Expensify, Inc. Q4 FY2021 Earnings Call

All right, everyone. We’re very excited to have you here for the next Quarterly Earnings Call for Expensify. We have a lot of exciting stuff to share and so let’s just hop right into it. To get started, however, we have some very exciting, let me just press the link here, here we go on the screen, okay, right there are, one more time. Okay, so let’s get started with, you’re going to read some very exciting legalese to get going.

Okay. Before we begin, please note that all the information presented on today’s call is unaudited 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 available 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. We also note that on today’s call, management will refer to certain 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 these non-GAAP financial measures to their most comparable GAAP measures. And with that, I’ll turn it back to you, David.

Thank you for that fascinating introduction. So we are coming to you live from the San Francisco lounge. We have the whole dream team here to discuss any questions you might have. We’re going to go through all of this and then each analyst is going to have one question, one follow up, so let’s get started. As a reminder, Expensify’s major plan to launch a success hinges on basically three major pillars. One is that we have a huge untapped market opportunity; the second is that we have a unique bottom-up adoption model; and third that we’re going after this huge, huge billion user opportunity. So I’ll review each of those in turn. To start, the market is huge and largely untapped. If you sum up all of the customers of all the competition, we’re talking about 1% of the actual companies in the world. The way that we view it is the opportunity is largely untapped and so the differentiation for Expensify is that we are going after the whole market using radical business law. Now, one thing we’re going to talk about a little bit more is that we’re doing a lot right now to sort of expand growth in a few different ways. Now you know from the roadshow and a bunch of other videos that we have a bottom-up adoption model and things like this. New initiatives we’re adding include dramatically expanding our advertising. If you’re new to the top 20 cities in America, you’ve probably seen our ads everywhere. We’ve also launched a new free plan, allowing you to adopt the Expensify Card and do reimbursements for free. This is the free plan on the market. Alongside that, what you might not know is that we’re doing a tremendous amount of work inside to capture the Greenfield opportunity. One aspect is that we’ve expanded our account manager organization which pairs our top partners and customers with a dedicated point of contact. Every customer can always reach out to account service for fast, effective 24/7 support, but also want that personal touch to build a meaningful relationship. We are therefore expanding our capabilities to provide that on a per-customer basis. Second, we’ve for the first time added an outbound call approach; we’ve never done this in our business's history. It is a new capability for us, and it allows us to leverage our individual users in over a million businesses worldwide as champions for Expensify internally, which we can use as an asset to grow our business. Lastly, we’ve reinvested in our channel partner relationships; we have extensive partnerships with the accounting channel and CPAs. This has led to the launch of an entirely new card focused exclusively on CPA, designed for CPAs and their clients. There’s a lot happening internally, some visible to the outside world and much that isn’t. To remind you, our major differentiation lies within our business model. While our product is great and the card is awesome, the major difference between Expensify and competitors is our business model. We have what we call a bottom-up adoption model where individual employees adopt the product internally without asking permission. They use Expensify to promote Expensify, turning their expense reports into highly targeted marketing messages directly to decision-makers. This is a radical departure from everything else in the industry and is uniquely Expensify. As we mentioned, this opportunity is vast and much larger than just the business sector. We’re targeting the entire market with a consumer-grade design that can solve financial burdens of individuals whether they are doing bachelor parties or going out of town; it's a complicated series of financial transactions happening within, outside, and between businesses. We aim for this complex ecosystem and have a global reach, with support for currencies and receipt types worldwide. We don’t just offer our own native card, but also native travel options where you can access concierge services to book travel, hotel stays, flights, and more; all free of charge. We are the only company in the market making all of these claims. To finalize, we think there’s a true billion-user opportunity here. We believe if Instagram can connect a billion people to photos, we can connect a billion people to money. This doesn’t happen with a normal product or a series of point solutions aimed at the back office; we believe the only approach is by building a platform consolidating all payment opportunities into a single seamless experience. That’s where we’re focusing our energy. Investing in Expensify is investing in a real opportunity, so with that, let’s talk about where we’re headed now.

All right. Let’s discuss how Q4 performed. As you can see on the screen, it was our best quarter in terms of paid member growth since the start of the pandemic; something we’re very excited about. Last quarter, we anticipated revenue to come in between $38.2 million and $39.2 million, but we actually came in at $40.4 million. That is above expectations. Regarding paid members, our initial forecast was for somewhere between 673,000 and 691,000; we came in at 711,000. We issued this guidance late in the quarter, so we didn’t sandbag these numbers; we actually recorded an incredible end to the quarter that pushed the numbers beyond our expectations, which is great for us. As you are aware, we have a reliable subscription model alongside variable pay-per-use. Those are customers who sign up without an annual subscription or existing customers exceeding their subscription limits. We experienced a considerable influx of that overage, which is why we have these numbers exceeding expectations. Other highlights from Q4 include a 57% year-on-year revenue growth and an increase in paid members in Q4 by 44,000. Our annualized revenue for Q4 is $161.6 million. On a GAAP basis, we reported a loss of $21.9 million, but on a non-GAAP basis, after adjusting for stock-based compensation and IPO bonuses which I will touch on more in a moment, we posted a net income of $4.4 million and adjusted EBITDA of $7.3 million. I previously discussed the IPO bonus; it was mentioned last quarter that we had to monitor this over multiple quarters. We will explain its impact within Q4. On a brighter note, after this quarter, we won’t have to discuss the IPO bonus any longer. Now, regarding how we derive non-GAAP net income, we report a GAAP net loss of $21.9 million while excluding $12.1 million in stock compensation and $14.2 million in IPO related bonuses, resulting in a non-GAAP net income of $4.4 million. Moving to adjusted EBITDA, we originally reported negative $6.9 million; including the previously mentioned bonuses, we arrive at $7.3 million in adjusted EBITDA. Now looking at fiscal year 2021, we generated $142.8 million in revenue, reflecting a 62% year-on-year growth over 2020. Our interchange revenue grew by 185% compared to the previous period, and we’ve improved our employee efficiency; we are currently generating $1.1 million in annual revenue per employee, surpassing what we shared in the roadshow from previous quarters. Talk about numbers getting more exciting: for the entire fiscal year 2021, we had a net loss of $13.6 million. However, if we examine adjusted EBITDA excluding stock-based compensation and IPO bonuses, we achieved $58 million in adjusted EBITDA and an impressive 41% EBITDA margin. Our Rule of 40 basis stands at 103%, which is definitely worth celebrating. Now moving onto guidance for Q1, you’ll see our previous guidance range with an updated expectation. In Q1, we expect revenue to be between $39.6 million and $38.6 million. As for paid members, we’re predicting a range of 684,000 to 702,000. We’d also like to discuss long-term guidance; until now we’ve only provided quarterly forecasts. We aim to issue long-term guidance now. We’re observing that revenue is growing sustainably at a rate of 2% to 3% month-on-month. However, we are experiencing some volatility with pay-per-use metrics due to macro events related to the pandemic and trends in business travel caused by geopolitical issues. This volatility has rendered forecasting more complicated than it used to be. Our long-term guidance reflects a target of 25% to 35% growth over several years, which we believe we can sustainably maintain. Moving away from quarterly guidance has become imperative due to the increased difficulty in making predictions linked to global macroeconomic events. Thus, we’d rather spend our time discussing long-term growth strategies rather than debating quarterly predictions. That covers all the material I have; I’ll now hand it over to Anu, who will kick off our Q&A session.

First, we have Sterling from J.P. Morgan.

You would think by now we would get the unmute button corrected.

Yeah.

Can you just start, maybe you touched on it in the last part of your comments, but talk a little bit about the seasonality in the paid user, given the expectation that this quarter is going to finish with fewer average paid members than what you did in the fourth quarter?

Yes. Thank you for that. You’ll see an actual increase from the guidance provided in Q4. We had an influx of oversubscriptions driven by the last two weeks of the year, boosting our numbers. From our perspective, we see the guidance increasing, but do recognize that influx was unexpected and not anticipated for Q1, so please rely on the guidance we provided.

Go ahead.

I would add that usually we don’t see major growth opportunities in the last two weeks of December during the holiday season. However, Q4 was special in that it demonstrated the robustness of our business model when the world returns to normal. It provided insight into the future of our operations as more traditional patterns return, following recent abnormalities in the macro environment.

I think we have one follow-up.

Yeah.

Sterling if you have anything?

Yeah. I muted myself so you can answer to avoid background noise. The second part is, at the time of the IPO, we discussed the pandemic and how our models around business travel were expected to recover back towards pre-pandemic levels likely in the latter half of 2022. Is there any change in your viewpoint in terms of this recovery?

We think Q4 illustrates how our business performs normally. In Q1, we experienced the Omicron surge, which peaked in January and is now receding. While the pandemic won’t last forever, we may see unpredictable flare-ups, similar to those in Q1. Q4 is indicative of a trend toward normalization, providing evidence of how our operations can return to pre-pandemic conditions.

Yes. We believe we’re getting back on track.

Understood. Thank you.

Thank you.

Next, we have Tamika from Bank of America, and I believe we haven’t spoken to you before, so...

Welcome.

Hello. Can you hear me?

Yes.

Yeah. Great.

Thanks for having me. Koji is actually in Hawaii right now, so I’m filling in for him. We’ve seen your signage outside of San Francisco; we were in Seattle for an Analyst Day. We have noted good success with investments outside of metropolitan areas. Could you clarify how you think about investing for growth? Has the investment profile changed since the IPO? Also, what is your outlook on the spending environment?

Yeah.

We’ve seen corporate expenses rise, and I’d like to know your thoughts on that moving forward.

Great question. Ultimately, the response to any question is that, whatever we’ve been doing is working, and we will keep doing it. We make incremental changes over time; we don’t typically shift drastically. Overall, we don’t feel that our overall business model or strategy needs changes. It is designed for a comprehensive market approach, working effectively outside metropolitan areas. We adapt our advertising, especially in metropolitan regions as well as through various digital avenues. You will see us wherever potential customers are looking. We're expanding account management initiatives to improve customer relations. In addition, we’ve added outbound capabilities to proactively reach new clients. We've engaged in direct mail to TPAs across the nation and we continue to grow through accounting firms. None of these methods are dramatic changes; they merely expand our existing global marketplace strategy. Does that answer your question, Tamika?

Yes.

Okay.

Any follow-up, Tamika?

Yes. Just a quick follow-up. Is there any update on the Marketo contract as it relates to GAAP revenue recognition? Any visibility or timeline would be helpful. Thanks.

We’ve made substantial operational progress on that and remain on track for completion. We anticipate finalizing everything by 2022. I can’t provide an exact timeline just yet, but we can offer more detail in the next earnings call.

That sounds good. Thank you so much.

Of course.

Thank you.

Next up, we have Tyler from Citi.

Hey. Can you hear me okay?

Yes. How is it going, Tyler?

Hey. Doing well, thanks. I wanted to better understand the comments regarding Q4 and the influx of paid members. What is driving the drop-off into Q1? Was this due to budget constraints, promotional activities, or is this typical seasonality due to reduced travel?

That's a great question. This drop is not due to customer churn but due to volatility among pay-per-use members. We observed an unprecedented level of customers exceeding their subscriptions during late December, which is typically a quiet period for us. We do not expect to see that level of pay-per-use surge in Q1, particularly considering the Omicron variant.

Yes.

But remember, the pay-per-use component and overage rely heavily on customer needs, making it challenging to predict. Therefore, while we don't anticipate similar surges, the unpredictability remains.

Yes. Core revenue growth is reliable and sustainably growing at a solid 2% to 3% rate. It’s the exceeding subscriptions that introduce volatility, especially considering what's happening in the world.

Right. The customers exceeding subscription indicates more revenue volatility versus average paid member volatility, correct?

The pay-per-use numbers are included in the total of paid members, so it affects them both.

I see. Okay. Moving on to some of your new product initiatives. The free plan was recently introduced; is this causing any cannibalization of the paid users?

No, it is designed not to cannibalize. The paywall was calibrated to ensure that current paying customers are preserved. Instead, it adds a new segment of customers, especially cardholders generating interchange, but not paying subscriptions.

Understood. Any updates regarding the invoicing and bill processing changes as they relate to growth?

Well, we haven’t segregated the specifics just yet, but we’re pleased with the traction of both growth areas. As part of our platform strategy, we are honing the art of cross-selling these functionalities to our existing customer base. We’ll start breaking it out when it reaches more than 10%, a threshold we define as material.

In Q4, it’s noteworthy to mention that we saw over 3,000 new customers sign up for the free plan, which is very exciting considering how recently it was launched.

Yeah.

Thank you.

Next up we have Brent from Piper.

Hi, Brent.

Hello. Good afternoon. I have a couple of questions if I could. David, I’ll start with you. I just returned from my first business trip last week at an event in Vegas and there was a lot more attendance than expected. As we consider your business and paid members, can you walk through expectations about a return to travel? If travel rebounds earlier in the year, would you expect that trend to affect SMBs differently than larger enterprises?

Great questions. You’re correct in observing leading indicators suggesting things are returning to normal. Just last night, we attended a team dinner, with more participants than I’ve seen in two years, and everything felt strangely normal. These signs provide hope that we are returning to pre-pandemic levels.

Helpful insight. For Ryan, historically, this has been a profitable business. As you think about the year ahead, what are your thoughts on where free cash flow and EBITDA could be? I’m assessing how to gauge meaningful free cash flow and EBITDA in the future.

Since the pandemic began, we decreased our spending, but as the economy recovers, we are ramping up expenses accordingly. For 2022, we anticipate spending more than we did in 2021. Consequently, we do foresee being profitable in 2022. However, if I had to estimate, it’ll likely be somewhat lower than what we saw in 2021, given our expenses will be ramped up for the entire year.

Helpful. Thanks for the insight.

Next up, we have Pat from JMP.

All right. Great. Thank you. Congratulations to you guys. I’ll follow up on what Brent just mentioned. You provided long-term revenue guidance; how should we view bottom-line and gross margins in the long run?

Good question. That was discussed during the roadshow, and not much has changed operationally. The long-term objectives we outlined previously remain intact, though they could vary slightly. Fundamentally, the business model has not changed. We’ve increased our sales and marketing expenditure, which could result in reduced margins, but overall, our business economics remain robust and profitable.

For the benefit of attendees unfamiliar with this call, could you please specify those numbers?

Off the top of my head, I believe it’s around 30%, if I’m recalling correctly.

All right. Great.

We are still above that figure, but we anticipate that it may trend closer to 30% in the long term.

David, smaller businesses face numerous options. What do you perceive as the most significant competitive threat, and what’s your plan to counter it?

Good question. I don’t believe much has changed. The competitive landscape includes numerous clones of existing competitors. The aggregate volume of these competitors still reflects a similar business model. Overall, we do not feel that the competitive landscape has drastically altered. We may see additional names, but this can lead to confusion, benefiting advertising as a way to stand out from the noise. The core of our strategy remains getting to customers first through scalable, effective viral marketing strategies.

Thank you.

Next up, we have Mark from Loop Capital.

Hi. Can you hear me okay?

Yes.

Thank you for taking my call. Returning to the margins concerning the guidance you provided of 25% to 35% long-term revenue growth, how should I interpret that within a defined time frame?

Great question. When we reference long-term, we indicate a multi-year outlook. Before the pandemic, we enjoyed consistent, predictable growth for nearly a decade. Though recent years have introduced uncertainties, we maintain confidence in our capacity to deliver these growth ranges over multiple years. So two years, five years, both are viable estimates.

Understood. Thank you. Moving to current pricing trends; what are your thoughts on the possibility of price increases coming soon?

We have no immediate plans for a price increase. We’ve surveyed our customers and found that compared to the array of functionalities replaced, Expensify presents great value at its current price point. We aim to continue increasing our market penetration before considering any pricing adjustments. Thus, while we have the ability to raise prices, it’s not something we plan to do soon.

Yeah.

Thank you. That was helpful.

I think we’re nearing the conclusion of the call.

It’s been a pleasure. We look forward to seeing you all again next quarter at the same time and channel. If there are no more questions, thank you once again. Talk to you soon.

Thank you, everyone.

Thank you, everyone.

Everyone goodbye.