Expensify, Inc. Q1 FY2022 Earnings Call

Hello everyone. Welcome, welcome, welcome to the Q1 2022 earnings call for Expensify. I’m David Barrett, Founder and Chief Executive Officer of Expensify. We have Ryan, our CFO; Anu, our COO. I can’t hear from tactical accounting, we are here to answer other questions that you have, and so let’s get started. Just a second. Let’s try this again. Here we go. First, we're going to start with some fascinating disclaimers read by our defense here Anu.

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 federal securities laws. 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. Please 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. With all that, back to you David.

All right, so we are coming to you live from the Bank of Expensify here in Portland, our lovely office up here in the great, great north. So first, we're going to start off just talking about a reminder of why we're all here. Basically, what is the heart of Expensify, our secret for success? It rests on three major pillars. The first is that we believe the market size is enormous; the opportunity is huge. We think that basically, of all the companies in the world, virtually none of them do anything yet. Almost every company in the world is still struggling with expense management, and we think that all of them are going to switch to some platform, and we're gunning for it. So we think there is a huge opportunity. And we have a business model that can acquire at all. This business model is unique to Expensify. All of our competition has the same classic top-down enterprise sales model, which only really works in the enterprise. The vast majority of the opportunities outside of that are inaccessible to the traditional business models. And so we think that we have a unique opportunity to capture the overwhelming majority of the market. Third, we think this market is huge. We can link a billion people together on a common platform. If Instagram can link a billion people through photos, we think we can do the same through money. To dig into that a bit more, the market is enormous. And it's not just the enterprise; we think that we can go into the overwhelming opportunity size of the SMB, which is by far the biggest and best part of the market, the highest margin part. We can go anywhere; we have enterprise customers, we have all sorts of customers. But we think the greatest part of the opportunity is SMB, where we are uniquely optimized and focused on. Our model basically involves brand advertising and freemium acquisition to create really efficient lead generation. Our super-efficient, high-velocity sales model involves inside sales team partners, and of course, our automatic self-service subscriptions. We think that all this is what leads to our super profitable growth over time. As a reminder, our business model works by individual employees signing up for Expensify in the company before waiting to be asked or asking permission, just basically signing up and giving it a shot. This turns every expense report into a highly targeted marketing message directly to the decision maker. So this is a way that we can generate leads and the companies of all sizes, basically without having to pay for them. Thus we want to close them, turning every employee of other companies into a salesperson for Expensify. Come on clicker, quicker, you can do it. Here we go. So Expensify’s model, we think we're the only ones who can reach the full market. We're the only ones who can make five super important claims. First, we have true enterprise scale; we can go up to the very top of the market and support the large, multinational public companies like ourselves. But we also have a consumer-grade design that we can meet the bottom of the market and support basically the small VSPs and individuals as they are just entering into their entrepreneurial space, the side hustle phase, things like this. We have global reach; we support all currencies; we support all sorts of corporate card feeds. We have not just native corporate cards but also native corporate travel built into our concierge. And finally, all of this is free. We're the only company that can make these five claims. We think this is very unique to Expensify and is a key part of why we think we can capture the whole market. We think there's a huge, huge opportunity out there about uniting all these previously disparate financial use cases into a single flow, everything from unstructured chat to P-to-P wallet functionality like Venmo, corporate travel, invoicing, real processing, corporate card, payroll expense; we think we can link all of this onto a common platform because they are all variations upon the same common theme. It's a list of expenses that you give to someone and they pay you in return and toward taking it all. So maybe just to kind of a quick refresher for everyone who doesn't already know this. Just to touch on a couple of different business updates. First, we launched our CPA card. The CPA card is the very first corporate card built exclusively for accountants and their clients. This card has a number of perks designed specifically for accountants like reimbursing AICPA memberships, CPE credits, and things like this. Also has dedicated and special pricing for accountants to manage their firms. This is the first in the industry. We're taking this out through our extensive partner network to all the accounting firms in the world, and we're super excited about the traction and so forth. Second, let's talk about the Free Plan. The Free Plan isn't new, but we're going to talk about some exciting sort of growth we've had. We like to say that the Free Plan is the freest of free plans around. It has more free functionality than anything else in the market. It has all sorts of administrative features to manage not just your expense reporting and reimbursements, but also has corporate card, you can send invoices, you can pay bills, you can collect revenue, and it supports everything you do in corporate travel. It has everything built into a single platform that is completely free. The Expensify Free Plan is designed for small businesses at the start of their journey when they are brand new and just getting started but is a complete platform for everything. So we like to say that our free customers pay us in a few different ways. First, if you use Expensify Card, you're generating interchange for us. Basically, every use of the Expensify Card is making us cash. Second, they are paying us in viral lead gen. Every time you send an invoice, you're sending it to the accounts payable group of a different company. Invoicing and bill processing allow us to leapfrog between the accounting departments of different companies. So basically, just to use the Free Plan, you can't help but promote us to everyone around you. Third, of course, is users; you pay us in word of mouth and branding. To use Expensify because it touches such a potent pinpoint, you just can't help but talk about it. We would much rather that you're using Expensify for free than continuing to use Excel or a competitor. This essentially locks up and establishes our brand dominance in the market. And of course, you don't stay free forever. Eventually, if you are a company that’s successful, you keep hiring, you are growing, your complexity hits a certain point where you cross one paywall, and you become a fully paid subscription. Thus, the free plan is an incredible plan that we're super excited about. And with that, I think, I will turn it over to Ryan.

Alright. Hello everyone. I'm excited to talk to you about our Q1 performance. Q1 is kind of interesting in that it was the height of the pandemic, so more people got COVID in Q1, which provides an interesting condition for a banner business month, but actually, March was our second best month in company history. I'm going to break down what that means. So first, let’s get off and let’s talk about the actual results. Our range was $38 million to $39.6 million in revenue. We came in at $40.4 million, so above expectations. The paid members we were expecting 684,000 to 702,000; we actually came in over that as well, at 706,000. Things are going great, and we're excited about the performance we're seeing in the growth of the business. I mentioned the impact of Omicron. We got a lot of questions about this last time, so I wanted to explain how this whole quarter kind of shook out. In December, we had a great end of the year. In January, we faced Omicron peaks, with more people infected in January than any other time in the pandemic. What's great about Omicron is that, most people got infected, but they got over very quickly. It didn't last as long as kind of the other spikes. We see that in our numbers. In March, if you were to cut out January and February and just take March from December, it's actually consistent up into the right; however, we did have that Omicron impact at the first half of the quarter, which makes it tough but we had a huge rebound in March. We feel great about things moving perfectly; obviously, Omicron is a bump in the road. We continue to demonstrate strong long-term growth. Again, we had 706,000 paid members and $40.4 million in revenue. Our year-on-year revenue growth is 36%, and on an annualized basis, that's $161.6 million in revenue. I also want to talk about the profitability of the business. We generate significant cash and profit. Our operating cash flow was $11.2 million. On a GAAP net loss basis, we had negative $7.4 million that is driven primarily by the stock-based compensation expense. If you back out stock-based compensation, our non-GAAP net income was $7.3 million and adjusted EBITDA was $1 million. David talked about the Free Plan; I wanted to share some numbers. We had over 9,000 new customers sign up for the Free Plan; that's an 183% quarter-over-quarter increase in Free Plan members. The Free Plan is extremely popular, and as David mentioned, these customers pay us either through word of mouth, through actual interchange, or through upgrading to a paid plan. We see this as a very exciting sign for things to come. This plan has not been out very long and it’s going great, so we want to highlight some exciting signs of future growth and we think this is one of them. We also reaffirm our long-term growth guidance, not only this year, but we think that we can maintain 25% to 35% growth over the multiple years going forward. So we want to remind everyone of that. And with that, we'll start our Q&A.

So first, we have Brent from Piper Sandler.

Thank you for the question here. It's great to see the business step back from a paid perspective, post the little Omicron air pocket. I guess, my first question is really on just this general return to business travel that you're clearly seeing in March; it looks like that return to business travel continued into April and May. Maybe walk us through the lag or the timing of when you start to see a return to travel show up either in active paid member users or in kind of TPV volume. Just trying to understand how we should connect the dots as we see an external business traveler pickup and how that impacts your business.

Yes, so more people traveling is obviously great for us not only because they're more active on the platform, but actually, we see more signups in times when people are growing. The reason for that is we solve a very real pain point, and that's expense reports. People complain more about expense reports when they're traveling. So if we see more people traveling, not only are they more active on our platform, other people who are not using Expensify are complaining about expense management. Because we have such a strong brand in that space, they're more likely to get a recommendation for Expensify when we have more people actively complaining about travel, which we didn't have, obviously, during the COVID periods. Now, you asked about the lag time. We build in arrears, basically like a 30-day lag. If we see a huge uptick in April, and there’s a bunch of reports that traveled double, that would show up the next month in terms of when we would see that.

Helpful color there. Just to be clear on the delta between the reported 706,000 paid members versus the 742,000 in your slide. The delta there is just the average; we should think about when you report the quarterly paid members, the 706 is the average over the full quarter, and then the 742,000 was just a snapshot, is that the right way to think about it?

That’s a great question, Brent. The paid user number that we report every quarter is the average of three months. Normally, we don't break out months and we won't do this going forward. But we felt like this was a very important piece of data that we needed to show. The average doesn't tell the whole story. We had the height of the pandemic; numbers were down. We had actually the second-best month in company history from a paid member perspective in March, but that isn’t showing up in the average. The first best month in company history was the month prior to the pandemic, so it’s the second best one; we think that's actually really exciting. But we will not be showing monthly data going forward; it usually is an average. But this was important.

We won't complain, we won't compare, if you choose to disclose more. My last question is kind of a follow-up; you're on the Free Plan. It sounds like really good momentum this quarter. Can you describe the type of customers that you landed? It looks like about close to 5,000 net new folks are going on to the Free Plan. Are these small entrepreneurs just now starting out, or is it a wide range? Just trying to understand what that customer profile looks like for my own TPV assumptions?

Yes, that's a great question. If you're going to go back to our islands of markets, it's only the beachhead. Basically, these are like, again, sole proprietor side hustles, brand new SMBs, people just entering the market. We view it as very much top of funnel for us; we are trying to capture everyone at the very earliest point of their journey with a free product. Once we're in, we stay in forever as long as we just don’t screw it up, basically. Because if we're already there and then invoicing solutions, like I can just use the one I already have. I need to start; finally, I have some bills; I should probably start using this, bills and things like this. We want to be in pull position for every new financial use case they have by getting to the earliest point, and then we can hold on to them as they go through their journey. If they go up to the snowy tundra to the north, we can follow them the entire way.

Got it. A very helpful color there. I’ll see the floor, but great to see you there recovering the business. Thanks.

One piece to add to that: the Free Plan metrics are definitely concentrated more towards really small customers, so one to five employee companies. But there is an immaterial number of slightly larger companies in there as well, like the 10 to 20 range. That's interesting because sometimes a company comes in, onboards on the Free Plan, uses it in a very low control, simple use case, tests it out. We don't know yet how long, but there’s, for some period of time, then decides to upgrade. So while still an edge case, there’s a healthy pipeline as well. So that’s exciting , and we look forward to talking more about conversion in the coming quarters.

Okay.

Next, let's go to Koji Ikeda.

Hey guys, can you hear me okay?

Yes, hi Koji.

Great. Thank you so much. Thank you so much. I'm bouncing in a couple of different calls here. Apologies, it sounds like you gave some good information on the subscriber side. So thank you for that. Just wanted to ask you a question. You reported the fourth quarter essentially at the end of Q1 on March 30, but you did beat by the subs and the revs. It sounds like you'd beat the revs in the March quarter by a lot. Just curious; was that just conservatism when you were coming out on the fourth-quarter call, guided to this quarter, or was there something else going on that just kind of surprised you right at the end of the quarter?

So the guidance that we gave was based on how we saw the quarter coming out, but March was a really big month, right? It was the second largest, so every single week the numbers were going up and up. So we gave the best guidance that we thought at the time, and it came in a little bit above that.

It’s not going to be conservatism for the sake of it. One thing to consider is we know at the point that we did the call, we know what we know about activity, but from an accounting perspective, we haven't yet booked the revenue. So we want to make sure that we take into consideration that there might be accounting-related treatment that might differ based on the actual results. That's where we do a range.

Got it. Got it. Just one follow-up from me. Apologies, again, if you mentioned this on the call. Ryan, in your commentary, just any sort of change in the way you're thinking about sales and marketing spend for the rest of the year? Especially given that you did set such a record quarter – record month in new sub adds. Are you thinking about sales and marketing the same as you did a couple of months ago, or are you deciding to maybe step on the gas a little bit? Can you help there in the way we shouldn't be thinking about your sales spend on marketing side?

So I don't think we're currently planning on increasing it. We're still measuring the effectiveness in all these markets because remember, we kind of exploded onto all these in the top 20 largest markets in the U.S. We mentioned last quarter that we are layering in more of a sales function than we’ve had historically. I would expect a relatively the same amount of S&M as you were thinking before, but we’re probably going to be adding in more sales, but less marketing and experimenting with that.

Got it. Thanks for taking my question, guys. Appreciate it.

Good to see you.

Next, we go to Tyler from Citi.

Hey there.

Hi, Tyler.

Thanks for taking the question. I wanted to see if you could just comment on the recent trends that you’ve been observing, especially with the uptick in travel that you’ve mentioned. Clearly, a nice improvement throughout the month of March. I don’t know why it keeps going out. Can you talk about how that’s trended through April and May? Has that improvement continued?

Just to make sure. Are you asking for insight into how team members are looking in Q2? Is that whatever you’re asking?

Yes. How is the paid member growth throughout Q2 since then in March?

It’s doing great. Obviously, we’re not seeing a drop like we saw in Q1. The growth has remained consistent. Obviously, we're not going to give guidance here, but it’s going great.

I'm curious, like with that drop, how much of an impact did that have on interchange revenue? And would you expect that growth to accelerate now that you have this free program, and obviously we’re kind of through Omicron?

Yes. That’s a really great question. If you, let’s say we were to layer on the interchange onto this chart, it went down with Omicron. The quarter-over-quarter increase in interchange was 15%. That’s despite the Omicron drop. Obviously, it did negatively impact that, but there was still larger growth in interchange than there was in revenue quarter-over-quarter. We believe it or know that Omicron impacted the growth of interchange. Did that answer your question?

Yes. I guess, like given that what you’re seeing in the free momentum, which should help the interchange business as well, now that we’re post-Omicron. Should we think about year-over-year growth accelerating going forward with that interchange revenue because this was kind of such an impacted quarter?

I think one-month impact is very pronounced in the quarterly results. But when you look annually at a program like the Card, which is still kind of in its evolutionary stage because we launched it two years ago. It really started to take off post-pandemic. I think it’s a blip in the annual journey, so I don’t think it should be. It’s not going to be material to the results when you look at it year-over-year.

The way we see people modeling, I think is probably pretty accurate.

Okay, great. Thanks for taking my question.

Maybe let’s talk about this in Q2.

Sounds good.

It's a weird quarter, right? So we can talk about that.

All right, thanks.

No problem; thank you.

Next, we go to Pat at JMP Securities. Do we have Pat? Okay, we’ll circle back to him later. Let's try Daniel at BMO.

Hi. Can you hear me?

Yes.

Okay. It won’t let me start my video, so I apologize. I’d love to see you in person. But on the buyback program that was announced today, it wasn’t mentioned, but I’d love to kind of compare and contrast your commentary about how impressive the market opportunity is and how it’s a race to capture it, with sort of the choice to do a buyback program instead of investing that for growth.

Great question. If you’re talking about the 1 billion user opportunity, that’s an opportunity that you capture through advertisement. The way that we grow in the long run, like the bulk of our growth between now and the next billion users is not going to be acquired by someone clicking on an ad or talking to a salesperson; it’s going to come because we’ve cracked a viral code. The primary driver in long-term growth is product and viral. I think that it’s tempting to see a direct correlation between spending on customer acquisition and growth. We have definitely been very aggressive when it comes to spending on advertising and customer acquisition. You shouldn’t misattribute our current growth exclusively to our increased advertising. The bulk of that growth is a consequence of a better product, better market conditions, and our ability to capture these viral loops. There is a point of diminishing returns to advertising. We're in a ridiculous number of cities; I see our billboards in Portland like ten times a day. I can do 20x or 100x a day, but at some point, it's like, okay, it's pretty saturated. I think we're a top advertiser – like outdoor advertising in the nation. Customer acquisition is wonderful. However, we have a business that kicks off so much cash that at some point, spending on another billboard or another ad isn’t the best use of funds. It's a crazy market condition. This is not an obligation to do anything, but it is an opportunity. We’re indicating we’re authorized if the conditions warrant, and we think at the moment this was the right thing to do, so we can act quickly.

Yes, thanks. We’ve had a lot of discipline growing sustainably over the last decade, and we’ve managed to grow at a great pace and also add cash in the bank. The buyback of shares will never be at the expense of sales and marketing or growth or anything like that. If you have excess cash, and you’re just collecting interest on it, let’s buy back some shares instead of just having a bigger and bigger pile of cash over time. That’s the thought process behind the authorization of that. It’s not instead of growth; it’s what do we do with the cash in excess of all the money we’re spending.

Great. I appreciate the context. And I haven’t asked yet, so I’ll ask it. Any update on the Marqeta contract?

Well, actually, some pretty good progress. Do you want to?

Yes. We’re still working through it; it’s sort of more of the same. But we’re making steady progress. We still think we can get it done this year. We’re currently working to lock in on the accounting treatment, which is our primary goal.

But great progress, and we’re more confident than even more confident this quarter than we were last quarter.

Got you. And maybe I can just sneak one more in then. How’s the penetration of the Card into the non-free base? How has that trended relative to your expectations?

That’s a great question. We’ve done a great job of getting customers signed up on the Card. Around the time of the IPO, we were at about a 4.5% or 5% attachment rate; now we’re looking at about a 9% attach rate of customers signed up. That does mean a 9% fully penetrated across those customers. Our job now is to get all the employees using the Card at all these customers, but I’m very, very happy with our ability to get customers signed up. Our job now is to just ensure that they are fully deployed across the company because that is kind of a habit change.

I don’t know if you guys saw this, but maybe a month – less than a month ago, we launched monthly settlement. We have some early results, although we’re not talking exact numbers. The early results have been super promising. This was one of the most requested enhancements to the Card that we’ve gotten out, so we’re very optimistic this will give us a bit of a boost to an already high momentum program.

Let me explain a little bit what that means. The Expensify Card to date has been a daily settlement program, which is great for high spend companies. This is optimized for companies that need to turn over their credit very quickly. If you have a $100,000 limit or something like this for a $10,000 limit, you can do every single day, $10,000, so you can spend a lot of money very quickly. As we go into other companies that are more cash-constrained, they actually want to sort of finance the business; they’re not turning over their credit as quickly. They want to extend that credit over a longer period. I think we're the only program that supports both monthly and daily settlement options; monthly is really great for high spend companies. Daily is excellent for high spend clinics; monthly is fantastic for cash-constrained companies trying to finance their operations, and we support both ends of that. We found that actually, the cash-constrained spectrum is more attractive for the accounting community, and that's why we launched it in parallel with our CPA Card because we found that CPAs are no longer just trying to identify problems but also solve problems for clients. Now, they can work through us to extend essentially credit to their clients through the Expensify CPA Card. We are very, very excited about it, and our accounting partners are super excited about it.

Great. Thank you very much, everyone.

Thank you.

Let's try Mark from Loop Capital one more time.

Hi, can hear me okay?

Yes.

Yes. So thanks for taking my question. David, during last quarter's call, you mentioned that you are adding some outbound capabilities to your go-to-market motion. I realize it's still early days for that initiative. I was wondering if you could just give us an update on how those outbound efforts are going?

Yes. I’d say it’s still early days. Our philosophy overall is to expand this sort of inside sales team such that we can turn around calls within 30 seconds. When anyone wants to call 24/7, there’s someone who can pick up the phone, talk to them, and give them the demo within 30 seconds of the request. That’s our focus right now: nailing that down. Our approach towards outbound is filling in the gaps between that. We’re putting an enormous amount of effort into this with a substantially sized team. We’re super excited about that progress; it’s still early days in terms of results perspective, but we’re definitely working on it.

Okay, great. Thank you. And then I have a question on the hiring front. Many software companies and tech companies out there are having a difficult time hiring good IT talent. I was just wondering if you could discuss how the company is managing through some of the hiring challenges?

That’s interesting. We talk about this a lot internally. Expensify is unique in a number of ways. For a lot of companies, hiring is a vanity metric; it’s like basketball; people say, 'Oh, we hired 500 people this quarter,' as a sign of success. We do hiring events like golf. I want to hire the fewest people necessary to solve the problems. Better than hiring is not having problems; automate the solution; find some outsource provider that can solve that problem in a scalable way, and then only if we can’t solve the problem in any other way should we expand the core team. Our core team is really the creative collaborative hub of the company. The expansion of the core team does not directly correlate with revenue growth; we can 10x revenue with the current team. We hire not just to keep the business running, but to pursue opportunities, so there's no direct relationship between the two. Hiring is necessary for long-term growth but doesn’t impact the short-term. So it’s a long preamble to say we’re not hiring the same types of people as other companies. Many companies struggle to find 500 qualified engineers. We’re looking for one amazing person a month. For us, that’s a good rate because we invest in our existing team for maximum value. We hire slowly, but that’s by design, and we’ve never struggled to hire. In fact, we’ve increased our hiring standards as it’s easier to hire.

To add to that, we’ve agreed with all that, but we also just hired two very seasoned individuals into our accounting team, which we’re very excited about. That’s, I guess, a strategic hire, in an area that we’re beefing up that we’re paying closer attention to.

Expensify is a great place to work, so we don’t have the same challenges that other people have.

That’s a fair point. We don’t have turnover problems either. It’s not like replacing staff. Most companies are just frantically treading water; we hold on to people forever.

Yes. If you could turn over your employee base every couple of years, that doesn’t make it hard to hire. We retain everyone for basically forever, so we don’t struggle with that as much.

Great, thank you.

One last question from Pat, who’s having technical difficulties. His question is, what are one or two most important things on David's to-do list for this year?

Oh, man.

That's a great question.

You're killing me here. Most important is a good time. A lot of it is just the table stakes of being a public company. We’re a new public company. We’re beefing up our accounting, going through SOX compliance, and there’s a lot of work to ensure we can continue to earn the position that we have. This conversation is exciting but also new for us, so we’re building our muscle memory to do this. First, just organizational excellence, like what is all the important stuff we need to do? Write it down; get everyone trained on it, and get everyone doing it reliably. It’s not the sexiest thing, but it’s something I care a lot about. I’m putting a lot of personal attention to it. Second, I’d say is finishing reunification. On our product roadmap, we’re investing tremendous amounts into this new vision of what the industry can do. It’s a new thing. It takes a lot of work. A huge fraction of our team works daily to imagine this new chat-centric, mobile-first way to not just do expense management but all corporate finance on a single platform. No one’s ever done that before; most don’t think it’s possible. We put a lot of thought into it, so I balance my time between just holding the organization’s feet to the fire for incredible efficiency and excellence and, in the exciting things and the boring things. I participate in robust discussions about disrupting and revolutionizing this industry forever. That’s exciting and important.

Well, I think we're ready to wrap it up.

Great. As always, it’s a pleasure. To summarize, in Q1 we remain cash flow positive and profitable despite peak COVID, which is pretty exciting. Revenue is up 36%; Expensify Card is up 105%; Free Plans are up 183% from last quarter alone. So this is an exciting time for the business. I mean, this is the most obvious thing in the world. I’m really excited as COVID looks like maybe it's behind us, and the more that’s true, the more things are going to be awesome. We’re built for good times and bad, but we obviously like the good times better. That’s it. Thank you so much, and I'll see you here next quarter.

Bye. Thank you.