Expensify (NASDAQ:EXFY) Q3 2022 Earnings Call

0:00 Welcome, welcome, welcome to the Q3 2022 earnings call for Expensify. We are, you know, to find this team here, we have Anu, our Chief Operating Officer, Ryan, Chief Financial Officer, David, I'm the founder and CEO, Trump from Technical Accounting. And so before we get started, Anu is going to take it away with a bunch of legalese. Before we begin, please note that all the information presented on today's call is unaudited. And during the course of this call, and others. 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.

1:09 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 reconciliation of these non-GAAP financial measures to their most comparable GAAP measures. With that, back to you, David. Thank you for that fascinating introduction. Keeping it real. That's right. Keeping it real. And so that's what we do. We talk again about our long-term strategy for anyone who has been following along. This is the same thing we've been talking about during the IPO.

1:56 This strategy is the same. It's designed for all market conditions, and it's the same strategy we're working. Let's review how that goes. Fundamentally, Expensify is based upon three major pillars for long-term success. First, we believe the market size is enormous. We think that every business in the world has to do the functions that we do, but only a tiny, tiny fraction of them are currently doing anything. So we view the market as almost entirely untapped, and our strategy is to go after all of it. So it's a fundamentally different opportunity and business model than any else in the market. Second, we go after it with a completely different business model. It's fundamentally word of mouth driven, bottom up adoption model where individual employees download the app for free and pull us into the organization. So every employee is a door to every single customer as opposed to just knocking on CFO's door. And then fundamentally, we think that we can link a billion people through finances in the same way that Instagram can link a billion people through people or through photos or something like that.

2:54 And so anyway, big opportunity out there and we are really gunning for this giant opportunity. Second, we think that the market is broken up into sort of four major parts and everyone talks about the enterprise market and obviously we're a player up there. But the bulk of the opportunity is really in the SMB and mid markets. And so we think that our business model is unique and that we can capture small businesses and then grow with them up to whatever size they go and we can profit from them from every scale. And so the way that we acquire those customers comes basically we use advertising or free plan to seed our funnel with small businesses. And then we use our sales and account managers as well as our partner program to engage with them and get them to leverage our full functionality.

3:41 And then all of this is to drive high margin subscription revenue. And so all this means that we have an incredibly efficient lead generation model. We have a super efficient sales model, and this contributes to our high profit margins. And the way this works, basically, as a reminder, is everyone else in the world has an exclusively top down business model where they just are calling the CFO of the Fortune 1000 or whatever it is. And then that CFO makes a decision as a gatekeeper before anyone else in the organization learns of the product. Eason. Expensify is different. Employees learn about Expensify from their friends and colleagues, things like this. They will download the app for free without needing to be asked, without asking permission, and will just start using us. This turns every expense report into a highly targeted marketing message directly to the decision maker, who will then roll it out to the rest of the organization.

4:27 It's a completely different business model than everyone else in the industry, and that's how we're able to get completely different results. We think that we have the only product that can reach the full market. And so we can look across the board again. All this functionality has been around forever. There's a million different players that do different subsets of this, but we think we're the only ones that can do all of that. We can scale up to the real enterprise, support the large requirements of the large multinational public companies. We can also scale down to consumer grade design and having something that's simple enough for individuals to adopt for sole proprietors and so forth. We have real global reach. Excuse me. We're already generating revenue in multiple markets around the world. And so this is a natural artifact of our business model. We allow ourselves to be pulled everywhere that has this problem, which coincidentally is everywhere. We don't just have our own card product.

5:13 We also have a native travel booking product as well. And of course, all of this is free. And so all of this is basically about building a chat first pre accounting solution that provides a wide range of functionality. Everything from not just expense management and corporate cards, but also invoicing, bill processing, payroll and so forth, all for nine bucks a seat. And so, again, this is the same strategy we've been talking about for a long time. We're making very good progress along that. The latest is that we think that our chat functionality is really now live and being used by active customers. And so the sum of all this is that we have sort of three different ways to monetize our users. First, we have viral functionality that provides natural lead generation as we grow out through the social networks and friend groups of employees. We have transactional revenue through our corporate card and other products.

6:00 And then, of course, we have high margin subscription revenue for everything else. And so we're trying to triple dip from all of these different things in order to make sure that we're getting the maximum value out of every single lead. So strategy is unchanged. The market and the world is sometimes complicated and dynamic. But fundamentally, our strategy, we think our differentiation is that we have the luxury of being able to focus on the long term. And so others are sort of scrambling to adapt. They lost their funding sources or their economics got inverted or whatever it is. Fundamentally, everything's the same here at ExpenseBot. We're still focused on the same strategy and still focused on the same vision. And so to kind of talk about that a bit, obviously the market's been pretty nuts right now, as you can tell. But Expensify is pretty steady.

6:47 We're still hiring and we remain hiring throughout. We're still generating cash despite all of this. We're still focused our energy on the future. And we're also buying back shares because we believe so strongly in the future of the business. And so we kind of dive into some of those. One is that we have our sales team to give you an update in some of this. None of this is new. We've been talking about doing it for a long time, but just to kind of give an update of where we are. We got about 70 salespeople, which are focused on onboarding new customers. And so this is a group that we've been building for a long time, and we've rolled them out to about a sizable fraction of our organic lead source. But we haven't run out of the sort of exhausted our own leads. So the focus right now is about fully engaging our sales team to take care of our existing lead channel And then on top of that, in parallel, we are building up an SDR group that's designed to do outbound calling into getting more leads. And so the first people we're calling are just, you know, conference lists, things like this. And next we're calling into our Schaffer.

7:51 14 years of like failed trials, charmed customers, and everyone else that basically is there. And then we're going to do the same list buying everything else. So yes, a lot of the same tactics are the same as you can see us in the industry. But our lead source is actually quite different. And that's the differentiation there. Because we're not calling the same people that everyone else is calling. We're calling people that already know something about Expensify. So it's a much warmer lead source. And so we think it's showing a much better results. Schaffer. Next, as we've mentioned, our account management group. So this is a group that, again, we've been growing steadily over time. Right now, customers that account for about 41% of revenue are being actively managed by an account manager. And so we're still scaling that up. We're targeting about 90% coverage by the end of the year.

8:36 But this is something that's basically methodically moving up coverage of this. Now, a main function, the account managers obviously do a wide variety of things. They focus on retention, ensuring that every customer is set up correctly, cross-selling all of our different functionality, and so forth. But one particular function that's useful this call is that they're also moving our pay-per-use customers over to annual subscriptions. Now, pay-per-use is valuable in that it's billed at a higher rate, but it's volatile. And especially in market conditions like this, we see higher pay-per-use usage. And so we really want to have slow and steady growth into the future. and I think the key to that is having annual subscriptions and having as much as possible in a steady sort of committed revenue base. And so the account managers are not just there to accelerate expansion of existing customers and retain them, but also stabilize revenue to get out of them.

9:26 Next, let's talk about the accounting channel. Again, we've talked about the accounting channel a million times. It's been important. It remains important. About 50% of the revenue that we get from the accounting channel is now being overseen by what we'll call a partner manager. And so partner managers are dedicated points of contact that talk directly to the accounting firms and then provide on-site training. We'll talk with accountants and things like this. And so, again, we're expanding this out. The goal is, of course, to get complete coverage. We're working our way up to this. There's a lot of accountants out there and we work with tons and tons of them. And so one consequence of this, which has been kind of interesting, is that as we engage more directly and proactively with the accounting firms, we're finding a lot of accountants in these firms that have not yet actually gone through our training and don't really know much about Expensify. They might even have Expensify clients basically under management, but they've never taken the time to get what we call Expensify approved, going through our Expensify University and so forth.

10:20 And so a lot of this has been finding a bunch of opportunity where there are existing accountants that use Expensify, but just haven't gone through our training and haven't gotten our certification. And that means that they haven't been giving their approved accounting discount to clients. And so as we're kind of cleaning up a lot of this, it's had a revenue impact, which Ryan's going to talk about in a bit. But fundamentally, the partner managers are about building out deep loyalty in this industry so that we can extract the maximum lead generation and retention in the long term. And we've mentioned that we're building up towards our event called Expense-a-Con. Expense-a-Con is a time when we can really demonstrate how much we care about these accounting channels, as well as spend really close time to understand their needs and respond to those needs. And so Expense-a-Con is coming up in May.

11:07 It's been very exciting for this industry, and we're going to keep pushing towards it. Next, we've been talking about all of our engineering is really focused on building a next generation platform. And so this is what we talk about when we're, of the many ways that we're focused on the future, is that we feel that fundamentally the future is going to be owned by whoever has the most robust pre-accounting platform that can do all this functionality in a highly seamless way. Everyone else out there is scrambling to stand up basically their existing products, probably given the economy. Maybe we'll see some acquisitions in there as people try to sort of Frankenstein together their own platforms of basically a bunch of different products that kind of assemble these checkboxes that might work in a top down sales manner.

11:52 where basically someone is buying based off of a checklist. But that sort of fragmented product experience doesn't work in a bottom up manner. It has to be a highly integrated experience. And we're the only ones who has the luxury of being able to devote our engineering resources based on this long term vision, because we're convinced that the long term market is going to be owned by whoever can capture the viral dynamic of this market. And that can only happen with a highly integrated product. And so where we are right now is our chat platform is really robust, and it's being used on a daily basis with live customers in all these different teams we talked about. So, for example, our SDRs, when they're calling to a customer, they're not just calling them on the phone. They're actually creating what's called an Expensify workspace, and then they're reaching out to them via Expensify. So the conversation of basically learning about the product is happening on the product.

12:40 Likewise, when there's a lead, the demo happens in the platform and our sales team can actually sit down and work with them on the platform to configure their product to make sure that it's perfect for their needs. The handoff to an account manager likewise happens inside of the product. We have a chat room made with all of the administrators in the finance team so that they can talk about the configuration and then our account manager can talk alongside with them. and then, of course, finally, the partner managers. When we are working with these accounting firms, we'll create a chat room for the entire partnership basically on our platform so we can directly engage with all the accountants in platform about how to promote more expensive thought. It's a super seamless integrated experience that we're very, very proud of.

13:26 So that's live in use today. Next up, we're really working on bringing a level of polish and stability to the mobile experience such that we can advance towards using this for employees. Again, it's a long-term roadmap. We talked about it again and again. The roadmap hasn't changed. It's very, very exciting. We're making good progress along it. And then finally, let's talk about payroll. You may have seen that actually we've launched payroll. It's live. Now, we've been using it ourselves for almost two years now. And now we're onboarding customers onto it. Now, we're still a little constrained. We haven't gotten all of our money transmission licenses. We're still working on New York, Texas, Hawaii, Massachusetts. So we can't support every single customer, especially customers that have across multiple states. But it's a very powerful solution we're very proud of. In fact, this solution has been refined for a lot of very sophisticated needs, the kind of needs that we need as a large public company.

14:17 And most of our engineering focus in the payroll product is about simplifying it down for the smaller businesses that have hourly workers, that have different payroll requirements, sort of scheduling requirements, tend on that kind of contractors and so forth. So payroll is live. It's in markets. And so we're excited about that. But again, We expect this to be something that grows over time. And so maybe not really the product, but something we're very excited about is that buybacks. So we think that right now is a great time to be buying Expensify shares. We think that so much that we got authorized for a $50 million share repurchase in May. In September, we made our first purchase, about $4 million. And now actually starting tomorrow morning, a sort of open market, we're going to be buying back up to $6 million basically as quickly as we can.

15:08 and so and then we still use $40 million for opportunistic buybacks as we go. Now, we've said that we're going to do buybacks. We think that a great we have a business that generates a ton of cash and this cash is not competing with our customer acquisition. Everything we have is fully funded in terms of our growth initiatives. We feel are fully funded and yet we still make more money. And so we think a great way to return that value back to shareholders is by repurchasing shares. This is a strategy that we intend to do consistently over time. And so we've demonstrated it a couple of times now. This is something you're going to see again and again going forward. And with that, let's hand it over to Ryan. Great. Let's talk about the numbers. So we had an increase in paid members in Q3,761,000.

15:54 Also, I wanna talk a little about the free plan. Now we're not gonna give updates every quarter, but we said we'd update you when we hit some milestones. So we crossed the 15,000 customer milestone for the free plan. So there's 15,000 different companies currently using the free plan. Revenue was 42 and a half million, which is a very slight decrease from last quarter. And I'll talk about that next slide. And on an annualized basis, our revenue was 170 million. So in Q3, we did see some downward pressure on our ARPU, but that is expected and we believe it to be temporary. So David mentioned our partner managers engaging with our accountants. We're finding that while there's a ton of accountants using Expensify, not all of them are part of the program. So as we engage with them, we're getting them enrolled in the program so they get our preferred pricing.

16:40 So that does put some downward pressure on the ARPU, but we ultimately believe that to be a good thing because we see that accountants within the program grow Schaffer. Our business way faster than accounts outside of the program. So this is a good long term change. Also, we saw some currency headwinds just due to the strength of the US dollar and also the expense by card. So card volumes growing. You've probably seen that in the release, but also our cashback is contra revenue. So as the interchange grows, cashback also grows and that the contra revenue pulls down The revenue number. However, as we've talked about every every call, our interchange is still not categorized as revenue yet. We we believe it will be shortly, but not yet. So basically, we are getting all the downside of cashback, which pulls down revenue.

17:27 But we don't get to we don't have it being pushed back up by the actual interchange. So it's still cash coming into the business. But in terms of how it's being presented, it doesn't push up revenue. And also a third thing, we're seeing more and more actual cardholders and cardholders do the discount on their subsidized subscription. Again, they generate more cash through the interchange than they would in the discount. So it is a net positive. But we have a couple of things pulling it down. But without interchange to push back up, that just creates downward pressure. So it's a little confusing. But the actual net net is that everything's growing. We're adding cash and things are good. Speaking of Expensify Card, year-on-year interchange growth was 115% and our gross interchange was just under 2 million at 1.9 million.

18:16 So I want to talk a little bit about cash flow. So our operating cash flow was negative 0.9 million. But I wanted to talk about free cash flow this quarter because operating cash flow includes customer funds. Customers move a lot of money through our system. And due to the timing of payments and when the quarter ends, that actually can distort the number a little bit. Usually, it's very consistent. But due to the timing, the customer funds actually push operating cash flow negative. So when you look at actual free cash flow and you pull out customer funds, so no customer money, just pure money that we've generated, we saw a positive $4.7 million for Q3. On a gap net loss basis, $8.2 million. Non-gap net income, which is net loss with taking out stock based comp, you get a positive $5.1 million.

19:05 Adjusted EBITDA was $9 million with an adjusted EBITDA margin of 21%, which is quite strong. We maintain our long term guidance on a multi year basis. We still believe that we can grow 25 to 35%. Obviously, the economy is a little challenging now, but we still believe on a multi year period that this is the right measure. So to summarize Q3, we think the business is extremely healthy. We have strong free cash flow, and we're profitable on an adjusted EBITDA basis. Our paid members continue to grow. Expensify card's up 115% last year, and we're seeing very strong enthusiasm from our customers for our product roadmap, which is chat payroll. and just to leave you with some good news here. So Q3 was a little slow, but we don't normally do this, but we thought that we would give you a little teaser on how Q4 is doing.

19:56 So October was our best month ever again. So in October we had 783,000 paid members and We expect revenue to come in between 14.3 and 14.7 just for the month of October. So we don't give guidance, but given kind of the volatility in the market, we thought we'd throw you a bone and give you a little teaser on how Q4 is doing so far. So that's all for the slides. Now we'll jump over to Q&A. I think, Anu, you want to take it away? So first up, we have Jamie Morgan. Raquel, if you're on. You can go. Good afternoon, guys. Thanks for taking my question. I wanted a little more color on how average paid members came in this quarter. Would you guys say it was within your internal expectations?

20:43 And then is that number kind of coming in softer than 2Q, a function of some additive turn, softer sales? How would you kind of categorize that? Yeah, great question, Markel. So as you can actually see, so this chart is broken down monthly. One thing that we're noticing when the market is odd, that the volatility of the paper use can swing a little bit more than we'd like, which is why we have this focus on account managers. Previously, we didn't really have account managers really engaging with our clients that much, and now we're really making that a focus, and a big goal of that initiative is to convert More pay-per-use users to subscription, which should reduce any volatility that we see or at least lessen the volatility that we're seeing.

21:31 And we do that as a good thing. So you can see that Q3 came in a little softer than expected versus the end of Q2, but it also kind of rubber banded right back and better than it was before in October. And as we get more and more of our users as a percentage on subscription revenue, we should see that volatility decrease. And just a follow up for me on gross margins also coming in a little bit softer. I think, you know, we spoke about in prior quarters that also being a function of you guys adding more account managers. So not looking for guidance here, but would it be fair to say that given you're trying to kind of ramp that up, that that would continue and persist into 4Q and beyond? That's a good question. So, yes, I think that we will continue expanding out the account manager program and that will obviously have a cost with it.

22:22 But I'd say I wouldn't expect that to be a super significant cost. Fundamentally, the team we fill is pretty fully staffed. I think that right now we're not focused on we don't. is less about hiring more people and more about increasing the efficiency in the engagement with the people we currently have. And so I wouldn't view it as because we have, you know, X percent coverage right now, that's going to be twice as much to get more. I think it's more about we have plenty of time. It's really about just increasing the improving the efficiency of the processes that we have internally. Yeah, I agree with that. Thank you, guys. Appreciate it. Thank you. Next up, we have Koji from Bank of America. Hey, guys. Thanks for taking the questions. I wanted to ask kind of on the new SDRs and the capacity that you're doing, the account management teams. So when we look at the third quarter results, is it fair to assume that the costs associated with those, the increased capacity there, is that all incorporated within the third quarter results, or should we anticipate more of that to come?

23:28 Basically, you're saying were they all hired at the end or were they at the beginning of the quarter? Is that basically? Are they fully big in the quarter? Is the third quarter a good representation of the increased capacity from a cost perspective? Well, going forward, we should see more SDRs. Yeah, we should see more SDRs, because that's still the least mature of those organizations. But I would say the guides and the account managers are pretty mature at this point. Now, as the SDRs scale up their ability to generate more leads, at some point, we'll outpace the capacity of our existing team. And then that will cause more sales hiring. But we would have to scale up the SDR team first before we need to scale up the sales team, I would say. Got it. Okay. And then I wanted to spend a moment on the slide right here that you have this October best month ever again. I mean, 782,000, that's a pretty good number considering the fact that it does feel like the economy and overall SMB sentiment is a little bit worse off today than it was maybe in previous months.

24:26 So maybe talk a little bit about what you're seeing out there that is driving that subscriber growth in October. Thanks, guys. The volatility of paper use kind of makes the story a little confusing, right? So we're adding customers throughout the entire quarter. But because paper use, you know, if people are expensing less, then that number can go down. So as you can see, at the end of Q2 and then at the start of Q3, we saw that actually decrease. And that's not a turnoff of any of customers. That's just a kind of a decrease in activity amongst our existing customers. But we continue to add customers throughout the whole time. So I'd say that When SMBs are struggling, we could see some lower activity, which is why we're addressing that with the account managers and this focus on moving more people to subscription because we want to reduce the volatility that pay-per-use introduces into our revenue.

25:24 Got it. Got it. Thanks, Brian. Thanks so much for taking the questions. No problem. Next up, we have George from Citi. Hi. Thanks for taking the question. I'm on for Stephen. George, we can barely hear you. Can we turn him up maybe? Hello? Can you hear me okay? We're just going to listen very, very carefully. Is that any better? No, but go for it. Okay, sorry, I'll try to speak up a little bit. Just wanted to ask on the growth equation between user growth and ARPU, which one you feel is more macro sensitive and which one you feel is a little more under kind of your guys' control?

26:15 Yeah, which is more under our control, ARPU or user growth? ARPU, I guess? Well, it uses macro sensitivity. Oh, macro sensitivity. Oh, I see. We influence ARPU via price change for instance or we influence ARPU when over time the mix of our business changes like if more people choose subscriptions versus people use if more people go to the free plan versus not but paid members generally reacts faster, like expansion within existing companies or contraction or new customers, et cetera. That's a sensitive metric.

27:01 I would say maybe we have, or maybe I didn't understand his question, but we have, I would say, more control over paid members because ARPU, there's the volatility of what percentage of and our company is going to exceed their subscription in overages. I'd say we are trying to rein in the volatility of the pay-per-use segment by getting more people on subscription. I'd say we have less control over that, which is why we are rolling out the account managers and taking this because we want to reduce that volatility. I would love more control over both. Yes. Got it. Got it. Thank you for the call there. And then one follow-up on the macro sensitivity piece. Have you seen any change in customer behavior on either up-tiering or down-tiering?

27:50 Thank you. Oh, okay, good question. So no, we have not. We just looked at this. So the mix of people on the plug plan or the control plan has been consistent. We haven't seen any change there. Yeah, and one reason to think about that is it's not that you choose to upgrade as you like the product more. Rather, you upgrade as your company gets more sophisticated. And so there's really not a downgrade case where it's like, I just don't like these features as much. It's kind of like your business just needs these features, and so you just kind of have to stick with it. So you use it as a basis as your business itself matures. Like if you laid off half your staff, you wouldn't downgrade your plan. That's a great way. The business requirements are actually still the same. Yeah, that's a great way to think about it.

28:38 Cool. Next up we have... Thank you. Sorry, I couldn't hear you. I didn't mean to speak over you. Next up we have Brent from Piper Sandler, please. Hey, guys, can you hear me? Yes. Awesome. Yeah, this is just Mara jumping in for Brent. So I just wanted to double click on the factors that we saw influence revenue growth this quarter. You called out a lot of things kind of internally around the subscription management change. What can you point to in terms of macro level factors that may or may not be influencing customer activity during the quarter? Anything just kind of more macro level, recessionary headwinds that might have influenced activity?

29:29 I think with the, obviously inflation is high. If you watch the news, right, this hurts SMBs by more than anyone else. I think I just saw something in Bloomberg that like 30% of SMBs are having trouble paying their rent. But yeah, so I'd say that the reaction, how that translates to us is in a, We're seeing our customers be less active as a percentage of their employees. And if they're on subscription, they pay the same rate. But if they have a they're mostly pay per use or they have some percentage of their Schaffer, users on paper use, and those employees aren't using the program because they're not expensing something, they're not traveling or whatever they're doing because money's tight, then we see their activity go down.

30:21 So we're not seeing a turnoff, but we are seeing what we did see in Q3 was and overall kind of decrease in the number of pay-per-use users. Yeah, and I need to build on that. Just say a little bit about I think the SMB is also, I think, to a degree, and so on, affected by sort of the overall sentiment and emotion of macroeconomic sort of policy and geopolitics and things like that. So it's like if you look at this chart, which is kind of convenient to have on the screen, every time we're below that green line, something huge happened in the world. So like the first time it was like COVID and then like we kind of picked back up, then Omicron, and then pick back up. And then you can even see this most recent one. It's like Russia invades Ukraine. And I think it takes the world time to react to these huge, huge, just monumental changes happening.

31:13 And I think everyone just pauses a little bit. Again, they don't turn off. They're just like, whoa, we're just going to pull back a little bit to reassess what's going on. And then a few months later, it's like, OK, OK, we're good now. And so I feel like a big part of this is also about, again, the business model performs when the economy performs in a stable fashion, when the macroeconomic situation is stable, when something comes and gives a big kick in the stomach to the world. It takes time for everyone to absorb that. and that's, I would say, when our model underperforms its green line, but normally we just keep going. Got it. Yeah. So it's not it's not all doom and gloom.

31:58 Yeah, I mean, yeah, exactly. Yeah. People have absorbed the impact. We understand. Essentially, it's like, what is it like? How do we coexist with a Russian invasion with the and the massive inflation and so forth? People are like, OK, I get it. I get what I've adjusted my business. I've done the things I need to do. And now I can get back to growth. And I think that's why we're seeing such a good October. Okay, yeah, very helpful color there. I guess last one from me just on that paper use topic. I'm not sure if you've disclosed this or if you can give any additional color here, but how much Smith, and many more. if you have 100 employees, roughly your subscription is probably at 75 and you had 25, an overage of 25 employees is generally what that means.

33:11 Since COVID, we have seen that number come up to lower 30%, which is higher than it's ever been. I think in the IPO, people ask, how high is it going to go? And we said, well, it's never been 30, so it probably won't hit 30. We've been over 30 for several quarters now, so we are... stepping in and we're going to address that. And we're with the account manager, we're going to try to do this big push for a subscription because it's gotten, I think, bigger than we ever expected it to get. And as it gets bigger, the volatility gets more and that's not really, you know, what we want to happen. So we're stepping in and addressing that. And it's a retention challenge too, like the subscription gets too expensive for the customer, which is not what we want. Yeah.

33:58 Cool. Moving on to Daniel from Biennale, please. So, Ryan, maybe you can spend some time talking about what exactly were the timing issues on the settlement? Like, did the quarter end on a Friday and you didn't settle? Or I guess, like, what does that mean conceptually, the timing issues? Yeah, so they're not issues. So this is something that's always been in the business. But as customer funds go in and out, that's recorded on our balance sheet, how much we have in, how much we're owed, that type of thing. And it's generally been consistent. But occasionally, it can if more cash goes in or out, it changes this number.

34:53 So you see operating cash flow is a negative, but we've cleaned it up, which is why we're talking about free cash flow. And we'll be reporting on this going forward because We've seen that it presented itself negatively, and it doesn't really tell the whole story, right? So the company generated almost $5 million in free cash flow, but operating cash flow doesn't tell that story because it's distorted by customer funds, which has no real impact on our cash position or the strength of the business or anything like that. So we'll be showing free cash flow going forward to make it less confusing to everybody. Okay. And then can you remind us about how you approach risk management? I mean, clearly SMBs are under stress.

35:39 You mentioned that for several quarters now. How do you make sure that that stress doesn't flow through to your business in terms of bad debt or anything like that? Great question. Thank you. So we have two different types of settlement for the Expensify card. We have daily settlement and monthly settlement. Daily settlement is a incredibly safe, very low risk mode of settlement. What it basically means is you swipe your card. We were sending you basically 24 hours of credit and then you pay us back the next day and then we pay Visa using the funds that you just we just collected from you. So the timing of how much the length of time that we're sending credit is very low. And that's we've seen that any losses there are exceedingly small.

36:28 Now, monthly settlement is higher risk, but we also we've moved billions and billions of dollars over the last 10 years. So we've gotten really good at risk management. So we have a number of Actually, I have a new here. I'm going to let Anu talk about this. We have a number of fraud detectors in place. But yes, I would say monthly settlement is a little bit higher risk than daily settlement, but we're not seeing any uptick at all in terms of defaults. But Anu, if you want to add to that. So the first thing is, by and large, most of our card customers are on daily settlement. We launched monthly. We still didn't see a huge amount of customers go from daily to monthly. and then we're also seeing on an overwhelming basis, new card adopting companies stay on daily. So I think monthly has this effect that it's available. It helps us compete in the market with other card providers because we are apples to apples, but it seems to have been a rumor that we needed monthly in order to serve the marketplace, which was always our theory, now it's been proven. So that's one. but in terms of who gets monthly settlement, who's eligible to stay on monthly settlement, think of it as if we have a greater degree of visibility into their finances, which we do through a variety of ways, flat balance, flat assets, like these are some ways through which we know what's going on in their bank account. The greater the degree of visibility we have, the bigger your

38:00 limit can be and the greater access to monthly settlements you can keep and maintain. that's how we sort of play around with our risk and at the same time that we want to be risk averse we also want to offer a good user experience so we're always learning like every month we learn from delinquencies that we see we have a job to various ways of collecting all within the law but creatively you know holding out usage of our platform over getting feedback and they've all been largely quite successful for us, knock on wood. But we're always watching the space because you bring up a good point. As we go into a recessionary market, we want to be careful with this. I think just one more point. The purpose of the Expensify card is not to extend credit to companies that don't have resources to support it.

38:50 We are just giving them an avenue to spend the money they already have. So it's not as risky. It's just an efficient method to disperse the cash that they already have. So it's not like people are running their business off of their expense by card and that they need the credit in order to make rent or anything like that. It's just we monitor bank balances and we always make sure that they have enough cash to pay off their card or we decrease their limit. and maybe just a final point that on the reason why companies like off the cuff, it seems like everyone would want monthly settlements because they'd be like, why wouldn't you want to borrow a month's worth of credit? It just feels like there's like no downside to that. But we'd say most companies have the money. They don't actually need the credit. And so we say, well, if you do daily settlement, we can offer you much, much higher limits because it's so much lower risk for us.

39:42 And so it's a question of do you want to optimize For, you know, timing your cash flow or do you want to optimize for the highest level of spent? And most customers are like, well, actually, I have the money. I don't really care about the cash flow. I would like the highest possible limit. And that's one reason why everyone goes for the daily options, because it's fundamentally just a better experience for the customer and it's lower risk for us. Gotcha. Thanks for all the color. Maybe if I can squeeze in one more, Ryan, what's the latest timeline in terms of cleaning up the financial reporting with regards to the Marketa contract and the interchange fees? Great question. So we are so close. I knew you were going to ask this.

40:28 I really wanted to tell you it was done but so the latest update is we believe currently hopefully by the end of the year we believe hopefully right hopefully by the end of the year we will be rolling out the new cards that have the that will have the new treatment one thing that's important to note is once the New Treatment is accepted by everyone, approved by the auditors, all that stuff. We still need to re-card. So we'll spend probably a quarter or two sending out the new cards with the new treatment. But we believe that we can start sending out these cards by end of year. But we'll have more update. I'm sure you asked this question. Oh, yeah. More update. Another update next earnings call.

41:13 I really thought I was going to have it this time. And we're not quite there. But we're very close. All right. Thanks, everyone. Thank you. Cool, so next we have Pat from JMP. Pat, are you on? Pat, thanks so much for the questions. First, culture. I'm just sort of seeing involved in, you know, how do you expect to maintain that culture as you continue to grow? A quick follow up. Thank you. Could you repeat that? Yeah, hey, can you guys hear me all right? Yeah, I'm sorry. Could you just repeat that question one more time?

42:00 It's something about how do we tend to maintain the culture as we grow? Yeah. Yeah. OK. I just want to talk about the culture you've created at Expensify. How have you seen it evolve, and how do you expect to maintain that culture as you continue to grow? Yeah, great question. So, I mean, Expensify is a pretty special place, but that specialist doesn't happen by accident. Everything we've done has been pretty methodical to construct an environment that really empowers everyone to deliver their absolute best. And so the question is how do you maintain that over time? I think it's because we're not sacrificing it every day. And that sounds obvious, but you talk to any founder and they're like, yeah, I want to build a business that I want to stay at forever.

42:49 But then they just build a business that sucks, that they just don't like. And so over time, most businesses just compromise every day on the culture and cannibalize basically the business. We haven't done that. We have very, very methodically invested in our employees in that culture and preserving the pillars of it. So one example would be our LT share structure. Now, when we were going public, we were like, wow, this seems like you are really going overboard in order to create incentives for employees to be focused in long term. Marcus on the up and up. Everything's perfect. Why would you even care? Everything's always going to be good. I said, well, you know, maybe things won't always be good. Like when I started Expensify, it was at the bottom of the greatest depression since the Great Depression. And so we've seen hard times in the past and we know the importance of a team that's willing to look past the temporary sort of distractions and noise of the market and stay focused in the long term.

43:48 And so our LT share structure is just one example of why our employees, they're just focused in the long term. They see the same numbers that you're seeing, but they're looking at that green line and they're like, yep, cool. Green line is good. The green line is up and to the right. And sure, maybe not every single month, maybe not every single quarter. But if you look at the trends, the trends are overwhelmingly clear. And so we're all very committed to this future. We believe in the strategy. And we like each other because we work hard to hire the right people. We invest in our people. We do extensive performance management to get everyone up to the get the best of everyone. So there's no single thing I would say that I point to for how we intend to scale it. But there's Maybe I guess I would say there's no reason we couldn't scale it. There's nothing that we're doing that isn't designed to scale because we're we've been built from day one to be a long term business.

44:42 And so we've only put in place cultural components that scale profitably indefinitely. And so I'd say this is the reason we're able to do it is because we made a point to do it and we never give up on that. I'd say we also, we hire methodically and slowly, which means that when the market turns on a dime and goes bad, you don't have to lay off 20% of your company, which can't be good for morale. So we have enough, more than enough people and we're growing and We're not worried by this. We're doing the same thing today that we were doing. The plan was a couple months ago, and the strategy hasn't changed.

45:28 This strategy works. Generally, every month is our best month. Now, that's not 100% true, but it's 90% true. It's mostly true. I'd say it's a strategy that works, and we believe in it, and we're going to keep investing in it. Thanks so much, guys. Appreciate it. Last but not the least, Mark from Lube Capital. Hi, can you hear me okay? Yes, great. Thank you. Hey, Mark. Hey, so thanks for taking my question. And Ryan, question for you. Last year during Q4, during the December quarter, you know, the company saw an influx of oversubscriptions from pay-per-use customers. And I'm wondering if you expect any reoccurrence of that in the coming years as well.

46:15 That is a very good question, because last year, October was a little soft, and so was November. But December was gangbusters. And right now, we're seeing a strong October. November is looking good. I don't know about December. I can't tell you if December is going to be good or not. I would say the October performance is probably all the guidance we're willing to give in terms of Q4. It looks good, but I can't say whether we're going to have gangbusters December or not because the paper use could fluctuate. Generally, we see people come in at end of year, more people than normal to submit, but that's the downside of the paper use. They pay more, but they're less reliable.

47:04 So we're working on increasing the reliability of that. Okay, great. And then on the margin front, I know that you don't provide specific margin guidance at this time, but at kind of a high level, just give us a sense of how we should be thinking about how the firm balances revenue growth versus operating margins. I would say margins will probably stay similar. We might see a temporary downtick as we scale up some of our other teams, but I think long term we're going to see margins improve. Miller, similar to when we introduced our concierge system, we saw margins go down and then go way up as the efficiency of that increased.

47:51 We're applying everything we've learned from our customer support concierge system, and we are applying that to our sales motion. So I think we'll see a similar increase in efficiency over time, but we're still in the early days of that. So I'd say for the near term, it's probably going to be similar-ish, and then long-term, it'll get better. Great. Thank you. Thank you. Great. Yeah, well, thank you so much. It's always a pleasure talking to you all. And so I guess we'll talk again another quarter. So thank you. Have a good day.