AvidXchange Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Everyone and thank you for joining us for the Avid Exchange Holdings Inc. 2nd Quarter 2023 Earnings Call. Joining us on the call today is Mike Frager, AvidExchange Co Founder and Chief Executive Officer Chawal Wilhite, AvidExchange Chief Financial Officer and Subhaj Kumar, AvidExchange Head of Investor Relations. Before we begin today's call, management has asked me to relay the forward looking statement disclaimer that is included at the end of today's press release. This disclaimer emphasizes the near uncertainties and risks inherent in the forward looking statements that the company will make this afternoon.

Operator

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 then be considered in isolation from our Board of Directors 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.

Operator

With that, I will now turn the call over to Mike Fraizer. Mike, over to you.

Speaker 1

Thank you, everyone, for joining us today. Joe Willite and I are excited to discuss Avid Exchange's Q2 2023 results. But before I do that, I just wanted to thank all of those who participated in our recent Investor Day event on June 1, held both in person and online. And especially for those of you that visit us in Charlotte, North Carolina for our Investor Day event, you experienced firsthand our performance based AvidXchange culture and how we have successfully transitioned to be back in the office 3 plus days a week across our multi office footprint. We are already seeing an impact on productivity, collaboration and teammate development.

Speaker 1

With that, I want to now turn to our 2nd quarter results. We delivered another quarter of solid operating results, Achieving now 8 consecutive quarters of exceeding our financial targets relative to our implied outlook. Revenues exceeded Our implied Q2 2023 outlook, while our adjusted EBITDA results were a standout bright spot, Driven by healthy revenue performance, continued gross margin expansion, unit cost reduction, along with operating expense leverage. These operating and financial results coupled with the optionality we believe we have at our disposal gives us further confidence in our progression Towards our medium term Rule of 40 objective of achieving both 20% organic revenue growth and 20% adjusted EBITDA targets By 2025, which we outlined during our Investor Day. As the macro backdrop remains somewhat volatile, Where economic sentiment swings back and forth between hard landing and no landing, our purpose built value proposition of Accounts payable and payment automation solutions is a proven capability with tangible and rapid ROI for middle market companies.

Speaker 1

By leveraging the force multiplier of our proprietary 2 sided network, buyer and supplier customers We have enormous value benefits that we believe get particularly magnified during volatile economic times. Our buyer customers are able to automate their back office And significantly reduced costs, oftentimes by more than 60%, while enhancing scalability and security of their accounts payable and payment Processes. While on the supplier side, our supplier customers get better visibility into their invoice and payments and are able to Accelerate their cash flows and working capital while optimizing aspects of their own back office reconciliation functions. A good customer example of the power of our overall AvidXchange business flywheel and the value we are delivering through our 2 sided network He's with Chicago, Illinois based Remedy Medical Properties, the nation's largest private owner of healthcare properties. Remedy exemplifies the power of Avid Exchange's 2 sided network.

Speaker 1

Before adopting Avid Exchange's invoice and pay solutions, Remedy accounts payable Payment processes were time intensive with many manual processes. According to Senior Accounts Payable Manager, David Bennett, Several hours a day were spent opening the mail, scanning invoices, filing and stuffing checks into envelopes. By adopting our API based Avid Invoice and Avid Pay Automation Software Solutions, we seamlessly integrate into Remedy's Yardi Voyager Accounting Bennett's team shaved off one whole workday per week by no longer needing to sign checks, stuff envelopes and file invoices. Without Avidxchange, Bennett estimates that they would have had to hire up to 3 to 4 more people to process the growing volume of Invoices and Payments over time. As David Bennett stated, keeping track of AP statuses And conversations was challenging, but with Avidant Voice, there is now a central place for updates, notes and answers, allowing us to work more efficiently and better communicate with property managers and our suppliers.

Speaker 1

While buyer customers like Remedi and other customers we have referenced over the past quarters highlight the customer value proposition, There are also broader market forces that are influencing the adoption of our solutions across the middle market or the mighty middle, as I call it. These forces range from the continued mass shift to the cloud for the critical back office applications Business continuity along with enabling work from home models for finance and accounting professionals along with Changing demographics and high focus on payment fraud prevention. And speaking of payment fraud prevention, recently the U. S. Postal Service Put out an urgent bulletin warning against sending checks through the mail due to a surge in mail theft.

Speaker 1

Nothing drives human behavior more than loss avoidance. And according to the Association of Financial Professionals, roughly 70% of payment fraud for organizations with paper checks. However, based on our data, payment fraud relates to checks in the B2B space is even greater at over 90%. While fraud is unfortunate, it adds another layer of uncertainty to our remaining paper check supplier customers, while making the find the value proposition of our various payment modalities. With roughly 55% of our payment mix still being checks, we're extremely well positioned to help our customers Mitigate this risk while building on our industry leading e payment penetration.

Speaker 1

Let me now provide a quick summary Of our year over year Q2 2023 financial results. We delivered revenues exceeding $91,000,000 which grew to rate of over 19% compared to the same period last year. Once again, our 2nd quarter growth was led by double digit revenue dynamics across most of our vertical markets. Non GAAP gross margins expanded to over 68% in the quarter, up 460 basis points on a year over year basis. In addition, we posted an accelerating non GAAP adjusted EBITDA profit Approximately $3,000,000 in the quarter, which was close to an $8,000,000 positive swing from an adjusted EBITDA loss of $4,700,000 in the same period last year.

Speaker 1

We also ended the quarter with a 9.5% Year over year increase in our total transaction yield to $4.84 which is now up $0.79 or roughly 20% since our IPO in October of 2021. On today's call, we will touch on 3 topics. 1st, our top of funnel activity. 2nd, discuss innovations to our existing product suite around new payment modalities under Gear 3 of our AvidXchange business flywheel. Quick reminder that Gear 3 incorporates All of our collective strategies to convert paper checks to electronic payments, along with an update of our pending launch of Invoice Accelerator 2.0.

Speaker 1

And third, explore several of our operational levers designed to accelerate automation that are key steps to Driving continued gross margin expansion and accelerating our profitability. So on to the first topic, from a top of funnel buyer opportunity We ended the first half of twenty twenty three with a healthy growth, up 70% on a year over year basis. Virtually all verticals saw double digit growth, including construction, financial services, media, healthcare, our HOA and educational as examples. Equally, the growth in the top of funnel came with a slightly higher average deal size attachment aided by our three way PO Match product. This healthy top of funnel was further backstopped by a sustained pace of close win rates.

Speaker 1

The only top of funnel deviation continues to be within the commercial office subsector of our overall real estate vertical. Just to be clear, when we talk about real estate vertical, we are largely talking about real estate commercial operating companies and not residential homebuilders. Although multifamily, student housing and industrial sub segments Of the real estate vertical remained very strong, commercial office real estate continues to soften. Meanwhile, product and integration partnerships launched over the last 12 months, continue to play a solid role in the growth of our top of funnel prospect activity. For example, the launch of our three way purchase order Our PO offering in 2022, although off a small base, has seen triple digit uptake.

Speaker 1

What's more exciting across both vertical and horizontal ERP accounting systems. Furthermore, the average new buyer deal size in our top of funnel Related to the three way match is also larger than what we typically see in those verticals. In the education vertical, for example, we're seeing three way PO use cases with individual schools and school systems for ordering supplies and managing their inventory. Equally encouraging, we're seeing Strong top of funnel activity within our preferred strategic partnership with ResMed in the real estate multifamily subsector, which was launched last year as well. All in all, we are very pleased with the underlying metrics driving our top of funnel sales momentum.

Speaker 1

This underscores not only the large and unpenetrated $20,000,000,000 plus addressable market within the B2B middle market for AP and payments automation solutions, but also the long Speculative growth opportunities that we see despite some near term pockets of macroeconomic softness. Topic number 2 is all about gear 3 of our Avidxchange business flywheel, where we continue to Accelerate ways to maximize our industry leading e payment penetration of converting paper checks to various forms of e payments across our 2 sided network By removing barriers to adoption, as an example of our STP offering and introducing new payment modalities, which we believe Is the secret sauce of our success and one of our biggest competitive advantages. We are excited to highlight new augmented payment modality in conjunction with just launched lien waiver management solution, which delivers critical automation functionality within our construction vertical. Currently, buyers and suppliers in the construction industry have to navigate a series of regulatory rules across various government agencies in order to set up and begin transacting. New and existing buyers in the construction vertical Must have the account validation and other customer due diligence requirements.

Speaker 1

While new and existing suppliers numbering in the 1,000 Must also pass numerous bank account validation rules in order to be paid. Our new same day payment offering for lien waivers compliantly and programmatically send same day payments from general contractors, our buyers, to subcontractors, our suppliers. With the integration of this new payment modality, the system allows for the programmatic creation of suppliers, payments and Status Reporting, while incorporating a new specialized payment funding model. This augmented payment modality makes a great use case for the roughly 1500 base of construction buyer customers. And finally, topic Number 3 is related to optimization of operational levers where we continue to look at the linkages across our operational value chain, specifically around payment processes, with the objective of further automating All of our remaining manual payment delivery processes.

Speaker 1

Currently, when making a virtual card payment, the process And time it takes between a wholesale processor generating a virtual card and getting that virtual card into a supplier's hands to complete the entry of card details into the merchant system Typically requires multiple manual steps translating into approximately 2 days of delivery time. Through our new virtual card delivery and distribution platform, which we plan to have fully rolled out by Q4, that processing time goes from 2 days To near real time delivery of cards to our suppliers. This dramatic overhaul does not only improve the customer experience through faster speed, But it also drives scalability and efficiency for us. With virtual card issuance potentially numbering into the millions on an annual basis, This new capability has the potential of not only generating meaningful savings over time, but also extending the payment automation horizon significantly further beyond our current 80% payment automation level today. In summary, we are pleased with our strong second quarter top line and Suctional bottom line results.

Speaker 1

We remain focused on delivering on our product roadmap, integration partnerships and e payment penetration, while leveraging data to drive incremental customer value. On today's call, we provided a progress update on And look forward to further such updates around partnerships in the works in addition to existing and new offerings we've been nurturing. This includes our flagship Invoice Accelerator 2.0 Finance offering, which is targeted to be released in the Q4 And is just one example of many new innovation products in our product pipeline. Along similar lines, We're also rapidly broadening the use case for products just launched across our other verticals based on demand. Our new lien waiver management offering that we announced last quarter He's a great example of this and we look forward to updating you on this offering along with other use cases in future quarters.

Speaker 1

Of course, none of this success we have achieved to date would be possible without the existing talent and new talent we continue to attract to be part of our team. So it is with great enthusiasm, I take this opportunity to announce the promotion of John Feldman to the role Chief Operating Officer from SVP of Operations. John has leveraged his formidable experience as Chief Operating Officer of Capital One's Retail Bank, Chief Risk Officer as well as other roles overseeing product management Around payments and various financial institutions to great effect at AvidXchange. Thanks to John and his team, Our efforts related to the service transformation strategy are yielding results as roughly 80% of our e payments Have now been automated with significant more gains to come. Also, I'm pleased to formally announce the appointment of Doug Anderson as our Chief Product Officer.

Speaker 1

Doug brings his forte of building products and other SaaS based offerings at scale to AvidExchange honed from his experience at leading global tech companies such as SAP Concur. We believe these strategic, operational and Allen initiatives coupled with our strong balance sheet cash gives us further optionality to accelerate value creation opportunities. Of course, we are mindful of the volatile macroeconomic backdrop and the potential for further short term impacts on our business. However, We believe we are still in the very early innings of a significant long term opportunity to drive impactful value for our customers, Create future growth opportunities for our team members and unlock both short term and long term value for our shareholders. With that, I'd like to turn the call over to my partner, Joe Wilhite.

Speaker 2

Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our Q2 2023 financial results, which reflect continued execution of our growth strategies amid continued macro uncertainty. Overall, we delivered another quarter of healthy year over year financial performance. Relative to the implied Q2 2023 business outlook, 2nd quarter revenues came in better driven largely by interest revenues. That together with higher gross margins driven by unit cost initiatives and yield expansion Coupled with expense control led to significant adjusted EBITDA outperformance.

Speaker 2

We believe this adjusted EBITDA outperformance underscores the scope For operating leverage and our financial model. Now turning to year over year results. Total revenue increased by 19.1% to $91,200,000 in Q2 of 2023 over the Q2 of 2022. Roughly 2 thirds of the revenue growth was driven by the combination of addition of new buyer invoice and payment transactions Coupled with yield expansion, the remaining third of our revenue growth this quarter was driven by higher year over year interest revenue, partially offset by a year over year decline in political revenues. Our strong revenue growth also resulted in total transaction yield expanding to 4.84 In the quarter, up 9.5 percent from $4.42 in Q2 of 2022.

Speaker 2

Of the 9.5% increase, roughly 3 quarters of the increase was driven by the aforementioned flux between interest And political revenues with the remainder driven by mix and yield expansion. Software revenues of $27,200,000 which accounted for 29.9 percent of our total revenue in the quarter, increased 12.6% in Q2 of 2023 Over Q2 of 2022. The increase in software revenues was driven by growth in total transactions of 8 point 7% with the balance driven by a combination of price increases and certain subscription based revenues. Payment revenue of $63,200,000 which accounted for 69.4% of our total revenue in the quarter Increased 22.6 percent in Q2 of 2023 over Q2 of 2022. Payment revenues reflect the contribution of interest revenues, which were $9,200,000 in Q2 of 2023 Versus $1,200,000 in Q2 of 2022.

Speaker 2

Recall, year ago period payment revenues also included contribution from political media revenue. Almost half of the 22 percent 22.6% increase in payment revenues was roughly in line with The increase in total payment volume, which was up 12.6% with the remaining portion driven by the aforementioned flux between interest and political revenues. On a GAAP basis, gross profit of $55,600,000 increased by 29.6 In Q2 of 2023 over the same period last year, resulting in a 500 basis point improvement in gross margin for the quarter to 61%. Non GAAP gross margin increased 460 basis points to 68.3% in Q2 of 2023 Over the same period last year, roughly more than half of which was driven by a combination of unit cost efficiencies, Yield expansion and mix with the remainder driven by higher interest revenue. Now moving on to operating expenses.

Speaker 2

On a GAAP basis, total operating expenses were $81,400,000 an increase of 18 point 3% in Q2 of 2023 over Q2 of last year. On a non GAAP basis, operating expenses excluding depreciation and amortization increased 10.9 percent or $5,800,000 to $59,200,000 in the Q2 of 2023 from the comparable prior year period. However, on a percentage of revenue basis, operating expenses excluding depreciation and amortization declined roughly 480 basis points to 65 percent in the Q2 of 2023 from 69.8% in the comparable period last year. This highlights the operating expense leverage, particularly across G and A as well as sales and marketing. I'll now talk about each component of the change On a non GAAP basis.

Speaker 2

Non GAAP sales and marketing costs decreased slightly by 0 point or 2.2 percent to $18,700,000 in Q2 of 2023 over Q2 of last year, Which was driven largely by lower marketing costs around event sponsorships. Non GAAP research and development costs increased by $3,800,000 or 21 percent $21,700,000 in Q2 of 2023 over Q2 of last year. The increase was due to the continued investment in our products and Platform. Non GAAP general administrative costs increased by $2,500,000 or 14.9 percent $18,900,000 in Q2 of 2023 over Q2 of last year driven by a combination of higher expenses As we transition to a public company coupled with higher performance based bonus accruals and bad debt reserve adjustment. Our GAAP net loss was $18,800,000 for the quarter versus a GAAP net loss of $25,700,000 in the prior year period, Driven by a combination of strong revenue flow through and expense control leading to lower operating losses coupled with higher interest income and lower interest expense due to reduced borrowing costs and partial debt pay down.

Speaker 2

Our GAAP loss reflects $3,600,000 of expenses Related to the cyber incident in the Q2 of 2023, which includes professional services and legal fees. On a non GAAP basis, excluding those cyber costs, our net loss in the Q2 of 2023 was $500,000 an improvement of $13,200,000 compared to the year ago quarter driven by the aforementioned factors. On a non GAAP basis, adjusted EBITDA was approximately $3,000,000 in Q2 of 2023 compared to a loss of $4,700,000 in Q2 of 2022 largely due to the aforementioned factors. Now turning to our balance sheet for a moment, I want to touch on a few key items. We ended the quarter with a strong corporate cash position of $438,300,000 against an outstanding total debt balance of $82,900,000 Including a note payable for $18,700,000 We had $23,900,000 on our credit facility undrawn at quarter end.

Speaker 2

Corporate cash, meanwhile, was split roughly 60% among money market funds, commercial paper and U. S. Treasuries with the remaining 40% in demand deposit accounts. The weighted average maturity on the corporate cash was roughly 12 days, While the effective interest rate on our corporate cash position for the 2nd quarter was roughly 4.6%, customer cash at quarter end was Approximately $1,200,000,000 with an interest rate of roughly 4.2% for the quarter. I'll now provide an update on our full year 20 with our Q2 2023 financial outperformance balanced with further volume impacts from macro crosscurrents And based on all information currently available, we're raising our 2023 outlook and now expect total revenue for the year to be in the range of $368,000,000 to $370,000,000 Our 2023 revenue outlook reflects approximately $35,000,000 in interest From customer funds versus approximately $11,000,000 earned in 2022.

Speaker 2

Also as a reminder, we do not anticipate any political media revenue contribution in 2023 versus having $8,500,000 in 2022. Similarly, we expect a higher non GAAP adjusted EBITDA profit ranging Between $7,000,000 $8,000,000 for the year. This adjusted EBITDA outlook reflects approximately $2,000,000 in incremental second Investments in IT security enhancements and associated costs related to the cyber incident. With that, I would now like to turn the call back over to the Prager to open up the line for Q and A. Operator?

Operator

Your first question comes from the line of Jamie Feldman from Susquehanna. Jamie, your line is now open.

Speaker 3

Hi. Good results here. Thank you for taking my question. I just was Hoping you could elaborate on this Slide 4, it's the financial monetization flywheel.

Speaker 4

And I

Speaker 3

know you had talked about It's a bit in your prepared remarks, but if you could take a couple of these in particular that you think The model is most leveraged to like how would you decompose it? Is it obviously the buyer customers, The transaction yield, if you could pull out a couple of these and just talk through how you're thinking about the inputs, That would be very helpful. Thank you.

Speaker 2

Thanks, Jamie. And appreciate the question. Why don't I kind of lead off and let Mike add some color. The first thing I would say is just zooming out from the flywheel and the metrics that you're referencing. When we think about that 20% organic growth potential that we have in the early days of this really big opportunity.

Speaker 2

We think about it in sort of Kind of 3 simple elements to our growth algorithm that kind of do math to that to the flywheel. And so first of all, when we think about Gear 1 is attracting and retaining buyer customers of accounts payable automation. We think about keeping and Expanding organically, that volume on our platform. Number 2, we're continually focused on adding Additional buyers and their volume. And number 3, expanding the yield of the volume on that platform.

Speaker 2

And the yield really comes into gear 3 and here 4. So just generally setting the table, Mike, I don't know if there's more that you want to sort of map back to the flywheel.

Speaker 1

Yes. So one of the things that the Flywheel does, Jamie, is allows us to really monetize continue to monetize the Same transaction multiple times and now we're up to 5 to 6 different monetization events that we can have in a single transaction From the managing the software for the purchase order, the invoice, the payment, and then we have specialized services that we recently Like Avid Analytics and even one around utility bill payments. And then on the network side, We certainly have the economics related to e payments along with them our Invoice Accelerator offering related to supplier financing. So it allows us to continue to monetize the same transaction multiple times and where that shows up is in our transaction yield continue to And then the one thing I like to remind people is with the Gear 3, which is at the bottom of Flywheel. That's a really big opportunity for us as we still have over 50% of our suppliers on paper check.

Speaker 1

And just to remind people, when you do that conversion from a paper check supplier to an e payment supplier, The revenue on the payment network for a check is 0 and we have relatively high cost of about $0.85 When we flip it to be an electronic supplier, the cost goes to pennies and the revenue goes to $8, $10 on average per So that's a really big kind of built in monetization kind of opportunity for us within the existing base before we even add new Your buyer customers and supplier customers to the flywheel.

Operator

Okay. Your next question comes from the line of Dave Koning from Baird. Dave, your line is now open.

Speaker 5

Yes. Hey, guys. Great job on profitability. And I guess my first question, incremental Margins on a year over year basis about 53%. It's the strongest in many years.

Speaker 5

And I'm wondering if you can kind of disaggregate a little bit. We know Interest revenues probably contributed some, cost cuts maybe some. And then how much is just kind of core Stable cost base and revenue growth just driving good incremental margin, like maybe just kind of walk through that a little bit and how sustainable this is?

Speaker 2

Yes, great question, Dave. Thanks for the question. So maybe let me just start with kind of talking about gross margin, then I'll make a few other comments All together contributing to the incremental margin you're seeing from an EBITDA perspective. We've talked about the importance of gross margin And the focus that we have on that, we said before that as we get into that 70% zip code, we begin to see a profitable business and we've kind of crossed that point And kind of not looking back. And so for the quarter overall good overall non GAAP gross margin expanded 460 bps as mentioned in the prepared remarks, 100 bps on a sequential basis.

Speaker 2

And to your point, the float Contribution is something that benefits, it's kind of a great feature in our model and benefits gross margin and EBITDA performance, but stripping out Both the impact of Flow and the year over year impact of the political media advertising, we're still up about 260 bps year over year, 40 bps Sequentially, so that really shows the focus that we're taking on just operational efficiency across the board. No one particular lever, but many That we're focused on and so we're proud of the gross margin result for the quarter. On the EBITDA side of Again, we're also we talked about beginning to see scale in the model this year, With kind of G and A as we kind of get through the full load of public company costs in our run rate and then a focus Kind of minimizing that growth and then also from an R and D perspective, we're really focused on Both growth and profitability and we have a full payload of investments in our products and platform, but also We see and are very focused on harvesting scale from R and D as well. So, all told, we're kind of pleased with the quarter, pleased with Progress from a profitability standpoint.

Operator

Your next question comes from the line of Nans Blum from Goldman Sachs. Nans, your line is now open.

Speaker 4

Hey, guys. I think that was me. I appreciate you taking the question. I was hoping you would spend a little bit more time just kind of unpacking some of the macro impacts That you're seeing in the quarter, trying to think about like the expectations for revenue ex float in the back half of the year and how that's Changed. And I guess as you look out, we've seen some of these macro related impacts on invoice sizes over the past year.

Speaker 4

Do you have a sense or can you maybe just kind of catalog when you first began to seeing it and when we should start to kind of grow over some of those negative impacts on invoice sizes? Thanks.

Speaker 2

Yes, good question, Will. And I'm happy to take that one. I guess what I would say is, first of all, we're pleased with the quarter, another solid Quarter kind of exceeding our expectations, but in a time of caution and moderation that has persisted All year and I think we talked early in the year about having seen this begin midway through the last for the 4th Quarter of last year and that choppiness or moderation, whatever you want to call it, has really kind of continued. And so as we sat and thought about You know, kind of guiding the second half of the year, obviously, we've incorporated, kind of the beat that we see in a revised take on what We see from a float revenue standpoint, apart from that, the back half really contemplates nothing different than what we've sort of been Suggesting all along. And so not sure when it turns around, we'll certainly talk about it when it happens, but expecting that the current conditions persist Through the better part through the end of the year.

Speaker 1

Yes. That was well said, Joel. And Will, just maybe a little historical context. In kind of past cycles when we've Seeing it turned around, we noticed that discretionary spend comes back really quickly across our customer So, we certainly look forward to kind of when that macro turns around as well.

Operator

Your next question comes from the line of Ramsey Alafal from Barclays. Ramsey, your line is now open.

Speaker 6

Hi there. Thanks so much for taking my question today. I wanted to it's great to see the entire vertical stack Sort of ex real estate was back to healthy growth this quarter. On real estate, I was wondering how you're Looking at that vertical over the longer term, I'm thinking of work from home trends and sort of struggling commercial office markets. Will real estate kind of diminish as we move forward in terms of its longer term contribution to growth?

Speaker 6

Or are you expecting a rebound back to sort of prior levels.

Speaker 1

Yes. So Ramsey, this is Mike. So one thing I'd like to clarify is that overall the vertical of real estate Actually performed fairly well for us. Then my commentary was, it's a big vertical related to lots of subsectors within the vertical. And when we look at our customer base, it's really kind of split across 5 different verticals, led by multifamily apartment operators Being 1, the second one is student housing and campus housing, third is industrial, the 4th is retail and the 5th is commercial office.

Speaker 1

So of the 5, personal office is the one that we saw that had that still has kind of the headwinds Related to the dynamics that you just indicated. But yes, the reason why the overall vertical was positive for us is Because multifamily, student housing and industrial are really performing well. And if you see a lot of our New kind of partnerships that we've launched in the last couple of years are with companies in the focus in the multifamily sector. So we and then maybe kind of the backdrop is, although it's our first vertical we started in 23 years ago, We're still single digit penetration within the vertical. So lots of runway in that overall vertical.

Operator

Your next question comes from the line of Craig Maurer from F. C. Parfas. Craig, your line is now open.

Speaker 3

Yes. Hi. Thanks, guys. Two questions. First, could you unpack the increase And revenue guide a little bit and differentiate between what was driven by an increase in float revenue versus What the change was in core revenue guidance?

Speaker 3

And secondly, if you think back to prior cycles, Can you perhaps try to size what you think the impact from political revenue will be in 2020

Speaker 2

Thanks, Craig. I'll take the first part of the question. Yes. So look, we were pleased again with the quarterly results, again, a beat on top and bottom. And so we've factored Obviously now raising the range for the year factored that into the equation.

Speaker 2

And really I think it would be If I were to split that out, it's really the continued what we continue to see is that moderation in spending across The middle market, that's baked in and a little bit of a tick up in that float revenue contribution, but Feel good about the outlook for the rest of the year. Mike?

Speaker 1

Yes. And on the political side, so in

Speaker 4

the last

Speaker 1

cycle, we Controlled or processed roughly 30% of the political spend payments of the industry. And if we look Forward to what's estimated for the 2024 political cycle, they estimate to be the first $10,000,000,000 Our spend cycle for political advertising and that's roughly I believe the last cycle It was roughly $7,800,000,000 So certainly some growth there in $24,000,000 And the one thing that was a learning for me was Everyone kind of assumes that it's exclusively for the candidates and that's actually not the case. It's a kind of mix Split between both candidate advertising as well as the main issues. So the issues drive a lot of the spend as well. So that probably maybe gives you a little bit of context.

Operator

Fraser. Your next question comes from the line of James Fusen from Morgan Stanley. James, your line is now open.

Speaker 7

Yes, sure. I wanted to talk a little bit about Competition and we've seen news recently from other players in the market including Brex and Ramp yesterday. And How are you seeing what are you seeing out in the market in terms of competition? And how would you frame the distinction in business model that are out there and Strategy compared to your own right now.

Speaker 1

Yes. So it's a good question. Certainly, we saw those announcements as well. It's kind of interesting in terms of actually what we see happening in the market. It's really no different than what we have seen historically Related to new competition within the middle market segment, typically the new entrants have been focused on small There's lots of good reasons for that, mainly driven by all the nuances of The mighty middle, as I call it, the middle market being roughly 50% of all the company's middle market highly align themselves with industry verticals That require unique business process as well as accounting systems to support the verticals.

Speaker 1

And that translates to a big effort related Product development related to integrations as well as accommodating the nuances of the industry. A good example of that is what Talked about with our lien waiver management for the construction vertical, so we can do a good job of executing construction related payments. And so, what we continue to see is really the same players across the middle market Component and it's very verticalized. And then you have the horizontal layer, where we do see kind of Probably the most competition is in the horizontals related to the NetSuite channel, Microsoft Dynamics, Sage Intacct, Acumatica as examples. And specifically for BrexRamp, they've been really on the spend management side Versus the AP side and we don't really see them They don't have significant activity that we see across our particular verticals within the middle market.

Operator

Who comes from the line of Shenzhen Wang from JPMorgan. Shen, your line is now open.

Speaker 8

Hi, thanks. Good morning. I think Dave asked on incremental margins, but maybe I'll ask on gross margins in the second half again. Just want to make sure if there's any callouts For the second half as we model that out.

Speaker 2

Yes, great question, Tien Tsin. And I think it's again, I won't repeat obviously my comments In response to Dave's question, but we were pleased with our kind of margin expansion again 460 That's even close to 300 stripping outflow political. One of the things specifically to your question about, I would go back to some comments I've made Previously about just cautioning some moderation in those gross margins going forward. Again, our we're super focused on gross margins. We expect to continue to see that edge up over time, but not in linear fashion.

Speaker 2

And so I would sort of say that We think about overall year expansion in the kind of 200 bps range and maybe 100 or so stripping out float on a full year basis.

Operator

Your next question comes from the line from Darren Pollard from Wolfe Research. Darren, your line is now open.

Speaker 8

Guys, thanks. Just revisiting the algorithm around EBITDA 20% targets, I know gross margin A big part of that. We're seeing the success of that now. But if you guys don't mind reminding us just of the path and the building blocks and the timing We could pick it up for all those factors playing out. And how much is relying on incremental well, I guess, I'd say both incremental products and offering Better high incremental margin as well as macro to some degree.

Speaker 2

Yes. I mean, maybe I'll let me make a brief comment and then Mike add some color. I think that Obviously, we're focused on getting to that kind of rule of 40 profile with a kind of organic twenty percent revenue growth as you move out into kind of 25% and even improving upon that beyond. I think the pattern again, I would go back to not Not necessarily linear, but sort of steady continued expansion in gross margins and scale Really beginning to see now and for the next year plus in our operating expenses. Mike, anything to add to that?

Speaker 1

Yes. So I got to go back to maybe it was a A little bit of the first question that we have today on the flywheel. I kind of think of that kind of overall growth algorithm today as really kind of 5, Six different components. The first is wherever we have these multiple 5, 6 now monetization events on a single transaction, And that's obviously growing. We still have the kind of the big bucket of paper check suppliers, the 50% of paper check suppliers.

Speaker 1

That's a great both revenue as well as gross margin driver. We're super excited about this year is going to be one of our biggest years in terms of Customer facing product innovation, certainly led by Invoice Accelerator coming up Over the second half of this year. And then we have the strong top of funnel activity, continue to be adding new kind of new buyers. And then the last thing is, I think the macro certainly will turn around at some point. And this is, I think, as Joel indicated, we're not expecting that to be anytime soon, but certainly in the future, that will Kind of correct itself as we've seen in past cycles as well.

Operator

Your next question comes from the line of Alex Margraf from KeyBanc Capital Markets. Alex, your line is now open.

Speaker 8

Hey, guys. Thanks for taking the question. Maybe first one, Just kind of on a similar topic around product and top of funnel activity. Mike, I think you mentioned the three way purchase order And module helping with deal size. Just wondering if you could maybe clarify or even quantify some of that tailwind?

Speaker 8

And then just more broadly, how you're thinking about The product roadmap and kind of impact on deal sizes going forward kind of in the near term.

Speaker 1

Yes, that's a great question related to some of the innovation that we've rolled out to customers. And Late last year, we talked about our kind of next generation purchase order procurement related Kind of functionality that we've been rolling out to customers and one of those was kind of the three way match capability. The result is what we are kind of hoping would And that is, we are starting to attract more of the upper middle market, some bigger customers. And that's kind of had an impact on our overall kind of average deal size increasing roughly about 20%. So I'll give you Historically, it's been roughly in the $50,000 range and now it's kind of migrated towards the $60,000 range.

Speaker 1

So it's had a really positive impact related to kind of the types of buyer customers that we're attracting across the

Operator

Your next question comes from the line from Tian from Deutsche Bank. Tian, your line is now open. Ian?

Speaker 2

Maybe next question.

Operator

Okay. Your Your next question comes from the line from Brent Bracelin from Piper Center. Brent, your line is now open.

Speaker 9

Thank you. Good morning. I think Mike you talked about 55% of the payment mix being tied to check today. What could that check mix like over the next 2 to 3 years? And what are the things in your control that you can Drive that mix lower?

Speaker 9

Thanks.

Speaker 1

Yes. So I like this question, Brent. It may be a gold star question because it's One of the things that I spent a lot of time thinking about and certainly a lot of our growth strategies relate to chipping away at this big installed base of paper track. So first of all, I think we believe kind of long term that that number can go into 70% type range. And the kind of the strategies to get there are exactly the types of things that were Yes, that I talked about this quarter that we're rolling out to customers and that is continue to look at different types of payment modalities with different Value propositions, different price points with different elements of data wrapped into it that we can deliver in an automated way or Straight through process way to our supplier customers.

Speaker 1

And the one that we talked about this quarter is It was related to kind of the same day payment execution for construction customers to Satisfy the lien waiver requirements, which is a unique business process within the construction vertical. And so that new payment offering that we're rolling out Is another good example of a new payment modality specifically for the construction vertical. And there's a great analogy here Because we learned about the impact of that type of payment modality, maybe a year or so ago when we rolled out A similar payment modality in the media vertical for same day satisfaction of political payments, Which has a very sensitive timeline within the political media industry. And so those are all good examples We continue to add new payment modalities that we look at how do we target different sectors of this remaining paper check base With unique value proposition both incorporating price points as well as data delivery.

Operator

Your last question comes from the line of Kian from Deutsche Bank. Kian, your line is now open.

Speaker 1

Hey, guys. I think that's me. I'm guessing it's Brian Keane. I guess two questions. Mike, can you just help us on sales cycles?

Speaker 1

As we talk about top of the funnel activity, I know they were pushed out a few weeks, maybe even a month. I'm just Curious, is that still the case? And then Joel, any callouts between 3rd Q4 as we set our models just to make sure We think

Speaker 4

about the right growth rates

Speaker 1

to put in there. Thanks. Yes. Maybe I'll start, Brian. And so I'm glad we got your question here.

Speaker 1

So as it relates to kind of sales cycles, it's remained consistent with what we've been seeing for I think we kind of referenced that we saw kind of a slight kind of extension of roughly 10 days From what we've historically seen and that's remained consistent in the past in this past quarter as well.

Speaker 2

And Brian, just to wrap up your Last part of your question, just when you think about the second half, couple of comments that I could add. First on the revenue side of things, Way I would think about it, we don't guide necessarily the next quarter, but I would think about revenue as more like a kind of a 49, 51 split more or less, a little bit of Ramp as you get to the end of the year. And then secondly, from an EBITDA perspective, we are really pleased with the quarterly results. The things that I would suggest, again, we're Proud to kind of be a profitable business, continue to focus on doing that, not looking back. Keep in mind, I did mention some investments we're making to pull forward Some investments in our information security profile and so those will be beginning to ramp between now and the end of the year And we also continue to make the investments whether it's Invoice Accelerator or other products.

Speaker 2

That said, we're focused on continuing to be a profitable business going forward. So thanks Good question.

Operator

Your next question comes from the line of Timothy Chouteau from Credit Suisse. Timothy, your line is now open.

Speaker 4

Great. Thank you for taking the question. A follow-up on the check mix question. So if you could just Lay out what a time series might have looked like. I know the business has been operating for many years.

Speaker 4

What was that check mix like 10 years ago? Were there any kind of step Functions ever when you introduced new products, you gave the example with the construction vertical one that might have helped with adoption of kind of eliminating some of those checks. And then To the extent that some of that check mix will start to go away at a more accelerated path over the coming years, other products could help with that.

Speaker 1

Yes. So good question. So a little bit of kind of the history lesson, we launched the Avapade network in 2012. And I think that 1st year we were 95% check. Certainly, as we got smarter about virtual card delivery That those percentages went up.

Speaker 1

One of the biggest step function changes was when we launched our AvidPay Direct, which is Our ACH plus type payment offering where we can configure different interchange or fee based rates, We settled through the ACH process, and then we wrapped kind of a data layer around that transaction. We Deliver it to the supplier for reconciliation. And when we delivered and we came up with the Avipage rack, that was probably a step function Change, and that kind of now has contributed roughly 10 percentage points of that monetization. So when I look back maybe 5 years ago, we are probably in kind of 25% range and that's ticked off Roughly 40% of transactions were settling through ePayments. So we have noticed a kind of a progression.

Speaker 1

One of the things that is Hurts that number a little bit when you look at it on a gross basis is that we're adding large volumes of new customers that are bringing large volumes of suppliers with them, and especially in as we add new verticals and in our emerging verticals where we don't have as deep Traction rate of converting those suppliers that we do in some of our earlier sub verticals, we see larger amounts of paper check suppliers that we're adding To the overall pool. But certainly, we're adding, converting thousands of suppliers on a weekly basis to

Operator

Last question comes from the line of Will Nance from Goldman Sachs. Will, your line is now open.

Speaker 4

Hey, guys. Appreciate you squeezing me in for a follow-up. Figured I wouldn't let the last 3 minutes go to waste here. But maybe just a follow-up on a similar vein of, I think, Tim's question And just now, when we look at sort of the take rate trajectory, we've kind of been in this roughly 30 basis point range for a while now. And I know a big part of the long term targets Seeing increased payment electronic payment adoption and presumably higher take rates over time.

Speaker 4

Just wondering if you would Talk about kind of near term drivers of an acceleration in that electronic payment adoption. And I guess maybe just more specifically a modeling question. When we think about that year over year headwind that you guys are facing in the political advertising vertical, like was that a higher Electronic penetration, like in other words, like is the 40% number that seems like it's been relatively flat over the past year, is that being weighed down by the lack of the political ad spending this year.

Speaker 2

Yes. Good question, Will. So the last Part of your question, so the answer is yes. There's a little bit of enhancement by the presence of political from any payment And sort of TPV yield. So yes, is the answer to that question.

Speaker 2

I think your general question is what Near term drivers to acceleration might exist. Again, we're not sort of predicting when we exit this kind of macro environment, it's possible that that Has some positive impact. But again, we're pretty proud of the TPV yield we've got to Start with just from an industry leading perspective, moreover in this environment, and certainly there's a lot of leverage over the medium and longer term Through Gear 3, as Mike talked about, to take checks out of the system and drive that up.

Operator

There are no further questions at this time. I would like to turn the call back over to Mike Frager. Mike, over to you.

Speaker 1

Thanks. So first of all, thank you for everyone joining our Q2 earnings call. We're looking forward to continuing to update you on our continued progress of our operating and financial performance along with our product innovations. With that operator, you may end the call.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
AvidXchange Q2 2023
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