Expensify, Inc. Q2 FY2023 Earnings Call

Hello, and welcome to the Q2 2023 Expensify Earnings Call. We're excited to have everyone here today and excited to share with you all the information that we have. First, on the call today we have myself, Ryan Schaffer, the Chief Financial Officer at Expensify, and we also have our Chief Operations Officer, Anuradha Muralidharan, on the call. Before we get started, let's hear some disclaimers.

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 a reconciliation of these non-GAAP financial measures to the most comparable GAAP measures.

Great. With that, Anu, can you take us away?

All right, let’s move to the next slide. Expensify for payments functions as a super app. Individuals can track personal expenses, send and receive payments among friends and family, and request payments from supervisors. Businesses can manage company expenses, pay employees, vendors, and contractors, and easily maintain accounting records using our product. Our goal is to serve as the all-in-one solution for expenses, regardless of user type. Now, let's discuss our long-term growth strategy. Since going public, we’ve highlighted what sets us apart, which remains a cornerstone of our business. Our distinct advantage lies in our customer acquisition model. Employees often face challenges with business expenses, needing to manage, track, and obtain timely reimbursements, yet most software isn't designed with employees in mind. Expensify is created with them at the forefront. Consequently, employees can download our app freely, bypassing the need for permission from their bosses,, thus automating their processes related to expense tracking and timely submissions for approval and reimbursement. This is significant because it allows employees to advocate for us within their organizations, leading to multiple users in a company adopting our solution, sometimes even before the company officially integrates Expensify. Submitting expenses in a company that hasn't yet adopted our product typically involves emailing receipts to a manager. When these managers receive the submissions, we simplify their decision-making, allowing for easy adoption of our product, which serves as a key driver of our growth and a model that is tough for competitors to replicate. Next, I want to outline the core elements of our growth strategy. The first step is acquiring new businesses to manage their expenses with Expensify. New business acquisitions bring in their employees, driving growth. The second is within existing businesses that expand, either by increasing employee numbers or by using Expensify for additional applications. For example, companies may start by using our service internally and later broaden its use for reimbursing candidate expenses. Third, we can generate revenue through the adoption of features like the Expensify card, which earns us interchange fees on transactions. This not only provides revenue but also helps cement subscription agreements, increasing retention. Fourth, leveraging our viral potential is essential. Our unique bottom-up growth strategy depends on catering to various individual user needs. The wider the application for individual users before company adoption, the more likely we stay on their radar, cultivating a large pool of free users. These users are likely to think of us when their businesses decide to adopt a product. Finally, we focus on global expansion. As businesses grow in size, especially those with international branches, they require an adaptable product that scales with them. Our Global Payments feature enables transactions in multiple currencies across over 200 countries, which helps us align with larger clients and maintain our customer base as they grow. Now, let's discuss our Q2 business updates. The accounting channel is crucial for us because accountants serve as significant referral points, acquiring numerous businesses as clients while establishing efficient financial processes for them. Strengthening our recognition in this channel is strategic since a single accountant can lead to hundreds or thousands of clients with minimal acquisition costs. Recently, we held ExpensiCon 3 to reinforce relationships with accountants and gather insights for enhancing our product's competitiveness. Post-conference, we secured partnerships with the California and Texas CPA Societies, which are influential organizations that set industry standards. This agreement significantly boosts our credibility among accountants. We also received valuable feedback on features needed to compete effectively in this area. We are currently working on various enhancements, such as admin-issued virtual Expensify cards for specific vendors and co-branded cards for our top partners, encouraging them to recommend our product. Additionally, we offer a 50 basis points revenue share with accounting firms to promote our products. Regarding general growth and awareness, our primary objective is to increase qualified leads in our sales funnel, which we can convert cost-effectively into paid subscriptions. To achieve this, we are investing significantly in SEO and SEM improvements and exploring new advertising channels. We are actively participating in relevant conferences, leveraging Expensify Chat for lead generation. Our onboarding specialists are effectively converting a higher percentage of these leads into paying users, and we’re improving our outbound sales strategies as we grow. Lastly, we are enhancing customer loyalty, particularly among companies with over ten employees—a demographic crucial to our revenue. We’re assigning dedicated account managers to these businesses to ensure that as they grow, their configurations in our system remain optimized. This proactive approach allows us to understand their evolving needs better, ensuring we continue to provide high-quality support. Our ongoing efforts in global expansion, including the launch of global reimbursements and payments, ensure that we can retain our enterprise customers as they grow into larger entities, safeguarding our valuable client relationships. With that, I’ll hand it over to Ryan for financial updates. Thank you.

Thank you, Anu. Now let's discuss the Q2 financial results. Our revenue for Q2 reached $38.9 million, with an average of 742,000 paid members, reflecting a decline from the previous period. However, our gross interchange totaled $2.7 million, marking a year-over-year increase of 56%, which is very encouraging. Our operating cash flow was negative $0.4 million. Our free cash flow, which adjusts for the timing of customer funds, was $1.1 million. We reported a GAAP net loss of $11.3 million and a non-GAAP net loss of $1 million, with adjusted EBITDA at a positive $2.2 million. While we experienced a dip in some profitability metrics, this was due to significant investments made in Q2, which I will elaborate on soon. We do not provide guidance due to current economic conditions, but we share our performance for the current quarter. In July, our paid members amounted to 719,000. To summarize Q2, we maintained positive free cash flow and reduced our debt by over $8 million this quarter. We are investing heavily in engineering and sales and marketing, which has strained our margins, but these investments are temporary, and we expect margins to recover. Our margins are not experiencing a permanent decline; we have historically been a profitable and cash flow positive company, and we intend to stay that way, despite the current pressure from these investments. I would characterize this as a rebuilding phase, as we transition from our old platform to the new one and make significant investments for future success. Although the current situation is challenging, early feedback on our new Expensify platform has been very positive. We are committed to advancing our ambitious product roadmap. As mentioned by David in his founder's letter, we have utilized our new expense platform for conferences, which has served as a communication hub and has received excellent feedback. Now, we would like to open the floor for your questions. Thank you.

Thank you. All right, so a little bit of a change of scenery here. There is a hurricane rolling through Hawaii, so I'm going to have to sub in for Ryan. Everybody just strap on, because who knows what's about to happen. I'm going to try to answer all your questions and David's going to support me.

Great. Let's get started. We have Bank of America on the line. Natalie, I believe you're here.

Yes, I am. Thanks. So I wanted to ask about your investments in sales and marketing. So how do you think about the balance between investing in your SDRs versus your outsourced sales channel? And along with that, what do you hope to gain from that outsourced sales motion? And how do you think about that capacity going forward with at this point in the demand cycle?

Do you mean the balance between investing in SDRs versus the outsourced sales channel?

The outsourced sales channel that you guys had mentioned.

The onboarding specialists. So SDRs and the onboarding specialists kind of go hand in hand because what SDRs are trying to do is increase the number of leads we get into the pipeline and onboarding specialists are trying to close them. So this was kind of the same trajectory we followed with onboarding specialists where we had, I forget the exact numbers, but twice the number that we needed. And then we kept working through looking at conversion rates month over month, building out a leaderboard, kind of tracking results on a per-agent basis, but also across the program. And then as we found our stride, we were able to identify low performers and were also able to identify just what the program needs in terms of headcount, and we kept optimizing it. So now, the onboarding specialist program more than pays for itself in terms of business closed. We are still in the early stages of that same trajectory with our SDR. So I want to say last month we actually went through an exercise where we looked at the total headcount and we cut quite significantly. But so far, till we did that, we didn't really have a framework and a model to be able to do that because the program was still too new and sort of coming into its own. Ultimately, what we want to do is grow these programs. And that would be a great problem to have really, because what we want to do is increase the number of leads coming into the pipeline to a point that we need more of them. But right now, we're in the process of just sort of finding out the framework, making sure we're staffed for capacity but not overstaffed, and making everything just a little bit more cost effective, and then we know how to sort of grow it from there. Does that answer your question?

Yes. Thank you.

Up next, we have George from Citi.

Hi, thanks for taking the questions. I'm on for Steve. I guess first of all, best wishes to Ryan and the whole state of Hawaii. Hope everyone's going to be safe there. My first question maybe for David is kind of a product philosophical question on text as a sort of a core medium that you run the business through, kind of develop a platform around, obviously there's been a lot of innovation in the AI space, but arguably the biggest has been in the ability to analyze text specifically. So maybe what new opportunities is that kind of unlock for the company?

Great. Thank you for that. So this will start my one hour TED Talk. So I think that this isn't some sort of new thing. Like we started a very, very long time ago with this recognition that payments and chat are the same thing. And if you look at sort of what makes disruptive technology cycles over time, the technologies that are disruptive are those that allow you to get closer to the customer, to lower your cost of acquisition to increase your market size. And so we think that when you look at the different kinds of technologies out there, it's blockchain or VR or whatever it is, I don't think those really have this disruptive potential because they don't actually achieve a bigger market opportunity at a lower cost of sale. But when you look at things like what's the next inevitable platform that's coming on the pipeline, it's probably going to be some sort of in-ear earpiece where you have an agent-based experience sort of intermediating the internet. And so that experience is going to be voice recognition and it's going to be chat-based. It's not going to be a bunch of buttons and sort of a heavy GUI and things like this. So I think it's inevitable that the industry transitions towards more of an agent-based approach, and it's going to be based on voice and chat. And this is something we've recognized for a very, very long time. That's why we invested so heavily in our Concierge AI from the very start, recognizing that the future is about basically picking a high-capacity agent that can do a wide variety of things for you. Now there's a bunch of things out there like Siri, Google assistant and so forth. Those are highly individualized consumer tools. So don't work in a context of sort of business collaboration. So we're trying to build basically the next assistant that can span not just the individual consumer cases but also help you in your most professional and difficult sort of collaboration environments. This is a long-term vision, obviously. And so, but it's a long-term vision that doesn't happen by accident. If you are investing your entire product around a heavy, GUI-based interface, you're not positioning yourself to the next generation of technology. We've been pushing everything towards simple text-based communications with our customers, and all of our workflows are sort of rebuilt for this coming agent-based revolution. And so we think the large language models and ChatGPTs and things like this were inevitable. Can't say that we predicted it would happen like right now, but we knew it was going to happen eventually. And so, I think that we've tried to recognize the opportunities that have come. But we've already incorporated ChatGPT in sort of in small use cases throughout the product, and so it has been growing more and more. So yes, we think that all this sort of large language model functionality is coming. We've been seeing this coming for a very long time. We've been trying to build the entire product suite around this kind of technology and the next technology to come.

Awesome. Thanks for the color. That's super interesting, super helpful. And then on competition, I think you kind of alluded to this in your letter, a few of your competitors with new product announcements and some discounting programs. In your more high frequency sort of KPIs around go to market, obviously a lot of this stuff is brand new, but have you noticed anything show up in the numbers?

I might defer to Anu for some of this, but I think the numbers are complex. There are many customers, and if you look closely enough, you can see various patterns. However, in general, I don't believe much has really changed. The economic environment remains challenging, with a high number of bankruptcies. We frequently hear from customers who are struggling, indicating that it is still a tough situation overall. Additionally, competitive dynamics contribute to the complexity. When companies sell products at a loss in the marketplace, it further complicates and distorts the situation, but that's not new either. I don’t think we’ve truly returned to the normal we saw before the pandemic. We are uncertain when that will occur, but I would say it remains a very complicated environment. I'm not sure if Anu has anything further to add on that.

Yes. I mean, I think the Niyo card providers come up a lot and I think the marketing and the growth in that industry both have done a very good job of making it look like they are our direct competitors one-to-one on every customer. That's just not the reality because if you take a wide swab of small businesses in America, they would never qualify for a corporate card because they just don't have the creditworthiness, they don't have the kind of cash balances they would need in order to have a line of credit that is going to keep their entire business spend flowing smoothly. So we still see a wide range of companies that don't want a corporate card or wouldn't qualify for a corporate card using reimbursables. So their business is sort of a subset of our business. And although they offer their product for free, when you adopt a card, if you take the number of businesses that are never going to qualify, they still need a software product that scales from being a small company to medium to big company in terms of functionality and range of features. So we don't necessarily go head-to-head with them on every sale. So the fact that they are cheaper doesn't apply in every situation. So I don't know if that's where your question is going in terms of Ramp and Brex and they're introducing a subscription fee. I mean it helps now even on the card side, like they're a little more expensive than they used to be, which we welcome because it's at least an even playing field and we all get to actually run a real business as opposed to just losing money. So that's good, but it's also not relevant in every sale.

That makes perfect sense. Thanks for taking the questions.

Great. Next we have Aaron from JMP.

Hi, thanks for taking my questions. How do you think about factors that are within your control versus outside of your control to get this business back to growth? And with that, how much of a priority is getting the business back to growth over the medium term, say one to two years relative to just heads down investing in the long term right now?

I'm not sure exactly, you know, I know if you take a crack at this one as well. That's a hard question. I don't think that there's a conscious effort to like, de-prioritize short-term versus long-term. I think there's a path forward and there's kind of only one path. I think it's a bumpy path given sort of some of the dynamics we just talked about. But I think fundamentally my view is there is a huge, huge opportunity out there. We're the only ones kind of trying to get it. Now it's not like you sacrifice the short term to go after the long term in my mind. But I do think that to get back to that sort of sustainable growth, we have to execute on a wide variety of things. Yes, there is a product opportunity that has to be mastered but also I think as Anu was mentioning we've been really getting tracking good code on the sort of paid acquisition side for marketing. We're optimizing the SDRs. We're basically working with our sales teams. And so we're, it's really a full-court press. And I would say one nice thing about having sort of a profitable business underneath us is that we can invest in a wide range of these opportunities simultaneously. And so we don't have to make a lot of kind of the tricky trade-off decisions. Like should we invest in product or should we invest in marketing? It's like well we can just do both. And so I would say I think we're to the maximum degree we're trying to invest in all of these different sort of aspects simultaneously. Now I think it's a challenge to kind of just manage all this at the same time. There's a lot going on internally. But I would say fundamentally, I don't think we view it as a trade-off between short- and short- or at least I don't view it as a trade-off between short- and long-term. I view it like we have a path in front of us. That path solves for both of those and we just need to push forward as fast as possible. Anu?

Yes, I agree. So I think Ryan referred to it as we're in the rebuilding phase. And so, a lot of what we are working on with Expensify 2.0, New Expensify, like a track forward expense management app. It's kind of forward-looking, right? Like, it's trying to expand the target audience, if you will. Right now, we go after a set of customers. We're trying to expand that dramatically by sort of innovating on our product. And that's the median to long-term roadmap. But short-term, the product that we have perfectly caters to the target audience that we're going after, like we don't have a product problem at all. But what we do have, what is kind of out of our control to answer your question really directly, is we can't control the macroeconomic environment. We can't control the fact that most companies are struggling for funding. They're not growing. And so, it's taking away one of our primary growth drivers, which I talked about, which is companies just naturally growing once they've adopted Expensify, and as a result, naturally increasing their usage. Like that tailwind is sort of suffering right now. And we're trying to make up for that loss of tailwind by, with more aggressive paid marketing opportunities, with more aggressive outbound calling, so on and so forth. So that's the short term sort of growth push. And the product that we have is more than sufficient for us to sort of keep making inroads in that sort of channel. And long-term, we're trying to expand our target audience dramatically and that's where a lot of our product and engineering resources are going right now. And you know, we don't have a crystal ball, but hopefully all of it sort of pays off within proportion of each other. And then we can come out of this when the economy sort of comes back as well, like sort of like a Phoenix is the hope.

That's very helpful. Thank you. And then just a quick housekeeping follow-up. Usually in the financial outlook section of the press release there's a sentence reaffirming the long-term 25% to 35% revenue growth guidance. I don't see it today. I just want to ask if you guys are reaffirming or withdrawing long-term guidance?

Yes. So I'm not going to be able to do it as much justice as Ryan would have, but I'll say this for a few quarters now, since the day we went public really, we have not been in sort of normal or stable economic conditions. And for a few quarters now, we keep reaffirming that long-term guidance, and we keep getting questions all around and they're fair, when will this long-term guidance actually be true since we haven't been close to the long-term guidance in terms of growth. So we actually took all of your feedback and removed it because we just don't know what we don't know. We haven't been in stable condition since 2020 with this or that or the other. Like first there was a pandemic, then there was concerns of the global recession, then there was a global recession. There still is, like I'm fuzzy on the details, but very chaotic. So we've removed it and then once we sort of hit stability again, we will be able to reaffirm it, but we don't want to keep giving you outdated long-term guidance, if you will. So that's the reason we took it away.

Thank you very much.

Next we have Loop. Do you have anybody on the line?

Yes, hi. This is Ankit Sangvi on behalf of Mark Schappel. So my question is regarding your, one of your recent sales initiative at the company is focusing on subscription users instead of pay per users. So could you provide an update on how that initiative is progressing?

Yes, to clarify, we have always prioritized subscription users ever since we launched annual subscriptions in 2018. The goal was to create a more stable annual recurring revenue stream because pay-per-use users can easily leave after a month, which doesn’t support a stable business model. During the pandemic, our pay-per-use numbers were at an all-time low since the introduction of annual subscriptions. However, as we emerged from the pandemic, that number increased above the healthier range we had previously seen. We’ve been proactive in highlighting savings opportunities so customers pay attention to their subscription size and adjust it as necessary. This approach has helped lower the pay-per-use figures. We believe a 30% rate is within the healthy range, previously sitting at 20% to 25% during the pandemic before rising to 35%. It has now decreased back to 30%, and we expect it to stabilize around this level without making significant changes to drive it lower.

Okay. If I can ask one more question, you don't provide margin guidance, but should we anticipate a similar margin in the second half, considering higher marketing expenses?

Yes, Ryan mentioned in his presentation that we take pride in being a cash-positive company. We operate as a real business that generates profit and will remain disciplined in maintaining our fundamentals. We've tried various marketing initiatives, such as out-of-home advertising last year and paid digital marketing this year. We also held ExpensiCon, which required a significant investment in marketing during Q2. Additionally, we have been investing in our sales channels with sales development representatives and onboarding specialists. As we move forward, we are focusing on optimizing costs. While I won't provide specific margin guidance, you can expect to see these optimizations reflected in our results, and we are optimistic about tightening our margins a bit more in the second half of the year.

Thank you.

Next we have Daniel Jester, I believe you're on the line here. Daniel, can you hear me?

Yes, this is Dan. Thank you for taking my questions. I would like to inquire about the growth situation you've mentioned in various ways to ensure I fully grasp all the details. In considering the quarter, it appears there has been a slowdown in the number of new clients joining the platform. Additionally, you're seeing fewer overages as you're adjusting customer subscriptions to align with their needs and avoid extra fees. However, you didn't address retention and what you are observing there. I would appreciate it if you could clarify these factors, and if you could take a moment to discuss retention, that would be very helpful as well.

Yes, David, I'll start. If you have anything to add, please feel free to jump in. The main factors are acquiring new customers, expanding existing customers, and retention. The leading driver of paid member growth has consistently been the expansion of existing customers. I haven't checked the exact numbers, but approximately, new customer acquisition and retention have remained fairly stable. This trend has persisted for several quarters, possibly even a year. The notable change is in the expansion of existing customers. Based on informed estimates, the current macroeconomic environment is not favorable for company growth. Many companies are not increasing their staff, which likely impacts their usage of Expensify, causing it to not grow as it typically would in a stronger market. Additionally, we have been working to reduce pay-per-use fees, but in a climate where companies are cutting back on spending, the pay-per-use naturally declines since they don't require overages. The subscription size is adequate for them as they are not overspending. Therefore, the main contributors to downward pressure are the limited expansion of existing customers and the reduced usage.

Yes. Thank you. I would say, just to reiterate what Anu said, I think that what's the big challenge is that our growth has historically been driven by expansion of existing customers, and that has just been sort of the challenging environment because of these macro effects. I don't think there's been anything else like significant change since then.

Yes. David touched on this too, but I think in the days before the pandemic, we benefited from companies simply expanding their spend with us as they grew to be larger. That just doesn't happen anymore due to all the funding challenges created by the environment. So retention is not an issue, it's really all about expanding usage. David, back to you.

Okay. And then on the new platform, you've been talking about this for several years, so it's great that it's now live and being used. Can you help us think about the trajectory for which you have your current customer base transition to the new platform? And ultimately, what kind of friction or not does that transition typically entail do you think? Thank you very much.

And so I'd say, yes, step one, the first 90% of the work is to build it. And then the second 90% is to get everyone to use it kind of thing. And so I'd say that the challenge here is we have a lot of technology, it's really good. It works in sort of these isolated use cases around chat. I think we've mentioned how it's been really, really great rolling it out to this conference circuit because the primary value, like what differentiates kind of our chat platform from others is that it requires such a low barrier to adoption. It doesn't require an account, doesn't require IT permission, doesn't require a password. You just basically click a, you scan a QR code and you start using it, for example. And this is a testament to kind of our massive kind of like social network style back-end architecture. It's built on these giant servers and blockchain, all this kind of stuff. So the technology is getting really proven. It's built on this, by this huge open source army of like 1500 developers. It's the same code base across all these different platforms. It's just this really powerful new technology. And so we've been working on it for a long time, but it's really proving itself out in these early use cases. Now the challenge of course, is how do you get existing customers from our classic platform onto the new platform? And that's a very active topic of discussion, as you can imagine. And I think that's basically through some form of deep linking and hybridization. So basically, as we identify use cases that will work for some sets of customers, we promote those use cases to existing customers that say, hey, you could use the new platform for smart scanning for your requirements, whatever it might be. And then we can link them over there, we can push them over there and so forth. This is going to be a slow process. It's going to take time to actually get all of our customers who are already comfortable in life, our existing classic products, to understand the benefits of this newer product and to kind of rewrite some of the older workflows into it. This is kind of an invasive answer, but because we don't exactly know. A lot of this comes down to we view this as a collaborative engagement with our customers. And we don't exactly know what their feedback is, but we know that we are getting it, that we're responding to it, and we're gradually pulling people over. So it's not going to be an overnight sort of nice switch. It's not like there's a sort of like a risk that customers are going to reject it or something like this. We're building it in collaboration with our customers. And I think it was mentioned, it's something like ExpensiCon is where we can test this out. And so it's not just us working on an ivory tower. We're working with the top accounting partners in the world to build these tools out for their needs and then we're verifying it with them as we go. So I would say again, that's not a very specific answer. It's kind of the best I got. That is something that we're going to roll out over time.

Thank you very much. I have one more question about the co-branding of the cards. Can you explain how that would work logistically and describe your relationship with your card provider? Does it allow for this type of opportunity? Thanks.

Yes, we are able to customize the branding on our existing card base without needing to order new cards, which keeps our costs down. This customization can be done easily via API. Initially, we were concerned about minimum order quantities for firms, but it turns out the process is much simpler, allowing us to implement it quickly. This gives firms a light branding option that enhances their identity and fosters loyalty. We're starting with our largest firms to test it, and if it proves successful, we may expand it to smaller firms in the future.

Great. Thank you very much.

Perfect. Well that rounds out our live Q&A. Thank you to everyone who joined. If you have any follow-up questions, please feel free to email them to investors at Expensify.com. And with that, we'll see you next quarter.

Bye, everyone. Thank you.

Thanks. Bye-bye.