Q3 2023 Avidxchange Holdings Inc Earnings Call

November 8, 2023

Good morning, everyone and thank you for joining us for the avid Exchange Holdings, Inc. Third quarter 2023 earnings call.

Joining us on the call today is Mike Prager avid exchanges co founder and Chief Executive Officer, Joe Wilhite avid exchanges, Chief Financial Officer, and she Bosch Kumar avid exchanges head of Investor Relations.

Before we begin todays call management has asked me to relay. The forward looking statements disclaimer that is included at the Understates press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward looking statements. The company will make this afternoon. Please keep these uncertainties and risks in mind as the company discuss future strategic initiatives potential market.

Opportunities operational outlook and financial guidance during today's call.

Also please note that the company undertakes no duty to update or revise forward looking statements. Today's call will also include a discussion of non-GAAP financial measures How's that term is defined in the regulation G. non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.

Accordingly at the end of today's press release. The company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.

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

Thanks for joining us this morning, Joel and I are both excited to talk about our third quarter results.

And milestones with you.

We once again delivered another set of strong quarterly business performance metrics and financial results.

I'll summarize these shortly and Joel will provide further details and commentary later on in his section.

Given the ongoing macroeconomic volatility our unique Abbott exchange value proposition continues to resonate in the marketplace with our middle market customers.

We recently held our annual customer Advisory Board meeting or cab as we call. It here in Charlotte with over 25 diverse buyer customers attending across our various industry verticals, who use our software to manage their accounts payable and payment processes.

The cab is an in person form subdivided into a series of vertical industry focus groups, where we dedicate time and resources for a deeper peer dialogue regarding their specific business and accounting processes unique to their vertical industry.

Updating on the key accounting systems that support their industry.

As well as overall specific industry trends and observations they are seeing in operating their businesses.

Specifically as thought leaders, we serve are as our customers' key trusted technology and automation partner and are at the forefront in driving their transformational back office initiatives.

Through our domain expertise, we are helping them with the vision and execution to achieve benchmark level of excellence and.

And automating their overall procure to pay processes in line with that of enterprise customers.

The calf reinforce the strategic importance.

Of our value proposition and advancing our customers invoice and payment automation initiatives with a rapid and quantifiable return on investment.

As we digitally transform their key back office procure to pay processes driving speed secure.

Security.

Along with workflow efficiencies catalyzed by our two sided network. They are able to optimize every cost lever to take pressure off of their income statement, while freeing up increasingly scarce financial resources to support higher value and more strategic initiatives for their core business.

This caf form also importantly, underscored that there is a great alignment among our customers related to our recently introduced products such as our construction lien waiver management software.

Our three way purchase order match functionality.

But also the promise of new product pipeline, which currently includes our integrated spend management offering that is in development.

New payment modalities.

Potential vertical marketplace purchasing capabilities.

Along with eight areas that we've identified of leaning into and utilizing artificial intelligence or AI across all segments of our business.

As we open up more opportunities to drive increased value and impact to our customers.

Gained increased efficiencies and delivering our products and services.

Along with continue to deepen our competitive moat that we have around delivering our unique solutions to our middle market customers and their suppliers.

Before I turn to our quarterly key metrics and financial results for the third quarter I wanted to take a minute to remind everyone of the significance and being purpose built to serve our middle market customers versus small business customers or SMB or some referred to it there are several key differences between.

Middle market companies and SMB companies.

Middle market companies are significantly larger in size and are typically in the range of $5 million up to and exceeding $1 billion in annual revenues.

Whereas smbs are generally considered sub $5 million of revenues.

Similarly, the number of transactions per customer with middle market companies are many multiples that of Smbs.

In many cases middle market companies are also the leaders other various industry segments in which they operate.

Moreover, the average lifespan of a middle market company is 31 years versus roughly eight and a half years for a small business.

And finally in an economic environment of rising interest rates and tightening financial conditions, while many small business bankruptcies tend to increase as access to capital grow scarce, coupled with the fact that a vast majority of smbs are subscale and undercapitalized.

We believe that middle market companies by contrast are much more resilient and better positioned to navigate a tough economic backdrop, given their scale and access to resources.

As such our competitive moat.

That we continue to build is purpose built for serving middle market companies and supporting their more complex business and accounting processes continues to be a significant advantage for us as highlighted by our vertical market industry approach across our nine different industry segments supported by over 220.

<unk> system integrations, and unique accounting and business process support we deliver to our customers in these verticals.

Now.

I am really excited to provide a quick summary of our financial and key metric scorecard for the third quarter.

We once again delivered another quarter of solid operating results, achieving our ninth consecutive quarter of exceeding our financial targets relative to our implied outlook.

Revenues of $98 7 million up 19, 7% for the quarter and 22% growth year to date exceeding our implied Q3, 'twenty three outlook, while our adjusted EBITDA profitability of $11 4 million.

Outstanding.

Driven by healthy revenue growth.

Continued gross margin expansion.

Unit cost reduction.

And continued scaling of our operating expenses.

These results of delivering a rule of 40 quarter measurement.

<unk> 31 for the quarter versus demonstrates our balanced focus of delivering on both 20% organic growth mantra and are accelerating profitability as we see the scale in our business reinforcing the confidence I have in our rule of 40 growth and profitability objectives. We introduced this past June.

During our Investor day event.

This balanced approach provides us additional levers to strategically invest in our business and further enables us to continue growing our industry, leading position and delivering accounts payable and payment automation software solutions to our middle market by our customers and their suppliers.

In addition, we ended the quarter with a transaction yield defined as total revenues over the total number of transactions of $5 15.

Breaking the $5 marker for the first time.

And this is up 12, 7% over the same period last year.

These operating and financial results highlight both our strong market position and continued execution as we enter the final stretch of this year.

On today's call I'm Super excited to discuss three topics.

Which do a great job of highlighting several of the growth strategies, we have been working on related to the four years of our avid exchange business flywheel that we articulated during investor day.

Which include number one.

Our top of funnel activity, which is a reflection of our gear, one and delivering a great user experience with our industry, leading accounts payable and payment automation software.

Second.

Discuss our major new software channel partnership with an exclusive built inside integration and positioning that we just signed which will further drive gears two and three of our avid exchange business flywheel.

And third give you an update on the recent launch of invoice accelerator to driving future growth under gear four of our business flywheel.

Let's start with the first topic.

From a top of funnel new buyer customer sales opportunity perspective, we're highly encouraged by the continued healthy engagement trends, we are experiencing given the volatile macroeconomic backdrop.

Please recall theres roughly a full year lead time from the moment. These opportunities entered the top of funnel to when they're closed.

<unk> on boarded.

And achieve full adoption.

So for the nine month period, ending September 30, our top of funnel, new buyer customer opportunities are up 13% on a year over year basis.

Although there may be some perceived moderation from levels compared to the first six months of 2023.

This was largely due to timing related to several of our key industry trade conferences, specifically suite world. The largest net suite user conference event of the year, which was in the third quarter last year and shifted to the fourth quarter. This year.

Second a portion of our quarterly spend around marketing initiatives, along with some trade shows and user conferences also shifted from the third quarter to the fourth quarter of 'twenty three.

And finally, our fourth quarter top 2023 top of funnel opportunities are off to a strong start across all of our vertical industries. As we look to end the year on a very strong top of funnel position to drive our new buyer organic growth in 2024.

Digging deeper into the fundamentals of our top of funnel activity. It is very consistent with the trends that we called out in the second quarter of 'twenty three virtually all of our industry verticals saw double digit growth, including construction.

Financial services media.

Healthcare.

HOA, Our homeowner Association management as we call it education.

Our examples.

More encouraging though we saw some initial indications of the sales cycle shortening by several business days.

Equally the growth in top of funnel activity for the nine months ended September 30th sustained a slightly higher average deal size attachment.

This healthy top of funnel growth was further backstopped by sustained pace of win rates.

The only top of funnel deviation continues to be within the commercial office sub sector of our overall real estate vertical.

Which also consists of multifamily student housing industrial as sub segments of the real estate vertical remaining very strong.

Overall, we're very pleased and we remain confident with our underlying metrics driving our top of funnel and new buyer customer sales momentum.

To better appreciate why our top of funnel remains healthy as our ability to drive high impact quantifiable business impact.

And outcomes for our customers such as PSA services located in Glendale, California.

<unk> services is an industry, leading provider of assessment and talent management solutions to the private and public sector organizations.

PSA streamlines its back office with avid exchanges accounts payable invoice and payment automation solutions using next we as its core accounting system.

<unk> has grown organically and inorganically to over 150 countries to support its growth <unk> was seeking ways to eliminate their legacy paper based accounts payable system and standardized processes across our worldwide group of corporate entities.

Alan Basilar director of accounting systems and Treasury explains.

We took the first steps towards streamlining and automating our accounting processes with Abbott exchange for next week.

The configuration and setup process was very easy.

And everyone got on board, a new automated process very quickly.

Given the initial success in automating our accounts payable invoice processes PSA shifted its focus and its energy on the payment side of their business Basilar stated we were purchasing blank check stock.

Stuffing envelopes.

Flying postage.

And mailing a large volume of checks every week.

With avid PE or 1500, plus paper checks my team was printing and signing each month was reduced by over 99%.

Reducing our total payment related costs by roughly 60%.

The savings are tremendous and very impactful to our business.

Now I'd like to discuss our avid exchange business flywheel momentum that fuels customer testimonials, such as those from Tsi services and our healthy top of funnel, new buyer customer sales opportunities.

Just as gear one of our flywheel is around delivering great AP automation software and is foundational to our strategy.

Tiers, two and three of our strategy our focus on forging new sales partnerships and deep built inside accounting system integrations, with leading accounting systems and erp's within both existing and new target vertical industries.

We believe these verticals have significant transaction volume to be monetized across our proprietary two sided avid pay network.

As such I cannot be more excited today.

To announce our new strategic partnership with App folio.

Which is now one of our biggest vertically focused integration partnerships and our 23 year history.

With over 19000 customers a fully as a top provider solutions focused in the real estate vertical.

As the first accounts payable application partner in the App Folio stack are avid exchange accounts payable integration includes our best of breed invoice automation and payment solutions.

This partnership is planned to go live in the first quarter of 2024.

Given our 20 plus year heritage in the real estate vertical and not to mention our ability to go deep in the customer base of these accounting system partnerships that fully a partnership underscores just how large and underpenetrated the runway opportunity still remains in the first vertical we.

Entered 23 years ago.

Now I would like to turn the gear for of our avid exchange business flywheel I couldnt be more excited today.

To go live with our much anticipated invoice accelerate our two <unk> offering.

Designed for our small business suppliers.

For those.

That are new to the avid exchange story invoice accelerator to point out is our much anticipated digital invoice financing offering.

It designed to accelerate the cash conversion cycle for the large segment of our 1 million plus base of supplier customers, we have today and growing every month.

Monetization of these of this invoice acceleration offering is derived from both fee and interchange payment structures and as another lever in growing Arsenal of our drivers for E payment adoption.

With roughly 60% of our supplier base, consisting of small businesses, which represents the sweet spot for this offering as they serve our middle market customers. We are uniquely positioned to address this large market opportunity to finance, our short term funding and highly automated and friction friction less way.

The key to executing this b to B invoice financing and payment modality offering at scale necessitates, a very unique and competitive advantage in both underwriting risk and collections.

While we believe gives us competitive advantage and eliminating the historical friction and scaling is our proprietary two sided network, where we are in the system of record for our buyer customers expenses and manage their entire payment file of payments to their suppliers and.

In other words, we have both.

The buyers and suppliers transaction data.

History and capital flows across our two sided network and our uniquely strong position to deploy this proprietary financing platform at scale.

As many of you know we've been in the market with our version one point all of our invoice accelerator offering for the last several years, which has fostered significant learnings insights and linkages around the transactional operational and functional service drivers of the supplier experience.

The domain knowledge and data science, we have amassed through the learnings is incorporated directly into our software and foundation of our version two point of this new platform.

As such everything from supplier Onboarding.

To transaction execution to.

The customer support have been core focus areas and building our next generation modern digital first feature rich and real time Decisioning platform and.

And we are and we'll be paying very close attention to the speed to transact and its scalability.

Our plan is the meter of the initial launch over the next several quarters to make sure. The offering is working as designed and then accelerate our invoice accelerated <unk> rollout no pun intended to our largest supplier cohort of over 600000 small businesses and growing.

I believe that our invoice accelerators to offering conservatively speaking could reach over 5% of total revenues over the next several years and has the characteristics to ultimately become our next $100 million revenue business in the future.

In summary, we are extremely pleased with the progression of our operating and financial performance, including our third quarter top line revenue growth and exceptional bottomline profitability results.

We remain laser focused on delivering on our extensive product roadmap.

Accounting system integration partnerships.

And E payment penetration strategies, while leveraging data to drive incremental customer value.

Our recent customer Advisory Board experience was a great Testament to our focus of being passionate to see our customers being successful in driving increased value to their organizations.

Which is further reinforced by our announcement of the <unk> integration partnership along with the launch of our invoice exor at her two offering.

Meanwhile, we're continuing to make tremendous progress on unit cost reduction as well as leveraging our operating expenses to drive sustained EBITDA margin expansion as we closed the year and prepare for 2024.

We believe the strategic and operational initiatives, coupled with our strong balance sheet.

And talented leadership team that many of you met during our Investor day positions us very well for value creation and strategic growth opportunities in the future.

Of course as always we are mindful of the uncertain macroeconomic backdrop and are focused on controlling those elements of our business that we can directly control, which is our overall value proposition and business impact that we can deliver to both our buyer and supplier customers.

That being said, it's hard to believe but we are still in the very early innings of a significant long term opportunity to drive impactful value for our customers.

<unk> future growth opportunities for our team members.

And unlock significant short term <unk>.

And long term value for our shareholders.

With that I'd like to turn the call over to my partner Joel.

Thanks, Mike and good morning, everyone. I am pleased to talk to you today about our third 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 third quarter 2023 business outlook and adjusting for political and one time deferred revenue cleanup third quarter revenues came in better driven largely by higher transaction volumes and yield expansion as we continue to drive checks out of the system.

That together with higher gross margins driven by higher revenues progress on unit cost initiatives yield expansion as well as a shift in the timing of certain operating expenses to the fourth quarter led 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, 7% to $98 7 million in Q3 of 2023 over the third quarter of 2022, roughly two thirds of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions cut.

Hold with yield expansion.

The remaining third or so of our revenue growth this quarter was driven by higher year over year interest revenue.

Coupled with deferred revenue cleanup, partially offset by a year over year decline in political revenues.

Our strong revenue growth also resulted in total transaction yield expanding to $5 15 in the quarter up 12, 7% from $4 57 in Q3 of 2022.

Of the 12, 7% increase roughly two thirds of the increase was driven by the aforementioned flux between interest and political revenues as well as the deferred revenues with the remainder driven by pay yield.

Software revenue of $28 $9 million, which accounted for 29, 3% of our total revenue in the quarter increased 15, 5% in Q3 of 2023 over Q3 of 2022, excluding the contribution from onetime changes in deferred revenue the increase in soft.

Revenue was 10, 9% and was driven by growth in total transactions of six 4% with the balance driven by a combination of price increases and certain subscription based revenues.

Payment revenue was $68 $5 million, which accounted for 69, 4% of our total revenue in the quarter increased 29% in Q3 of 2023 over Q3 of 2022.

Payment revenue reflects the contribution of interest revenues, which were $10 $6 million in Q3 of 2023 versus $2 7 million in Q3 of 2022.

Recall that a year ago payment revenues also included contribution from political media revenue of the 29% increase in payment revenues roughly two thirds was driven by a combination of an increase in payment transaction volume of 9% and yield expansion with the remaining portion driven by the <unk>.

Four months aforementioned flux between interest and political revenues.

On a GAAP basis gross profit of $62 $3 million increased by 31% in Q3 of 2023 over the same period last year, resulting in a 63, 2% gross margin for the quarter compared to 57, 8% in Q3 2022.

non-GAAP gross margin increased 500 basis points to 70% in Q3 of 2023 over the same period last year, roughly two thirds of which was driven by a combination of unit cost efficiencies and yield expansion with the remainder driven by higher interest revenue and a one time deferred revenue.

Cleanup.

Moving on to our operating expenses.

On a GAAP basis total operating expenses were $77 5 million an increase of three 9% in Q3 of 2023 over Q3 of last year on a non-GAAP basis operating expenses, excluding depreciation and amortization increased <unk> seven.

<unk> to $57 6 million in the third quarter of 2023 from the comparable prior year period.

On a percentage of revenue basis operating expenses, excluding depreciation and amortization declined to 58, 4% in this third quarter of 2023 from 69, 4% in the comparable period last year.

The year over year decline largely highlights the significant operating expense leverage, particularly across G&A as well as sales and marketing to an extent, even after stripping out the contribution of float and deferred revenue.

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

non-GAAP sales and marketing costs decreased by $1 5 million or 8% to $17 5 million in Q3 of 2023 over Q3 of last year, which was driven largely by a combination of efficiencies in marketing spend and the shift in the timing of events sponsorships related to trade shows and user conferences from the <unk>.

Third quarter to the fourth quarter of 2023.

non-GAAP research and development costs increased by $2 4 million or 12, 5% to $21 $7 million in Q3 of 2023 over Q3 of last year.

The increase was due to continued reinvestment in our products and platform.

non-GAAP general and administrative costs decreased by $5 million or down two 5% to $18 5 million in Q3 of 2023.

Over Q3 of last year, driven largely due to leveraging public company costs across a larger revenue base of net of various puts and takes.

G&A costs as a percentage of revenues have now decreased five quarters in a row and are expected to continue their annualized downward progression as we indicated during our investor day.

Yes.

Our GAAP net loss was $8 1 million for the quarter versus a GAAP net loss of $25 4 million in the prior year period with the reduction in losses, 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.

<unk> due to reduced borrowing costs and partial debt paydown.

Our GAAP loss in the third quarter of 2023 reflects $7 million of professional services and legal fees net of insurance recoveries related to the cyber incident detected in April 2023.

On a non-GAAP basis, excluding the cyber costs, our net income in the third quarter of 2023 was $5 $8 million versus a net loss of $11 7 million, a $17 5 million positive swing from a year ago quarter, driven by the aforementioned factors.

On a non-GAAP basis, adjusted EBITDA was approximately $11 4 million in Q3 of 2023 compared to a loss of $3 7 million in Q3 of 2022, largely 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 quarter with a strong corporate cash position of $446 million against an outstanding total debt balance of $82 5 million <unk>.

Including a note payable for $18 7 million, we had $30 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 or in deposit accounts.

The weighted average maturity on our corporate cash was roughly 20 days, while the effective interest rate on our corporate cash position for the third quarter was roughly 495% customer cash at quarter end was approximately $1 2 billion.

With an interest rate of roughly 442% for the quarter.

I'll now provide an update on our full year 2023 guidance in light of our third quarter 2023 financial outperformance balanced with further volume impacts from mass macro crosscurrents based on all information currently available we are raising our overall 2023 guidance, we now expect towed.

Revenue for the year to be in the range of $374 5 million to $375 5 million.

Our 2023 revenue outlook reflects reflects approximately $38 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.

Similarly, we expect a higher non-GAAP adjusted EBITDA profit ranging between $22 million and $23 million for 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 operator.

We will now begin the question and answer session.

The management team asked that you please limit yourself to one question.

To ask a question you May press Star then one on your telephone keypad.

If you're using a speakerphone please pick up your handset before pressing the keys.

To withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question will come from Dave Koning with Baird. You May now go ahead.

Hey, guys great job across the board here. Thanks.

Thanks, Dave I.

I appreciate it Dave.

Yes.

Maybe first one of the biggest highlights for me was the sequential growth in yield in payments you've had it very consistently almost every quarter, but this was I think the biggest we can see on record sequential yield and thats without quite as much interest revenue sequentially like the growth sequentially wasn't quite as much. What's happening is there's just a big shift of ECC right.

And how do you see that in the future.

So it's a great question, we were again.

Super pleased with the results in the quarter and a good strong top and bottom.

Most of the underlying metrics, we're really strong in some cases meaningfully better than we expected.

<unk> talked about I think youre asking about TPB yield in and we did see a sequential step up about five bps. If you strip out the political inflow of dynamic and what we said in the past is don't read too much into a <unk> or two top or bottom. This is a little bit more than that range and we're pleased with the results, but I would just point back to what we talked about at Investor day.

The real opportunity for US is to continue to expand this with new payment most going forward, but overall pleased with the quarter.

Great. Thanks, and then just as a follow up incremental margin ex the interest contribution was also probably about the strongest we've ever seen.

Is is that sustainable or do you expect like a lot of the revenue growth the core revenue growth to fall to the bottom line going forward now.

Yes, So let me let me take that in two parts one as we've said before we are.

We're pleased with the gross margin results, even stripping outflow and political dynamics, we're seeing consistent incremental gross margin expansion through both yield and unit cost improvements.

At Investor Day, we talked about.

75, plus percent gross margin business. So we still have a ways to go and we still have headroom to.

And that gross margin again through both unit cost efficiencies and yield expansion.

Great Great job guys. Thanks.

Thanks, Dave.

Our next question will come from Ramsey El <unk> with Barclays.

Now go ahead.

Hi, guys, good morning, and I'll Echo that very very solid results today.

Mike I had a question on the top of funnel dynamics.

Discussion.

<unk> had with us.

It sounded like macro headwinds are really.

More localized just in a sort of commercial office sub segments and pretty much everywhere else. It sounded like things that kind of are looking pretty good is it is it a fair characterization to say that there is a kind of a.

<unk> and the sort of demand environment out there and maybe the macro overlay to that as well is that is that what youre seeing.

Yes, so maybe ill take a page out of <unk> book.

Don't know.

Too much into any one particular quarter, but certainly we're pleased with that.

Top of funnel activity that we're seeing as I said one of the things I've tried to coach people over time on is the real estate vertical itself is actually a collection of.

Many different sub verticals.

And certainly we've seen within real estate.

For example.

Multifamily industrial student housing affordable housing all of those sub components perform really well in the market.

<unk>.

<unk> to the one that's kind of static little bit is the commercial office, but across all the new R. R.

Other I should say kind of verticals that we have.

Makeup our collection of nine total verticals.

Really across the board healthy.

Top of funnel growth and I think it's a combination of a handful of things certainly.

The leadership that James has done has brought to our sales organization.

Now closing in on his first full year.

As Ben.

Really terrific along with building the team.

And kind of the mission that will both damage reason I had with James is how do we build the go to market sales organization to be $1 billion business and that's the lens that we've kind of loans that we've made.

A lot of progress on that side and the talent, particularly in the over the course of the year.

And.

And certainly I think with.

Some of the new kind of product features and the roadmap that we've been delivering its created a lot of excitement and engagement. So.

Certainly we saw some slight benefit an average time to close.

And so we've been really encouraged.

What we've seen overall, despite kind of the continued volatility of the overall market.

Got it okay. So some internal contribution there as well.

A follow up question for me I was wondering on invoice accelerator now that that product is getting sort.

Sort of M&A.

What does the sales cycle booking conversion implementation timeline look like for that product is it the same as kind of the core middle market AP offering is there any difference in like the velocity of that product or is it both with similar yes. That's a great rest of your question Ramsey and so I would say, it's like night and day different.

Versus.

<unk>.

With our core buyer offerings for invoice pay there is certainly a setup configuration onboarding process in the case of invoicing salary to point out.

This is really a seamless process these are existing.

<unk>.

Transactions.

On our network and through a simple user interface. They can just literally click a button.

To have an invoice be accelerated for next day payment.

If they are enrolled and then invoice accelerator program.

So.

<unk>.

It happens fairly quickly and it can happen in real time as suppliers want to advance payments.

One thing I will say as with any new kind of product launch we've now excited that.

We started processing, our first transactions with invoice et cetera to point out.

During the month of October and.

In the first phase of any new product launch we are working hard to make sure the product is.

Working.

As we've designed it to work.

Making sure we've incorporated all of the data and analytics and understanding that we had during our one offering as well as to recapture elements.

Sure that we're recapturing payments as they are flowing through our network and then the user experience is working as designed so that's the current focus as we roll the product out to more.

On a measured basis to our supplier customers, but super encouraged and excited about what this product is going to be in the future for us.

Fantastic. Thank you so much.

Thanks Ramsey.

Our next question will come from Andrew <unk> with Wells Fargo you may.

Oh go ahead.

Hey, good morning, guys and a nice set of results not sure how unintentional that upon was around invoice accelerator, but.

Wanted to ask about the macro environment and particularly in the middle market I know it was just asked but we all heard some commentary from your closest peer last week kind of discussed.

Middle market businesses, having more.

Room in their cost structure to kind of scale down expenses.

Is there something about the vertical that you guys are playing in that makes your mix a little bit more resilient to that.

Yes, so first of all I'm glad you caught the PON.

Just make sure our analysts stay on their toes so good job there.

The second part of the question related to kind of the I'd say, the resiliency of the middle market and because of the verticals that we're in.

I don't think theres much.

With the vertical element of it is just as I highlighted during my commentary middle market customers, which is very different than small business customers. These are.

Substantial customers that have built out.

<unk>.

Finance teams.

Counts payable teams they have.

Longevity in their business they have scale and I think when you have to kind of scale and longevity.

It allows you to really navigate through a down market more effectively you have more levers to pull.

You typically have access to different financing levers that a small business does and so I think they operate very differently.

The one thing.

I'll say is that.

We've been at this a while and so.

A bit of history of operating through past cycles, and I think this cycle is no different than kind of the results. We're seeing are kind of what we expected to see with the resiliency of our middle market customer base and how they've these savings.

Similar sets of customers have operated through past cycles. So.

We're really encouraged by that and I think it really highlights.

Talking about it since our IPO.

Upmarket, maybe it's harder to tell the difference, but when you get into a choppy market I think it's really distinguishable.

Distinguishable differences between middle market and small business.

Got it.

Nice to see growth really kind of get back to that 20% algorithm that you guys have been calling out for in the medium term.

Yes.

Considerable piece attributable to float.

About as we head into 2024, I know that fourth quarter implies a step down in growth, but with the AD folio political in 2024. It seems like all the building blocks are in place for you guys to reaccelerate back to that medium term algorithm. So we just want to get your confidence around that.

Correct me, if I'm wrong or highlight any point that we should be thinking about.

Perfect and then let me just jump in some of those business commentary, Joe probably follow up as well.

So yes.

You hit the nail on the head.

Super confident related to kind of what we laid out at Investor day.

And I would say for next year kind of five core things that kind of least I'd look at that gives me that confidence in the first one is where we started was top of sales.

Our organic sales activity for top of funnel, that's a good barometer of what code.

Goes through kind of sell through that shows up in our.

Total sales over time, the second one is certainly the new payment modalities that we're rolling out.

Joel kind of highlighted earlier.

The commentary.

That's one of the components of that.

Our increase in take rate.

And we expect those the new payment modalities to continue.

Third is what we were just talking about with invoice accelerator to point out now will be in the market for the full year next year is kind of as we will kind of slowly ramp that over the course of the year.

And then we have the new partnerships.

Certainly we have a number of those but.

<unk> is one of those and then the last piece number five in political.

And certainly what the political piece back end.

It's probably anybody's guess on how.

That confer.

Confusion to the current political cycle will impact us, but we think we're positioned really well there Joe you may have some additional we thought that was the only thing I would add is we're really pleased with the Q3 results see strength in the business. We're excited about the long term opportunity. It's important to remember that we're in the middle of some really kind of.

Choppy environment I think is the word that we view spending moderation on the part of our buyers and so certainly we're not giving guidance now for 24, we'll do that in February.

An update you guys on what we see we need to finish the year strong, but we're really really pleased with the results of the business in Q3 and excited about the future.

Great. Thanks, a lot guys.

Okay.

Again, we please ask that you limit yourself to one question. If you have a question. Please press Star then one.

Our next question will come from Bryan Keane with Deutsche Bank.

You May now go ahead.

Hi, guys good morning.

Mike wanted to ask you one of your peers in the BTB payments landscape called out some caution electronic payment adoption given the higher costs associated with payments like D C or instant transfer in an economic slowdown do you see that in the mid market or is that an SMB thing.

So here's what I would say is.

What I would say, it's a little bit of apples and oranges.

And what I mean by that is.

If you remember one of the core business decisions. We made when we launched you have to pay network is to kind of deep and positioned the supplier as a core customer just like the buyer.

And what that's allowed us to do is.

Is create a value proposition for.

For the supplier that's more than just coming to the pay network to receive a payment.

They are coming to gain visibility into their invoices. They are coming to manage their business rules and the types of payments they want to take under certain circumstances and then they are coming to get tools like invoice accelerator to better manage their cash flow and I think.

That strategy in the current environment is starting to really differentiate ourselves because it's not just about coming to receive a payment because when you come in to receive a payment. It's typically been about price because there is no other value, but when you create a value proposition around it is not about price. It's about the total value proposition that we're delivering.

And so we remain super encouraged on our ability to engage with suppliers and move them from paper checks to various forms of electronic payment.

Time, and so we think that certainly that strategy is even be heightened in the current economic environment.

Got it and then just as a follow up on App folio and partnerships like that how do the economics work is there a cut that goes to App folio is at lower margin are the same margin how do we think about that.

Yes, good question.

All of our kind of core partnerships and not all partnerships are created equal we have referral partnerships reseller and then kind of white label type partnerships.

But yes, there is compensation that goes to our partner in this case to folio.

We believe that the kind of the contribution of it is very is in the same ballpark as our direct sales.

A lot of that sales and marketing expenses absorbed by the partner versus avid exchange. So a very similar kind of net contribution as I look at it.

Got it thanks, so much and congrats yes, thanks, Brian.

Our next question will come from Brett <unk> with Piper Sandler you May now go ahead.

Good morning, Joel if you could just talk us through visibility into further increasing yield clearly.

Yield and float were big factors, helping you insulate against.

Slowing GDP growth rate here do you have visibility you can continue to kind of drive improvement in yield one and then Mike If you could just double click in that polio is that a white label relationship where they're going to be promoting.

This across their installed base.

And could there be any quick ramp there or not thanks.

Hey, Brent so I'll take a crack at your first part of your question. So the short answer is yes, and what I would do is just remind you of kind of how we think about the overall growth algorithm in the business remember that we.

Measure the degree to which we kind of retain and expand the overall transaction volume.

And we were.

Last couple of years, we are in sort of a 104, 105% overall net organic expansion that is suppressed somewhat this year, obviously, given the macro environment that we're in but continuing to kind of maintain.

Our solid base and still expand to some degree so that's first step is.

Kind of the retention and expansion number two adding buyers and adding the buyers volume and then three yields so you've asked about yields we have seen good yield expansion.

We've talked about that.

The third piece of our overall revenue.

Model and we've talked in our Investor day about the opportunity. We see ahead of us and so long story short, yes yield plays an important part in our overall revenue model revenue growth and gross margin and EBITDA expansion as well.

And a little bit I'll add onto the second part of your question regarding at Folio.

Yes, we're super excited about what that means.

In my remarks.

I think in our 23 years as the largest.

Accounting system partnership we've ever done in terms of the sizable.

Customer base, that's applicable to our profile.

We believe that.

Over 50% of therefore customers fit within our target profile.

And typically we see is that the first 36 months of any new partnership are the most critical.

And as in this case with our white label relationships that they will be promoting it to their installed base.

We are working hard with the portfolio team too.

On that positioning and strategies taking.

Taking account all the learnings we have across other strategies.

Examples that we've incorporated over the year, such as MRI real page rent manager regimen are all examples of similar partnerships. We can take all those learnings and apply them to that fully a partnership. So certainly 36 months will be the most critical in terms of kind of that ramp up.

Sounds good sounds like a big win thanks.

Yep.

Next question will come from James Fawcett with Morgan Stanley You May now go ahead.

Hi, everyone, it's Michael <unk> on for James Thanks for taking my question.

Wanted to ask about volume anything to add.

Call out in terms of how volume trends may have evolved throughout the quarter, Mark curious as to how exit rates trended relative to the fourth quarter volume growth and perhaps what you're anticipating are embedding into the <unk> guide. Thanks.

Okay I'll take that great question again TPB.

Volume for us in the quarter was close to $20 million up about 8% over the over the prior year period.

And a couple of things maybe just to point out speaking about overall TPB.

Again that metric for us drives payment revenue, meaning.

A meaningful way and it's also a metric thats been impacted by some of the caution that we've seen exercised buyer.

<unk> by our customers across the middle market I think if I think about the results for this quarter and the volume trends that we've seen we haven't really seen meaningful departure from what we've seen in the past couple of quarters, and it's hard to predict but we're imagining something similar.

In the quarters.

To come and obviously hopeful for this for this temporary kind of macroeconomic condition to lift in 'twenty for a couple of quick points. When you think about that growth in the third quarter of 2003 have to keep in mind, not just that discretionary volume impact, but also the political dynamics contributed TPG.

In the prior year, where it would not exist in the current year, so theres a little bit of impact there.

Remember also that growth rates last year were impacted by sort of the COVID-19 impact from prior year. So some distortion in those growth rates.

<unk>.

Together with potentially some impact from inflation and then finally, we do see potentially lapping the year ago period sometime in the middle of the fourth quarter. When we began to see this moderation start.

So could see some some benefit from that obviously when we when our comparables improve.

So hopefully that gives you a little bit of insight into the TPP volume dynamic.

Yeah. That's helpful. I wanted to ask you mechanically on invoice accelerator I think your intention there is to transition the funding mechanism.

Top to on versus off balance sheet over time, how should we be thinking about the timing of that and charted the financial impact.

Yes, good question.

Youre exactly right we believe.

Our strategy is to transition invoice accelerator to be off balance sheet over time.

We believe that in terms of those partners that we've already begin conversations with.

That we ideally it in order to get kind of the best structure in and kind of rate for the program.

We want to have about a year's worth of history with the two new offerings. So I think.

As we are at this time next year will be some pretty well.

Developed strategies I'm moving it off balance sheet.

And.

<unk>.

<unk> incorporated that into our economic model in <unk>.

Leave that.

The yields to avid exchange will be consistent.

With what they are now and certainly believe that we'll be able to lower our cost of capital because we're at today, we're really using our equity of our balance sheet to fund the programs. So looking forward to getting to that point certainly over the next year or so.

That's great. Thanks, guys.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Mike Reger for any closing remarks.

Thank you again, thank you for everyone for joining us to discuss our solid third quarter results and the sustained execution around product innovation strategic partnerships and differentiated performance.

We believe we are the only publicly traded pure play accounts payable and payment automation investment that's purpose built for the middle market.

Leveraging our two sided network of having both buyer and supplier customers.

And given our sustained operational and financial performance since our IPO, coupled with our strong balance sheet. We believe we are well positioned to execute towards our goal of being a rule of 40 plus company as outlined in our recent Investor day. This past June.

Okay.

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

[music].

Good morning, everyone and thank you for joining us for the avid Exchange Holdings, Inc. Third quarter 2023 earnings call joining.

Joining us on the call today is Mike Prager avid exchanges co founder and Chief Executive Officer, Joe Wilhite, other exchanges, Chief Financial Officer, and she Bosch Kumar avid exchanges head of Investor Relations.

Before we begin today's call management has asked me to relay. The forward looking statements disclaimer that is included at the end of States press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward looking statements. The company will make this afternoon. Please keep these uncertainties and risks in mind as the company discuss future strategic initiatives potential.

Market opportunities operational outlook and financial guidance during today's call.

So please note that the company undertakes no duty to update or revise forward looking statements. Today's call will also include a discussion of non-GAAP financial measures How's that term is defined in the regulation G. non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.

Accordingly at the end of today's press release. The company has provided a reconciliation of these non-GAAP financial measures to financial results prepared in accordance with GAAP.

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

Thanks for joining us this morning, Joe and I are both excited to talk about our third quarter results.

Myles stones with you.

We once again delivered another set of strong quarterly business performance metrics and financial results.

I'll summarize these shortly and Joel will provide further details and commentary later on in his section.

Given the ongoing macroeconomic volatility our unique Abbott exchange value proposition continues to resonate in the marketplace with our middle market customers.

The cab as an in person form subdivided into a series of vertical industry focus groups, where we dedicate time and resources for a deeper peer dialogue regarding their specific business and accounting processes unique to their vertical industry.

Updating on the key accounting systems that support their industry.

As well as overall specific industry trends and observations they are seeing in operating their businesses.

Specifically as thought leaders, we serve as our customers' key trusted technology and automation partner and are at the forefront in driving their transformational back office initiatives.

Through our domain expertise, we are helping them with the vision and execution to achieve benchmark level of excellence.

And automating their overall procure to pay processes in line with that of enterprise customers.

The calf reinforce the strategic importance.

Of our value proposition and advancing our customers invoice and payment automation initiatives with a rapid and quantifiable return on investment.

As we digitally transform their key back office procure to pay processes driving speed secure.

Security.

Along with workflow efficiencies catalyzed by our two sided network. They are able to optimize every cost lever to take pressure off of their income statement.

Freeing up increasingly scarce financial resources to support higher value and more strategic initiatives for their core business.

This caf form also importantly, underscored that there is a great alignment among our customers related to our recently introduced products such as our construction lien waiver management software.

Our three way purchase order matched functionality.

But also the promise of new product pipeline, which currently includes our integrated spend management offerings that is in development.

New payment modalities.

Potential vertical marketplace purchasing capabilities.

Along with eight areas that we've identified of leaning into and utilizing artificial intelligence or AI across all segments of our business.

As we open up more opportunities to drive increased value and impact to our customers gain increased efficiencies and delivering our products and services.

Along with continue to deepen our competitive mode that we have around delivering our unique solutions to our middle market customers and their suppliers.

Middle market companies and SMB companies.

Middle market companies are significantly larger in size and are typically in the range of $5 million up to and exceeding $1 billion in annual revenues.

Whereas smbs are generally considered sub $5 million of revenues.

Similarly, the number of transactions per customer with middle market companies are many multiples that of Smbs.

In many cases middle market companies are also the leader as other various industry segments in which they operate.

Moreover, the average lifespan of a middle market company is 31 years versus roughly $8 five years for a small business.

And finally in an economic environment of rising interest rates and tightening financial conditions, while many small business bankruptcies tend to increase as access to capital grows scarce coupled with the fact that a vast majority of smbs are subscale and undercapitalized.

We believe that the middle market companies by contrast are much more resilient and better positioned to navigate a tough economic backdrop, given their scale and access to resources.

As such our competitive moat.

<unk> system integrations, and unique accounting and business process support we deliver to our customers in these verticals.

Now.

I am really excited to provide a quick summary of our financial and key metric scorecard for the third quarter.

We once again delivered another quarter of solid operating results, achieving our ninth consecutive quarter of exceeding our financial targets relative to our implied outlook.

Revenues of $98 7 million.

Up 19, 7% for the quarter and 22% growth year to date exceeding our implied Q3, 'twenty three outlook, while our adjusted EBITDA profitability of $11 4 million was outstanding.

Driven by healthy revenue growth.

<unk> gross margin expansion.

Unit cost reduction.

And continued scaling of our operating expenses.

These results of delivering a rule of 40 quarter measurement exceeded 31 for the quarter versus demonstrates our balanced focus of delivering on both 20% organic growth mantra and are accelerating profitability as we see the scale in our business reinforcing the confidence I have.

And our rule of 40 growth and profitability objectives. We introduced this past June during our Investor day event.

In addition, we ended the quarter with a transaction yield defined as total revenues over the total number of transactions of $5 15.

Breaking the five dollar marker for the first time.

And this is up 12, 7% over the same period last year.

These operating and financial results highlight both our strong market position and continued execution as we enter the final stretch of this year.

On today's call I'm Super excited to discuss three topics.

Which include number one.

Our top of funnel activity, which is a reflection of our gear, one and delivering a great user experience with our industry, leading accounts payable and payment automation software.

Second.

<unk> discussed a major new software channel partnership with an exclusive built inside integration and positioning that we just signed which will further drive gears two and three of our avid exchange business flywheel.

And third give you an update on the recent launch of invoice accelerator to driving future growth under gear four of our business flywheel.

Let's start with the first topic.

Please recall theres roughly a full year lead time from the moment these opportunities enter the top of funnel to when they are closed.

On boarded.

And achieved full adoption.

So for the nine month period, ending September 30, our top of funnel, new buyer customer opportunities are up 13% on a year over year basis.

Although there may be some perceived moderation from levels compared to the first six months of 2023.

This was largely due to timing related to several of our key industry trade conferences, specifically suite world. The largest net suite user conference at the end of the year, which was in the third quarter last year and shifted to the fourth quarter. This year.

Second a portion of our quarterly spend around marketing initiatives, along with some trade shows and user conferences also shifted from the third quarter to the fourth quarter of 2003.

Financial services.

Media healthcare.

<unk>, Our homeowner Association management as we call it education.

Our examples.

More encouraging though we saw some initial indications of the sales cycle shortening by several business days.

Equally the growth in top of funnel activity for the nine months ended September 30th sustained a slightly higher average deal size attachment.

This healthy top of funnel growth was further backstopped by sustained pace of win rates.

Only top of funnel deviation continues to be within the commercial office sub sector of our overall real estate vertical.

Which also consists of multifamily student housing industrial as sub segments of the real estate vertical remaining very strong.

Overall, we're very pleased and remain confident with our underlying metrics driving our top of funnel and new buyer customers sales momentum.

To better appreciate why our top of funnel remains healthy as our ability to drive high impact quantifiable business impact.

And outcomes for our customers such as PSA services located in Glendale, California.

PSA services is an industry, leading provider of assessment and talent management solutions to the private and public sector organizations.

PSA streamlines its back office with avid exchanges accounts payable invoice and payment automation solutions using next week as its core accounting system.

Galen Bachelor director of accounting systems, and Treasury explains.

We took the first steps towards streamlining and automating our accounting processes with Abbott exchange for next week.

The configuration and setup process was very easy.

And everyone got onboard the new automated process very quickly.

Given the initial success in automating our accounts payable invoice processes PSA shifted its focus and its energy on the payment side of their business Bassler stated.

We were purchasing blank check stock stuff.

Stuffing envelopes.

<unk> postage.

And mailing a large volume of checks every week.

With avid PE or 1500, plus paper checks my team was printing assigning each month was reduced by over 99%.

Reducing our total payment related cost by roughly 60%.

The savings are tremendous and very impactful to our business.

Just as tier one of our flywheel is around delivering great AP automation software and is foundational to our strategy.

We believe these verticals have significant transaction volume to be monetize across our proprietary two sided avid pay network.

As such I cannot be more excited today.

To announce our new strategic partnership with App folio.

It is now one of our biggest vertically focused integration partnerships and our 23 year history.

With over 19000 customers a fully as a top provider solutions focused in the real estate vertical.

As the first accounts payable application partner in the App Folio stack are avid exchange accounts payable integration includes our best of breed invoice automation and payment solutions.

This partnership is planned to go live in the first quarter of 2024.

Given our 20 plus year heritage in the real estate vertical and not to mentioned our ability to go deep in the customer base of these accounting system partnerships that fully a partnership underscores just how large and underpenetrated the runway opportunity still remains in the first vertical we.

<unk> entered two three years ago.

Now I would like to turn the gear for of our avid exchange business flywheel.

Couldnt be more excited today.

To go live with our much anticipated invoice accelerator to <unk> offering.

Designed for our small business suppliers.

For those.

That are new to the avid exchange story invoice accelerator to point out is our much anticipated digital invoice financing offering.

It designed to accelerate the cash conversion cycle for the large segment of our 1 million plus base of supplier customers, we have today and growing every month.

Monetization of these of this invoice acceleration offering is derived from both fee and interchange payment structures and as another lever in growing Arsenal of our drivers for E payment adoption.

The key to executing this b to B invoice financing and payment modality offering at scale necessitate a very unique and competitive advantage in both underwriting risk and collections.

We believe gives us competitive advantage and eliminating the historical friction and scaling is our proprietary two sided network. We are the system of record for our buyer customers expenses and manage their entire payment file of payments to their suppliers and.

In other words, we have both.

The buyers and suppliers transaction data.

History and capital flows across our two sided network and our uniquely strong position to deploy this proprietary financing platform at scale.

The domain knowledge and data science, we have amassed through the learnings is incorporated directly into our software and foundation of our version two <unk> of this new platform.

As such everything from supplier Onboarding.

To transaction execution.

Customer support have been core focus areas and building our next generation modern digital first feature rich and real time Decisioning platform.

And we are and we'll be paying very close attention to the speed to transact and its scalability.

Our plan is the meter of the initial launch over the next several quarters to make sure. The offering is working as designed and then accelerate our invoice accelerated <unk> rollout.

Pun intended to our largest supplier cohort of over 600000 small businesses and growing.

I believe that our invoice accelerator to offering conservatively speaking could reach over 5% of total revenues over the next several years and has the characteristics to ultimately become our next $100 million revenue business in the future.

We remain laser focused on delivering on our extensive product roadmap.

Accounting system integration partnerships.

And E payment penetration strategies, while leveraging data to drive incremental customer value.

Our recent customer Advisory Board experience was a great Testament to our focus of being passionate to see our customers being successful in driving increased value to their organizations.

This was further reinforced by our announcement of the <unk> integration partnership along with the launch of our invoice exor at her two offering.

Meanwhile, we are continuing to make tremendous progress on unit cost reduction as well as leveraging our operating expenses to drive sustained EBITDA margin expansion as we close the year and prepare for 2024.

We believe the strategic and operational initiatives, coupled with our strong balance sheet.

And talented leadership team that many of you met during our Investor day positions us very well for value creation and strategic growth opportunities in the future.

Of course as always we are mindful of the uncertain macroeconomic backdrop and our focus on controlling those elements of our business that we can directly control, which is our overall value proposition and business impact that we can deliver to both our buyer and supplier customers.

That being said, it's hard to believe but we are still in the very early innings of a significant long term opportunity to drive impactful value for our customers create.

Create future growth opportunities for our team members.

And unlock significant short term.

And long term value for our shareholders.

With that I'd like to turn the call over to my partner Joel.

Third quarter revenues came in better driven largely by higher transaction volumes and yield expansion as we continue to drive checks out of the system.

We believe this adjusted EBITDA outperformance underscores the scope for operating leverage in our financial model now.

Now turning to year over year results total revenue increased by 19, 7% to $98 $7 million in Q3 of 2023 over the third quarter of 2022.

Two thirds of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions coupled with yield expansion.

The remaining third or so of our revenue growth this quarter was driven by higher year over year interest revenue.

Coupled with deferred revenue cleanup, partially offset by a year over year decline in political revenues.

Our strong revenue growth also resulted in total transaction yield expanding to $5 15 in the quarter up 12, 7% from $4 57 in Q3 of 2022.

Software revenue of $28 $9 million, which accounted for 29, 3% of our total revenue in the quarter increased 15, 5% in Q3 of 2023 over Q3 of 2022, excluding the contribution from one time changes in deferred revenue the increase in soft.

Where revenue was 10, 9% and was driven by growth in total transactions of six 4% with the balance driven by a combination of price increases and certain subscription based revenues.

Payment revenue was $68 $5 million, which accounted for 69, 4% of our total revenue in the quarter increased 29% in Q3 of 2023 over Q3 of 2022.

Payment revenue reflects the contribution of interest revenues, which were $10 $6 million in Q3 of 2023 versus $2 7 million in Q3 of 2022.

Four months aforementioned flux between interest and political revenues.

On a GAAP basis gross profit of $62 $3 million increased by 31% in Q3 of 2023 over the same period last year, resulting in a 63, 2% gross margin for the quarter compared to 57, 8% in Q3 2022.

Clean up.

Moving onto our operating expenses.

<unk> to 57 6 million in the third quarter of 2023 from the comparable prior year period.

On a percentage of revenue basis operating expenses, excluding depreciation and amortization declined to 58, 4% in the third quarter of 2023 from 69, 4% in the comparable period last year.

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

Third quarter to the fourth quarter of 2023.

non-GAAP research and development costs increased by $2 4 million or 12, 5% to $21 7 million in Q3 of 2023 over Q3 of last year.

The increase was due to continued reinvestment in our products and platforms.

non-GAAP general and administrative costs decreased by $5 million or down two 5% to $18 5 million in Q3 of 2023.

Yes.

Over Q3 of last year, driven largely due to our leveraging public company costs across a larger revenue base of net of various puts and takes.

G&A costs as a percentage of revenues have now decreased five quarters in a row and are expected to continue their annualized downward progression as we indicated during our investor day.

Our GAAP net loss was $8 $1 million for the quarter versus a GAAP net loss of $25 4 million in the prior year period with the reduction in losses, driven by a combination of strong revenue flow through and expense control leading to lower operating losses, coupled with higher interest income.

Lower interest expense due to reduced borrowing costs and partial debt paydown.

Our GAAP loss in the third quarter of 2023 reflects $7 million of professional services and legal fees net of insurance recoveries related to the cyber incident detected in April 2023.

On a non-GAAP basis, adjusted EBITDA was approximately $11 4 million in Q3 of 2023 compared to a loss of $3 7 million in Q3 of 2022, largely due to the aforementioned factors.

That facility Undrawn at quarter end.

Cash Meanwhile, was split roughly 60% among money market funds commercial paper and U S treasuries with the remaining 40% in demand or in deposit accounts.

The weighted average maturity on the corporate cash was roughly 20 days, while the effective interest rate on our corporate cash position for the third quarter was roughly 495% customer cash at quarter end was approximately $1 2 billion with an interest rate of roughly 442% for the quarter.

Revenue for the year to be in the range of $374 5 million to $375 5 million.

Our 2023 revenue outlook reflects reflects approximately $38 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.

Similarly, we expect a higher non-GAAP adjusted EBITDA profit ranging between $22 million and $23 million for 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 operator.

We will now begin the question and answer session.

The management team asset you please limit yourself to one question.

To ask a question you May press Star then one on your telephone keypad.

If you're using a speakerphone please pick up your handset before pressing the keys.

To withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question will come from Dave Koning with Baird. You May now go ahead.

Hey, guys, great job across the board here.

I appreciate it Dave.

Yes.

And how do you see that in the future.

So it's a great question, we were again.

Super pleased with the results in the quarter and a good strong top and bottom.

Most of the underlying metrics, we're really strong in some cases meaningfully better than we expected we've talked about I think youre asking about <unk> yield and we did see a sequential step up about five bps. If you strip out the political inflow of dynamic and what we've said in the past is don't read too much into a <unk>.

Or bottom this is a little bit more than that range and we are pleased with the results, but I would just point back to what we talked about at Investor day, the real opportunity for US is to continue to expand this with new payment mode going forward, but overall pleased with the quarter.

Great. Thanks, and then just as a follow up incremental margin ex the interest contribution was also probably about the strongest we've ever seen.

Is is that sustainable do you expect like a lot of the revenue growth the core revenue to fall to the bottom line going forward now.

Yes, So let me let me take that in two parts one as we've said before.

We're pleased with the gross margin results, even stripping outflow and political dynamics, we're seeing consistent incremental gross margin expansion through both yield and unit cost improvements.

At Investor Day, we talked about.

75, plus percent gross margin business. So we still have a ways to go and we still have headroom to.

And that gross margin again through both unit cost efficiencies and yield expansion.

Great Great job guys. Thanks.

Thanks, Dave.

Our next question will come from Ramsey El <unk> with Barclays. You May now go ahead.

Hi, guys, good morning, and I'll Echo that very very solid results today.

Mike I had a question on the top of funnel dynamics.

Discussion.

They had with us.

It sounded like macro headwinds are really.

More localized just in a sort of commercial office sub segments and pretty much everywhere else. It sounded like things that kind of are looking pretty good as it is it a fair characterization to say that there is a kind of a.

<unk> and the sort of demand environment out there and maybe the macro overlay to that as well is that is that what youre seeing.

Yes, so maybe ill take a page out of <unk> book.

Don't know.

Too much into any one particular quarter, but certainly we're pleased with that.

Top of funnel activity that we're seeing as I said, one of the things I try to coach people over time on is the real estate vertical itself is actually a collection of.

Many different sub verticals.

And certainly we've seen within real estate.

For example.

Multifamily industrial student housing affordable housing all those sub components performed really well in the market.

<unk>.

<unk> to the one that's kind of static a little bit as the commercial office, but across all the new R. R.

Other I should say kind of verticals that we have.

Makeup our collection of nine total verticals.

Really across the board healthy.

Top of funnel growth and I think it's a combination of a handful of things certainly.

The leadership that James son has brought to our sales organization.

Now closing in on its first full year.

Ben.

Really terrific along with building the team.

And kind of the mission that will bolt Andreessen I had with James is how do we build the go to market sales organization to be $1 billion business and that's the lens that we've kind of loans that we've made.

A lot of progress on that side and the talent, particularly in the over the course of the year.

And.

And certainly I think.

With some of the new kind of product features and the roadmap that we've been delivering its created a lot of excitement and engagement. So.

Certainly we saw some slight benefit an average time to close.

So we've been really encouraged on what.

What we've seen overall, despite kind of the continued volatility of the overall market.

Got it okay. So some internal contribution there as well.

A follow up question for me I was wondering on invoice accelerator now that that product is getting.

Sort of what does the sales cycle booking conversion implementation timeline look like for that product is it the same as kind of the core middle market AP offering is there any difference in like the velocity of that product or is it similar yes. That's a great rest of your question Ramsey and so I would say, it's like night and day different.

Versus.

<unk>.

With our core buyer offerings for invoice pay there is certainly a setup configuration on boarding process in the case of invoice et cetera to point out.

This is really a seamless process these are existing.

<unk>.

Transactions that they have.

On our network and through a simple user interface. They can just literally click a button.

Have an invoice be accelerated for next day payment.

If they are enrolled in voice accelerator program and so it's.

It happens fairly quickly and it can happen in real time as suppliers want to advance payments.

One thing I will say as with any new kind of product launch we've now excited that.

We started processing, our first transactions with invoice et cetera to point out during.

During the months of October and we're in the first phase of any new product launch we are working hard to make sure the product is working.

As we've designed it to work.

Making sure we've incorporated all of the data analytics and understanding that we had during our one offering as well as to recapture elements to make sure that we're recapturing payments as they're flowing through our network and then the user experience is working as designed so that's the current focus as we roll the product out to more.

On a measured basis to our supplier customers, but super encouraged and excited about what this product is going to be in the future for us.

Fantastic. Thank you so much.

Thanks Ramsey.

<unk>.

Our next question will come from Andrew <unk> with Wells Fargo.

You May now go ahead.

Hey, good morning, guys and nice set of results not sure how unintentional that on was around invoice accelerator, but.

Wanted to ask about the macro environment and particularly in the middle market I know it was just asked but we all heard some commentary from your closest peer last week kind of discussed.

Middle market businesses, having more.

Room in their cost structure to kind of scale down expenses.

There something about the vertical that you guys are playing in that makes your mix a little bit more resilient to that.

Yes, so first of all I'm glad you caught the PON.

Our analysts stay on their toes so good job there.

Second part of the question related to kind of the I'd say, the resiliency of the middle market and kind of the verticals that we're in.

I don't think theres much with the vertical element of it is just as I highlighted during my commentary middle market customers, which is very different than small business customers. These are substantial customers that have built out.

Finance teams.

Accounts payable teams they have.

Longevity in their business they have scale and I think when you have to kind of scale and longevity.

It allows you to really navigate through a down market more effectively you have more levers to pull.

You typically have access to different financing levers that a small business does and so I think they operate very differently.

The one thing.

I will say is that.

We've been at this a while and so.

Quite a bit of history of operating through past cycles.

I think this cycle is no different than kind of the results. We're seeing are kind of what we expected to see with the resiliency of our middle market customer base and how they've these savings.

Similar sets of customers have operated through past cycles. So we're.

We're really encouraged by that and I think it really highlights.

I've been talking about it since our IPO.

In an upmarket maybe it's harder to tell the difference, but when you get into a choppy market I think it's really.

Distinguishable differences between middle market and small business.

Got it.

Nice to see growth really kind of get back to that 20% algorithm that you guys have been calling out for in the medium term.

Yes.

Considerable piece attributable to flow.

Thinking about as we head into 2024, I know that fourth quarter implies a step down in growth, but with at folio political in 2024. It seems like all the building blocks are in place for you guys to reaccelerate back to that medium term algorithm. So I just wanted to get your confidence around that and Bob.

Correct me, if I'm wrong or highlight any point that we should be thinking about.

Perfect and let me just jump in some of those business commentary, Joe probably follow up as well.

So yes.

You hit the nail on the head.

Super confident related to kind of what we laid out at Investor day and.

And I would say for next year kind of five core things that kind of least I'd look at that gives me that confidence in the first one is where we started was top of sales.

Our organic sales activity for top of funnel, that's a good barometer of what we get.

<unk> goes through kind of sell through that shows up in our.

Total sales overtime.

Second one is certainly the new payment modalities that we're rolling out.

Joel kind of highlighted earlier in.

In the commentary.

That's one of the components of our.

Our increase in take rate.

And we expect those the new payment modalities to continue.

Third is what we're just talking about with invoice accelerator to point out now will be in the market for the full year next year is kind of as we will kind of slowly ramp that over the course of the year.

And then we have the new partnerships.

Certainly we have a number of those but.

<unk> is one of those and then the last piece number five in political.

And certainly what the political piece back end.

It's probably.

Probably anybody's guess.

Now.

That the confusion of the current political cycle will impact us, but we think we're positioned really well there. Joe you may have some additional we thought that was the only thing I would add is we're really pleased with the Q3 results see strength in the business. We're excited about the long term opportunity. It's important to remember that we're in the middle of some.

Really kind of choppy.

Copy environment I think is the word that we view spending moderation on the part of our buyers and so certainly we're not giving guidance now for 24, we'll do that in February.

An update you guys on what we see we need to finish the year strong, but we're really really pleased with the results of the business in Q3 and excited about the future.

Great. Thanks, a lot guys.

Again, we please ask that you limit yourself to one question. If you have a question. Please press Star then one.

Our next question will come from Bryan Keane with Deutsche Bank.

You May now go ahead.

Hi, guys good morning.

Mike wanted to ask you one of your peers in the BTB payments landscape called out some caution electronic payment adoption, given the higher costs associated with payments like VC or instant transfer in an economic slowdown do you see that in the mid market or is that an SMB thing.

So here's what I would say is.

What I would say, it's a little bit of apples and oranges.

Yes.

I mean by that is.

If you remember one of the core business decisions. We made when we launched do you have to pay network is to kind of deep and position the supplier as a core customer just like the buyer.

And what that's allowed us to do is.

Create a value proposition.

For the supplier that's more than just coming to the pay network to receive a payment.

They're coming to gain visibility into their invoices, they are coming to manage their business rules and the types of payments they want to take under certain circumstances and then they are coming to get tools like invoice accelerator to better manage their cash flow and I think.

That strategy in the current environment is starting to really differentiate ourselves because it's not just about coming to receive a payment because when you come in to receive a payment has typically been about price because there is no other value, but when you create a value proposition around it is not about price. It's about the total value proposition that we're delivering.

And so we remain super encouraged on our ability to engage with suppliers and move them from paper checks to various forms of electronic payment.

Over time, and so we think.

Certainly that strategy is even be heightened in the current economic environment.

Yes, good question.

All of our kind of core partnerships and not all partnerships are created equal we have referral partnerships reseller and then kind of white label type partnerships.

But yes, there is compensation that goes to our partner in this case to folio. However.

We believe that the kind of the contribution of it is very is in the same ballpark as our direct sales.

A lot of that sales and marketing expenses absorbed by the partner versus avid exchange. So a very similar kind of net contribution as I look at it.

Got it thanks, so much and congrats.

Yes, Thanks, Brian.

Our next question will come from Brett <unk> with Piper Sandler you May now go ahead.

Good morning, Joel if you could just talk through visibility into further increasing yield clearly.

Yield and float were big factors, helping you insulate against a slowing <unk> growth rate here do you have visibility you can continue to kind of drive improvement in yield one and then Mike If you could just double click in that folio is that a white label relationship where they're going to be promoted.

<unk>.

This across their installed base.

And could there be any quick ramp there or not thanks.

Measured the degree to which we kind of retain and expand the overall transaction volume.

And we were.

Our solid base and still expand to some degree so that first step is.

Kind of the retention and expansion number two adding buyers and adding the buyers volume and then three yields so you've asked about yields we have seen good yield expansion.

We've talked about that.

The third piece of our overall revenue.

And a little bit I'll add on to the second part of your question regarding our folio.

Yes, we're super excited about what that means.

In my remarks.

I think in our 23 years as the largest.

Accounting system partnership we've ever done in terms of the sizable.

Customer base, that's applicable to our profile.

We believe that.

Over 50% of therefore, your customers fit within our target profile.

And typically we see is that the first 36 months of any new partnership are the most critical.

Yes.

In this case with our white label relationships that they will be promoting it to their installed base.

We are working hard with the portfolio team too.

On that positioning and strategies taken.

Taking account all the learnings we have across other strategies.

Sounds good sounds like a big win.

Yep.

Next question will come from James Fawcett with Morgan Stanley You May now go ahead.

Hi, everyone, it's Michael <unk> on for James Thanks for taking our question.

Call out in terms of how volume trends may have evolved throughout the quarter, our mark curious as to how exit rates trended relative to the fourth quarter volume growth and perhaps what you're anticipating are embedding into the guide. Thanks.

Okay I'll take that great question again TPB.

Volume for us in the quarter was close to $20 million up about 8% over the over the prior year period.

And a couple of things maybe just to point out speaking about overall TPB.

Again that metric for us drives payment revenue in a meaningful way and it's also a metric that has been impacted by some of the caution that we've seen exercise buyer.

Based on by our customers across the middle market I think if I think about the results for this quarter and the and the volume trends that we've seen we haven't really seen meaningful departure from what we've seen in the past couple of quarters.

And it's hard to predict but we're imagining something similar.

In the quarters to come.

Obviously hopeful for this for this temporary kind of macroeconomic condition.

In 2000 and for a couple of quick points. When you think about that growth in the third quarter of 2003, you have to keep in mind, not just that discretionary volume impact, but also the political dynamics contributed.

<unk> in the prior year, where it would not exist in the current year, so theres a little bit of impact there.

Remember also that growth rates last year were impacted by.

The COVID-19 impact from prior year, so some distortion in those growth rates.

Together with.

Potentially some impact from inflation and then finally, we do see potentially lapping the year ago period sometime in the middle of the fourth quarter. When we began to see this moderation start.

So we could see some some benefit from that obviously when we when our comparable improve.

So hopefully that gives you a little bit of insight into the TPP volume dynamic.

Yeah. That's helpful. I wanted to ask you mechanically on invoice accelerator I think tien tension there.

To transition funding mechanism.

Tom.

To on versus off balance sheet over time, how should we be thinking about the timing of that and charted the financial impact. Thanks.

Yes, good question.

You are exactly right we believe.

Our strategy is to transition invoice accelerator to be off balance sheet over time.

We believe that in terms of those partners that we have ready for you again conversations with.

That we ideally it in order to get kind of the best structure in and kind of rate for the program.

We want to have about a years worth of history with the two new offerings. So I think.

As we are at this time next year, we will be some pretty well.

Developed strategies I'm moving it off balance sheet.

We've.

Incorporated that into our economic model and believe that the yields to avid exchange will be consistent with what they are now.

We certainly believe that we'll be able to lower our cost of capital because we're at today, we're really using our equity of our balance sheet to fund the programs. So looking forward to getting to that point certainly over the next year or so.

That's great. Thanks, guys.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Mike Prager for any closing remarks.

Yes.

Thank you.

Thank you for everyone for joining us to discuss our solid third quarter results and the sustained execution around product innovation strategic partnerships and differentiated performance.

We believe we are the only publicly traded pure play accounts payable and payment automation investment that's purpose built for the middle market.

Leveraging our two sided network of having both buyer and supplier customers and.

Okay.

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

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