AvidXchange Holdings, Inc. (NASDAQ:AVDX) Q4 2023 Earnings Call Transcript
AvidXchange Holdings, Inc. (NASDAQ:AVDX) Q4 2023 Earnings Call Transcript February 28, 2024
AvidXchange Holdings, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $0.01. AvidXchange Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone, and thank you for joining us for the AvidXchange Holdings, Inc. Fourth Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Joining us on the call today is: Michael Praeger, AvidXchange's Co-Founder and Chief Executive Officer; Joel Wilhite, AvidXchange's Chief Financial Officer; and Subhaash Kumar, AvidXchange's 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 today's press release. This disclaimer emphasizes the major uncertainties and risks inherent in the forward-looking statements the company will make today.
Please keep these uncertainties and risks in mind as the company discusses future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. Non-GAAP financial measures should 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.
I would now like to turn the conference over to Michael Praeger. Please go ahead.
Michael Praeger: Thank you, everyone, for joining us today. Joel Wilhite and I are excited to discuss AvidXchange's fourth quarter 2023 results. This is now marks our 10th consecutive quarter of exceeding our revenue and adjusted EBITDA expectations. This past quarter was also a great reflection of executing the strategies we articulated during our Investor Day this past June, in terms of balancing our growth and profitability objectives. Consistent with that, I am proud to announce that we delivered our first ever $100 million plus revenue quarter, along with a $15 million plus adjusted EBITDA profit quarter, thereby posting a 36 on our Rule of 40 construct, which combines our revenue growth rate of 21%, along with our adjusted EBITDA margin of 15% for the quarter.
Overall, we saw five main themes emerged over this past year that was certainly magnified in Q4. First, our continued strong customer engagement. Second, our payment yield and supplier monetization strategies, which will continue to be our secret sauce showing measurable results. Third, our margin expansion and cost efficiency strategies, delivering continued reductions in our unit costs and driving our gross margin expansion and resulting adjusted EBITDA growth. Fourth, our continued focus on investment in new innovation continues to drive competitive differentiation, increased value proposition for our customers as well as create the long-term pathway to support our 20% plus annual organic growth rate objective. And lastly, our fifth theme being the resiliency of our middle market customers, continue to show strong customer logo retention metrics exceeding 95% for our combined buyers and suppliers.
I want to highlight our continued high level of customer engagement right off the bat because this success has been fueled first and foremost by our customers' success, which in turn has been enabled by our value proposition that our product, technology, sales and operation teammates have engineered and executed. Our buyer and supplier customers have validated this lasting value proposition by viewing us as their trusted partner to drive scale, workflow efficiency along with confidence in managing billions of dollars worth of their invoices and payments over our two-sided network. And we wouldn't be here where we are today and where we're headed in our growth and profit trajectory without them, as we seek to scale AvidXchange to be $1 billion revenue business in the coming years, in a still vastly underpenetrated $40 billion addressable market opportunity.
Staying with the customer theme for a moment, let me just highlight the power of our value proposition with one of our buyer customers, Speedway Motorsports. Founded in 1959, Charlotte based Speedway Motorsports is a leading player in motorsports marketing, promotion and sponsorship, specializing in events like NASCAR and IndyCar races. Similar to many of our clients, pre-AvidXchange, Speedway was weighed down by a siloed yet decentralized paper-intensive accounts payable and payments process on its TRAVERSE accounting system. Combined with the newly adopted shared services business model, the level of complexity faced by Speedway was overwhelming. In adopting our AvidInvoice and AvidPay solutions to streamline, digitize and automate their invoice processing and supplier payments, Speedway was able to reduce monthly accounts payable work hours, shorten its month-end accrual process to approximately 30 minutes from a couple of days previously, while driving an estimated cost savings of over $300,000 annually.
Spurred on by the success of invoice and pay solutions, Speedway broadened its lens to other AvidXchange products such as AvidAnalytics, to review and analyze spending on a company-wide basis. Senior Vice President of Finance, Sara Grafals said it best, you'll be amazed at how AvidAnalytics streamlines tasks and allows managers to see things in real-time. It provides us with the ability to give our staff the reporting mechanisms and matrixes hey need on a timely basis. We are continuing to improve, who we spend money with. Looking at our purchasing data and being able to negotiate give us buying power we can leverage. Those savings are then reinvested in other ways to enhance our attract fan experience and empowering the finance team to focus on other business initiatives.
The ability to create this type of lasting value for our customers such as Speedway is at the center of our innovation and product strategies. There is a deep product pipeline for 2024 that further builds on the value proposition we expect to further cement our leadership position in the marketplace. But before we lay out what new product offerings and platform innovations are in store for 2024, it's worth highlighting reflecting for a moment on 2023. Starting with our AvidXchange Flywheel metrics. During 2023, we increased the total number of buyer customers utilizing our accounts payable and payment automation software, excluding the decommissioned, Create-a-Check product offering, by 8.1% to 8,000 customers from 7,400 buyer customers in the year prior, driven by delivering a great AP automation software experience under gear 1 of our AvidXchange Flywheel.
A quick note on Create-a-Check, this offering was non-strategic check printing solution utilized by our smallest customers to print paper checks on premise, that was one of the several products acquired approximately 10 years ago via our Piracle Payments acquisition and not consistent with our focus on middle market buyer customers along with our focus on eliminating paper checks. By contrast, we are still in single digit penetration across our nine current verticals within our overall estimated addressable market of 435,000 middle market companies just in the United States alone. In addition to our strong buyer customer engagement, our supplier customer count was up 24% in 2023 versus 2022 and continues to be part of our secret sauce in our ability to monetize payments, which is fueled by innovative payment offerings and networking effects of buyers bringing their suppliers to our two-sided AvidPay network.
The resulting addition of new buyer customers and supplier customers drove increased transactions onto our two-sided network and our overall spend under management under gear 2. Transaction volumes on our network exceeded $75 million, rising 7.4% for year-over-year with our total payment volume increasing by over 11% on a year-over-year basis, to almost reaching $76 billion in 2023. This increase in total payment volume largely mirrored growth in our payment transaction count. The 7.4% year-over-year rise in spend under management to $230 billion tracks largely in line with the growth in our transaction volume. And given our growing transaction volume, we remain focused on maximizing our industry-leading ePayment monetization, which is our secret sauce as we refer to it.
By converting suppliers to one of our various forms of electronic payment on the AvidPay network under Gear 3 of our flywheel. In 2023, ePayment-monetized supplier count on the AvidPay network grew by roughly 10% from the year prior, largely in line with our payment transaction growth rate. We believe this underscores the overall value proposition of our AvidPay network for our suppliers. The sum of execution and growth across our AvidXchange Business Flywheel encompassing buyers, suppliers and transaction monetization, resulted in nice growth in our all-encompassing transaction yield metric, which was up over 12% to $5.05 per transaction in 2023, compared to $4.51 per transaction in 2022. In addition, in the fourth quarter, we reached a record high transaction yield of $5.45, which is up 13.8% over the same period last year.
We also ended the year with our net transaction retention rate at 101%, which has been impacted by the pressure of discretionary spend across the middle market as a result of the current macroeconomic environment, causing middle market companies and their CFOs to be more cautious with their discretionary spend. As we bid farewell to 2023, I want to take a moment to reflect on the financial and strategic accomplishments of the year. 2023 was a year of demonstrable financial resilience and strategic advancement as we delivered both 20% revenue growth and adjusted EBITDA profitability, driven by the impact of our various efficiency initiatives and scale of our operations. From resilience perspective, we delivered a healthy revenue growth up 20.3% to over $380 million for the year.
This, in the face of ongoing macro choppiness impacting transaction volume around discretionary spend in the areas of marketing, advertising and professional services, which we are able to effectively counterbalance with continued yield expansion through our various innovation strategies with suppliers. Meanwhile, the pace of progress on unit cost reduction continued unabated through actions around standardization, automation and sourcing, including numerous work streams utilizing artificial intelligence across all areas of our business. This enabled us to deliver solid execution on our unit cost objectives, driving gross margin expansion of 540 basis points to 69.4% in 2023, and we continue to be excited about the expected long-term impact on these unit cost reduction initiatives.
We also continue to focus to optimize our resources in other functional areas as we [indiscernible] our OpEx and investment discipline, which led to a swing of over $45 million in adjusted EBITDA profitability in 2023 over 2022. I am especially pleased to say that we exited the fourth quarter with our first-ever adjusted EBITDA profit, excluding the contributions of float and political-related media revenues. And finally, we finished the year with a solid balance sheet, including a net cash position of over $374 million. The combination of our strong balance sheet, combined with our scaling profitability provides us with significant optionality to continue investing in our targeted strategic initiatives, which we believe will drive shareholder value in years to come.
On the strategic front, we believe we have positioned the business for a greater success in 2024: First, we inked a key transformational accounting system partnership with AppFolio, our biggest partnership ever with a top provider of solutions focused in the Real Estate multifamily vertical with roughly 19,000 customers, potentially half of those that meet our target customer profile. Also in 2023, we leveraged another accounting system in partnership with a cloud-based accounting solutions market leader, M3, as a springboard into our new Hospitality vertical with our M3 CoreSelect integration, which went live in November of 2023. Both of these integration partnerships should begin to contribute starting in the second half of 2024. Second, our top of funnel buyer sales opportunities increased around 15% in the 12 months of 2023 over 2022, demonstrating strong interest and engagement with buyers.
Third, we advanced our payment product portfolio with several significant innovations, including the launch of our new payment modality such as our Lien Waiver payment modality for the Construction vertical. Fourth, we released our much anticipated digital invoice financing product, Invoice Accelerator 2.0 in October of 2023, now being branded as Payment Accelerator. And finally, we continue strengthening our executive talent team with key additions on our revenue and product teams with: James Sutton as our Chief Revenue Officer; and Doug Anderson as our Chief Product Officer, while elevating Dan Drees and John Feldman to the roles of President and Chief Operating Officer, respectively. Overall, I am very pleased with the leadership team that we have built and feel that we are well positioned as we focus on executing the next chapter of our journey to attain our goal of reaching $1 billion in revenues in the coming years.
With those highlights, I want to spend the remainder of my remarks on our product and platform innovation initiatives in 2024, both of which fall under Gears 3 and 4 of our AvidXchange Business Flywheel. We are excited about the development of our new spend management platform. Currently, virtually all of our buyers’, customers’ invoice-based expenses are processed through our platform, as we are the system of record for our customers’ invoice transactions with the remainder of the non-invoice-based expense transactions being processed outside of our system, either through manual processes or through other third-party software applications. Our new spend management offering will tackle those remaining non-invoice expense transactions.
However, our approach to spend management is highly differentiated and purpose-built for the middle market. Whereas traditional spend management programs are focused mainly on travel and entertainment expenses, ours will be focused on managing functional team level procurement first, along with managing travel and entertainment expenses for our customers. It will also be managed at the point of purchase with real-time syncing, coding and approval status. And most importantly, our spend management module will be highly integrated with our core accounts payable invoice suite, leveraging our GL coding and approval workflow capabilities along with having centralized expense and data reporting for all of our customers expenses in one platform. Both invoice and non-invoice transactions, which is extremely important in the terms of driving adoption, cross-selling, interoperability and user experience.
We expect that our spend management offering should result in high attachment rates and nonlinear growth contributed while driving higher TPV yield in future years. There are lots of different use cases for the product. One, for instance, could be a property manager employing the card to purchase a faucet and the transaction immediately synchronizes with our AP solution. This, we believe, will provide finance leaders a holistic view of virtually all expenses that occurs across the company, displacing either displacing either personal cards without proper controls or petty cash. With our offering, this ensures that their spend – would be in compliance with each customer's business rules, including budgets and expense categories, as we monetize transactions from both virtual and physical card volume.
The platform is planned for initial rollout with select customers in the latter half of 2024, and then scaling in 2025. 2024 is also the year when we plan to ramp key functionality of our new payments platform, which is the foundation of our AvidPay network. This is an effort that has been part of our product roadmap for the last several years. We believe the new capabilities of our payments platform are transformational in the way our customers experience managing their payments and the way we operate. A critical dependency in our ability to advance ePayment adoption is to create new payment modalities through real-time configuration, combining pricing terms, speed of settlement, access to remittance data and payment acceptance automation as opposed to software development dependencies.
Our new payments platform is designed to unify disparate systems and operational processes within a single platform to deliver the best supplier and buyer customer experiences. With our new platform, we'll be able to be well positioned to guarantee delivery of critical payments on time, despite potential delays of invoice approval by our buyer customers. Second, we believe that we can expand our payment footprint to non-invoice-based transactions such as loan, leases and various other tax payments. Third, we will be able to create new payment products real-time, based on speed, remittance data, pricing, automation, et cetera, and therefore drive greater ePayment adoption for our buyers and suppliers. And finally, with our new payment platform, we believe we'll not only be able to enhance revenue through greater yield, share of payments wallet, but also improve the cost structure in both hard and soft operational costs, including the reduction of paper check payments.
In closing, we believe we are well positioned for 2024. With our 2023 building blocks in place, the five themes which drove our success in 2023 will continue to bear fruit for us in 2024 and beyond, coupling our industry leadership with highly differentiated foundations for our strategic and operating roadmaps in 2024. In particular, the success we continue to achieve in reducing unit costs and leveraging operational expenses, we believe we are setting up for delivering on our Investor Day targets. To be sure, we'll be tested along the way, given the macro volatility, and remain focused on controlling those elements of our business that we can directly control ourselves. But with the strategy and execution rigor, we have set in motion and are delivering on, we believe we're well positioned to drive impactful value for our customers, create future growth opportunities for our team members and unlock significant long-term value for our shareholders.
With that, I'd now like to turn the call over to my partner, Joel Wilhite.
Joel Wilhite: Thanks, Mike, and good morning, everyone. I'm pleased to talk to you today about our fourth 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 fourth quarter 2023 business outlook and adjusting for float and political, fourth quarter revenues came in higher due to payment and software yield expansion driven by ongoing ePay conversion. That, together with higher gross margins driven by higher revenues, progress on unit cost initiatives, software and pay yield expansion, as well as sustained expense discipline led to significant adjusted EBITDA outperformance.
It's worth noting that we delivered our first ever adjusted EBITDA profit, a major milestone even after stripping out float and political. We believe that by crossing this profit CASM on a core basis underscores not just the power of our business model and disciplined execution, but also our confidence in achieving our Rule of 40 target by 2025. Now turning to year-over-year results. Total revenue increased by 20.8% to $104.1 million in Q4 of 2023 over the fourth quarter of 2022. More than three quarters of the revenue growth was driven by the combination of the addition of new buyer invoice and payment transactions, coupled with software and pay yield expansion. The remaining revenue growth this quarter was driven by higher year-over-year float revenue, net of year-over-year decline in political revenues.
Our strong revenue growth also resulted in total transaction yield expanding to $5.45 in the quarter, up 13.8% from $4.79 in Q4 of 2022. Of the 13.8% increase, roughly three quarters of the increase was driven by pay and software yield, coupled with transaction mix skewed toward payments. The remainder was due to the flux between float and political revenues. Software revenue of $29 million, which accounted for 27.9% of our total revenue in the quarter increased 10.1% in Q4 of 2023 over Q4 of 2022. The increase in software revenues of 10.1% was driven by growth in total transactions of 6.1%, which continues to be impacted by macro conditions with the balance driven by growth in certain subscription-based revenues. Payment revenue of $74.2 million, which accounted for 71.3% of our total revenue in the quarter, increased 25.5% in Q4 of 2023 over Q4 of 2022.
Payment revenue reflects the contribution of interest revenues, which were $13.7 million in Q4 of 2023 versus $5.8 million in Q4 of 2022. Recall, our year ago payment revenues also included contribution from political media revenue. Of the 25.5% increase in payment revenues, more than three quarters was driven by a combination of an increase in pay yield expansion and payment transaction volume increase of 9% with the remaining portion driven by the aforementioned flux between interest and political revenues. On a GAAP basis, gross profit of $67.3 million increased by 34.8% in Q4 of 2023 over the same period last year, resulting in a 64.6% gross margin for the quarter compared to 57.9% in Q4, 2022. Non-GAAP gross margin increased 650 basis points to 71.4% in Q4 of 2023 over the same period last year and was driven mostly by unit cost efficiencies and yield expansion.
Now moving on to our operating expenses. On a GAAP basis, total operating expenses were $79.5 million, an increase of 1% in Q4 2023 over Q4 of last year. On a non-GAAP basis, operating expenses, excluding depreciation and amortization, increased 2.6% to $58.8 million in the fourth quarter of 2023 from the comparable prior year period. On a percentage of revenue basis, operating expenses, excluding depreciation and amortization, declined to 56.5% in the fourth quarter of 2023 from 66.5% in the comparable period last year. The year-over-year percent decline largely highlights the significant operating expense leverage, particularly across G&A, sales and marketing as well as R&D to an extent even after stripping out the contribution of float. 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 by $1.1 million or 5.7% to $17.5 million in Q4 of 2023 over Q4 of last year, which was driven by a combination of efficiencies in marketing spend, a decrease in performance-based compensation and realignment of resources, coupled with a delay in timing of certain investments. Non-GAAP research and development costs increased by $2.6 million or 13.1% to $22.1 million in Q4 of 2023 over Q4 of last year. The increase was due to continued reinvestment in our products and platforms, including spend management, pay offering and payment accelerator. Non-GAAP general and administrative costs remained unchanged at $19.2 million in Q4 of 2024 versus Q4 of last year due to leveraging public company costs across a larger revenue base.
They continue their annualized downward progression as a percentage of revenue as we indicated during our Investor Day. Our GAAP net loss was $4.5 million for the fourth quarter of 2023 versus a GAAP net loss of $25 million in the fourth quarter of 2022, with the reduction in loss is driven by a combination of strong revenue flow-through and expense control leading to lower operating expenses, coupled with higher interest income and lower interest expense, due to reduced borrowing costs and partial debt paydown. On a non-GAAP basis, our net income in the fourth quarter of 2023 was $9.4 million versus a net loss of $7.5 million in the same year ago period, a $16.9 million positive swing from last year driven by the aforementioned factors. Similarly, on a non-GAAP basis, Q4, 2023, adjusted EBITDA was a $16.9 million positive swing from an approximately $1.3 million loss in Q4 of 2022.
Turning to the balance sheet for a moment, I want to touch on a few key items. We ended the year with a strong corporate cash position of $451.6 million of cash and marketable securities against an outstanding total debt balance of $77.3 million, including a note payable for $13.9 million. We had $30 million on our credit facility undrawn at year-end. Corporate cash meanwhile, was split roughly two-thirds among money market funds, commercial paper and time deposits, with the remaining third in deposit accounts. The weighted average maturity on corporate cash was roughly 10 days while the effective interest rate on our corporate cash position for the fourth quarter was roughly 5.25%. Customer cash at quarter end was approximately $1.6 billion with an interest rate of roughly 5% for the quarter.
The jump in customer cash was primarily timing related to funds in transit along with shifts in calendar days between weekdays and weekends of receipt and disbursement of that cash. Turning to our 2024 business outlook. We expect total revenue for the year to be in the range of $441 million to $447 million. Based on the midpoint, we expect approximately 47% of the 2024 revenue distribution to be in the first half versus 53% in the second half. Our 2024 revenue outlook reflects the revenue impact of decommissioning our on-premise check printing software Create-A-Check, the buyer customer base and revenue contribution of which was roughly $1,401 million in 2023, respectively. The outlook also incorporates approximately $44 million of interest revenues from customer funds versus roughly $41 million earned in 2023.
Also, we anticipate political media revenue contribution of approximately $9 million, given that this is our first presidential cycle under FastPay. Recall, we acquired FastPay in 2021. For context, in 2022, during the midterm election cycle, the political arm of FastPay generated roughly $8.5 million in revenues. Similarly, we expect non-GAAP adjusted EBITDA profit ranging between $67 million and $71 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?
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