships along with continued vertical market expansion. Number two, deliver on key product innovation pipeline highlighted by our payment accelerator 2.0 offering, our pay 2.0 platform, and our new spend management platform. Number three, Scaling our various new products to support all 8,500 buyer customers and our roughly 1.4 million supplier customers in delivering the value proposition they expect from Avid Exchange. And finally, priority number four, continue to elevate the customer experience across Avid Exchange's product suite for both our buyer and supplier customers across our purpose-built two-sided network. To build on the success of Gears 1, 2, and 3, which are about creating robust customer-focused ERP integrations, as well as maximizing transactions and monetization on our platform to drive growth and scale, I am very pleased to provide an update on some of the previously announced and notable ERP integrations in our embedded pay partnerships. As stated in the past, we believe that a large number of our valuable ERP integrations And consequential strategic partnerships coupled with our product innovation pipeline lays the foundation for future growth. For instance, recently announced a notable large software integration partnership such as Appfolio and M3 spanning the real estate, HOA, and hospitality verticals are beginning to gain steam. Our portfolio partnership, which has roughly 19,000 product market fit targeted customers, went live in early 2024 and is seeing a doubling in customer engagement lead flow to several hundred with close rates almost doubling in the last year alone. M3, on the other hand, with a product market fit target customer base of roughly 1,000, is progressing even faster with lead flow tripling to hundreds with close rates up almost 4x in the last year. We believe that the momentum of these two partnerships is building because of our partners' continued commitment, which is fueled by the recognition of our industry-leading payment monetization and the rapid and quantifiable ROI for their customers by leveraging our highly dense, purpose-built, two-sided network. While these two highlights are just part of the class of 2023 partnerships alone. 2024 was another productive year for the partnerships across our HOA, healthcare, financial service verticals that included Buildium, DSOs, Cadence Bank, to name a few. And we anticipate that these partnerships should start to gain traction in a similar way to that folio M3 during the latter part of 2025 and meaningful in the 2026. All in, we are excited about the momentum building across our business flywheel with these partnerships and look forward to announcing additional ERP and payment embedded partnerships as they progress in the pipeline in the coming quarters. Now, I'd like to provide an update on the new products that are in the foundation of our future growth and should drive gears three and four of our business flywheels. Under gear three of our business flywheel, which is all about monetizing payment volume and maximizing e-payment penetration by leveraging the new payment modality product innovation to continue eliminating paper checks, 2025 marks a pivotal year as we ramp up the key functionalities of our new AvidPay 2.0 payments platform, which serves as the foundation of our AvidPay network. We believe that the capabilities of Avid Pay 2.0 will enable us to create new payment modality offerings through real-time configuration, combining pricing terms, speed of settlement, access to remits data, and payment acceptance automation, eliminating the need for lengthy software development dependencies. Along with supporting our ability to manage numerous new payment modalities that serve to create a payment acceptance value proposition for our customers that is second to none. With Avid Pay 2.0, we anticipate increasing our penetration and share of our buyers' and customers' payment files in several ways while capturing greater transaction economics. First, improvements in critical-to-pay supplier information coupled with additional payment mechanisms we believe will allow us to offer a variety of guaranteed solutions for time-sensitive payments. Second, by expanding our payment network solutions, we aim to increase e-payment adoption which will enhance overall payment monetization, reduce mail check volume, and accelerate payment speed, along with significantly reducing payment fraud as we estimate that with B2B payments, almost 90% of fraud relates to paper checks. Third, our enhanced ability to customize product payment modality, speed, remit, and price in real time should drive additional e-payment adoption for both buyers and their suppliers. Finally, with our new AvidPay 2.0 platform, we believe that we have not only enhanced revenues to expanded buyer and supplier products, greater payment and monetization, and increased share of wallet, but also improve our cost structure in both hard and soft operational costs, including direct expense of reducing paper check payments. Taken together, these things should create substantial opportunity for us in terms of revenue growth and margin expansion as we convert their paper check suppliers to accepting one of our many forms of e-payment. In addition to Pay 2.0 and also under Gear 3 of our Avid Exchange Flywheel, we've launched initiatives to fast-track existing new check conversion into electronic payments. Dubbed the Extended Network Payments, these efforts go hand-in-hand with new offerings being rolled out as part of Avid Pay 2.0 and are highly strategic in value. In fact, the new efforts could represent a function change in reducing the number of checks, which is represented around 55% of payment transaction mix today. We've entered into a strategic partnership with a large financial technology firm and the various other such partnerships in process within the financial services ecosystem to accelerate the conversion of paper checks with specialty networks of suppliers into electronic payments, which should bear fruit in 2025. We look forward to discussing this in greater detail as the year unfolds. Also under gears three and four of our business flywheel, which is about both maximizing e-payment penetration and leveraging innovation and data to create new product offerings, we plan to significantly scale our flagship payment accelerator 2.0 supplier financing offering in 2025. For those new to our story, Payment Accelerator 2.0 is our supplier financing product where suppliers can elect to have eligible invoices advance for immediate payment. We have had version 1.0 of our product in the market for the past few years, which has generated a lot of learnings and interest across suppliers. But version 2.0, which was launched at the end of 2023, marks a step function change in the product. This 2.0 product is the next generation in terms of user experience, with enhanced features and functionality that should drive scalability. To put it in perspective, Payment Accelerator 2.0's target service level agreements, compared to its predecessor, are compressing the onboarding time to less than 24 hours from several days previously. In the near future, we expect to be able to compress that time frame down to minutes. What makes this process frictionless is that having both the buyer and supplier on our AvaPay network, we eliminate the need for traditional underwriting processes which typically requires historical financial statements from a supplier. This means leveraging supplier and buyer history and transaction data, as well as real-time visibility into the status and approvals inherent on our two-sided network to underwrite and lower the credit risk, as well as providing protective provisions across the entire flow of invoices that a particular supplier may have on our network. The rapid onboarding process is also a result of the platform's highly integrated back-end that is designed to simultaneously validate the supplier's bank account information along with know your customer and know your business compliance regulations. Real-time as a supplier validates an online questionnaire of legal entity data and beneficial ownership information. Once onboarded, a supplier is presented with multiple acceleration offers with transparent pricing and various time-based funding options, including real-time payments. In addition, to the payment accelerator offering outlining the eligible supplier invoices available for acceleration, we also provide an auto fund option where our intelligent decision engine automatically identifies all of the supplier's eligible invoices and funds them automatically, ensuring the fastest access to cash availability every time an eligible invoice is available on our network. The rolling three-month volume of dollars accelerated in the number of new payment accelerator customer enrollments has already more than doubled, giving us confidence that the ramp targeted for Payment Accelerator 2.0 to potentially achieve revenue parity with 1.0 version this year. Finally, I would like to provide an update on our operational strategy that has been instrumental in efficiently scaling the business while lowering unit costs and driving our impressive gross margin expansion. We've made tremendous strides in increasing our non-GAAP gross margins, and we expect there's more to come. Since our IPO in 2021, even stripping out the contribution from float and seasonal political revenues, our non-GAAP gross margins have been up almost 10 percentage points to almost 70%. We believe that the success on the gross margin front is all due to disciplined execution on our strategy around standardization, sourcing, and automation, which has all been about leaning into self-learning, and scalable AI solutions across key operational functions of our business. Recall, there are six ways in which we execute virtual card payments, as an example, with our suppliers. One is via straight through process. Second is direct API connections. Third is online portals. The fourth is through IVR systems. The fifth is through traditional email. And the sixth is over the phone. As a result of leveraging AI, we have now accelerated our virtual card automation strategies. To put that in context, the number of virtual card transactions in 2024 over 2023 increased by roughly 600,000, but we automated almost 700,000 more than the total increase of the total number of virtual card transactions. In other words, we are rapidly automating not just new virtual card transactions on our network, but also converting the back book of virtual card transactions as well. This is highly synergistic with our new Avid Pay 2.0 platform to convert paper checks into electronic payments. This further highlights our scalability of our platform, which thanks to the current AI solutions, we can now automate at a higher speed and lower cost. Ultimately, our goal is to get over 80% virtual card automation over the next two years, which should continue our gross margin expansion towards 80% as we leverage automation combined with various yield enhancement levers. In closing, we're proud of our operating performance amid continued macroeconomic headwinds impacting our middle market customers. While the 2025 guidance reflects a cautious approach given the unpredictable macroeconomic environment, we continue to firmly execute on the levers we control and invest in our product roadmap to drive future growth across our business. With our four operating priorities interlocking with the four gears of our business flywheel, we continue to strengthen our competitive advantage further, by building out new strategic and integration partnerships, as well as driving scalable innovation across our payment platform through new products leveraging AI, which we believe positions well for the future. In 2024, we entered into strategic and integration partnerships across various verticals, including real estate, hospitality, HOA, healthcare, financial services, along with media and non-for-profit. This builds on the success of partnerships entered into in 2023, such as Affolio, M3, et cetera. These partnerships, coupled with the scaling of our new product offerings, including Payment Accelerator 2.0, our new Pay Platform 2.0, and Spend Management, which we expect to roll out in the second half of 2025 with a ramp in 2026, should provide momentum to potentially outrun our 2025 growth expectations in 2026. We strongly believe in our vision of the long runway of growth in the accounts payable and payment automation market across the middle market segment. While our growth trajectory has been below our targeted overall the last two years impacted by the macro environment, we've demonstrated operating discipline as well as believe in our leadership position and the competitive advantage we are building across the middle market's untapped opportunity. I want to provide a special thanks to all of our AvidX team members for their continued 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 most importantly, builds long-term value for our shareholders. With that, I'd like to turn the call over to my partner, Joel Wilhite. Joel?

Thanks, Mike, and good morning, everyone. I'm pleased to speak to you today about our strong fourth quarter 2024 financial results. which reflect discipline operational execution amid continued macro headwinds. Overall, we delivered a strong 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 fourth 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. Gross margin performance remained strong due to ongoing progress on unit cost initiatives and yield expansion. Coupling that with sustained operating expense leverage, driven by a combination of expense discipline and lower performance bonus accruals, we drove stronger adjusted EBITDA outperformance relative to expectations. It's worth pointing out that this continues our streak of delivering adjusted EBITDA profit expansion, ex-float and political expansion. Equally noteworthy, we delivered our third GAAP net income quarter since going public in 2021. Now, turning to year-over-year results, total revenue increased by 10.9% to $115.4 million in Q4 of 2024 over the fourth quarter of 2023. Stripping out the impact of float and political revenues on a comparable basis, which provides a more apples-to-apples comparison of underlying growth trends, The revenue growth was driven by a combination of pay yield expansion and the addition of new buyer invoice and payment transactions. Our revenue growth also resulted in total transaction yield expanding to $5.80 in the quarter, up 6.4% from $5.45 in Q4 2023. The increase was driven by software and pay yield, as well as higher payments transaction mix. Software revenue of $30.9 million, which accounted for 26.8% of our total revenue in the quarter increased 6.4% in Q4 of 2024 over Q4 of 2023. The increase in software revenues was largely driven by a growth in total transaction count. Payment revenue of $83.4 million, which accounted for 72.2% of our total revenue for the quarter increased 12.3% in Q4 of 2024 over Q4 of 2023. Payment revenue reflects the contribution of interest revenues, which were $12.2 million in Q4 of 2024 versus $13.7 million in Q4 of 2023. Political media revenue in the current quarter was approximately $2.9 million and negligible in the same period a year ago. Excluding the impact of float and political revenues from both comparable periods, which provides a more apples-to-apples comparison, payment revenues grew 13.5%, driven by a combination of an increase in pay yield, greater payment mix, and payment transaction volume increase of 8.3%. On a GAAP basis, gross profit of $78.8 million increased by 17.1% in Q4 of 2024 over the same period last year, resulting in a 68.2% gross margin for the quarter compared to 64.6% in Q4 of 2023. Non-GAAP gross margin increased 350 basis points to 74.9% in Q4 of 2024 over the same period last year, with the lion's share of the increase driven mostly by unit cost efficiencies and yield expansion and to a minor extent by lower annual performance bonus rules. I'm pleased to say that the fourth quarter 2024 non-GAAP gross margin was now at the top end of the 72 to 75 percent range targeted for 2025 as projected during the company's June 2023 investor day. Moving on to our operating expenses. On a gap basis, total operating expenses were $82.5 million, an increase of 3.7% in Q4 of 2024 over Q4 of last year. On a non-gap basis, operating expenses excluding depreciation and amortization and stock-based compensation increased as well by 2.3% to $60.1 million in the fourth quarter of 2024 from the comparable prior year period, and with the increase driven primarily by sales and marketing initiatives partially offset by lower annual performance bonus expense. On a percentage of revenue basis, operating expenses excluding depreciation and amortization and stock-based compensation, or non-GAAP OPEX, declined to 52.1% in the fourth quarter of 2024 from 56.5% in the comparable period last year. I'm equally pleased to say that fourth quarter 2024 non-GAAP OPEX as a percentage of revenues in the quarter was also at the bottom end of the 50% to 55% range targeted for 2025 as projected during the company's June 2023 investor day. Overall, the decline in non-GAAP OPEX as a percentage of revenues year over year largely highlights expense discipline and significant operating expense leverage across G&A R&D, even after stripping out the contribution of float and political revenues. I'll now talk about each component of the change in operating expenses on a non-GAAP basis. Non-GAAP sales and marketing costs increased by $2.4 million, or 14%, to $19.9 million in Q4 of 2024 over Q4 of last year, with increased investments in sales and marketing spend to support our continued growth, partially offset by lower annual performance bonus expense. Non-GAAP research and development costs were essentially flat on a comparable basis at $22 million in Q4 of 2024, and were helped largely by lower annual performance bonus expense. We continue to reinvest across our products and platform, including spend management, pay offering, and payment accelerator. Non-GAAP G&A costs decreased by approximately $1 million or down 5.2% to $18.2 million in Q4 of 2024 versus Q4 of last year due largely to lower annual performance bonus expense. 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 gap net income was $4.7 million for the fourth quarter of 2024 versus a gap net loss of $4.5 million in the fourth quarter of 2023. With the $9.2 million positive swing in net income driven largely by a combination of strong revenue flow through, solid gross profit increase, and expense control leading to a positive swing in operating income coupled with higher net interest income due to reduced borrowing costs and partial debt paydowns. Gap diluted earnings per share for the fourth quarter was two cents, which was a four cent positive swing from the same comparable period last year. On a non-gap basis, our net income in the fourth quarter of 2024 almost doubled to $17.3 million versus $9.4 million in the same year ago period, with non-gap diluted earnings per share up 60% to eight cents versus five cents diluted earnings per share in the fourth quarter of 2023. All of the net income performance was driven primarily by the aforementioned factors. On a non-GAAP basis, Q4 2024 adjusted EBITDA was $26.3 million versus $15.6 million in Q4 of 2023, with the favorable delta split mostly between expense leverage driven by higher comparable revenues and lower annual performance bonus expense. Turning to our balance sheet for a moment, I want to touch on a few key items. We ended the year with a strong corporate cash position of $389.3 million of cash and marketable securities against an outstanding note payable for $9.1 million. At year end, our credit facility, which consists of $150 million revolver with $150 million accordion feature, remained undrawn. During the quarter, the company utilized $25 million of cash from its balance sheet to purchase approximately $2.3 million of its own shares at a price of $11.10 under our $100 million share repurchase program announced in August 2024. For the year, the company utilized approximately $50 million of its cash, the maximum allowed within a calendar year, to purchase 5.4 million shares at a price of $9.33 per share. Corporate cash, meanwhile, was split roughly three quarters and with one quarter between demand deposit accounts and various other fixed income interest instruments, including money market funds, commercial paper, and time deposit instruments, respectively. The weighted average maturity on the corporate cash was roughly 13 days, while the effective interest rate on our corporate cash position for the fourth quarter was roughly 4.7%. Customer cash at quarter end was approximately $1.2 billion with an interest rate of roughly 4.3% for the quarter. Turning to our 2025 business outlook, we expect total revenue for the year to be in the range of $453 million to $460 million. Our 2025 revenue outlook reflects approximately $44 million of interest revenues from customer funds versus $49.7 million earned in 2024. We do not anticipate any political media revenue contribution in 2025 versus $6.6 million in 2024. We expect 2025 revenue distribution between the first half and second half of the year to be approximately 48% and 52% respectively, roughly similar to levels in 2024. Similarly, we expect non-GAAP adjusted EBITDA profit ranging between $86 million and $91 million for 2025. We also expect 2025 non-GAAP diluted earnings per share in the range of 25 to 27 cents, which does not currently reflect the impact of any additional share repurchases in 2025 under our previously authorized share repurchase program. With that, I'd now like to turn the call back over to the operator and open up the line for Q&A. Operator?