AvidXchange Holdings, Inc. (NASDAQ:AVDX) Q1 2024 Earnings Call Transcript

AvidXchange Holdings, Inc. (NASDAQ:AVDX) Q1 2024 Earnings Call Transcript May 11, 2024

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 Incorporated First Quarter 2024 Earnings Call. 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. [Operator Instructions] 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 first quarter 2024 results. This is our 11th reporting quarter since becoming a public company in October of 2021, and we now have delivered 11 consecutive quarters of financial outperformance relative to our expectations. Amid prolonged macroeconomic volatility, our results highlight the relative resilience of our financial model. With the continued choppiness we’re seeing in customer transaction volumes, we remain steadfast in executing our strategic playbook. This includes driving our yield expansion to counter the impact of uneven transaction volumes, focusing on expanding our gross margin through unit cost productions and driving operating leverage through cost discipline and smart investments to expand our adjusted EBITDA margin.

The drivers of our success continue to be our middle market customers and the impact of our purpose-built value proposition for middle market companies. More crucially, it entails engineering and executing our various product offerings, technology, go-to-market and operational value proposition that delivers quantifiable benefits of digitally transforming our customers back office by automating accounts payable and payments over the differentiated two-sided network that we have today. The payback for our customers is rapid, impactful and quantifiable, and both the efficiency related to labor cost savings and supporting their ability to grow without adding incremental back office headcount. This, in turn, deepens our competitive advantage as we are a market leader in driving digital transformation strategy for middle market companies.

Thanks to our dedicated and talented team members, the runway for value creation for both our customers and investors is still in the very early stages. On today’s call, I will touch on the 5 key priorities we have for this year that we’re using to gauge our path of financial and operating progress in addition to continue to widen our competitive advantage around the middle market. Our key priorities for this year include performance culture, customer obsession, innovation, growth and scale objectives. Kicking off, we believe that the quick shorthand measure on performance culture is our financial scorecard. In looking at the first quarter of 2024, we delivered solid financial results across the board. Joel will go into more detail on our results later in today’s call, but here are some of the highlights.

Revenue growth in the quarter was over $105 million, up over 21% year-over-year. The growth in the quarter was led by a combination of continued yield expansion coupled with transaction growth. Our success around yield expansion is a result of our value proposition related to our various e-payment modalities focused on converting paper check suppliers into electronic payment adopters, as well as continued efficiencies with our processes, automation and AI improvements around executing these various forms of electronic payments. Non-GAAP gross margins continued their upward trajectory coming in at 72.4% and crossing the lower band on the 72% to 75% non-GAAP gross margin target ahead of our 2025 gross margin expectations as we outlined during our Investor Day last June.

Along with solid operating expense discipline, our adjusted EBITDA margins in the quarter exceeded 16%. Furthermore, our transaction yield, which is a metric that we focus on across our executive leadership team as it demonstrates the power and effectiveness of our AvidXchange business-wide role model, was up almost 15% to reach $5.47 per transaction. Moving on to our customer obsession metrics. One of the data points we track is our top of funnel prospect activity. The first quarter of 2024 saw some very encouraging trends as well as some adjustments to our marketing initiatives that we believe will be net positive for the year but negatively impacted us during the past quarter. Overall, the top of funnel activity during the first quarter of 2024 was unchanged year-over-year with certain verticals leading and some lagging.

The real estate vertical, our longest standing vertical market segment, led the pack and was up high double-digit percentages on a year-over-year basis. The growth in the real estate vertical is very encouraging as we have not seen this level of growth in more than a year, led by very strong multifamily activity. We also saw double digit growth in our education and nonprofit verticals as well. Most compelling of all, our buyer customer close rates were up almost 50% year-over-year virtually across all of our industry verticals, further demonstrating our increasing sales effectiveness. However, in a handful of our verticals, we did see instances where our top of funnel performance lagged during Q1. In the quarter, those verticals included our new markets, homeowners association, or HOA management as we call it, construction and financial services.

Let me briefly discuss the reasons for this lag and how the top of funnel has rebounded since. As we continue to onboard new leaders in our sales and marketing group designed to help us scale to our next milestone target of reaching $1 billion in revenue, they have brought greater discipline, alignment and allocation mix of our marketing and go-to-market investment dollars. As part of this evolution, we have prioritized our resource allocation mix to focus on slightly fewer but higher yielding industry user conferences and trade shows that meet our ROI and lead flow targets. As a result, we exited a number of the lower yielding conferences and trade shows during the quarter and prioritized greater investment in higher yielding conferences and trade shows occurring over the balance of the year.

This resulted in a 30% year-over-year decline in trade show traffic during the quarter with a corresponding impact on our top of funnel metrics during Q1 as we implemented this strategy. We’ve allocated more of our investment resources for higher yielding trade shows in Q2 and for the balance of the year, which we believe still have an overall higher impact to our overall top of funnel engagement metrics. And the good news is that this strategy is already getting traction as our top of funnel activity is up nicely in the high single-digit percentages across the board so far in the second quarter. We believe that the strategic changes we’re making to our marketing motions, notwithstanding the macro backdrop, are the right moves and highly aligned with our long term organic growth objectives.

With our recent accounting system integration partnerships, we’re cautiously optimistic about our top of funnel as we scale up for the remainder of the year. Now turning to our innovation priorities. I’d like to provide an update on Payment Accelerator, formally Invoice Accelerator 2.0. This product enables the small business supplier customers on our network frictionless access to improving their cash flow by leveraging our robust underwriting analytics, security and scalability protocols. We’re extremely excited about the prospects for Payment Accelerator as it is expected to be a meaningful growth contributor in 2025 and beyond as we believe that supplier financing and cash flow management offerings will be the third leg of our overall revenue model in partnership with driving additional software and payment network revenues.

Given that this is a credit product, we continue to meter the launch in order to better understand the user experience given that this next generation product has an entirely new digital front-end user experience complete with self-service digital enrolment capabilities. In addition, we also want to ensure that our various third-party integration that support Payment Accelerator are working and supporting our back office processes as designed at scale. These include enterprise grade features such as the data science analytics critical for successful payment interception and support for our new Subledgering Central Repository required for real time offsets and bifurcation of payments to properly execute the innovative money movement approach.

This will enable us to seamlessly leverage multiple third-party financing partners in the future as well as open this offering to a large proportion of our 1.2 million supplier customer base, many of which fall into the small business segment, even including support for larger middle market suppliers looking to accelerate larger invoices. To put this new generation user experience in perspective, Payment Accelerator compared to its predecessor is designed to onboard a supplier in a matter of minutes versus several days. What makes this process frictionless is that we eliminate the need for a traditional financial review underwriting process which requires historical financial statements from suppliers. However, we leverage supplier and buyer history in transaction data as well as real time visibility into the transaction status and approvals inherent in our two-sided network to underwrite and lower the credit risk as well as provide protective set of provisions across the entire flow of invoices that a particular supplier may have on our network.

The rapid onboarding process is also the result of the platform’s highly integrated back-end that is designed to simultaneously validate the supplier’s bank account information along with know your customer and know your bank compliance regulations real time as the supplier completes an online questionnaire of legal entity data and beneficial ownership information. Once onboarded, a supplier is presented with multiple acceleration offers, with transparent pricing and various time-based funding options, including real time payments. In addition to the Payment Accelerator offering highlighting the eligible supplier invoices available for acceleration, we also provide an Auto Fund option, where an intelligent decision engine automatically identifies all the supplier’s eligible invoices and funds them automatically, ensuring the fastest access to cash availability every time an eligible invoice is available on our network.

We have a growing network of supplier customers currently live using this Auto Fund option. This includes Charlotte, North Carolina based supplier JW Home Improvement, which was looking for quick access to receipt of payments for their invoices to support their overall business expansion and found the simplicity of our Auto Fund feature to be a major plus in our Payment Accelerator offering. We’re leveraging data science and user experience heatmaps to understand and analyze the user behavior as we intend to scale this offering fivefold over the next several quarters. We believe that our Payment Accelerator product will ultimately bring the intuitive front-end user experience for all of our B2B constituents similar to that of a best-in-class consumer payments application, with robust back-end instant decisioning and underwriting capability.

Next, I’d like to provide a progress update on some of our major accounting and ERP partnerships that we announced in 2023 as part of our strategic growth priorities. Recall that we announced 2 marquee partnerships last year, AppFolio in the multifamily vertical industry and M3 in the hospitality vertical. Both of these partnerships are highly strategic in nature for very specific reasons. Let’s start with AppFolio, whose strategic rationale stems from its size, scope and our vertical market experience. Recall the accounting system partnership with AppFolio is our biggest ever with a top accounting system provider focused on the multifamily real estate vertical. We are currently executing our initial go-to-market phase with AppFolio as we went live with our joint invoice and pay API integration a few weeks ago and is now broadcasted for general availability to all 19,000 AppFolio customers through AppFolio’s stack marketplace.

As part of our joint Go Live motion, AppFolio is deploying various marketing outreach initiatives across channels to steer its customers to our offering in its marketplace through email, landing pages, webinars, and joint pipeline reviews. What is truly exciting is the increasing top of funnel activity we have already seen in the lead up to the Go Live integration announcement, along with high customer engagement. Since the announcement of our partnership in the fourth quarter of 2023, we have tripled the number of new opportunities created in the first quarter. We believe this kind of ramp sets a nice tone for this partnership for 2024, with meaningful revenue build in 2025 and beyond as we believe that over 50% of AppFolio’s 19,000 existing customers are a strong product market fit for our offering.

Moving on to the M3 partnership in the hospitality vertical, where we’re seeing similar opportunity dynamics unfold. M3, as you may recall, is the hospitality market leader in cloud-based accounting solutions, along with a data management platform tailored specifically for the hospitality industry. M3’s customer base exceeds 1,000 hotel management groups and owner operators, including 50% of the top hotel managers and operators in the United States. M3 is highly strategic for us given that it accelerates our entry into the hospitality vertical through a player with a dominant positioning in the marketplace. We went live with our embedded pay integration with M3’s Core Select accounting solution in the third quarter of 2023. Since our initial launch, we’ve seen robust opportunity creation with our joint marketing efforts, including dedicated M3 representatives evangelizing partners such as AvidXchange for our highly integrated and embedded pay offering.

These opportunity creations are up four-fold on a year-over-year basis compared to Q1 2023. Given the traction we are seeing, we have jointly decided to broaden our relationship and we just signed a contract extension with M3 to provide integration into its flagship Accounting Core solutions. This Accounting Core integration is slated to Go Live in the second half of 2024. We believe that both our AppFolio and M3 partnerships along with several others that are in the pipeline position us well for long-term growth within our large addressable and unpenetrated AP automation market for middle market companies. Finally, on our key priority related to business scale, I’d like to discuss the opportunities for sustained gross margin expansion, a major lever that we’ve relentlessly been addressing to great success.

The success in gross margin expansion perfectly complements the operating expense and investment discipline that we have demonstrated since becoming a public company. To ensure continued expansion of gross margin, we believe that we have significant room to run as we work towards our long-term 80% plus gross margin target. We have continued to engineer new innovative technology, automation and AI solutions that we believe could work at scale across every component and sub-component of our operational value chain across our business. The latest arrow in our quiver is our new AI-powered IVR payment automation solution. To put this particular use case opportunity in perspective, currently we employ both follow the sun sourcing strategies and chatbots to make payments across our various payment modalities.

While the sourcing strategies optimize both unit cost and time zone coverage, our IP-driven bots optimize unit costs and time zone coverage at speed and scale. But RPA-driven bot methods of payment execution have certain limitations given that they need IVR to perform the exact path of execution every time or they break and need constant remapping work to be done along with requiring human beings to be inserted at critical junctures for the process to be successful. So any time anything changes or if there is a latency, bot automation fails and the payment becomes manual or potentially kicked to a paper check. With our new AI-powered IVR automation solution, which is self-learning and self-correcting, optimizing the functionality of what our existing bots currently do along with what our bots cannot do, such as adapting to changes and updates in a particular IVR decision tree, marks a major new innovation milestone for us.

During Q1, our new AI payment execution solution, which is still in the early stages of deployment, already demonstrated a 2x the productivity of our prior bot technology and over 10x the productivity of humans executing this function. With this capability, we can increase our ability to scale across supplier payments and capture automation of low-volume suppliers where the cost versus benefit is disproportional due to the high cost of automation versus the lower volume and spend of many of these suppliers, driving increased electronic payment penetration rates even further in our business. And most importantly, we believe this solution will scale non-linearly as we double and triple our transaction volume on the payment network in the future.

In closing, we’re off to a very strong start in 2024, and I’m excited with the progress we are making across our five operating priorities for the year, which include continue to develop and recruit key talent to support our performance culture, our customer obsession and continuing to increase the value proposition for both our buyer and supplier customers, delivering on our innovation initiatives and offerings to support our durable long-term 20% organic growth objectives, along with continued scaling of our business towards our next $1 billion milestone in the coming years. We recognize that the macro backdrop has remained volatile and challenged over the past 2 years and creates a cautious approach towards discretionary spending across the middle market.

However, we remain laser-focused on the operational rigor and execution along with controlling those elements of our business model that we can control directly, which includes our targeted innovation investments geared towards continued expanding the customer value proposition and impact we’re having on both our buyer and supplier customers, increasing our competitive advantage across the middle market. As we remain on track to deliver our 2024 financial commitments, we believe the robust product payload and integration partnership that we’ve announced provide us with an important tailwind building for 2025 and beyond. I want to provide a special thanks to all my AvidX team members for their hard work, dedication and relentless focus on excusing our operational and strategic priorities.

We believe we’re still in the very early innings of penetrating what is a large and unpenetrated market opportunity, deliver business-to-business accounts payable and payment automation offerings to middle market companies. Given our product innovation, strong execution, competitive and financial strength, we believe we are well positioned to drive impactful value for customers, create future growth opportunities for our team members and unlock significant long-term value for our shareholders. With that, I’d 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 first quarter 2024 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 first quarter 2024 business outlook. And excluding float and political revenue contributions, first quarter revenues came in higher due to payment and software yield expansion driven by ongoing e-pay conversion. That, together with higher gross margins driven by higher revenues, ongoing 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 highlighting that this is our second consecutive quarter of adjusted EBITDA profit, ex-float and political. Most notably, we more than doubled our adjusted EBITDA profit sequentially ex-float and political to $3.7 million in Q1 of 2024 from $1.5 million in Q4 2023 due to higher transaction growth, software and payment yield expansion, lower unit cost and operating leverage, leaving us incrementally more confident in achieving our financial targets rolled out during our June 2023 Investor Day. Now turning to year-over-year results. Total revenue increased by 21.6% to $105.6 million in Q1 of 2024 over the first quarter of 2023. It’s important to note that the number of business days year-over-year remained unchanged at 63 days.

Roughly 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 and political revenues. Our strong revenue growth also resulted in total transaction yield expanding to $5.47 in the quarter, up 14.9% from $4.76 in Q1 of 2023. Of the 14.9% increase, more than half of the increase was driven by paid and software yield, coupled with transaction mix skewed towards payments. The remainder was due to float and political revenues. Software revenue of $29.7 million, which accounted for 28.1% of our total revenue in the quarter, increased 10.1% in Q1 of 2024 over Q1 of 2023.

The increase in software revenues of 10.1% was driven by growth in total transactions of 5.8%, which continues to be impacted by macro choppiness with the balance driven by growth in certain subscription-based revenues. Payment revenue of $75.2 million, which accounted for 71.2% of our total revenue in the quarter, increased 27.1% in Q1 of ‘24 over Q1 of ‘23. Payment revenue reflects the contribution of interest revenues, which were $13.1 million in Q1 of ‘24 versus $7.1 million in Q1 of 2023. Political media revenue in the current quarter was approximately $800,000, a negligible in the same period a year ago. Excluding the impact of float and political revenues, which represent third of the 27.1% increase, the remaining roughly two-thirds of the increase in payment revenues was driven by a combination of an increase in pay yield expansion, greater payment mix and payment transaction volume increase of 8.1%.

On a GAAP basis, gross profit of $69.2 million increased by 32.7% in Q1 of 2024 over the same period last year, resulting in a 65.5% gross margin for the quarter compared to 60% in Q1 2023. Non-GAAP gross margin increased 510 basis points to 72.4% in Q1 of 2024 over the same period last year with the lion’s share of the increase driven mostly by unit cost efficiencies and yield expansion. Now moving on to our operating expenses. On a GAAP basis, total operating expenses were $79.4 million, an increase of 6.6% in Q1 of 2024 over Q1 of last year. On a non-GAAP basis, operating expenses, excluding depreciation, amortization and stock-based compensation increased 1.4% to $58.8 million in the first quarter of 2024 from the comparable prior year period.

On a percentage of revenue basis, operating expenses, excluding depreciation and amortization and stock-based compensation, declined to 55.7% in the first quarter of 2024 from 66.8% in the comparable period last year. The year-over-year percent decline largely highlights expense discipline and significant operating leverage 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 roughly $300,000 or 1.7% to $18.6 million in Q1 of 2024 over Q1 of last year, which reflects ongoing yet targeted investments in sales and marketing spend to support our continued growth.

Non-GAAP research and development costs increased by $1.3 million or 6.5% to $22.1 million in Q1 of ‘24 over Q1 of last year. The increase was due to continued reinvestment in our products and platform, including spend management, pay offering and Payment Accelerator. Non-GAAP G&A costs decreased slightly by roughly $200,000 or 1.2% to $18.1 million in Q1 of 2024 versus Q1 of last year due to leveraging public company costs across a larger revenue base. They continued their annualized downward progression as a percentage of revenues as we indicated during our Investor Day. Our GAAP net loss was $1 million for the first quarter of 2024 versus a GAAP net loss of $16 million in the first quarter of ‘23, with the reduction in losses driven by a combination of strong revenue flow-through solid gross profit increase in expense control, leading to lower operating losses, 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 first quarter of 2024 was $11.3 million versus a net loss of $3.4 million in the same period last year, a $14.7 million positive swing driven by the aforementioned factors. On a non-GAAP basis, Q1 2024 adjusted EBITDA was $17.7 million versus $400,000 in Q1 of 2023, 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 year with a strong corporate cash position of $443.6 million of cash and marketable securities against an outstanding total debt balance of $75.8 million, including a note payable for $13.9 million. We had $30 million on our undrawn under our credit facility at year-end. Corporate cash meanwhile was split roughly two-thirds among money market funds, commercial paper and time deposit instruments with the remaining third in deposit accounts.

The weighted average maturity on the corporate cash was roughly 36 days, while the effective interest rate on our corporate cash position for the first quarter was roughly 5.2%. Customer cash at quarter end was approximately $1.2 billion with an interest rate of roughly 5% for the quarter. The sequential decline in customer cash was largely due to typical seasonal patterns related to disbursement and settlement of payments in flight from the prior quarter. This, along with average customer cash, balances intra-quarter and shifts in calendar days between weekdays and weekends of receipt and disbursement of that cash impacts float revenue. Turning to our updated 2024 business outlook. We now expect total revenue for the year to be in the range of $442 million to $448 million.

Based on the midpoint, we expect approximately 47% of the ‘24 revenue distribution in the first half versus 53% in the second half. Our 2024 revenue outlook reflects approximately $45 million of interest revenue from customer funds, a $1 million increase from our initial ‘24 outlook versus roughly $41 million earned in 2023. We anticipate approximately 54% of the $45 million in interest revenue from customer funds in the first half of 2024, with the remaining approximately 46% in the second half of 2024. 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. And 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 $71 million and $75 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?

See also 15 Easiest Degrees That Pay Well and Jim Cramer Talks About 10 Consumer Stocks As Americans Push Back on High Prices.

Q&A Session

Operator: [Operator Instructions] The first question comes from Dave Koning with Baird. Please go ahead.

Dave Koning: Yes. Hey, guys. Great job. And I guess my question, so it looks to me like this is the best growth quarter in maybe a couple of years when you exclude float and political, which is great to see, and it reflects a lot of what you talked about payments yield, which has been up now seven – I think, nine straight quarters. What’s the shape of that going forward? I know there’s puts and takes between interest revenue, between Payment Accelerator coming on. Does that just step function just up every quarter still? Or how should we see that over the next several quarters?

Joel Wilhite: Yes. Thanks, Dave. I appreciate your comments and I appreciate your question as well. I think what I would just say on the TPV in particular that’s really been helping support that payment revenue line is, like we said before, you might see variability from quarter-to-quarter, but our track record is kind of steady expansion over time. And of course, the gear 3 of our model, checks coming out of the system, increasingly finding opportunities to monetize digital payment together with some of the initiatives that we’ve talked about and that Mike mentioned, Payment Accelerator, etcetera, give us kind of the tools and levers to continue to see that yield expand over time.

Michael Praeger: I mean just, David, to follow up on what Joel said is, across our team, we’re laser-focused on kind of the one metric that I like talking about, which is the transaction yield. And certainly, that’s up over $0.70 over last year and up slightly over last quarter. But that’s the one that we kind of lean into in terms of all the different strategies we’re executing across the business to continue to focus on what we can control. And one of the metrics there is that transaction yield metric.

Operator: The next question comes from Darrin Peller with Wolfe Research. Please go ahead.

Darrin Peller: Guys, can we just expand a little bit more on the top of funnel comments? I know, Mike, you were commenting on earlier about conferences and changes to philosophy around it. And maybe what you’re seeing in terms of bookings momentum, and just to add on to that, demand for some of the new offerings on the supplier side as well as a quick update there. I know it’s still relatively early, but any further color would be grateful.

Michael Praeger: Yes. Darren, I appreciate the question. You were breaking up a little bit, but I think it was around the top of funnel and commentary there. I think what we saw was different verticals certainly experiencing kind of different types of activity. On the positive side, we’re really encouraged with what we saw in the real estate vertical that was best results in probably a couple of years related to top of funnel and then combined with education, non-profit being really strong. And certainly kind of the multifamily piece of – multifamily and industrial pieces of the real estate were very strong for us. Not a big surprise considering that’s a key area that we have strong industry domain knowledge, experience and also have lots of partnerships in that area.

On the flipside, certainly, verticals like our Hway [ph] management, Horizolty [ph] management vertical as we call it, combined with financial services and – experienced some kind of lagged activity. And one of the things that – in terms of peeling back the onion of reasons why, we also implemented a fairly large just kind of strategic shift in our approach to lots of different kind of industry conferences. And so just to give you a sense of it, last year in Q1, we attended about 85 different conferences and industry trade shows, and we were about 30 less this year. And so rather than spreading kind of the peanut butter pretty thin related to our investment dollars, the team has been much more strategic in terms of where do we invest, in terms of the highest yielding conferences and events that we can attend to drive both ROI yield as well as the activity from these.

And so one kind of result of that is that we attended less in Q1, but also super encouraging about some of the segment that did not do as well in Q1, we saw bounce back and – or bouncing back in Q2, and overall activity up 9% so far in the quarter. And so we think over the course of the year, those strategies will pay dividends for us, and we are going to be right where we expect to be in terms of driving our overall growth objectives. So, that’s maybe a little bit of flavor related to top of funnel.

Operator: The next question comes from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani: Thanks. Good morning. I guess I have a question just macro broadly. One is just on the float. I guess you had decent outperformance relative to the quarterly run rate, and it seems like you expect float contribution to come down over the back part of this year. What’s the rate outlook in that? And then secondly, just macro in general, I know Mike kind of talked about it still being mixed. But maybe just elaborate a little bit more on sort of what you are seeing and if there are green shoots, I think you mentioned a little bit in real estate, but would love more elaboration around that. Thank you.

Joel Wilhite: Yes, you bet. Great questions, I will take float and macro. So, on your float question, we did $30 million in the quarter. It’s a little bit higher than our expectations. And one thing to keep in mind is that rate is a factor, but also customer balances are a meaningful factor. And in fact, in Q1, rate was not an impact whatsoever. And so those customer balances are really impacted by just the timing and whether the period end lands on a weekday or weekend and such. And so that sort of beat in the quarter is kind of what led us to bump up the range for that float fee. In terms of your question about the expectations in the back half, we haven’t really meaningfully changed from our initial guidance where we did anticipate a handful of rate cuts in the back part of the year, something like 75 bps.

We will see what actually shakes out, but that’s kind of how we think about float revenue, just keeping in mind those customer balances being a huge driver. I think from a macro perspective, I would just kind of go back to the – what we have been experiencing now for over a year is just some suppression in spending and transactions associated with our buyers on our platform. And we attribute that to, in particular, discretionary spending and no one particular vertical, just general caution and spending. And that’s continued through the first quarter, even into through the month of April. And so that macro impact is something that continues to be baked into our guidance.

Operator: The next question comes from Craig Maurer with FT Partners. Please go ahead.

Craig Maurer: Yes. Hi. Thanks for taking the question. So, appreciate all the commentary around the macro. Is the bottled macro driving any changes in transaction mix between modalities, whether it’s VCC, ACH or other?

Michael Praeger: Yes. So, hey Craig, I appreciate the question. What I would say, I think where we see macro impacting our business the most is on the discretionary spend volumes. So, I would say having less impact on kind of the allocation across different payment modalities. Those are probably very specifically driven by supplier experience. And typically, we find suppliers think about a combination of timing of the payment, the price of the payment, combined with the level of data, remittance data provided in automation. And those things really drive kind of payment modality acceptance much more so than macroeconomic type issues is what we have experienced. So, typically, in my conversations that I have, it’s usually around discretionary spend on overall volume is where we are seeing the impact.

Operator: The next question comes from Andrew Bauch with Wells Fargo. Please go ahead.

Andrew Bauch: Hey. Thanks guys. I know you don’t guide to a quarterly basis, but wanted to get a sense of your results this quarter relative to your internal expectations. Revenue came in $3 million to $4 million ahead of what our expectations were. And then on a full year basis, you had the guide come up $1 million. So, just wanted to get a sense on how this all played out and what were the puts and takes around the quarter specifically.

Michael Praeger: Yes, it’s – I hear your question, and I think you kind of summarized it well. Just to repeat, we had relative to sort of the first quarter, let’s just say, using consensus as the benchmark, it’s about $3 million up. We attribute a couple of that to the float revenue and a couple of that sort of underlying outperformance in the business, particularly around yield. And our guidance, like I have kind of mentioned in the last response, contemplate sort of the continued activity that we see from a volume trends perspective for the rest of the year. So, we are excited about having another quarter under our belt where we are sort of beating revenue expectations, seeing yield consistently expand – expanding gross margin and sort of doubling EBITDA profit ex-float quarter-over-quarter. So, that’s what we are focused on executing.

Operator: The next question comes from Bryan Keane with Deutsche Bank. Please go ahead.

Bryan Keane: Hi guys. Good morning. Mike, is there anything you can do on your end to try to drive faster transaction growth, or is it just macro driven that there is not a lot you can do to move that number or grow that number?

Michael Praeger: Yes. Hey Bryan, that’s a great question. And it’s one that I spent a lot of time asking my team about. And so when I think of that transaction number, there was kind of two buckets. There is existing customers that are already on our platform that are implemented and where we are seeing some of the headwinds on discretionary spend related to the CFOs across the middle market. That one is probably we have less ability to impact in the short term. And however, the other piece of it is new transactions that we are adding to the platform. And in that bucket, certainly, there are things that – and strategies that we are deploying. One of the biggest things is kind of the evolution of our sales and go-to-market activity.

And one of the things that I highlighted during the call that we are really excited about is the impact of some of the new partnerships that are just in the early stages of being launched, certainly, AppFolio being a big one combined with M3, and then just the continued execution of existing partnerships. So, one of the things when it highlights the top of funnels in the last quarter was what we saw in real estate. That was certainly a big part of that activity, was from the kind of let’s say, legacy partnerships that we have had. Companies like MRI, ResMen, RealPage, examples like that. And – but we are really excited about AppFolio, M3 as a new partnership examples. And right now, we feel that we are kind of on pace to execute those. But certainly, I am talking to my team every day about things that we can do to continue to accelerate those type of partnerships.

Operator: The next question comes from Ramsey El-Assal with Barclays. Please go ahead.

Ramsey El-Assal: Hi. Thanks for taking my question. On the top of funnel headwinds, will we see more of a kind of a noticeable air pocket from the sales pivot that hits numbers in a specific quarter this year? Is there any type of cadence dynamic to be aware of? And then just on the M3 and AppFolio rollout, so I was just curious if you had any updated thoughts on annualized revenue contribution or how much you have embedded in guidance this year for those deals? Thanks.

Joel Wilhite: Hi Ramsey. I will take the first part and Mike will take the second part. So, I wouldn’t really call out necessarily an air pocket. I mean we think we have got – like there is puts and takes overall, but we like our progression of customer adds for the year and feel good about the guidance set up, and certainly then exiting for a strong ‘25. So, I don’t know, Mike, if you want to comment on the M3 and AppFolio.

Michael Praeger: Yes. What I would say, Ramsey, is these partnerships, they are different from the standpoint of one is in a vertical that we know really well and that we are a long-term leader in, being the multifamily segment of real estate. And we already have kind of the key integration partnerships with the other competitors in that segment, i.e., like the RealPage, the ResMens of the world. And so that was one that I think has the capability of ramping faster. Now, having said that, we had kind of already plans in place that we expected to ramp faster to some degree. And then the M3 partnership is one that – we have the same level of segment about, but it’s just in a new emerging vertical for us, being hospitality that we announced last year.

So, we don’t have the big existing name recognition and penetration within that vertical as we do in the real estate side. So, I would say we are right on plan in terms of our internal expectations and certainly working hard to have those ramps throughout the year.

Operator: The next question comes from Tien-tsin Wang with JPMorgan. Please go ahead.

Tien-tsin Wang: Thank you. Just a clarification on the question, if you don’t mind, just the 53% of revenue in the second half as you know that’s unchanged, so the implied second quarter revenue for calculating this correctly is suggesting it will be flat sequentially when it’s usually up, is that correct, and if so, why? And then just on the – I know Ramsey asked it, just the real estate up high double digits, is that a result of AppFolio production, or is it more macro? Thank you.

Joel Wilhite: Got it. Okay. Good question, Tien-tsin. I will go first, and Mike will come after me. So, on your first question, yes, the back end is – in our guidance, the back end of the year is slightly less back-ended with updated guidance, but largely consistent in that sort of 50-53-ish, 52.5, 53 range. And then your question about what is implied in Q2, of course, we don’t guide the next quarter, but your math isn’t wrong. And what we are doing is taking a fairly cautious posture here with guidance as we look out across the rest of the year. I wouldn’t say that there is anything significantly different in terms of the activity that we are experiencing in terms of the macro getting better or worse, but we are exercising an additional measure of prudence as we are giving guidance. And so just kind of keeping the range changed just for that float beat in Q1.

Michael Praeger: And maybe to follow up on the second part of your question related to that top of funnel and the double-digit growth that we saw in real estate wasn’t dominated by one particular partner like AppFolio. And the answer is no, it was really nice activity across the board within kind of real estate, specifically actually weighted towards multifamily. But within multifamily, we saw both more mature partners such as RealPage and ResMen contribute nicely along with MRI. And then on the kind of new partner side, certainly, we have seen the ramp of AppFolio. But it wasn’t kind of heavily weighted or over-weighted for one particular partner. We saw nice across the board activity within that sector.

Operator: The next question comes from James Faucette with Morgan Stanley. Please go ahead.

James Faucette: Great. Thank you. I want to follow-up on Tien-tsin’s question in terms of like seasonality and your indication that you are being prudent here. It sounds like in terms of how you are applying that to the political contribution that that’s also the case, is that fair? And it seemed like you were kind of laying out that this is the first presidential cycle with that business?

Joel Wilhite: That’s right, James. We commented in the February call when we set initial guidance for that political revenue this year is $9 million. We are sort of holding to that. We are cautiously optimistic. It’s our first presidential cycle. It’s largely back-end weighted. And there could be a range of outcomes in terms of overall spend. So, we are being conservative there as well.

Operator: The next question comes from Alex Markgraff with KeyBanc Capital Markets. Please go ahead.

Alex Markgraff: Thanks. Mike, maybe one for you, just on some of the comments around the improvement in automation with some of the bots and AI, I am just curious – I don’t know if I am doing it justice in describing that way – but just curious in the context of digital transaction penetration, does that, in any way, sort of accelerate the path to the 55% to 60% range you laid out for 2025 in the most recent Investor Day? Thanks.

Michael Praeger: Yes. That’s a really insightful question, Alex, related to kind of does that increase in automation, especially around the AI tools, and I kind of referenced one of those being our IVR tool that we have now deployed. And the answer is it does have an impact. And where it has an impact is on small dollar transactions where we have had very specific ROI models where if a transaction fell underneath the threshold of what it would cost us internally to execute that transaction electronically through either a human being or a bot, then it got kicked out. And now with our AI tools, we are able to process those transactions down to a much smaller dollar amount than we have historically been able to do. And so that means that more those small dollar amount of transactions will be going out electronically.

Now, having said that, they are a small dollar amount of transactions, so it won’t have a big impact on the overall volume. But it certainly is part of our overall strategy with customers on how we maximize moving transactions away from paper track to electronic overall. And it’s just one additional lever of all the strategies that we are deploying.

Operator: [Operator Instructions] The next question comes from Rufus Hone with BMO. Please go ahead.