AvidXchange Seeks $484 Million In U.S. IPO

Summary

• AvidXchange has filed anticipated terms for a $484 million IPO of its common stock.
• The firm provides middle-market companies with advanced accounts payable software and related services.
• AVDX has grown quickly but hasn't made much progress toward operating breakeven, so I'll watch the IPO from the sidelines.
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Quick Take

AvidXchange Holdings (NASDAQ:AVDX) has filed to raise $484 million in an IPO of its common stock, according to an S-1/A registration statement.

The firm provides a SaaS-based accounts payable software system.

AVDX needs improvement in certain metrics, its operating losses remain significant, and is using significant amounts of cash so may need to come back to equity or debt markets in the not-too-distant future.

So, I'll pass on the IPO.

Company & Technology

Charlotte, North Carolina-based AvidXchange was founded to develop a cloud-based AP accounting and payments system aimed at middle-market companies and their suppliers.

Management is headed by co-founder, Chairman and CEO Michael Praeger, who has been with the firm since inception and was previously co-founder of PlanetResume and InfoLink Partners.

Below is a brief overview video of AvidXchange:

(Source)

The company’s primary offerings include:

• AP Automation Software

• AvidPay Network

• Cash Flow Manager

AvidXchange has received at least $842 million in equity investment from investors including Bain Capital Ventures, Mastercard, Caisse de depot et placement du Quebec, Ossa Investments, Capital Research, and Management advised entities, and Steve McLaughlin entities.

Customer/User Acquisition

The firm seeks customers in the middle market space via a direct sales and marketing approach as well as indirectly through independent resellers and strategic partnerships such as through MasterCard's B2B Hub.

The company also sells through third-party software providers like RealPage, MRI Software, and SAP Concur.

Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:

Sales and Marketing	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2021	24.6%
2020	25.8%
2019	26.5%

Click to enlarge

(Source)

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, has risen to 1.0x in the most recent reporting period, as shown in the table below:

Sales and Marketing	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2021	1.0
2020	0.8

Click to enlarge

(Source)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

AVDX’s most recent calculation was only 5% as of June 30, 2021, so the firm needs significant improvement in this regard, per the table below:

Rule of 40	Calculation
Recent Rev. Growth %	33%
EBITDA %	-28%
Total	5%

Click to enlarge

(Source)

The firm’s net transactions retention rate from 2019 to 2020 was 102%.

Market & Competition

According to a 2021 market research report by Verified Market Research, the global market for accounts payable software was an estimated $8.77 billion in 2020 and is forecast to reach $17.6 billion by 2028.

This represents a forecast CAGR (Compound Annual Growth Rate) of 9.1% from 2021 to 2028.

The main drivers for this expected growth are a growth in middle-market and small organizations in adopting accounts payable software and a continuing trend toward cloud-based systems.

Also, users have continuing concerns about security related to data authentication, which may act as a brake on the growth of demand in the market.

Major competitive or other industry participants include:

• Bill.com (BILL)

• Coupa Software (COUP)

• Others

Financial Performance

AvidXchange’s recent financial results can be summarized as follows:

• Growing top line revenue

• Increasing gross profit and gross margin

• Lowered operating losses and negative operating margin

• Fluctuating and high cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2021	$ 113,968,000	33.4%
2020	$ 185,928,000	24.3%
2019	$ 149,584,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended June 30, 2021	$ 68,417,000	52.7%
2020	$ 102,173,000	30.2%
2019	$ 78,451,000
Gross Margin
Period	Gross Margin
Six Mos. Ended June 30, 2021	60.03%
2020	54.95%
2019	52.45%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2021	$ (31,872,000)	-28.0%
2020	$ (75,070,000)	-40.4%
2019	$ (77,055,000)	-51.5%
Net Income (Loss)
Period	Net Income (Loss)
Six Mos. Ended June 30, 2021	$ (92,025,000)
2020	$ (101,246,000)
2019	$ (93,546,000)
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2021	$ (41,093,101)
2020	$ (44,129,341)
2019	$ (61,791,412)
(Glossary Of Terms)

Click to enlarge

(Source)

As of June 30, 2021, AvidXchange had $203 million in cash and $940 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2021, was negative ($59 million).

IPO Details

AvidXchange intends to raise $484 million in gross proceeds from an IPO of its common stock, offering 22 million shares at a proposed midpoint price of $22.00 per share.

Existing investor Capital Group and potential new investors BlackRock and Neuberger Berman have indicated a non-binding interest to purchase shares of up to a total of $140 million in the aggregate at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $3.8 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 11.5%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering (including any additional proceeds that we may receive if the underwriters exercise their option to purchase additional shares of our common stock) to redeem the shares of redeemable preferred stock issuable upon conversion of our senior preferred stock (approximately $169 million), and for general corporate purposes, which we currently expect will include headcount expansion, continued investment in our sales and marketing efforts, product development, general and administrative matters, and working capital.

(Source)

Management’s presentation of the company roadshow is available here.

Regarding outstanding legal proceedings, management says it is not a party to any claims or proceedings that would be material to its financial condition or operations.

Listed bookrunners of the IPO are Goldman Sachs, J.P. Morgan, BofA Securities, Barclays, and other investment banks.

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Market Capitalization at IPO	$4,209,702,244
Enterprise Value	$3,832,353,244
Price / Sales	19.63
EV / Revenue	17.87
EV / EBITDA	-53.25
Earnings Per Share	-$0.73
Float To Outstanding Shares Ratio	11.50%
Proposed IPO Midpoint Price per Share	$22.00
Net Free Cash Flow	-$59,036,128
Free Cash Flow Yield Per Share	-1.40%
Revenue Growth Rate	33.35%
(Glossary Of Terms)

Click to enlarge

(Source)

As a reference, a potential public comparable to AvidXchange would be Coupa Software; below is a comparison of their primary valuation metrics:

Metric	Coupa Software (COUP)	AvidXchange (AVDX)	Variance
Price / Sales	24.75	19.63	-20.7%
EV / Revenue	27.02	17.87	-33.9%
EV / EBITDA	-145.59	-53.25	-63.4%
Earnings Per Share	-$4.37	-$0.73	-83.2%
Revenue Growth Rate	40.2%	33.35%	-17.06%
(Glossary Of Terms)

Click to enlarge

(S-1/A and Seeking Alpha)

Commentary

AvidXchange is seeking U.S. public investment capital to redeem preferred stock and to fuel its unspecified corporate expansion efforts.

AVDX’s financials show strong revenue and gross profit growth, lower but still high operating losses, and operating cash burn.

Free cash flow for the twelve months ended June 30, 2021, was a steeply negative ($59 million).

Sales and Marketing expenses as a percentage of total revenue have dropped as revenue has increased; its Sales and Marketing efficiency rate rose to 1.0x in the most recent six-month reporting period.

The market opportunity for providing cloud-based accounts payable software and related services is large and expected to grow at a 9.1% CAGR through 2028, so the firm has positive industry growth dynamics in its favor.

Goldman Sachs is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 27.8% since their IPO. This is a mid-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook are the significant additional capital it may need to continue its investment plans in its AvidPay Network as well as the ability of larger full-suite companies to ‘bundle’ accounts payable software into their existing offerings, producing downward pricing pressure on AVDX in the process.

As for valuation, compared to competitor Coupa, the IPO is expected to price at lower revenue multiples, which appears reasonable given the firm’s lower revenue growth rate.

AVDX needs improvement in certain metrics, its operating losses remain significant, and is using significant amounts of cash so may need to come back to equity or debt markets in the not-too-distant future.

The company has positives in its growth rate and sales efficiency metrics, so a case could be made for it as a longer-term investment in the hopes that it makes progress toward earnings generation.

But, I haven’t seen a significant move toward operating breakeven so positive earnings are probably a far-off hope.

Accordingly, I'll watch the IPO from the sidelines.

Expected IPO Pricing Date: October 12, 2021

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Investing in IPOs is an inherently volatile and opaque endeavor. My research is focused on identifying quality IPO companies at a reasonable price, but I’m wrong sometimes. I analyze fundamental company performance and my conclusions may not be relevant for first-day or early IPO trading activity, which can be highly volatile and unrelated to company fundamentals. This report is intended for educational purposes only and is not financial, legal or investment advice.