AvidXchange Holdings, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

AvidXchange is a provider of accounts payable (AP) automation software and payment solutions for middle-market businesses and their suppliers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: AvidXchange is a software and payment solutions provider catering to middle market businesses across North America. The company’s core offerings involve AP automation and payment technologies. AVDX’s business primarily revolves around two categories: Software revenue, and Payment revenue.

  • Software Revenue: This includes subscription fees for access to their AP automation software, which automates invoice capture, workflow, approvals, and payment processing. It is also recognized as a service revenue on the client’s side.
    • Software revenue is primarily recognized over the estimated life of the contract which is estimated using a straight-line method.
  • Payment Revenue: This stems from processing payments on behalf of their clients, particularly through electronic means. The company earns a fee from these transactions which are based on a per-transaction basis.
  • The most significant component of this revenue includes Interchange Fees.

Industry Dynamics:

  • Market Trends: AVDX operates in a fragmented but rapidly-evolving market, with a general trend towards greater digitization and automation of financial processes. Middle-market companies, which represent a large portion of the economy, are increasingly seeking ways to streamline AP, enhance compliance, and reduce costs.
  • Competition: The company faces competition from established ERP providers and more specialized software firms. The payments industry, in particular, is quite competitive, with new providers and payment options emerging frequently.
  • Macroeconomic Conditions: They’re affected by economic circumstances and the current interest environment. Higher inflation and interest rates are expected to negatively affect both customers and the overall economy and thus may affect their financial performance

What Makes AVDX Different?

  • Focus on Middle Market: AVDX targets middle-market companies, a segment often underserved by large providers of financial solutions. This is an area where AVDX claims a competitive advantage.
  • Integrated Platform: They provide an integrated payment network linking buyers and suppliers, simplifying the accounts payable process.
  • Strong Growth: AVDX has shown strong growth in its revenues and the number of customers utilizing its platform.

Financials:

  • Revenue Distribution: The company’s revenues are distributed between software revenue and payment revenue. Recent trends show a higher growth in payment revenue.
  • Revenue Growth: AVDX has shown consistent revenue growth, primarily driven by a jump in revenue from payment processing services and, to a lesser extent, growth from software. In Q3 2023, AVDX’s total revenues grew 16% year-over-year, with software revenue growing 9% and payments revenue 17%. The growth was primarily due to an increase in transaction volumes.
  • Margins: Gross profit margin for the company is over 60%. However, the company has reported net losses in every financial period that we have access to.
  • Capital Expenditure Despite considerable revenue growth, the company is seeing its operating expenses and capital expenditures eat up a lot of the revenues.

Important Financial Notes from the Latest Report (10-Q):

  • AVDX’s net loss for Q3 2023 was ($36.5 million) and for the nine months ended September 30, 2023, it is a net loss of ($140.9 million).
  • Gross profit margins are improving and were 61% for the latest quarter, from 58% in the same period last year
  • Adjusted EBITDA in Q3 was 8.9 million compared to an adjusted EBITDA of 4.8 million in the same period last year.
  • Free cash flows have improved, and were a positive 18.1 million dollars in Q3 of 2023.
  • From the Q3 2023 report, we find that “Net debt decreased to $136.1 million as of September 30, 2023, compared to $142.8 million as of December 31, 2022”
  • Total operating expenses in Q3 2023 were reported as 127.2 million, against total revenues of 105.5 million, leaving an operating loss of 21.7 million dollars. The same pattern is visible in YTD financials.
  • From the 10K report of 2022, we can see that the company’s goodwill is valued at 165.9 million, and the total value of intangible assets is 234 million.

Moat Analysis:

  • Moat Rating: 2/5
    • Network Effects: AVDX’s network effect is not as strong as some, because their platform does not directly become more valuable for every user that signs up, as compared to something like a social media platform. However, with an increasing number of suppliers adopting their payments network, the platform becomes more attractive to buyers and creates switching costs for both buyers and suppliers. The company is also building a 2 sided network by connecting buyers and suppliers.
    • Switching Costs: Switching costs are evident as clients become integrated into the AVDX platform and the integration can take significant time to establish.
    • Intangible Assets: AVDX does have some intangibles assets like it’s brand value and trade name, but these assets are not yet as established and well known to act as a barrier to entry or an advantage over competitors.
    • Scale: Scale is a potential source of competitive advantage; however, AVDX does not dominate the market yet.
    • Summary: While the company has elements of moats, they are not yet as wide or entrenched enough to create a strong competitive advantage. They have some pricing power, but the market is very competitive.

Legitimate Risks to the Moat and Business Resilience:

  • Technology Disruption: Rapid technological changes can make AVDX’s technology obsolete, leading to a rapid erosion of their moat. To address this risk, AVDX is aggressively investing in emerging technologies like AI to integrate into its platform.
  • Competition: The AP automation and payment space is rapidly evolving, with competition from established players and new entrants. Aggressive competition can put significant downward pressure on their margins.
  • Economic Downturn: Decreased trading volumes, higher borrowing rates, or increased insolvencies can impact the overall business performance of the company.
  • Integration Risks: The Company is exposed to integration risks associated with integrating acquired businesses, which can disrupt operations and dilute earnings.
  • Regulation: Legal and regulatory changes in the payment and banking industries can lead to higher compliance costs, and make it hard for AVDX to implement new changes or offer new solutions, and these can also increase the risks of data protection and privacy breaches.
  • Data Breaches and Cyber Attacks: AVDX collects and stores large amount of sensitive and proprietary information, and any security incidents may lead to financial and reputational damage to their business.

Business Resilience: AVDX can mitigate risks by ensuring that its platform is user-friendly and incorporates AI and machine learning, thus enabling its platform to be agile and provide new features quickly. AVDX is also improving its compliance procedures and its contracts with customers. The diverse customer base of AVDX also reduces reliance on a single client.

Understandability:

  • Rating: 3/5

  • AVDX’s business model is fairly straightforward in principle but needs knowledge of accounting, technology, and the payment industry. They offer a platform to streamline business payments and related accounting operations. Though the basic idea is simple, the technicalities of their automation system, financial statements, and competition require further understanding. So the understandability is slightly below average.

Balance Sheet Health:

  • Rating: 4/5
  • AVDX’s balance sheet is quite robust, with a low level of long term debt and a positive equity. While the company is not profitable yet, their financial assets are in a good position to fund future growth and innovation.
  • Cash and marketable securities on hand are $228.3 million in 2022 and $319.3 million in 2023. * Long term debt is at $75 million. Total assets are at $2,489 million and total equity is at 686 million. Overall good ratios.
  • The company is growing quite fast, however, this has not translated to higher profitability and margins, as the company’s expenditure are high, this will be a risk going forward.
  • One risk lies in goodwill, which has been incurred as a result of acquisitions, if any of the acquisitions performed poorly, the company will be forced to write off goodwill, which could lead to a big loss.

Overall Summary:

AvidXchange is a company in a fast growing market, with significant potential, but faces high competition and needs to establish strong barriers to entry to maintain its growth and profitability in the long term. Their balance sheet is in a good place, but will need active monitoring. The company has elements of a moat but further time is needed to see if those moats will expand. Management’s ability to make the right decisions will be key to the company’s long-term growth.