Q3 2022 Avidxchange Holdings Inc Earnings Call
Good morning, everyone and thank you for joining us for the album Exchange Holdings, Inc. Third quarter 2022 earnings call.
Joining us on the call today is Mike prisoner of exchanges co founder and Chief Executive Officer.
Joe Wilhite exchange, Chief Financial Officer, and too harsh Kumar of exchange head of Investor Relations.
Before we begin todays call management has asked me to really the forward looking statement disclaimer is included at the end of today's press release.
This disclaimer emphasizes the major uncertainties and risks inherent in the forward looking statements. The company will make this afternoon.
Okay.
Certain fees and risks in mind as.
The company discuss future strategic initiatives potential market opportunities operational outlook and financial guidance during today's call.
Also please note that the company undertakes no duty to update or revise forward looking statements.
Today's call will also include a discussion of non-GAAP financial measures as that term is defined in regulation G.
non-GAAP financial measures should be should not be considered in isolation from.
Or a substitute for financial information presented in compliance with GAAP.
Accordingly at the end of today's press release.
He has provided a reconsideration of these non-GAAP financial measures to financial results prepared in accordance with GAAP.
With that I'll now turn the call over to Mike Prager.
Thank you everyone for joining us here today, Joe <unk> and I are excited to discuss avid exchanges third quarter 2022 results and the continued momentum we are experiencing across our business driven by our middle market focus and our board growth gears of our Abbott exchange business flywheel that drives our business.
As we anniversary our initial public offering it is noteworthy that today's volatile economic backdrop is somewhat analogous to the one that existed during our founding back in 2000.
Since then and since our IPO, we have not only demonstrated our durability, but also have thrived laying the foundation for a relentless focus on driving customer innovation.
Value creation for both customers and shareholders and strong financial and operating performance.
Yeah.
Today I want to talk about three themes that are behind our strong performance for the third quarter and should set us up to continue delivering strong results in the future.
Three themes are as follows.
One our industry, leading electronic payment penetration remains a key lever in both differentiating avid exchange and driving financial results.
Two our hybrid go to market sales strategy with a differentiated vertical market approach and integration strategy is driving customer adoption and sales momentum.
And three our focus on customer innovation is increasing our value creation, along with extending our vertical market penetration and reach.
Let's start by discussing the impact of theme number one and how our industry, leading electronic payment penetration remains a key lever and differentiating Abbott exchange and driving financial results as evidenced by our consistent operating and financial results. We have delivered since our IPO.
To appreciate the calculus behind our electronic payment penetration it is worth recounting our driving force.
We've taken a holistic approach to our customer base since launching the Abbott pay network in 2012 are.
Our value proposition extends not just the buyer customers through our AP automation, but equally important to supply our customers through our offering supporting various payment modalities.
Cash flow manager invoice accelerator and avid analytics.
Through these bespoke offerings, we have driven industry, leading electronic payment penetration.
Strong payment volume higher yield metrics and robust payments revenue growth.
Third quarter of 2022 was no exception.
We delivered revenues of over $82 million.
Which was up 26% over the same period last year.
This now marks five consecutive quarters of exceeding our internal financial targets and delivering over 20% comparable organic revenue growth.
Led by a robust payments revenue growth of 34%, we drove revenue performance in our non-GAAP gross margins, which approached 65%.
Along with expense controls the baseline levels of which we are proactively calibrating. The result was that almost we almost half our adjusted EBITDA losses to roughly $3 7 million in the quarter.
A further upshot to our third quarter results, we're raising our full year 2022 revenue outlook, while lowering our adjusted EBITDA losses further.
This brings us to our second theme driving our results, which is our hybrid go to market sales strategy.
With a differentiated vertical market approach and integration strategy driving customer adoption and sales momentum.
The sustained progress on our demand generation is driven by our vertically differentiated and purpose built solutions, creating our middle market.
Your proposition for.
The value proposition includes dynamic automation and Decisioning, a manual and paper intensive workflows, where sophisticated business rules supporting our middle market companies accounts payable and payments lifecycle.
Through our 220, plus vertically and horizontally aligned integrations with different accounting systems intertwined with our referral reseller and white label reseller partnerships. These middle market customers are able to digitally transform their back office, thereby reducing the current and future cost and getting a rapid return on their investment.
As these buyer customers adopt our solutions are avid exchange flywheel and value proposition gained further momentum, creating a powerful two sided network as buyers bring their suppliers, thereby maximizing network density scalability transaction liquidity and electronic payment converge.
And the information discovery to drive operational efficiencies for both buyers and suppliers.
As the current economic backdrop remains volatile where efforts to reduce cost and bolster productivity remains an imperative to offset inflationary headwinds and its knock on economic growth in my opinion, the benefits of our value proposition should continue to comment a sharper view and drive further market adoption.
One powerful example, supporting our vertical market integration strategy and our value proposition is with buyer customer that's pets.
A veterinary hospital network as part of our health care facilities vertical According to Blair Myers, Vice President of finance and accounting at pets pets. Prior to Abbott exchange, that's pet's back office processes, we're inefficient costly manual and a bottleneck to growth, including manual cutting paper checks to pay.
Each invoice.
After visiting and accounting systems conference and evaluating several AP automation companies Blair chose avid exchange ports full circle platform, which provides both AP and payments automation capabilities, which is highly integrated with their stage in tax accounting system, thereby turning a bottleneck into a profit center.
Enter.
First of all blurry counted honestly this was probably one of the easiest new product implementations that I've been part of in my entire career.
Another. Good example is with Saban community clinic.
A nonprofit health clinic with multiple locations throughout Los Angeles.
Another success story within our growing not for profit vertical highlighting the power of avid exchanges AP and payments automation solution tightly integrated with their MIP fond accounting system.
Contending with staff turnover in its accounts payable department save and community clinic found it difficult to maintain business continuity and struggled with processing their invoices and payments on time.
With our combined Abbott exchange.
Invoice to pay solution fully integrated into the clinics accounts payable process saving community is now able to process payments on time without worrying about negatively impacting the clinics operations or their ability to serve their community.
Yes, DAP accountants, Michelle Toast states with avid exchange I am now able to Medtronic lead approve invoices and payments in seconds.
Given these very compelling customer testimonials articulating the business problems that we're solving for our customers I will now provide an update on our value proposition and driving market adoption of avid exchanges industry, leading offerings, which are purpose built for the middle market.
In addition, I want to focus my directional commentary on demand trends year over year as it relates to our top of funnel sales activity.
This commentary provides a line of sight into potential opportunities tied to new buyer customer logo wins and additional product attachments to existing buyer customers that are expected to convert fully ramp and impact 2023 results.
Furthermore, our pipeline analytics, which overlays the sales funnel tracks deal sizes close rates. In addition to Onboarding and new customer go lives along with our 90 days certification rates for new invoice volume.
To date, we are encouraged by the demand activity, we are seeing both the buyer and the supplier side of the equation in the face of the current macro backdrop.
Our real estate.
Homer Association and nonprofit verticals, along with our horizontal focus all of which represent a greater weighting in our business mix continued to exhibit strength quarter over quarter and sequentially.
Within the real estate vertical we're also seeing strong channel demand partner support for driving new opportunities as evidenced by avid exchange be named partner of the year by MRI software patents are sent user conference last weekend in New Orleans, along with a record year of rent manager another channel.
We're driving adoption in the multifamily sector of real estate.
This is all more impressive considering this year's top of funnel activity was probably influenced by some COVID-19 related catch up.
Our construction and financial services verticals. Meanwhile, have seen some unevenness, which.
Which we are also closely monitor.
Overall that sort of puts and takes we are pleased with the strength of our top of funnel sales momentum and remain cautiously optimistic as we positioned for a strong 2023.
Finally, I want to share insights into our third theme of demonstrating our relentless focus on customer innovation to increase our value creation for both buyer and supplier customers along with extending our vertical market penetration and reach.
The investments we are making in our product roadmap, our compounding our strong operating and financial results through these through three of the four years of our Abbott exchange flywheel.
During the quarter, we advanced our integration strategy with the launch of a new application programming interfaces integrations or API as we call them for blackboard impacting gears, one and gear two of our flywheel.
Blackboard as a vertical accounting solution provider, which we established a strategic partnership focused on expanding our non for profit education and healthcare verticals market footprint in the third quarter of 2022, we introduced new API integrations with Blackboard financial edge NXT are cloud based fund account.
Solution.
On our next generation avid connect integrations platform the seamless out of the box integrations enable automatic syncing of general Ledger codes vendor list, along with the invoice and payment data between avid suite, which includes avid invoice and Abbott PE and black box financial edge NXT system.
With roughly 6000 blackboard customers currently on financial edge accounting system. We believe this integration when the first on avid connect should deepen our technical sales marketing and organizational partnership with blackboard.
It's enabling us to accelerate our penetration across black box customer base fares.
Furthermore, as more of our accounting system partners migrate their on premise solutions to the cloud. Our API is built on Abbott connection enables faster customer acquisition implementation and payment adoption, along with a better overall seamless buyer customer experience.
Under gear number three which is the monetization of payment transactions. We recently launched our avid exchange cross border payment offerings at net suites annual Sweet World user conference in Las Vegas, consistent with our delivery commitment at the start of the year.
This capability will be embedded within that suite ERP with the intentional.
International money transmission and settlement component being powered by wise, our international payments processing partner the adoption of cross border payments is an important product not only in terms of broadening our payment went allergies.
But also in advancing our international pillar of growth growth strategy, but also deepening our relationships by leveraging this capability across all of our horizontal software channel partners.
As we have stated in the past cross border payments currently comprise a very small component of our existing money flows.
But the App and the absence of it did however limit our historical participation in a subset of bundled opportunities that included both domestic and international payments with our advanced three way purchase order matching functionality introduced in the first quarter of 2022 combined with our new cross border payment offering we believe we are.
We're well positioned to pick up both new buyer customer opportunities as well as extend our vertical market focus into new verticals, such as manufacturing and others.
In summary, we're very pleased with our results in the third quarter, along with navigating our first year as a public company, which we have been driven by the three themes. We discussed combined with our consistently strong execution, our strong balance sheet and our positive business outlook for 2022, we have much to be.
Proud of.
I want to thank all of our avid exchange team members for their hard work and dedication in driving this strong financial outperformance amid a very volatile economic backdrop.
As we celebrate our accomplishments during our first year as a public company. We're excited about the opportunities ahead and recognize the discipline needed to execute on them.
To be sure we have been tested many times since our founding <unk>.
The middle market industry leader, we expect to be tested as we build highly durable growth business rest assured we are focused on selling.
Selling and innovating to drive overall middle market adoption with the investments we've been making across the four gears of our avid exchange business flywheel. We believe we are well positioned to advance our value proposition enhance our industry, leading integrations continue growing our proprietary two sided.
Network and expand our significant competitive moat and being the leader for middle market companies and automating their accounts payable and payment processes, while maximizing shareholder value creation.
With that I'd like to turn the call over to my partner Joel Wilhite.
Joel.
Thanks, Mike and good morning, everyone I'm excited to talk to you today about our third quarter 2022 financial results, which reflect continued execution of our growth strategies, leading now three consecutive quarters of positive we revised 2022 guidance.
Overall, we delivered another quarter of solid financial performance, our third quarter 2022 revenues came in better than our forecast driven by higher total transactions payment volumes and contribution of interest revenue from funds held for customers given the fed induce change in interest rate levels.
That together with better operational efficiencies and expense control contributed to our lower than expected adjusted EBITDA loss in the third quarter of 2022.
Total revenue increased by 26, 4% to $82 4 million in Q3 of 2022 over the third quarter of 2021 organic revenue growth, which excludes the contribution of our paid clearly acquisition, which closed in January 2022 was $25.
6%.
Organic growth was primarily driven by the addition of new buyer invoice and payment transactions, which increased payments to suppliers.
As a reminder to those who are new to the avid exchange story, both fast pay and pay clearly our media advertising books of business that include a portion of revenue that skews to the mid term and presidential election cycles in the U S.
For the nine months ended September 32022, the revenue contribution from just the political segment of the media vertical was $5 4 million.
While we are not guiding to 2023 numbers, it's worth noting that 2023 has neither the U S mid term nor presidential elections benefits.
Back to Q3 2022 financial results.
Our strong revenue growth also resulted in total transaction yield expanding to $4 57 in the quarter up 12, 8% from $4 and five in Q3 2021.
The increase was driven principally by improvements in mix and payments yield software revenues of 25 million, which accounted for 34% of our total revenue in the quarter increased 12, 1% in Q3 of 2022 over Q3 of 2021.
The increase in software revenues was driven primarily by growth in total transactions of 11, 9% in Q3 of 2022.
Payment revenue of $56 $6 million, which accounted for 68, 7% of our total revenue in the quarter increased 34, 3% in Q3 of 2022 over Q3 of 2021, excluding pay clearly which contributed approximately a $5 million in the quarter.
Organic payment revenue growth was 33, 1% the increase in payment revenues was driven by the growth in total payment volume of 29, 4% and 28, 7% excluding pay clearly.
On a GAAP basis gross profit of 47 $6 million increased by 38, 7% in Q3 of 2022 over the same period last year, resulting in a 510 basis point improvement in gross margin for the quarter to 57, 8%.
non-GAAP gross margin increased 440 basis points to 65% in Q3 of 2022 over the same period last year, driven primarily by a combination of total transaction yield and operational efficiencies.
Moving onto our operating expenses.
On a GAAP basis total operating expenses were $74 6 million an increase of 34, 5% in Q3 of 2022% over Q3 of last year, driven by head count additions to support our growth initiatives increased expenses and transition to a public company and a recognition of <unk>.
Noncash stock based compensation costs.
On a non-GAAP basis operating expenses, excluding depreciation and amortization increased 25, 9% or $11 8 million to $57 2 million in the third quarter of 2022 from the comparable prior year period, highlighting the operating expense leverage on a.
Terrible basis.
I'll now talk about each component of the change in operating expenses on a non-GAAP basis.
non-GAAP sales and marketing costs increased by $3 1 million to $19 million in Q3 of 2022 over Q3 of last year with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and suppliers customers non.
non-GAAP research and development costs increased by $3 8 million to $19 3 million in Q3 of 2022 over Q3 of last year. The increase was due to continued investments in our products and platform <unk>.
non-GAAP general and administrative costs increased by $4 9 million to $18 9 million in Q3 of 2022 over Q3 of last year driven by a combination of an increase in performance based bonus accruals due to continued strong operating and financial results coupled with expenses.
Transition to a public company status.
Our GAAP net loss was $25 $4 million in the quarter versus a GAAP net loss of $35 5 million in the prior year period, which included the impact of a mark to market adjustment for convertible common stock liability prior to conversion upon our IPO on.
On a non-GAAP basis, our net loss in the third quarter of 2022 was 11 $6 million and.
<unk> of $3 $7 million compared to the year ago quarter on solid organic revenue growth combined with ongoing operational efficiencies and expense leverage.
On a non-GAAP basis, adjusted EBITDA was a loss of $3 7 million in Q3 of 2022 compared to a loss of $6 million in Q3 of 2021 due to the aforementioned factors.
Turning to our balance sheet for a moment I wanted to touch on a few key items, we ended the quarter with a cash position of $508 four.
$4 million the cash is split between cash and equivalents of $411 1 million, which is a combination of demand deposit accounts and money market funds. The remaining 97 $3 million isn't a basket of financial instruments, including Treasury bills in commercial paper with a weighted average.
Maturity of roughly 71 days.
The weighted average annualized effective interest rate on our corporate cash position for the third quarter was roughly one 6% our outstanding debt balance at quarter end was approximately $128 million out of our credit facility at quarter end, which was $133 $5 million.
I'll now move on to our updated full year 2022 guidance.
In light of our strong third quarter outperformance and mikes cautiously optimistic commentary about the opportunities and initiatives, we continue to see and execute across our business.
We now expect total revenue for the year to be above what we previously provided and in the range of $314 million to $315 million. We are also adjusting our non-GAAP adjusted EBITDA expectations lower to a loss between 18 and $19 million with.
That I would now like to turn the call back over to the operator to open up the line for Q&A operator.
We will now begin the question and answer session.
To ask a question with Star then one on your telephone keypad.
He is your speakerphone, please pick up your handset before pressing the keys.
Let's try a question. Please press Star then two.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question will come from Dave Koning with Baird.
You May now go ahead.
Yeah, Hey, guys. Congrats on another really good quarter.
Thanks, Hey, Thanks, Dave.
Yeah.
Maybe for my first question payments volume yield or I guess revenue yield on volume has continuously gone up I think three quarters in a row sequentially.
Maybe you can talk through kind of the different moving parts I would imagine interest revenue, probably helped that a little bit, but even maybe payment type of verticals kind of talk through kind of.
What's driven that continued improvement and then how maybe we should see that going forward.
Yes, Great question, David This is Joe.
You are asking about kind of our yield on total payment volume right so payment revenue.
Over that PPV, we had good growth in the quarter, we were pleased with 29% overall, we'd kind of exceeded our expectations from a volume and a total transaction count growth TPB yield itself again, we.
It remains.
Kind of industry, leading and healthy.
A couple of dynamics, we've said in the past the basis point up or down would it be something necessarily to focus on we do believe that over the long run. This yield is connected the gear three for US and is one of the biggest opportunities that drives growth for us in the future.
We don't break out the components and the puts and takes a couple of things certainly our interest revenue, which grew Q Q2 to Q3 as mentioned in the prepared remarks that is included in payment revenue there is incremental.
Incremental.
That's associated with that same same too.
Lesser extent given the inclusion of.
The political component of the revenue, but all in all we're really pleased with the progression of that yield and expect that again, thats really where there is a long term opportunity for us is checks come out of the system and we move more and more payments to digital.
Yeah, great great. Thank you and then I guess my second question gets kind of back to the interest revenue and I think just based on the $800 million or so of that float portfolio and rates being up a lot. We have that that line up $2 3 million sequentially and it's probably our margin so.
It looks like your guidance, if we just put that through and no core improvement youre going to hit your guidance, even without any core growth.
Imagine you have core growth too so maybe.
Let me know, maybe if im a little too aggressive maybe on net interest revenue.
Yeah, a couple of questions. So what I would say and we called out certainly we benefit from the funds held from customers in a rising rate environment.
Youre right in the kind of plus or minus $1 billion of cash up from customers.
Early early quarters. This year, we were sub $40 50 basis points.
And on average now what we saw in the third quarter was 100 bps.
And you know ramping a little bit as you as you exited the quarter so that certainly contributed.
And we'd expect that to continue.
Sort of pace.
Fed funds minus the 100 120 basis points on somewhat of a lag so we do see that.
Included but even removing that impact we saw good good growth good yield expansion and then the final part I guess of your question. David is how we think about that relative to the guide.
Like Mike said, we're cautiously optimistic we have not seen meaningful kind of macro impact, but just being cautious as we sort of predict the outcome for the quarter and our guidance.
Gotcha, great well, thanks, great job.
Thanks.
Yeah.
Our next question will come from William <unk> with Goldman Sachs.
No go ahead.
Hey, guys. Good morning, I. Appreciate you taking my questions I wanted to ask on the gross margin improvement.
You guys have this plan to improve gross margin by 10 points I think by 2024 and so it seems like you guys are basically halfway there and seem.
It seems to be running a little bit ahead of plan. So I just wanted to kind of pick that apart a little bit and understand how much of the gross margin improvement is coming from some of the elevated AD spending and higher float revenues this year versus.
If you kind of strip that back do you guys feel like Youre kind of running ahead of schedule on that plan.
Look at it over over the next year and a half or so.
Got you. Good question will yes, we were happy with 65% margin in the quarter meaningful step up sequentially and we've talked about that being a part of our path to profitability. We have said before that kind of in the.
Our full year calendar 'twenty four we're committing to this business will become a profitable business. We believe that happens in the 70% gross margin ZIP code along with good scale in G&A and then RMB. So we did just speaking about that 65% in the quarter the preponderance of that benefit.
Or that sequential increase is really continued operating efficiency that we're seeing and we're seeing that top to bottom, but it certainly shows up in gross margins also payment yield.
It is true that that incremental that sequential growth in the interest revenue contributed to that gross margin.
To some degree we're not breaking out the components also the presence of political was a benefit removing both of those we were pleased with the underlying expansion of gross margin from Q2 to Q3.
The last thing I might just add to that question well as you think about.
Certainly not guiding 23, now and we don't guide to gross margin, but I would kind of balance the expectations of margins going forward for for two things. One is you already mentioned and I answered the political component there is a bit of a benefit there just given the nature of that spend and margin and so we've mentioned before the political.
<unk> is largely absent in the 23 year and the second thing I would say is I think we mentioned last quarter that we have more fully now moved our business into the Azure cloud and so that transition is behind us, but we are making investments and making certain spend as we exit 'twenty.
Two associated with the security and the platform.
The robustness of that and so I would sort of meet expectations for that.
Over the next couple of quarters.
Understood that all makes sense and then Mike I thought the question or the commentary on top of funnel demand was interesting one of the things I think you've highlighted in the testimonials was turnover among staff.
I guess is that a trend that youre seeing and as we think about the great resignation, playing out and back offices across across the country is that is that a trend that youre seeing drive more demand for the product.
Yeah I think.
That's a good question I think the overall.
Trend that we're seeing is.
The question when people are forced to hire additional staff do they want to invest in the labor component or now the right time to invest in automation.
Whether that need and staff is driven by the growth of their business or by kind of resignation.
Kind of element I think is a good question we recently.
Actually released our Q2 middle market spend.
Index and one of the things that we highlighted there as part of our survey is that in the last year of four to five of our customers across the middle market have grown their business and so whenever you have a growing business. You also have a need for additional.
Accounts payable staff and I think in the current economic backdrop, what we see and what we're seeing currently is consistent with in the past.
When you have chop your waters is it really kind of forces are buyer customers.
To look at is now the right time to automate this process rather than continue to invest in human labor. So.
I think that overall theme is certainly playing out.
And whether the increase in hiring is that we're seeing is due to kind of growth of their business or part of the turnover of their staff I think is a good question.
Got it I appreciate you taking all the questions.
Thanks, Rob.
Okay.
Our next question will come from Darrin Peller with Wolfe Research you May now go ahead.
Hey, guys. Thanks.
I wanted to follow up on the top of funnel again for a minute and just talk about what you think is truly resonating I know a lot of it was post COVID-19 being back out of conferences, but still.
Still a ton of white space and so when you think about what sort of sustainable on the front.
New customer adds and then just a quick follow up on volume trends you talked about we saw the results may continue to be very strong I think you mentioned some differences in terms of verticals and some puts and takes so can you just go into that again is it something you're seeing from a macro standpoint, that's driving some changes in certain verticals versus others.
But look overall in context of the strength were seeing I guess is that new business is that some verticals the outweighing others.
More color would be great.
That'd be great there.
Good questions.
So certainly so they kind of start with the question of kind of top of funnel activity that we're seeing.
Certainly the kind of conversion back to in person conferences has been a positive element for us.
Historically that's been.
A key component and in supporting kind of our digital top of funnel.
Generation, along with that of channel partners and what we're seeing is I was just at two of our comp.
Gartner conferences last week alone and attendance was up about 50% over last year. So certainly there is an interest in finance leaders CFO is getting back to.
How do they catch up or is it really lean into some of the automation initiatives that maybe they haven't invested in during COVID-19.
The second thing we're seeing is really.
Some nice activity across some of our channel partners.
Again during Covid many of our channel partners were more focused on just maintaining customer relationships, rather than selling new products and now they're getting back to how they grow their customer base. So that's really.
Being a positive element in terms of top of funnel activity.
As it relates to kind of the performance of our across our verticals first of all.
<unk>.
The beauty of our business today is that we have.
Super diversified across eight different verticals, plus we have the horizontal slice.
That's driven by some of our channel partners and.
What I would say is we've had we actually in the quarter had four verticals that really you probably outperformed our internal expectations being real estate.
HOA or Homer Association, and Condo Association management market nonprofits, and then the horizontal market and I've made reference to two verticals that we are seeing some unevenness with being construction and financial services.
However, I'd be careful.
Not to kind of equate it to maybe.
Entirely driven by macro construction for example, we have some internal strategies on how we're going.
Going to market related to the conversion of <unk>.
Still a fairly large base of on Prem timber scan customers and how we're moving them to our new titanium cloud based offerings for construction and so.
Some of that and even this is <unk>.
Based on some of our internal go to market strategies and how we're <unk>.
Converting that base.
Not making down to pay network available to some of those on premise customers.
A catalyst for getting them to adopt.
And then on financial services.
We're also seeing.
Somebody endedness across some of our channel partners that we rely on.
In terms of just not being as avid exchange me not as directly involved in the sales processes. We are in some of our other verticals. So those are some of the commentary that I would say all in all the puts and takes we're very pleased across.
All the verticals in terms of on balance they're performing.
Okay, that's really helpful. Mike Jones.
And then 'twenty four.
So I guess I'm curious.
Any update there.
Yeah.
Maybe I'll just hit the hit that in the two parts again believers.
And the first part and the path to profitability in the second part so from a lever standpoint, we've talked about our path to profitability is being.
Obviously, the gross margin improvement is a really core part of that in addition to scale and operating expenses and we've talked about that gross margin progression.
Being essentially made up of roughly two thirds expansion of yield and roughly a third of just steady consistent.
Operating.
Unit costs.
<unk> proven that and that can sort of be zig zag across the quarters, depending on various circumstances, but that's basically the way we see those gross margins expanding.
And then from the second part of your question again, what we're we're not giving guidance now, but certainly we will do so for 'twenty three in the March timeframe. So we're sticking with and we still see that profitability point for us in the full year 2004, and again I'll just remind you that we're focused on.
Really being Super disciplined we've talked about efficient growth and the focus of the team across the company and making sure that we're continuing to investing.
Growth and so we do have.
We're expecting to continue to invest around the flywheel products for buyers and suppliers into our platform. That's why you're seeing that steady progression of gross profit. So we do see profitability around the corner Darren and we'll update you guys. When we give guidance in March.
Great.
Dave just maybe just to kind of a reminder, too Joe.
The good job of care take away any about two thirds of that.
Spansion to yield.
In terms of driving gross margins from expansion yield and one of the biggest levers. There remember is this large base of paper check suppliers and we have and that conversion continue to expect conversion from paper checks to electronic.
It does really good things for us in terms of.
Taking cost out of this spectrum as well as increasing revenues related to those transactions and the faster we add new buyer customers. It adds a bigger backlog to that paper check supplier base.
Understood. Thanks again guys.
Yes.
Okay.
Our next question will come from Josh Beck with Keybanc you.
You May now go ahead.
Thanks, guys for taking the question.
I wanted to drill down a little bit.
Around the political revenue. So certainly I think we have a really good.
Sense of how that.
Trended in the first half and you know what it looks like in Q3 I guess my question is like moving forward.
The calendar Q4 generally.
The strongest obviously, that's when a lot of the.
Actual election activity is.
So that's kind of part one and then part two is just thinking about next year is that something that really drops off where there's it's more of a maintenance spend just any.
Any further color on just how to think about that political piece would be would be great.
Yes, Great question, Josh Let me just kind of provide a couple of data points and perspectives and then Mike maybe just talk generally about that business, but.
We're just we just lapped our first year kind of owning fast they.
Kind of a.
Pleased to have just to increase the diversity of our vertical wells across the middle market and so pleased with that business of course, a subset of that.
Overall media business is political and I think what we've.
Year to date, I think again, just will sunset talking about fast pay separately as we lap the organic we lap the anniversary, but year to date, we've generated about $13 $5 million of total media revenue associated with that acquisition at about eight.
<unk> 8 million of that non political and so we've talked about the inclusion of roughly $2 five $2 6 million of political in the third quarter, We've said before that even though the election in November . There is there is kind of a meaningful build of that revenue through the year. It is pretty tough to predict and so from a guidance standpoint, we're being.
Cautious it's tough to predict what that Q4 could be it could it could move depending on the way the election cycle plays out runoffs and otherwise and so.
That's about that's about as specific as I would get from a guidance standpoint too to answer your question a little bit about how should we think about 'twenty three we've talked about that not being a presidential or midterm.
Cycle, and maybe just to give it some color to that two six that we mentioned we generated in political revenue in Q3, the comparable number in the prior year was around 700000, and so kind of meaningfully different and that should give you a little bit of a little bit of color about how to think about 'twenty three Mike anything you'd add yeah.
I would say that.
Were all the media vertical for us is fairly diversified.
Majority of that.
The customers and the spend is from kind of corporate media.
And on the political side, we're actually almost split 50 50 download.
Down the fairway between those customers that support the Republicans versus the Democrats.
And the thing Thats been interesting actually for me to seeing is a lot of the spend is actually driven by the issues.
Even more so than the candidate.
Political spending and so the issues is one of the biggest drivers related to that category for us.
Really helpful and then I think the.
The question that you've addressed and we're getting a lot as well.
With respect to the macro and the vertical.
Commentary and certainly your ability to help fight.
Slight inflation Super helpful. But I'm also kind of curious like what signals or maybe macro indicators are you watching obviously theres lots of BDC oriented payments companies, it's pretty obvious <unk>, it's a little bit trickier I think for investors to track. So maybe you know from the prior recession.
Or just grow.
No indicators you've found helpful would be great yes.
Yes, certainly.
What we've been talking about in terms of on the buyer side at the top of funnel activity and.
The continued adoption of the of the overall market, that's still managing paper invoices and paper checks in that conversion.
So it kind of starts there.
And then the second thing that were.
Being in the payments business.
Which is a little bit different than what we've seen in kind of the last economic downturns, where we didn't have as big of a payments business as we do today.
Paying close attention to say average payment sizes, and overall kind of payment volumes.
And to date those remained pretty healthy for us.
Across the <unk> spectrum.
One of the biggest.
Areas that we're also paying close attention to is on the supplier side is weather.
Or more kind of challenging macro environment actually ends up being a bigger catalyst for us in those suppliers moving from paper checks to electronic.
Today with a paper check transaction on average, it's taking the supplier seven to 10 days to get kind of fully.
Paid and settled.
When the U S postal service isn't making that any faster.
And moving to electronics, certainly provides them a significant advance in terms of their cash flow and so.
Although we don't have.
We've not forecasted really into any of our models.
We are cautiously watching weather.
That's a positive impact for us.
In the current environment.
Super helpful. Thanks, Scott.
Our next question will come from Brad Sills with Bank of America, You May now go ahead.
Oh, great. Thanks, guys for taking my question.
Wanted to ask about TBD lots of puts and takes with the macro backdrop right now you've got on one hand inflation.
Could be a tailwind and then on the other hand, we're.
Heading into a recession.
And seeing some choppiness across different verticals and industries.
<unk> talked about some changes by vertical if you could just kind of help help us understand more kind of the puts and takes as to what youre seeing with regard to spend volume on a per customer basis.
How that's trending and any color on different verticals.
Yeah, Thanks, Brad I'll take a shot and Mike may add some context as well again just stepping back we were we're pleased with the results in the quarter.
We.
Top and bottom line beat but also beats on sort of the core fundamental health of the business total transactions TPB.
On the macro like we've said we haven't seen.
Meaningful impact on our adverse macro environment, we're cautious and optimistic as we move through that and we've also seen lots of puts and takes across across the verticals, but I would say that the mix of those puts and takes is no different this quarter than we've seen in past quarters.
And sort of steady as she goes so I don't know, Mike if you want to add anything to that yes, maybe.
My last commentary kind of focused on some of the verticals one maybe.
One other aspect of it is.
And our horizontal business that was another area that we saw some outperformance based on our internal expectations in the quarter and really driven by some of our bigger channel partners like the net suite <unk> of the world than others.
And I think.
We're seeing lots of overall demand on the horizontal side. The net suite user conferences recently in Las Vegas was very well attended conference.
And we did announce our cross border offering at that conference for specifically.
<unk> net suite, that's highly integrated into the nets, we payment process.
And our expectation is that that will continue to drive some nice performance.
In terms of new buyer customer adoption on the horizontal side of the market as well.
In addition to the commentary I made previously on the various.
You know puts and takes on the.
Vertical markets that we're in.
Wonderful. Thank you and then one more if I may please just on the cross border offering are there any verticals, where you see a near term opportunity have you taken a look at your kind of transaction volumes to kind of parse through where you see the opportunity for that or are there certain verticals, where there is just the heavier volume of international.
<unk>, where do you see the initial success.
And any color on just pricing or for cross border and what that might bring into the model in terms of monetization. Thank you.
Yes. So it's a good question I mean, there's probably an anxious as you are Brad in terms of where the impact is going to be.
As we've kind of talked about historically.
We don't have a.
A big demand for cross border within the existing verticals that we're in today due to the fact that they're very geographically center type verticals. However, we're seeing kind of the initial interest.
I E adjusting last.
<unk> 30 days or so is in the horizontal market and specifically probably in opportunities that we would historically have opted out of because we weren't a good fit for those type of customers.
So playing in those type of opportunities in the horizontal market within say net suite and some of our other.
Horizontal accounting systems that were deeply integrated with.
Is going to be kind of that opportunity. We also think it's going to.
Over time.
Lend itself to us developing new vertical markets.
That incorporate cross border type of opportunities as part of that and we are pacifically, perhaps the intersection of combining.
What we've previously released in the last couple of quarters related to our next generation purchase order and procurement related tools combined with cross border.
Provides us.
For a nice solution for example, potentially in the manufacturing vertical and some of those other verticals, where there may be purchase order procurement centric combined with having an international supplier base. So those are some of the things that we're taking a look at and it can be interesting to see where some of those kind of natural customer.
<unk> come from.
But we expect certainly it's probably going to be driven by the horizontal market first.
And then followed up by perhaps pursuing new vertical markets based on customer trends that we're seeing.
Thanks, Mike Thanks Joel.
Thank you thanks, Brian .
Our next question will come from Andrew.
<unk> Nikko Securities.
Now go ahead.
Hey, good morning, guys and thanks for taking the question just wanted to visit.
Just wanted to visit.
Comments, you made Mike on the Blackboard relationship you said.
You said 6000 customers currently on the accounting system and an opportunity to really penetrate that base can you give us a sense on what's addressable there from a buyer and customer perspective.
B premium opportunity in the context of the 8000 by our customers you had at the end of 'twenty one.
Yes.
First of all I agree with you.
And.
This is another good example of kind of our playbook in terms of that vertical market focus and going very deep within the verticals and one of the biggest components.
Components.
Being in a vertical market as being deeply integrated to the core accounting systems that support that vertical. So blackboard is a great example of that and having the next generation <unk>.
Call kind of built inside integration with a partner like Blackboard gives us a nice avenue to.
Pursue that 6000 customers I.
I think our team is.
Obviously, we're still in that kind of the early days of.
Ramping and going to market within that partnership.
And but I think it's very similar to some of the other verticals that we've seen with our partners with similar.
Customer sizes.
At the end of the day, we're still subject to the adoption rates that we're seeing across the overall industry.
And.
And continuing to build on the value proposition, but having a deeply integrated.
AP automation.
<unk> payment experience with Blackboard certainly provides.
A great customer experience and so we do believe that will be a lever in terms of increase in that adoption rate within the nonprofit vertical for those customers that are using blackboard.
So I would say more to come and we'll certainly keep you updated but I know.
The team and myself are really excited about what that opportunity presents.
Long term for us.
Got it thanks for the color there and then.
Would it be a proper earnings calls we didn't discuss invoice accelerator any.
Update there I know that.
You talked about accelerated two points last quarter and so on.
Anything you can provide on that front on where that's going to be great.
Yes no.
I am glad here is a passionate about invoice accelerators I am.
So.
What I would say is that one of the things that we have launched over the last quarter is.
The development of invoice accelerate or to point out and so I think our main focus is on development of that product.
Being in the market later next year with it.
And so what I would say is probably the focus is going to be more on the.
Getting invoiced $6 two point in the market and then the launch of it in the market versus maximizing the opportunity that are on a one point old platform in the near term.
However, we do.
And see.
Consistent growing demand for the offering certainly the macro backdrop, we think is a natural catalyst for more suppliers that want to take advantage of it.
Just to remind people in.
With our current one offering we've really only made it available to a very small subset of suppliers, while we get the learnings.
For both.
The qualification of invoices that are eligible to be advanced as well as all the the business rules related to managing the offering and the recapture of the payment.
And in the in the two point offering.
It'll be a made available to all our suppliers and we believe that roughly 50% to 6% of our overall supplier pool of 825000 plus suppliers.
<unk> fall into that kind of the small business category, which is really the category that the voice accelerator to point out is designed to serve.
So I'd say we remain.
Really excited about that offering and.
Inkjet is to be in the market with it next year.
And then just a quick follow up 50% to 60% that's relative to I think you said in the past, 40% addressable within the <unk> offering.
Much less than that we've made the <unk> offering available for less than 10% of those suppliers.
Okay got it thanks, Mike.
Yes.
Our next question comes from Ramsey El <unk> Barclays.
You May now go ahead.
Hi, Thanks for squeezing me in here I just had one question for you I was wondering if you could give us an update on.
The M&A pipeline and also just comment on the degree to which you've got all these great new products out there now cross border invoice accelerator STP is there a way.
Now that you have those products out and market to kind of accelerate their adoption via M&A. It seems like there might be some interesting kind of tuck ins that would help us.
The progress on traction.
Yes, <unk> good question.
So what I would say is that our playbook related to M&A continues to be very focused on how we accelerate vertical market expansion versus product expansion.
I think we feel very.
Confident and good about our product portfolio and the progress innovation progress that we're making.
And sometimes on the product side related acquisition.
That actually can slow you down versus accelerate as you try to kind of integrate products and things like that.
So we believe as.
As the industry leader in the middle market.
And having our products purpose built for the middle market.
There is actually not a lot of opportunity for product related type of expansion through M&A.
We believe that our playbook has stayed consistent.
Kind of using it for vertical market expansion and we love the profile of smaller software companies that are making headway is in a particular vertical that we're not in that understand the nuances and the domain knowledge of that vertical market and also have some of the integration experience with the leading accounting systems that may serve that.
Vertical and.
And they have not yet.
Pursued adding a payment capability and so those that's the playbook for us that we remain focused on.
However, I would say that the current kind of environment.
We've not seen some of the valuation corrections filter through to the private markets.
It's taken probably longer than we've expected for that to occur and so we.
Remain.
Fairly optimistic about the future of M&A.
As we go forward and maintain a really healthy balance sheet and in really a war chest to position ourselves in a really good way for windows opportunities arise.
Interesting. Thank you so much I appreciate it.
Our next question will come from James Faucette with Morgan Stanley .
You May now go ahead.
Hey, good morning, Thanks, everybody.
Just a couple of quick questions for me I mean, obviously, everybody seems very excited and rightfully so around.
The improving profitability and moving into.
That.
Profitability in what that roadmap looks like but how are you thinking about kind of balancing that that rate of profitability improvement with growth in and the levers that you may need to pull or push one way or another there.
Yes.
Yes, I think that yes.
Equation related to kind of.
Growth investment versus profitability and I think we look at it as we kind of define it as efficient growth.
We don't believe that our kind of accelerated path to profitability.
Is.
Impacting growth.
We still believe that's a really important component for us to take advantage of kind of the market adoption.
Thank you.
The biggest reflection on our growth there is just the rate of overall market adoption and as that rate.
Increases in the future, we expect our growth rates. The continued did increase as well.
Probably the biggest thing that we can do is continue to build the value proposition consistent about how we have been building it.
And so that'd be kind of my commentary related to.
That growth and certainly focused on internally, maybe more of a kind of a rule of 40 type concept in terms of how we're balancing those two equations.
That's great.
As you can get here and then.
Tied to that can you just give a quick update on what youre seeing competitively in the market. How much you may be running in to other players or is everybody is staying pretty well and they're consistent line or lanes excuse me in.
And what you think the key determinants are for for wins right now for avid exchange.
Yeah. So.
On the pay competitive side.
So first of all I'll take the kind of swim lanes first.
We have not seen any changes related to.
The swim lanes.
We're.
Within our core middle market, we don't see Bill Dot Com as an example.
Within the middle market certainly within the verticals in the horizontal focus that we have.
In the same sense, we don't see people like Cooper and others.
In our core deals either.
Maybe around kind of the core edges.
Literally.
Less than 20 deals a year, we may see those type of competitors.
So our number one competitor continues to be the status quo paper based process.
95% plus of all our new customer adds are customers that are doing this for the first time moving from paper invoices and paper checks to electronic.
And so that continues to be our number one loss reason.
It has to be that the customer is not ready yet they are asking us to come back in six months come back in nine months.
To talk to them about it.
As it relates to other competitive companies.
Party companies.
I would say in one of the interesting dynamics is we probably have less competition today than we had a couple of years ago.
M&A has been.
Part of that so for example, we used to see mineral tree historically in past years, and maybe 10% of our opportunities.
And they've really disappeared from our core market and really haven't run into them at all in 2022.
So that would be kind of one example.
And then the barriers to entry just continue to increase.
The.
The challenge has begun.
With getting license as well.
Our regulated money transmitter.
The bar continues to increase.
Not only in terms of the cost to get license the timing, but also some of the tangible net worth requirements of some of the states have just makes it prohibited for startup companies to pursue that path and so.
We've really seen a probably a fairly stable kind of competitive landscape and.
The number one competitor that we remained laser focused on competing with every day is a status quo process and how do we continue to build the value proposition to entice these controllers and cfos to move.
To let to an electronic process sooner than later.
That's great. Thanks, a lot.
Yeah.
Yeah.
Our next question will come from Bret Griess Lynn Piper Sandler.
You May now go ahead.
Thank you good morning, Mike.
On kind of the.
The topic of let's say co op petition.
Obviously.
We've seen kind of the ERP vendors offer their own kind of modules over the last decade, you. Obviously have a best of breed module, specifically to net suite, which just came out with an AP automation suite.
The net suite world.
You, obviously are adding more functionality and embedding functionality of next week could you just kind of remind us.
About that relationship is a strong relationship.
Is it kind of normal Co-opetition, just walk us through changes if there has been any with that relationship and then a new product they came out with.
Yeah.
What are you hinting at is.
Within <unk>, we in particular and this is a good example, where I think.
How we partner closely with.
Our leading and biggest channel partners.
And so one of the things in that suite has done recently is they'd be pared back the number of <unk>.
Participants in their kind of core partner deep integration ecosystem.
Now, it's only a handful of players of which we're the leading where the.
The largest AP.
AP automation partner that they have with the biggest install base, that's b customers and.
But what we're kind of seeing.
Seeing as part of not only <unk>, but others is yes, the be competitive ERP systems.
You have a baseline level of functionality in their kind of AP module.
But at the same time that only addresses a small subset and particularly with the new offering it's really designed.
What I would say is more kind of the small business.
Side of the <unk> customer base.
They don't have business rules related to their approvals, it's kind of a one step approval process very simplistic type of.
Management, and then for those companies that have more sophisticated business rules, which is where we're cater to.
We have very deep relationship with net suite sales team they bring us into those opportunities as really an embedded partner.
Solve those customer problems. So I would say one of the benefits actually that the net suite.
<unk> has made.
Is actually helping to increase the overall education and knowledge base.
Around the benefits of AP and payment automation.
So we're seeing an uptick of.
<unk> customers now that are evaluating solutions a solution for this business problem for the first time and then they are saying okay.
Now that may have more educated about it what is the best solution for me and so we're clearly positioned for those customers that have a more complex business process around.
Multiple general ledgers more complicated coding.
More dynamic approval workflows is our bread and butter versus more of a simplistic small business customer, which would be probably appropriate for the the net suite offering.
Perfect very helpful color there has been some questions on that and it's very clear that the differences.
My follow up here for you is just around just the transactional unit volumes growth there did moderate.
I think 13% to just below 12% growth.
This quarter here, obviously completely understandable given the macro do you think that could.
Stabilize in this 11% range this quarter based on the trends you see so far is there risk that.
Starts to moderate a little bit closer to 10% I know its a specific question, but love to get any color around transactional unit trends that youre seeing here in Q4 relative to just a slight downtick you saw in Q3.
Yes, you bet.
Question and happy happy to address it again.
Start kind of fraud, and then get right to your question I mean broadly again.
Really kind of proud of the performance we turned in for the quarter.
Good TPB growth better than our expectations, good transaction growth better than our expectations.
And we feel like the.
The we're sort of pleased with where we are from a progression standpoint, and again remembering the growth algorithm expansion of our underlying buyer customers, adding new logos, new buyers and then expanding that transaction yield as we go we think those things we do see those things working together that give us confidence.
In light of specialty opportunity that we see ahead of us for that kind of 20% organic growth on average over time I think just with respect to the quarter. You are right I mean, I think about 100 basis points different than last quarter. So.
12, and 13 range I do think it's reasonable that we sort of think it's reasonable that.
We're in the.
And the ZIP code that it would sort of kind of stay and I think we mentioned last quarter and I would repeat this quarter that we did it's an interesting base comparison, given 21 being a bit of the COVID-19 recovery and so there is some noise overall in quarter to quarter, but nothing other than that so we feel good about the growth of <unk>.
Health.
The network and the volume.
Okay, Great. That's all I had thank you so much.
Okay.
Our next question will come from Timothy Chiodo with credit Suisse.
No go ahead.
Great. Thanks, a lot I'll try and keep these on the quicker side since we're a little bit over here, but on the supplier network. The last update was a 2021 number I believe at about 825000.
Deep into 2022, I was hoping you could maybe just give us a sense of where that number stands today given it's a it's an important part of your network effect and competitive advantage and then as a brief follow up I know you mentioned that the construction vertical in financial services are the ones that you just kind of monitoring, but everything is going well still.
Sure we will get this question from investors. If you could just recap what the proportion of either volumes or revenue or gross profit is of those two verticals, specifically I'm sure that would be much appreciated.
Tim I'll jump in real quick and then Mike can add some context. So we we kind of established a routine.
Public last year kind of updating our buyer and supplier accounts on an annual basis, and we will we will certainly do so again this year and address that obviously and talk about it.
And the year end call.
But kind of happy with the overall growth across across the business, Mike anything you'd add.
Yes, what I would say is that that supplier component is really the secret sauce of avid exchange in that region.
<unk> provides us the competitive advantage in the marketplace is our ability to monetize the supplier side and so as Joe said, we're pleased with that growth.
We certainly are looking forward to updating those numbers in March.
As it relates to.
I think your second area your question related to kind of across our eight verticals as they are kind of waiting across some of those verticals.
I would say that overall is extremely diversified.
Across our eight verticals plus the horizontal part of the market.
Horizontal is.
One piece, that's exceeding our expectations as well.
But.
Our.
Within those.
Again, our most mature and some of our largest verticals are the real estate HOA.
<unk> of it just because those were our first verticals that we entered into so we have really nice customer base and growing nicely within those verticals.
As well as just overall deep market presence.
Struction and financial services are two of our newer verticals that we got into.
Through acquisitions being construction with <unk> associates.
Financial services with the bank till acquisition.
So maybe that's a little bit of flavor, there, but I'd say overall, we don't have any outsized waiting on any one particular vertical or the other.
We have a nice diversification and then the.
Horizontals actually adding another component of that diversification and the growth that we're seeing there.
Okay.
Excellent, Mike and Joe I think that contact surely helps especially around the reminder, on the recency I'm sure people will appreciate that and most of that on the 25 number we will wait for March but agree that as part of the secret sauce. Thanks for taking the question.
Yes.
Okay.
Our next question will come from Tien Tsin Huang with Jpmorgan.
You May now go ahead.
Okay.
Thanks, Steve covered it on the ground already I know so just a clarification has the operating expense outlook changed.
In any way since last quarter I know the gross margin performance is.
This is better including the float that you discussed, but just wanted to clarify on the opex.
Good good good question Tien Tsin, and one thing that I haven't had a chance to mention it again from a from an operating expense standpoint, nothing significant apart from what I would say here one overall general operating discipline that we're applying in the business balancing growth and our path to profitability specifically the sequential step up.
And operating expenses in the third quarter over the second quarter. The lion's share of that sequential growth is associated with our bonus accruals that we alluded to when we gave guidance last quarter that would be a little bit higher in the back half of this year as we are sort of exceeding our kind of internal incentive targets.
And apart from that we just were seeing ahead of us in around around the corner of really getting that operating expense leverage together with the gross margin expansion that takes us to the profitable business that we see ahead of us.
Alright, thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Kramer for any closing remarks.
Great well first of all I want to thank everyone for their time today.
As you can see we're really passionate about helping our middle market customers everyday and excited about our year to date results.
We look forward to talking to you in the new year and with that operator, you can close the call.
The conference has now concluded. Thank you for your clinical those presentation you may now disconnect.
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