Avidxchange Holdings Inc (AVDX) 2023 Q1 法說會逐字稿

Good morning, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. First Quarter 2023 Earnings Call. Joining us on the call today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's Head of Investor Relations.

Before we begin today's call, management has asked me to relay the forward-looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make this afternoon. Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call. Also please note that the company undertakes no duty to update or revise forward-looking statements.

Today's call will also include a discussion of non-GAAP financial measures as the 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. Please also note, today's event is being recorded.

With that, I will now turn the call over to Mike Praeger. Please go ahead.

Thank you, everyone, for joining us today. Joel Wilhite and I are excited to discuss AvidXchange's first quarter 2023 results. We delivered another solid quarter of year-over-year financial results backed by healthy underlying metrics.

First of all, I'm excited to report that we've delivered our first profit on an adjusted EBITDA basis since our IPO on October 13, 2021, and 2 years ahead of plan at the time of our IPO. Relative to our first quarter 2023 business outlook expectations, which Joel will discuss in his prepared remarks, our first quarter 2023 results also came in better than expected.

As we stated in our March earnings call, we continue to see strong top of funnel activity with leading economic indicators moderating amid continued macro volatility, our value proposition of accounts payable automation and payment solutions fueled by our 2-sided network is a powerful lever for resource-constrained middle-market companies to gain significant cost structure advantages and savings by automating their accounts payable and disbursement processes.

As evidenced by our continued strong top of funnel activity up roughly 20% year-over-year in Q1 in what is a large and un-penetrated addressable market is extremely encouraging. This current quarter is no exception as we are on track for another strong double-digit top of funnel growth quarter.

Moreover, this growth remains largely broad based across our 8 verticals, driven by partnerships, integrations, product and feature launches in 2022 and year-to-date this year. This gives us further confidence that our value proposition and product portfolio aligns with our customers' needs even more deeply as we help them navigate an increasingly challenging macroeconomic backdrop.

In summary, I believe our strong Q1 results were driven by the following 3 themes: One, the resiliency of middle-market companies as evidenced by our continued strong year-over-year top of funnel growth; two, our biggest competitive advantage in leading the middle market continues to be our ability to monetize payments through the AvidPay Network at a 2 to 3x advantage over our competitors and is a key ingredient in driving revenue growth and payment yield results.

And third, the pace of new integrations, strategic partnerships, new product functionality and features, along with vertical market expansion, leaves us cautiously optimistic for 2023, while we're looking forward to a robust 2024.

Let me now provide a quick summary of our year-over-year first quarter 2023 financial results. We delivered revenues of over $86 million, which grew at a rate of 22% compared to the same period last year. This now marks 7 consecutive quarters of exceeding our internal financial targets and delivering 20% plus comparable organic revenue growth.

Non-GAAP gross margins expanded to 67.3% in the quarter, up 500 basis points on a year-over-year basis. We posted a non-GAAP adjusted EBITDA profit of approximately $400,000 in the quarter versus an adjusted EBITDA loss of $5.6 million last year. And we ended the quarter with 2.5% year-over-year increase in our total transaction yield to $4.76.

On today's call, I want to highlight our execution on 3 key areas of strategic growth and innovation across our AvidXchange business flywheel. First, we're going to highlight the formal addition of an exciting new industry vertical. Second, we are excited to discuss new marquee partnership in the support of this new vertical.

And third, we're discussing new integrations as well as innovation in our existing product suite. All 3 areas we'll discuss as part of our broader strategic and execution framework we committed to at the time of our IPO and we are delivering on all these commitments and more.

Today, we're excited to announce our formal entry into the hospitality vertical under Gear 1 of our AvidXchange business flywheel. This expansion brings a total number of verticals we address to 9 overall industry verticals, where penetration rates are still largely in single digits.

Our approach to vertical market expansion is a function of marketplaces push and pull dynamics. While the push dynamic is wholly bottoms up and targeted, the pull dynamic is more customer-led initially, a function of the networking effects driven by CFOs, controllers and finance professionals who champion our product leadership over their careers.

As these internal champions target new industries, they become our brand and product ambassadors, creating industry awareness and building a critical mass of users within our various vertical and horizontal markets. Overlaying our marketing engine on top of the user cluster and gleaning insights for various factors, such as market fit, product fit, partnership and competitive landscape as well as testing and learnings, this enables us to stand up a new vertical where our position of strength leads to a deeper integration from leading ERPs and go-to-market partnerships focused on a particular industry vertical.

The hospitality vertical ecosystem boasts roughly 10,000 middle-market customers, including subsegments such as recreation and country clubs. Already, we have amassed over 50 customers organically, which is similar to customer levels when we acquired our way into the media vertical as an example. And our top of funnel is seeing a very healthy level of activity and interest already.

Our excitement in entering the hospitality vertical is centered on our M3 partnership, a marquee strategic ERP partnership that we recently won and we believe will further accelerate our momentum in the hospitality vertical. To illustrate the power of our value proposition and the traction we've already gotten in the hospitality vertical, I'd like to provide a case study of Island Hospitality Management. Managing over 170 hotel properties across the United States, West Palm Beach-based Island Hospitality is one of the largest independent hotel operators. The company's vendor base consists of thousands of suppliers from those with national reach to local operators.

Under Brian Murphy, Director of JD Edwards Business Services at Island Hospitality, Island Hospitality adopted our invoice and pay solution and was able to completely transform its accounts payable department by cutting invoice processing time by over 80%. Whereas it would take an average of 18 days to historically approve and process a paper invoice, our AvidXchange system reduced their 18-day invoice approval process by over 80% down to averaging only 3 days.

As a result, Island Hospitality was able to reduce and reallocate their accounts payable head count to more strategic positions while avoiding financial penalties on various nondiscretionary payables, including utility invoices and payments. Furthermore, the company was also able to have real-time visibility into an electronic audit trail for their invoices and payments that were easily digestible for their outside auditors.

Brian Murphy said it best by stating, "Overall, it was really a no-brainer for us. My advice to any one is to take a look into automation and see if it will help your organization the way it transformed ours." This brings us to our new partnership under Gears 2 and 3 of the AvidXchange business flywheel.

As part of our strategy in targeting leading ERPs in new verticals, we are excited to announce a new strategic partnership with M3 to embed our AvidPay Network inside of their ERP functionality to drive M3 customer payment transaction volume and monetization across our AvidPay Network.

As a reminder, our strategy around API partnerships and integration playbook is to be deeply embedded with each accounting system and ERP provider who has a vertical leading market share of customers across our existing and new targeted verticals where there's an opportunity for significant transaction volume to be monetized.

M3 is the hospitality market leader in cloud-based accounting solutions and data management platform, custom-tailored specifically for the hospitality industry. Today, M3 has a customer base exceeding 1,000 management groups and owner operators, including 50% of the top U.S. hotel managers and operators in United States.

M3's accounting solutions work seamlessly with other critical back office hospitality systems and productivity tools for hotels of all sizes. This strategic partnership, which we expect to go live over the next 2 quarters, underscores the leadership of our payment and invoice solutions, including our industry-leading e-payment adoption levels, which lead our industry for B2B electronic payment monetization, coupled with our robust accounts payable automation software solutions.

Similar partnerships in the past have yielded penetrations upwards of 50% of an accounting partner's customer base. We believe this opportunity is sized for similar levels of penetration over the next 3 to 5 years.

We continue to innovate through these new integrations and deeper product functionality. On the integration front, we redoubled our penetration efforts into the nonprofit vertical with MIP under Gears 1 and 2 of our AvidXchange business flywheel. MIP is a major cloud and on-premise-based ERP focused on nonprofits.

In addition, we already have integrations and partnerships in the nonprofit vertical market with Blackbaud. Our solid track record and reputation with Blackbaud has been a catalyst to create networking effects by stimulating the market demand and driving non-Blackbaud customers using MIP towards our solution.

Through our robust invoice-to-pay API integrations built on our Avid Connect platform, MIP's 6,000 strong customers will see significant cost savings by digitizing their back office while enabling them to leverage our payment network to pay their suppliers.

Embedding and integrating new industry-leading functionality into our existing vertically-focused accounts payable automation solutions continues to be one of the building blocks for Gear 1 of our AvidXchange business flywheel. We are also pleased to announce the introduction of a lien waiver management for the construction vertical. Our construction vertical products features our timber scan and titanium suite of playship accounts payable processing and content management software, which are so mission-critical to our customer operations that one customer recently proclaimed that they would actually to quote, "Crash and burn without AvidXchange."

We believe the integration of lien waiver management takes our construction product suite to the next level of being critical application that construction customers depend on to run their business. Lien laws are state laws that ensures a subcontractor or supplier is paid for the agreed-upon service and/or materials that they provide to a project or job, and if not, they're allowed to file a lien on the property.

Simply put, a lien waiver is a legally binding document that assures an owner or a lender that a subcontractor or a supplier has received payment for the agreed-upon service or materials and therefore, waives any right to file a lien on the property. On any given construction project, there can be anywhere between hundreds and thousands of these lien waivers being processed monthly.

Currently, this is a highly manual process and the functionality around lien waivers exist as a stand-alone offering. We believe our solution is a game-changer for customers that is embedded, integrated and automated into our purchase of a software workflow.

Currently slated for general availability this quarter, our Version 1.0 of our lien waiver management product starts with creating a lien waiver register. It then intakes and images the executed lien waiver, feeding the lien waiver data into a dashboard that tracks the status of the lien waiver while closing the loop with reporting capabilities.

With a cohort of roughly 1,500 invoice-only existing buyer customers, we believe our lien waiver functionality will provide visibility and control within the entire purchase day process on 1 single platform for our construction customers, thereby increasing transaction volume across our AvidPay Network and accelerating the pace of our payment adoption within the construction vertical cohort, in turn, driving both Gears 2 and 3 of our AvidXchange business flywheel.

In summary, we are off to a strong start in the year with a solid set of first quarter 2023 financial results, highlighted by delivering adjusted EBITDA profitability ahead of expectations. As stated earlier, these results were driven by the following 3 themes: First, the resiliency of middle-market companies as evidenced by our continued strong year-over-year top of funnel growth. Second, the biggest competitive advantage in leading the middle market continues to be our ability to monetize transactions through our AvidPay Network at a 2 to 3x advantage over our competitors and is a key ingredient in driving our revenue growth and payment yield results.

And third, the pace of new integrations, strategic partnerships, new product functionality and features, along with vertical market expansion leaves us cautiously optimistic for 2023 while looking forward to a robust 2024. These achievements, combined with our expected accelerated path to adjusted EBITDA profitability for 2023, along with our strong balance sheet, positions us well to continue deepening our competitive moat as we have the financial wherewithal to reinvest in our core business to drive future growth.

Of course, we are mindful of the volatile macroeconomic backdrop as it is manifested in some underlying volume headwinds with discretionary spending impacting middle-market companies across our various vertical markets. As always, we continue to run strategic and operational scenarios and are prepared to continuously adjust if any key trends and leading indicators meaningfully change direction.

Ultimately, we believe our standing as a public company, coupled with our large balance sheet will enable us to capitalize on some of the macro volatility given the risk aversion among some clients to engage with smaller bootstrap or venture-backed competitors as evidenced by our strong top of funnel growth. We are also beginning to see increased activity inorganically through our M&A funnel as funding markets for venture-backed companies has become more constrained. The bottom line is that the execution of each gear of our AvidXchange business flywheel further reinforces our leadership status across the middle market, which we believe will unlock value for our shareholders.

Before I turn it over to Joel, I wanted to mention that we are looking forward to seeing you at our upcoming Investor Day event on May 31 and June 1, where we'll be providing greater insights into our business. You can register to attend our Investor Day directly on our AvidXchange website.

With that, I'd like to turn the call over to my partner, Joel Wilhite.

Thanks, Mike, and good morning, everyone. I'm excited to talk to you today about our first quarter 2023 financial results, which reflect continued execution of our growth strategies amid continued macro uncertainty. Overall, we delivered another quarter of solid year-over-year financial performance.

Relative to the implied first quarter 2023 business outlook, first quarter revenues came in better, driven largely by higher transaction volumes. That, together with higher gross margins driven by yield expansion, coupled with expense control led to our first profit on an EBITDA basis since our IPO. This adjusted EBITDA performance underscores the scope for operating leverage and resilience in our financial model.

Total revenue increased by 21.9% to $86.8 million in Q1 of 2023 over the first quarter of 2022. Roughly 2/3 of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, which reflect increased e-payments to suppliers. The remaining 1/3 of our revenue growth this quarter is from contribution of interest revenues.

Our strong revenue growth also resulted in total transaction yield expanding to $4.76 in the quarter, up 12.5% from $4.23 in Q1 2022. Of the 12.5% increase, roughly half of the increase was driven by yield improvement and the remainder driven by interest revenue.

Software revenues of $27 million, which accounted for 31.1% of our total revenue in the quarter increased 12.8% in Q1 of 2023 over Q1 of 2022. The increase in software revenues was driven by growth in total transactions of 8.3% with the balance driven by price.

Payment revenue of $59.2 million, which accounted for 68.2% of our total revenue in the quarter, increased 27.4% in Q1 2023 over Q1 of 2022. Payment revenues reflect the contribution of interest revenues, which were $7.1 million in Q1 of 2023 versus $1.2 million in Q1 of 2022. More than half of the 27.4% increase in payment revenues was driven by total payment volume, which was up 16.7% and the remaining portion driven by interest revenues.

On a GAAP basis, gross profit of $52.1 million increased by 33.4% in Q1 2023 over the same period last year, resulting in 510 basis points improvement in gross margin for the quarter to 60%. Non-GAAP gross margin increased 500 basis points to 67.3% in Q1 2023 and over the same period last year, roughly half of which was driven by a combination of yield expansion and efficiency with the remainder driven by higher interest revenue.

Now moving on to our operating expenses. On a GAAP basis, total operating expenses were $74.5 million, an increase of 16.9% in Q1 of 2023 over Q1 of last year. On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 16.1% or $8 million to $58 million in the first quarter of 2023 from the comparable prior year period.

However, on a percentage of revenue basis, operating expenses, excluding depreciation and amortization, declined roughly 340 basis points to 66.8% in the first quarter of 2023 from 70.2% in the comparable period last year. This highlights the operating expense leverage across sales and marketing, R&D and G&A.

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 $2.6 million or 16.1% to $18.9 million in Q1 of 2023 over Q1 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and supplier customers.

Non-GAAP research and development costs increased by $2.6 million or 14% to $20.8 million in Q1 of 2023 over Q1 of last year. The increase was due to continued investment in our products and our platform.

Non-GAAP G&A costs increased by $2.9 million or 18.7% to $18.3 million in Q1 of 2023 over Q1 of last year, driven by a combination of higher expenses as we transition to become a public company.

Our GAAP net loss was $16 million for the quarter versus a GAAP net loss of $25.1 million in the prior year period, driven by the 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.

On a non-GAAP basis, our net loss in the first quarter in 2023 was $3.4 million, an improvement of $11.1 million compared to the year ago quarter, driven by the aforementioned factors. On a non-GAAP basis, adjusted EBITDA was approximately $400,000 in Q1 of 2023 compared to a loss of $5.6 million in Q1 of '22, largely due to the aforementioned factors.

Turning to our balance sheet for a moment. I want to touch on a few key items. We ended the quarter with a strong corporate cash position of $431.7 million against an outstanding total debt balance of $83.3 million, including a note payable for $18.7 million. We had approximately $24 million on our credit facility undrawn at quarter end.

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 10 days while the effective interest rate on our corporate cash position for the first quarter was roughly 4%.

Customer cash at quarter end was approximately $1.1 billion with an interest rate of roughly 3.2% for the quarter. We expect interest rate levels on customer cash in excess of 4% fully reflected starting in the second quarter, absent any further increases in the Fed funds rate for the remainder of the year.

I'll now provide an update on our full year 2023 guidance. In light of our first quarter 2023 financial outperformance, balanced with further volume impacts from macro crosscurrents and based on all information currently available, we are raising our 2023 outlook and now expect total revenue for the year to be in the range of $363 million to $368 million. Our 2023 revenue outlook still reflects approximately $30 million of interest revenues from customer funds versus approximately $11 million earned in 2022.

As a reminder, we do not anticipate any political media revenue contribution in 2023 versus having recognized $8.5 million in 2022. We expect roughly 48% of the projected 2023 revenues to occur in the first half with the remaining 52% in the second half. Similarly, we expect a higher non-GAAP adjusted EBITDA profit ranging between $2 million and $4 million for the year.

With that, I'd now like to turn the call back over to the operator to open up the line for Q&A. Operator?

(Operator Instructions) And today's first question comes from Dave Koning with Baird.

Great job. Yes. And I guess a couple of questions. The first one, in the payments segment, the yield was up both year-over-year and sequentially, but I wanted to focus on the sequential progression, which was really good because interest revenue drove maybe a little bit of it, but sequentially interest revenue didn't go up that much. So it seemed like there was some core progression. I don't know if it's from political ad maybe being low-yielding coming off or what that was, but just really nice progression. What was that?

Yes, great question, Dave. Just to kind of summarize the question a little bit. We were -- we've consistently maintained in that sort of 30 bps ZIP code in terms of TPV yield overall. And given kind of the choppy environment, we're really pleased to see that stable and even inch up a little bit. Overall, year-over-year for the quarter, we were up 2.8 bps and sequentially up a bit even removing, like you say, any impact from kind of flow. And so again, we are encouraged that it was steady during this environment, but wouldn't read too much into kind of a bit plus or minus quarter-to-quarter. So pleased with the outcome.

And then just my second question. One thing investors have been a little bit concerned the guidance for the year, I think, up $19 million of interest revenue and then EBITDA guidance also up kind of in that same ballpark. And so some say there's not a lot of core improvement. Maybe just talk about that a little bit, what maybe the puts and takes within the core part of it are?

Yes. No, great question. And just coming back to -- look, we were super pleased with the outcome in the first quarter. Another beat on the top line, first quarter of EBITDA profitability, in a period of time where we see buyers kind of moderating spend. And so given the choppy environment and looking at the trends that we've seen, which again started kind of partway through Q4, we're just sort of led to be a little cautious in that outlook. And so we've baked in the trends that we're seeing. So we have a modest raise, but maybe not to the full extent of the beat in light of current conditions.

So the last thing I would say is we have a lot of optionality. As Mike mentioned in his remarks initially and we're really focused on continuing to focus on growth and driving more efficiency in the business and delivering a profitable year.

(Operator Instructions) Our next question today comes from Ramsey El-Assal with Barclays.

I wanted to ask about the hospitality vertical. Congratulations on launching that or launching it soon. I was wondering if you could comment on the eventual kind of revenue impact from adding that vertical? And also just how should we think about the ramp after you guys -- I think you said you were launching over the next few quarters. How does that ramp at that point? Is it somewhat steep, or is it a very gradual build?

Yes. So great question. We're obviously excited about kind of formally declaring hospitality is a new vertical for us. And typically, how these verticals get started is we see a progression of existing customers that we have in the Avid platform developing beachheads and customers. And we saw kind of the hospitality customer base continue to grow. And once it gets to kind of 50-plus approaching 100 customers is when we typically start to really take notice, does it make sense to kind of create a specialized sales force with deep domain knowledge to attack the go-to-market in a particular vertical. And so that is very consistent with how we've created past verticals.

With hospitality, one of the things that we think is kind of a great formula for kind of, what I'd say, kind of accelerating kind of growth is with key partnerships. And so the M3 partnership is certainly highly strategic related to the hospitality vertical. And typically, with any kind of new partnership, I would say there's certainly a learning as we go through the education and training process with the M3 sales force as well as how our team supports their team as part of this.

And so I would say it's a gradual approach. And typically, we find that the second year of a relationship is always more robust than the kind of the first year as you have some of those kind of learnings as you launch the vertical. But overall, we think it has a lot of formulas versus SaaS, especially in terms of how we're thinking about having a highly built inside embedded payment offering for their ERP system. So lots of excitement by our sales and go-to-market teams as it relates to the new vertical.

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

So I guess for my one question, I will ask on the macro impacts on spending that you guys have been talking about now for -- since last quarter, I guess you've had a couple more months to sort of get arms around and observe the spending trends. Anything changed in your expectations about -- or just any notable observations that you would point out in terms of the spending behavior of your customer base? And if there are any numbers that you can share around that? Or any color around where those pullbacks are most acute, that would be helpful?

Yes. Thanks, Will. I'll take that. Look, we -- again, just going back to we're proud of the quarter we had in a time of caution in spending across our buyers. And I'd sort of go back and largely repeat the way we described it in our last call. We're seeing that fairly broadly across all of our verticals. So no real kind of vertical to call out. That's been fairly consistent. And again, the types of spending is these discretionary buckets. We talked about advertising, marketing, professional services type spending, tenant improvements, that kind of construction-related spending. And so that is consistent with the quarter having rounded out. And so I'm really -- I would really just kind of reaffirm the language we use and the way we characterize the environment in our previous call.

And our next question today comes from Josh Beck with KeyBanc.

Thanks for taking the question with the macro one off the table, which was very helpful. Yes, maybe I have a little bit more of a higher level market question, just given that FedNow will be launching in a few months here. Just kind of curious on your high-level views on real-time payments and kind of what the puts and takes there are for your business and then kind of B2B in general?

Yes. Great question, Josh. And certainly from a kind of overall kind of industry perspective, it's something that we pay close attention to. One of the things that we believe is kind of core to our success is our ability to utilize multiple payment modalities, whether it be across the electronic payment spectrum, whether it be various former virtual card, various forms of our AvidPay Direct, which is our closed loop network as well as leaning into what I would say some of the kind of the new kind of real-time rails, whether it be RTP or kind of the FedNow. And so we expect that those continue to be that we will lean in related to certain use cases as we've done in the past.

The one thing that I will say is that all these new payment modalities as we currently see and take much longer in terms of adoption cycles as probably people think on the front end, and we've been in this business a long time. And so it takes a while for kind of one bank infrastructure and then, b), the acceptance. But where we really lean into and the value that we provide across any of these new payment methods is the ability to get the reconciliation data that suppliers need to make these transactions really efficient to them in an integrated way so they can use it to auto-reconcile. And so I think that's one of the biggest value propositions that we deliver and control across our network of now approaching 1 million suppliers on the AvidPay Network is our ability to get them the reconciliation data in the format that they need.

Our next question today comes from Craig Maurer with FT Partners.

Two questions. One, are you seeing any lengthening in the contract process that is typical when you're going into a questionable macro backdrop? And second, the yield on TPV was up nicely year-on-year. Can you talk about if there's any shift in the proportionality of payments going over individual rails that might have helped that?

Yes. Great, Craig. I appreciate the question. So first of all, it relates to kind of the macro on what I'd say the sales/contracting process. As we've kind of talked about in our strong top of funnel, we're seeing pretty really robust engagement across really all now 9 of our verticals, plus the horizontal segment. We are seeing kind of consistent behavior as we referenced last quarter that sales cycles have been extended a couple of weeks over kind of what they've been historically. And that stayed consistent this quarter as well. So taking a 2, 3-month sales cycle and adding a couple of weeks to it is what we've seen over the last couple of quarters related to that contract process.

As it relates to your second question around kind of changes in mix related to TPV, it's been very consistent. We continue to lean in to continue to increase the different forms of payment modalities, whether it be a different form of virtual card at different kind of price points related to suppliers as well as our close network. And one of the things that continues to kind of surprise us a little bit is that it's really the #1 driver of acceptance is relates to what their process is on the receiving side and how they can get the data electronically to process a transaction electronically and supporting their existing business process. And so that's been consistent that we've seen continue. So the mix between kind of virtual card AvidPay Direct, various forms of other electronic payments, whether it be ACH or other real-time combined with paper check has really stayed consistent that we saw in the past quarter as well.

And our next question comes from Bryan Keane with Deutsche Bank.

Congrats on the solid results here. Just kind of 2 high-level guidance kind of questions. Joel, it sounds like 48% revenue in the first half, 52% in the second. If I do the quick math on that, it looks like a little stronger growth than consensus expected for second quarter and then maybe a little softer growth in the back half. Just want to think about the cadence there of first half versus second half?

And then, Mike, when you talk about a robust 2024, are you talking about the potential for an economic recovery there? Are you also talking about new launches, fundamental business catalysts that give you the confidence for robust '24?

Yes, Bryan, let me jump in on that. So first, just kind of the guidance cadence. So we were -- in the first quarter, our practice has been to every quarter update our annual guidance, but not to provide next quarter guidance. We did in the Q&A in the first quarter to do so given the proximity to the end of the quarter and in light of kind of the choppiness that we were talking about. And so while we haven't given guidance specifically for Q2, we did characterize the front half, back half. And I would just say using -- backing in, using the math that you described, what you're probably seeing is a reflection of our fundamental assumption that supports our guidance forecast, which ultimately is consistent unevenness and choppiness. And so we haven't made an assumption that it gets meaningfully better or meaningfully worse. But we're excited with a good quarter behind us on this path to profitability that we saw for the year, so.

And then the last thing maybe -- I'll let Mike jump in. Obviously, at this point, given the conditions that we're in now, we're not providing guidance for 2024 and we're not necessarily operating the business, assuming that conditions would be much different than what we see today.

And I think my robust comments really relate to doing the things that we know contribute to kind of strong customer growth as we continue to see in top of funnel activity. And it's really driven by our continued kind of vertical market expansion, certainly as we go into next year, seeing the hospitality vertical and some of our other sub-verticals that continue to progress is exciting, along with the new partnerships that support it.

And then lastly, kind of the new features and offerings, whether it be the ones that we talked about on this call with lien waiver management and kind of new integrations. But we also are getting ready for our new Invoice Accelerator 2.0 offering to release the second half of the year. And so certainly that will have an impact related to continue to add new customers, both on the buyer and supplier side as we go into '24.

And our next question comes from Tien-Tsin Huang with JPMorgan.

Appreciate good update here. Just a clarification on the question. I think Craig asked it, but just with the top of funnel activity, I think, like you mentioned double-digit on track in this quarter. So I think it was 25% this in Q1. So I'm just curious if we should expect a little bit of a slowdown, if I'm interpreting that correctly? And then my question for Joel, on gross margin considerations for the rest of the year because that did come in quite strong in the first quarter, given some of the yield dynamics in float, so any thoughts on 2Q versus second half?

Yes. Good question, Tien-Tsin. So I'll take the first one. And I think my comments related to top of funnel. So certainly, we continue to see really strong top of funnel, as I talked about and north of kind of 20% plus on average over a year ago. And what we're seeing, obviously, we're just into the second quarter. But we're seeing activity that's very consistent with and what we see in and what we saw in Q1, but have kind of 1 month of data, but we expect to have consistent top of funnel. So I wouldn't characterize any slowdown related to top of funnel activity.

And Tien-Tsin, maybe I'll take the second part of your question just on gross margins. Again, we've said that our path to profitability tracks kind of the consistent gross margin improvement. We are pleased with the outcome in the quarter in at 67%. And even removing the impact of float and political as we've done in the past, over 300 bps. So we feel good about the results. We feel like we're on track on that path to profitability even amidst a choppy environment. As we've said, I would sort of hold with and we're not meaningfully changing the guidance that we provided in the last call around the expectation that we see a couple of hundred basis points of overall margin expansion. Again, that obviously factors in some uncertainty about the rest of the year, but feel like we're making good progress and on track.

And our next question comes from James Faucette with Morgan Stanley.

Maybe I want to talk a little bit about the accelerated path to profitability that we've seen. Can you talk a little about the biggest drivers that you've been able to find from an OpEx and scaling perspective that allowed you to get there kind of ahead of time? And how can we be thinking about tens per incremental leverage on a go-forward basis?

Thanks, James. Great question. And basically, what I would -- the way I would respond is we're seeing it where we expected to see it. We've been intentional about this focus on continuing to make investments in growth and you're seeing us do that, but also to be very intentional about the efficiency in our business. And it starts with that gross margin expansion on its way to the 70% ZIP code. We've talked about that being the result of improved revenue yield and also operating efficiencies. We're seeing both of those occur. Obviously the float revenue dynamic has helped expand that yield. And so that's benefited us.

But in addition to that, we're seeing efficiencies like we said we would. And G&A, as we round out the post first year after being a public company, having built that infrastructure along with where we will continue to see it from a R&D perspective. So I'd say we're seeing it as we expected and really ahead of schedule on a couple of those dimensions as well.

Yes. And just so we may add a little bit of cover to you kind of take what Joel said and kind of related back to a product feature-type perspective of what we've launched in the last year is that we've talked about in the past, our intelligent data capture IDC initiatives in terms of handling the front-end process related to invoice more efficiently as well as our straight-through process, STP processes for virtual card. All those are kind of components of continuing to build that gross margin as well.

Our next question today comes from Tim Chiodo with Credit Suisse.

I want to follow up on a topic that came up earlier in the call and I believe this came up on the Jack Henry call this morning as well around that now. So the question is, you mentioned that there's an issue sometimes around adoption, acceptance, you mentioned reconciliation and that's a lot of the advantage that AvidPay Direct can provide. Could we just see more of a mix shift of instead of using traditional ACH that you could slot in RTP, FedNow into AvidPay Direct? And essentially, I guess what I'm getting at is can you reduce cost for the system overall by doing that, but at the same time maintaining your own unit economics?

Yes. So Tim, I would say that call falls in the category of a Gold Star question. So this is kind of a passion of ours is we believe that kind of the FedNow and other RTP gives us an opportunity to not only kind of grow our different payment modalities, but also you do so at unique price points around the timing and delivery of good funds to a supplier. And so we absolutely expect to leverage the different modalities that have timing to create different offerings at different price points. And we think that's an overall formula to drive acceptance and the reason why we have kind of the big 2, 3x advantage in the marketplace today in monetization.

And our next question today comes from Brent Bracelin with Piper Sandler.

I actually wanted to drill down into technology, if I could here. Just as we think about how you're leaning into automation, AI, you've talked about some things you're doing with Microsoft on IDC with leveraging Azure AI and OCR. Can you talk a little bit more where you're at on those processes? How much cost savings are you seeing so far? And how much more is there to come?

Yes. So kind of that's a big bucket as it relates to kind of how we're thinking about what I'd say deploying AI-type technology. We already have leaned into it already with some of the products that we talked about in the past with Microsoft, developing our intelligence data capture product, lots of really kind of new technology that's incorporated into that offering. And certainly, kind of the perforation of ChatGPT is a good example, where we actually had recently a dedicated off-site meeting with our executive team in which to talk about all the different kind of use cases and strategies across every function of our business.

And so certainly, historically, there's been key areas in operations that we've been focused on, how do we drive more efficiency through our gross margin. And I think the exciting part with some of the new AI opportunities or just say AI opportunities are really -- they impact every functional team. And I think that's the part that makes it exciting. And so we're very focused on really every team developing say the top 3 use cases and doing a lot of testing and learning as the year unfolds to really incorporate those into more of our efficiency strategies going forward.

And our next question today comes from Darrin Peller with Wolfe Research.

It's Andrew on for Darrin. Just a quick one on the payment revenues. Relative to internal expectations, would you attribute the quarter's outperformance to more a function of higher payment penetration and engagement or more a function of greater volumes? And if the former, just curious, what kind of growth is coming from, again, the higher engagement with prior existing customers versus maybe net new buyers that ramp intra-quarter?

Andrew, I'll take that one. Yes. So I'd really attribute kind of the beat in the quarter to the volume. We pointed out the choppiness, we pointed out the assumptions that we made and it has been uneven. We were -- we had some unevenness in the front end of the quarter and then a strong finish in March. And so that's really the key driver there.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Yes. Thanks, everybody. Again, we believe we delivered a strong Q1 and are cautiously optimistic for the remainder of the year. Also, as a reminder, we look forward to seeing all of you at our upcoming Investor Day event May 31 and June 1, where we will again provide greater insights into our business. And with that, we'll close today's call.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.