Q3 2021 Avidxchange Holdings Inc Earnings Call
Good day and welcome to the avid exchange third quarter 2021 conference call.
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I would now like to turn the conference over to Ryan stall General Counsel. Please go ahead.
Good afternoon, everyone and thank you for joining us for the App Exchange Holdings third quarter 2021 Conference call with me today is Mike Brager asset exchanges co founder and Chief Executive Officer.
Joel Wilhite avid exchanges 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 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 the 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 filing then Abbott exchanges 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'll now turn the call over to Mike fragrance.
Thank you everyone for joining us for avid exchanges 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 avid exchange 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 Abbott exchange teammates for making this a reality I am so proud of all we have collectively accomplished in the last 20 plus years in building our business.
Joe will Ed and I are excited to share our third quarter results as well as an overview of our business future growth strategies, and where we're seeing momentum and continued success in driving our Abbott exchange business flywheel with that ill 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.
The strong momentum we are seeing in the business gives us confidence in our full year 2021 financial outlook, which Joe 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 quarter quarterly results conference call format, I thought it'd be helpful to drill down deeper into how our business works.
Avid exchange as 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 Abbott exchange business flywheel, along with our strategies to capture the significant greenfield opportunity that we believe exists in the middle market.
Approximately 42% of U S business to business payment volume is still paid by using paper checks.
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, and supporting ERP or accounting software solutions.
Hi costs related to manual complex accounts payable workflows, and finally, a status quo mindset of traditional long tenured finance leaders being reluctant 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 payment transactions for the middle market. In addition to providing.
BTB payments, we see a large unmet need and 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've created avid exchange, which is purpose built to deliver a significant value proposition by seeking to make inefficient and expensive paper based BTB 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 until intelligent electronic transactions simply speaking our mission is eliminate both.
The paper invoice and the paper checks 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 rich for mens data along with visibility into their invoice and payment status is.
In addition, we provide value added invoice financing services through our emerging invoice accelerator offering which is a key feature of our avid pay 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 avid exchange business flywheel shows how we work to create value for our buyer and supplier customers and reinforces and accelerates other value regenerate driving continued growth by delivering a great customer experience for our 7000 buyer customers and over 700000 supplier customers on the Abbott pay network or <unk>.
Haven't changed 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 year of our flywheel, we're 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 homeowners association or HOA market.
Financial services, which includes tier two and tier three banks, along with credit unions construction.
Media.
Health care 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 and 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 avid pay 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 <unk> hub, which includes fifth third bank, along with Bank of America, and other financial institutions, such as Keybank and third.
Software providers, such as MRI software real page and SAP concur.
New customers in the third quarter spanned across avid exchange's core verticals, including Goodwin <unk> company within our HOA vertical case, and 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 avid invoice to automate their accounts payable process along with avid paid automate their supplier payment process. One. Recent example in current holdings of Florida Real estate firm had a history of incorrect and delayed payments to its vendors due to Florida accounts.
<unk> system that was costing them several thousand dollars a month using avid exchange software, they're able to achieve three key objectives first they are able to customize their workflow approval functions to automate their invoices and payments.
Second they.
They wanted to reduce incorrect payments and non improved payments and third they wanted to have real time anywhere access to accounts payable data.
We're 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.
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 manage the entire payment file for their payments, we're able to maximize the 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 and our <unk> network.
Today, we manage over 200 tenant integration with the most widely used accounting and ERP systems, and we support a variety of payment methods, depending on the suppliers preference, including virtual card or BCC enhanced AC H or our avid page wrecked offering and physical checks, while delivering rich <unk>.
To streamline the reconciliation process supporting the middle market and the various industry verticals to make up the middle market. We view these strategies and integrations is critical key differentiators for avid exchange 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 the one 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 the customers invoice and payment volume is on our platform, we seek to create additional value by utilizing the <unk> network to facilitate the conversion of paper checks to intelligent E payments, which is our third year.
We have over 700000 suppliers that we paid through the <unk> network, we can bind specifically design business process with technology to dynamically manage the various business rules along with managing the preferred payment method for the suppliers.
Managing their payment business rules, we also manage how they would like to receive their electronic women's data. So they can apply the payment to the correct supplier account, an invoice number along with enabling suppliers to more efficiently reconciled their outstanding invoices.
We're excited to see continued growth in the number of enrolled E payment suppliers, receiving electronic payments from the <unk> network.
Repayments suppliers are defined as those suppliers that we've enrolled in one of our various avid exchange virtual card payment offerings as well as our Abbott page rocked modalities.
Having paid direct is our version of ACTH, plus where we settled through AC H, but wrapped transaction with electronic remittance data the supplier needs to automatically apply and reconcile each payment, giving them the payment speed security and women's data that they require.
We consider avidly network to be our secret sauce and is a significant competitive advantage versus others, who are primarily outsourced their supplier payment engagement and settlement efforts. We've made a large investment each year since we launched the <unk> network in 2012 and anticipate significant future return on our investment given that we have.
Expect our ABP 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 women's data.
Our App exchange 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 design to leverage that 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've captured detailing each buyer and supplier transaction.
Our single cloud based platform for invoices and payments enabled us to abstract all the learnings from these buyer and supplier relationships and uses 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.
Great example of this today is our emerging invoice accelerator offering in which we utilize the data of our <unk> 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.
<unk>, enabling them to get paid when they want to get paid.
Focusing on how we can invest in accelerating our avid exchange 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.
Yeah.
So to summarize we believe we built a powerful flywheel business model 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 <unk>.
Buyers and suppliers, along with increased 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 theres a significant opportunity to increase the penetration of electronic payments as paper checks you still comprise over 42% of overall businesses the 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 avid exchange as the leader in driving your 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 leverages 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 vertical and horizontal capabilities. For example in Q3, we entered the media vertical by acquiring fast pay a leading provider of payments automation solutions for the media versus.
<unk> industry.
Number five cross border and international expansion. We're 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've already developed within the middle market. We're in the early days of seeing for catalysts and fold 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.
Annuity and support work from home and hybrid workforce models.
There've been a 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 an experienced 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 catalyst is the generational shift or millennial effect as I like to call. It with tech savvy younger generation finance leaders taking.
An increased leadership roles and middle market companies.
We are certainly excited about the future of Abbott exchange 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 avid exchange in 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 will 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 them.
Our 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 as 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.
Our 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 gear 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 <unk>.
Suppliers, we offer electronic payment solutions to those suppliers are electronic payment solutions. Currently include virtual credit cards, and an enhanced ACA H payment product called avid pay direct therefore total payment volume is also another key metric.
Now, let's turn to our results for the three month period ended September 32021, total revenue increased by 37% to $65 $2 million in Q3 of 'twenty one over the third quarter of 2020. The increase was primarily driven by the addition of new buyer invoice and payment <unk>.
Actions and increased E payments to suppliers. Additionally, in recent months, we've been experiencing modest tailwind 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.
In Q3 of 2020.
Software revenue, which accounted for 34% of our total revenue in the quarter increased 30% in Q3 of 'twenty one 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.
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 'twenty one 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 onto our operating expenses. These expenses increased by 38% in Q3 of 2021 over Q3 of last year sales and marketing cost increased 37% in Q3 of 'twenty. One over Q3 of last year, driven by continued investment in our direct and channel strategies as well as acquisition.
Research and development cost increased 42% in Q3 of 'twenty one 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 preparation 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 last year, while we expanded our transaction yield and non-GAAP gross margins are continued investments in our growth and our platform continues.
We ended the quarter with cash and cash equivalents of $159 million on October 13th 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.
To execute on our growth strategies I'll now move on to guidance as we mentioned in our press release, we are 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 $31 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 would like to turn the call now back over to the operator and open up the line for Q&A operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
<unk>.
Our first question today comes from will Nance with Goldman Sachs.
Sure.
Hi, everyone. Good afternoon, congrats on the first quarter.
Hey, Thanks will.
Maybe I'll just kick it off on some of the traction we're seeing on the network I'm. Just wondering if you could help kind of flush it was understanding.
The penetration of the network with your current customers that and then how about.
How that compares to kind of new business.
Yeah.
So as it relates to kind of the other pay network and I think your question is related to adoption.
Related to existing and how it maybe.
Don't relate to new customers.
We kind of think of it on a transactional basis and so today across the entire network of about 40% of all transactions.
We're able to monetize either through one of our forms of pay virtual card or haven't paid 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 kind of 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 if you had any kind of a follow up to that question.
No that's great I appreciate the details and then just maybe a second you mentioned invoice accelerator a handful of times on the call. Just wondering if you could give us an update on kind of what the timeline is to roll that broadly out to the entire supplier network and.
Any signs of kind of demand coming from our client base from them.
Yeah, Great question invoice accelerators, one of the areas that we're super excited about and certainly think it's kind of the next.
The third leg of our kind of monetization model.
So today, it's still.
Kind of an emerging offering.
Kind of sub $5 million of revenue, but growing quickly and we've been kind of metering. It from the standpoint of today, it's only available for less than 10% of our overall.
Supplier base, and that's really kind of due to two things one is.
Yes, 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.
That's helpful. I appreciate you taking my questions Congrats again.
Thanks, well I appreciate it.
Our next question comes from Tien Tsin Huang with Jpmorgan.
Thanks, so much I'll echo the congrats on the first quarter.
Quarter advocate here as a public company looks clean.
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 must be focused on there.
Yes, Great question, Tien Tsin I'll take it.
And first thing I'd Guide you just given the revenue model work, so I wouldn't I wouldn't necessarily correlate the change in deferred revenue sales, but we're excited about the sort of the performance. This year, we've seen great continued strong demand for our solutions.
We've talked about kind of a mix of some really great tailwind from Covid and then some.
Sustained kind of headwinds.
In places, but we were pleased to sort of deliver.
To deliver better than our internal forecast from a from a sales perspective, we don't provide a bookings or IRR figure, but we do have good confidence in being able to deliver our long term.
Our guidance for Q4 and sort of.
Our outlook for 'twenty, two so felt so good about the production in the quarter. Okay. Good and then on my follow up quickly just on the partner front.
How are those conversations.
And do you feel like Youre closer maybe security anymore.
Larger partners just curious how that's going.
Yes.
Yes.
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.
Others with kind of our software.
Partners and within each of the two categories, where both referral partners and we have we call reseller partners and typically reseller partners of the more substantial partners that are able to actually white label, our platform and use there.
Their own sales force and go to market strategies to.
To sell to their customers.
And so within the bank channel I think as we've personally message one of our <unk>.
<unk>.
<unk> partners is bank of America, and they began onboarding customers earlier this year.
We're really.
<unk>.
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 piece on the software partners, we continue to see good momentum across kind of a handful of partners, including kind of real page.
And.
As well as MRI software within the real estate vertical.
What I would say is that we are very selective in terms of adding new reseller partners. So that number that base of we expect to grow by a small amount each year, but where we're adding more partners is on the referral side and that today, we're up to 120 plus different referral partner.
And we continue to grow that nicely.
So that's what we're currently seeing and.
Excited about the interest level that we're getting from both partners as well as customers.
Very good thank you both alright.
Alright, Thanks Susan.
Our next question comes from Ramsey El <unk> with Barclays Hi.
Hi, gentlemen, thanks for taking my question this evening.
I wanted to ask about the transaction yields with Chubb, which went up sequentially pretty nicely.
What are the primary drivers there it didn't look like it was a mix shift to software is there as fast pay a contributor there what can you tell us about why that stepped up sequentially.
Yes, Thanks Ramsey great question.
Theres, a handful of Theres a handful of drivers.
Kind of contribute.
A couple that I would point out and I kind of mentioned in our prepared remarks to some degree we think theres a little bit of.
We're seeing an average payment size increase we think theres, a little bit of inflation driving that.
And.
Some mix.
Some mix impact as well and then to a lesser extent.
We do have inorganic contribution to that as well as you mentioned from fast pace, so kind of a handful of drivers there.
Okay and.
My follow up is a.
Longer term strategy too.
Two part or the first part is.
And going forward can you give us sort of your most updated thoughts on expanding your vertical mix or are you sort of now focused on trying to penetrate the verticals yearend versus expanding into new verticals and also over the longer term would you contemplate either moving up market or down market more broadly.
Yes, Thanks, Robert that's a good question one that will get routinely.
So.
To remind you.
Within the eight verticals that we're in today, we believe that we're still in.
Single digit penetration across all eight.
In the financial services vertical.
With the growth of kind of tier two and tier three banks as well as credit unions, we may be approaching 20%.
But still.
Big runway within the.
The eight verticals that we're 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 the continue to be.
Kind of aggressive as well as opportunistic opportunistic in terms of adding to those verticals and I think as we referenced Doug we'd like to add a handful of new vertical focus as each year as we evolve.
And.
That would 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, Ramzi and transit.
Our next question comes from Josh Beck with Keybanc.
Thanks team for taking the questions 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. It 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 is.
Any chatter or any trends that youre seeing take shape on those fronts.
Yes, I think Thats a great question.
Certainly within the macro environment.
It's kind of top of mind for a lot of our customers.
Typically what we've seen within especially kind of 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.
Kind of 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 kind of macro impacts of.
Supply chain as well as inflation.
Okay, great. So it seems like maybe on the margin.
Perhaps a tailwind or at least what you.
You've seen this quarter.
Okay.
Maybe a question for you Joe as well.
Just with respect to the guidance philosophy, obviously, you had flashed your numbers prior to this report so.
We didn't get to see.
Exactly how 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 Great question Josh.
If you compare the flash numbers in the S. One relative to what we delivered we were kind of at that.
Nice beat across across each I think we're on the high end of the transaction count, which we we see that volume as we sit at the end of the quarter. So obviously now looking forward, we see we've seen a little bit of the volume activity, but honestly it.
There are things, we control and there's things, we don't control and I think we're playing it kind of right down the middle.
And so again high confidence.
That we can sort of deliver those results from where we sit today.
Very helpful. Thank you both thanks.
Thanks, Rocco and thanks, Josh.
Our next question comes from Darrin Peller with Wolfe Research.
Hey, guys.
Thanks.
Hey, Darren.
Okay.
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 am 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.
<unk> really monetize in a sense or I think you said, maybe 40% of transactions when considering the avid paid direct or RBC.
There is still huge runway I think great and so just curious how you're approaching that how you think we should think about that over the next few quarters and then more importantly longer term, what youre doing to try to.
Advantage of that lever thanks, yes.
Yes, I'll take a shot first.
Really as we've talked about this and Mike talked about tier three of the flywheel right. The opportunity. We see ahead of us over the long run for really continuing to increase the penetration.
Take that whole payment file at the end of an AP process, and then we kind of optimized payment against the supplier network.
I wouldn't focus as much on the next couple of 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% <unk>.
<unk> growth overall, 37% growth in the quarter, so really see that as validation to the model and excited about that long term opportunity yes.
Yes, maybe adding a little bit more color to what Joel said is we also expect that.
The percentage of monetize payments, both either transaction volume to continue to grow over time as well as we introduced new payment modalities into the market as well.
One that we're currently.
Underdevelopment for example, as our cross border capabilities and.
And we have a number of other <unk>.
Payment modalities that we expect to incorporate.
With customers in the coming year, and so I think all of those different strategies combined with just our core virtual card and avid pay direct acceptance methods continues to drive ongoing supplier growth.
Got it.
Alright Thats helpful.
When we think about the verticals you mentioned earlier the verticals I mean, 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 <unk>.
Touched on this earlier, it's going well.
Can we just can you just expand on that Permian because I think we get a question a lot about competition.
I mean, how much of a barrier has that been for you and touching on these integrations for a minute. Thanks again guys.
Yes, so great question Darrin.
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.
Yes, I haven't changed is really kind of purpose built for the middle market and so what does that mean it starts with the feature set of our software.
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 coating structures support for multiple general ledger and cost job cost systems, which are all kind of characteristics of middle market companies.
The second component is then.
All of the different accounting systems that support each of the different verticals. So today.
We split over 210 different accounting system or ERP integrations across the verticals that we serve.
And then the kind of the third is really the payment network itself.
Is really purpose built to support all the suppliers of the middle market, So 700000 suppliers and drove us each week.
And then what I would say 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.
Very deliberate sales process that is typically characteristics of cfos within middle market companies.
So whether it be our kind of products the integrations that will reward them, where our go to market strategies really all geared around.
Middle market companies end up and that we believe that it has created a big moat for us.
Most of the new competition at least that we've seen has not been in the middle market and see then typically in small business.
Right.
Alright, thanks, guys.
Thanks, Greg.
Our next question comes from Timothy Chiodo with 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 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 is clearly there's a ton of check in and paper based.
Forms of payment to eat into but when the offering is virtual card versus the enhanced ECH realize theres different systems that have a card integrations, there's transaction sizes or different verticals, maybe you could just dig into the value proposition of each virtual card versus the enhanced D C H and when and why and why not.
Suppliers might choose one or the other.
Yeah.
Really good question.
And it's pretty intuitive.
Because it.
There is some art and there is some science related to it but I would say first of all we today support seven different different types of payment types of modalities as we call them that.
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 500 as an example that will take a virtual card transaction, but it's over 500.
Ill requests a different type of payment modality as part of their business rules.
And so the.
For both of you know kind of are our main two can monetize payments virtual card never be direct.
One of the key components of it is the data and.
The data is really critical in terms of how they reconcile that transaction.
But in terms of the preference on which.
<unk> supplier may select one or the other.
It is typically not based on price its based on where the supplier has automated their internal process and so if there were for example, retail kind of have a large retail focus.
<unk> typically.
We have spent significant amount of both.
<unk> time and dollars automating their their card basis, optum with their accounting and with their billing systems and 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 and so if they have an automated process that they've invested and they typically want to maximize volume. So that typically is the number one decision factor that we see that suppliers have.
Yeah.
Excellent.
Really really helpful context, we really appreciate that my quick follow up is around the cost of goods sold item and we've touched on this in the past but.
We often talk about sort of the double whammy that you have meaning as you eat into that check volume and turn it into more monetize of all forms of payments either either virtual card or enhanced ACTH. 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 <unk>.
Gross margin opportunity in other words, how much of that Cogs is really from check processing sorry about that.
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 pain.
Payments from check to electronic but it does have that kind of a double whammy effect, what we have an opportunity to do is actually take that that check cost and again on a transaction basis that Mike talked about.
Roughly about 40% that's electronic the other 60% would be checks that we're fulfilling for our for our buyers as they pay their suppliers and so as we shift to electronic we take.
Whatever $1, plus and turn that we have the opportunity.
To turn that into <unk> and <unk>.
An opportunity for us obviously gear three years on a revenue perspective, but also adds to the gross margin lift that we get over time and that sort of supports the confidence we have in our long term gross margin targets in the mid to high 70. So great question. Thank you, yes, and also just to add what Joel said it doesn't really good.
In terms of our yields as well.
Because certainly taking on the payment networks side, taking on a paper check which is a zero revenue transaction and adding revenue component to it does really good things in terms of that yield expansion.
Excellent. Thank you, Michael and Joe and congratulations again.
Hey, Thanks, Tim.
Our next question comes from Brad Sills with Bank of America Securities.
Oh, Great Hey, guys. Thanks for taking the question congratulations on the IPO and a nice quarter here out of the gate.
I wanted to ask about avid pay direct it's a relatively newer offering relative to BCC.
What efforts are underway to kind of drive penetration of that into into the installed base.
Yes, so really good question and the reason.
Maybe provide a little bit of history of why it was created originally back a number of years ago. It is R. R.
Most recent kind of new payment modality.
<unk>.
The reason why it was created is because we had suppliers coming to us and said they wanted the same data capabilities that we're offering with our card based virtual card base offerings, but for one reason or another.
Didn't accept card either the NAV merchant account or.
They only accepted it under.
Certain limited number of scenarios and.
But they wanted access to the data and so we created it to we settled through ACTH bubble wrap them data layer around the transaction and send it to them.
And we've now seen.
Of our roughly.
40% of transactions that we're able to monetize avid pay direct now has grown to be.
<unk> contributed 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 avid pay direct transaction.
Got it thanks, so much Mike and then one more if I may please.
I understand the core associates and bank Teller, a couple of acquisitions of software only.
Assets, what efforts are you doing there to kind of convert those customers to transaction and kind of where are you with that effort.
Yes.
So you provided a little bit of context, one of the.
Parts of our playbook related acquisitions that we really like us to.
Is defined.
Software providers in different vertical markets that have deep domain knowledge of that vertical and maybe a nuance solution related to the unique business process of that vertical market and then we can kind.
Combined they haven't paid network with their software offering and provide a really compelling value proposition.
To that customer.
And so that's playing out really nicely and I think.
We are very pleased with kind of that conversion process.
And in both our.
The ones that you referenced core associates within construction and with bank tell within the financials vertical financial services vertical.
We are.
I'd say the team is very pleased with that conversion process.
Thanks, so much.
I'm just wondering if you have a question please press star one.
Our next question comes from Bryan Keane with Deutsche Bank.
Hey, guys. Thanks for taking my questions I've got two I guess first Mike now with fast pay close just interested in your thoughts on the acquisition pipeline or there are a lot of opportunities out there.
Thinking about international expansion would that be somewhere where you probably need to make an acquisition to get started.
Yes. So so two kind of questions are both related to acquisitions. So the first one just on the acquisition pipeline.
Our corporate development team is active tracking.
The companies across the different verticals.
And.
Typically we like creating kind of long term relationships with these the principles of these companies.
Core associate some bank til are great examples of that where we had a multiyear relationship with these companies.
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.
We look we like that dynamic I think we've seen.
With the companies that are out being sold that are being represented by banks and things of that nature.
It's more challenging process, just because it's more competitive.
And certainly we see some of the pricing pressure.
And those type of scenarios, so we like developing kind of long term relationships with the big pipeline.
The second question about international.
I would say is that we have a multi pronged strategy.
If you kind of step one is by incorporating.
Our new cross border payment capability, which we expect to rollout over the course of 2022.
And the second component that is.
It 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 kind of mix continue to expand that.
And then the third would be kind of what I would say.
Overseas expansion typically focused we believe it's going to be within the European market and.
Thank you.
We will be opportunistic related to do we jumpstart that process through an M&A effort.
We would be opportunistic.
<unk>.
In evaluating those type of opportunities.
Make themselves available, but we do have a great set of existing channel partners that have been asking us to support them.
Nationally for.
Number of years, and so we're going to be very focused on.
Our international expansion via.
Working closely with our existing partners to support them internationally with Europe as the main focus in a very similar ways, we support them here in the U S market.
Got it got it that's helpful. And then Joe just wanted to ask on payment volume was up 40% we were modeling 23%.
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 you expect that inflation that kind of persists.
Yes, I mean, theres a number of factors.
Brian I wouldn't point to inflation at the sole driver.
That has had an impact.
Also to a lesser extent had a little bit of a little bit of fast pay volume in there.
But but again sort of pleased with that level of volume growth and just kind of feel like that gives us. It gives us some tailwind going into the next quarter and next year.
Great Congrats on the great start.
Alright, great. Thanks, Brian.
Our final question today comes from Brent <unk> with Piper Sandler.
Good afternoon.
Questions have been asked and answered Mike maybe I'll, just drill down into cross border.