Hello. Welcome to the Expensify Q3 2023 earnings. I'm Expensify's CFO, Ryan Schaffer; and with me, I have Expensify's COO, Anu Muralidharan.

Over to the 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 those 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 measurements to their most comparable GAAP measures. Back to you.

Thank you. All right. So I want to kick this off with a reminder on how our business model works and what our growth strategies are. So first of all, of course, the very simple concept is the acquisition of new customers, new companies that adopt Expensify in order to manage expenses and reimburse employees on our platform. Then, and kind of our biggest growth generator, is the expansion of users, expansion of company size, maybe deploying to other subsidiaries of existing customers on the platform. Throughout the history of Expensify, this usage expansion among existing customers has been one of our primary growth generators. Then there's increasing Expensify card adoption, but more generally, cross-selling of our various back-office features to the companies that increases both their usage but also generates all manner of other revenue streams for us. Of which interchange is one. Fourth is adding new viral loops, and this is really about engaging all of those free users, all the freemium customers on the platform that may not yet have the need for a business expense management software or may not have reached that activation point where they've decided to adopt business expense software, but are using the product for whatever viral use case there might be, such as maybe paying their friends or family or sending invoices to their few customers or whatnot. The point of this growth generator is really that it engages them way before they become ready to purchase a business expense product. And so when we get ready to make a decision, we are top of mind. And last but not least, of course, tapping into international markets. Most of the English-speaking world is fair game for the platform, so long as we have tax capabilities sort of baked in. And of all of our international markets, the U.K., Europe, Canada, and Australia are pretty big for us. Leaning into those markets more is also a solid growth generator. Now, I wanted to remind you of our key strategies that contribute to our long-term success. One is that the market is enormous. Most of it is very untapped. It's greenfield, and it's there for the taking. Two is that not every business model can succeed in a market where most of the volume is at the bottom, which is largely constituted of very small companies. A top-down sales-driven strategy doesn't really work in that segment of the market because you don't have that return on investment on each deal. Moreover, a card-oriented strategy doesn't work quite as well at the bottom of the market due to underwriting challenges. You need a subscription-based model, which is able to engage users even before they are ready to make a decision. This bottom-up subscription-based acquisition model is primed for success. Those are our three key strategies, and we discuss them often, but this time around, I want to show you some real data because I want to show, not tell. This is the latest available census data on small businesses as a market. For the sake of this visual, I defined small businesses as any company with between one to 250 employees, or from zero to 250. Here, you can see that companies with 2 to 10 employees and then those with 11 to 50 employees employ the largest chunk of the market. Most end users actually work at very small companies. Even if you expand to 100 employees, that essentially accounts for almost 70% of the pie. This is important because a very small employee base generally correlates with the annual revenue these firms generate. When smaller, they are making less revenue; as they grow, they scale up and increase their headcount. This poses problems for underwriting companies of this size. We tend to underwrite at the 50-plus employee level, but have significant employee volume at the lower levels, so you need a different approach in order to tap into this segment of the market effectively. A subscription-driven, bottom-up acquisition model is essential. This is sort of a peek into what sign-up volume looks like on Expensify in a way that we've never presented to you before. To the very left, you have total sign-ups. This chart utilizes weekly sign-up data to show a very consistent trend. Regardless of the week, month, or year, this consistency has held for a long time. So the bar to the very left shows total sign-ups. I broke those sign-ups down by public emails, because generally when someone signs up with a public email, they're looking to use Expensify for themselves and not for a business use case. That is the vast majority of sign-ups. I also took private emails that couldn't be enriched on Clearbit. Again, as mentioned previously, it's challenging to enrich very small businesses due to the limited reliable data. If you categorize the sign-ups into public and unenriched private emails, you can make an educated guess that all public emails are likely individuals and all unenrichable private emails are likely very small businesses. This then leaves 15% of sign-ups that are actually private emails that could be enriched, which represent decision-makers looking to adopt Expensify for their business. This trend has consistently been the case, and all of the growth we've seen has stemmed from that 15% of sign-ups, converting from free trials to paid products. While we strive to engage the others with individual use cases on the current product, it isn’t perfectly optimized for those cases, which are much more suited for decision-making adoption and deployment to companies. Overall, we currently have a large majority of inbound interest that we are not effectively engaging with on our present platform. How can we capitalize on this momentum? Let’s talk about the user journey for a freemium customer. First, they discover the product, then they sign up; these first two steps are working very well. We have strong brand recognition, and we’ve conveyed to end-users that they can adopt the product without corporate approval for self-use to scan receipts and stay organized. This strategy has worked for over a decade and continues to yield benefits. However, we need to improve user activation, which represents a moment when a free user interacts with the product and realizes its effectiveness in simplifying their tasks. Our current onboarding process leads to a strong inbound interest, yet it isn’t fully optimized, and the features to generate that 'aha' moment are not as intuitive as they could be. After activating, users create a free trial, which we need to convert. Scaling their usage is equally essential. While we don’t decide when they add seats to their company, we can enhance retention and create use cases that encourage more employees to be active users on Expensify. This involves introducing collaboration features that eliminate the need for separate apps for company-wide communication. Developing offerings like invoicing, bill pay, and payroll will also help engage users and drive adoption. I want to further elaborate on the activation step with our upcoming product, Expensify 2.0. We are very close to launching this product to real users, and our recent activations at conferences have shown promising results. Without further ado, I will now present a brief video showcasing a sneak peek of the product, which is nearly ready for launch. I hope that presentation was as exciting to you as it is to us. The core goal is to engage end-users from the moment they enter the product by providing numerous use cases to enhance their experience and alleviate their pain points, allowing us to activate them sooner rather than later. On this slide, I want to delve deeper into this end-user flow, which is expected to launch as soon as next week. Consider an employee coming to Expensify, not intending to adopt it for their company but seeking a solution to maintain receipts and submit them easily. When they access the platform, they will see the landing screen, where they can initiate a new chat, connect with their manager, and receive money requests. The process allows users to either manually enter an amount or scan a receipt. If they request money, and assuming their manager is not an existing customer, they will receive an email notification that clearly states the request. Upon clicking the email, they will be directed to the app where they can pay the employee. If the manager opts to pay using a business account, we will identify them as a decision-maker and create a workspace for them, fostering collaboration within their organization. Within this new workspace, we place the expense and facilitate ongoing communication with an onboarding specialist to help onboard the rest of the company. This seamless experience transitions users toward a business context while ensuring we gather valuable feedback for continued improvement. We've focused on enhancing the product experience to effectively capitalize on the substantial inbound interest we are currently receiving from end-users and small businesses, optimizing it to activate them more efficiently than competitors. Additionally, focusing on the inbound momentum is essential as we enhance our presence at key conferences and events to leverage our growth. We continue to optimize all digital and organic marketing efforts. We recognize the significance of the accounting community in reaching small businesses, and we are maintaining our growth strategy through that channel. We have invested in conferences to demonstrate the beta experiences of Expensify 2.0 and gather early feedback on user experience. The ROI of our digital advertising efforts is significantly higher than outbound sales, leading to our decision to sunset the outbound sales program.

Thank you, Anu. Let's now move to the numbers. Revenue was $36.5 million, reflecting a 14% decrease from the same period last year, driven by a decrease in activity in our user base. As Anu noted, user expansion has been a primary growth driver for us, but we've seen a decline in growth expansion. This trend has only occurred twice previously in our 12-13 years of operation: during COVID and now. Typically, our customers onboard and continue to grow with us, but we are currently seeing a decrease in their activity, impacting our revenue. Although our subscription numbers are rising, the activity-based portion of our users is decreasing due to economic pressures like high-interest rates. These conditions have created a challenging environment for revenue growth. Our paid members are now at 719,000, and our net interchange reached $3.1 million, which is a 65% year-over-year and 16% quarter-over-quarter increase. We're proud of this achievement. Our operating cash flow was a negative $5.1 million, and our net loss was $17 million. We anticipate starting to issue new Expensify cards with new revenue treatment by the end of the year. As a reminder, by becoming the program manager for the Expensify card, we will gain 20% more interchange revenue. This new accounting treatment will also permit us to count interchange as revenue instead of contra revenue, which will significantly improve our financial reporting. We are currently focusing on internal expense reductions to adapt to the current economic conditions. The percentage of customers citing downsizing as a reason for reducing their subscription has jumped nearly 50% since earlier this year. In adapting to these changes, we've also reduced our debt by $36 million in October, lowering our projected expenses by under $1 million for Q4 and $3.8 million for fiscal year 2024. We expect to reduce our operating costs by $15 million in 2024, which, combined with these changes, gives us confidence that we will achieve cash flow positivity in 2024 and beyond. For Q4, we've actually seen a nice jump in paid members in October. Our subscriptions continue to rise, and we've seen a corresponding increase in pay-per-use users. However, we must acknowledge that the decreased activity segment has been a concern. Overall, while we focus on improving these metrics, it’s a rebuilding phase as we transition to the new platform, and we remain excited about our roadmap ahead.

We will now transition to the Q&A section. Thank you all for joining us.

You have Steve Enders from Citi. I appreciate you all taking the question today. To start, I wanted to ask about a comment in the letter that referred to seeing clear skies emerging. What’s giving rise to that perspective, and what are you observing that leads you to that outlook?

Great question. It’s wonderful to hear from you. A couple of factors are contributing to our optimism. Firstly, we’re noticing some positive signs in the accounting sector since our ExpensiCon 3 conference this year, where we saw a significant uptick in productivity in that space. Additionally, the card's growth continues to shine. Soon, the accounting treatment will shift in our favor, allowing us to count card revenues rather than having them negatively impact reported revenues. This change, combined with our new platform going live for customers, fills us with optimism about our investments in R&D over the past few years.

That sums it up. We are just excited to test and improve the virality and word-of-mouth that comes with rolling Expensify 2.0 out to our customers.

Regarding expense reductions for next year, which areas do we expect to see cuts taking place, and should we anticipate any impacts in Q4 from these operational cuts? For Q4, some of these cuts are mid-quarter. While we expect some slight reductions, the greater impact will likely be seen in Q1. Specifically, reductions are occurring in sales and marketing, G&A, and R&D. Note that these reductions don't reflect decreases in actual development; we are simply improving efficiency rather than output.

I wanted to ask about the dynamic with your customers regarding pay-per-use versus subscription-based payments. Have you managed to normalize that ratio, and can you provide an update on what it is today?

Great question. The ratio of pay-per-use has decreased, albeit we had seen a surge in activity-based billing, which at its peak accounted for about 35% of our users. Now, this has calmed down to about 28% mix, thanks to our efforts to promote subscription plans amid the decline in overall activity.

As we think about the investments you've made in OpEx, can you clarify what level of gross margins we should expect to stabilize at long-term, especially after launching the new Expensify platform?

That's a great question. While I don't have a specific target number to share right now, we do anticipate a decline in cost of goods sold in '24. We are navigating a dynamic environment currently, so adjustments may be necessary based on how conditions evolve.

What remains to be completed for launching Expensify 2.0?

I apologize; I missed the exact question. Are you asking about the timeline?

What specific tasks are pending on your end before launching to the market?

Essentially, we take an iterative approach to product launches, enabling us to release features progressively rather than delaying the full rollout. Throughout 2023, we've already launched several features at conferences to beta audiences. As we move forward, we expect to launch the complete viral adoption path by potentially next week, facilitating immediate engagement for end users.

Thank you for that clarity. Regarding the uptick in paid members to 730,000 in October, can you provide insights into how much of that might be seasonal versus improving market demand?

This could stem from both factors. Our subscriptions continue to grow, and the increase in paid members is fostering that. However, we must also consider the decrease in activity users, which we need to address. As long as we can stabilize that activity, we should be on a positive growth trend.

The Shareholder Letter specifies the pricing of competitors. Have you noticed that your relatively lower pricing has improved adoption compared to competitors?

Yes, indeed. Our pricing structure has created a competitive advantage amidst the challenging environment. We've seen well-funded startups attempt to raise their pricing to align with market pressures, which is favorable for us. Our unique subscription and activity mix allows us to ensure a more attractive offer on a per-seat basis while anticipating a more favorable competitive landscape in the upcoming quarters.

Following the recent balance sheet movement and the repayment of $36 million in debt, should we expect to maintain a cash-burning status in Q4 based on current forecasts?

It's your best guess, so we expect to burn less cash and not be cash-negative in 2024.

I appreciate the customer account update that you started sharing in the 10-Qs. The numbers have been declining. Can you clarify the distinction between VSB customers (1-9 employees) and SMB customers (10-500 employees)?

The trend remains, and it has been consistent since COVID. Larger companies are more resilient, while our smaller customers have faced more challenges. They are impacted by business closures and downsizings at a higher rate compared to those with more substantial employee counts.

The mix of our customer base remains relatively unchanged since the IPO, even with slight fluctuations. We maintain existing acquisition patterns and rankings across various customer segments.

As we transition to a significant shift with our new Expensify cards, we expect stronger revenue boosts from the card's adoption, but forecasting specific linearity remains complex. There is potential for more adoption in the later half of 2024, depending on how quickly existing users embrace the new program.

The transition to the new card program will occur gradually. We aim to minimize disruptions by allowing many users to switch seamlessly. Additionally, we’ll keep separate lines for interchange and cashback to simplify analysis for our stakeholders.

Considering the sequential improvement in card growth, is this due to an increase in new customer sign-ups or an expanded share of spending from existing customers?

The average spend per domain remains stable, and most gains are attributed to new cardholders. The strategy of offering cashback to offset subscription fees has been fairly well received, and we anticipate users will benefit from this in adopting the company card.

With the impending rollout of the new Expensify product, how is customer transition being approached? Will some continue using the old version?

Absolutely, we won’t be forcing any switches. We’ll ensure customers can trial the new features while retaining access to the current version. Collecting customer feedback will be integral for fine-tuning both platforms moving forward.

I want to thank everyone for joining us today. We're excited about our future developments and look forward to sharing our progress next quarter.

Thank you all for your time. We appreciate your interest and support.

Goodbye.