Mike Praeger: Okay. Thanks James.
Joel Wilhite: Thanks James.
Operator: And the next question is from Timothy Chiodo with Credit Suisse. Please go ahead.
Timothy Chiodo: Great. Thanks a lot. I appreciate all the extra color on IA 2.0. I want to hit a little bit on that just across the three areas. One being the credit risk assuming — and you’ve disclosed that you do assume that but it’s small and you have the data so not an issue there but just wanted to clarify anything you could comment there. And in terms of the funding, assuming that you’re funding that today if that could change over time as the program expands? And then related to that, is there a rough percentage of TPV that you think about that might be addressable to the Invoice Accelerator program in terms of how much penetration the program could see over time, would appreciate any of that context? Some of that kind of today and some of that might evolve over time.
Mike Praeger: Right. No, that’s a good question, Tim. So first of all on the credit risk standpoint, we have the benefit of having a true two-sided network that both the buyer and supplier are both on the network. And we have the benefit of seeing all the historical transactions that they’ve done between the parties. And so, we believe — and again, although we’re launching our 2.0 offering, we’ve been in the market for the last several years is our 1.0 offering and have seen all the different examples of buyer and supplier behavior related to these type of transactions. So we feel really good about that element of it and that will be kind of a highly automated kind of credit process. Related to the underlying funding element, today we are doing it on our own balance sheet.
However, that is something that we’re in our business model that we’re planning to change. We view that we’re roughly maybe 18, 24 months away from having those balances in a way that it’s exciting for probably one of our existing partners. We have a large stable of bank partners that have been talking to us for the last couple of years about being able to take this off balance sheet. And so we absolutely expect that, we will do that, and that’s part of our long-term model. As it relates to the last part of the question, how we think of it is that this product is really best suited to help the cash flow needs of our small business suppliers. We anticipate that roughly of our total pool about 50% of our suppliers are small businesses. And so that’s kind of the target market that we’re making this offering available to.
And I think, one kind of insight stats that, we’ve kind of shared routinely, which is really what makes us excited, and led to really kind of the building of our 2.0 offering is that, over the last year or so we did notice that, when suppliers were taking advantage of our invoice accelerate offering. Within 90 days they came back for ongoing advances. So we’re really excited about the impact that this is going to have long term for our business.
Timothy Chiodo: Michael, thank you. Those are great clear answers and point well taken on the €“ currently on the balance sheet. But as it scales and you have more of a time series of data could take it off. Thank you for all that, and the context on the SMB penetration or the portion of TPV.
Mike Praeger: Thanks Tim.
Operator: And the next question is from Brent Bracelin from Piper Sandler. Please go ahead.
Brent Bracelin: Thank you. Good morning. Mike, it sounds like there’s a lot of optimism here top of funnel. It sounds like you got a lot of new products that could help growth going into next year. It sounds like the real near-term challenge is just the mid-market and belt tightening. Looking at past cycles, trying to assess here, how bad does the mid-market get relative to TPV growth, I mean, are we talking prior cycles where you saw TPV go flat on a year-over-year basis? Does it go negative? Temporarily, the good thing about recessions as they are temporary, but what can you tell us relative to past cycles within the mid-market on trying to assess near term where TPV growth could go? Thanks.
Mike Praeger: Yes. So, I think €“ so first of all, we €“ I particularly look at it in kind of two lenses. One is the underlying health of the €“ our middle market supplier. I mean a buyer customer. And then the second one is the impact on their transactions. Within the last kind of negative cycle being kind of 2007, 2008 cycle, we had one customer go out of business and across the middle market through bankruptcy. And so we literally retained close to 100% of our customers from that perspective. So that really demonstrates resilience to the middle market. I would say, a kind of different transaction flows. What we’ve seen is, again, we were not in the payments business in 2007, 2008. We’ve launched the payment network in 2012.
But extrapolating from invoice volumes, typically we’ve seen in the past cycles is up to kind of a 5% headwinds across the different verticals, within the middle market. And then, it’s usually geared across this discretionary spend delaying improvement projects capital expenditures things like that. And then, they usually get caught up and kind of snap back to those type of expenses pretty quickly exiting the cycle. So that’s what we’ve seen historically. And I think what we’re seeing, currently is, consistent with what we’ve seen historically. There’s nothing that’s really an anomaly that, we’re saying, hey, we haven’t seen that type of behavior before.
Brent Bracelin: Got it. And so, it sounds like little to no churn impact. Do you expect some sort of 5%-ish headwind to transactions processed? And then obviously, the variable is going to be how much discretionary spend impacted. But that’s super helpful. That’s all I had. Thank you.
Operator: And the next question comes from Darrin Peller from Wolfe Research. Please go ahead.
Darrin Peller: Hey guys. Thanks. Just a quick one. It’s good to see that the profitability levels have been pulled up a bit. And I mean maybe just the reiteration or revisiting, what you guys expect and what your plans are in expenses for the year and the next couple of years. And how you plan on managing that and balancing your growth investments versus profitability going forward now into ’24 and ’25? How much of a dramatic uptick we can hopefully see in those levels of profitability as part of your story?
Joel Wilhite: Yes Darrin, happy to take that one. So, again, we were kind of pleased to bring forward by a year that profitability point in our guidance in the face of obviously some uncertainty. And so, what that reflects is just a lot of discipline on the part of management to sort of be super prudent, but to continue to invest in the growth we know lies ahead even on the other side of whatever this season is that we’re in. And so, maybe one thing to call out is, we do see kind of EBITDA negative in the front half of the year, EBITDA positive in the back half. I’m not sure, if I made that clear before. And then, ’24 and ’25 it really depends on what the macro is doing. So, I would need to underscore any comment I make about, we know that there will be an endpoint.
We don’t know when that would be. But we’re really focused on being a profitable business exiting ’23 and thereafter. And — but also, we have a huge market opportunity ahead of us. And so, we’re going to be disciplined and use the sort of the capital that we’re able to generate ourselves to invest in the business going forward.
Mike Praeger: Yes. Maybe one thing that Darrin, I’d add to Joel’s comments would be, again, we’re in a long game here. I don’t know, it’s spring training and baseball. So maybe, we’re in the bottom of the first, heading into the second to give you context. So it’s really early in the overall game that we’re playing. And still, we’re seeing roughly 60% of the middle market have not yet adopted any solutions related to automating their accounts payable or payments. And so, we’re balancing that investment and what we can do to drive that incremental adoption each year, as well as kind of that efficient growth to maximize profitability. So, I would say, we continue to invest in what’s kind of required for the adoption of the market. And maybe this also is a little opportunity to kind of amortize our upcoming June 1 Analyst Day. I think, we’ll be diving deeper in some of these questions, as well as providing some updated long-term targets related to gross margin.
Darrin Peller: That would be really helpful.
