Avidxchange, one of the biggest and oldest players in AP automation (it started in 2000) filed to go public.  Competitors include:

• Mineral Tree (to be acquired by Global Payments for $500M)
• Tipalti (which recently raised $150M at a reported $2 billion valuation)
• Bill.com (which sports a market cap of $27 billion), and perhaps to a lesser extent
• Paymode-X which is part of Bottomline Technologies

The Avidxchange Target Market

Avidxchange targets the mid-market, which the company defines as the 435,000 companies with revenues between $5 million and $1 billion.  With a current client base of 7,000 buyer customers, the company sees plenty of upside.  The company believes the SMB market and Enterprise market are better served than the mid-market.  Avidxchange is probably right.  After all, you have Bill.com and Quickbooks at the SMB end of the market and SAP, Coupa, etc. at the enterprise end.  Think of Avidxchange as the Hubspot or Netsuite of AP automation.

The AvidXchange Business

The company’s S-1 is a very useful guide to AP automation.  The company lays out in detail the distinct processes of invoice management and payments execution.

This distinction is important because some competitors (e.g., WEX, NvoicePay (Fleetcor), CSI, and Paymode-X) only play in payment execution, while others offer a complete invoice-to-pay solution.  It’s also an important distinction because Avidxchange derives revenue in two very different ways:

• An AP automation software revenue stream monetized via transaction and subscription fees paid by buyers.  These products are AvidInvoice, AvidPay, AvidUtility, and a few other products for buyers. (AP automation was the only revenue stream for the company’s first 12 years.)
• A payments revenue stream monetized primarily on the supply side via net interchange (after rebates to buyers and suppliers) for virtual card payments as well as fees for paying suppliers electronically (instead of via check) (e.g. AvidPay Direct/ enhanced ACH).  The company also derives revenues from the float resulting from buyer balances for payments.  (ADP for suppliers!) Finally, the company is also offering invoice financing to suppliers.

The basic premise of the company’s business model is captured in the CEO’s letter to shareholders: it’s to manage the AP process for middle-market companies, upsell them on AvidPay, and monetize the payments via supplier fees for electronic and/or early payment.

I’m responsible for highlighting that last sentence.  Note that AvidPay’s penetration is much lower than AvidInvoice’s.  AvidPay is ideally a faster-growing and more profitable business.

Avidxchange Financial Metrics

There are many yummy metrics in the S-1, though some are a little wonky. Key financial metrics are:

• The company grew 24.3% for the year ended December 31, 2020, to $186 million in revenue.    (This includes inorganic growth.)  For the six months ended June 30, 2021, growth was 33.4% to $114 million.  This also includes a little inorganic growth, as well as a favorable year-over-year comparison versus the depths of Covid.
• Avidxchange reported a GAAP gross margin of 52.0% and a non-GAAP gross margin of 60.2% for the six months ended in June.  (The non-GAAP gross margin excludes stock-based comp and depreciation and amortization.)  Clearly, these are not yet SaaS gross margins.
• The company has 1,500 full-time US employees for less than $250 million in annual revenue.  Right now this is closer to a tech-enabled business process outsourcing company than a SaaS company or a B2B payments company.
• For the six months ended June 30, the company’s had an adjusted EBITDA loss of $12M, or about 11% of revenue.  Adjusted EBITDA does not include a substantial charge for “non-recurring items not indicative of ongoing operations”. It’s a “Rule of 15-20” company.
• For the lastest six months reported, Avidxchange derived about 37% of revenue from software and 62% from payments.  This mix was similar to the mix for the full year 2020.

Avidxchange Operational Metrics

The company provides some really interesting (and again slightly wonky) operational metrics.  Avidxchange:

• has 7,000 buyer customers.
• paid 700,000 suppliers from 2015-2020 (an odd measure, which undoubtedly includes many non-active suppliers).
• reported “spend under management” of $145 billion in 2020.  This metric is defined as the value of all invoices processed plus the value of payments.  Since Avidxchange had $38 billion in payments in 2020, the company must have had $107 billion in invoice value. (These figures are consistent with the fact that 30% of customers used AvidPay.  The company should probably, instead, be reporting the percentage of invoice value monetized via payments.)
• processed almost 30 million transactions over the first six months of this year, representing a growth rate of 21.2%.  A transaction is defined as a purchase order, invoice, check, ACH, or VCC payment. (Interestingly, a buyer or supplier probably thinks of one transaction as including all of those pieces.)
• reported a “net transactions processed retention rate” of 102% from 2019 to 2020.  This was lower than I was expecting, but could be influenced by Covid.
• calculates its “yield” per transaction as $3.81 for the latest six months, up 9.8%.  This is total revenue divided by total transactions.
• Perhaps most important, payment volume was $23 billion in the latest six months reported, up 36.3% versus the prior-year period.  Combined with payment revenue of $70.6 million for the same time period, we can impute a “take rate” on payments of 31 bps.  This take rate includes net interchange, float from buyers, and fees from suppliers accepting AvidPay Direct.

Avidxchange Bottomline

This one will be really fun to watch in the public markets.  It’s a revenue leader in a super-hot space and it has substantial scale in that market.  And yet.   Right now, it is more of a tech-enabled service than a SaaS offering and it still loses money despite its substantial scale.

AP businesses that make most of their money on payments are like mining businesses.  You have to solve a big problem for the customer (all of those paper invoices) to get to the right to manage payments.  Then you have to mine through all of the payments to convince suppliers to accept something other than checks.  It’s a lot of digging for the gold–which are payments on which you can charge basis points.   How fast, and how profitably, Avidxchange gets to the profitable payments will determine whether or not it is a great investment.

The heading for this last section is not a coincidence.  The valuation Avidxchange receives will also shed light on the valuation of Bottomline which has an Avid-like business within it in the form of Paymode-X.  It will also push Bottomline to be more forthcoming about that business.