Expensify, Inc. Q3 FY2024 Earnings Call

Good afternoon, and welcome to Expensify’s Q3 2024 earnings call. 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 their most comparable GAAP measures. And, with that, I’ll hand it over to Anu to get us started.

Thank you for that intro. I am pretty excited to walk all of you through our third quarter’s financial performance and highlights. Notably, we’ve made some pretty key strides towards stabilizing the business, improving the core fundamentals, and also laying down a stronger foundation for future growth. So let's dive into the details. First off revenue, in Q3, total revenue came in at $35.4 million. This is a 6.3% increase quarter-over-quarter, and we also beat the street’s consensus forecast. So we’re pretty excited about that, pretty proud of that. Now, admittedly, this was a 3% decrease year-over-year, reflecting some lingering challenges in the business. But our near-term momentum makes us more optimistic about the upcoming quarters, and the new Expensify platform is also expected to continue to pick up and contribute towards revenue growth. In Q3, average paid members came in flat quarter-over-quarter at 684,000, representing a 5% decrease compared to the same period last year. Interchange from the Expensify Card was $4.6 million and that was a whopping 48% increase compared to the same period last year. And that is a key highlight this quarter, and I will get into some more detail on that in a few slides. Let’s talk a little bit about cash performance. A standout highlight for Q3 was our free cash flow performance, which came in at $6.7 million. Now, operating cash flow, which includes the timing of customer funds, came in at $3.7 million. Net loss was $2.2 million in Q3 with non-GAAP net income of $5.4 million. Last, but perhaps the most exciting is our adjusted EBITDA, which came in at $9.7 million. The continued improvement in profitability and free cash flow is driven by two things: a higher interchange take rate as we start moving more and more of our spend towards our new card program, and also our continued focus on our core cost efficiency, which continues to show effects in terms of profitability. Let’s talk a little bit more about free cash flow and get into our free cash flow guidance a little bit. Given our strong performance in terms of our adjusted EBITDA free cash flow, last quarter we increased our free cash flow guidance for the year from $11 million to $13 million, and now to $15 million to $16 million. This quarter, we are going to do that again, with a free cash flow guidance for the year of $19 million to $20 million. So again, free cash flow performance and profitability improvements have been key highlights this quarter, and we are very proud of the fact that our continued effort to stabilize the business is showing results. Now, as promised, let’s talk a little bit more about those Expensify Card updates. This is one of our very exciting growth drivers. Expensify Card interchange revenue from Expensify Card increased 48% year-over-year. The launch of the new Expensify Card program has been very well received, and the migration effort has exceeded even our expectations. 94% of our existing card spend has already been migrated to the new program, which is incredible, given it’s been less than a year since it launched. The new program allows us to earn 20% more interchange, so it has a higher take rate, and this is expected to further bolster our revenue growth in the coming quarters. So let’s break down the details of the interchange this quarter in a little bit more detail. The existing old program generated a net interchange of $0.9 million. Our new program generated interchange of $3.7 million. So taking together, total interchange came in at $4.6 million. We are committed to getting that 94% spend number that’s been migrated to the new program up to 100% before the end of the year. We have a lot of irons in the fire, and they’re all going pretty well. We feel confident that we can hit that 100% number. Last, but not least, as we do every quarter, we give you a look ahead on paid active users. October’s paid active users came in at 693,000, which is a 1% improvement versus the Q3 number, and we are pretty excited about that. We are hopeful that the trend continues, and we see a much better Q4 in terms of paid members and subscription revenue. With that, I hand things over to David to talk a little bit about business highlights.

Thanks for that, Anu. So at this point is where I typically go through the roadmap and talk about the new developments we’ve had since. But I would say for the Q3 quarterly highlights, I’d like to talk about what we’ve learned on the road. As mentioned last quarter, we put a lot of work into taking the product out to market, and we’ve been at a couple of conferences and got a lot of real-world feedback from customers, and the feedback has been great. I think in the process, we learned some really key things about the value of new Expensify and why it’s going to create so much value in this market. We call it kind of the 80-20 advantage. Historically, expense management has only ever been able to automate about 80% of the workflow. At some point, there’s a remaining 20%, and that 20% is where all the actual pain of expense management is. That’s the information that isn’t on the transaction itself, and to gather that information, you have to ask a human about it. And that part of the process is where a lot of frustration arises because it requires human intervention. The first part of new Expensify is trying to automate the process of gathering that 20% by streamlining the conversation around it. That’s why we have this chat-centric design for new Expensify. Historically, if you need to gather information, you do it by emailing someone, which operates at email speed. If you text or chat with someone, you’ll get a much faster response. So, new Expensify’s design is about making expense management happen at chat speed, helping to close the books faster. The second part of that is enabling us for the next generation of AI. Most of that 20% of the discussion is about information that already exists somewhere in chat. For example, imagine you’re an accountant and you see a charge at a club in Vegas. You need to check whether that’s fraud or if it was for a conference. Normally, you’d wait days or weeks for an email response, but with Expensify’s new design, the chat-centricity allows us to check prior conversations related to that expense. Our goal is not merely to streamline that last 20%, but to automate it, aiming for the industry's first 100% automated expense management. Summarily, Q3 was fantastic; it showed stability in the business. New Expensify is powered by a strong classic foundation. I think we’ve increased our free cash flow guidance once again. The Expensify Card is almost fully deployed, and we still feel confident we’re on track for full deployment by the end of 2024. New Expensify is generating revenue, and we believe that we’ll be the first to achieve what we expect to be the new standard: 100% automated expense management by integrating the chat-centric flow into the product. Finally, Expensify Travel is also in market and generating revenue, with great reception. So again, it’s been a fantastic quarter built on great momentum.

Fantastic. I believe, Aaron, you’re here from JMP. We’ll get started with your question.

Yeah, that’s great. Thank you guys so much. I guess the first question, just off of your last comment, Dave. For Expensify Travel, any idea on what the revenue contribution is today? And how big a piece of the business, do you think that can become over time?

I think it can become quite big because travel and expense management is the entire category. Every one of our customers has a travel requirement, so I think it has the potential for significant lift. We’re still getting started with it, rolling it out, and we’ve had great early traction, but I don’t have anything concrete to share at this point.

Okay. That’s helpful. And then switching to capital allocation, the company bought back 646,000 shares at $2.34 per share on August 28, and that was the only stock the company bought back in 3Q. Can you help us think about how you plan to manage the buyback going forward between repurchasing shares in private transactions versus buying shares in the public market?

I’d be curious for any new thoughts on this, but I think we’re very opportunistic. We’ve built up quite a cash reserve that we can deploy quickly. We’re still investigating various opportunities, and as we’ve shown, we’re flexible.

Yeah, I agree. We are pretty bullish on the company. A lot of what my business or financial highlights focused on was really just getting the core fundamentals to a strong place. Now that we are in that place and feel like the business is reliably kicking off cash and optimistic in terms of growth, I think in future quarters we should be a little more proactive in terms of buybacks, but we don’t have anything concrete to share just yet.

Okay. Thank you, guys.

Perfect. Steven, I believe you’re here with Citi.

Hey, great, thanks for taking the questions here. I guess I want to ask on the sub-user side and good to see that ticking up and stabilize. I’m curious if you have an idea of maybe what’s helping support that tick up like is there something that you feel like you’ve done that’s helping drive that number in the right direction or does it feel like the macro's getting better? Just kind of how would you articulate what’s going on there?

Yeah, I can take this. We are pretty optimistic going into future quarters as new Expensify ramps up more and more. We start to send more of our traffic there, and that conversion's going to perform much better, and new customer growth is expected to improve. The big driver for paid member growth has historically been existing customers increasing their usage on Expensify, which is largely driven by macroeconomic factors. We’ve seen some existing customer usage expansion rebound, so I think that’s giving us some tailwinds.

Okay. All right. That makes sense. And then maybe on the go-to-market side, how are you seeing the recent changes resonating and how are you viewing the efficacy of some of those investments?

We’ve had success with organic channels like SEO, word-of-mouth, and the strength of our brand. A majority of our new signups come directly to us. This continues to be a leading indicator that we are never starved for leads. Our focus is on improving conversion and sales efficiency. With our new platform, we’re testing how we can improve conversion by sending all of our smaller leads to the new platform. This effort will likely take a few quarters to refine, but overall, I think our go-to-market efforts are effective, driven by strong organic channels.

I agree with everything Anu said. A big part of our go-to-market strategy is building a product that inspires customers. An example is that when we attended SuiteWorld this year, pitching new Expensify, we produced about 61% more leads compared to previous years. This shows how a standout product translates into more leads and higher conversion rates.

Fabulous. Eric from Lake Street Capital, I believe you are able to join us.

Yeah, I had a question regarding the interchange from travel traction. You had obviously a nice shift here, Q2 to Q3. Are we seeing any green shoots in interchange from the travel offering you have? If not, when should we see that?

I don’t think we are breaking it out in that degree of detail. Travel as a product doesn’t always correlate with card usage. So, I’m not sure what the connection is between those two from an interchange perspective.

Yeah, it was just to the extent they’re using the card to book travel.

Yes, I think that’s probably not meaningful. That’s a pretty small subset of what we look at in terms of card spend on travel.

One of the advantages we have in the marketplace is our card agnosticism that we support all third-party card feeds. It's great to use the Expensify Card with Expensify Travel, but there's no requirement to, and many of our Expensify Travel customers are still using their existing corporate card program.

Okay. And then second question regarding the increase in free cash flow, but were there cost efforts taken that led to a reduction in force or are these more on the cost of goods side where you’re continuing to squeeze costs out of the business?

No, we didn’t have any workforce decrease. We are continuing operationally to get more efficient, and that’s the second driver. So there was the higher interchange take rate, but also operational efficiencies contributed to our higher free cash flow margin.

Got it. Thanks for taking my questions.

Fantastic. That was everyone we have on the call live.

Great. Hey, well, it’s been a real pleasure. Thank you so much for joining us for this call. We’re very excited about this quarter’s results, and we can’t wait to talk to you next quarter.

Thanks, everyone.