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Good day, and welcome to the AvidXchange Third Quarter 2021 Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Ryan Stahl, General Counsel. Please go ahead.
Good afternoon, everyone, and thank you for joining us for the AvidXchange Holdings Third Quarter 2021 Conference Call. With me today is Mike Praeger, AvidXchange's Co-Founder and Chief Executive Officer; and Joel Wilhite, AvidXchange's Chief Financial Officer.
Before we begin today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss financial guidance, operational outlook, future strategic initiatives and potential market opportunities during today's call.
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 and in the investor supplement, each found on AvidXchange's Investor Relations website. We have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.
With that, I will now turn the call over to Mike Praeger.
Thank you, everyone, for joining us for AvidXchange's first earnings call as a public company. It's great to be connecting with all of you today. Our transition to a public company was a significant milestone for AvidXchange, and we were able to celebrate that occasion by ringing the NASDAQ bell from our campus here in Charlotte, North Carolina, just a few weeks ago. We achieved this through a lot of hard work, and I want to thank all my AvidXchange teammates for making this a reality. I'm so proud of all we've collectively accomplished in the last 20-plus years in building our business.
Joel Wilhite and I are excited to share our third quarter results as well as an overview of our business, future growth strategies and where we are seeing momentum and continued success in driving our AvidXchange business flywheel. With that, I'll begin my remarks with our third quarter highlights.
Total revenue for the quarter was over $65 million, an increase of 37% from Q3 of 2020. And we processed over 16 million transactions during the quarter, an increase of over 17% from Q3 of 2020. Overall, our third quarter results reflect continued strong demand for our software and payment solutions, along with solid execution against our key growth initiatives. The strong momentum we are seeing in the business gives us confidence in our full year 2021 financial outlook, which Joel will discuss in more detail later in the call.
Now before I talk about some recent and exciting new business developments, since it's the first time we are discussing our quarterly results in a conference call format, I thought it would be helpful to drill down deeper into how our business works. AvidXchange is a software company that is purpose-built to help middle market companies automate their accounts payable and payment processes. In addition, I'd like to spend more time discussing our long-term growth plan through the lens of our AvidXchange business flywheel along with our strategies to capture the significant greenfield opportunity that we believe exists in the middle market.
Approximately 42% of U.S. business-to-business payment volume is still paid by using paper checks, and we believe that number of middle market companies manually approving invoices and utilizing paper checks is actually much higher.
With that, let me start off by articulating the market opportunity that we see in front of us. We believe that the middle market segment is the largest portion of the overall accounts payable automation and business-to-business payments market. In addition, this large and growing market is facing unique challenges such as: inefficient legacy solutions that are manual and paper intensive; complex integration requirements supporting various vertical industries; unique business process requirements and supporting ERP or accounting software solutions; high cost related to manual and complex accounts payable workflows; and finally, a status quo mindset of traditional long-tenured finance leaders being reluctant to change.
As companies continue to automate complex accounts payable workflows and replace paper checks with alternative electronic payment methods, we estimate more than $20 billion in addressable annual revenue opportunities across both accounts payable automation solutions and business-to-business payment transactions for the middle market. In addition to providing B2B payments, we see a large unmet need in supplier financing, which we believe is an additional $20 billion of white space opportunity, bringing our total estimated addressable market to over $40 billion.
To take advantage of this opportunity, we've created AvidXchange, which is purpose-built to deliver a significant value proposition by seeking to make inefficient and expensive paper-based B2B payments and invoices obsolete for middle market companies. We seek to deliver further value to our mid-market buyer customer by automating their accounts payable invoice and payment process, managing their complex business rules and supporting multiple general ledger systems and converting paper-based checks into intelligent electronic transactions. Simply speaking, our mission is to eliminate both the paper invoice and the paper check for our customers.
We also seek to deliver value to our supplier customers by providing payments efficiently and securely managing their business rules for their preferred digital payment acceptance methods and providing Rich Forman's data along with visibility into their invoice and payment statuses. In addition, we provide value-added invoice financing services through our emerging invoice accelerator offering, which is a key feature of our AvidPay Network, designed to enable suppliers to better manage their cash flow through directly controlling when they receive payment.
This 2-sided network that we built, serving both buyers and suppliers, generates a tremendous flywheel effect for our business. Our AvidXchange business flywheel shows how we work to create value for our buyer and supplier customers, and it reinforces and accelerates other value we generate, driving continued growth by delivering a great customer experience for our 7,000 buyer customers and over 700,000 supplier customers on the AvidPay Network. Our average age flywheel begins with Gear #1, which is delivering great accounts payable automation and payment software. We believe our ability to deliver a great software automation experience draws buyers to our platform. Our product removes the paper, automates business rules and workflows along with reducing payment fraud risk, bringing all invoices of payments into 1 cloud-based platform that can be accessed anytime, anywhere by all of our customers.
To accelerate the first gear of our flywheel, we're working to maximize our go-to-market strategies horizontally across the middle market, along with focusing on 8 specific core verticals, which include: real estate; the Homeowner Association, or HOA market; financial services, which includes Tier 2 and Tier 3 banks, along with credit unions; construction; media; health care facilities; social services and nonprofit organizations, along with education. Through our hybrid go-to-market strategy utilizing both direct and indirect channels. Our direct sales force leverages our deep domain expertise in these verticals and over 120 referral partner relationships to identify and attract buyers that would benefit from our accounts payable software solutions, along with automating their payment process via the AvidPay Network.
On the indirect channel side, our strategy is built on key accounting system integrations, reseller partners and other strategic relationships, such as our exclusive strategic partnership with Mastercard through their Mastercard B2B Hub, which includes Fifth Third Bank, along with Bank of America and other financial institutions such as KeyBank and third-party software providers such as MRI Software, RealPage and SAP Concur. New customers in the third quarter spanned across AvidXchange core verticals, including Good Winning Company within our HOA vertical, Casen Associates properties and Robert High development within our real estate vertical, along with Fusion Transport and BPS Supply Group, just to name a few.
Customers across each of our verticals are looking to add both AvidInvoice to automate their accounts payable process, along with AvidPay to automate their supplier payment process. One recent example in current holdings, a Florida real estate firm had a history of incorrect and delayed payments to its vendors due to flawed accounts payable system that was costing them several thousand dollars a month. Using AvidXchange software, they're able to achieve 3 key objectives: first, they're able to customize their workflow approval functions to automate their invoices and payments; second, they wanted to reduce incorrect payments and non-improved payments; and third, they wanted to have real-time anywhere access to their accounts payable data.
We're seeing good traction in our financial services vertical. As an example, the pace of credit union customer additions has expanded by 38% year-to-date with credit union additions more than doubling. By drawing buyer customers to our AP automation software platform, we enable to build a second flywheel gear, which is maximizing the number of transactions we manage on our platform. By combining our business model to be the system of record for all buyer AP transactions, along with an the entire payment file for their payments, we were able to maximize the overall number of invoice and payment transactions that we manage for our customers.
Furthermore, we strive to provide a great customer experience through integrations between our buyer customers accounting systems and our invoice management platforms in our AvidPay Network. Today, we manage over 210 integrations with the most widely used accounting and ERP systems, and we support a variety of payment methods, depending on the suppliers' preference, including Virtual Card, or VCC; enhanced ACH, or our AvidPay direct offering; and physical checks, while delivering Rich Forman's data to streamline the reconciliation process, supporting the middle market and the various industry verticals that make up the middle market. We view these strategies and iterations as critical key differentiators for AvidXchange. Our competitors don't necessarily want all their customers' volume, whereby they focus on only specific transaction types, which we believe creates a real long-term advantage for us as we want both to own the buyer and the supplier customer experience and deliver an industry-leading and unique long-term value proposition to our customers.
The development of channels and partnerships for distribution is also key to enabling the growth of transactions on our platform. Further proof of our continued progress in maximizing the number of transactions under management is that we processed over 16 million transactions in the third quarter, up approximately 17% year-over-year. Once a customer's invoice and payment volume is on our platform we seek to create additional value by utilizing the AvidPay Network to facilitate the conversion of paper checks to let intelligent e-payments, which is our third gear.
We have over 700,000 suppliers that we paid through the AvidPay Network. We combine specifically designed business process with technology to dynamically manage the various business rules, along with managing the preferred payment methods for these suppliers. By managing their payment business rules, we also manage how they would like to receive their electronic remittance data so they can apply the payment to the correct supplier account and invoice number, along with enabling suppliers to more efficiently reconcile their outstanding invoices.
We're excited to see continued growth in a number of enrolled e-payment suppliers receiving electronic payments from the AvidPay Network. E-payment suppliers that find as those suppliers that we've enrolled in 1 of our various AvidXchange virtual card payment offerings as well as our AvidPay Direct modalities. AvidPay Direct is our version of ACH+, where we settled through ACH, but wrapped transaction with electronic remittance data the supplier needs to automatically apply and reconcile each payment giving them the payment speed, security and reminisce data that they require. We consider our AvidPay Network to be our secret sauce and as a significant competitive advantage versus others who have primarily outsourced their supplier payment engagement and settlement efforts.
We've made a large investment each year since we launched the AvidPay Network in 2012 and anticipate significant future return on our investment, given that we expect our AvidPay Network to be a long-term differentiator and driver of future margin expansion as we own the entire supplier experience from invoice submission through the payment acceptance by systematically automating each supplier's unique business rules for payment acceptance and delivery of reminisce data.
Our AvidXchange business flywheel accelerant is a continued focus on automating key business processes to improve the speed and reliability of our payment offerings along with additional monetization features created for our fourth gear. Our fourth gear is designed to leverage the data of our network to further increase the value proposition we are delivering to both our buyer and supplier customers, which leverages the 20-plus years of data that we've captured detailing each buyer and supplier transaction.
Our single cloud-based platform for invoices and payments enables us to abstract all the learnings from these buyer and supplier relationships and use it to target new verticals for expansion as well as new innovations such as advanced and management analytics as well as data related to specific invoice types such as utility bills, insights into the management of their cash flow and financing features for our customers. A great example of this today is our emerging invoice accelerator offering, in which we utilize the data of our AvidPay Network along with the historical payment trends between buyers and suppliers to underwrite specific invoices that are eligible to be advanced for next-day payment, creating a very unique and differentiating value proposition for our supplier customers, enabling them to get paid when they want to get paid. Focusing on how we can invest in accelerating our AvidXchange business flywheel not only provides us with increased transactional monetization opportunities but also serves as a source for continued innovation, growth and market leadership across the middle market.
So to summarize, we believe that we built a powerful flywheel business model that is well positioned to capitalize on this massive growth opportunity and the adoption catalysts propelling our business by executing on our focused key strategic growth drivers, which include: number one, that driving the number of overall transactions processed by acquiring new buyers and suppliers, along with increase in the number of transactions went each of our existing buyers and their suppliers. Number two, increasing conversion of paper checks to electronic payments. We believe there is a significant opportunity to increase the penetration of electronic payments as paper checks still comprise over 42% of overall businesses, the business payments in the United States today across all sectors of the middle market, and we estimate that the number of companies predominantly using paper checks across the middle market to be significantly higher. AvidXchange is the leader in driving e-payment adoption through our innovative products and processes.
Number three, innovation and delivery of new products. We'll continue to leverage the rich data and business insights that we've accumulated across buyer and supplier transactions, enabling us to strategically leverage this data to develop new innovations and capabilities. Number four, entering new vertical markets. We'll continue to supplement our organic growth by pursuing strategic mergers and acquisitions to expand new verticals and horizontal capabilities. For example, in Q3, we entered the media vertical by acquiring FastPay, a leading provider of payments automation solutions for the media vertical industry.
Number five, cross-border and international expansion. We're currently developing a cross-border payments offering, targeted generally available for customers across multiple software leases over the course of 2022. On top of our unique market opportunity, flywheel effect and moat that we've already developed within the middle market, we're in the early days of seeing 4 catalysts unfolds that we believe will be accelerators across the middle market for our offerings, which include: first, the pandemic highlighted the importance of automation for business continuity and support work from home and hybrid workforce models. Second, there have been a growing concerns over fraud risk and data privacy with paper invoices and paper checks. In fact, the majority of payment fraud in the middle market occurs with paper checks. Third, familiar technology with users having the experience benefits of cloud-based solutions for automation and other back-office processes. And fourth, which long term may be the most impactful of all the catalysts, is the generational shift or millennial effect, as I like to call it, with tech savvy, younger generation finance leaders taking on increased leadership roles in middle market companies. We are certainly excited about the future of AvidXchange, and I look forward to updating you on our progress during future calls.
So in closing, we delivered strong third quarter 2021 financial and operating results, and our momentum heading into 2022 is very encouraging. We continue to drive uses for AvidXchange and our customers by growing and enhancing our offerings, services and talent to help more businesses transform and automate their accounts payable and payment processes. We believe our results and continued progress against our key growth initiatives are indicative of our commitment and focus on creating long-term value for all of our stakeholders for many years to come.
Now I'll turn the call over to Joel, so he can provide a review of our financial results from the third quarter and review our 2021 full year guidance. Joel?
Thanks, Mike, and good afternoon, everyone. I'm excited to talk to you today about our strong Q3 financial results and provide guidance for the full year 2021. Given that this is our first earnings call as a public company, I'll briefly talk about our revenue model and drivers.
We have a highly visible revenue model. Based on the durability of our buyer relationships and the recurring nature of the revenues we earn, our revenues are predominantly derived through software revenue from our buyers and revenue from payments made to their suppliers. We generate software revenue from our buyers through our focus on years 1 and 2 of our flywheel, delivering great AP automation, software and maximizing transactions on our platform. Software revenue comes primarily through fees that are calculated based on the number of invoices and payment transactions processed, which is why one of our key metrics is total transactions processed.
To a lesser extent, we also generate some recurring maintenance and subscription fees. While our buyers are typically billed and paid on a monthly basis, they're usually under a multiyear contract with revenue recognized over the term of the contract. We generate payments revenue through the payment volume from Gears 1 and 2 noted previously, which is optimized by our Gears 3 and 4 of our flywheel. Gears 3 and 4 focus on delivering value to our suppliers through e-payments and leveraging data across our network.
As we facilitate payments from our buyers to their suppliers, we offer electronic payment solutions to those suppliers. Our electronic payment solutions currently include virtual credit cards and an enhanced ACH payment product called AvidPay Direct. Therefore, total payment volume is also another key metric.
Now let's turn to our results for the 3-month period ended September 30, 2021. Total revenue increased by 37% to $65.2 million in Q3 of '21 over the third quarter of 2020. The increase was primarily driven by the addition of new buyer invoice and payment transactions and increased e-payments to suppliers. Additionally, in recent months, we've been experiencing modest tailwinds from the increased average payment size, which we believe is driven at least in part by a recent uptick in inflation.
Our strong revenue growth also resulted in our total transaction yield expanding to $4.05 in the quarter, up 17% from $3.46 in Q3 of 2020. Software revenue, which accounted for 34% of our total revenue in the quarter, increased 30% in Q3 of '21 over the same period last year. The increase was primarily driven by 17% growth in transactions processed in the quarter as well as the benefit of $2.1 million of revenue associated with the acquisition of Core Associates, which closed in December 2020. Payment revenue, which accounted for 65% of our total revenue in the quarter increased 40% in Q3 2021 over the same period last year, primarily driven by 40% growth in total payment volume in the quarter.
Non-GAAP gross profit increased 48% in Q3 '21 over the same period last year to $39.5 million, resulting in a 450 basis point improvement in non-GAAP gross margin for the quarter to 61%. Non-GAAP gross margin improvement was driven by increased total transaction yield in the quarter as well as continued operational efficiency.
Moving on to our operating expenses. These expenses increased by 38% in Q3 of 2021 over Q3 of last year. Sales and marketing costs increased 37% in Q3 of '21 over Q3 of last year, driven by continued investment in our direct and channel strategies as well as acquisitions. Research and development costs increased 42% in Q3 of '21 over Q3 last year. This increase reflects our continued investment in new and enhanced products for both buyers and suppliers, together with investments in our platform that will drive our growth going forward. General and administrative costs increased by $5.2 million in Q3 of 2021 over Q3 of last year and reflects the growth in our business and also includes investments associated with our preparation to operate as a public company.
Overall, our GAAP net loss was $35.5 million for the quarter, driven by continued investments in our growth strategy as seen in sales and marketing and R&D as well as our preparation to become a public company. On a non-GAAP basis, adjusted EBITDA was a loss of $6 million in Q3 of 2021 compared to a loss of $6.2 million in Q3 last year. While we expanded our transaction yield and non-GAAP gross margins, our continued investments in our growth and our platform continue.
We ended the quarter with cash and cash equivalents of $150.9 million. On October 13, we completed our initial public offering, in which we issued and sold 26.4 million shares of common stock at a public offering price of $25 per share. We received $620 million in net proceeds after deducting underwriting discounts and commissions of $39.6 million. We believe that we are well capitalized to execute on our growth strategies.
I'll now move on to guidance. As we mentioned in our press release, we're providing the following guidance for the full year 2021. Total revenue for the year is expected to be in the range of $244.5 million to $245.5 million. At the midpoint, this would represent growth of 32% on a year-over-year basis. Adjusted EBITDA in the range of negative $30.1 million to a negative $28.1 million. In summary, we delivered strong third quarter 2021 financial and operating results, and our momentum heading into 2022 is very encouraging.
I'd like to turn the call now back over to the operator and open up the line for Q&A. Operator?
[Operator Instructions] Our first question today comes from Will Nance with Goldman Sachs.
Congrats on the first quarter.
Thanks, Will.
Maybe I'll just kick it off on some of the traction you're seeing on the AvidPay Network. Just wondering if you could help kind of flesh out people's understanding of the penetration of the network with your current customer set and then how that compares to kind of new business?
Yes. So as it relates to kind of the AvidPay Network, and I think your question is related to adoption, related to existing and how it maybe relate to new customers. So we kind of think of it on a transactional basis. And so today, across the entire network, about 40% of all transactions, we're able to monetize either through one of our forms of AvidPay Virtual Card or AvidPay Direct payment offerings. And that's pretty consistent across the different industry verticals that we're in.
One of the things when we take on a new customer to get up to their kind of full adoption cycles, that period is typically a 6- to 9-month period for a new customer to get to their full adoption period. And I don't know if, Will, if you had any kind of follow-up to that question.
No. that's great. I appreciate the details. And then just maybe second, you mentioned Invoice accelerator a handful of times on the call. Just wondering if you could give us an update on kind of what the timeline is to roll that broadly out to the entire supplier network? And any signs of kind of demand coming from your client base from them?
Yes. Great question. Invoice accelerator is one of the areas that we're super excited about, and I certainly think it's kind of the next -- kind of the third leg of our kind of monetization model. So today, it's still kind of an emerging offering, kind of sub-$5 million of revenue but growing quickly. And we've been kind of metering it from the standpoint of today, it's only available for less than 10% of our overall supplier base.
And that's really kind of due to 2 things: one is, yes, we can continue to perfect kind of the algorithms related to determining the eligibility of invoices that we choose to advance; the second thing is that we are executing on our balance sheet today. And so going forward, we expect to make it available to our full supplier base, probably kind of systematically over the next 18 months or so. And as part of that process also look to take it off balance sheet with one of our existing financing partners.
Got it. It's helpful. Congrats again.
Our next question comes from Tien-Tsin Wang with JPMorgan.
I will say congrats on the first quarter out the gate here as a public company. Looks clean and solid here. Thinking about bookings and signings, guys, just how did that come in versus plan? How do you see the year closing out with respect to new sales? I did see that deferred revenue was up nicely. So must be a good sign there.
Yes. Great question, Tien-Tsin. I'll take it. And first thing I'd guide you, just given the way our revenue model works, I wouldn't necessarily correlate the change in deferred revenue to sales. But we're excited about the sort of the performance this year. We've seen great continued strong demand for our solutions. We've talked about kind of a mix of some really great tailwinds from COVID and then some sustained kind of headwinds in places, but we were pleased to sort of deliver better than our internal forecast from a sales perspective.
We don't provide a bookings or ARR figure, but we do have good confidence in being able to deliver our long-term -- our guidance for Q4 and sort of our outlook for '22. So feel good about the production in the quarter.
Okay. Good. And then on the -- my follow-up quickly, just on the partner front, how are those conversations? And do you feel like you're closer to maybe securing a few more larger partners? Just curious how that's going.
Yes. So great question related to kind of the partners. So we think of partners, they follow in a kind of a handful of different buckets. One is within the bank channel. -- the others with kind of our software partners. And within each of the 2 categories, we have both referral partners, and we have, we call reseller partners and typically, reseller partners in a more substantial partners that are able to actually white label our platform and use their own sales force and go-to-market strategies to sell to their customers.
And so within the bank channel, I think as we firstly message one of our newest partners is Bank of America, and they began onboarding customers earlier this year, and we're really excited about the evolution of that bank channel and believe that Bank of America has the capability to be one of our leading partners once they complete the ramp-up.
The second kind of piece on the software partners, we continue to see good momentum across kind of a handful of partners, including kind of RealPage and SAP as well as MRI software within the real estate vertical. And what I would say is that we are very selective in terms of adding new reseller partners. So that number -- that base of we expect to grow by a small amount each year. But where we're adding more partners is on the referral side. And that, today, we're up to 120-plus different referral partners, and we continue to kind of grow that nicely. So that's what we're currently seeing and excited about the interest level that we're getting from both partners as well as customers.
Our next question comes from Ramsey El-Assal with Barclays.
I wanted to ask about the transaction yields, which went up sequentially pretty nicely. Joel, what are the primary drivers there? It didn't look like it was a mix shift to software. Is there -- is FastPay a contributor there? Or what can you tell us about why that stepped up sequentially?
Yes. Thanks, Ramsey. Great question. Yes, there's a handful of drivers that kind of contribute. A couple that I would point out, and I kind of mentioned in our prepared remarks, to some degree, we think there's a little bit of -- we're seeing an average payment size increase. We think there's a little bit of inflation driving that, and some mix impact as well. And then to a lesser extent, we do have inorganic contribution to that as well, as you mentioned, from FastPay. So kind of a handful of drivers there.
Okay. And my follow-up is about longer-term strategy and is a 2-parter. The first part is and going forward, can you talk give us sort of your most updated thoughts on expanding your vertical mix? Are you sort of now focused on trying to penetrate the verticals you're in versus expanding into new verticals? And also over the longer term, would you contemplate either moving upmarket or down market more broadly?
Yes. Thanks, Ramsey. No, that's a good question, one that we get routinely. And so to remind you, within the 8 verticals that we're in today, we believe that we're still in kind of single-digit penetration across all 8, probably in the financial services vertical with the growth of kind of Tier 2 and Tier 3 banks as well as credit unions. We may be approaching kind of 20%, but still a big runway within the verticals that we're in today.
And what we expect is to continue to focus and really penetrate those over the next 18 to 24 months as well as continue to be kind of aggressive as well as opportunistic in terms of adding to those verticals. And I think as we referenced, we'd like to add a handful of new vertical focuses each year as we evolve and expect that to be the case in the coming year as well.
Great. And I offer my congratulations as well getting out of the gate here.
Our next question comes from Josh Beck with KeyBanc.
My congrats as well on new life as a public company. I wanted to ask a little bit about the macro across other industries in calls, we've heard a little bit more about supply chain, labor shortages, these type of effects. I'm just curious across your base, if there's any chatter or any trend that you're seeing take shape on those fronts?
Yes. I think it's a great question. And certainly, within the macro environment, it's something that's kind of top of mind for a lot of our customers. Typically, what we've seen within especially kind of the 8 verticals that we focus in as well as some of our horizontals. They haven't been significantly impacted directly by supply chain, certainly, probably the labor component, especially customers that have a retail focus have been kind of impacted the most. But where we're probably seeing some of that impact is reflected in the yield number, and that relates to some of the what we believe is kind of inflation of just average payment sizes ticking up slightly. And we think that is kind of directly related to some of the kind of macro impacts of supply chain as well as inflation.
Okay. Great. So it seems like maybe on the margin, it's perhaps a tailwind or at least what you've seen this quarter.
Yes. Exactly.
Okay. And maybe a question for you, Joel, as well. Just with respect to the guidance philosophy, obviously, you had flashed your numbers prior to this report. So maybe you didn't get to see exactly how things come in versus your philosophy. But just help us understand maybe what you've embedded into Q4 level of conservatism, those types of things.
Yes. Great question, Josh. I mean we're -- if you compare the flash numbers and the S-1 relative to what we delivered, we were kind of at the nice beat across each. I think we are on the high end of the transaction count, which we see that volume as we sit at the end of the quarter. So obviously, now looking forward, we see we've seen a little bit of a volume activity.
But honestly, it's -- there's things we control and there's things we don't control. And I think we're playing it kind of right down the middle. And so again, high confidence that we can sort of deliver those results from where we sit today.
Our next question comes from Darrin Peller with Wolfe Research.
When we look at the actual payments revenue growth rate, it was obviously very strong, but it really does look like it was driven by the volume growth underneath it, which is great to see, except I'm just trying to understand the dynamic of contribution from incremental monetization of payments. Obviously, we know you guys are decently along, although still having maybe 20% to 25% of your total volume really monetized in a sense or I think you've said maybe 40% of transactions when considering the AvidPaid Direct or BC, there's still a huge runway, I think, right?
And so just curious how you're approaching that? How you think we should think about that over the next few quarters? And then more importantly, longer term, what you're doing to try to take advantage of that lever?
Yes, Darrin, I'll take a shot first. Really, as we've talked about this and Mike talked about year 3 at the flywheel, right, the opportunity we see ahead of us over the long run for really continuing to increase the penetration we take that whole payment file at the end of an AP process and then we kind of optimize payment against the supplier network.
So I wouldn't focus as much on the next couple of quarters, but I would really say over the long run, we have high conviction that there's really a great opportunity to provide expansion there. And again, we were pleased with volume growth overall, 37% growth in the quarter. So really see that as validation to the model and excited about that long-term opportunity.
Yes, maybe adding a little bit more color to what Joel said is we also expect that the percentage of monetized payments, both either transaction or volume to continue to grow over time as well as we institute new payment modalities into the market as well, one that we're currently under development, for example, is our cross-border capabilities. And we have a number of other payment modalities that we expect to incorporate with customers in the coming year.
And so I think all those different strategies, combined with just our core virtual card and AvidPay Direct acceptance methods continues to drive ongoing supplier growth.
Got it. All right. That's helpful. When we think about the verticals you mentioned earlier, the 8 verticals and then obviously this deal recently getting you more into the media supplier side as well. I'm just curious, I mean, I think a barrier to entry for you guys is continued to be the differentiated connectivity into some of the industry vertical solutions. And you touched on this earlier, it's going well. Can we just -- can you just expand on that for a minute because I think we get a question a lot about competition in this. Like how much of a barrier has that been for you and touching on these integrations for a minute?
Yes. So great question, Darrin. So I think we think of kind of the different sections of the overall market, the middle market is just -- it's hard, and we like that dynamic. And yes, AvidXchange is really kind of purpose-built for the middle market. And so what does that mean? It starts with the feature set of our software. It's really designed to support the business rules of the middle market companies that we serve.
There are multiple party complex invoice and payment approval structures, coding structures support for multiple general ledgers and job cost systems, which are all kind of characteristics of middle market companies.
The second component is then all the different accounting systems that support each of the different verticals. So today, we spent over 10 different accounts our ERP integrations across the verticals that we serve. And then the kind of the third is really the payment network itself is really purpose-built to support all the suppliers of the middle market. So 700,000 suppliers, and it grows each week.
And then what I would say the last one is really our go-to-market strategies. But related to -- we have direct sales teams that are focused on each of the different industry verticals that work directly with the CFOs of these prospects and taking them through a very deliberate sales process that is typically characteristics of CFOs within middle market companies. And so whether it be our kind of products, the integration of support of or our go-to-market strategies, they're really all geared around middle market companies hand up. And that's -- we believe that has created a big moat for us as most of the new competition, at least that we've seen, has not been in the middle market, it's been typically in small business.
Our next question comes from Timothy Chiodo with Credit Suisse.
I wanted to dig into the outbound supplier recruitment team. So we get this question often from investors, and I just thought it would be helpful to shed some more light on it during this call. When the outbound supplier recruitment team is speaking with the suppliers and offering them the various payment methods, clearly, there's a ton of check and paper-based forms of payment to eat into. But when the offering is virtual card versus the enhanced ACH, I realize there's different systems that have a card integrations, there's transaction sizes, they're different verticals. Maybe you could just dig into the value proposition of each virtual card versus the enhanced ACH? And when and why and why not various suppliers might choose one or the other?
Yes. Really good question, and it's pretty intuitive because it -- there's some art and there is some science related to it. But I would say, first of all, we today support different types of payment types or modalities as we call them, that are really geared towards the different supplier preferences within the business rules. So many of the suppliers actually have business rules that they will take one type of payment modality under a certain circumstance.
For example, like maybe if it's under $1,500, as an example, they'll take a virtual car transaction. But it's over $1,500, they'll request a different type of payment modality as part of their business rules. And so the -- for both of kind of our main 2 kind of monetized payments, virtual card and AvidPay Direct, one of the key components of it is the data. And the data is really critical in terms of how they reconcile that transaction.
But in terms of the preference and which -- why a supplier may select one or the other, today, it is typically not based on price. It's based on where the supplier has automated their internal process. And so if there, for example, a retail kind of have a large retail focus, they typically have spent a significant amount of both time dollars automating their card base is uptime with their accounting and with their billing systems. And so they typically want to maximize volume through that business process because the most expensive transaction that Aspire has is one that requires manual intervention or manual exception handling. And so if they have an automated process that they've invested in. They typically want to maximize volume. So that typically is the #1 decision factor that we see that suppliers have.
Excellent. That's a really, really helpful context. My quick follow-up is around the cost of goods sold item. We've touched on this in the past, but we often talk about sort of the double whammy that you have, meaning as you eat into that check volume and turn it into more monetizable forms of payment, either card or enhanced ACH, you also get to reduce the COGS from the check production mailing, et cetera. Maybe you could just talk a little bit about that opportunity and what that might mean in terms of the gross margin opportunity? In other words, how much of that COGS is really from check processing? Sorry about it Joel.
. Yes. No, Tim, good question. And thanks for teeing that up. I think that is one of the huge opportunities for us. We talk about the opportunity, the revenue opportunity that we have in shifting payments from Check to electronic, but it does have that kind of double whammy effect. What we have an opportunity to do is actually take that check cost. And again, on a transaction basis, that's, Mike talked about, roughly the 40% that's electronic. The other 60% would be checks that we're fulfilling for our buyers as they pay their suppliers. And so as we shift to electronic, we take whatever, $1 plus and turn that the opportunity to turn that into pennies.
And so an important opportunity for us, obviously, Gear 3 is on a revenue perspective, but also adds to the gross margin lift that we get over time. And that sort of supports the confidence we have in our long-term gross margin targets in the mid- to high 70s. So great question. Thank you.
Yes. And also, just to add to what Joel said, it does really good things in terms of our yield as well because certainly taking on the payment network side, taking a paper check, which is a 0 revenue transaction and adding revenue component to it, does really good things in terms of that yield expansion.
Excellent. Congratulations again.
Our next question comes from Brad Sills with Bank of America Securities.
Congratulations on the IPO, and a nice quarter here out of the gate. I wanted to ask about AvidPay Direct. It's a relatively newer offering relative to VCC. What efforts are you -- are underway to kind of drive penetration of that into the installed base?
Yes. So a really good question. And the reason maybe provide a little bit of history on why it was created originally back a number of years ago. It is our most recent kind of new payment modality. And the reason why it was created is because we had suppliers coming to us and said they wanted the same data capabilities that we were offering with our card-based virtual card-based offerings.
But for one reason or another, they didn't accept card either they have a merchant account or they only accepted it under a certain limited number of scenarios. And -- but they wanted access to the data. And so we created it to -- we settled through ACH, but we wrapped that data layer around the transaction and send it to them. And we've now seen of our roughly 40% of transactions that we're able to monetize, AvidPay Direct now has grown to be contribute about 20% of that number. And we expect that to continue to grow nicely as well.
And I think as it relates to our sales force related to it, we're really indifferent in terms of the different payment modality that a supplier needs. So the supplier has the choice on whether they want to receive a card-based transaction or an AVidPay Direct transaction.
Got it. And then one more, if I may, please. Just I understand the core associates and Bank tell are a couple of acquisitions of software-only assets, what efforts are you doing there to kind of convert those customers to transaction? And kind of where are you with that effort?
Yes. So Brad, a little bit of context, one of the parts of our playbook related acquisitions that we really like is to find software providers in different vertical markets that have deep domain knowledge of that vertical and have maybe a nuance solution related to the unique business process of that vertical market. And then we can kind of combine the AvidPay Network with their software offering and provide a really compelling value proposition that customer.
And so that's playing out really nicely. And I think we are very pleased with kind of that conversion process. And in both our -- the ones that you referenced, Core Associates within construction and with BanK Tell within the financial services vertical, we are -- I'd say the team is very pleased with that conversion process.
[Operator Instructions] Our next question comes from Bryan Keane with Deutsche Bank.
I got 2. I guess, first, Mike, now with FastPay close, just interested in your thoughts on the acquisition pipeline. Are there a lot of opportunities out there? And then thinking about international expansion, will that be somewhere where you probably need to make an acquisition to get started?
Yes. So two kind of questions there, both related and acquisitions. But the first one, just an acquisition pipeline. So our corporate development team is active of tracking lots of companies across the different verticals. And typically, we like creating kind of long-term relationships with these -- the principles of all these companies.
I think of course, Associates and Bank Tell are great examples of that where we had a multiyear relationship with these companies actually as a partner with them prior to the acquisition, and that really demonstrated a great working relationship across our teams as well as the trust building. between the 2 companies. And we look -- we like that dynamic.
I think we've seen with companies that are out being sold that are being represented by banks and things of that nature. It's a more challenging process just because it's more competitive. And certainly, we see some of the pricing pressure in those types of scenarios. So we like developing kind of long-term kind of relationships with the big pipeline. The second question about international.
What I would say is that we have a multipronged strategy and to kind of step 1 is by incorporating our new kind of cross-border payment capability, which we expect to roll out over the course of 2022. And the second component then is really to evolve the Canadian market. We have stood up 2 of our largest customers within the Canadian market currently, and we expect to kind of continue to expand that.
And then the third would be kind of what I'd say, overseas expansion typically focused. We believe it's going to be within the European market. And I think we will be opportunistic related to do we jump start that process through an M&A effort. And I think we would be opportunistic in evaluating those type of opportunities as they make themselves available. But we do have a great set of existing channel partners that have been asking us to support them internationally for a number of years. And so we're going to be very focused on our international expansion by working closely with our existing partners to support them internationally with Europe as the main focus in very similar ways we support them here in the U.S. market.
Got it. Got it. That's helpful. And then, Joel, I just wanted to add on payment volume, it was up 40%. We were modeling 23%. Is that all explainable by inflation, you think? I mean that's a pretty big jump versus our expectations.
And then does it stay elevated at these kind of levels up 40%? And do you expect that inflation to kind of persist?
Yes. I mean there's a number of factors, Bryan, I wouldn't point to inflation as the sole driver. We think that had an impact. We also, to a lesser extent, had a little bit of FastPay volume in there. But again, sort of pleased with that level of volume growth and just kind of feel like that gives us some tailwinds going into the next quarter and next year.
Great. Congrats on the great start.
Our final question today comes from Brent Bracelin with Piper Sandler.
Many questions have been asked and answered, Mike. Maybe I'll just drill down into cross-border. You flagged cross-border as a new payment type coming for 2022. Can you help frame the opportunity here? Obviously, the fee transaction fees are pretty compelling, but what portion of volumes, do you think are cross-border international for you today? Is it 10%, 20% of the volumes? Any color there, just given the opportunity and you flagged that a couple of times in the comments would be super helpful.
Yes. That's a really good question related to kind of cross border. So what I would say today is if you think of the 8 different kind of vertical markets that we're in, they aren't typically markets that lend themselves to cross-border being like real estate, HOA and help the facilities. They're very geographically centered industries here in the U.S. But where we do see it is in the horizontal market and working with some of our key partners such as NetSuite, Sage Intech, Microsoft Dynamics and even QuickBooks Enterprise, we're seeing kind of a growing interest in customers doing cross-border transactions.
So we're still in the early days and evaluating kind of that opportunity, but we think it's going to relate in the future more towards our continued kind of horizontal expansion as well as some of the new verticals that we're targeting.
Got it. Helpful color. And then last one here for Joel. You surprised us on the gross margin. I think it's above 60% for the second straight quarter in a row here. Was that check mix kind of going down? Were there other factors that contribute to the nice beat here on gross margins? Just trying to understand the durability of that number there, given you've got now 2 straight quarters here of 60% plus gross margin?
Yes. Great question. Yes. So we're proud of the 61% we turned in for the quarter. So 450 basis points better year-over-year. gives us confidence, again, like I said before, on our long-term targets of over the next several years getting to 75% plus. I'd really point to kind of a mix of factors, including continuing to be focused on our own operational efficiency, increase obviously, that revenue yield contribution and again, the power of the flywheel and Gear 3 in particular, and then year 4 as we add data just gives us more opportunities to expand that margin. So great question, and we're excited about continuing to see that expand over time.
Helpful color. Great to see the moment of the business.
This concludes our question-and-answer session. I'd like to turn the call back over to Mike Praeger for some closing remarks.
I want to thank everyone for joining us on today's call. We really appreciate your participation, great questions, and of course, your ongoing support of AvidXchange.
With that, operator, you may now end the call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.