Q2 2023 AvidXchange Holdings Inc Earnings Call

August 2, 2023

Good morning, everyone and thank you for joining us for the avid exchanged already.

Got it.

Joining us on the call today is Mike Reger Avenue, co founder and Chief Executive Officer.

Hi, I have an exchange chief financial officer, and some logical or haven't exchanged.

Yeah.

I'm going to begin today's call management has asked me to read the forward looking statement disclaimer.

In today's press release.

This disclaimer.

Emphasizes the major uncertainties and risks inherent in the forward looking statements that the company will make the shopping.

Yes, I'm sorry.

As the company discusses features strategic initiatives potential market opportunities operational outlook.

So the Guy that's today's call.

Also please note that the company undertakes no duty to update.

Our revised forward.

Today's call will also include a discussion of non-GAAP financial measures as that's.

Sorry, Mr fighting recognition.

non-GAAP financial measures should be considered.

Isolation.

Just for information.

Yeah.

Accordingly.

Press release, the company has provided a reconciliation of this non-GAAP financial metrics as a result of Brexit fragrance.

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

Thank you everyone for joining us today, Joe and I are excited to discuss avid exchanges second quarter 2023 results.

Before I do that I just wanted to thank all of those who participated in our recent Investor day event on June <unk> held both in person and online.

And especially for those of you that visit us in Charlotte North Carolina for our Investor Day event, you experienced firsthand our performance based avid exchange culture, and how we have successfully transitioned to be back in the office three plus days a week across our multi office footprint.

We are already seeing an impact on productivity collaboration and teammate development.

With that I will now turn to our second quarter results.

We delivered another quarter of solid operating results.

Achieving now eight consecutive quarters of exceeding our financial targets relative to our implied outlook.

Revenues exceeded our implied Q2 2023 outlook, while our adjusted EBITDA results were a standout bright spots.

Driven by healthy revenue performance continued gross margin expansion unit cost reduction along with operating expense leverage.

These operating and financial results coupled with the Optionality. We believe we have at our disposal gives us further confidence in our progression towards our medium term rule of 40 objective of achieving both 20% organic revenue growth and 20% adjusted EBITDA targets by 2025, which we out.

Wind during our Investor day.

As the macro backdrop remains somewhat volatile where economic sentiment swings back and forth between a hard landing and no landing our purpose built value proposition of accounts payable and payment automation solutions is a proven capability with tangible and rapid ROI for middle market companies.

By leveraging the force multiplier of our proprietary two sided network buyer and supplier customers reap enormous value benefits that we believe particularly magnified during volatile economic times, our buyer customers are able to automate their back office and significantly reduce cost oftentimes by more than.

60%, while enhancing scalability and security of their accounts payable and payment processes.

While on the supplier side, our supplier customers get better visibility into their invoice and payments and are able to accelerate their cash flows and working capital while optimizing aspects of their own back office reconciliation functions.

A good customer examples of the power of our avid exchange business flywheel and the value we are delivering through our two sided network is with Chicago, Illinois based remedy medical properties, the nations largest private owner of healthcare properties.

Remedy exemplifies the power of avid exchanges two sided network before adopting avid exchanges invoice pay solutions remedy accounts payable and payment processes.

We're time intensive with many manual processes. According to senior accounts payable manager David Bennett several hours a day was spent opening the mail scanning invoices filing and stuffing chucks into envelopes by adopting our API based avid invoice in Aberdeen automation software solutions with <unk>.

Seamlessly integrate into remedies Dougherty Voyager accounting system and its team shaved off one whole workday per week by no longer needing to sign checks top envelopes and file and voices.

Without the habit exchange Bennett estimate that they would have had a higher after three to four more people the process the growing volume of invoices and payments over time.

As David Ben It's David keeping track of AP statuses, and conversations was challenging but with evident voice. There is now a central place for updates notes and answers, allowing us to work more efficiently and better communicate with property managers and our suppliers.

While buyer customers liked remedy.

Other customers, we have referenced over the past quarters highlight the customer value proposition. There are also broader market forces that are influencing the adoption of our solutions across the middle market.

Or the Mighty middle as I call it.

These forces range from the continued mass shift to the cloud for the critical back office applications to support business continuity, along with enabling work from home models for finance and accounting professionals, along with changing demographics and heightened focus on payment fraud prevention.

Speaking of payment fraud prevention recently, the U S. Postal service put out an urgent bullington warning against sending checks through the mail due to a surge in mail theft, nothing drives human behavior more than loss avoidance and according to the association of financial professionals, roughly 70% of payment fraud for.

<unk> occurs with paper checks.

However, based on our data payment fraud relates to checks in the BBB space is even greater at over 90%.

While fraud is unfortunate it adds another layer of uncertainty to our remaining paper check supplier customers, while making the find the value proposition of our various payment modalities.

With roughly 55% of our payment mix still being checks, we're extremely well positioned to help our customers mitigate this risk while building on our industry, leading E payment penetration.

Let me now provide a quick summary of our year over year second quarter 2023 financial results, we delivered revenues exceeding $91 million, which grew at a rate of over 19% compared to the same period last year.

Once again, our second quarter growth was led by double digit revenue growth dynamics across most of our vertical markets.

non-GAAP gross margins expanded to over 68% in the quarter up.

460 basis points on a year over year basis.

In addition, we posted an accelerating non-GAAP adjusted EBITDA profit of approximately $3 million in the quarter, which was close to an $8 million positive swing from an adjusted EBITDA loss of $4 7 million in the same period last year.

We also ended the quarter with a nine 5% year over year increase in our total transaction yield to $4 84.

Which is now up 79 or roughly 20% since our IPO in October of 2021.

On today's call, we will touch on three topics.

First our top of funnel activity.

Second discuss innovations to our existing product suite around new payment modalities under gear three of our avid exchange business flywheel quicker.

A quick reminder, that gear three incorporates all of our collective strategies to convert paper checks to electronic payments along with an update of our pending launch of invoice accelerator to point out.

And third explore several of our operational levers designed to accelerate automation that are key steps to driving continued gross margin expansion and accelerating our profitability.

So answer the first topic from a top of funnel buyer opportunity perspective.

We ended the first half of 2023 with a healthy growth up 70% on year over year basis, virtually all verticals saw double digit growth, including construction financial services media healthcare, our HOA and educational as examples equally grew.

Both in the top of funnel came with a slightly higher average deal size attachment aided by our three way match product. This healthy top of funnel was further backstopped by a sustained pace of close win rates.

The only top of funnel deviation continues to be within the commercial office sub sector of our overall real estate vertical just to be clear when we talked about real estate real estate vertical we are largely talking about real estate commercial operating companies and not residential homebuilders, although multifamily student housing.

Housing and industrial sub segments of the real estate vertical remained very strong commercial office real estate continues to soften. Meanwhile.

Meanwhile, product and integration partnerships launched over the last 12 months continue to play a solid role in the growth of our top of funnel prospect activity.

For example, the launch of our three way purchase order for offering in 2022, although off a small base has seen triple digit uptake what's more exciting is how broad the adoption has been spanning education real estate in our HOA Condo Association management verticals across both vertical and horizontal.

ERP accounting systems.

Furthermore, the average new buyer deal size in our top of funnel related to the three way match is also larger than what we typically see in those verticals in the education vertical for example, we're seeing three way <unk> use cases with individual schools and school systems for ordering supplies in managing their inventory.

Italy, encouraging we're seeing strong top of funnel activity within our preferred strategic partnership with residents and the real estate multifamily sub sector, which was launched last year as well.

All in all we are very pleased with the underlying metrics driving our top of funnel sales momentum.

Underscores not only the large and Underpenetrated 20 billion plus addressable market within the BBB middle market for AEP and payments automation solutions, but also the long secular growth opportunities that we see despite some near term pockets of macroeconomic softness.

Topic number two is all about year three of our avid exchange business flywheel.

Where we continue to accelerate ways to maximize our industry, leading E payment penetration of converting paper checks to various forms of repayments across our two sided network by removing barriers to adoption.

As an example of our STP offering and introducing new payment modalities, which we believe was the secret sauce of our success in one of our biggest competitive advantages.

We're excited to highlight new augmented payment modality in conjunction with just launched lien waiver management solution, which delivers critical automation functionality within our construction vertical.

Currently buyers and suppliers in the construction industry have to navigate a series of regulatory rules across various government agencies in order to set up and begin transacting.

New and existing buyers in the construction vertical must have account validation and other customer due diligence requirements.

While new and existing suppliers numbering in the thousands must also past numerous bank account validation rules in order to be paid.

Our new same day payment offering for lien waivers compliant leaf and programmatically same day payments from general contractors are buyers to subcontractors are suppliers.

With the integration of this new payment modality. The system allows for the programmatic creation of suppliers payments and status reporting while incorporating our new specialized payment funding model. This augmented payment modality makes a great use case for the roughly 500 base of construction by our customers.

And finally topic number three is related to optimization of operational levers, where we continue to look at the linkages across our operational value chain, specifically around payment processes with the objective.

<unk> are further automating all of our remaining manual payment delivery processes.

Currently we're making a virtual card payment the process and time it takes between our wholesale processor generating a virtual card and getting that virtual card into a supplier's hands to complete the entry of card details into the merchant system typically requires multiple manual steps translating into approximately two days of delivery time.

Through our new virtual power delivery and distribution platform, which we plan to have fully rolled out by Q4 that property and time goes from two days to near real time delivery have cards to our suppliers.

This dramatic overhaul does not only improve the customer experience through faster speed, but it also drives scalability and efficiency for us.

With virtual card issuance potentially numbering in the millions on an annual basis. This new capability has the potential of not only generate meaningful savings over time, but also extending the payment automation horizon significantly further beyond our current 80% payment automation level today.

In summary, we are pleased with our strong second quarter topline and exceptional bottom line results. We remain focused on delivering on our product roadmap integration partnerships and E payment penetration, while leveraging data to drive incremental customer value.

On today's call, we provided a progress update on some of those areas and look forward to further such updates around partnerships in the works in addition to existing and new offerings, we've been nurturing.

This includes our flagship invoice accelerator to finance offering which is targeted to be released in the fourth quarter and is just one example of many new innovation products and our product pipeline.

Along similar lines. We're also rapidly broadening the use case for products just launched across our other verticals based on demand.

Our new lien waiver management offering that we announced last quarter is a great example of this and we look forward to updating you on this offering along with other use cases future quarters.

Of course, none of this success, we have achieved to date would be possible without the existing talent and new talent, we continue to track to be part of our team.

So it is with great enthusiasm I take this opportunity to announce the promotion of John Feldman to the role of Chief operating officer from SVP of operations.

John has leveraged as formidable experience as chief operating officer of capital one's retail bank, Chief risk officer, as well as other roles overseeing product management around payments and various financial institutions to great effect at avid exchange.

John and his team our efforts related to the service transformation strategy are yielding results as roughly 80% of our E payments have now been automated with significant more gains to come.

Also I'm pleased to formally announce the appointment of Doug Anderson as our Chief product Officer.

Doug brings his forte of building products and other SaaS based offerings at scale salvage exchange Poland from his experience at leading global Tech companies such as SAP concur.

We believe these strategic operational and talent initiatives, coupled with our strong balance sheet cash gives us further optionality to accelerate value creation opportunities of course, we are mindful of the volatile macroeconomic backdrop and the potential further short term impacts on our business. However, we built.

We've we are still in the very early innings of a significant long term opportunity drive impactful value for our customers create future growth opportunities for our team members and a lot both short term and long term value for our shareholders with that I'd like to turn the call over to my partner Joel Wilhite.

Thanks, Mike and good morning, everyone. I am pleased to talk to you today about our second quarter 2023 financial results, which reflect continued execution of our growth strategies amid continued macro uncertainty.

Overall, we delivered another quarter of healthy year over year financial performance relative to the implied second quarter 2023 business outlook second quarter revenues came in better driven largely by interest revenues.

That together with higher gross margins driven by unit cost initiatives in yield expansion.

Bold with expense control led to significant adjusted EBITDA outperformance. We believe this adjusted EBITDA outperformance underscores the scope for operating leverage in our financial model.

Now turning to year over year results total revenue increased by 19, 1% to $91 $2 million in Q2 of 2023 over the second quarter of 2022 roughly.

Roughly two thirds of the revenue growth was driven by the combination of addition of new buyer invoice and payment transactions.

Coupled with yield expansion the remaining third of our revenue growth. This quarter was driven by higher year over year interest revenue, partially offset by a year over year decline in political revenues.

Our strong revenue growth also resulted in total transaction yield expanding to $4 84 in the quarter up nine 5% from $4 42.

In Q2 of 2022.

Of the nine 5% increase roughly three quarters of the increase was driven by the aforementioned flux between interest and political revenues with the remainder driven by mix and yield expansion.

Software revenues of $27 2 million, which accounted for 29, 9% of our total revenue in the quarter increased 12, 6% in Q2 of 2023 over Q2 of 2022.

The increase in software revenues was driven by growth in total transactions of eight 7% with the balance driven by a combination of price increases in certain subscription based revenues.

Payment revenue of $63 2 million, which accounted for 69, 4% of our total revenue in the quarter increased 22, 6% in Q2 of 2023 over Q2 of 2022.

Payment revenues reflect the contribution of interest revenues, which were $9 2 million in Q2 of 2023 versus $1 2 million in Q2 of 2022 recall year ago period payment revenues also included contribution from political media revenue almost half of the 22.

Percent of 22, 6% increase in payment revenues was roughly in line with the increase in total payment volume, which was up 12, 6% with the remaining portion driven by the aforementioned flux between interest and political revenues.

On a GAAP basis gross profit of $55 $6 million increased by 29, 6% in Q2 of 2023 over the same period last year, resulting in a 500 basis point improvement in gross margin for the quarter to 61%.

non-GAAP gross margin increased 460 basis points to 68, 3% in Q2 of 2023 over the same period last year roughly more than half of which was driven by a combination of unit cost efficiencies yield expansion in mix with the remainder driven by higher interest revenue.

Now moving on to operating expenses on a GAAP basis total operating expenses were $81 4 million an increase of 18, 3% in Q2 of 2023 over Q2 of last year on a non-GAAP basis operating expenses, excluding depreciation and amortization increased 10 nine.

Percent or $5 8 million to $59 2 million in the second quarter of 2023 from the comparable prior year period.

This highlights the operating expense leverage, particularly across G&A as well as sales and marketing I'll now talk about each component of the change in operating expenses on a non-GAAP basis.

non-GAAP sales and marketing costs decreased slightly by <unk> 4 million or two 2% to $18 $7 million in Q2 of 'twenty three over Q2 of last year, which was driven largely by lower marketing costs around event sponsorships.

non-GAAP research and development costs increased by $3 8 million or 21% to $21 7 million in Q2 of 'twenty three over Q2 of last year. The increase was due to continued investment in our products and platform.

non-GAAP general administrative costs increased by $2 5 million or 14, 9% to $18 9 million in Q2 of 2023 over Q2 of last year, driven by a combination of higher expenses as we transition to a public company, coupled with higher performance based bonus accruals and bad debt.

<unk> adjustment.

Our GAAP net loss was $18 $8 million for the quarter versus a GAAP net loss of $25 7 million in the prior year period, driven by a combination of strong revenue flow through and expense control, leading to lower operating losses, coupled with higher interest income and lower interest expense due to <unk>.

Reduced borrowing costs and partial debt paydown.

Our GAAP loss reflects $3 6 million of expenses related to the cyber incident in the second quarter of 2023, which includes professional services and legal fees.

On a non-GAAP basis, excluding those cyber costs, our net loss in the second quarter of 2023 was <unk> 5 million, an improvement of $13 $2 million compared to the year ago quarter, driven by the aforementioned factors.

On a non-GAAP basis, adjusted EBITDA was approximately $3 million in Q2 of 2023 compared to a loss of $4 7 million in Q2 of 2022, largely due to the aforementioned factors.

Now turning to our balance sheet for a moment I wanted to touch on a few key items. We ended the quarter with a strong corporate cash position of $438 $3 million against an outstanding total debt balance of $82 $9 million, including a note payable for $18 7 million.

We had $23 $9 million on our credit facility Undrawn at quarter end corporate cash. Meanwhile.

Was split roughly 60% among money market funds commercial paper and U S treasuries with the remaining 40% in demand deposit accounts.

Weighted average maturity on our corporate cash was roughly 12 days, while the effective interest rate on our corporate cash position for the second quarter was roughly four 6% customer cash at quarter end was approximately $1 2 billion.

With an interest rate of roughly four 2% for the quarter.

I'll now provide an update on our full year 2023 guidance in light of our second quarter 2023 financial outperformance balanced with further volume impacts from macro crosscurrents and based on all information currently available we are raising our 2023 outlook and now expect total revenue for the year.

Year to be in the range of $368 million to $370 million.

Our 2023 out revenue outlook reflects approximately $35 million in interest revenue 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.

Similarly, we expect a higher non-GAAP adjusted EBITDA profit ranging between seven and $8 million for the year. This adjusted EBITDA outlook reflects approximately $2 million in incremental second half investments in it security enhancements and associated costs related to the cyber incident.

With that I would now like to turn the call back over to the operator to open up the line for Q&A operator.

At this time I would like to remind everyone to ask questions by star and the number one on your telephone keypad also please begin with your question to one per person.

But just a moment to compile the Q&A roster.

Our first question comes from the line of Jim If I might.

Susquehanna.

Your line is now open.

Hi.

Good results here. Thank you for taking my question.

I just was hoping you could elaborate on this slide for the financial monetization flywheel and I know you talked about this a bit in your prepared remarks, but if you could.

Take a couple of these in particular that you think.

The model is most leverage too.

How would you decompose it is it.

Obviously, the by our customers.

The transaction yield.

Could pull out a couple of these and just talk through how you're thinking about the inputs.

That would be very helpful. Thank you.

Thanks, Jamie.

And I appreciate the question why don't I kind of lead off and let Mike add some color.

First thing I would say, it's just zooming out from the flywheel on the metrics that you are referencing when we think about that 20% organic growth potential that we have in the early days of this really big opportunity, we think about it in sort of kind of three simple elements to our growth algorithm that kind of do math to that to the fly.

And so first of all when we think about gear, one is attracting and retaining.

Buyer customers of accounts payable automation, we think about keeping and expanding organically.

Volume on our platform number two we're continually focused on adding additional buyers and their volume and number three expanding the yield of the volume on that platform and the yield really comes into year, three and year. Four so just generally setting the table, Mike I don't know if theres more that you want to.

Sort of mapped back to the flywheel, yes.

So one of the things that the flywheel does Jamie is.

Allows us to really.

Monetize continuing to monetize the same transaction multiple times and now we're up to five to six different monetization events that we can have in a single transaction from.

The managing the software for the purchase order the invoice payment.

And then we have specialized services that we recently released like avid analytics and even went around utility.

Bill payments and then on the network side, we certainly have the economics related to <unk>.

Payments.

Along with them are invoiced accelerator offering related to <unk>.

Higher financing so it allows us to continue to monetize the same transaction multiple times and where that shows up is in our transaction yield continue to expand.

And then the one thing.

I'd like to remind people is.

With gear, three which is at the bottom of the flywheel.

That's a really big opportunity for us as we still have over 50% of our suppliers on paper check and just remind people when you do that conversion from a paper <unk> supplier.

The payment supplier.

<unk>.

The revenue on the payment network for a check is zero and we have relatively high cost of about 85.

When we flip it to be electronic supplier.

The cost goes the pennies.

The revenue goes.

On average per transaction. So that's a really big kind of built in monetization kind of opportunity for us.

Within the existing base before we even add new.

By your customers and supplier customers to the flywheel.

Okay. Your next question comes from the line of a koning from Baird.

Your line is now open.

Hey, guys great job on profitability.

Yes.

And I guess my first question incremental margins on a year over year basis about 53%, it's a strongest in many years.

I'm wondering if you can kind of disaggregate a little bit we know interest revenues probably contributed some.

Cost cuts may be and then how much is just kind of core stable cost base and revenue growth just driving good a good incremental margin, maybe just kind of walk through that a little bit on how sustainable this is.

Yes, Great question, Dave. Thanks for the question. So maybe let me just start with kind of talking about gross margin and then I'll make a few other comments all together contributing to the incremental margin you are seeing from an EBITDA perspective.

We've talked about the importance of gross margin and the focus that we have on that we've said before that as we get into that 70% ZIP code, we begin to see a profitable business and we've kind of crossed that point.

And kind of not looking back and so.

For the quarter overall, good overall non-GAAP gross margin expanded 460, <unk> as I mentioned in our prepared remarks.

100 bps on a sequential basis and to your point the float contribution is something that benefits, it's kind of a great feature in our model and benefits gross margin and EBITDA performance, but stripping out both the impact of flow and the year over year impact of the political media advertising.

We're still up about 260 bps year over year 40 bps sequentially. So that really shows the focus that we're taking on just operational efficiency across the board no. One particular lever, but many that we're focused on and so we're proud of the gross margin result for the quarter.

On the EBITDA side of things again, we're also we talked about beginning to see Youll see scale in the model this year.

First with kind of G&A as we kind of get through the full load of public company costs in our run rate and then our focus on.

Kind of.

<unk> that growth and then also from an R&D perspective, we're really focused on both growth and profitability and we have.

Full payload of investments in our products and platform, but also we see and are very focused on.

Harvesting scale from R&D as well so.

All told we're kind of pleased with the quarter pleased with the progress from a profitability standpoint.

Our next question comes from the line.

From a bottom.

Thanks.

And then your line is now open.

Hey, guys I think that was made.

I appreciate you taking the question.

I was hoping you would spend a little bit more time, just kind of unpacking. Some of the macro impacts that you that you are saying in the quarter I'm trying to think about like the expectations for revenue ex slowed in the back half of the year and how that's changed and I guess as you look out we've seen some of these some of these macro related impacts on invoice sizes over the past year.

Do you have a sense or can you maybe just kind of catalog. When you first began to seeing it and when we should start to kind of grow over some of those negative impacts on an invoice sizes.

Yes.

Yes, good question will.

And I'm happy to take that one I guess, what I would say is first of all we're pleased with the quarter another solid quarter kind of exceeding our expectations, but in a time of caution in moderation that has persisted.

All year and I think we talked early in the year about having seen this began midway through the last through the fourth quarter of last year and that choppiness or moderation whatever you want to call. It has really kind of continued and so as we sat and thought about.

<unk>.

Kind of guiding the second half of the year, obviously, we've incorporated.

Kind of the beat that we see in our revised take on what we see from our float revenue standpoint apart from that the.

The back half really contemplate.

Nothing different than what we've sort of been suggesting all along and so not sure when that turns around.

We will certainly talk about it when it happens, but expecting that the current conditions persist through the better part through the end of the year, Yes that was well said John It will just maybe a little historical context.

And kind of past cycles, when we've seen it.

It turnaround.

We've noticed that discretionary spend comes back really quickly.

Across our customer base so.

We certainly look forward to kind of win that macro turnaround as well.

Our next question comes from the lineup Ramsey El <unk> from Barclays.

Okay.

Hi, there. Thanks, so much for taking my question today.

I wanted to it was great to see the entire vertical stack sort of ex real estate was back to healthy growth this quarter.

On Unreal estate I was wondering how you are looking at that vertical over the longer term I'm thinking of.

Work from home trends and sort of struggling commercial office markets, where real estate kind of diminish as we move forward in terms of its longer term contribution to growth or are you expecting a rebound back to sort of prior levels.

Yes, so Randy this is Mike.

So one thing I'd like to clarify is overall the vertical of real estate actually.

Performed fairly well for us.

Then my commentary was.

It is a big vertical related to lots of subsectors within the vertical and we will look at our customer base.

It's really kind of split across five different verticals.

Led by multifamily apartment operators being one the second one is.

Student housing on campus housing.

<unk> industrial fourth is retail and the fifth is commercial office.

Of the five.

All offices to one that we saw.

Thats still has kind of the headwinds related to the dynamics that you just indicated.

But.

Yes. The reason why the overall vertical was was positive for us is because multifamily student housing and industrial are really performing well.

And.

If you see a lot of our new kind of partnerships that we've launched in the last couple of years are with companies in the focus in the multifamily sector.

So we.

And then maybe kind of the backdrop is.

Although our first vertical we started in two three years ago, we're still single digit penetration.

Within the verticals so lots of runway in that overall vertical.

Your next question comes from the line of Craig Maurer Ft partners right alongside of them.

Yes, hi, thanks, guys.

Two questions first could you unpack the increase in revenue that a little bit and differentiate between what was driven by an increase in float revenue versus what the change was in core revenue guidance and.

Secondly, if you think back to prior cycles can you perhaps try to size. What you think the impact from political revenue will be in 2020 for considering the election cycle.

Thanks, Craig I'll take the first part of the question.

Yes, So look where we were pleased again with the quarterly results again a beat.

On top and bottom and so we've factored in.

Obviously now raising the range for the year factored that into the equation and really I think it would be if I were to split that out. It's really continued what we continue to see is that moderation in spending across the middle market.

<unk> been in a little bit of a tick up.

And that float.

Revenue contribution, but feel good about I feel good about the outlook for the rest of the year, Mike, Yes, and on the political side.

So in the last cycle.

We.

Controls our process of roughly 30% of the portfolio to political spend payments of the industry.

And if we look forward to.

Estimated for two.

2020 for political cycle, the estimate to be the first of the $10 billion spend cycle for political advertising.

<unk>.

Thats up roughly.

I believe the last cycles, roughly $7 8 billion. So certainly some growth there in 2004.

And the one thing.

It was a learning for me was everyone kind of assumes that secures exclusively for the candidates and Thats actually not the case, it's a kind of a mix split between both Canada advertising as well as the main issues. So the issues drive a lot of the spend as well.

So that maybe gives you a little bit of context.

As a reminder to everyone listening.

One some quality.

Yes.

Our next question will come from the line of chances from Morgan Stanley gains for line is now open.

Yes.

Yes, sure wanted to talk a little bit about competition and we've seen news recently from other players in the market, including Braxton ramp yesterday.

How do you see what are you seeing out in the market in terms of competition and how would you frame the distinction and business model.

That are out there in strategy compared to your own right now.

Yes, so that's a good question and certainly we saw those announcements as well it's kind of interesting in terms of.

Actually what we see happening in the market.

There is really no different than what we have seen historically.

It related to.

New competition within the middle market segment.

Typically the new entrants have been focused on small business and lots of good reasons for that mainly driven by the.

All the nuances of the.

The Mighty middle as I call it the middle market.

Roughly 50% of all the company's middle market highly aligned themselves with industry verticals that require unique business process as well as accounting systems to support the verticals and that translates to a.

Big effort related to.

Product development related to integrations as well as accommodating the nuances of the industry.

Good example of that is what we talked about with our lead waiver management.

The construction vertical so we can do a good job of.

Executing construction related payments and so.

Yes.

We continue to see is really the same players across the.

The middle market component and it's very vertical wise and then you have the horizontal layer, where we do see kind of probably the most competition is in the horizontals related to you and Thats, We channel Microsoft dynamics age intact <unk> as examples.

And the specifically for <unk> ramp up they've been really spent management side.

Versus the E&P side.

<unk>.

We don't really see them.

They don't have the significant activity that we see across our particular verticals within the middle market.

Comes from the line of Tien Tsin Huang from JP Morgan.

Your line is now open.

Hi, Thanks, Good morning, I think David asked on incremental margins, but maybe I'll ask one on gross margins in the second half again, just just wanted to make sure. If there's any callouts for the second half as we model that out.

Yes, yes, great question Tien Tsin.

And I think it's again I won't repeat obviously my comments in response to Dave's question, but we were pleased with our.

Our kind of margin expansion again, 460 bps, even close to 300 stripping outflow political one of the things specifically to your question about I would go back to some comments I've made previously about just cautioning. Some some moderation in those gross margins going forward again the hour hour, we're super focused on gross.

<unk>, we expect to continue to see that edge up over time, but not in linear fashion and so I would sort of say that we.

We think about overall year expansion in the kind of 200 bps.

Range, and maybe 100 or so stripping out flowed on a full year basis.

Your next question comes from the line.

From Wolfe research.

Your line is now open.

Thanks, just revisiting the.

The algorithm around EBITDA, 20% targets I know gross margin is a big part of that we're seeing the success of that now but.

If you guys don't mind reminding us.

Path and the building blocks of the timing that we could think about for all those factors playing out and how much is reliant on incremental.

I'd say, both incremental products and offerings that are high incremental margin as well as macro to some degree.

Yes, I mean, maybe I'll, let me, let me make a brief comment and then Mike add some color I think that obviously, we're we're focused on getting to that kind of rule of 40 profile with <unk>.

Organic 20% revenue growth as you move out into kind of 'twenty, five and even improving upon that beyond I think the pattern again I would go back to not necessarily not necessarily linear.

But sort of steady continued expansion in gross margins and scale really really beginning to see now and for the next year plus in our operating expenses, Mike anything to add yes, yes. So I got to go back to maybe it was a little bit on the first question that we have today on the flywheel I kind of think of that kind of overall growth algorithm.

Today.

Kind of five to six different components. The first is remember we have these multiple $5 six down monetization events on a single transaction.

And that is.

Obviously growing we still have the kind of the big bucket of paper check suppliers to 50% of paper check supplier Thats, a great both revenue as well as gross margin driver.

Super excited about this year as we one of our biggest years in terms of customer facing product innovation certainly led by <unk>.

Accelerator coming up.

Over the second half of this year.

And then we have the strong top of funnel activity TV kind of.

New buyers.

And then the last thing is I think the macro certainly will turn around at some point.

And I think as Joe indicated, we're not expecting that to be.

Anytime soon but certainly in the future that will kind of correct itself as we've seen in past cycles as well.

Our next question comes from the line of Alex Michael <unk> Keybanc capital markets. Alex Your line is now open.

Hey, guys. Thanks for taking the question maybe first one just kind of on a similar topic around product and top of funnel activity and Mike I think you mentioned the three way per disorder, a module, helping with deal size. Just wondering if you could maybe clarify or even quantify some of that tailwind and then just.

More broadly how you are thinking about.

The product roadmap and kind of impact on deal sizes going forward.

In the near term.

Yes, that's a great question related to.

Some of the innovation that we've rolled out to customers and.

Last year late last year, we talked about are.

Next generation purchase order procurement related.

Kind of functionality that we've been rolling out to customers and one of those was kind of a three way match capability.

The result is what we're kind of hoping would happen in that is.

<unk>.

Our starting to attract more of the upper middle market, some bigger customers and and that's kind of had an impact on our overall kind of average deal size.

Increasing roughly about 20% so I'll give you a context historically, it's been roughly the $50 range and now it's kind of migrated towards the $60000 range.

So it's a really positive impact.

Related to kind of the types of by our customers that we're attracting across the middle market.

Your next question comes from the line from Kian and tissue Bank.

Your line is now open.

Yes.

Hi.

Maybe next question.

Okay. Your next your next question comes from the line from Brent.

Piper Sandler.

Your line is now open.

Thank you good morning, I think Mike you talked about 55% of the payment mix being tied to check today.

Could that check mix like.

Over the next two to three years and one of the things in your control that you can drive that mix lower thanks.

Yes.

I like this question Brent.

Vehicles to our question because it's one of the things that I spent a lot of time thinking about and certainly a lot of our growth strategies relate to chipping away at this big install base of paper check.

So so first of all.

I think we believe long term that that number can go into 70% type of range.

The kind of the strategies to get there.

Are exactly the types of things that were that I talked about this quarter that we're rolling out to customers and that is.

We'll continue to look at different types of payment modalities.

With different value propositions different price points with different elements of data wrapped into it that we can deliver.

And the automated way or a straight through process weight to our supplier customers and the ones we've talked about this quarter.

Yes.

It was related to kind of the same day payment execution.

For construction customers to satisfy their lien waiver requirements, which is a unique business process within the construction vertical and so that new payment offering that we're rolling out is another. Good example of a new payment modality, specifically for the construction vertical.

And Theres a great analogy here, because we learned about the impact of that type of payment modality.

Maybe a year or so ago, when we rolled out a similar payment with ality in the media vertical for same day.

Satisfaction of political payments, which has a very sensitive timeline within the political media industry and so those are all good examples of us continuing to add new payment modalities that.

We look at how do we target different sectors of this remaining paper check base with unique value proposition, both incorporating price points as well as <unk>.

Data delivery.

Our last question comes from the line of Ian I appreciate that yes.

Your line is now open.

Hey, guys I think Thats me I'm guessing it's Bryan Keane.

I guess two questions.

Mike can you just help us on on sales cycles, we talk about top of the funnel activity I know they were pushed out a few weeks, maybe even a month I'm. Just curious is that still the case and then Joel any call outs between third and fourth quarter as we set our models just to make sure. We we think about the rate growth.

To put it in there yes.

Yes, maybe I'll start Brian .

And so I'm glad we got your question here.

So as it relates to.

Kind of.

Sales cycles.

We're making assistant with what we've been seeing for the last year.

I think we kind of referenced that we saw kind of a slight.

Kind of extension of roughly 10 days.

From what we've historically seen and that's remained consistent.

In this past quarter as well.

And Brian just to wrap up your last part of your question just when you think about the second half couple comments that I could add first on the revenue side of things.

Way I would think about it we don't guide necessarily the next quarter, but I would think about revenue is more like a kind of a 49 51 split more or less a little bit of a ramp as you get to the end of the year and then secondly from an EBITDA perspective, we're really pleased with the quarterly results. The things that I would suggest again were proud to kind of be a profitable.

Business continue to focus on doing that and not looking back keep in mind I did mention some.

Some investments, we're making to pull forward.

Some investments in our information security profile and so those will be.

Beginning to ramp between now and the end of the year and we also continue to make the investments whether its invoice accelerate our other products.

That said, we're focused on continuing to be a profitable business going forward. So thanks for the question.

Our next question comes from the line of dealing with each Yano from credit Suisse.

Your line is now all of them.

Great. Thank you for taking the question a follow up on the check mix question. So if you could just lay out what a time series might've looked like in the business.

Operating for many years was that check mix like 10 years ago, where there any kind of step functions ever when you introduce new products. You gave the example, with the construction vertical one that might have helped with adoption of kind of eliminating some of those checks and then.

To the extent that some of that check mix will start to go away at a more accelerated path over the coming years other products could help with that.

Yes so.

So good question.

It's a little bit of kind of the history lesson and we've launched the <unk> network in 2012.

And.

I think.

That first year, we were at 95% check.

We.

Certainly.

As we got smarter about virtual card delivery.

That.

Those percentages went up one of the biggest step function changes was when we launched the avid.

Our avid <unk>, which is R. R.

<unk>.

Plus type payment offerings, where we can.

Configure different.

Her change our fee base rates, we settled through the ECH process.

And then we ramp kind of a data layer around that transaction, we delivered to the supplier for reconciliation.

And when we delivered and we came up.

With the <unk> that was probably a step function change.

And that kind of now has contributed roughly 10 percentage points.

Of that all.

All of that monetization so.

When I look back maybe five years ago, we were probably in kind of.

25% range.

And Thats now ticked up to roughly 40% of transactions, we're settling to repayments. So we have noticed a kind of a progression.

One of the things that is.

Hertz that number a little bit when you look at it on a gross basis is that we're adding large volumes of new customers that are bringing large volumes of suppliers with them.

And especially as we add new verticals and our emerging verticals, where we don't have as deep a penetration rate of converting those suppliers that we do in some of our earlier sub verticals.

See larger amounts of paper checks suppliers that we're adding to the overall pool.

But certainly we're adding.

Hurting.

So suppliers on a weekly basis.

Two kind of E payments that were pretty strong.

Sales force dedicated exclusively to the supplier side of the equation.

Last question comes from the line.

Yes.

Well that is now open.

Hey, guys. Appreciate you squeezing me in for a follow up figured I wouldn't let the last three minutes go to waste here, but maybe just a follow up biosimilar ban.

Tim's question just now.

When we look at sort of the take rate trajectory, we've kind of event in this roughly 30 basis point range for a while now and I know a big part of our long term targets are seeing.

Increased electronic payment adoption, presumably higher take rates over time.

Wondering if you would if you kind of talk about kind of near term drivers of an acceleration in that electronic payment adoption and I guess, maybe just more specifically a modeling question. When we think about that year over year headwind that you guys are facing and the political advertising vertical.

Was that a higher electronic penetration in other words, I guess, the 40% number that seems like it's been relatively flat over the past year that being weighed down by the.

The lack of political AD spending this year.

Yes good.

Good question will.

So the last part of your question. So the answer is yes, there is a little bit of enhancement by the presence of political from any payment.

And sort of TPB yield.

So yes is the answer to that question I think your general question is what near term drivers to acceleration might exist again, we're not sort of predicting when we exit this kind of macro environment. It's possible that that has some positive impact.

But again, we're we're pretty proud of the TPG yield we've got to start with just from an industry leading perspective.

Moreover, in this environment.

And certainly there's a lot of leverage over the medium and longer term through gear three as Mike talked about take checks out of the system and drive that up.

Alright, no further questions at this time.

I'd like to turn the call so I'll make a Mike Mike Magee.

Thanks, So first of all thank you for everyone joining our Q2 earnings call.

We're looking forward to continue to update you on our continued progress of our operating and financial performance along with our product innovations.

With that operator, you may end the call.

Today's conference call you may now disconnect.

[music].

Yes.

[music].

Good morning, everyone and thank you for joining us for the avid exchanged holiday.

QUADRA.

And Scott.

Joining us on the call today is Mike Reger Avenue streams, co founder and Chief Executive Officer.

Hello, Hi.

Or an exchange Chief financial officer, and so much Omar.

And the deconsolidation.

Before we begin todays call management. They asked me to read the forward looking statement disclaimer that is included.

This press release.

This disclaimer emphasize.

Emphasizes the major uncertainties and risks inherent in the forward looking statements that the company will make it.

I'm sorry, it's in the region.

As the company discusses features strategic initiatives.

For Trinity operational outlook.

So the guidance during today's call.

Also please note that the company undertakes no duty to update.

Our revised forward looking statements.

Today's call May also include discussion of non-GAAP financial measures that sorry, Mr fighting regulation G.

non-GAAP financial measures should not be.

Isolation.

Alright.

Absolutely.

Last week.

Accordingly.

The press release the company has provided a reconciliation of this non-GAAP financial metrics.

Yeah.

With that I'll now turn the call over to Mike.

Oh, thank you.

Thank you everyone for joining us today, Joe and I are excited to discuss avid exchange's second quarter 2023 results, but before I do that I just wanted to thank all of those who participated in our recent Investor day event on June <unk> held both in <unk>.

Person and online.

We already seeing an impact on productivity collaboration and teammate development.

With that I will now turn to our second quarter results.

We delivered another quarter of solid operating results.

Achieving now eight consecutive quarters of exceeding our financial targets relative to our implied outlook.

Revenues exceeded our implied Q2 2023 outlook, while our adjusted EBITDA results were a standout bright spot.

Driven by healthy revenue performance continued gross margin expansion unit cost reduction along with operating expense leverage.

Wind during our Investor day.

By leveraging the force multiplier of our proprietary two sided network buyer and supplier customers reap enormous value benefits that we believe can particularly magnified during volatile economic times, our buyer customers are able to automate their back office and significantly reduce cost oftentimes buy more.

60%, while enhancing scalability and security of their accounts payable and payment processes.

A good customer example of the power of our avid exchange business flywheel and the value we are delivering through our two sided network is with Chicago, Illinois based remedy medical properties, the nations largest private owner of healthcare properties.

<unk> exemplifies the power of avid exchanges two sided network before adopting avid exchanges invoice and pay solutions remedy accounts payable and payment processes.

Our time intensive with many manual processes. According to senior accounts payable manager David Bennett several hours a day was spent opening the mail scanning invoices filing and stuffing chucks into envelopes.

By adopting our API based avid invoice and Abbott automation software solutions, which seamlessly integrate into remedies Dougherty Voyager accounting system and its team shaved off one whole workday per week by no longer needing to sign checks stop envelopes and file and voices.

Without the habit exchange then it estimates that they would've had a higher after three to four more people the process to growing volume of invoices and payments over time.

As David Ben It's David keeping track of AP statuses, and conversations was challenging but with avid invoice. There is now a central place for updates notes and answers, allowing us to work more efficiently and better communicate with property managers and our suppliers.

While buyer customers like remedy and other customers, we have referenced over the past quarters highlight the customer value proposition. There also broader market forces that are influencing the adoption of our solutions across the middle market.

Or the Mighty middle as I call it.

And speaking of payment fraud prevention recently, the U S. Postal service put out an urgent bullington warning against sending checks through the mail due to a surge in mail theft, nothing drive human behavior more than loss avoidance and according to the association of financial professionals, roughly 70% of payment fraud for.

Organizations occurs with paper checks.

However, based on our data payment fraud relates to checks in the BBB space is even greater at over 90%.

While fraud is unfortunate it adds another layer of uncertainty to our remaining paper check supplier customers, while main define the value proposition of our various payment modalities.

With roughly 55% of our payment mix still being checks, we're extremely well positioned to help our customers mitigate this risk while building on our industry, leading E payment penetration.

Once again, our second quarter growth was led by double digit revenue growth dynamics across most of our vertical markets.

non-GAAP gross margins expanded to over 68% in the quarter up 460 basis points on a year over year basis.

We also ended the quarter with a nine 5%.

Year over year increase in our total transaction yield to $4 84.

Which is now at 79 or roughly 20% since our IPO in October of 2021.

On today's call, we will touch on three topics.

Our top of funnel activity.

Second discuss innovations to our existing product suite around new payment modalities under gear three of our avid exchange business flywheel.

Reminder, that gear three incorporates all of our collective strategies to convert paper checks to electronic payments along with an update of our pending launch of invoice accelerator to point out.

And third explore several of our operational levers designed to accelerate automation that are key steps to driving continued gross margin expansion and accelerating our profitability.

So I'll answer the first topic from a top of funnel buyer opportunity perspective.

We ended the first half of 2023 with a healthy growth up 17% on year over year basis, virtually all verticals saw double digit growth, including construction financial services media healthcare, our HOA and educational as examples equally the grow.

Both in the top of funnel came with a slightly higher average deal size attachment aided by our three way match products. This healthy top of funnel was further backstopped by a sustained pace of close win rates.

The only top of funnel deviation continues to be within the commercial office sub sector of our overall real estate vertical just to be clear when we talk about real estate real estate vertical we are largely talking about real estate commercial operating companies and not residential homebuilders, although multifamily.

Student housing and industrial sub segments of the real estate vertical remained very strong commercial office real estate continues to soften.

Meanwhile, product and integration partnerships launched over the last 12 months continue to play a solid role in the growth of our top of funnel prospect activity.

For example, the launch of our three way purchase order for offering in 2022, although off a small base has seen triple digit uptake.

More exciting is how broad the adoption has been spanning education real estate in our HOA Condo Association management verticals across both vertical and horizontal ERP accounting systems.

Furthermore, the average new buyer deal size in our top of funnel related to the three way match is also larger than what we typically see in those verticals in the education vertical for example, we are seeing <unk> use cases with individual schools and school systems for ordering supplies in managing their inventory.

Equally encouraging we're seeing strong top of funnel activity within our preferred strategic partnership with resident in the real estate multifamily sub sector, which was launched last year as well.

All in all we are very pleased with the underlying metrics driving our top of funnel sales momentum.

This underscores not only the large and Underpenetrated 20 billion plus addressable market within the BBB middle market for AEP and payments automation solutions, but also the long secular growth opportunities that we see despite some near term pockets of macroeconomic softness.

Topic number two is all about year three of our avid exchange business flywheel.

As an example of our STP offering and introducing new payment modalities, which we believe was the secret sauce of our success in one of our biggest competitive advantages.

Currently buyers and suppliers in the construction industry have to navigate a series of regulatory rules across the various government agencies in order to set up and begin transacting.

New and existing buyers in the construction vertical must have the account model validation and other customer due diligence requirements.

While new and existing suppliers numbering in the thousands was also past numerous bank account validation rules in order to be paid.

Our new same day payment offering for lien waivers compliant leaf and programmatically send same day payments from general contractors are buyers to subcontractors are suppliers.

With the integration of this new payment modality. The system allows for the programmatic creation of suppliers payments and status reporting while incorporating our new specialized payment funding model. This augmented payment modality makes it a great use case for the roughly 500 base of construction by our customers.

Currently we're making a virtual card payment the process and time it takes between our wholesale processor generating a virtual card and getting that virtual card into our suppliers hands to complete the entry of par details into the merchant system typically requires multiple manual steps translating into approximately two days of delivery time.

Through our new virtual power delivery and distribution platform, which we plan to have fully rolled out by Q4 that processing time goes from two days to near real time delivery have cards to our suppliers.

This dramatic overhaul does not only improve the customer experience through faster speed, but it also drives scalability and efficiency for us.

With virtual card issuance potentially numbering into the millions on an annual basis. This new capability has the potential of not only generated meaningful savings over time, but also extending the payment automation horizons significantly further beyond our current 80% payment automation level today.

On today's call we've provided a progress update on some of those areas and look forward to further such updates around partnerships in the works in addition to existing and new offerings, we've been nurturing.

Along similar lines. We're also rapidly broadening the use case for products just launched across our other verticals based on demand.

Our new lien waiver management offering that we announced last quarter is a great example of this and we look forward to updating you on this offering along with other use cases in future quarters.

Of course, none of the success, we have achieved to date would be possible without the existing talent and new talent, we continue to track to be part of our team.

So it is with great enthusiasm I take this opportunity to announce the promotion of John Feldman to the role of Chief operating officer from SVP of operations.

<unk> are yielding results as roughly 80% of our E payments have now been automated with significant more gains to come out.

Also I'm pleased to formally announce the appointment of Doug Anderson as our Chief product Officer.

Doug brings his forte of building products and other SaaS based offerings at scale to avid exchange hone from his experience at leading global Tech companies such as SAP concur.

We are still in the very early innings of a significant long term opportunity to drive impactful value for our customers and create future growth opportunities for our team members and a lot both short term and long term value for our shareholders with that I'd like to turn the call over to my partner Joel Wilhite.

Coupled with expense control led to significant adjusted EBITDA outperformance. We believe this adjusted EBITDA outperformance underscores the scope for operating leverage in our financial model.

Now turning to year over year results total revenue increased by 19, 1% to $91 $2 million in Q2 of 2023 over the second quarter of 2020 to roughly.

Roughly two thirds of the revenue growth was driven by the combination of addition of new buyer invoice and payment transactions.

Our strong revenue growth also resulted in total transaction yield expanding to $4 84 in the quarter up nine 5% from $4 42 in.

In Q2 of 2022.

Of the nine 5% increase roughly three quarters of the increase was driven by the aforementioned flux between interest and political revenues with the remainder driven by mix and yield expansion.

Software revenues of $27 2 million, which accounted for 29, 9% of our total revenue in the quarter increased 12, 6% in Q2 of 2023 over Q2 of 2020 to the.

The increase in software revenues was driven by growth in total transactions of eight 7% with the balance driven by a combination of price increases in certain subscription based revenues.

Payment revenue of $63 2 million.

Which accounted for 69, 4% of our total revenue in the quarter increased 22, 6% in Q2 of 2023 over Q2 of 2022.

<unk> 22, 6% increase in payment revenues was roughly in line with the increase in total payment volume, which was up 12, 6% with the remaining portion driven by the aforementioned flux between interest and political revenues.

On a GAAP basis gross profit of $55 $6 million increased by 29, 6% in Q2 of 2023 over the same period last year, resulting in a 500 basis point improvement in gross margin for the quarter to 61%.

Now moving on to operating expenses.

On a GAAP basis total operating expenses were $81 4 million an increase of 18, 3% in Q2 of 2023 over Q2 of last year on a non-GAAP basis operating expenses, excluding depreciation and amortization increased 10, 9% or $5 $8 million.

To $59 2 million in the second quarter of 2023 from the comparable prior year period.

However, on a percentage of revenue basis operating expenses, excluding depreciation and amortization declined roughly 480 basis points to 65% in the second quarter of 2023 from 69, 8% in the comparable period last year. This highlights the operating expense leverage, particularly across G&A as well as sales and marketing.

I'll now talk about each component of the change in operating expenses on a non-GAAP basis.

non-GAAP sales and marketing costs decreased slightly by <unk> 4 million or two 2% to $18 7 million in Q2 of 'twenty three over Q2 of last year, which was driven largely by lower marketing costs around events sponsorships non.

non-GAAP research and development costs increased by $3 8 million or 21% to $21 7 million in Q2 of 'twenty three over Q2 of last year. The increase was due to the continued investment in our products and platform.

non-GAAP general administrative cost increased by $2 5 million or 14, 9% to $18 $9 million in Q2 of 2023 over Q2 of last year, driven by a combination of higher expenses as we transition to a public company, coupled with higher performance based bonus accruals and bad debt.

Serve adjustment.

Reduced borrowing costs and partial debt pay down.

Our GAAP loss reflects $3 $6 million of expenses related to the cyber incident in the second quarter of 2023, which includes professional services and legal fees.

On a non-GAAP basis, excluding those cyber costs, our net loss in the second quarter of 2023 was <unk> 5 million.

An improvement of $13 $2 million compared to the year ago quarter, driven by the aforementioned factors.

On a non-GAAP basis, adjusted EBITDA was approximately $3 million in Q2 of 2023 compared to a loss of $4 7 million in Q2 of 2022, largely due to the aforementioned factors.

We had $23 $9 million on our credit facility Undrawn at quarter end corporate cash. Meanwhile.

Was split roughly 60% among money market funds commercial paper and U S treasuries with the remaining 40% in demand deposit accounts.

The weighted average maturity on our corporate cash was roughly 12 days, while the effective interest rate on our corporate cash position for the second quarter was roughly four 6% customer cash at quarter end was approximately $1 2 billion with an interest rate of roughly four 2% for the quarter.

Year to be in the range of $368 million to $370 million.

Our 2023 out revenue outlook reflects approximately $35 million in interest revenue 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.

With that I would now like to turn the call back over to the operator to open up the line for Q&A operator.

At this time I would like to remind everyone Inaugurates last question by Star and the number one on your telephone keypad also please begin with your question to one per person.

But just a moment to compile the Q&A roster.

Our first question comes from the line of Jami.

Scanner.

Your line is now open.

Hi.

Good results here. Thank you for taking my question.

I just was hoping you could elaborate on this slide for the financial monetization flywheel and I know you had talked about this a bit in your prepared remarks, but if you could.

Take a couple of these in particular that you think.

The model is most leverage too.

How would you decompose it is it.

Obviously, the by our customers.

The transaction yield yes, if you could pull out a couple of these and just talk through how you're thinking about the inputs.

That would be very helpful. Thank you.

Thanks, Jamie.

And I appreciate the question why don't I kind of lead off and let Mike add some color.

And so first of all when we think about gear, one is attracting and retaining.

Buyer customers of accounts payable automation, we think about keeping and expanding organically.

Sort of mapped back to the flywheel, yes.

So one of the things that the flywheel does Jamie is.

Allows us to really monetize continue to monetize the same transaction multiple times and now we're up to five to six different monetization events that we can evidence single transaction from.

The managing the software for the purchase order the invoice payment.

And then we have specialized services that we've recently released Blake avid.

<unk> and even went around utility.

Bill payments and then on the network side we.

We certainly have the economics related to E payments, along with them are invoiced accelerator offering related to supplier financing so.

How's us to continue to monetize the same transaction multiple times and where that shows up is in our transaction yield continue to expand.

And then the one thing I like to remind people is.

With gear, three which is at the bottom of a flywheel.

That's a really big opportunity for us as we still have over 50% of our suppliers on a paper check.

Just remind people when you do that conversion from a paper <unk> supplier.

Payment supplier.

<unk>.

The revenue on the payment network for a check is zero and we have relatively high cost of about 85 when.

When we flip it to be electronic supplier.

The cost goes to pennies and the revenue goes.

Dollars on average per transaction. So that's a really big kind of built in monetization kind of opportunity for us.

Within the existing base before we even add new.

By our customers and supplier customers to the flywheel.

Okay. Your next question comes from the line of a koning from Baird.

Your line is now open.

Hey, guys great job on profitability.

And I guess my first question incremental margins on a year over year basis about 53%, it's the strongest in many years.

I'm wondering if you can kind of disaggregate a little bit we know interest revenues probably contributed some.

We've talked about the importance of gross margin and the focus that we have on that we've said before that as we get into that 70 presented ZIP code, we begin to see a profitable business and we've kind of crossed that point.

And kind of not looking back and so.

For the quarter overall, good overall non-GAAP gross margin expanded 460, <unk> as I mentioned in our prepared remarks.

100 bps on a sequential basis and to your point the flow.

<unk> contribution is something that benefits, it's kind of a great feature in our model and benefits gross margin and EBITDA performance, but stripping out both the impact of flow and the year over year impact of the political media advertising were still up about 260 bps year over year 40 bps sequentially so that.

Shows the focus that we're taking on just operational efficiency across the board no. One particular lever, but many that we're focused on and so we're proud of the gross margin result for the quarter.

<unk>.

On the EBITDA side of things again, we're also we talked about beginning to see Youll see scale in the model this year.

First with kind of G&A as we kind of get through the full load of public company costs in our run rate and then a focus on kind of.

Minimizing that growth and then also from an R&D perspective, we're really focused on both growth and profitability and we have a full.

Full payload of investments in our products and platform, but also we see and are very focused on.

Harvesting scale from R&D as well so.

All told we're kind of pleased with the quarter pleased with the progress from a profitability standpoint.

Our next question comes from Black Nashville from Goldman.

And then your line is now open.

Hey, guys I think that was me.

I appreciate you taking the question.

I was hoping you would spend a little bit more time, just kind of unpacking some of the macro impacts that you that youre seeing in the quarter I'm trying to think about like the expectations for revenue ex slowed in the back half of the year and how that's changed and I guess as you look out we've seen some of these some of these macro related impacts on invoice sizes over the past year.

Do you have a sense or can you maybe just kind of catalog. When you first began to seeing it and when we should start to kind of grow over some of those negative impacts on an invoice sizes.

Yes.

Yes, good question will.

I'm happy to take that one I guess, what I would say is first of all we're pleased with the quarter another solid quarter.

Exceeding our expectations, but in a time of caution in moderation that has persisted.

All year and I think we talked early in the year about having seen this begin midway through the last for the through the fourth quarter of last year and that Choppiness or moderation whatever you want to call. It has really kind of continued and so as we sat and thought about.

Kind of guiding the second half of the year, obviously, we've incorporated.

Kind of the beat that we see in our revised take on what we see from our float revenue standpoint apart from that.

The back half really contemplate.

Nothing different than what we've sort of been suggesting all along and so not sure when that turns around.

And kind of past cycles, when we've seen it.

And turnaround.

We noticed that discretionary spend comes back really quickly.

Across our customer base so.

We certainly look forward to kind of win that macro turnaround as well.

Our next question comes from the lineup Ramsey El <unk> from Barclays.

Okay.

Hi, there. Thanks, so much for taking my question today.

I wanted to it was great to see the entire vertical stack sort of ex real estate was back to healthy growth this quarter.

On Unreal estate I was wondering how youre looking at that vertical over the longer term I'm thinking of work from home trends and sort of struggling commercial office markets, where real estate kind of diminish as we move forward in terms of its longer term contribution to growth or are you expecting a rebound back to sort of prior.

Levels.

Yes, so Randy this is Mike So one thing I'd like to clarify is that overall the vertical of real estate actually.

Performed fairly well for us.

Then my commentary was.

It is a big vertical related to lots of subsectors within the vertical and we look at our customer base.

It's really kind of split across five different verticals.

Led by multifamily apartment operators being one the second one is.

Student housing on campus housing.

<unk> industrial fourth is retail and the fifth is commercial office.

Of the five.

All offices to one that we saw.

Thats still has kind of the headwinds related to the dynamics that you just indicated.

But.

Yes. The reason why the overall vertical was was positive for us is because multifamily student housing and industrial are really performing well.

And.

If you see a lot of our new kind of partnerships that we've launched in the last couple of years are with companies in the focus in the multifamily sector.

So we.

And then maybe kind of the backdrop is.

Although our first vertical we started in 23 years ago, we're still single digit penetration.

Within the vertical so lots of runway in that overall vertical.

Your next question comes from the line of Craig Maurer from FTE Barclays.

Your line is now open.

Yes, hi, thanks, guys.

Secondly, if you think back to prior cycles can you perhaps try to size. What you think the impact from political revenue will be in 2020 for considering the <unk>.

Election cycle. Thanks.

Thanks, Craig I'll take the first part of the question.

Yes, So look where we were pleased again with the quarterly results again a beat.

On top and bottom and so we've factored in.

<unk> been in a little bit of a tick up.

And that float.

Revenue contribution, but feel good about I feel good about the outlook for the rest of the year, Mike, Yes, and on the political side.

So in the last cycle.

We.

Controls our process to roughly 30% of the portfolio to political spend payments of the industry.

And if we look forward to.

What's estimated for two.

2020 for political cycle, the estimate to be the first of the $10 billion spend cycle for political advertising.

<unk>.

Thats.

Roughly.

With the last cycles, roughly $7 8 billion. So certainly some growth there in 2004.

And the one thing.

It was a learning for me was.

Everyone kind of assumes that secured exclusively for the candidates and thats actually not the case, it's a kind of a mix split between both Canada advertising as well as the main issues. So the issues drive a lot of the spend as well.

So that maybe gives you a little bit of context.

As a reminder to everyone. Please limit.

One.

Thank you very much.

Next question comes from the line of chances from Morgan Stanley .

Your line is now open.

Yes, sure wanted to talk a little bit about competition and we've seen news recently from other players in the market, including Braxton ramp yesterday.

How do you see what are you seeing out in the market in terms of competition and how would you frame that distinction and business model.

That are out there in strategy compared to your own right now.

Yes.

Good question and certainly we saw those announcements as well.

Kind of interesting in terms of.

Actually what we see happening in the market.

There is really no different than what we have seen historically.

It related to.

New competition within the middle market segment.

Typically the new entrants have been focused on small business and so lots of good reasons for that mainly driven by the.

All the nuances of the.

The Mighty middle as I call it the middle market.

Big effort related to.

Product development related to integrations as well as accommodating the nuances of the industry.

Good example of that is what we talked about with our lead waiver management.

The construction vertical so we can do a good job of.

Executing construction related payments and so.

Yes.

We continue to see is really the same players across the.

And.

Specifically for <unk> ramp up they've been really on the spend management side.

Versus the E&P side.

<unk>.

We don't really see them.

They don't have the significant activity that we see across our particular verticals within the middle market.

Comes from the line of Tien Tsin Huang from JP Morgan.

Your line is now open.

Yes, yes, great question Tien Tsin.

And I think it's again I won't repeat obviously my comments in response to Dave's question, but we were pleased with.

Our kind of margin expansion again, 460 bps, even close to 300 stripping outflows political one of the things specifically to your question about I would go back to some comments I've made previously about just cautioning. Some some moderation in those gross margins going forward again the hour hour, we're super focused on gross.

<unk>, we expect to continue to see that edge up over time, but not in linear fashion and so I would sort of say that we.

We think about overall year expansion in the kind of 200 bps.

Range, and maybe 100 or so stripping out flowed on a full year basis.

Your next question comes from the line from <unk>.

Alright.

All of them.

Thanks, just revisiting the.

The algorithm around EBITDA, 20% targets I know gross margin is a big part of that we're seeing to suggest that now but.

If you guys don't mind reminding us.

Path and the building blocks of the timing that we could think about for all those factors playing out and how much is reliant on incremental.

I'd say, both incremental products and offerings that are high incremental margin as well as macro to some degree.

Yes, I mean, maybe I'll, let me, let me make a brief comment and then Mike add some color I think that obviously, we're we're focused on getting to that kind of rule of 40 profile with <unk>.

Organic 20% revenue growth as you move out into kind of 'twenty, five and even improving upon that beyond I think the pattern again I would go back to not necessarily not necessarily linear.

But sort of steady continued expansion in gross margins and scale really really beginning to see now and for the next year plus in our operating expenses, Mike anything to add yes, yes. So I got to go back to maybe you are a little bit of the first question that we have today on the flywheel I kind of think of that kind of overall growth algorithm.

Today.

It really kind of five to six different components.

First is wherever we have these multiple $5 six down monetization events on a single transaction.

And.

Obviously growing we still have that kind of the big bucket of paper check suppliers to 50% of paper check supplier Thats, a great both revenue as well as gross margin driver.

Super excited about this year as we one of our biggest years in terms of customer facing product innovation certainly led by <unk>.

The accelerator coming up.

Over the second half of this year.

And then we have the strong top of funnel activity and TV.

New buyers.

And then the last thing is I think the macro certainly will turn around at some point.

And I think as Joe indicated, we're not expecting that to be.

Anytime soon but certainly in the future that will kind of correct itself as we've seen in past cycles as well.

Our next question comes from the line of Alex Michael <unk> Keybanc capital markets. Alex Your line is now open.

Hey, guys. Thanks for taking the question maybe first one just kind of on a similar topic around product and top of funnel activity. Mike I think you mentioned the three way per disorder, a module help England with deal size. Just wondering if you could maybe clarify or even quantify some of that tailwind and then just.

More broadly how you are thinking about.

The product roadmap and kind of impact on deal sizes going forward.

In the near term.

Yes, that's a great question related to.

Some of the innovation that we've rolled out to customers and.

Last year late last year, we talked about are.

Kind of next generation purchase order procurement related.

Kind of functionality that we've been rolling out to customers.

One of those was kind of a three way match capability.

The result is what we're kind of hoping would happen in that is.

<unk>.

Our starting to attract more of the upper middle market, some bigger customers and and that's kind of had an impact on our overall kind of average deal size.

Increasing roughly about 20% so I'll give you context historically, it's been roughly the $50 range and now it's kind of migrated towards the $60000 range.

So it's a really positive impact.

Related to kind of the types of by our customers that we're attracting across the middle market.

Your next question comes from the line from Tia and tissue Bank, yes.

Your line is now open.

Yes.

Hi.

Maybe next question.

Okay. Your next your next question comes from Blayne from Brian .

Piper Sandler.

Your line is now open.

Thank you good morning, I think Mike you talked about 55% of the payment mix being tied to check today.

Could that check mix like.

Over the next two to three years and one of the things in your control that you can drive that mix lower thanks.

Yes.

This question Brett.

Maybe it goes to our question because it's one.

One of the things that I spent a lot of time thinking about and certainly a lot of our growth strategies relate to <unk>.

Shipping away at this big install base of paper check.

So so first of all.

We believe long term that.

That number can go into 70% type range.

And the kind of the strategies to get there.

Are exactly the types of things that were that I talked about this quarter that we're rolling out to customers and that is.

You look at different types of payment with <unk> with different value propositions different price points with different elements of data wrapped into it that we can deliver.

And automated way or a straight through process way to our supplier customers and the ones we've.

We've talked about this quarter.

It was related to kind of the same day payment execution.

<unk> construction customers to satisfy their lien waiver requirements, which is a unique business process within the construction vertical and so that new payment offering that we're rolling out is another. Good example of a new payment modality, specifically for the construction vertical and Theres a great analogy here because we've learned about.

The impact of that type of payment with <unk>.

Maybe a year or so ago, when we rolled out a similar payment with ality in the media vertical for same day.

Satisfaction of political payments, which has a very sensitive timeline within the political media industry and so those are all good examples of us continuing to add new payment modalities that.

We look at how do we target different sectors of this remaining paper check base with unique value proposition, both incorporating price points as well as <unk>.

Data delivery.

Our last question comes from the line of Ian I appreciate that yes. Your line is now open.

Hey, guys I think Thats me I'm guessing it's Bryan Keane.

I guess two questions. Mike can you just help us on on sales cycles, we talk about top of the funnel activity I know they were pushed out a few weeks, maybe even a month I'm. Just curious is that still the case and then Joel any call outs between third and fourth quarter as we set our models just to make sure we.

We think about the right growth rate to put in there yes.

Maybe I'll start Brian .

And so I'm glad we got your question here.

So as it relates to.

Kind of.

<unk> cycles.

Consistent with what we've been seeing for the last year.

I think we kind of referenced that we saw kind of a.

Right.

You know kind of extension with roughly 10 days.

From what we've historically seen and that's remained consistent.

In this past quarter as well.

And Brian just to wrap up your last part of your question just when you think about the second half couple comments that I could add first on the revenue side of things.

I would think about it we don't guide necessarily the next quarter, but I would think about revenue is more like.

Kind of a 49 51 split more or less a little bit of ramp as you get to the end of the year and then secondly from an EBITDA perspective, we're really pleased with the quarterly results. The things that I would suggest again were proud to kind of be a profitable business continue to focus on doing that and not looking back keep in mind I did mention.

Some investments, we're making to pull forward.

Some investments in our information security profile and so those will be.

Beginning to ramp between now and the end of the year and we also continue to make the investments whether its invoice accelerate or other products.

That said, we're focused on continuing to be a profitable business going forward. So thanks for the question.

Our next question comes from the line of dealing with each Ono from credit Suisse.

Thanks to all of them.

Great. Thank you for taking the question a follow up on the check mix question. So if you could just lay out what a time series might've looked like in the business.

To the extent that some of that check mix will start to go away at a more accelerated path over the coming years other products could help with that.

Yes so.

So good question.

So a little bit of kind of the history lesson and we've launched the <unk> network in 2012.

And I.

I think.

That first year, we are 95% check.

We.

Certainly.

As we got smarter about virtual car delivery.

That.

Those percentages went up one of the biggest step function changes was when we launched the avid.

Our avid <unk>, which is R. R.

<unk>.

Plus type payment offerings, where we can.

Configure different.

Her change our fee base rates, we settled through the ECH process.

And then we ramp kind of a data layer around that transaction, we delivered to the supplier for reconciliation.

And when we delivered and we came up in.

With the <unk> that was probably a step function change.

And that kind of Enel <unk> has contributed roughly 10 percentage points.

Of that all.

That monetization so.

When I look back maybe five years ago, we were probably in kind of.

25% range.

It's now ticked up to roughly 40% of transactions, we're settling to repayments. So we have noticed a kind of a progression.

One of the things that.

Hertz that number a little bit when you look at it on a gross basis.

That we're adding large volumes of new customers that are bringing large volumes of suppliers with them.

And especially as we add new verticals in our emerging verticals, where we don't have as deep a penetration rate of converting those suppliers that we do in some of our earlier sub verticals.

We see larger amounts of paper check suppliers, then we're adding to the overall pool.

But certainly we're adding converting.

With thousands of suppliers on a weekly basis.

E payments that were pretty strong.

<unk> force dedicated exclusively to the supplier side of the equation.

Last question comes from the line.

Yes.

Well the line is now open.

Hey, guys. Appreciate you squeezing me in for a follow up figured I wouldn't let the last 30 minutes go to waste here, but maybe just a follow up biosimilar band of I think Tim's question just now.

When we look at sort of the take rate trajectory, we've kind of event in this roughly 30 basis point range for a while now and I know a big part of our long term targets is seeing.

Increased payment electronic payment adoption, presumably higher take rates over time.

Wondering if you would.

If you kind of talk about kind of near term drivers of an acceleration in that electronic payment adoption and I guess, maybe just more specifically a modeling question. When we think about that year over year headwind that you guys are facing and the political advertising vertical.

Like was that a higher electronic penetration in other words, I guess, the 40% number that seems like it's been relatively flat over the past year that being weighed down by.

The lack of that political AD spending this year.

Yes.

Good question will.

So the last part of your question. So the answer is yes, there is a little bit of enhancement by the presence of political from any payment.

And through TPB yield.

But again, we're we're pretty proud of the TPG yield we've got to start with just from an industry leading perspective.

Moreover, in this environment.

And certainly there is a lot of leverage over the medium and longer term through gear three as Mike talked about take checks out of the system and drive that up.

Alright, no further questions at this time.

I'd like to turn the call so I'll make a Mike Mike Magee.

Thanks, So first of all thank you for everyone joining our Q2 earnings call we.

We're looking forward to continue to update you on our continued progress of our operating and financial performance along with our product innovations.

With that operator, you may end the call.

Today's conference call you may now disconnect.

Q2 2023 AvidXchange Holdings Inc Earnings Call

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