Q4 2022 Avidxchange Holdings Inc Earnings Call
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Speaker 2: exchange co-founder and chief executive officer, Joel Wilhite, avid exchange chief financial officer, and Tubaash Kumar, avid exchange head of investor relations.
Speaker 2: Before we begin today's call, management has asked me to relay the four looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the four-we're looking statements the company will make this afternoon. Please keep these uncertainties in mind. As the company discusses future strategic initiatives, potential market opportunities,
Speaker 2: optional outlook and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise for the 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 not be...
Speaker 2: considered in isolation from or as substitute for financial information presented in compliance with GAP. Accordingly at the end of today's press release the company has provided a reconciliation of these non- GAAP financial measures to the financial results prepared in accordance with GAP. I will now turn the call over to Mike Pregger. Please go ahead. Thank you everyone for joining us today. Joe Wilhye and I are excited to discuss Abbott Exchange's fourth quarter, 2022 results. We had another quarter of healthy financial and operating performance.
Speaker 2: leading to a strong finish in our first full year as a public company. And what a productive and successful year 2022 was. As highlighted by three core themes to our success, which include our talent, our products, and our financial performance.
Speaker 2: Our first theme relates to the incredible talent we continue to assemble across all our key functions to support our objective of delivering profitable.
Speaker 2: long-term organic 20% plus average revenue growth for our business. This is highlighted by the recent elevation of Dan Trees to his new role as President, along with the addition of James Sun as our new chief revenue officer, driving both buyer and supplier customer sales of our business. With this new organizational structure, I believe we'll foster greater...
Speaker 2: development initiatives for future meaningful acquisitions and strategic partnerships. I cannot be more excited to partner closely with Dan in both driving and executing the future growth of our business.
Speaker 2: Secondly, we significantly advanced our product capabilities with new API integrations and partnerships built on our highly scalable, avid-connect integrations platform, along with key new product launches, such as our new next-generation purchase order management and three-way matching tools for purchase orders, invoices, and receipts.
Speaker 2: Straight through virtual card and ACH processing capabilities, the Aiden Supplier Reconciliation, while eliminating their manual data entry of card information along with cross-border payments in our new AVID Analytics offering.
Speaker 2: We also kicked off key new product initiatives related to our next-generation pay platform and invoice accelerator 2.0 offerings, which we believe would drive meaningful revenue growth in future years, as well as address a growing demand from our small business suppliers to have access to cash flow management and supplier financing tools to better manage their cash flow and run their businesses.
Speaker 2: Lastly, related to financial performance, we are capitalizing on our strong operational and financial results, including our continued acceleration towards profitability. I'm excited to share with you that we now expect to be EBITDA profitable for the full gear of 2023.
Speaker 2: which is a poll forward of our previous 2024 break even target. The strength of our overall habit exchange fly will business model, enabled us to generate growing float income as an embedded monetization lever for the management of our buyer customers full payment file and the management of the remaining paper checks. One of the key metrics that we focus on across our leadership team and that I believe is a good barometer of the strength of our business.
Speaker 2: and demonstrates the power of our Avid Exchange Flywheel business models and the impact of our true two-sided Avid Pay Network is our transaction yield metric, which we've increased incrementally every quarter for the last two years from $3.52 to $4.51 per transaction.
Speaker 2: Our strong operational performance combined with our accelerated pathways profitability this year in 2023 and our overall financial strength enabled us to recently renegotiate a new $95 million credit facility on favorable terms to substantially reduce our borrowing costs while partially deleveraging our ready strong balance sheet.
Speaker 2: With a very productive 2022 behind us, we are entering 2023 with a fresh set of new product introductions and integration initiatives. They help buyer and supplier customers leverage the power of our accounts payable and payments automation platform to drive digital transformation of their back office. We will provide more details around our product momentum and technology roadmap for 2023 shortly after I touch on the highlights of this past quarter in the year that just ended. On today's call, I like to cover three topic areas which include number one, our perspectives on our fourth quarter results.
Speaker 2: Number two, review of our year-end, Avid Exchange Business Flywheel metrics and our key initiatives for this calendar year. And number three, along with insights and trends, we are seeing related to the macro impacts to our business and our middle market customers. Despite a year of mounting macro uncertainty across the general economy, we remain laser-focused with curvebrings. Yay! resource pool.
Speaker 2: on executing those things that we control. Specifically, we remain steadfast in our deepening of our competitive mode and advancing our proprietary two-sided avid pay network. We did this through the disciplined execution of our playbook across the four growth gears of our avid exchange business flywheel. Thank you.
Speaker 2: Our flywheel framework is designed to drive new software and partnership integrations. Product innovation.
Speaker 2: I will framework is designed to drive new software and partnership integrations. Product innovation, operational execution.
Speaker 2: and value creation for our buyer and supplier customers, along with our value shareholders. We believe our solid year over year and quarterly financial performance is proof of our execution. For the fourth quarter ending December 2022, we delivered revenues of over $86 million, which grew at a rate of over 24% compared to the same period last year.
Speaker 2: This now marks six consecutive quarters of exceeding our internal financial targets, and delivering 20% plus comparable organic revenue growth. Non-GAP gross margins expanded to almost 65% in the quarter, up 270 basis points on a year-over-year basis.
Speaker 2: And we further narrowed our non-GAP adjusted EBITDA losses to 1.3 million in the quarter relative to our implied business outlook expectations.
Speaker 2: While numbers only tell part of the story, our customers and their adoption of our automation software products complete the story and there are no better evangelists for our value proposition than our customers. Take Chief Financial Officer Ken Osh of Piedmont Service Group, a Raleigh, North Carolina based heating ventilation air conditioning company or an HVAC company.
Speaker 2: Piedmont specializes in providing energy efficiency, industrial HVAC solutions to help commercial and industrial government organizations lower their operating costs. Ken manages an accounting team of 15 associates utilizing the Microsoft Dynamics Great Plains accounting system.
Speaker 2: PMOC was drowning in thousands of paper invoices and struggling to match them with purchase orders to get their suppliers paid on time. Thanks to Abbott Exchange, when auditors needed information and GM's ask about certain invoices and need quick replies,
Speaker 2: Ken immediately can access the key information and reports to get them their answers. We tell people all the time about how an exchange Ken said and what is done for our business, streamlining our accounts' payable and eliminating the need to send paper checks. Reply Doge.
Speaker 2: The power and stickiness of a value proposition can be seen across many industry verticals, including one of our merging sub verticals of hospitality. Hampton Gulf is another powerful story that speaks to our success in solving our customers problems.
Speaker 2: Florida-based Hampton Gulf is a premier golf course hospitality management company with 2600 associates that manage 30 golf course and facility locations throughout the United States. Using QuickBooks Enterprise as its accounting system, Chief Financial Officer, D.D. Franklin manages a team of 16 associates overseeing the day-to-day processing of invoices and payment and onboarding new golf course.
Speaker 2: courses to the company's accounting system. Prior to adopting avid exchanges accounts payable and payments automation solutions, Hemphing off with scanning stacks of paper and voices and pulling them from emails while cutting paper checks. After adopting avid exchanges full-invoice to pay solution, which seamlessly integrates into QuickBooks Enterprise, D.D. Franklin articulated our impact to their business pretty well by saying,
Speaker 2: Automated AP is no-brainer. Avid Exchange's automated invoice and pay offerings are essential to our business. And onboarding is such a simple process. It's the first of our critical systems that we train new hires on. I had no idea how truly exceptional automated AP can be, along with the economic and efficiency impact to our business. Now I have no idea how I ever survived without it. Thanks to middle market customers such as Piedmont and Hampton Gulf, we closed 2022 on a strong note as reflected in our year-end operating metrics.
Speaker 2: So let's take a closer look at those metrics in the context of our flywheel. During 2022, we increased the total number of buyer customers by 10% to 8,800 from 8,000 in the prior year, driving driven by delivering great AP automation software under gear one of our flywheel.
Speaker 2: With a large and highly fragmented, total addressable market of approximately 435,000 middle-marking companies in the United States alone representing 400 billion of untapped opportunity, growth and buyer customers was once again broad-based across all of our eight core verticals. This growth in buyer customers was a result of our hybrid go-to-market strategy. Contemplating our strong buyer growth was supplier-cult-
Speaker 2: Transaction volumes on our network reached 70.2 million, or rising year-over-year, 12.3% with our total payment volume increasing roughly 31% on a year-over-year basis to $68 billion in 2022. This increase in total payment volume was driven by growth and payment transactions.
Speaker 2: And given our growing transaction volume, we remain focused on maximizing our industry leading e-payment monetization, which is the secret sauce as we refer to it by converting suppliers to one of our various forms of electronic payment on the AVID Pay Network under gear three of our flywheel. In 2022, e-payment transactions on the AVID Pay Network grew by 16 percent.
Speaker 2: from the prior year. Roughly in line with our supplier growth numbers. We believe this underscores the overall value proposition of our AvaPay network for our suppliers. The sum of execution and growth across the business flywheel encompassing buyers, suppliers, and transaction monetization resulted in growing our all-encompassing transaction yield metric, which results over 13% to $4.51 per transaction from $3.98 per transaction in 2020.
Speaker 2: We don't want to overinterpret the trajectory in volume trends and retention. We are paying daily attention to all of our key metrics and continued run strategic and operational scenarios that preserve optionality should any of the macro headwinds markedly shift and have a greater impact on our middle market customers. We are paying daily attention to all of our key metrics and continued run strategic and operational scenarios.
Speaker 2: That said, we plan to capitalize on the building blocks that we put in place throughout 2022, while continuing to invest in new product offerings and API integrations to deepen our significant competitive mode that we have across the middle market sector, along with enhancing our growth and scale of our operations. On the product front in 2023,
Speaker 2: We are very, very excited to launch our proprietary flagship invoice accelerator 2.0 offering. This launch couldn't come at a better time for our large and growing base of small business supplier customers. For those that are hearing about invoice accelerator for the first time, IA as we call it, it is a product that provides unique invoice payment acceleration which functions as a short term working capital financing tool for eligible invoices and bridges critical working capital funding gaps for our supplier customers. Our business model is purpose-built to leverage this product as it overcomes two of the most significant hurdles.
Speaker 2: for traditional invoice financing products, which are around the underwriting risk of the supplier and collecting the money when it is paid by the underlying buyer. That's because in our unique two-sided business model, both the buyer and the supplier are customers on our Avid Pay network. And we have visibility to all their historical transactions, including invoice and payment history, along with their timings. In addition, these transactions and the related payments flow through our network, which enables us to underwrite targeted invoices and automatically intercept the buyer payments related to these invoices. We've been testing and metering our initial 1.0 version of Invoice Accelerator with a limited cohort of suppliers to develop key learnings.
Speaker 2: along with perfecting the underlying data science and determine how best to scale this offering efficiently. In Voice Excellerator 2.0 is designed to be an automated self-service supplier solution underpinned by our next-generation technology architecture incorporating real-time underwriting, credit analytics, and credit decisioning targeted towards our growing small business-related suppliers utilized by our middle-market buyer customers. Our voice Excellerator 2.0 offering is laid to be launched in the second half of 2023 and we expect it will serve as a growth lever in 2024 and beyond.
Speaker 2: whose great data fields off paper and non-machine generated PDF invoices.
Speaker 2: But with IEC, we'll arm our data extraction team with a custom-built interface paired with real-time AI and machine learning capabilities, which together are projected to drive scalability by increasing productivity levels by almost two-fold. We believe this scale change in productivity will further aid our gross margin expansion for faster, simpler and even faster.
Speaker 2: towards our long-term gross margin target exceeding 75%, as we continue to leverage automation to markedly reduce our unit costs. And lastly, on the integration front, we have a robust portfolio of new integrations and partnerships on deck for 2023. Since our launch of our out-of-the-box integration APIs built on our Avid Connect platform last year, we've been deepening our penetration of the vertical and horizontal accounting systems and our ERP partners used by our buyer customers. Our strategy around API partnerships and integration playbook is to be deeply embedded...
Speaker 2: who combined pool of roughly 15,000 customers are multiple of our current total buyer customer base today. What's powerful about these API integrations is that they typically lead to a deepening of our technical, sales, marketing, and go-to-market partnership with these accounting solution providers.
Speaker 2: which provides a catalyst for accelerating our share of middle market customer base. We are confident that 2023 will accelerate that activity with API integrations across our eight vertical markets, along with planned development of several new subvertical focus areas, while supporting growing horizontal and accounting system partners.
Speaker 2: In summary, we are very pleased with our results in the fourth quarter and our first full year as a public company. We believe that we significantly advanced our competitive moat serving the middle market, along with strategically, operationally, and financially positioning our business to achieve our revenue and profitability objectives as we enter 2023. As I discussed at the beginning, our three themes of success in 2022, which included our talent,
Speaker 2: products and financial performance will also help position us well in 2023 and beyond to deliver our product roadmap and achieve our accelerated profitability and free cash low objectives. That's not to say that we won't be tested and we'll have to navigate potential bumps along the way as we successfully have done throughout our previous 22 years. We believe that the current macroeconomic backdrop will remain choppy throughout 2023 and we continue to assess the impacts to our customers and we are adapting accordingly. That said, we believe that while the macro picture creates near-term uncertainties, it also...
Speaker 2: to our competitive strength as middle market customers gravitate even more towards proven market leading, differentiated and well capitalized providers such as Avid Exchange.
Speaker 2: call over to my partner Joel.
Speaker 2: Thanks, Mike, and good morning everyone. I'm excited to talk to you today about our fourth quarter 2022 financial results, which reflect continued execution of our growth strategies and continued macro uncertainty.
Speaker 2: Overall, we delivered another quarter of solid year-over-year financial performance. Relative to the implied fourth quarter 2022 business outlook, fourth quarter revenues came in better, driven largely by higher interest revenue from funds held for customers. That, together with expense control, contributed to a lower than expected adjusted EBITDA loss in the fourth quarter of 2022.
Speaker 2: As Mike mentioned in his prepared remarks, we're once again pulling forward our path to EBITDA profitability to 2023 from 2024. More on that later. Total revenue increased by 24.4% to $86.2 million in Q4 of 2022 over the fourth quarter of 2021. Organic revenue growth, which excludes the contribution of our pay clearly acquisition which closed in January 2022, was 23.3%.
Speaker 2: Organic revenue growth was driven primarily by the combination of the addition of new buyer invoice and payment transactions, which reflect increased e-payments to suppliers, and the contribution of interest revenues. Revenue related to our political media advertising book of business for the fourth quarter and full year 2022 was $3.1 million and $8.5 million, respectively. This revenue contribution stems from the 2022 midterm elections and associated run-
Speaker 2: and 21 cents in Q4 2021.
Speaker 2: and the remainder driven by interest revenue. Software revenues of $26.4 million, which accounted for 30.6% of our total revenue in the quarter, increased 12.5% in Q4 of 2022 over Q4 of 2021. The increase in software revenues was driven largely by growth in total transactions of 9 Home Remector.
Speaker 2: which were $5.8 million in Q4 of 2022 versus $1.1 million in Q4 of 2021.
Speaker 2: Payment revenues also reflect the contribution of the Pay Clearly acquisition. Excluding Pay Clearly, which contributed approximately $0.8 million in the quarter, organic payment revenue growth was 29.3%. Roughly two-thirds of the organic increase in payment revenues was driven by payment...
Speaker 2: volume, and the remainder driven by interest revenues. On a GAAP basis, gross profit of $49.9 million increased by 41.8% in Q4 of 2022 over the same period last year, resulting in a 710 basis point improvement in gross margin for the quarter to 57.9%. non-GAAP gross margin increased 270 basis points to 64.9%
Speaker 2: The year-ago period's operating expenses reflect the impact of IPO transaction expenses.
Speaker 2: termination fees related to a facilities development agreement, and the recognition of non-cash stock-based compensation costs resulting from completing our IPO in Q4 2021. On a non-GAAP basis, operating expenses excluding depreciation and amortization increased 11.8% or $6.1 million.
Speaker 2: to $57.3 million in the fourth quarter of 2022 from the comparable prior year period. A percentage of revenue basis operating expenses excluding depreciation and amortization declined roughly 750 basis points to 66.5% in the fourth quarter of 2022 from 73.9% in the comparable period last year.
Speaker 2: This highlights the operating expense leverage across sales and marketing, R&D, and G&A. I'll now talk about each component of the change in operating expenses on a non-GAAP basis. non-GAAP sales and marketing costs increased by $2.3 million to $18.5 million in Q4 of 2022 over Q4 of last year.
Speaker 2: with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and supplier customers. non-GAAP research and development costs increased by $1.8 million to $19.5 million in Q4 of 2022 over Q4 of last year. The increase was due to continued investment in our products and our platform.
Speaker 2: Non-GAP General Administrative Cost increased by $1.9 million to $19.2 million in Q4 of 2022 over Q4 last year, driven by a combination of higher expenses as we transitioned to a public company and an increase in performance-based bonus accruals due to continued strong operating and financial results.
Speaker 2: Our GapNet loss was $25 million for the quarter, versus a GapNet loss of $72.1 million in the prior year period driven by the impact of IPO transaction expenses, a marked-to-market adjustment for a convertible common stock liability upon our IPO, termination fees related to a facility's development agreement, and a recognition of not-
Speaker 2: combined with expense leverage.
Speaker 2: On a non-GAP basis, our adjusted EBITDA was a loss of $1.3 million in Q4 of 2022 compared to a loss of $8.2 million in Q4 of 2021 due to the aforementioned factors.
Speaker 2: Turning to our balance sheet for a moment, I want to touch on a few key items. We ended the year with a strong corporate cash position of $461.5 million against an outstanding total debt balance of approximately $83.7 million, including a note payable for $18.7 million.
Speaker 2: The year-end total debt balance reflects debt paydown of approximately $44 million from 2021. The corporate cash meanwhile is split roughly $60.40 between money market funds along with commercial paper and demand deposit accounts respectively. The weighted average maturity on corporate cash was roughly 13 days while the effective interest rate in our corporate cash position for the fourth quarter.
Speaker 2: are borrowing costs. Subsequent to your end, we increase our credit facility to $95 million from $75 million. I'll now move on to our full year 2023 guidance. In light of Mike's commentary about the opportunities and initiatives we can continue to execute across our business.
Speaker 2: Balanced with the macro cross-currents and the potential for further volume impacts based on all information currently available, we expect total revenue for the year to be in the range of $359 million to $366 million.
Speaker 2: Our 2023 revenue outlook reflects approximately $30 million of interest revenues from customer funds versus approximately $11 million earned in 2022.
Speaker 2: Also, as a reminder, we do not anticipate any political media revenue contribution in 2023 versus having recognized $8.5 million in 2022. We expect roughly 47% of the projected 2023 revenues in the first half with the remaining 53% in the second half. We expect our non-GAAP adjusted EVA to be between break even.
Speaker 2: and 3.5 million positive EBIDA for the year. We expect EBIDA losses to occur in the first half and to reverse in the second half of the year. With that, I would now like to turn the call back over to the operator to open up the line for Q&A.
Speaker 2: Operator? Thank you. We will now begin the question and answer session to ask a question you may press star than one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you please limit yourself to one question. If you have further questions, you may re-enter the question queue.
Speaker 2: At this time, we will pause momentarily to assemble our roster. And the first question will come from Dave Konig from Baird. Please go ahead. Yeah, hey guys. Thanks and nice quarter. And I guess my first question, it's kind of two parts. The software revenue grew sequentially at the fastest pace in probably seven quarters. And I often think of that as that's what you can control. That's based on new sales. Am I right about that? And then the corollary to that is the payments business.
Speaker 2: We did have some kind of year-end, one-time, non-recurring kind of catch up around some revenue share, etc. So I wouldn't guide that level of software yield necessarily going forward, but pleased with the outcome on software revenue. And then broadly, yes, relative to the guide, certainly reflects some of the emerging caution we see in spending across the business.
Speaker 2: Yeah, in the day just maybe I had a little bit of flavor related to kind of top of funnel activity related to new customer ads. We continue to see really healthy engagement across all the verticals of our business. And see current really top the funnel activity up about 20%.
Speaker 2: that zip code over a year ago. Gotcha. No thanks. And then just my second question, the way you're guiding 2023 incremental margins, you know it seems like you're guiding revenue up you know 40-50 million something like that with about 35-40 percent incremental margin to drive that EBITDA profitability.
Speaker 2: Is that, you think, kind of a normalized, kind of go forward in criminal margin? Just wondering around that. Yeah, I mean, good question, Dave. Like, broadly, we're pleased with the steady expansion of gross margin across the business. Remember, our long-term target is 75 plus percent. And we said, as we begin to approach that 70 percent zip code, we see the business turning profitable, which is reflected in the guide. Um.
Speaker 2: We did certainly have some impacts annually and quarterly, depending on the flow and political contribution. But even stripping that out, we do see good, steady, gross margin expansion going forward. All right. Thanks, guys.
Speaker 3: And the next question is from Will Nance from Goldman Sachs. Please go ahead. Hey guys, good morning. I wanted to follow up on maybe some of the payment volume trends that you guys spoke about. I know both the software and the payment side are kind of largely volumetric driven. You mentioned lower seeing lower transaction retention trends. I'm just wondering, could you maybe touch on average transaction size and how it's impacting payment volume as well?
Speaker 2: And I kind of mentioned in the answer to the first question that we did see during the fourth quarter some emerging caution in spending across really all our buyers and all our verticals fairly broad based. And what I would say about that is as we look closer what we see as customers adjusting largely their discretionary spending. So not necessarily vertical but specific but sort of spend type specific and things like advertising and marketing, professional services.
Speaker 2: Maybe to follow up on my last comments to Dave related to top of funnel activity. When you look across all the different verticals plus the horizontal, maybe current areas where top of funnel is exceeding our expectations would be in the horizontal slice is one good example where driven by.
Speaker 2: channel partner such as Netsuite, you know, Acumatica, and others like that. I've seen really strong engagement. The other one being in some of the new, what I call, you know, kind of emerging vertical markets that we've talked about. I highlighted one of them, you know, on the call today, within, you know, hospitality with Hampton Galfa as a good example. And we're seeing some really, you know, emerging trends related to hospitality vertical, as well as, you know, I'd say, sub sector of our healthcare vertical being long-term care centers. So, let's be, you know, some examples on...
Speaker 2: that are probably exceeding our expectations. We really have one vertical that is kind of below expectations currently, and that's with our financial services and kind of tier two, tier three banks. They've been more cautious related to taking on kind of new projects, initiatives related to digital transformation. And then we have a number of verticals that are more kind of flat year to year. Real estate would be a good example of that.
Speaker 3: So, but again, you know, really good diversification and collectively across all verticals, seeing you know, type of productivity about, you know, about 20% over a year ago. Got it. Super helpful. And then just, you know, maybe if I can ask a quick follow-up on the intelligent data capture, you know, I was wondering if you could kind of size the pie of expenses that you guys are currently devoting towards, like the invoice ingestion part of the business. And you know, when you think about, in the context of the 75% gross margin target, and I think the 10 points of gross margin, especially you guys are kind of outlying more over the near term, like, is this kind of, it was a-
Speaker 2: you know, we and everybody in this business has is invoices are non, you know, standard documents. Every, you know, supplier has a different form. Every accounting system has different forms of invoices. And, um, and they get, you know, uh, delivered to the supplier in many different forms. Obviously we're driving, you know, electronic, you know, receipt of invoices, as much as we can.
Speaker 2: But what IDC does is it enables to kind of read and capture the data elements across all these different forms of invoices in a standardized way. And so certainly taking Microsoft's new OCR capabilities combined with AI and machine learning and then training it on literally 20 years worth of Avid Exchange invoices, we think we're at a huge advantage of really driving automation in that front end process. And I think that's embedded in our confidence.
Speaker 2: Thank you. And our next question is from Ramsey, Ella Saul from Barclays. Please go ahead. Hi, thanks so much for taking my question. I wanted to follow up on, I think, Will's prior question and your response there. And just get a little bit more color from you in terms of the magnitude of macro pressure that's sort of factored into your guide. Just trying to understand better whether your guide contemplates.
Speaker 2: cross-currence, whatever you want to call it. And we've factored that together with everything we're seeing in the trends in the business into the guide. So it's certainly contemplated to the extent that we would beat that meaningfully, it would need to be a fairly abrupt reversal of those trends. And so we're expecting that to exist for the year and our guidance. And maybe, Ram, just to be a little longer-term view, remember, we did it.
Speaker 2: and then we typically see our middle market cups, those type of spenders snap back pretty quickly as we exit a cycle.
Speaker 4: I also wanted to ask separately about pricing as a lever that you potentially have deployed or could deploy. I'm just trying to think about that across your business, especially in this context of macro distress. Is pricing a contributor to margin? How should we think about that?
Speaker 2: Yeah, so it's a really good question and one that we talk a lot about internally because based on our market reading position and just over a volume of customers across the middle market, we have significant pricing power. Having said that, the number one objective that we're focused on is...
Speaker 2: In a market, we're still 60% roughly of the middle market is not yet adopted automated solutions. How do we create incentives for adoption? We certainly don't want price to get in the way. So it's a delicate balancing act that we're following related to, having some year-to-year cost-to-living type increases, but are certainly sensitive to the amount of increases that we're passing through to not get in the way of our adoption objectives. Thank you. And the next question is from Andrew Bo from SMBC NECO Securities. Please go ahead.
Speaker 4: Hey guys, thanks for taking the question. Just want to think about the building blocks to getting this back to the 20% growth algorithm that you outlined in your prepareable margin. And in that context, I wanted to kind of hone in on the political cycle. Joel, the disclosure around 8.5 million in 2022 is helpful. And maybe taking that number and thinking about where that goes in 2024, I mean, does are mark the research that you've done that can kind of directionally point people to where that could be and be either from a magnitude or time perspective.
Speaker 2: Yeah, so I love that question Andrew. That may be a go at our question that we get about you know thinking about you know those building blocks and I kind of think of them in you know his you know kind of based business that we have today and you hit a really good point around the political actually I was in Washington DC yesterday. We had
Speaker 2: media customer biases for meetings with our, you know, top media customers, including the political factor. And what's really interesting is, you know, you know, just a couple of political cycles ago, you know, that sector hit $5 billion in the political sector and in 24 industries expecting the rate $10 billion to spend. Today, we have roughly 30% of the political, you know, payment transactions running through our platform. So, certainly, you know, we're going to benefit from, you know, the overall kind of growth and political, you know, advertising spend overall.
Speaker 2: So that's kind of inherent in our existing business. And then I kind of think of this, this is a really big year for us in terms of innovation and new product delivery. And product delivery kind of goes in cycles. And what we're delivering this year and kind of three big buckets starting with invoice accelerator, 2.0 offering, which has a lot of excitement both within the four walls of the habit exchange as well as in the outer market. We're going to be in market during the second half of the year with our 2.0 version of that offering. In addition, we probably have the biggest payload we ever had.
Speaker 4: on what you're seeing on the supplier side of the world. I know that the buyer spend moderating in January and February is something that's kind of played in the guide. Is there any elements of macro weakness impacting the supplier side of the business that would also kind of influence the full year guide? Yeah, that's a really interesting question and one that we study a lot because there's multiple things kind of happening at the same time. So, starting...
Speaker 2: in our case, MasterCard offers to get reduced interchange based on how they process the transaction with the data. And so we actually, although in the short term, it's a headwind perhaps on revenue, if you think of that way, we actually think it's a very positive element because what it does is driving adoption.
Speaker 2: and it also drives retention of those suppliers, continuing to accept cards. And they're using the data that we provide them as one of the key benefits of being on the AvaPay network to be able to be eligible to use that data to get better rates by qualified for different rate tiers based on the data that they're using the process. So although it may be kind of negative and the short term related to a supplier, using a data tier long term, we think it's a really positive element for long term retention as well as adoption for suppliers of electronic payments, whether it be a virtual card payment or even our AvaPay Direct.
Speaker 4: Thank you. And the next question is from Brian Keane from Deutsche Bank. Please go ahead. Hi guys. Good morning. Just was thinking about how to model this out in terms of cadence by quarter. Anything to think about jewel and then any high level comments also just on the key metrics on transactions or yield or volume. How to model that out for the year. Any puts and takes or any direction you can give us. Yeah Brian I can tell you you know what we are typical guidance cadence is just to provide annual guidance and update that update that quarterly but but certainly we're seeing some some different trends in knowing what the political inflow dynamics.
Speaker 4: So hopefully that gives you a little bit of color to think about the quarter. No, that's helpful. And Mike, just on the M&A front, obviously, curious if there's any movement there since it's been a little bit stagnant as you mentioned for the last 18 months.
Speaker 2: Yeah, well, it's one of the, what I'd say kind of the internally adabit exchange, there's lots of activity in terms of our, you know, conversations that we're having with lots of, you know, kind of players in the market, especially those that are in, you know, smaller players and industry verticals that we're targeting. I would say that we are expectations that we're going to start seeing, you know, greater activity related to those types of...
Speaker 2: providers looking at evaluating sale opportunities. During probably the second half of this year going into next year, a lot of them were, benefited from raising capital over the last two years, so they're not yet in a position of having to go back to the markets to raise capital. We think that'll be the natural catalyst for them then evaluating whether they want to go down that path or actually pursue a sale. So our current...
Speaker 2: for productivity is the stay in touch and have lots of conversations. So we have a really good sense of the market when those opportunities rise. And the next question is from Josh Beck from Keybank. Please go ahead. Yeah, thanks so much for taking the question team. I wanted to double click a little bit. I think it was Mike's comment around discretionary spend. So yeah, I think what we've heard from some other companies in the B2B and general back office space has been, you know, customers have pulled back on advertising. They've pulled back on TV.
Speaker 2: I'm just curious, like are those the types of discretionary elements that you may be seeing a little bit of a pullback within? And does that really encompass all of your verticals, or is it maybe more so, you know, certain ones you obviously call it out, financial services, some color there would be great. Yeah, so first of all, I would say we're seeing it, we're going to broaden based across all verticals, you know, some of that discretionary to spend pullback. And we kind of think of it as what we've been able to answer, it's really fun and it kind of three buckets, you know, number one being kind of advertising in meat and marketing related spend. The second one being kind of professional services.
Speaker 2: consulting administrative type services, and the third being some kind of tenant improvement build-up projects for expansion. And that's the last one is probably geared towards more construction real estate, but really broad-based impact that we've seen across all the verticals. But again, what I would say though, we're not seeing any dramatic fall off of any particular spend. It's really slowing of these categories on an phenomenal basis.
Speaker 2: the top of the funnel, the middle of the pipe, the middle of the stage of the pipe. How was that progression? So really good question, Josh. So when we think of one of the things important to recognize, top of funnel activity is just as it designs the top of the funnel, but a lot of...
Speaker 2: things have to happen before it turns into revenue. You see if you go through a sales cycle and then on implementation, you know, configuration cycle. And then once the customer is live and adoption cycle. But on the sales cycle side, you know, kind of the two metrics that we, you know, kind of focus on are one is, you know, any changes to close rates and then be would be the timing, the sales cycle timing. And so there we've seen no changes to overall close rates. Those are consistent to what we've seen historically. And then the second one is related to timing. This is where we, you know, have seen what historically we saw as a 60 to 90 day sales cycle. The, you know, across different verticals. We're seeing that being extended by maybe five to 10 days.
Speaker 2: in terms of overall sales cycles. So that's where we are seeing some impact. Thanks for coming back. Thanks, Josh. And the next question is from James Fawcett, from Morgan Stanley . Please go ahead.
Speaker 5: Thank you very much. Thanks for all the detail today. I wanted to go back quickly to your gross margin and the incremental margin that you're having there. I'm wondering if you can help strip out at least some of how we should think about like float benefit versus just natural leverage. And I guess as importantly, is there any type of rule of thumb you can share with us about?
Speaker 5: how that float can move around in at least in terms of planning operations in the event that interest rates move around. Like if we move interest rates move 50 basis points or whatever metric you want to use. Yeah, gotcha James. Okay, so good question. Let me make a couple comments on Gris Morgan, but I'll unpack it a little bit further. Again, I think I mentioned already good expansion year-to-year. Again, this is the-
Speaker 4: 270 bits. We did see float benefit, which is a positive feature of the model. But if I then let's take a look at Gross Margin and just sort of pull out the impact of both float and political advertising because we recognize that you've got some some puts in take. So just to give you a sense of the impact there, I would say that the political, the inclusion of the political business added about a hundred bits.
Speaker 4: And again, on improved yield, mix and efficiencies, that steady progression of gross margin expansion. But then for the quarter, we were down about 40 bits. And so we've talked before about, as we've managed expectations, going into Q3 and then going into Q4, about our cloud cost ramp, including some incremental headcount associated with our data.
Speaker 4: that profit that we're calling in guidance. And then your final question just around rule of thumb, I think what we've talked about is you should think about our float revenue as roughly 120 bits, off of Fed Sun rate on a lag. And our, as I mentioned in our paired marks, our guidance calls for about 39 of float revenue for 2023.
Speaker 5: Got it. And then just, I really appreciate that. And just as a quick follow up to finish out that, you know, you guys have the benefit of having run this business for quite a while. As rates increase, do you see a change in your customers and those that are participating in the networks, behavior in terms of how they pay or other things that would affect the underlying deposit amount effectively?
Speaker 2: Yeah, so part of our business model is that we, in terms of how we manage the flow of funds, that's consistent in any scenario, regardless of what rates are related to deposits. What I would say is that across the board in the middle market, our customers are trying solve...
Speaker 2: and solve for a more efficient automated process. You know, Mr. Number One. And, you know, I think the, probably what you're going to do in terms of kind of managing flow, cash flow, things of that nature, monetization of flow, is probably more of an enterprise focus of companies.
Speaker 2: You know, our customers are trying to get their suppliers paid in an efficient way, reduce, you know, kind of the manual process and the paper process, you know, that they're going through today. And so we don't typically see that dynamic. And again, we, our characteristics are in terms of how we manage the money movement. Customers, when they, you know, send a file directly from their underlying accounting system and then, you know, we're up to...
Speaker 6: Please go ahead. Great, thanks a lot. Appreciate all the extra color on IA2.0. I want to hit a little bit on that just across the three areas. One being the credit risk, assuming you've just closed that you do assume that, but it's small and you have the data. So not an issue there, but just wanted to clarify anything you could comment there. And then in terms of the funding, assuming that you're funding that today, if that could change over time as the program expands, and then related to that,
Speaker 2: Is there a rough percentage of TPP that you think about that might be addressable to the invoice accelerator program in terms of how much penetration the program could see over time? Would appreciate any of that context. Some of that kind of today and some of that might evolve over time. Right, right. No, that's a good question. So first of all, on the credit risk standpoint, we have the benefit of having a true, true side of network that both the buyers supplier, both on the network, and we as the benefit of seeing all the historical transactions that they've done between the two parties.
Speaker 2: And so we believe, and again, although we're launching our two-point-of-offering, we've been in the market for the last several years with our one-point-of-offering, and have seen all the different examples of buyer and supplier behavior related to these types of transactions. So we feel really good about that element of it, and now be a highly automated...
kind of credit process. Related to the underlying funding element, yeah, today we are doing a home balance sheet. However, that is something that we're in our business model that we're planning to change. We view that we're roughly maybe 18, 24 months away from having those balances be it a way that it's exciting for probably one of our existing partners.
We have a large stable of bank partners that have been talking to us for the last couple of years about being able to take this off balance sheet. So we absolutely expect that we will do that and that's part of our long-term model.
As it relates to the last part of the question, you know, how we think of it is that this product is really, you know, best suited to help the casual needs of our small business suppliers. We anticipate that roughly of our total supply pool, about 60% of our suppliers are small businesses.
And so that's kind of the target market that we're making this offering available to. And I think one, you know, kind of insights that we've kind of shared routinely, which is, you know, really what makes us excited and what, you know, led to really kind of the, you know, the building of our 2.0 offering is that, you know, over the last year or so, we did notice that when suppliers were taking advantage of our invoice, etc, offering within 90 days that came back for ongoing advances.
So we're really excited about the impact that this is going to have long term for our business. Michael, thank you. Those are great, clear answers and point well taken on the currently on the balance sheet, but as it scales and you have more of a time series of data could take it off. So thank you for all that and the context on the SMB penetration or the portion of TPV.
So we're really excited about the impact that this is going to have long term for our business. Michael, thank you. Those are great clear answers and point well taken on the currently on the balance sheet, but as it scales and you have more of a time series of data could take it off. Thank you for all that and the context on the SMB penetration or the portion of TPV. Thanks, Tim.
And the next question is from Brent Braseland from Piper Sandler. Please go ahead. Thank you. Good morning. You know, Mike, it sounds like there's a lot of optimization here. Top of funnel. Sounds like you got a lot of new products that could help growth going into next year. It sounds like the real near-term challenge is just the mid-market and belt tightening. Looking at path cycles, trying to assess here how bad does the mid-market get?
relative to TPPV growth. I mean, are we talking prior cycles where you saw TPPV go flat on a year of your basis? Does it go negative? Temporarily good thing about recessions is they are temporary. But what can you tell us relative to pass cycles within the mid market on trying to assess near term where TPPV growth could go? Thanks. Yeah, so I think
So first of all, I particularly look at it in kind of two lenses. One is the underlying health of our middle market supplier, I mean, a buyer customer, and the second one is the impact on their transactions. Within the last kind of negative cycle, being kind of the 207, 208 cycle, we had one customer go out of business across the middle market through bankruptcy. And so we literally retained close to 100%.
within the middle market and then it's usually geared across this discretionary spend, delaying improvement projects, capital expenditures, things like that, and then they usually get caught up and snap back to those types of expenses pretty quickly exiting the cycle.
So that's what we've seen historically, and I think what we're seeing currently is consistent with what we've seen historically. There's nothing that's really anomaly that we're saying, hey, we haven't seen that type of behavior before. Got it. And so it sounds like little-to-no-chern impact. Do expect some sort of...
5% ish headwind to transaction Processed and then obviously the variable is going to be how much discretionary spends impacted, but that's super helpful That's all I have. Thank you
Thanks. And the next question comes from Darren Peller from Wolf Research. Thanks. Just a quick one. It's good to see that the profitability levels have been pulled up a bit. I mean, maybe just the reiteration or revisiting what you guys expect and what your plans are and expenses for the year and the next couple of years and how you plan on managing that and balancing.
you know, your growth investments versus profitability going forward now into 24 and 25, and how much of a dramatic uptick we can hopefully see in those levels of profitability as part of your story? Yeah, Darren, I'm happy to take that one. So, you know, again, we've, you know, we're kind of pleased to bring forward by a year that profitability point in our guidance in the face of, obviously, some uncertainty, and so what that reflects is just a lot of discipline on the part of management to sort of be super prudent, but to continue to invest in the growth we know lies ahead, even on the other side of whatever this.
season is that that we're in. And so maybe one thing to come to call out is we do see kind of EBITDA negative in the front half of the year, EBITDA positive in the back half. I'm not sure if I made that clear before. And then, you know, 24-25, it really depends on, you know, what what the macro is doing. So I would I would need to underscore any comment I make about, you know, we know that there will be an end point. We don't know when that would be. But we're really focused on, you know, being a profitable business, you know, exiting 23 and thereafter. And but also we have a huge market opportunity ahead of us. And so we're going to be disciplined.
and use the capital that we're able to generate ourselves to invest in the business going forward. Yeah, maybe one thing that Darren and I would add to Joel's comments would be, again, we're in a long game here. I don't know, it's spring training and baseball, so maybe we're in the bottom of the first heading into the second to give the context. So it's really early in the overall game that we're playing. And still, we're seeing roughly 60% of the middle market have not yet adopted any solutions related to automating their accounts payable or payments. And so we're balancing.
that investment and what we can do to drive that incremental adoption each year as well as that efficient growth to maximize profitability. So I would say we continue to invest in what's required for the adoption of the market. Maybe this also is a little opportunity to advertise our upcoming June 1st analyst, I think we'll be diving deeper in some of these questions as well providing some updated.
long-term targets related to gross margin. That would be really helpful. Yeah, and just a cap it off there. And I think the thing that I would say is we wrap that question is we do have a lot of optionality. So we have uncertainty relative to the macro, but we're focused on investing in that growth, but we kind of have a lot of levers available to us to do so. Great question. Guys, very quickly, I didn't hear an update on the number of new buyers added throughout 2022. Maybe I missed it actually, but I think it was 8,000 in the end of 2020. That's right. Yeah, we've finished here at 8800. So 8800 is the 8800 at the end of 2022. Okay, and you're still expecting some a decent number of net new or I know it's a tougher macro, but.
Yeah, I mean, look, Mike made a comment that we really kind of encouraged by the top funnel we see as we enter the year. And so, you know, optimistic that we can continue to add buyers along with continuing to see, you know, good network tension expansion, yield expansion, and the literal on the growth we've committed to. Cool. Great. You're welcome. Yeah. Yeah. And the next question is from Tin, Jin Hoang from JP Morgan. Please go ahead. Hey, Mike, and Joe, I know you guys have answered a lot of questions already. I just have one more just on transactional happy, you can't get. Hey, no, happy to be on the call. Just some transaction revenue retention, I think is 103.
Did you highlight or say what you're thinking for retention that same metric for 23 but what I really wanted to hear was Has the historical rate look like I think it's touched 107 I think it's hovered around 103104 But to go further back how how has that trended? Yeah, great question tension and you're right We we've sort of said that we see and we have seen historically kind of pre-candemic kind of that 104105ish retention just underlying growth across our buyers volume
We saw that dip abruptly and then returned gradually over time that sort of gave rise to that 107 that you referenced that was higher even in the quarters post COVID recovery. But we would expect kind of, I don't know, normalish in the 105, one of four range. We don't guide that specifically in our forward guidance, but certainly do see a little bit of an impact there from some of the belt tightening we talked about.
Thank you. Ladies and gentlemen, this now concludes our question and answer session. I would like to turn the conference back over to Michael Prager for any closing remarks. Thank you. Again, I wanted to thank everyone for joining us here today. We're excited about the opportunities ahead of us and the large opportunities that we're playing related to accounts payable and payment automation across the middle market. And we believe our leadership puts us in a strong position to capitalize on this opportunity. Finally, I wanted to remind everyone about our upcoming investor day on June 1 in Charlotte, North Carolina. Thank you.
Thank you. Ladies and gentlemen, this now concludes our question and answer session. I would like to turn the conference back over to Michael Prager for any closing remarks. Thank you. Well, again, I wanted to thank everyone for joining us here today. We're excited about the opportunities ahead of us and the large opportunities that we're playing related to accounts payable and payment automation across the middle market. And we believe our leadership puts us in a strong position to capitalize on this opportunity. Finally, I wanted to remind everyone about our upcoming investor day on June 1 in Charlotte, North Carolina. With that, we'll close the call.
And thank you, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Good morning everyone and thank you for joining us for the Avid Exchange and Holdings Inc. Fourth Quarter 2022 earnings call.
Joining us on the call today are Mike Prager, Avid Exchange co-founder and chief executive officer, Joel Wilhite, Avid Exchange's chief financial officer, and Subash Kumar, Avid Exchange's head of investor relations. Before we begin today's call, management has asked me to relay the four looking statements disclaimer that is included at the end of today's press release. This disclaimer emphasizes the major uncertainties and risks in the age remains the factor in growing a status in a primary primary primary primary secondary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary primary
Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. non-GAAP financial measures should not be peoples orphans!
considered in isolation from or as substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, the company has provided a reconciliation of these non-GAAP financial measures to the financial results prepared in accordance with GAAP. I will now turn the call over to Mike Prager. Please go ahead.
Thank you everyone for joining us today. Joe Wilhite and I are excited to discuss Abbot Exchange's fourth quarter 2022 results. We had another quarter of healthy financial and operating performance.
leading to a strong finish in our first full year as a public company. And what a productive and successful year 2022 was.
as highlighted by three core themes to our success, which include our talent, our products, and our financial performance.
Our first theme relates to the incredible talent we continue to assemble across all our key functions to support our objective of delivering profitable, long-term organic 20% plus average revenue growth for our business. This is highlighted by the recent elevation of Dan Threes to his new role as president.
along with the addition of James Sutton as our new Chief Revenue Officer, driving both buyer and supplier customer sales of our business. With this new organizational structure, I believe we will foster greater organizational agility and operational synergies by bringing sales, marketing, operations, and product management under Dan. At the same time, this new structure will enable me to further focus on the professional and administrative approach that we had previously integrated into the process and initial Spring 2016 strategy. The C Lean principle explores all areas of? Sh brands with a wide range of security matters have already engaged in longer duration thougt
on our longer-term strategic growth and operational efficiency efforts, along with leading our corporate development initiatives for future meaningful acquisitions and strategic partnerships.
I could not be more excited to partner closely with Dan in both driving and executing the future growth of our business. Secondly, we significantly advanced our product capabilities with new API integrations and partnerships built on our highly scalable Avid Connect integrations platform, along with key new product launches, such as our new Avid Connect integrations platform.
next generation purchase order management, and three-way matching tools for purchase orders, invoices, and receipts. Straight through virtual card and ACH processing capabilities, they aid in supplier reconciliation while eliminating their manual data entry of card information along with cross-border payments in our new AVID Analytics offering.
We also kicked off key new product initiatives related to our next generation pay platform and invoice accelerator 2.0 offerings, which we believe will drive meaningful revenue growth in future years, as well as address a growing demand from our small business suppliers to have access to cash flow management and supplier financing tools to better manage their cash flow and run their businesses. Lastly, related to financial performance Distortion Adobe
We are capitalizing on our strong operational and financial results, including our continued acceleration towards profitability. I'm excited to share with you that we now expect to be EBITDA profitable for the full year of 2023.
which is a poll forward of our previous 2024 break even target. The strength of our overall avid exchange fly will business model, enabled us to generate growing float income as an embedded monetization lever for the management of our buyer customers full payment file and the management of the remaining paper checks. One of the key metrics that we focus on across our leadership team
And then I believe is a good barometer of the strength of our business. And demonstrates the power of our Avid Exchange Flywheel business models and the impact of our true two-sided Avid Pay Network is our transaction yield metric, which we've increased incrementally every quarter for the last two years from $3.52 to $4.51 per transaction. Our strong operational performance combined with our accelerated passwords profitability this year in 2023.
and our overall financial strength enabled us to recently renegotiate a new $95 million credit facility on favorable terms to substantially reduce our borrowing costs by partially deleveraging our Ready Strong balance sheet. With a very productive 2022 behind us, we're entering 2023 with a fresh set of new product introductions and integration initiatives to help buyer and supplier customers leverage the power of our accounts payable and payments automation platform to drive digital transformation of their back office.
We will provide more details around our product momentum and technology roadmap for 2023 shortly after I touch on the highlights of this past quarter and the year that just ended. On today's call, I'd like to cover three topic areas which include, number one, our perspectives on our fourth quarter results. Number two, review of our year-end Avid Exchange business flywheel metrics and our key initiatives for this calendar year.
And number three, along with insights and trends, we're seeing related to the macro impacts to our business and our middle market customers. Despite a year of mounting macro uncertainty across the general economy, we remain laser focused on executing those things that we control. Specifically, we remain steadfast in our deepening of our competitive moat and advancing our proprietary two-sided Avid Pay network..
We did this through the discipline execution of our playbook across the four growth gears of our Advent Exchange business flywheel. Our flywheel framework is designed to drive new software and partnership integrations.
product innovation, operational execution, and value creation for our buyer and supplier customers, along with our valued shareholders. We believe our solid year-over-year and quarterly financial performance is proof of our execution. For the fourth quarter ending December 2022, we delivered revenues of over $86 million.
which grew at a rate of over 24% compared to the same period last year. This now marks six consecutive quarters of exceeding our internal financial targets, and delivering 20% plus comparable organic revenue growth.
non-GAAP gross margins expanded to almost 65% in the quarter, up 270 basis points on a year-over-year basis. And we further narrowed our non-GAAP adjusted EBITDA losses to a higher rate than the previous year.
to 1.3 million in the quarter relative to our implied business outlook expectations. While numbers only tell part of the story, our customers and their adoption of our automation software products complete the story, and there are no better evangelists for our value proposition than our customers. Take Chief Financial Officer
Ken Osh of PMOt service group, a Raleigh, North Carolina based heating, ventilation, air conditioning company, or an HVAC company. PMOt specializes in providing energy efficiency, industrial HVAC solutions to help commercial and industrial government organizations lower their operating costs. Ken manages an accounting team of 15 associates utilizing the Microsoft Dynamics Great Plains Accounting System. PMOt was drowning.
thousands of paper invoices and struggling to match them with purchase orders to get their suppliers paid on time. Thanks to Abbott Exchange, when auditors needed information and GM's ask about certain invoices and need quick replies.
Ken immediately can access the key information and reports to get them their answers. We tell people all the time about Avid Exchange, Ken said, and what it has done for our business, streamlining our accounts payable and eliminating the need to send paper checks.
the key information and reports to get them their answers. We tell people all the time about how an exchange can be said and what is done for our business, streamlining our accounts' pavel and eliminating the need to send paper checks. Reply Doge.
The power and stickiness of a value proposition can be seen across many industry verticals, including one of our emerging sub verticals of hospitality. Hampton Gulf is another powerful story that speaks to our success in solving our customers problems.
Florida-based Hampton Gulf is a premier golf course hospitality management company with 2600 associates that manage 30 golf course and facility locations throughout the United States. Using QuickBooks Enterprise as its accounting system, Chief Financial Officer, D.D. Franklin manages a team of 16 associates overseeing the day-to-day processing of invoices and payments and onboarding new golf courses to the company's accounting system.
Prior to adopting Advote Exchange's accounts payable and payments automation solutions, Hemphing off with scanning stacks of paper invoices, and pulling them from emails while cutting paper checks. After adopting Advote Exchange's full invoice to pay solution, which seamlessly integrates into QuickBooks Enterprise, D.D. Franklin articulated our impact to their business pretty well by saying, automated AP is no-brainer. Advote Exchange's automated invoice and pay offerings are central to our business.
and onboarding is such a simple process. It's the first of our critical systems that we train new hires on.
I had no idea how truly exceptional Automate AP can be, along with the economic and efficiency impact to our business. Now I have no idea how I ever survived without it. Thanks to middle market customers such as Piedmont and Hampton Gulf, we closed 2022 on a strong note as reflected in our year-end operating metrics.
So let's take a closer look at those metrics in the context of our flywheel. During 2022, we increased the total number of buyer customers by 10% to 8,800 from 8,000 in the prior year, driven by delivering great AP automation software under year one of our flywheel. With a large and highly fragmented total addressable market of approximately 435,000 middle market companies.
The networking effects of buyers bringing their suppliers to our two-sided network culminated in us approaching one million suppliers on our avid paid network
The resulting addition of new buyer and supplier customers drove increased transactions onto our two-sided network and are spent under management in year number two of our flywheel.
Transaction volumes on our network reach 70.2 million or rising year-over-year, 12.3% with our total payment volume increasing roughly 31% on a year-over-year basis to $68 billion in 2022. This increase in total payment volume was driven by growth in payment transactions, contributions from the fast pay and pay clearly acquisitions.
coupled with some vertical mix impact. The increase in total volume reflected 19% year-over-year rise in spend undermanagement to $215 billion.
And given our growing transaction volume, we remain focused on maximizing our industry-leading e-payment monetization, which is the secret sauce as we refer to it, by converting suppliers to one of our various forms of electronic payment on the Avid Pay Network under Gear 3 of our flywheel.
In 2022, ePayment transactions on the Avid Pay Network grew by 16% from the prior year, roughly in line with our supplier growth numbers. We believe this underscores the overall value proposition of our Avid Pay Network for our suppliers. The sum of execution and growth across the business flywheel encompassing buyers, suppliers, and transaction monetization.
We are mindful of the macro cross-currence related to the rising interest rates and inflation with their potential impact to our customers and our business. While we continue to be encouraged by our top of final sales activity, we have seen some moderation in transaction retention trends across several of our verticals.
While we don't want to overinterpret the trajectory in volume trends and retention, we are paying daily attention to all of our key metrics and continued run strategic and operational scenarios that preserve optionality should any of the macro headwinds markedly shift and have a greater impact on our middle market customers.
That said, we plan to capitalize on the building blocks that we put in place throughout 2022, while continuing to invest in new product offerings and API integrations to deepen our significant competitive mode that we have across the middle market sector, along with enhancing our growth and scale of our operations. On the product front, in 2023, we are very, very excited to launch our proprietary flagship invoicing.
eligible invoices and bridges critical working capital funding gaps for our supplier customers.
Our business model is purpose-built to leverage this product as it overcomes two of the most significant hurdles for traditional invoice financing products, which are around the underwriting risk of the supplier and collecting the money when it is paid by the underlying buyer. That's because in our unique two-sided business model,
both the buyer and the supplier are customers on our avid pay network. And we have visibility to all their historical transactions, including invoice and payment history along with their timing. In addition, these transactions and the related payments flow through our network through our network.
which enables us to underwrite targeted invoices and automatically intercept the buyer payments related to these invoices. We've been testing and metering our initial 1.0 version of invoice accelerator with a limited cohort of suppliers to develop key learnings along with perfecting the underlying data science and determine how best to scale this offering efficiently.
In Voice Excellerator 2.0 is designed to be an automated self-service supplier solution underpinned by our next-generation technology architecture incorporating real-time underwriting, credit analytics, and credit decisioning targeted towards our growing small business-related suppliers utilized by our middle market buyer customers.
Our invoice accelerator 2.0 offering is slated to be launched in the second half of 2023, and we expect that it will serve as a growth lever in 2024 and beyond. Second, 2023 is also a year that we're planning to launch a proprietary avid exchange intelligent data capture product, or IDC as we call it. This is an intelligent invoice.
Digestation and indexing platform that we jointly designed and configured in partnership with Microsoft leveraging artificial intelligence and machine learning to analyze a decades plus worth of historical invoice data sets.
We've been engineering and partnering closely with Microsoft on this product since 2019. IDC digitizes invoice data sent by suppliers to our buyer customers before they go through our standard workflow approval process.
Currently, we digitize a portion of the invoice data by deploying human capital assets worldwide whose great data fields off paper and non-machine-generated PDF invoices. But with IDC, we will arm our data extraction team with a custom-built interface.
paired with real-time AI and machine learning capabilities, which together are projected to drive scalability by increasing productivity levels by almost two-fold. We believe this scale change in productivity will further aid our gross margin expansion towards our long-term gross margin target exceeding 75%, as we continue to leverage automation to markedly reduce our unit costs. And lastly, on the integration front,
We have a robust portfolio of new integrations and partnerships on deck for 2023. Since our launch of our Out-of-the-Box integration APIs built on our avid connect platform last year, we have been deepening our penetration of the vertical and horizontal accounting systems and our ERP partners used by our buyer customers. Our strategy around API partnerships and integration playbook is to be deeply embedded with accounting system and ERP providers who have been leading the market of our customers across existing and new target verticals where there is an opportunity for significant transaction volume to be monetized.
marketing and go to market partnership with these accounting solution providers, which provides a catalyst for accelerating our share of middle market customer base. We are confident that 2023 will accelerate that activity with API integrations across our eight vertical markets, along with planned development of several new sub vertical focus areas.
while supporting growing horizontal and accounting system partners. In summary, we are very pleased with our results in the fourth quarter in our first full year as a public company. We believe that we significantly advanced our competitive moat serving the middle market along with strategically, operationally, and financially positioning our business to achieve our revenue and profitability objectives as we enter 2023.
As I discussed at the beginning, our three themes of success in 2022, which included our talent, products, and financial performance, will also help position us well in 2023 and beyond to deliver our product roadmap and achieve our accelerated profitability and free cash flow objectives. That's not to say that we won't be tested and we'll have to navigate potential bumps along the way as we successfully have done.
of revenue and cost pressures. Among these opportunities, we see openings for new verticals and subverticals for our offerings across our large and fragmented addressable middle market, which is still in the early stages of digital transformation and shifting away from paper invoices and paper checks. Market dislocations can also unlock acquisition opportunities, which have been largely dormant for us for the last 18 months.
due to various market reasons. Finally, macro uncertainty can also play to our competitive strength as middle market customers gravitate even more towards proven market leading, differentiated, and well capitalized providers such as Avid Exchange. Thus bolstering and even accelerating our overall market.
leading position across the middle market. Overall, I am very excited about the level of innovation impact to both our buyer and supplier customers in 2023, along with reaching our profitability objectives for the year.
With that, I'd like to turn the call over to my partner, Joel. Thanks, Mike, and good morning, everyone. I'm excited to talk to you today about our fourth quarter 2022 financial results, which reflect continued execution of our growth strategies and continued macro uncertainty. Overall, we delivered another quarter of solid year-over-year financial performance.
Relative to the implied fourth quarter 2022 business outlook, fourth quarter revenues came in better driven largely by higher interest revenue from funds held for customers. That, together with expense control, contributed to a lower than expected adjusted EBITDA loss in the fourth quarter of 2022. As Mike mentioned in his prepared remarks, we're once again pulling forward or past to EBITDA profitability.
to 2023 from 2024. More on that later. Total revenue increased by 24.4% to $86.2 million in Q4 of 2022 over the fourth quarter of 2021. Organic revenue growth, which excludes the contribution of our pay clearly acquisition, which closed in January 2022, was 23.3%. Organic revenue growth was driven primarily by the combination of the addition of new
As a reminder, because 2023 has neither the midterm nor presidential elections, we are not factoring any revenue contribution from political advertising in our 2023 business outlook. Back to Q4 2022 financial results. Our strong revenue growth also resulted in total transaction yield expanding to $4.79 in the quarter.
up 14% from $4.21 in Q4 2021. Excluding the four cent contribution from the acquisition of Pay Clearly in the fourth quarter of 2022, the transaction yield of $4.75 increased 12.9% with roughly half of the increase driven by yield improvement and the remainder driven by interest revenue. Software revenues of $26.4 million, which accounted for 30.6% of our total revenue in the quarter.
increased 12.5% in Q4 of 2022 over Q4 of 2021. The increase in software revenues was driven largely by growth in total transactions of 9.2%. Payment revenue of $59.1 million, which accounted for 68.6% of our total.
$1.1 million in Q4 of 2021.
Payment revenues also reflect the contribution of the pay clearly acquisition. Excluding pay clearly which contributed approximately $0.8 million in the quarter, organic payment revenue growth was 29.3%. Roughly two-thirds of the organic increase in payment revenues was driven by payment volume and the remainder driven by interest revenues.
On a GAAP basis, gross profit of $49.9 million increased by 41.8% in Q4 of 2022 over the same period last year, resulting in a 710 basis point improvement in gross margin for the quarter to 57.9%. non-GAAP gross margin increased 270 basis points to 64.9% in Q4 of 2022. In a GAAP basis, gross margin increased by 41.8% in Q4 of 2022.
over the same period last year, driven primarily by the contribution of higher interest and political revenue. Moving on to our operating expenses. On a gap basis, total operating expenses were $78.7 million. A decrease of 22.2% in Q4 of 2022 over Q4 of last year. The year-ago periods operating expenses reflect the impact of IPO transaction expenses, termination fees related to a facility's development agreement.
and the recognition of non-cash stock-based compensation costs resulting from completing our IPO in Q4 2021. On a non-GAAP basis, operating expenses excluding depreciation and amortization increased 11.8%, or $6.1 million, to $57.3 million in the fourth quarter of 2022 from the comparable prior year period.
However, on a percentage of revenue basis, operating expenses excluding depreciation and amortization declined roughly 750 basis points to 66.5% the fourth quarter of 2022 from 73.9% in the comparable period last year. This highlights the operating expense leverage across sales and marketing, R&D, and G&A. I'll now talk about each component of the change in operating expenses on a non-GAAP basis.
non-GAAP sales and marketing costs increased by $2.3 million to $18.5 million in Q4 of 2022 over Q4 of last year, with the increase driven by the continued investment in our direct and channel strategies to acquire new buyers and supplier customers. non-GAAP research and development costs increased by $1.8 million to $19.5 million in Q4 of 2022 over Q4 of last year, the increase was due to continued investment in our products and our platform.
General administrative costs increased by $1.9 million to $19.2 million in Q4 of 2022 over Q4 of last year, driven by a combination of higher expenses as we transitioned to a public company and an increase in performance-based bonus accruals due to continued strong operating and financial results. Our gap net loss was $25 million for the quarter versus a gap net loss of $72.1 million in the prior year period, driven by the impact of IPO transaction expenses.
A marked-to-market adjustment for a convertible common stock liability upon our IPO, termination fees related to a facility's development agreement, and a recognition of non-cash stock-based compensation costs resulting from completing our IPO in Q4 2021. On a non-gap basis, our net loss in the fourth quarter of 2022 was $7.4 million, an improvement of $10.3 million compared to the year ago quarter, on solid organic revenue growth, as well as interest revenues combined with expense leverage.
On a non-GAP basis, our adjusted EBITDA was a loss of $1.3 million in Q4 of 2022 compared to a loss of $8.2 million in Q4 of 2021 due to the aforementioned factors. Turning to our balance sheet for a moment, I want to touch on a few key items. We ended the year with a strong corporate cash position of $461.5 million against an outstanding total debt balance of approximately $83.7 million, including a note payable for $18.7 million.
The year-end total debt balance reflects debt paydown of approximately $44 million from 2021. The corporate cash meanwhile is split roughly $60.40 between money market funds along with commercial paper and demand deposit accounts respectively. The weighted average maturity on corporate cash was roughly 13 days while the effective interest rate in our corporate cash position for the fourth quarter was roughly $335 basis points. Customer cash at quarter end was approximately $1.3 billion with an interest rate of $1.3 billion.
well for our business?
Balanced with the macro cross-currents and the potential for further volume impacts based on all information currently available, we expect total revenue for the year to be in the range of $359 million to $366 million. Our 2023 revenue outlook reflects approximately $30 million of interest revenues from customer funds,
versus approximately $11 million earned in 2022. Also, as a reminder, we do not anticipate any political media revenue contribution in 2023 versus having recognized $8.5 million in 2022.
We expect roughly 47% of the projected 2023 revenues in the first half with the remaining 53% in the second half. We expect our non-gap adjusted EBITDA to be between break even and 3.5 million positive EBITDA for the year. We expect EBITDA losses to occur in the first half and to reverse in the second half of the year.
With that, I would now like to turn the call back over to the operator to open up a line for Q&A. Operator? We will now begin the question and answer session to ask a question you may press star than one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star than two.
We ask that you please limit yourself to one question. If you have further questions, you may re-enter the question queue. At this time, we will pause mum materially to assemble our roster.
And the first question will come from Dave Konegg from Beard. Please go ahead. Yeah, hey guys, thanks in a nice quarter.
And I guess my first question is kind of two parts. The software revenue grew sequentially at the fastest pace in probably seven quarters. And I often think of that is that's what you can control. That's based on new sales. Am I right about that? And then the corollary to that is the payments business. I know you're guiding to deceleration, but is it fair to think of it the new sales part doing maybe a little better than normal? And it's really the stuff out of your control. The macro is really...
and one time non-recurring kind of catch up around some revenue share, et cetera. So I wouldn't guide that level of software yield necessarily going forward, but pleased with the outcome on software revenue. And then broadly, yes, relative to the guide, certainly reflects some of the emerging caution we see in spending across the business. Yeah, and Dave, just to maybe add a little bit of flavor related to kind of top of funnel activity related to new customer ads.
we continue to see really healthy engagement across really all the verticals of our business. And SeaCurrent really topped the funnel activity up about 20% in that zip code over a year ago. Gotcha. No, thanks. And then just my second question, the way you're guiding 2023 incremental margins, it seems like you're guiding revenue up 40, 50 million, something like that, with about 35, 40% incremental margin to drive that EBITDA profitability. Is that, do you think, kind of a normalized, kind of go-forward incremental margin? Just wondering around that.
Yeah, I mean good question Dave. Like broadly we're pleased with the steady expansion of gross margin across the business. You know, remember our long-term target 75 plus percent and we said as we begin to approach that 70% zip code, we see the business turning profitable, which is reflected in the guide. We did certainly have some impact annually and quarterly.
I wanted to follow up on maybe some of the payment volume trends that you guys spoke about. I know both the software and the payment side are largely volumetric driven. You mentioned lower, seeing lower transaction retention trends. I'm just wondering, could you maybe touch on average transaction size and how it's impacting payment volume as well?
and then maybe just more to market color. When you talk about seeing a slowdown in transaction retention, is it more across the vertical, the vertical businesses, the horizontal parts of the business, and any kind of noticeable trends or delineations across various parts of the business? Thanks. Yeah, thanks, Will. I'll start it off just adding a little bit of color. Again, I kind of mentioned in the answer to the first question that we did see during the fourth quarter some emerging caution in spending across really all our buyers and all our verticals fairly broad-based.
And what I would say about that is as we look closer, what we see as customers adjusting largely their discretionary spending. So not necessarily vertical specific, but sort of spend-type specific. And things like advertising and marketing, professional services, in some cases, tenant improvement projects, et cetera, but still, please set the face of these macro cross-currents still retaining over 100% of the transactions year-over-year. But hopefully that gives you a little bit of power in what we're seeing for the quarter and what's kind of baked into our guidance going forward.
Mike, I don't know if you want to add anything from a market perspective. Yeah, I'd say maybe to follow up on my last comments to Dave related to top of funnel activity. And when you look across all the different verticals plus the horizontal, maybe current areas where top of funnel is exceeding our expectations would be in the horizontal slice is one good example where driven by channel partners such as NetSuite, Acumatica, and others like that, we're seeing really strong engagement. The other one being in some of the new, what I call kind of emerging vertical markets.
that we've talked about. I highlighted one of them on the call today within hospitality with Hampton Gulf as a good example. And we're seeing some really emerging trends related to the hospitality vertical, as well as I'd say a subsector of our healthcare vertical being long-term care centers. So those would be some examples that are probably exceeding our expectations. We really have one vertical that is kind of below expectations currently, and that's a...
with our financial services and kind of tier two, tier three banks. They've been more cautious related to taking on kind of new projects, initiatives related to digital transformation. And then we have a number of verticals that are more kind of flat year to year. Real estate would be a good example of that. So, but again, really good diversification and collectively across all verticals seeing top of funnel activity up about 20% over a year ago. Got it, super helpful. And then just, maybe if I can ask a quick follow up on the intelligent data capture, you know, I was.
for Intelligent Data Capture and this is a project we were working on for the last couple of years in partnership with Microsoft and really excited about how, you know, one of the challenges, you know, we and everybody in this business has is invoices are non-standard documents. Every supplier has a different form, every accounting system has different forms of invoices and they get, you know, delivered to the supplier in many different forms, obviously we're...
20 years worth of Avid Exchange invoices, we think we're at a huge advantage of really driving automation in that front-end process. And I think that's embedded in our confidence level of getting to 75% plus gross margins over time. Maybe Joel, you provide a little bit of flavor on that. Joel, your follow-up was just the degree to which we contemplated that.
Thank you. Our next question is from Ramsey Elisol from Barclays. Please go ahead.
Hi, thanks so much for taking my question. I wanted to follow up on, I think, Will's prior question and your response there and just get a little bit more color from you in terms of the magnitude of macro pressure that's sort of factored into your guide. I'm just trying to understand better whether your guide contemplates sort of like further deterioration in conservatism or just more sort of a steady state.
in terms of what you're seeing today. Yeah, great question Ramsey. Let me just sort of hit that head on. So we talked about beginning to see over the course of the fourth quarter, this sort of emerging challenge, cross-currence, whatever you want to call it. And we factored that together with everything we're seeing and the trends in the business into the guide. So it's certainly contemplated to the extent that we would be sort of...
beat that meaningfully, it would need to be a fairly abrupt reversal of those trends. And so we're expecting that to exist for the year in our guidance. And maybe, Randy, just to give you a little longer term view, remember we've been at this for 20 plus years and certainly navigated through a number of cycles. And we're not seeing anything different than what we've necessarily seen in other economic cycles. The middle market is a pretty resilient group of companies related to very few companies go out of business. But they do manage their expenses and certainly are more cautious related to the market.
discretionary spend and then we typically see, you know, our middle market companies, you know, that those type of expenditures snap back pretty quickly as we exit a cycle. Got it. And I also wanted to ask separately about pricing as a lever that you may potentially have deployed or could deploy. I'm just trying to think about that across your business especially in this kind of, you know, context of macro distress. Is pricing a contributor to margin or how should we think about that? Yeah, so it's a really good question and one that we talk a lot about internally because, you know, based on our market, you know, leading position and, you know, just, you know, overall volume of customers across the middle market, we have significant pricing power.
Having said that, the number one objective that we're focused on is in a market we're still 60% roughly of the middle market is not yet adopted automated solutions. How do we create incentives for adoption? And we certainly don't want price to get in the way. So it's a delicate balancing act that we're following related to having some year-to-year kind of...
the building blocks to getting this back to the 20% growth algorithm that you outline and you're prepared with March. And in that context, I wanted to kind of hone in on the political cycle. I mean, Joel, the disclosure around 8.5 million in 2022 is helpful. Maybe taking that number and thinking about where that goes in 2024, I mean, does there mark a research that you've done that?
can kind of directionally point people to where that could be, and either from a magnitude or time perspective. Yeah, so I love that question, Andrew. That may be a gold star question that we get about thinking about those building blocks. And I kind of think of them as kind of base business that we have today. And you hit a really good point around the political. Actually, I was in Washington DC yesterday.
We had our media customer advisory board meetings with our top media customers, including the political sector. And what's really interesting is, just a couple political cycles ago, that sector hit five billion in spend in the political sector, and in 24, the industry's expecting to break 10 billion of spend. Today, we have roughly 30% of the political trade.
payment transactions running through our platform. So certainly, we're going to benefit from the overall growth in political advertising spend overall. So that's kind of inherent in our existing business. And then I kind of think of this, this is a really big year for us in terms of innovation and new product delivery. And product delivery kind of goes in cycles. And what we're delivering this year in kind of three big buckets, starting with invoice accelerator 2.0 offering, which has a lot of excitement both within the four walls of Avid Exchange as well as in the outer market.
we're going to be in market during the second half of the year with our 2.0 version of that offering. In addition, we probably have the biggest payload we ever had in terms of new integrations, new accounting system ERP integrations that we're going to be delivering this year for our customers, and then combined with our new payment platform. And so those are the building blocks from a product perspective to drive 24, 25, 26 revenue growth. And our confidence when you look at any multi-year period that we'll be north of our 20% organic growth targets.
No, no, how full is it to hear all that laid out like that? One other question, if I guess we've been in maybe there's nothing here, but just want to touch upon what you're seeing on the supplier side of the world. I know that the buyer spend moderating in January , February is something that's kind of leading the guys. Is there any elements of macro weakness impacting the supplier side of the business that would also kind of influence the whole year guy? Yeah, that's a really interesting question. And one that we study a lot because there's multiple things kind of happening at the same time. So certainly we've been...
you know, active and very aggressively adding new suppliers to our network that our supplier customers, you know, were up over 16% last year. And while we're doing that, we're also noticing that, you know, more suppliers are taking advantage of some of the data rate tiers that, you know, in our case, MasterCard offers to get, you know, reduced interchange based on how they process the transaction with the data. And so we actually, although in the short term, it's a headwind perhaps on revenue if you think of that way, we actually think it's a very positive element.
because what it does is it's driving adoption and it also drives retention of those suppliers continuing to accept cards. And they're using the data that we provide them as one of the key benefits of being on the Avapay network to be able to be eligible to use that data to get better rates by qualifying for different rate tiers based on the data they're using to process. So although it may be kind of negative in the short term related to a supplier using a data tier, long term we think it's a really positive element for long term retention as well as adoption for.
suppliers of electronic payments, whether it be a virtual car payment or even a rabbit And the next question is from Brian Keane from Deutsche Bank. Please go ahead. Hi guys. Good morning. I was thinking about how to model this out in terms of cadence by quarter, anything to think about dual and then any high level comments also just on the key metrics on transactions or yield or volume, how to model that out for the year. Any puts and takes or any direction you can give us. Yeah, Brian . I can tell you what our typical guidance cadence is just to provide annual guidance and update that out.
update that quarterly, but certainly we're seeing some different trends and knowing what the political and flow dynamics. What I thought I would share on this call is that we see a range in Q1, I'll go ahead and talk about a revenue expectation for Q1, kind of between 81 and 83 million dollars within that overall guidance. And there's a few things to remember when you're thinking about those quarters. One, there's no political in Q1 when there was roughly a million last year.
And there was about 3 million in the fourth quarter, right? So if you think about the quarterly cadence. The other thing that I'd thrown out is float revenue, first quarter last year was about $1.2 million, and then the fourth quarter that we're reporting now is about 5.8. So hopefully that gives you a little bit of color to think about the quarter. No, that's helpful. And Mike, just on the M&A front, obviously, curious if there's any movement there since that's been a little bit stagnant, as you mentioned, for the last 18 months. Yeah. Well, it's one of the, what I'd say, kind of the.
over the last two years, so they're not yet in a position of having to go back to the markets to raise capital. We think that'll be the natural catalyst for them then, you know, evaluating whether they want to go down that path or actually pursue a sale. So, you know, our current, you know, corporate dev activity is to stay in touch and have lots of conversations.
So we have a really good sense of the market when those opportunities rise. And the next question is from Josh Beck from KeyBank. Please go ahead. Yep, thanks so much for taking the question, team. I wanted to double click a little bit, I think it was Mike's comments around discretionary spend. I think what we've heard from some other companies in the B2B and general back office space has been a lot of people are saying, you know,
you know, customers have pulled back on advertising, they've pulled back on P&E. I'm just curious, like, are those the types of discretionary elements that you may be seeing a little bit of a pullback within, and does that really encompass all of your verticals, or is it maybe more so, you know, certain ones? You obviously called out financial services, some color there would be great. Yeah, so first of all, I would say we're seeing it kind of broad-based across all verticals, you know, some of that discretionary spend pullback, and we kind of think of it as what we've been able to ascertain is really falling into kind of three buckets, you know, number one being...
categories, you know, on an nominal basis, which is consistent with what we've seen in past, you know, economic cycles across the market.
Okay, yeah, certainly seems like a little bit of a belt tightening, if you will, which is a pretty consistent theme that we've heard. The other question was, with respect to the funnel, it does sound like the top of the funnel activity has been encouraging. I guess I'm curious to hear about...
the conversion from the top of the funnel, the middle of the pipe, to the later stages of the pipe. How is that progressing? So really good question, Josh. So when we think of one of the things important to recognize, top of funnel activity is, just as it's designed, it's the top of the funnel. But a lot of things have to happen before it turns into revenue. So you have to go through a sales cycle, and then an implementation configuration cycle.
and then once a customer is live, an adoption cycle. But on the sales cycle side, kind of the two metrics that we focus on are, one is any changes to close rates, and then B would be the timing, the sales cycle timing. So we see no changes to overall close rates. Those are consistent to what we've seen historically. And then the second one is related to timing. This is where we have seen what historically we saw as a 60 to 90 day sales cycle. Across the different verticals, we're seeing that being extended by maybe five to 10 days.
in terms of overall sales cycles. So that's where we are seeing some impact. Thanks for calling, Mike. Thanks, Josh. And the next question is from James Faucette from Morgan Stanley . Please go ahead. Thank you very much. Thanks for all the detail today. I wanted to go back quickly to your...
growth margin and the incremental margin that you're having there. I'm wondering if you can help strip out at least some of how we should think about like float benefit versus just natural leverage. I guess as importantly, is there any type of rule of thumb you can share with us about how that float can move around in at least in terms of your planning operations in the event that interest rates move around like if we move interest rates move 50 basis points or whatever metric you want to use. Yeah, got you James. Okay, so good question. Let me make a couple comments on growth margin.
take a look at gross margin and just sort of pull out the impact of both float and political advertising because we recognize that you've got some some puts and takes. So just to give you a sense of the impact there, I would say that the political inclusion of the political business added about 100 bibs in 2022 for the year and for the fourth quarter.
And then float added about 100 bits to gross margin for the year and about 200 bits for the quarter as rates continued to ramp. And so taking out both, you're up about 160 bits for the year, and again, on improved yield mix and efficiencies, that steady progression of gross margin expansion. But then for the quarter, we were down about 40 bits.
And so we've talked before about, as we've managed expectations, going into Q3 and then going into Q4 about our cloud cost ramp, including some incremental headcount associated with getting fully in the Azure public cloud. You see a little bit of that impact there along with this spend softening that we called out separately in Q4. And so looking forward to stripping both float and political out, we see good margin expansion continued on our way to that profit that we're calling in guidance.
And then your final question just around rule of thumb, I think what we've talked about is you should think about our float revenue as roughly 120 bits off of fed fund rate on a lag. And our, as I mentioned in our prepared marks, our guidance calls for about 30 million of float revenue for 2023.
Got it. And then just, I really appreciate that. Just as a quick follow-up to finish out that, you know, you guys have the benefit of having run this business for quite a while. As rates increase, do you see a change in your customers and those that are participating in the networks behavior in terms of how they pay or other things that would affect the underlying deposit amount effectively? Yeah. So, you know, part of our business model is that, you know, we...
in terms of how we manage the flow of funds, that's consistent in any scenario, regardless of what rates are related to deposits. And what I would say is that across the board in the middle market, our customers are trying to solve for a more efficient automated process. Mr. Ruan. And I think the, probably what you're getting in terms of managing flow, cash flow, things of that nature, monetization of flow.
It's probably more of an enterprise focus of companies. Our customers are trying to get their suppliers paid in an efficient way, reduce the manual process and the paper process that they're going through today. We don't typically see that dynamic. Again, our characteristics are in terms of how we managed the money movement. Customers, when they send the file directly from their underlying accounting system and now we're up to over 225 different systems that we're integrated to, that triggers the flow of funds immediately into our platform as well.
So the customers still control the timing when they pay their bills. Right. No, that's great and great setup. I appreciate all that detail. Okay. Thanks, James. And the next question is from Timothy Chiodo with Credit Suisse. Please go ahead. Great. Thanks a lot. Appreciate all the extra color on IA 2.0. I want to hit a little bit on that just across three areas, one being the credit risk, assuming and you've disclosed that you do assume that, but it's small and you have the data. So not an issue there, but just wanted to clarify anything you could.
a standpoint, we have the benefit of having a true, true side of network that both the buyers supplier, both on the network, and we as the benefit of seeing all the historical transactions that they've done between the two parties. And so we believe, and again, although we're launching our two point of offering, we've been in the market for the last several years with our one point of offering, and have seen all the different examples of,
you know, buyer and supplier behavior related to these types of transactions. So we feel really good about, you know, that element of it and now be a kind of highly automated, you know, kind of credit process. Related to the underlying, you know, funding element, yeah, today we are doing a home balance. However, that is something that we're, you know, in our business model that we're planning to change. We view that we're, you know, roughly maybe 18, 24 months away from having those balances as a way that it's exciting, you know, for probably one of our existing partners. We have, you know, a large stable of, you know, bank partners.
that have been talking to us for the last couple years about being able to take this off balance sheet. And so we absolutely expect that we will do that, and that's part of our long-term model. As it relates to the last part of the question, how we think of it is that this product is really best suited to help the casual needs of our small business suppliers. We anticipate that roughly of our total supply pool plus 60% of our suppliers are small businesses. And so that's kind of the target market that we're making this offering available to.
And I think one insight that we've kind of shared routinely, which is really what makes us excited and led to really kind of the building of our 2.0 offering, is that over the last year or so, we did notice that when suppliers were taking advantage of our invoice, our offering, within 90 days they came back for ongoing advances.
So we're really excited about the impact that this is going to have in long term for our business. Michael, thank you. Those are great clear answers and point well taken on the currently on the balance sheet, but as it scales, and you have more of a time series of data could take it off. Thank you for all that and the context on the SMB.
or the portion of TPD. No thanks Tim. And the next question is from Brent Braseland from Piper Sandler. Please go ahead. Thank you. Good morning. You know, it sounds like there's a lot of optimization here. Top of funnel. Sounds like you got a lot of new product that could help growth going in the next year. It sounds like the real near-term challenge is just the mid-barcadent and bell tightening. Looking at path cycles, trying to assess here how bad does the mid-barcad get?
relative to TPPV growth. I mean, are we talking prior cycles where you saw TPPV go flat on a year of your basis? Does it go negative? Temporarily good thing about recessions is they are temporary. But what can you tell us relative to pass cycles within the mid market on trying to assess near term where TPPV growth could go? Thanks.
Yeah, so I think, so first of all, I particularly look at it in kind of two lenses. One is the underlying health of our middle market supplier, I mean, a buyer customer, and the second one is the impact on their transactions. You know, within the last kind of negative cycle, being kind of the 2007, 2008 cycle, we had one customer go out of business and across the middle market through bankruptcy.
And so, you know, literally retained, you know, close to 100% of our customers from that perspective. So that, you know, really demonstrates the resilience of the middle market. I would say on kind of different transactions flows. What we've seen is, again, we were not in the payments business until 728. We launched a payment network in 2012. But, you know, extrapolating from invoice volumes, you know, typically we've seen in the past cycles is, you know, up to, you know, kind of a 5% headwinds across the different verticals within the middle market. And then, you know, it's usually geared across this discretionary spend.
delaying improvement projects, capital expenditures, things like that, and then they usually get caught up and snap back to those type of expenses pretty quickly exiting the cycle. So that's what we've seen historically, and I think what we're seeing currently is consistent with what we've seen historically. There's nothing that's really an anomaly that we're saying, hey, we haven't seen that type of behavior before. Got it. It sounds like little to no churn impact.
do expect some sort of 5% ish headwind to transaction processed and then obviously the variable is going to be how much discretionary expense impacted but that's super helpful. That's all I have, thank you. And the next question comes from Darren Teller from Wolf Research. Please go ahead. Hey guys, thanks. Just a quick one. Yeah it's good to see that the profitability levels have been pulled up a bit and I mean maybe just the reiteration or revisiting what you guys expect and what your plans are and expenses for the year or the next couple of years and how you plan on managing that and balance.
this season is that we're in. And so maybe one thing to call out is we do see kind of EBITDA negative in the front half of the year, EBITDA positive in the back half. I'm not sure if I made that clear before. And then 24 and 25, it really depends on what the macro is doing. So I would need to underscore any comment I make about we know that there will be an end point. So that's what I would do.
Again, we're in a long game here, I don't know, it's spring training and baseball, so maybe we're in the bottom of the first heading into the second to give the context. So it's really early in the overall game that we're playing. And still, we're seeing roughly 60% of the middle market have not yet adopted any solutions related to automating their accounts payable or payments.
And so, you know, we're, you know, balancing, you know, that investment and what we can do to drive that incremental adoption, you know, each year, as well as, you know, kind of that fishing growth to maximize profitability.
So I would say we continue to invest in what's required for the adoption of the market. And maybe this also is a little opportunity to advertise our upcoming June 1st Analyst's Day. I think we'll be diving deeper in some of these questions as well as providing some updated long-term targets related to gross margins. That'd be really helpful. Yeah, and just to cap it off, Darren, I think the thing that I would say as we wrap that question is we do have a lot of...
of 22. Okay, and you're still expecting some a decent number of net new or I know it's a tougher macro, but yeah. Yeah, I mean, look, with you know, Mike made a comment that we really kind of encouraged by the top funnel we see as we enter the year. And so, you know, optimistic that we can continue to add buyers along with continue to see, you know, good network tension expansion yield expansion.
I just have one more just on transaction. Happy to see you. Thanks Megan.
Hey, happy to be on the call. Just on transaction revenue retention, I think it's 103. Did you highlight or say what you're thinking for retention? That's a metric for 23, but what I really wanted to hear was what has the historical rate look like? I think it's touched 107, I think it's hovered around 103, 104, but if we go further back, how has that trended?
Yeah, great question, Tension. And you're right, we've sort of said that we see, and we have seen historically kind of pre-pandemic kind of that 104, 105-ish retention underlying growth across our buyers volume. We saw that dip abruptly and then returned gradually over time that sort of gave rise to that 107 that you referenced that was higher even in the quarters post-COVID recovery. But we would expect kind of, I don't know, normally I should in the 105, one of four range. We don't guide that specifically in our forward guidance, but certainly do see a little bit of an impact there from some of the belt timing we talked about.
Thank you. Please, now concludes our question and answer session. I would like to turn the conference back over to Michael Prager for any closing remarks. Thank you. Well again, I wanted to thank everyone for joining us here today. We're excited about the opportunities ahead of us in the large opportunities that we're playing related to accounts payable and payment automation across the middle market. And we believe our leadership puts us in a strong position to capitalize on this opportunity. Finally, I want to remind everyone about our upcoming investor day on June 1st in Charlotte, North Carolina.
With that, we'll close the call. And thank you. The conference has now concluded. Thank you for attending today's presentation. You