Avidxchange Holdings Inc (AVDX) 2021 Q3 法說會逐字稿

Good day and welcome to the AvidXchange third-quarter 2021 conference call. (Operator instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ryan Stahl, General Counsel. Please go ahead.

Good afternoon, everyone, and thank you for joining us for the AvidXchange Holdings third-quarter 2021 conference call. With me today is Mike Praeger, AvidXchange's Cofounder and Chief Executive Officer, and Joel Wilhite, AvidXchange's Chief Financial Officer.

Before we begin today's call, I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss financial guidance, operational outlook, future strategic initiatives, and potential market opportunities during today's call.

Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release and in the investor supplement, each found on AvidXchange's Investor Relations website, we have provided a reconciliation of these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP.

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

Thank you, everyone, for joining us for AvidXchange's first earnings call as a public company. It's great to be connecting with all of you today. Our transition to a public company was a significant milestone for AvidXchange and we were able to celebrate that occasion by ringing the NASDAQ bell from our campus here in Charlotte, North Carolina, just a few weeks ago.

We achieved this through a lot of hard work and I want to thank all my AvidXchange teammates for making this a reality. I'm so proud of all we have collectively accomplished in the last 20-plus years in building our business.

Joel Wilhite and I are excited to share our third-quarter results as well as an overview of our business, future growth strategies, and where we are seeing momentum and continued success in driving our AvidXchange Business Flywheel. With that, I will begin my remarks with our third-quarter highlights.

Total revenue for the quarter was over $65 million, an increase of 37% from Q3 of 2020. And we processed over 16 million transactions during the quarter, an increase of over 17% from Q3 of 2020. Overall, our third-quarter results reflect continued strong demand for our software and payment solutions along with solid execution against our key growth initiatives. The strong momentum we are seeing in the business gives us confidence in our full-year 2021 financial outlook, which Joel will discuss in more detail later in the call.

Now, before I talk about some recent and exciting new business developments, since it's the first time we are discussing our quarterly results in a conference call format, I thought it would be helpful to drill down deeper into how our business works. AvidXchange is a software company that is purpose-built to help middle-market companies automate their accounts payable and payment processes. In addition, I'd like to spend more time discussing our long-term growth plan through the lens of our AvidXchange Business Flywheel along with our strategies to capture the significant greenfield opportunity that we believe exists in the middle market.

Approximately 42% of US business-to-business payment volume is still paid by using paper checks and we believe that number of middle-market companies manually approving invoices and utilizing paper checks is actually much higher. With that, let me start off by articulating the market opportunity that we see in front of us.

We believe that the middle-market segment is the largest portion of the overall accounts payable automation and business-to-business payments market. In addition, this large and growing market is facing unique challenges, such as inefficient legacy solutions that are manual and paper-intensive, complex integration requirements supporting various vertical industries, unique business process requirements in supporting ERP or accounting software solutions, high costs related to manual complex accounts payable workflows, and finally, a status quo mindset of traditional long-tenured finance leaders being reluctant to change.

As companies continue to automate complex accounts payable workflows and replace paper checks with alternative electronic payment methods, we estimate more than $20 billion in addressable annual revenue opportunities across both accounts payable automation solutions and business-to-business payments transactions for the middle market. In addition to providing B2B payments, we see a large unmet need in supplier financing, which we believe is an additional $20 billion of white space opportunity, bringing our total estimated addressable market to over $40 billion.

To take advantage of this opportunity, we have created AvidXchange, which is purpose-built to deliver a significant value proposition by seeking to make inefficient and expensive paper-based B2B payments and invoices obsolete for middle-market companies. We seek to deliver further value to our mid-market buyer customer by automating their accounts payable invoice and payment process, managing their complex business rules and supporting multiple general ledger systems, and converting paper-based checks into intelligent electronic transactions. Simply speaking: our mission is to eliminate both the paper invoice and the paper check for our customers.

We also seek to deliver value to our supplier customers by providing payments efficiently and securely, managing their business rules for their preferred digital payment acceptance methods and providing remittance data along with visibility into their invoice and payment statuses. In addition, we provide value-added invoice financing services through our emerging Invoice Accelerator offering, which is a key feature of our AvidPay Network, designed to enable suppliers to better manage their cash flow through directly controlling when they receive payment.

This two-sided network that we built, serving both buyers and suppliers, generates a tremendous flywheel effect for our business. Our AvidXchange Business Flywheel shows how we work to create value for our buyer supplier customers and it reinforces and accelerates other value we generate, driving continued growth by delivering a great customer experience for our 7,000 buyer customers and over 700,000 supplier customers on the AvidPay Network.

Our AvidXchange flywheel begins with gear number one, which is delivering great accounts payable automation and payment software. We believe our ability to deliver a great software automation experience draws buyers to our platform. Our product removes the paper, automates business rules and workflows along with reducing payment fraud risk, bringing all invoices of payments into one cloud-based platform that can be accessed anytime, anywhere, by all of our customers.

To accelerate the first gear of our flywheel, we are working to maximize our go-to-market strategies horizontally across middle-market along with focusing on eight specific core verticals, which include real estate; the homeowner association or HOA market; financial services, which includes Tier 2 and Tier 3 banks along with credit unions; construction; media; healthcare facilities; social services and nonprofit organizations along with education through our hybrid go-to-market strategy utilizing both direct and indirect channels.

Our direct sales force leverages our deep domain expertise in these verticals in over 120 referral partner relationships to identify and attract buyers that would benefit from our accounts payable software solutions along with automating their payment process via the AvidPay Network. On the indirect channel side, our strategy is built on key accounting system integrations: reseller partners and other strategic relationships such as our exclusive strategic partnership with MasterCard through their MasterCard B2B hub, which includes Fifth Third Bank along with Bank of America and other financial institutions such as KeyBanc and third-party software providers such as MRI software, RealPage, and SAP Concur.

New customers in the third quarter spanned across AvidXchange's core verticals, including Goodwin & Company within our HOA vertical, Case & Associates Properties and Robert High Development within our real estate vertical, along with Fusion Transport and BPS Supply Group, just to name a few. Customers across each of our verticals are looking to add both AvidInvoice to automate their accounts payable process along with AvidPay to automate their supplier payment process.

One recent example in [Current] Holdings, a Florida real estate firm, had a history of incorrect and delayed payments to its vendors due to a flawed accounts payable system that was costing them several thousand dollars a month. Using AvidXchange software, they are able to achieve three key objectives. First, they are able to customize their workflow approval functions to automate their invoices and payments. Second, they wanted to reduce incorrect payments and nonapproved payments. And third, they wanted to have real-time anywhere access to their accounts payable data.

We are seeing good traction in our financial services vertical. As an example, the pace of credit union customer additions has expanded by 38% year to date with credit union additions more than doubling.

By drawing buyer customers to our AP automation software platform, we enable the second flywheel gear, which is maximizing the number of transactions we manage on our platform. By combining our business model to be the system of record for all buyer AP transactions along with managing the entire payment file for their payments, we are able to maximize their overall number of invoice and payment transactions that we manage for our customers.

Furthermore, we strive to provide a great customer experience through integrations between our buyer customers' accounting systems and our invoice management platforms in our AvidPay network. Today we manage over 210 integrations with the most widely used accounting and ERP systems. And we support a variety of payment methods depending on the supplier's preference, including virtual card or VCC, enhanced ACH or our AvidPay direct offering, and physical checks while delivering rich remittance data to streamline the reconciliation process supporting the middle-market and the various industry verticals that make up the middle-market.

We view these strategies and integrations as critical key differentiators for AvidXchange. Our competitors don't necessarily want all their customers' volume, whereby they focus on only specific transaction types, which we believe creates a real long-term advantage for us as we want both to own the buyer and the supplier customer experience and deliver an industry-leading and unique long-term value proposition to our customers.

The development of channels and partnerships for distribution is also key to enabling the growth of transactions on our platform. Further proof of our continued progress in maximizing the number of transactions under management is that we processed over 16 million transactions in the third quarter, up approximately 17% year over year. Once a customer's invoice and payment volume is on our platform, we seek to create additional value by utilizing the AvidPay Network to facilitate the conversion of paper checks to intelligent e-payments, which is our third gear.

We have over 700,000 suppliers that we pay through the AvidPay Network. We combine specifically designed business process with technology to dynamically manage the various business rules along with managing the preferred payment methods for these suppliers. By managing their payment business rules, we also manage how they would like to receive their electronic remittance data so they can apply the payment to the correct supplier account and invoice number, along with enabling suppliers to more efficiently reconcile their outstanding invoices.

We are excited to see continued growth in the number of enrolled e-payment suppliers receiving electronic payments from the AvidPay Network. E-payment suppliers are defined as those suppliers that we have enrolled in one of our various AvidXchange virtual card payment offerings as well as our AvidPay Direct modalities. AvidPay Direct is our version of ACH+, where we settle through ACH but wrap the transaction with electronic remittance data the supplier needs to automatically apply and reconcile each payment, giving them the payment speed, security, and remittance data that they require.

We consider our AvidPay Network to be our secret sauce and is a significant competitive advantage versus others who have primarily outsourced their supplier payment engagement and settlement efforts. We have made a large investment each year since we launched the AvidPay Network in 2012 and anticipate significant future return on our investment, given that we expect our AvidPay Network to be a long-term differentiator and driver of future margin expansion as we own the entire supplier experience from invoice submission through the payment acceptance by systematically automating each supplier's unique business rules for payment, acceptance, and delivery of remittance data.

Our AvidXchange Business Flywheel accelerant is a continued focus on automating key business processes to improve the speed and reliability of our payment offerings along with additional monetization features created for our fourth gear. Our fourth gear is designed to leverage the data of our network to further increase the value proposition we are delivering to both our buyer and supplier customers, which leverages the 20-plus years of data that we captured detailing each buyer supplier transaction.

Our single cloud-based platform for invoice of a payment enables us to abstract all the learnings from these buyer and supplier relationships and use as a target new verticals for expansion as well as new innovations such as advanced spend management analytics as well as data related to specific invoice types such as utility bills, insights into the management of their cash flow, and financing features for our customers. A great example of this today is our emerging Invoice Accelerator offering in which we utilize the data of our AvidPay Network along with the historical payment trends between buyers and suppliers to underwrite specific invoices that are eligible to be advanced for next-day payment, creating a very unique and differentiating value proposition for our supplier customers, enabling them to get paid when they want to get paid.

Focusing on how we can invest in accelerating our AvidXchange Business Flywheel not only provides us with increased transactional monetization opportunities but also serves as a source for continued innovation, growth, and market leadership across the middle market. So to summarize, we believe we've built a powerful flywheel business model that is well positioned to capitalize on this massive growth opportunity and the adoption catalyst propelling our business by executing on our focus key strategic growth drivers, which include number one, the driving the number of overall transactions processed by acquiring new buyers and suppliers along with increasing the number of transactions processed between each of our existing buyers and their suppliers.

Number two, increasing conversion of paper checks to electronic payments. We believe there is a significant opportunity to increase the penetration of electronic payments, as paper checks still comprise over 42% of overall businesses-to-business payments in the United States today across all sectors of the middle-market. And we estimate that the number of companies predominantly using paper checks across the middle-market to be significantly higher. AvidXchange is the leader in driving e-payment adoption through our innovative products and processes.

Number three, innovation and delivery of new products. We will continue to leverage the rich data and business insights that we've accumulated across buyer and supplier transactions, enabling us to strategically leverage this data to develop new innovations and capabilities. Number four, entering new vertical markets. We will continue to supplement our organic growth by pursuing strategic mergers and acquisitions to expand new verticals and horizontal capabilities. For example, in Q3, we entered the media vertical by acquiring FastPay, a leading provider of payments automation solutions for the media vertical industry.

Number five, cross-border and international expansion. We are currently developing a cross-border payments offering, targeted generally available for customers across multiple software releases over the course of 2022.

On top of our unique market opportunity, flywheel effect, and moat that we have already developed within the middle-market, we are in the early days of seeing four catalysts unfold that we believe will be accelerators across the middle-market for our offerings, which include: first, the pandemic highlighted the importance of automation for business continuity and support, work-from-home, and hybrid workforce models. Second, there have been growing concerns over fraud risk and data privacy with paper invoices and paper checks. In fact, the majority of payment fraud in the middle-market occurs with paper checks.

Third, familiar technology with users having experience benefits of cloud-based solutions for automation and other back-office processes. And fourth, which long term may be the most impactful of all the catalysts, is the generational shift, or millennial effect as I like to call it, with tech-savvy younger generation finance leaders taking on increased leadership roles in middle-market companies.

We are certainly excited about the future of AvidXchange and I look forward to updating you on our progress during future calls. So in closing, we delivered strong third-quarter 2021 financial and operating results and our momentum heading into 2022 is very encouraging. We continue to drive success for AvidXchange and our customers by growing and enhancing our offerings, services, and talent to help more businesses transform and automate their accounts payable and payment processes. We believe our results and continued progress against our key growth initiatives are indicative of our commitment and focus on creating long-term value for all of our stakeholders for many years to come.

Now I'll turn the call over to Joel so he can provide a review of our financial results from the third quarter and review our 2021 full-year guidance. Joel?

Thanks, Mike, and good afternoon, everyone. I'm excited to talk to you today about our strong Q3 financial results and provide guidance for the full year 2021. Given that this is our first earnings call as a public company, I'll briefly talk about our revenue model and drivers.

We have a highly visible revenue model based on the durability of our buyer relationships and the recurring nature of the revenues we earn. Our revenues are predominantly derived through software revenue from our buyers and revenue from payments made to their suppliers. We generate software revenue from our buyers through our focus on gears one and two of our flywheel: delivering great AP automation software and maximizing transactions on our platform.

Software revenue comes primarily through fees that are calculated based on the number of invoices and payment transactions processed, which is why one of our key metrics is total transactions processed. To a lesser extent, we also generate some recurring maintenance and subscription fees. While our buyers are typically billed and paid on a monthly basis, they are usually under a multiyear contract with revenue recognized over the term of the contract.

We generate payments revenue through the payment volume from gears one and two noted previously, which is optimized by our gears three and four of our flywheel. Gears three and four focus on delivering value to our suppliers through e-payments and leveraging data across our network. As we facilitate payments from our buyers to their suppliers, we offer electronic payment solutions to those suppliers. Our electronic payment solutions currently include virtual credit cards and an enhanced ACH payment product called AvidPay Direct. Therefore, total payment volume is also another key metric.

Now let's turn to our results for the three-month period ended September 30, 2021. Total revenue increased by 37% to $65.2 million in Q3 of '21 over the third quarter of 2020. The increase was primarily driven by the addition of new buyer invoice and payment transactions and increased e-payments to suppliers. Additionally, in recent months, we've been experiencing modest tailwinds from the increased average payment size, which we believe is driven at least in part by a recent uptick in inflation. Our strong revenue growth also resulted in our total transaction yield expanding to $4.05 in the quarter, up 17% from $3.46 in Q3 of 2020.

Software revenue, which accounted for 34% of our total revenue in the quarter, increased 30% in Q3 of '21 over the same period last year. The increase was primarily driven by 17% growth in transactions processed in the quarter as well as the benefit of $2.1 million of revenue associated with the acquisition of Core Associates, which closed in December 2020. Payment revenue, which accounted for 65% of our total revenue in the quarter, increased 40% in Q3 2021 over the same period last year, primarily driven by 40% growth in total payment volume in the quarter.

Non-GAAP gross profit increased 48% in Q3 '21 over the same period last year to $39.5 million, resulting in a 450-basis-point improvement in non-GAAP gross margin for the quarter to 61%. Non-GAAP gross margin improvement was driven by increased total transaction yield in the quarter as well as continued operational efficiency.

Moving on to our operating expenses, these expenses increased by 38% in Q3 of 2021 over Q3 of last year. Sales and marketing costs increased 37% in Q3 of '21 over Q3 of last year, driven by continued investment in our direct and channel strategies as well as acquisitions. Research and development cost increased 42% in Q3 of 2021 over Q3 last year. This increase reflects our continued investment in new and enhanced products for both buyers and suppliers together with investments in our platform that will drive our growth going forward.

General and administrative costs increased by $5.2 million in Q3 of 2021 over Q3 of last year and reflects the growth in our business and also includes investments associated with our preparation to operate as a public company. Overall, our GAAP net loss was $35.5 million for the quarter, driven by continued investments in our growth strategy, as seen in sales and marketing and R&D, as well as our preparations to become a public company. On a non-GAAP basis, adjusted EBITDA was a loss of $6 million in Q3 of 2021 compared to a loss of $6.2 million in Q3 of last year.

While we expanded our transaction yield and non-GAAP gross margins, our continued investments in our growth and our platform continue. We ended the quarter with cash and cash equivalents of $150.9 million. On October 13, we completed our initial public offering in which we issued and sold 26.4 million shares of common stock at a public offering price of $25 per share. We received $620 million in net proceeds after deducting underwriting discounts and commissions of $39.6 million. We believe that we are well capitalized to execute on our growth strategy.

I will now move on to guidance. As we mentioned in our press release, we're providing the following guidance for the full year 2021. Total revenue for the year is expected to be in the range of $244.5 million to $245.5 million. At the midpoint, this would represent growth of 32% on a year-over-year basis. Adjusted EBITDA in the range of negative $30.1 million to a negative $28.1 million. In summary, we delivered strong third-quarter 2021 financial and operating results and our momentum heading into 2022 is very encouraging.

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

(Operator instructions) Will Nance, Goldman Sachs.

Hi, everyone. Good afternoon. Congrats on the first quarter.

Thanks, Will.

Maybe I'll just kick it off on some of the traction you are seeing on the AvidPay Network. Just wondering if you could help flesh out people's understanding of the penetration of the network with your current customer set and then how that compares to new business.

Yes, so as it relates to the AvidPay Network, and I think your question is related to adoption really to existing and how it maybe relate to new customers. So we kind of think of it on a transactional basis. And so today, across the entire network, about 40% of all transactions we're able to monetize either through one of our forms of AvidPay virtual card or AvidPay Direct payment offerings.

And that's pretty consistent across the different industry verticals that we're in. One of the things when we take on a new customer, to get up to their full adoption cycles, that period is typically a six- to nine-month period for a new customer to get to their full adoption period. And I don't know, Will, if you had any kind of follow-up to that question.

No, that's great. I appreciate the details. And then just maybe second, you mentioned Invoice Accelerator a handful of times on the call. Just wondering if you could give us an update on what the timeline is to roll that broadly out to the entire supplier network. And any signs of demand coming from your client base from that?

Great question. Invoice Accelerator is one of the areas that we are super-excited about and certainly think it's the next -- third leg of our monetization model. So today it's still an emerging offering; sub-$5 million in revenue but growing quickly. And we've been metering it from the standpoint of today it's only available to less than 10% of our overall supplier base.

And that's really due to two things. One is as we continue to perfect the algorithms related to determining the eligibility of invoices that we choose to advance. The second thing is that we are executing on our balance sheet today. And so going forward, we expect to make it available to our full supplier base probably kind of systematically over the next 18 months or so. And as part of that process also look to take it off balance sheet with one of our existing financing partners.

Got it. That's helpful. Appreciate you taking my questions. Congrats again.

Thanks, Will. Appreciate it.

Tien-tsin Huang, JPMorgan.

Thanks so much. I will echo what Will said: congrats on the first quarter out the gate here as a public company. It looks clean and solid here. Thinking about bookings and signings, guys, just how did that come in versus plan? How do you see the year closing out with respect to new sales? I did see that deferred revenue was up nicely, so must be a good sign there.

Yes, great question, Tien-tsin. I will take it. And first thing I'd guide you, just given the way our revenue model works, is I wouldn't necessarily correlate the change in deferred revenue to sales. But we're excited about the performance this year. We've seen great continued strong demand for our solutions.

We've talked about the mix of some really great tailwinds from COVID and then some sustained kind of headwinds in places. But we were pleased to deliver better than our internal forecast from a sales perspective. We don't provide a bookings or ARR figure, but we do have good confidence in being able to deliver our long-term our guidance for Q4 and our outlook for '22. So felt good about the production in the quarter.

Good. And then my follow-up quickly, just on the partner front. How are those conversations? And do you feel like you're closer to maybe securing a few more larger partners? Just curious how that's going.

Yes, so great question related to the partners. So when we think of partners, they fall into kind of a handful of different buckets. One is within the bank channel; the other is with kind of our software partners. And within each of the two categories, we have both referral partners and we have what we call reseller partners. And typically reseller partners are the more substantial partners that are able to actually white label our platform and use their own sales force and go-to-market strategies to sell to their customers.

And so within the bank channel, I think as we previously messaged, one of our newest partners is Bank of America. And they began onboarding customers earlier this year and we're really excited about the evolution of that bank channel and believe that Bank of America has the capability to be one of our leading partners once they complete their ramp-up.

The second kind of piece on the software partners, we continue to see good momentum across a handful of partners, including RealPage and SAP as well as MRI Software within the real estate vertical. And what I would say is that we are very selective in terms of adding new reseller partners. So that number, that base we expect to grow by a small amount each year. But where we are adding more partners is on the referral side. And that today, we're up to 120-plus different referral partners and we continue to grow that nicely. So that's what we're currently seeing and excited about the interest level that we are getting from both partners as well as customers.

Very good. Thank you both.

Ramsey El Assal, Barclays.

Hi, gentlemen. Thanks for taking my question this evening. I wanted to ask about the transaction yield, which went up sequentially pretty nicely. Joel, what are the primary drivers there? It didn't look like it was a mix shift to software. Is FastPay a contributor there? Or what can you tell us about why that stepped up sequentially?

Thanks, Ramsey. Great question. Yes, there's a handful of drivers that contribute. A couple that I would point out, and I kind of mentioned in our prepared remarks. To some degree we think there's a little bit of -- we're seeing an average payment size increase. We think there's a little bit of inflation driving that and some mix impact as well. And then to a lesser extent, we do have inorganic contribution to that as well, as you mentioned, from FastPay. So kind of a handful of drivers there.

Okay. And my follow-up is about longer-term strategy and is a two-parter. The first part is going forward, can you give us your most updated thoughts on expanding your vertical mix? Are you now focused on trying to penetrate the verticals you are in verses expanding into new verticals? And also over the longer term, would you contemplate either moving upmarket or downmarket more broadly?

Thanks, Ramsey. That's a good question, one that we get routinely. And so to remind you, within the eight verticals that we are in today, we believe that we're still in kind of single-digit penetration across all eight. Probably in the financial services vertical with the growth of Tier 2 and Tier 3 banks as well as credit unions, we may be approaching 20%, but still big runway within the eight verticals that we are in today.

And what we expect is to continue to focus to really penetrate those over the next 18 to 24 months as well as continue to be aggressive as well as opportunistic in terms of adding to those verticals. And I think as we referenced, we would like to add handful of new vertical focuses each year as we evolve and expect that to be the case in the coming year as well.

Great. Thanks, and I offer my congratulations as well getting out of the gate here.

Great, thanks, Ramsey.

Josh Beck, KeyBanc.

Thanks, team, for taking the question and my congrats as well on new life as a public company. I wanted to ask a little bit about the macro across. Other industries and calls, we've heard a little bit more about supply chain, labor shortages, these type of effects. I'm just curious across your base if there's any chatter or any trends that you are seeing take shape on those fronts?

I think it's a great question, and certainly within the macro environment, it's something that's kind of top of mind for a lot of our customers. Typically what we've seen within especially the eight verticals that we focus in as well as some of our horizontals, they haven't been significantly impacted directly by supply chain. Certainly probably the labor component, especially customers that have a retail focus have been impacted the most.

But where we're probably seeing some of that impact is reflected in the yield number. And that relates to some of the what we believe is kind of inflation of just average payment sizes ticking up slightly. And we think that is kind of directly related to some of the macro impacts of supply chain as well as inflation.

Okay, great. So it seems like maybe on the margin, it's perhaps a tailwind or at least what you've seen this quarter.

Yes, exactly.

Maybe a question for you, Joel, as well. Just with respect to the guidance philosophy, obviously you had flashed your numbers prior to this report, so maybe didn't get to see exactly how things come in versus your philosophy. But just help us understand maybe what you've embedded into Q4, level of conservatism, those types of things.

Yes, great question, Josh. I mean, if you compare the flash numbers in the S-1 relative to what we delivered, we were at the nice beat across each. I think we were on the high end of the transaction count, which we see that volume as we sit at the end of the quarter. So obviously now looking forward, we've seen a little bit of the volume activity. But honestly, there's things we control and there's things we don't control and I think we're playing it right down the middle. And so again, high confidence that we can deliver those results from where we sit today.

Very helpful, team. Thank you both.

Darrin Peller, Wolfe Research.

Hey, guys. Thanks. You know, when we look at the actual payments revenue growth rate, it was obviously very strong, but it really does look like it was driven by the volume growth underneath it. Which is great to see, except I'm just trying to understand the dynamic of contribution from incremental monetization of payments. Obviously, we know you guys are decently along, although still having maybe 20% to 25% of your total volume really monetized in a sense -- or I think you have said maybe 40% of transactions when considering the AvidPay Direct or VC.

There's still a huge runway, I think, right? And so just curious how you are approaching that, how you think we should think about that over the next few quarters, and then more importantly longer term what you are doing to try to take advantage of that lever. Thanks.

I'll take a shot first. Really, as we've talked about this and Mike talked about gear three of the flywheel, the opportunity we see ahead of us over the long run for really continuing to increase the penetration, we take that whole payment file at the end of an AP process and then we optimize payment against the supplier network.

So I wouldn't focus as much upon the next couple quarters, but I would really say over the long run, we have high conviction that there is really a great opportunity to provide expansion there. And again, we were pleased with 40% volume growth overall, 37% growth in the quarter. So really see that as validation to the model and excited about that long-term opportunity.

Yes, and maybe adding a little bit more color to what Joel said is we also expect that the percentage of monetized payments, both either transaction or volume, to continue to grow over time as well as we institute new payment modalities into the market as well. One that we are firmly under development, for example, is our cross-border capabilities. And we have a number of other payment modalities that we expect to incorporate with customers in the coming year. And so I think all those different strategies combined with just our core virtual card and AvidPay Direct acceptance methods continues to drive ongoing supplier growth.

Got it. All right, that's helpful. When we think about the verticals -- you mentioned earlier the eight verticals. And obviously, this deal recently getting you more into the media supplier side as well. I'm just curious. I mean, I think a barrier to entry for you guys has continued to be the differentiated connectivity into some of the industry vertical solutions. And you touched on this earlier; it's going well.

Can you just expand on that for a minute? Because I think we get a question a lot about competition (technical difficulty). I mean, how much of a barrier has that been for you? And touching on these innovations for a minute. Thanks again, guys.

Yes, so great question. So I think when we think of kind of the different sections of the overall market, the middle-market is just -- it's hard and we like that dynamic. And AvidXchange is really purpose-built for the middle-market.

And so what does that mean? It starts with the feature set of our software. It's really designed to support the business rules of the middle-market companies that we serve. They are multiple-party complex invoice and payment approval structures, coding structures, support for multiple general ledgers and job cost systems, which are all characteristics of middle-market companies.

The second component is then all the different accounting systems that support each of the different verticals. So today, we support over 210 different accounting system or ERP integrations across the verticals that we serve. Then the third is really the payment network itself is really purpose-built to support all the suppliers of the middle-market. So 700,000 suppliers and it grows each week.

And then what I would say is the last one is really our go-to-market strategies related to we have direct sales teams that are focused in each of the different industry verticals that work directly with the CFOs of these prospects and taking them through a very deliberate sales process that is typically characteristic of CFOs within middle-market companies.

And so whether it be our products, the integration to support them, or our go-to-market strategies, they are all really geared around middle-market companies. And we believe that has created a big moat for us as most of the new competition, at least that we've seen, has not been in the middle-market. It's been typically in small business.

Right. That's what I thought. All right, thanks, guys.

Timothy Chiodo, Credit Suisse.

Great, excellent. Thanks for taking the question. I wanted to dig into the outbound supplier recruitment team. So we get this question often from investors and I just thought it would be helpful to shed some more light on it during this call.

When the outbound supplier recruitment team is speaking with the suppliers and offering them the various payment methods, clearly there's a ton of check and paper-based forms of payments to eat into. But when the offering is virtual card versus the enhanced ACH, I realize there's different systems that have a card integration; there's transaction sizes; there are different verticals. Maybe you could just dig into the value proposition of each virtual card versus the enhanced ACH and when and why and why not various suppliers might choose one or the other.

Yes, a really good question and it's pretty intuitive because there's some art and there some science related to it. But I would say first of all, we today support seven different types of payment types or modalities, as we call them, that are really geared towards the different supplier preferences within the business rules. So many of the suppliers actually have business rules that they will take one type of payment modality under a certain circumstance. For example, like maybe if it's under $1,500 as an example, they'll take a virtual card transaction, but if it's over $1,500, they'll request a different type of payment modality as part of their business rules.

And so for both our main two monetized payments, virtual card and AvidPay Direct, one of the key components of it is the data. The data is really critical in terms of how they reconcile that transaction.

But in terms of the preference and why a supplier may select one or the other, today it is typically not based on price. It's based on where the supplier has automated their internal process. And so if they are, for example, retail, kind of have a large retail focus, they typically have spent a significant amount of both time and dollars automating their card base acceptance with their accounting and with their billing systems.

So they typically want to maximize volume through that business process. Because the most expensive transaction that a supplier has is one that requires manual intervention or manual exception handling. So if they have an automated process that they have invested in, they typically want to maximize volume. So that typically is the number-one decision factor that we see that suppliers have.

Excellent. That's really, really helpful context. We really appreciate that. My quick follow-up is around a cost of goods sold item. We've touched on this in the past. But we often talk about the double whammy that you have, meaning as you eat into that check volume and turn it into more monetizable forms of payment, either virtual card or enhanced ACH, you also get to reduce the COGS from the check production mailing, et cetera.

Maybe you could just talk a little bit about that opportunity and what that might mean in terms of the gross margin opportunity. In other words, how much of that COGS is really from check processing. Sorry about that, Joel.

No, Tim, good question and thanks for teeing that up. I think that is one of the huge opportunities for us. We talk about the opportunity -- the revenue opportunity that we have in shifting payments from check to electronic. But it does have that kind of double whammy effect.

What we have an opportunity to do is actually take that check cost and again on a transaction basis that Mike talked about, roughly the 40% that's electronic, the other 60% would be checks that we're fulfilling for our buyers as they pay their suppliers. So as we shift to electronic, we take whatever dollar plus and turn that -- we have the opportunity to turn that into pennies.

And so an important opportunity for us obviously gear three is on a revenue perspective, but also adds to the gross margin lift that we get over time. And that supports the confidence we have in our long-term gross margin targets in the mid to high 70%s. So great question. Thank you.

And also just to add to what Joel said, it does really good things in terms of our yield as well. Because certainly taking -- on the payment network side, taking a paper check, which is a zero revenue transaction, and adding a revenue component to it does really good things in terms of that yield expansion.

Excellent. Thank you, Michael and Joel, and congratulations again.

Brad Sills, Bank of America Securities.

Oh, great. Hey, guys. Thanks for taking the question. Congratulations on the IPO and the nice quarter here out of the gate. I wanted to ask about AvidPay Direct. It's a relatively newer offering relative to VCC. What efforts are underway to drive penetration of that into the installed base?

Yes, it's a really good question. And the reason -- maybe provide a little bit of history on why it was created originally back a number of years ago. It is our most recent new payment modality.

And the reason why it was created is because we had suppliers coming to us and said they wanted the same data capabilities that we were offering with our card-based -- our virtual card-based offerings. But for one reason or another, they didn't accept card. Either they didn't have a merchant account or they only accepted it under a certain limited number of scenarios. But they wanted access to the data.

So we created it to -- we settled through ACH, but we wrap that data layer around the transaction and send it to them. And we have now seen of our roughly 40% of transactions that we're able to monetize, AvidPay Direct now has grown to be -- contribute about 20% of that number. And we expect that to continue to grow nicely as well.

And I think as it relates to our sales force related to it, we're really indifferent in terms of the different payment modality that a supplier needs. So the supplier has the choice on whether they want to receive a card-based transaction or an AvidPay Direct transaction.

Got it. Thanks so much, Mike. And then one more, if I may, please. Just I understand that Core Associates and BankTEL are a couple of acquisitions of software-only assets. What efforts are you doing there to convert those customers to transaction and where are you with that effort?

Yes, so providing a little bit of context, one of the parts of our playbook related to acquisitions that we really like is to find software providers in different vertical markets that have deep domain knowledge of that vertical and have maybe a nuanced solution related to the unique business process of that vertical market. Then we can combine the AvidPay Network with their software offering and provide a really compelling value proposition set to that customer.

So that's playing out really nicely and I think we are very pleased with that conversion process. And in both our -- the ones that you referenced, Core Associates within construction and with BankTEL within the financial services vertical, we are -- I'd say the team is very pleased with that conversion process.

Thanks so much.

(Operator instructions) Bryan Keene, Deutsche Bank.

Hey, guys. Thanks for taking my questions. I've got two. I guess first, Mike, now with FastPay closed, just interested in your thoughts on the acquisition pipeline. Are there a lot of opportunities out there? And then thinking about international expansion, will that be somewhere where you probably need to make an acquisition to get started?

Yes, and so two kind of questions there, both related to acquisitions. The first one just on acquisition pipeline. So our corporate development team is active tracking lots of companies across the different verticals. And typically, we like creating long-term relationships with the principles of these companies. I think Core Associates and BankTEL are great examples of that, where we had a multiyear relationship with these companies actually as a partner with them prior to the acquisition. And that really demonstrated a great working relationship across our teams as well as the trust building between the two companies.

And we -- look, we like that dynamic. I think we've seen with companies that are out being sold that are being represented by banks, things of that nature, it's a more challenging process just because it's more competitive. And certainly we see some of the pricing pressure in those type of scenarios. So we like developing long-term relationships with a big pipeline.

The second question about international, what I would say is that we have a multipronged strategy. And step one is by incorporating our new cross-border payment capability, which we expect to roll out over the course of 2022. And the second component then is really to evolve the Canadian market. We have stood up two of our largest customers within the Canadian market currently and we expect to continue to expand that.

Then the third would be what I'd say overseas expansion. Typically focused; we believe it's going to be within the European market. And I think we will be opportunistic related to do we jumpstart that process through an M&A effort? And I think we would be opportunistic in evaluating those type of opportunities as they make themselves available.

But we do have a great set of existing channel partners that have been asking us to support them internationally for a number of years. So we are going to be very focused on our international expansion by working closely with our existing partners to support them internationally with Europe as the main focus in a very similar way as we support them here in the US market.

Got it. That's helpful. And then Joel, just want to ask on payment volume. It was up 40%. We were modeling 23%. Is that all explainable by inflation, you think? I mean, that's a pretty big jump versus our expectations. And then does it stay elevated at these kind of levels, up 40%, and do you expect that inflation to persist?

Yes, I mean, there's a number of factors, Bryan. I wouldn't point to inflation as the sole driver. We think that had an impact. We also to a lesser extent have a little bit of FastPay volume in there. But again, sort of pleased with that level of volume growth and just kind of feel like that gives us some tailwinds going into the next quarter and next year.

Great. Congrats on the great start.

Brent Bracelin, Piper Sandler.

Good afternoon. Many questions have been asked and answered. Mike, maybe I'll just drill down into cross-border. You flagged cross-border as a new payment type coming for 2022. Can you help frame the opportunity here? Obviously, the fee -- post-transaction fees are pretty compelling, but what portion of TPV volumes do you think are cross-border international for you today? Is it 10%, 20% of the volume? Any color there, just given the opportunity and you find that a couple times in the comment to be super helpful.

Yes, that's a really good question related to cross-border. So what I would say today is if you think of the eight different vertical markets that we're in, they aren't typically markets that lend themselves to cross-border, being like real estate, HOA, and healthcare facilities. They are very geographically centered industries here in the US.

But where we do see it is in the horizontal market. And working with some of our chief partners such as NetSuite, Sage Intacct, Microsoft Dynamics, and even QuickBooks Enterprise, we're seeing a growing interest in customers doing cross-border transactions. So we are still in the early days in evaluating that opportunity, but we think it's going to relate in the future more towards our continued horizontal expansion as well as some of the new verticals that we are targeting.

Got it. Helpful color. Then last one here for Joel. You surprised us on the gross margin. I think it's above 60% for the second straight quarter in a row here. Was that check mix going down? Were there other factors that contributed to the nice beat here on gross margins? Just trying to understand the durability of that number there, given you got now two straight quarters here of 50%-plus gross margin. Thanks.

Yes, great question. So we're proud of the 61% we turned in for the quarter. So 450 basis points better year over year gives us confidence, again, like I said before, on our long-term targets of over the next several years getting to 75%-plus.

I'd really point to kind of a mix of factors, including continuing to be focused on our own operational efficiency, increasing obviously that revenue yield contribution. And again, the power of the flywheel and gear three in particular and then gear four as we add data just gives us more opportunities to expand that margin. So great question and we're excited about continuing to see that expand over time.

Helpful color. Great to see the momentum in the business. Thanks.

This concludes our question-and-answer session. I'd like to turn the call back over to Mike Praeger for some closing remarks.

I want to thank everyone for joining us on today's call. We really appreciate your participation, great questions, and of course, your ongoing support of AvidXchange. With that, operator, you may now end the call.

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