Expensify, Inc. Q3 FY2021 Earnings Call

Call Starts Abruptly And during the course of this call, management may make forward-looking statements within the meaning of the federal securities law. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. Please refer to today’s press release and our filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today’s call, management will refer to non-GAAP net income, adjusted EBITDA, and adjusted EBITDA excluding the IPO-related bonus, which are non-GAAP financial measures. While we believe these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release or the investor presentation for a reconciliation of non-GAAP net income, adjusted EBITDA, and adjusted EBITDA excluding the IPO-related bonus to their most comparable GAAP measures. That was very high stress. But with that, let me turn the discussion over to David.

Thank you for that fascinating introduction. So maybe a quick introduction, so we get started. So, I am David Barrett, the Founder and CEO of Expensify. We have our COO; Ryan is our Chief Financial Officer; and of course, a senior technical accountant. We have the whole dream team here to answer any questions you can conceivably have. But to get started, let’s review why we’re here. So, technology, we love it. So, at a very high level, as a reminder, many of you know this, of course, but there’s a lot of people on the phone here who haven’t really heard this field. So, I want to give a quick overview. At a very high level, we do expense reports that don’t suck. I know it’s a bold vision, but we’re making the world a better place, one expense report at a time. Now, if you’re considering investing in Expensify, there’s sort of like three main things you need to know. Now, we can go on forever about the advantages of the product and all that, but there are kind of three main things you need to know. The first is that we feel there is an enormous untapped opportunity that we’re going after, not just the tip of the industry, like the snowy North of the enterprise, but the entire market. Our view is that the market is enormous because every single business on the planet has some kind of expense management problem. If you were to add up all of the customers of traditional players, it adds up to maybe a couple of hundred thousand companies in the world. That’s out of hundreds of millions of businesses in the world. Virtually no one is using anything. The real competition for Expensify isn’t Concur or anything like that; it’s basically a manila envelope, email, and Excel. Most of the world is doing nothing at all. We’re targeting a global opportunity, not just the small enterprise corner of the market. We’re going after the Fortune 100 million businesses out there. The question, of course, is how has everyone missed this huge opportunity? That’s because we believe it cannot be achieved through traditional sales models. Expensify’s primary differentiation is that we’re all in on a completely different acquisition model than everyone else in the industry. We call it our bottom-up adoption model, where everyone else employs some variation upon the same basic strategy. They knock on the CFO’s door, and it goes through various sales channels. It’s a scalable model, but also a high cost of sale model. The traditional sales model has reached a tiny corner of this opportunity because there’s only a small subset of the market that can be acquired through that high cost of sale model. Our design is completely different. Everything starts with the individual employee downloading the app for free and learning about it through word of mouth. Then they sign up their own company without permission and start submitting expense reports to their boss. Every single employee is a different door to the company. While everyone else is knocking on the same CFO’s door, we have 100 doors in every company. This allows us to reach companies that were never in the traditional markets. We’re reaching companies that weren’t even searching for expense management. We’re building a platform that can reach 1 billion users. We’re not there yet. I don’t know when we’re going to get there yet, but we do think it’s possible. If it’s possible to link 1 billion people through photography, we think it’s possible to link 1 billion people through the financial conversations that connect us. This is not about creating new conversations; it’s about bringing currently offline conversations online into a common platform. This is a tweet we received a couple of days ago from someone we’ve never met, discussing how the Expensify bottom-up process automatically closes those customers at an incredibly high volume and very low marginal cost. The difference with Expensify is that we acquire customers in a completely different way than everyone else, which allows us to reach the whole market. Our view is that the whole market is huge, and we’re gunning to be a major player in this expansive market. So, that’s the quick spiel. Now, let’s talk a bit about Q3.

Great. Well, thank you, David. And I just wanted to say it’s great to see everyone on the call. Thank you for dialing in. So, let’s get started. Q3: We actually had these numbers in the S-1, right? We had our Q3 flash. In terms of revenue, we disclosed we are looking at $36.6 million to $37.6 million. We actually came in at the top end of that range, $37.4 million. So, we’re very excited about that. In terms of paid members, we had 660,000 to 670,000, and again, we came in at the top range at 667,000. Q3 was the best quarter for paid member growth that we’ve seen since the start of COVID-19. This puts us at a 73% year-on-year growth rate for revenue. The Expensify Card is doing fantastic, with over 207% year-on-year interchange growth, bringing us to $150 million in annualized revenue. One thing I want to take some time on is the IPO bonus that we did, which was in the S-1 but is causing the numbers to look a little different. So, I want to ensure we’re all on the same page regarding Expensify’s profitability going forward. As disclosed in the S-1, we had a $26.3 million IPO bonus to employees in Q3, intended for employees to exercise their shares and convert them into our long-term equity shares. Those shares require time to convert to common, ensuring our employees are focused on long-term growth rather than short-term incentives from going public. We believe this bonus is a great investment in the Company, but we’ll let the results speak for themselves. Our GAAP net income was a negative $6.3 million. However, adding back that IPO bonus gives us a non-GAAP net income of $19.9 million. Similarly, for adjusted EBITDA, we showed a negative $6.5 million, but adding in the IPO bonus results in $19.8 million adjusted EBITDA, excluding that IPO bonus loss. This is important to highlight as one of the big pillars of Expensify’s story is that we grow fast but do it profitably. It’s efficient, responsible growth. The EBITDA and net income, when you account for the IPO bonus, are much more reflective of the fundamentals of the business. When looking at Rule of 40 and taking out the IPO bonus, we’re at 126%, reflecting our very high growth and profitability. We have a very talented employee base, bringing in over $1 million in ARR per employee, positioning us at the top of the public tech market range. We are investing in retaining our great team, and we believe it's a significant investment. I’ll pass it back over to David.

Great. All right. As you know, we have a big vision, and that vision involves a lot of development over a long period. Expensify is not just an expense reporting app; it’s a payments superapp. We’re designed for every variation of listed expenses. Now, traditionally, all these different products would be seen as completely different industries. But for Expensify, they are just different ways of using the same common platform. We’ve built a universal payment engine that adapts to a wide variety of digital use cases. Looking across what we have, the blue items are functionalities in the Expensify app that are already live. We’re still improving all these, but these real features are in the market today. For instance, you can use our Concierge Travel feature to book travel through chat, send an invoice to anyone else using Expensify and collect online. The recipient receives our bill payment experience, where they can process bills and pay them online. We have a world-leading smart card, the Expensify Card. Also, we have our expense management platform, which scales from sole proprietors to large enterprises, all using the same experience. What we’re working on are the green bullets. These are items that already exist in beta or in internal use. We are building our own payroll solution using the same technology. For us, a paycheck is just an expense report submitted twice a month automatically, along with some tax deductions. We utilize our payroll internally; it hasn’t launched externally yet, but I want you to know we’re working on it. We also have consumer wallet functionality built into the app where you can send a money request to someone else—the functionality is not limited to just your company but extends to your friends and family. Expensify’s design is much more like LinkedIn or Facebook rather than Salesforce or Concur. Our aim is not just to be limited to the silo of an individual company but rather facilitate connectivity between all companies. We're designed not just for submitting an expense report to your company but for connecting companies through invoicing and bill processing, allowing us to leap virally between the accounts payable and accounts receivable departments. The wallet functionality connects companies through consumer flows. Our chat-first design integrates chat throughout the product. Every payment is a conversation trying to resolve an underlying financial tension. All of this essentially adds multiple layers of value, enabling us to grow virally. It also creates transactional income. We identify our product roadmap for future growth as creating huge revenue potential. We’ve recently introduced a new Free Plan that allows new companies to adopt Expensify without using expense management. We’ve also launched a new cash back built into The Expensify Card to drive faster adoption.

So, let’s talk about what we’re looking at for Q4. In Q4, we expect revenues to come in between $38.2 million and $39.2 million. We expect paid members to come in at 673,000 and 691,000. People often ask about growth prospects moving forward. We describe it as a layered growth strategy. At the bottom of that foundation is seat expansion—when existing customers grow. Expensify has a unique ability where the lowest a customer pays us is generally in the first couple of months, and over time, they pay us more. Seat expansion is a significant driver of growth. The next layer is new customer acquisition through word of mouth, adding many new customers every quarter. We’ve resumed our nationwide advertising after halting it during the pandemic. We’re currently in 9 major markets and plan to continue increasing our advertising in the next quarters. This foundation of customer growth is augmented by the interchange growth from The Expensify Card and additional functionality like bill pay and invoicing. As the suite of functionality we offer is comprehensive, it is relatively inexpensive for customers. While I’m not pointing to a specific timeline, I believe we can make some interesting adjustments to our pricing model down the line. That covers everything, and we want to leave time for Q&A, so I’m going to throw it back.

Our first question is from Sterling Auty with J.P. Morgan.

Hi, guys. It’s good to see you. A couple of things. Maybe just to get started, was there a supplement that you put on the website? Just want to make sure, so help us out with a little bit of a GAAP to non-GAAP reconciliation, because I think there are a couple of moving parts that I think all of us are going to want to try to drive into our model, to get a true non-GAAP line item by line item. Was there a supplement on your website? I didn’t see it when I checked.

Yes. We’ll be putting all that up on the website right after the call.

We are beginning to observe the impact of different COVID variants, such as Omicron, in various regions. What is your perspective on this? Additionally, how have you considered these factors concerning the addition of paid members for the fourth quarter and any potential effects?

Great question, Sterling. When discussing the impact of COVID on our customer base, the focus should be on the economy. If we have a variant spreading but businesses are still open and growing, we won’t see much impact. We saw a significant impact when everything shut down, and no one was traveling. In a post-vaccine world, people are more confident; that affects their travel behavior. While we remain concerned about Omicron, we believe its impact will not resemble what we witnessed previously.

I wish I had gotten my booster. I was supposed to get it next week. Unfortunately, I contracted COVID…

I’m so sorry.

One follow-up would be, can you talk to us about the different pricing levels and attach rates with the card? One of the questions I get a lot from investors is just about the trends of The Expensify Card as you went through the quarter and what you’re thinking in terms of what’s embedded in your guidance?

We didn’t break out the attach rates in our guidance, but directionally, we’re seeing new customers adopting the card quickly, which is exciting. We’ve added this Free Plan, which we’re seeing a lot of pickup from also. Previously, customers had to be paying to adopt the card; that’s not the case anymore. They can get a card for free without a subscription, and they get a suite of functionality with that. We plan to break out more card stats in the future, but for now, the 200% year-on-year growth is what we’ve broken out.

The next question is from Tyler Radke with Citi.

Thanks for taking my question, and good to see you as well. I like the physical layer cake as well as the virtual layer cake that you have. My question was just on the paid members. It sounded like you saw a lot of positive things in the quarter regarding paid member growth returning to historical levels. Considering you're nearing the end of Q4, your visibility should be good on where you’re going to end up. Why wouldn’t we see the same number of net adds that you saw in Q3, especially as we’re heading into Q4 without summer vacations and seasonality dynamics that might otherwise impact Q3?

We believe we’re going to see good paid member growth in Q4. Everything is looking good in the business. We feel very encouraged with what we’re seeing.

Okay, makes sense. Also, regarding the recent changes and cash back incentives, how are you viewing that from a payments economic perspective? Does this lower your margins in the near term with the potential to increase card volume over time? Secondly, with the free tier, how are you viewing that impact on near-term paid member growth as users might opt for the free tier before becoming paid members?

To follow up on your question about free members, we believe the card can be a significant entry point for users. Even if they initially opt for the free plan before moving to a paid subscription, that can benefit the business overall. The Free Plan is ideal for starting businesses, and we expect users from there to upgrade. We’ve initiated a customer journey earlier than we did historically, helping us capture more customers.

I completely agree with Ryan, and I think viewing the Free Plan as initiating the customer journey earlier is key. Historically, expense management was a consideration when companies became more complex. The Free Plan targets a new customer group that typically doesn’t recognize the need for expense management.

So, the short answer is the introduction of cash back may degrade card margins to some degree. However, we designed those tiers for cash back with some achievable targets that many businesses can reach, giving them a positive feeling for their spending while encouraging them to convert all company spending onto the card. We can provide higher cash back to larger companies who spend well beyond $250,000. This will incentivize them while also providing benefits to smaller businesses. So yes, we expect some margin decrease, but we are also working on becoming our old program manager to enhance margin capacity.

Yes, and we also have implemented tiered cash back based on performance. If companies don’t meet the target spend, they receive no cash back. If they’re below the second target, they earn the first reward. This design drives much more spend on our platform while providing value-added opportunities.

Our next question is from Koji Ikeda with Bank of America.

Hey guys, congrats on becoming a public company. I have a couple of questions. First, Ryan, regarding guidance methodology. With the IPO launching in November, the flash range guidance of $36.6 million to $37.6 million resulted in a slightly lower end result. As we approach Q4, with guidance of $38.2 million to $39.2 million, how should we consider your guidance methodology for future quarterly results?

Great question, Koji. We’re conservative in our guidance approach. We're not trying to inflate figures for short-term gains. We present achievable and realistic ranges based on actual trends and projections. We ensure our forecasting is grounded in reality, indicating transparent communications to the market.

I think the Midwestern sensibility permeates our approach, and we focus on sustainable, long-term growth rather than trying to inflate near-term results. Our objective is long-term value creation through realistic forecasting.

So, just to clarify, when you say achievable, are you setting a range that will try to land at or above the midpoint to high end?

We're not going to provide that level of granularity on specifics; the range indicates where we will be.

Thanks, Ryan. And then my last question is about your relationship with your payment processor. How is that progressing? When might we expect potential contract changes or incorporating interchange revenue into revenue?

It’s progressing well at a steady pace. I’m not comfortable providing an ETA just yet, but we believe we can implement the necessary changes in 2022. We hope to provide more granular timelines in the next earnings call.

We feel confident it will happen. As soon as we have a better timeline, we’ll give you significant advance notice—it'll transition interchange from a cost of revenue to revenue, and that will have an impact. We'll keep you informed.

Our next question is from Brent Bracelin with Piper Sandler.

A couple of questions. David, can you discuss the free card strategy? As Q3 was just the beginning stages, how do you plan to target current users versus new users for 2022?

The Free Plan is primarily about new customer acquisition. This isn’t only for existing free users; we’re driving significant marketing towards attracting new customers. It will be a layered strategy across existing and new users through substantial marketing efforts in key markets.

That makes sense. Thank you. And Ryan, how should we expect advertising spend to roll out? Will it be a steady build or quick ramp-up in Q4?

Without giving explicit guidance, we’re ramping up advertising in Q4 after significant increases since Q3. Q4 will experience a growth increase over Q3, and we expect further acceleration in 2022 as we get more established again.

The next question is from Pat Walravens with JMP Securities.

Congrats all around! My first is about the Expensify lounge. Why do you have these kinds of allowances? Secondly, can you remind us of your competitive differentiation?

We're broadcasting live from the San Francisco Expensify lounge. The story behind it is that the workplace is an integral part of the future. COVID aside, people desire to return to an office, but they want a place that feels worthwhile compared to working from home or at a café. Our lounge offers a high-end working environment available to our customers, providing an experience where they can work alongside us. We’re building meaningful relationships through this shared workspace. Regarding differentiation, the simple fact is there are innumerable players out there. Expense management intersects almost every business. Our differentiation comes down to our customer acquisition process. Many can build a product, but few can successfully drive consumer interest. We view them all collectively as one entity. The crowded field indicates that most will struggle for attention. We're utilizing a different model with organic growth instead of traditional RFP methods, which allows us to reach a much broader audience.

Our last question is from Yun Kim with Loop Capital.

Congrats on the first earnings call! David, you mentioned that as the economy improves, T&E activity increases. Can we expect ARPU to potentially get a boost as business activity accelerates?

Yes, exactly. As we see customers grow, they exceed their subscriptions, which can drive ARPU higher. Customers tend to pay less initially, but as they expand, they pay more. This reflects well on our guidance, as we see positive signs in the ongoing customer growth.

What about your international business? What trends are you seeing outside the U.S.?

About 9% of our revenue comes from overseas, stemming from organic growth rather than deliberate efforts. Our word-of-mouth growth model has drawn interest from international users, resulting in traction in countries like Australia, the UK, and Canada. We anticipate continuing to grow that segment.

Do you plan on investing additional marketing dollars to expand that international presence?

Absolutely, we plan to invest and grow within international markets in the future.

Thank you. Congratulations.

Thank you. Great questions.

I’ll hand it back to David to wrap up.

Great. We’re very excited to be here live from the San Francisco Expensify lounge. It’s an exciting moment to be a public company. This journey means a lot to us. We want to do this IPO once and focus on sustainable growth. Our employees are focused on long-term growth, and we plan to ensure we provide valuable interactions through these calls. We hope you’ve enjoyed our time today. Thank you.

Thank you.

Thank you, everyone.