Welcome to the Q1 2023 Expensify Earnings Call. And today, you have myself, Ryan Schaffer and new Anu Muralidharan. Our CEO, David Barrett, is laser-focused right now on working with the team to get everything ready for ExpensiCon, our conference next week, and we'll be doing a number of important product announcements there, and he is working side-by-side with the team heads down to make sure everything is ready. So today, Any and I are going to take you through the slides. And without further ado, let me turn it over to Any to read the legalese and take us through the business section.

Thanks, Ryan. Good afternoon, everyone. Before we start, please be aware that all information presented on today's call is unaudited. Throughout this call, management may make forward-looking statements based on current expectations and beliefs, which involve risks and uncertainties that could lead to actual results differing significantly from what is discussed. These statements in the earnings release and on this call are valid only as of today and will not be updated as events occur. For a thorough discussion of the risks that could cause actual results to differ from any forward-looking statements made today, please refer to our press release and SEC filings. Additionally, management will refer to certain non-GAAP financial measures today. While we believe these measures provide useful information, they should not be viewed in isolation or as a replacement for GAAP financial information. Please check today's press release or the investor presentation for a reconciliation of these measures to the closest GAAP measures. With that, let’s begin. I want to briefly remind you of our long-term strategy. Expensify's success hinges on three key factors. Firstly, the market is vast, and we continually emphasize that few are using any software product, which means our main competition remains Excel and paper. The real opportunity lies not with enterprise companies but with the multitude of small and medium businesses that collectively represent the largest workforce, and this is our core value proposition. The challenge is how to effectively acquire these small businesses on a large scale. However, we have a unique advantage—our viral word-of-mouth adoption model allows us to capture a significant market share profitably, which is our goal. We aim to develop a platform catering to a billion users, and we invite you to join us on this journey. Let’s move to the next slide. I won’t spend much time on this as you've likely seen it before. This slide illustrates the rich opportunity available as we shift focus from enterprises to a vast array of small and medium businesses, which offers a larger pool of employees. It’s important to note that profitably acquiring this small-medium business segment isn't feasible through traditional sales-driven models, highlighting the need for our product-led growth and viral adoption strategy. Next slide, please. To quickly recap how our bottom-up adoption model functions: Expensify addresses a real pain point for employees—a largely overlooked segment. We are the only company that offers a product tailored to meet their needs, even before their employer adopts it. Employees can download our app and use it for free, which, because it addresses a genuine need, leads them to recommend it to friends, family, or anyone they know who experiences similar issues. This results in a substantial number of individual users utilizing our product for business purposes, often within various groups in a company. This organic growth enables us to convert the organization into a customer without direct sales intervention, showcasing the effectiveness of our bottom-up model. This approach can scale without increasing headcount or sales costs. Next slide, please. When acquiring smaller companies, our philosophy is to never allow customers to outgrow us. We cater both to individual users and have capabilities at an enterprise level, featuring a comprehensive suite of tools and global outreach. Next slide. You've seen this slide multiple times; this is our extensive roadmap. As you can see, more items that were previously gray, indicating plans, are progressing to green, signifying beta status, and further along becoming blue, meaning they are fully launched. Read this from left to right: anything on the far left is aimed at boosting viral lead generation, while items on the far right focus on enriching the product subscription for our existing and target partners. Let’s cover a few strategic updates for Q1 before Ryan addresses the financials. First, our accounting channel, which we view as a significant opportunity, has been previously discussed. Each accountant can introduce hundreds of customers, translating to thousands of potential paid accounts. The quality of customers from this channel is high, as these companies are typically set up by well-informed accountants who are trained on our product. This leads to better support and retention rates. We have two initiatives to enhance this channel. The first is assigning partner managers to around 500 accounting firms already using our platform. These managers provide one-on-one support during customer onboarding and assist with any issues or growth adjustments. This keeps the channel well-supported and offers a great opportunity for team growth. The second is hosting ExpensiCon 3, featuring industry experts and accountants. The event aims to foster relationships and gather insights to better tailor our product to their needs, along with enjoying time together, which strengthens loyalty. Next slide, please. Our sales efforts have also been consistent, generating inquiries about how sales fit within our product-led adoption model. We see product-led growth as a key growth driver, similar to a sailboat that moves faster when winds are strong, while acknowledging current macroeconomic conditions may slow down that wind. Our sales efforts, likened to a motorboat, serve as a reliable backup during slow periods to sustain growth. We’ve been implementing a flexible outsourced model for our Sales Development Representatives (SDRs) who focus on generating direct leads. In the first quarter of 2023, they have started to gain momentum, as evidenced by an increase in incoming leads. Additionally, we are enhancing our guides program, where setup specialists convert leads into paid members at increasing rates each month, which is an encouraging sign for our growth. Next slide. Now, regarding product-led growth, while we cannot control macroeconomic conditions, we want to be prepared for the market recovery. Our aim is to have our entire product roadmap fully launched and complete. To achieve this ambitious goal, we are leveraging an external contributor community alongside our internal engineering team. This strategy ensures we can address bugs while moving swiftly towards our product launch objectives. In summary, the three major updates are our sales channel, accounting channel, and contributor community. The progress made in Q1 is promising and positions us well for the future. I will now turn it back to Ryan, who will take us through the financials.

Great. Thanks, Anu. All right, everyone. Happy to see everybody again. I'd love to take you through the Q1 financials. So revenue was $40.1 million, which is just slightly down year-over-year. But one thing to consider is that our cashback is contra revenue. So as the card continues to grow, and it has been growing quite nicely, that actually pulls down that revenue number. If you were to adjust for cashback, you would see that revenue is actually higher. We have more users than we had last year, but actually, the card is more successful, and that pulls down revenue. So we had a flattish, slightly down revenue year-over-year. Our average paid members were 747,000, up about 6% year-over-year, and our gross interchange is $2.3 million for the quarter, which is an 85% increase year-over-year, so the card continues to grow quite nicely despite some headwinds elsewhere in the business. Next slide. Our operating cash flow was $7.6 million, and our free cash flow was $10.2 million, which we're quite happy about. Our GAAP net loss was $5.9 million. Our non-GAAP net income was $4.1 million, and the difference, again, between GAAP net loss and non-GAAP net income is stock-based compensation. Our adjusted EBITDA was $8.7 million. All right. So let's talk about what happened in Q1. Our customer count was up in Q1. However, we did see activity across our customers decrease, which resulted in a net decrease in paid members from Q4. So basically what that means is, let's say, the average customer has 14 paid members, and we basically saw that decrease to 13 or 13.3, or something like that. So we saw a small decrease across the board, but we have so many customers that even a small decrease in activity outstripped the increase in net new we saw. So subscription members did increase in Q1, but our pay-per-use member decreased, which was larger than the growth in subscription. So this wasn't a big churn off of customers; it was just an average decrease in activity across the board. The good news is that we believe because it's not a big churn off of customers we think the activity decrease is due to economic conditions. We think that is expected given the environment. And ultimately, we think it is temporary. No one thinks the economy is going to be bad forever. It's cyclical, and it is going to come back up. And as long as we retain these customers, when activity goes back up, their user counts will increase. So we want to make sure we're retaining the customers. And if there's some choppiness in terms of their activity going up and down, we will weather that storm, obviously, because we are cash flow positive, and it's just kind of a sign of the times. Next slide, please. All right. So we don't give guidance, but what we do is let you know how the first month in the current quarter is trending. So as you can see in April, it's the yellow bar furthest to the right. We're continuing to see some volatility. It actually looks remarkably similar to the kind of up and down we saw in 2021, if you look over on the left-hand side. But as you can see, in every single one of these months, we are having our subscription numbers increase, but the pay per use is kind of going up and down a lot. So we are not through the woods yet on the volatility. Next slide, please. Let's talk about free cash flow. So we had a strong free cash flow in Q1, $10.2 million. And people say, what are you going to do with it? Great free cash flow, what do you do with it? So we obviously, we're spending it more and more on sales and marketing, but also, in Q2, we're going to take the free cash flow from Q1 to do a $3 million buyback in the open market that starts tomorrow. And also, we're going to reduce our debt by $8 million. And as Anu said, we are positioning ourselves for success in the future. Our sales efforts are starting to show some real results and free trials have seen a huge jump. So we are optimistic about the future. We think that the investments we made there are starting to show some early green shoots that make us quite encouraged. We're well-capitalized, and our free cash flow is strong, and we're using that positive free cash flow to reduce our debt, and we're also returning value to our shareholders via buybacks. Very soon, we'll be starting the migration of our users to our next-gen platform. So nothing to announce today, but expect more announcements from us soon during ExpensiCon 3, which is May 18 to 22. We have a lot of product changes that we've been in the lab cooking for a while. So we're excited to get those out in the open pretty soon. Next slide. And just as a reminder, this is the future we've been building. A lot of our efforts on the engineering side have been really focused on this new platform we've been working on, and not a lot of people have seen it yet, which is why we're so excited to start getting actual paid members onto it. And as a reminder, the Super app that we're building right now includes expense management, corporate card with cashback, invoicing, billing, chat, corporate travel management, personal travel management, P2P money transfer, bill splitting, and a personal wallet, all for $9, all in 1 app and coming to you very soon. So we're all very excited about that. All right. Now we'll throw it over to Q&A. And I believe our first analyst is Natalie Hao from Bank of America.

So my question for you guys is, so pay-per-user went down, and you guys have previously said that they do pay a premium price, and you're trying to find a good balance of subscriptions and pay-per-use. I think you guys have mentioned 20% would be your ideal number. Have these trends sort of had you guys on that path? Or have you guys been thinking about it earlier than you anticipated?

Great question. So yes, we are being successful in converting people over from pay-per-use to subscription. We are seeing increases in subscription. However, we also saw a decrease in paper usage this quarter. And again, that doesn't mean the customers left. It just means that they have fewer employees that were active. So we are seeing paper use come down. But this quarter, it was a little bit of both; we're moving people over to subscription, but that also decreased. So yes, our pay-per-use percentage is going down, but part of that is attributed to generally less activity and also in part because we've been successful in converting. So it's a little bit of both.

Okay. Cool. And then a quick follow-up. It appears that sales and marketing as a percentage of revenue went down, but you guys mentioned you're doing like more investments into that SDR program. Can you provide a bit of color there?

Sure. So we've ramped down some of our marketing as we ramped our sales, but they didn't coincide perfectly. So we added 100 SDRs in Q1, but a lot of those came on board kind of towards the tail end, so the cost wasn't fully baked into the quarter. So we should expect to see an increase in sales and marketing in Q2, especially because we have ExpensiCon 3 also. So it's kind of a double whammy there; we have a big conference, and then also our SDR costs are mutually baked for the full quarter. So we should expect to see an increase in sales and marketing going forward.

But that program is also getting more and more efficient. Like all of our setup specialists and SDRs are getting more and more trained and becoming better and better. So we don't think that we need to keep ramping up to get a higher ROI; rather we don't need to keep ramping it to be able to get bigger results. We can just improve the ROI. So there's a bit of a nuance there. So Ryan said the full cost is not maintained, so Q2 is going to come in a little bit higher on that cost alone. But I don't think I would expect that it's going to keep ramping up because we are investing in the channel. We're investing in the channel launch in terms of growing the headcount of those agents, but also making them better and more efficient.

That's a good point. We added 100 SDRs in Q1, but we are now adding another 100 SDRs in Q2. We are training them to make them more efficient and maybe even cutting low performers. So it's not 100 per quarter, how we are at it. All right, next, we have Steven Enders from Citi.

I guess I just want to ask a little bit about the new Expensify that you talked about both in the press release and in the call on the transcript here. I guess what is the biggest change that we should be looking for, and kind of any early preview for how we should be kind of thinking about what that could potentially look like and how it might change the business overall?

We are broadening the scenarios in which Expensify can be utilized. Currently, users primarily employ it for expense management or while on business trips. You can visit new.expensify.com to sign up or find our app in the app store. What is available now resembles functionality similar to Slack or WhatsApp. We have upcoming product announcements at ExpensiCon 3 and will be integrating all features from the current Expensify product into this new platform. Once we achieve feature parity, we will start introducing new use cases, which will be exciting as having all these features on one platform will enhance user experience. This will include both new functionalities and existing ones. The result will be increased user activity; for instance, even if you're not traveling for business, engaging with someone through Expensify counts as activity. Our goal is to encourage more frequent use of Expensify, aiming for daily interactions instead of infrequent use.

Having viral lead generation is the goal; to have bottom-up adoption, then you want to turn every one of your individual users into sort of your champion, right? And the more functionality we give them to live easier lives, the more they're going to talk about us. So that's really growth. There are some features that are in that increased activity to turn users into paid members, and there are others that are aimed at better variation to reduce individual more opportunities to talk about it. So there's a bit of both.

Okay. So I guess is the view here that if they both increase growth, the viral nature but also maybe to have a more consistent subscription user number in paper use.

Yes.

Okay. That's helpful. And then I wanted to ask on the credit card side. It looks like pretty good growth here. But I guess where are we in terms of ramp-up curve to having that move from contra revenue to revenue and being recognized in a more traditional way?

We have completed all our operational work, including finalizing contracts and obtaining revenue recognition memos from the auditors. The challenging part is behind us. As you may have observed, we have a clear path ahead. I presented a slide illustrating our increasing reliance on contributors to enhance our competitive pace. The main challenge lies in managing engineering resources and determining which initiatives will yield the highest return for our business. Currently, we are implementing the new program and transitioning all Expensify employees from the old program to the new one, which will serve as a valuable testing ground for our products. Every employee will use the account daily, and we are in the process of this transition. After completing this phase, we aim to launch the program to select companies and prioritize what will provide the best outcomes from an engineering standpoint. This focus on maximizing our engineering efforts will continue since we have addressed everything outside our control, and now we are prioritizing what we manage.

All right. Next, we have Mauro Molina from Piper Sandler.

I have a couple of questions regarding the SDR initiative. First, what led to the decision to outsource the SDR functions to the vendor you mentioned? In what circumstances might Expensify decide to bring this initiative in-house in the long run? Secondly, how long do you anticipate it will take for this initiative to reach breakeven or achieve a positive ROI?

Yes, that's a great question. To begin with, I want to explain our general approach to handling tasks in-house versus outsourcing, and SDR is a perfect example. We choose to outsource jobs that are repetitive, can be documented, and are straightforward for anyone to execute repeatedly. By doing this, we can hire a significant number of agents, provide them with clear instructions, and even work with multiple vendors, which gives us leverage on pricing and better value. We then manage these agents internally, structuring the sales program with our internal employees and sales team who focus on partner management and other strategic areas of the business. They oversee the specialists, who carry out tasks that require lower skill levels compared to our in-house staff because their role involves converting incoming leads. While they need to be proactive, it doesn't require the extensive training and experience we look for in our internal employees. Regarding the internal staff and the SDR pipeline, their role is quite repetitive; they follow a script and carry it out repeatedly. This is how we've organized it, and while we never completely rule anything out, I don't foresee us bringing SDR roles in-house since outsourcing offers a more cost-effective and flexible solution for scaling our needs. I’ll pause here and see if that addresses your question.

Yes, that's helpful. As a follow-up, how easy is it to increase the SDR headcount month-over-month or quarter-over-quarter? That's all I have.

Yes. So that is also a very interesting question. We started this at late last year. I want to say like Q4 like October, November. And we did in fact think that it could be, like we told these centers that we started with very few just in attaching to work at all. And when we saw that it could work, we wanted to scale it to 100. So we started with like 10, and then we wanted to scale it to 100. We did notice that it took those vendors up to a month to hire them, and then a few more weeks after that to just give them some basic training and let them hit the phones. So that's quite a while; we started this initiative and kind of announced that we're ramping up in Q4; we didn't fully ramp up until maybe mid Q1. So it was a continuous process. It didn't go from 0 to 100 overnight, but it went from 10 to 25 to 45, so on and so forth. So it seems like it takes them something of a quarter to get to 100. But that said, it's also behind us going forward, and I think we were responding to another one of your questions earlier, we're not trying to keep growing the headcount. And this is where maybe I'll come back to your second question. The idea behind this entire arms of growth model will be to meet yield something consistent, something steady, something modest that we are happy with. So right now, we have 77 specialists and 100 SDRs. And the idea isn't even to maintain that; the idea is to sort of deploy that, identify the real winners, and then very aggressively performance manage the bottom of the team, if you will, and then keep optimizing. So we can kind of identify the 20% team that contributed to 80% of output because that's generally how it ends up being. So that's the challenge now. Over the next few quarters, that's what we're going to be focused on identifying the winners and identifying the losers, so to speak, and then being aggressive about managing this program for ROI, and I'll let Ryan add anything that he wants to as well.

Yes. I would just say it's pretty flexible in that we can drastically upscale and downscale numbers intra-quarter. So we're not locked into annual numbers or anything like that. It's very flexible, which is one of the reasons we like it. All right. Up next, we have Daniel Jester from BMO.

So regarding the paid growth, it showed strong progress, but the focus seems to be on the channels for growth.

I think there's a little bit of echo. I know you talk really quick; sorry about that, Daniel. Sorry, can you repeat the question? Sorry about that.

Is this better now?

Yes.

All right. So regarding the free product or free trials, you've mentioned growth in that area for some time. It's been quite positive. Can you provide any insights on the conversion rate from those free trials to subscriptions, or should we focus more on viewing those free trials as contributors to growth for interchange?

Good question. The free trials are not related to the free plan. There is a free plan where you can use basic Expensify Light for free and run a simple business with it without any cost. The free trials, however, are associated with the paid program. We have been focusing on our sales and marketing, and we have observed a significant increase in the number of free trials for the paid product in the first quarter compared to previous quarters. This data is encouraging due to the substantial rise in free trials. It is important to note that this is not linked to the free plan, and I understand how it might be confusing. We have a free plan, and when someone decides to pay for our product, we offer a free trial, which has seen considerable growth in the first quarter.

Got you. Okay. That is helpful. And then maybe philosophically, I know you're not giving guidance, but as you think about sort of the growth trajectory this year, obviously, the macro is what the macro is. Do you think that interchange growth is really going to be a big potential overall growth this year? Or maybe kind of walk through the puts and takes for the different variables in terms of getting the top line moving on?

Yes. That’s a great question. The interchange isn’t classified as revenue according to GAAP, even though many people adjust for it in their models. However, interchange is experiencing strong growth, and we believe it will eventually contribute positively to our top-line revenue when reflected in the interchange line item. Regarding subscriptions, we are gaining new customers each quarter, and our subscription numbers are on the rise. The pay-per-use segment has been somewhat erratic. If we can retain our customers and continue to add new ones, we expect to be in a better position once the current economic conditions stabilize. We're focused on weathering this storm and ensuring we don’t lose customers. While a decrease in their activity is not ideal, our priority is customer retention. As the market rebounds and activity levels rise, along with the introduction of new use cases on our platform, we anticipate an increase in usage. We believe the current decline in activity is temporary, although it did affect us in Q1.

Okay. And then one more, if I can squeeze it in. The product roadmap has been very compelling. You've made a lot of progress there. Can you just help us think about customer usage of the various products, how that has trended? I'm just trying to get a sense for what the demand pull for your customer base is for some of the new products that you're launching and some of the new pipeline that we'll hear at ExpensiCon 3.

Yes. I can’t reveal too much because David has important announcements planned, and I don't want to give anything away. However, expense management is widely used, and Expensify is recognized for that. Additionally, we've noticed an increasing number of users adopting the Expensify card, particularly due to recent upheavals in the banking sector, which has positively impacted our card service. We’ve had many customers switch to the Expensify card. Furthermore, there's a growing interest in our invoice solution, although I don’t have specific numbers to share yet. We've also received positive feedback on the chat product, which is currently available at new.expensify.com, and we have active users there. That's about all I can share without giving too much away. I encourage everyone to stay tuned for ExpensiCon 3 on May 18, where we will announce several updates. We’re eager to start transitioning customers to the new platform, which we believe will be greatly beneficial for the business, and we have been developing it for the past few years. We are all enthusiastic about getting it into the hands of more customers. All right. Next up, we have Mark Schappel from Loop Capital.

Can you hear me okay?

Yes.

Perfect. Sort of two quick ones for you. The first thing, have you seen, obviously, subs were up in the quarter, which is great. But just wondering if you've seen any turnover from your larger accounts?

Churn has been relatively low. The decline in paid members is primarily due to an overall reduction in activity among the user base. Most of the churn is coming from smaller segments of the business, particularly those with one or two employees. Generally, larger businesses are less likely to churn and show higher net seat retention. It appears that the larger customers are staying while the smaller ones are more likely to go out of business or be inactive for a couple of months. However, these smaller segments contribute the least to our revenue. Overall, the decrease in activity is not from customer churn but is attributed to broader macroeconomic factors.

Perfect. That's helpful. I appreciate it. And then secondly, and then I'll hop off. Just wondering what sort of trends you're seeing in business travel recently?

I believe we've noticed a resurgence in business travel, but it's important to remember that business travel isn't a direct correlation. We don't require individuals to take multiple trips each month to engage with our platform. They just need to submit one expense, like buying a cup of coffee from Starbucks or dining with a client, to be active on our platform. Therefore, even if travel goes up threefold, that doesn't necessarily mean our subscriber base will increase by the same amount. What we need is an increase in the number of unique business travelers; it isn't essential for our current audience to travel three times more. This situation is somewhat different from common expectations. However, a surge in business travel benefits Expensify by generating more opportunities for word-of-mouth growth, as individuals encounter the challenges we address. The most frustrating aspect of expense management often occurs during trips or consecutive trips when there is a large stack of receipts, leading people to share their frustrations with their network. If they voice this problem, they're more likely to learn about Expensify, resulting in overall growth. Thus, while business travel is advantageous for our business, it operates a bit differently than one might assume. We aren't directly gaining revenue from the business trips; rather, business travel fosters activity, and that's how we generate our income. That's the end. That is operating off of old lists. All right. Well, thank you, everyone, for joining the call. We really appreciate it. We love talking about the business now with you all. Just kind of as a closing, we're all very excited. I think we had a bit of a shareholder letter in our earnings release from David, but we're all very excited about the future of the business here. We've been cooking in the lab for a long time on our new platform, and it's so close to being released. So we are excited to get that in the hands of all of our users. And we'll see you all next quarter. Thank you all very much.

Thank you. Bye.