Welcome to the Q3 2022 Earnings Call for Expensify. We’re excited here, we have our new Chief Operating Officer, Ryan, Chief Financial Officer David, Founder and CEO from Technical Accounting. Before we get started, Anu is going to take it away with a bunch of legalese.

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 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 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 the reconciliation of these non-GAAP financial measures to the most comparable GAAP measures. With that, back to David.

Thank you for the introduction. Let's keep it straightforward. We're discussing our long-term strategy, which has been consistent since our IPO. This approach is designed to work in all market conditions. Expensify is built on three key pillars for sustained success. Firstly, we see a vast market potential since every business needs our services, but only a small fraction is currently utilizing them. Thus, we believe the market remains largely untapped, and we aim to capture it. Secondly, our business model is unique; it's primarily driven by word of mouth and bottom-up adoption, allowing employees to download the app for free and bring it into their organizations. Each employee serves as a conduit to customers, rather than just relying on access through CFOs. We envision linking a billion people through finance, similarly to how Instagram connected a billion through photos. The market is divided into several segments. While we are recognized in the enterprise market, the majority of opportunities lie in small and medium businesses. Our business model allows us to target small businesses and scale alongside them. We utilize advertising and our free plan to attract small businesses, while our sales team and partner program enhance engagement with clients, driving high-margin subscription revenues. Our efficient lead generation and sales model contribute to our impressive profit margins. Unlike the typical top-down approach where only the CFO is contacted, our employees introduce Expensify to potential users, prompting immediate app downloads. This method converts expense reports into targeted marketing messages directed to decision-makers, leading to broader organizational adoption. We believe our product is uniquely capable of reaching the entire market. Our offerings have been around for a while, with numerous players offering different features, but we stand out as the only company that provides a comprehensive solution. Our scale allows us to cater to large enterprises while maintaining simplicity for individual users. We're generating revenue globally, which aligns with our business model, enabling us to address financial needs wherever they arise. Our product suite includes not just expense management and corporate cards, but also invoicing, bill processing, and payroll, all at competitive pricing. We're progressing well with our strategy, and our chat functionality is now actively being used by customers. We identify three main monetization avenues: viral features that generate leads, transactional revenue through our corporate card, and high-margin subscription fees. Our strategy remains focused, and while the market can be unpredictable, Expensify remains stable. We're continuing to hire and generate cash flow during these times, and we actively repurchase shares as a sign of our confidence in the business's future. As for our sales team, we have around 70 sales representatives concentrating on onboarding new customers, a group that has been cultivated over time. Currently, they are focused on maximizing the existing lead channel while simultaneously building an outbound team to generate more leads by targeting previous trial users and churned customers. We are approaching our leads uniquely, contacting those already familiar with Expensify, which yields better results. Our account management team is also growing, managing customers that represent approximately 41% of our revenue, and we aim for 90% coverage by the end of the year. They play a critical role in customer retention and transitioning pay-per-use clients to annual subscriptions, ensuring a stable revenue base. The accounting channel, which accounts for about half of our revenue, is managed by dedicated partner managers who are enhancing relationships with accounting firms through training and engagement. We’re preparing for our event, ExpensiCon, to deepen our connection with the accounting community. Our engineering is focused on creating a next-generation platform that integrates multiple functionalities seamlessly. We believe the future belongs to those who can leverage a highly integrated experience, as others in the industry scramble to improve their offerings. We're actively using our chat platform with live customers and integrating various aspects of the product to enhance collaboration within finance teams and with accounting partners. Moreover, our payroll service is now live, having been refined for small businesses and is currently being rolled out, although we are awaiting some state licenses. We see substantial potential in this service and are eager to expand it further. We believe it's a great time to invest in Expensify shares, which prompted our authorization for a $50 million share buyback program. We've recently initiated purchases, and we plan to continue repurchasing shares opportunistically. Our strong cash generation supports our growth plans, and we view share repurchases as an effective way to deliver value to our shareholders. Our strategy will continue to be consistently applied in the future. Now, I’ll hand it over to Ryan.

Great. Let's talk about the numbers. We had an increase in paid members in Q3, reaching 761,000. Now, we're not going to provide updates every quarter, but we said we'd update when we hit some milestones. We crossed the 15,000 customer milestone for the free plan; so that's 15,000 different companies currently using the free plan. Revenue was $42.5 million, which is a very slight decrease from last quarter, and I'll talk about that next slide. On an annualized basis, our revenue stands at $170 million. In Q3, we did see some downward pressure on our ARPU beliefs, which we expect to be temporary. As David mentioned, our partner managers are engaging with accountants. We're discovering that while there are many accounts using Expensify, not all of them are part of the program. As we engage with them, we're enrolling them in the program to secure our preferred pricing, which has a slight downward effect on ARPU. However, we believe this will be for the best in the long term because accounts within the program grow our business much faster than those outside it. Furthermore, we've experienced some currency headwinds due to the dollar's strength. Regarding our Expensify card, card volumes are up, as highlighted in our release, but our cashback acts as contra revenue. Thus, as interchange increases, cashback rises as well, reducing reported revenue numbers. It’s important to note that our interchange is still not categorized as revenue yet; we believe that day will come but not yet. Therefore, our apparent revenue pull-down relates to cashback, without interchange earnings lifting it back up. Although it may seem complicated, in net terms, everything is progressing positively, and we're adding cash. Looking at the Expensify card, year-on-year interchange growth was up 115%, with our gross interchange just under $2 million at $1.9 million. Turning to cash flows, our operating cash flow was negative $0.9 million; however, I wanted to emphasize free cash flow this quarter because operating cash flow includes customer funds. Customer payments can distort this number due to timing, affecting its consistency. Typically, it remains quite stable, but due to timing this term, customer funds caused an operating cash flow dip. When isolating actual free cash flow, stripping out customer funds, we had a positive $4.7 million in Q3. From a GAAP net loss perspective, we're at $8.2 million. Non-GAAP net income, which takes out stock-based compensation, gives us a positive $5.1 million. Our adjusted EBITDA was $9 million, with an adjusted EBITDA margin of 21%, which is quite strong. We maintain our long-term guidance on a multi-year basis, believing we can grow by 25% to 35%. The economy may seem challenging, but we believe this remains the right measure for multi-year assessments. In summary, Q3 reflects a very healthy business. We have robust free cash flow and profitability on an adjusted EBITDA basis. Paid members continue to grow, with Expensify cards up 115% from last year, and customers show strong enthusiasm for our product roadmap, which includes chat and payroll. As good news, Q3 was a bit slow, but we don’t normally do this—however, we’d like to provide a teaser for Q4. October was our best month ever again. This October, we reached 783,000 paid members and expect October revenue to fall between $14.3 and $14.7 million. Although we don't typically offer guidance, given the market's volatility, we thought it beneficial to provide this insight into Q4 performance thus far.

So first up, we have JP Morgan, Raquel. If you're on, you can go.

Good afternoon, guys. Thanks for taking my question. I want more color on how average trade members came in this quarter. Would you say it was within your internal expectations? Is that number coming in softer than 2Q due to additive churn or softer sales? How would you categorize that?

Yes. Great question, Raquel. As you can see, this chart is broken up monthly. One thing we notice is that, with the current market volatility, pay-per-use can swing more than we’d like, which is why we’ve prioritized account managers. Previously, we didn't have account managers engaging with our clients much, but now we’re making that a focus. A key goal of our initiative is to convert more pay-per-use users to subscriptions, which should mitigate the volatility we’ve seen, and we view that as positive. Q3 was a little softer than expected vs. the end of Q2, but it rebounded significantly in October. The more users we transition to subscription revenue, the more we expect that volatility to lessen.

To follow up on gross margins, we noticed they came in a bit softer. We discussed this in prior quarters, as it relates to adding more account managers. I’m not asking for guidance here, but would it be fair to say that this expansion will continue to affect 4Q and beyond?

That’s a good question. Yes, I think we will continue expanding the account manager program, which will incur some cost. However, I wouldn’t expect it to be a significantly large cost. The current team is pretty fully staffed. We’re focused less on hiring more people and more on increasing efficiency in how we engage with our existing team. I wouldn’t see it as simply because we have x-percent coverage now, it means we need to hire twice as much to achieve greater coverage. More so, we have time and are concentrating on improving the efficiency of our internal processes.

Thank you guys. Appreciate it.

Next, we have Koji from Bank of America.

Hey guys, thanks for taking the questions. I wanted to ask regarding the SDRs and the capacity of your account management teams. Is it fair to assume that the associated cost increase is captured in third-quarter results? Should we expect further increases?

Essentially you’re asking whether all the SDRs were hired towards the end of the quarter or earlier in the quarter, correct?

Yes, I wanted to confirm if third quarter was a solid representation of increased capacity from a cost perspective.

As we move ahead, we will indeed see more SDRs brought on. They represent the less mature of our organizations, but the guidance and account managers are pretty established currently. As the SDRs scale their ability to generate leads, we’ll eventually outpace our existing team’s capacity, which will necessitate further sales hiring. However, we need to scale the SDR team first before increasing the sales team.

Got it. Thank you. One more point. Looking at your performance for October, 780,000 is solid despite a more challenging SMB sentiment. Can you discuss what’s driving subscriber growth in October?

The volatility with pay-per-use strains our narrative. We continued to add customers throughout the quarter, but with pay-per-use, if individuals are expensing less, then that number can trend downward. So, at the end of Q2 and at the beginning of Q3, we saw the decline not due to customer turnover, but reflecting decreased activity among existing customers. While some SMBs face hardships and reduced transactions, we continued to onboard customers. So when SMBs struggle, we can expect less engagement. Our response is implementing account managers with an emphasis on moving more customers to subscriptions to stabilize any fluctuations related to pay-per-use.

Thanks, Ryan. Appreciate your insights.

Next up, we have George from Citi.

Hi. Thank you for taking the question. I'm here.

George, we can barely hear you.

Hello. Can you hear me okay?

We are listening carefully.

Is this any better?

No, but go for it.

I just wanted to ask about the growth equation between user growth and ARPU. Which do you feel is more macro-sensitive, and which one is more under your control?

To clarify which is more under our control: ARPU or user growth? I would say ARPU.

Users are more macro-sensitive.

Correct; this is an important leading indicator. ARPU can be influenced through price changes over time, adjusting based on our business mix, such as more subscriptions versus pay-per-use, or the free plan adoption. Paid member metrics generally reflect faster reactions to overall company expansion, contraction, or new customer activity.

To clarify, we have more control over paid members compared to ARPU. ARPU showcases volatility influenced by the percentage of our company exceeding subscription overages. We are working to mitigate pay-per-use volatility by encouraging more subscription sign-ups, hence the enhancement of account manager roles.

Yes. I would love more control over both.

Got it. Thank you for the clarity. Can I follow up on how customer behavior has shifted regarding up-tiering or down-tiering?

Good question. No, we have not. We looked into this recently. The mix of clients on the collect plan or control plan has remained consistent. We haven't seen any change there.

Yes, and an important aspect to realize is it’s not about opting to upgrade based simply on liking the product more; it’s when a business becomes more sophisticated, they will upgrade accordingly. There isn't really a downgrade case as users generally have essential features they need.

Like, if you laid off half your staff, you wouldn’t downgrade your plan.

That's a great way to phrase it.

Next up we have

Thank you.

Sorry, I couldn't hear you. Next up, we have Brent from Piper Sandler.

Hey guys, can you hear me?

Yes.

Yes.

So, I wanted to explore the macro-level factors impacting revenue growth this quarter, especially since you've pointed to some internal factors regarding subscription management changes. Have recessionary pressures influenced customer activity during the quarter?

Certainly, with inflation at historical highs, people are conscious of what they see on the news, which tends to affect SMBs most. I recently saw a Bloomberg report indicating that around 30% of SMBs struggle with rent payments. This situation translates into observable actions; we’ve seen customers exhibit lower activity rates as a percentage of their employee base. If customers pay a set rate via subscription, it remains constant but with a higher reliance on pay-per-use, they are less engaged, contributing to decreased expenses due to money tightening. We haven’t observed significant customer turnover but did note an overall decrease in pay-per-use users in Q3.

Certainly, I’d like to build on that. The SMB sector feels the effects of overall sentiment, macroeconomic policies, and geopolitical influences. Observing the chart, it’s interesting to note that every time we drop below the green line, a notable event seems to have impacted the world—COVID, Omicron, and the invasion of Ukraine. This demonstrates that it typically takes a period for clients to rebound after significant worldly changes.

Got it.

It’s not all doom and gloom.

Yes, as people process these circumstances and adjust their businesses, growth would subsequently return. This is why we witnessed such a successful October.

Thank you; that clarifies a lot. Lastly, regarding pay-per-use, can you disclose the current proportions of pay-per-use versus subscription? And what’s the intended steady-state mix for the future?

Great question. Pre-COVID, we were looking at a lower to mid 20% of our users on pay-per-use. It generally indicates that from a company with 100 employees, around 75 would be using subscription while 25 would rely on pay-per-use. Post-COVID, we've observed that number incrementally rose to thelower 30% area, the highest it's ever been. Initially, we thought it would never reach such heights while maintaining stability below the 30% threshold for so long. We are addressing this growing trend through our account management efforts, significantly pushing for subscriptions as observed volatility has risen higher than we initially expected.

This also reflects a retention challenge; if subscriptions become too expensive for customers, it might gauge their willingness to stay.

Exactly.

Moving along to Daniel from BMO, please.

Ryan, can you walk us through the timing issues related to settlement? Did the month-end align with a Friday, or can you provide conceptual clarity on those timing issues?

These timing issues have existed in this business for a while. Customer funds come in and go out, appearing on our balance sheet as amounts owed. Occasionally, if cash flows shift more significantly, it can cause some distortion. Thus, even though our operating cash flow appears negative, we prefer illustrating free cash flow. This measure, excluding customer funds, offers a more accurate reflection of our cash position: nearly $5 million in free cash flow, contrasting with negative operating cash flow affected by customer funds.

Can you clarify your strategy regarding risk management? Given how SMBs are under stress, how do you prevent that from flowing into bad debt for your business?

We have two different types of settlement for the Expensify card: daily and monthly. Daily settlement carries an incredibly low-risk profile, where you swipe the card, and we issue credit within 24 hours, collecting your repayment the following day before remitting fees owed to Visa. Consequently, losses from this model are minimal. Monthly settlement introduces more risk, but we’ve successfully managed billions over a decade. We've developed numerous fraud detection mechanisms. However, no significant uptick in defaults has been detected.

The majority of our card customers utilize daily settlement. We launched monthly options, but we haven’t seen many transitions. Most new card adopters have remained on daily settlement, negating the theory that monthly was necessary for competitive advantage. It functions similarly—those on monthly settlements require a higher level of visibility into financial stability, gauged through bank balances and assets. A significant aspect of our risk management process involves learning from delinquent accounts while maintaining good practices and compliance, resulting in a positive trend thus far.

To reiterate, the Expensify card aims not to provide credit to companies lacking resources but to facilitate spending cash they already possess efficiently. We consistently verify that available cash meets card expenses or will lower lending limits if not.

Adding clarification, it often seems intuitive that companies would prefer monthly settlement to borrow cash, but the reality is, most have sufficient funds and don’t need additional credit. Choosing daily settlement allows for substantially higher limits due to reduced risk on our end. It’s a matter of optimizing cash flow timing versus maximum spending potential, where most customers value higher spending limits over cash flow optimization.

Thank you for the insights. Can you provide any updates on financial reporting related to the Marqeta contract and interchange fees?

That’s a great question. We are very close to finalizing this. I wish I could share that it is complete, but we believe we will roll out the new cards with updated treatments by the end of this year. After this change is accepted by our auditors, it will take additional time to distribute new cards, but we anticipate that process to begin by year-end, with more updates to follow in subsequent earnings calls.

Thank you, everyone.

Thank you.

Next, we have Pat from JMP. Pat, are you on?

Ramsey on for Pat. Thanks for taking the questions. First, could you discuss how your culture at Expensify has evolved? How do you plan to maintain that culture as you continue to grow?

Excellent question. Expensify is a special place; however, its culture isn’t by chance. Everything we’ve developed is methodical, creating an environment empowering everyone to deliver their best. How do we preserve this? We take care not to compromise culture each day, which may sound obvious, but many founders push through unsustainable business models they eventually dislike. Most sacrifice culture daily, depleting their operations. We’ve not done that. We’ve made a methodical investment in our employees and culture to preserve its core. An example is our long-term share structure. At our IPO, we maintained focus on how to create incentives for our employees to be committed to long-term goals amidst market fluctuations. We have witnessed tough times and understand the importance of a team willing to ignore temporary distractions. For our team, this share structure translates to a focus on trends, which we track consistently. Our cultural pillars have always been designed to scale, as we focus on profitable growth strategies that work. There’s no reason it can’t scale as we’ve built it to last and grow meaningfully.

Additionally, our hiring practices are slow and methodical. It’s less likely we need to make 20% layoffs in a downturn, which adversely affects morale. We have ample talent and continue to grow thoughtfully. Our approach has remained consistent, irrespective of market conditions.

The strategy proves effective—most months see improvements over the last, and while not true 100%, it’s consistently the case. We trust in our strategy and will continue to invest.

Thank you, appreciate your insights.

Lastly, Mark from Loop Capital.

Hi. Can you hear me okay?

Yes. Great. Thank you.

Hey Mark.

I wanted to ask if you expect a repeat of last year’s subscription surge from pay-per-use users during Q4?

Great question. Last year, October was soft, but November-to-December saw significant activity. October performance has improved. While I can’t predict December’s outcome, the strong October results suggest promising trends. However, the volatility of pay-per-use complicates predictability, as pay-per-use isn’t as reliable, and we are working to enhance the consistency.

Thanks! Regarding margins, while I know you’re not providing specific guidance currently, could you give us insight on balancing revenue growth against operating margins?

Generally, margins will likely remain stable. There may be a short-term dip as we scale up some of our teams, but ultimately, we expect to achieve improved margins, similar to our experiences with the Concierge system—which initially resulted in decreased margins, later significantly increasing them through efficiency gains. We are applying those learned efficiencies across our sales mechanisms, similar gains are expected longer-term but are still in the early stages.

Great, thank you.

Thank you.

We’re all good for today.

Thank you so much, it’s always a pleasure talking to you all. We look forward to next quarter.

Thank you.

Thank you.