Expensify (NASDAQ:EXFY) Q4 2022 Earnings Call

0:03 by a huge measure outpace enterprise companies and their employees. But it's not just that the market is huge in the small and medium business space. It's also that it's largely greenfield. They're not using any kind of tool today. They're using Excel and manual processes. And what you really just need to do is convince them that using Expensify is a better use of their time and resources. But the challenge is most of the market, all of our competition is operating with a top down sales driven acquisition model. What this means is if they try to go to market and pick off one small business after another in order to acquire them, they can't do it scalably. They can't do it profitably. It just doesn't work.

0:50 Next slide. And this is where our acquisition model comes in. So we have a bottom up acquisition model. And why is that interesting? We market a very consumer grade product to end users for employees. These employees have a very real pain point that none of the other competitor applications out there are targeting or trying to solve. What this means is we make the employee's life better for free and they can adopt us without asking their company for permission. And this motivates them to talk about us to their colleagues. It motivates them to talk about us to their managers and sell us up into their company. And that's how we grow. We grow bottom up.

1:37 So we have this very scalable, very profitable business model that can use word of mouth and viral legion to pick off small business after small business in a manner that we can acquire this large untapped market opportunity over time. Next slide. So to recap, we are one of the few free applications out there that is consumer grade and can be sold to employees who can adopt us without asking their companies for permission. But then once we are sold up into the company, as that company grows, we have enterprise scale and we have global reach.

2:22 We can continue to scale with that growing company, and they never need to leave us, and we can retain them forever. And, you know, combined, the fact that we free consumer grade, but we have enterprise reach and global scale is why you should believe in us. Next slide. So you've seen this slide many times as well, but I just want to remind you that this is our roadmap. and largely the only thing that's changed here over time, like since we went public, is the fact that more and more of these features have gone from gray, which means it's in development, to green, which means it's in beta, to blue, which means it's launched. So the way to read this slide is go left to right and everything that is on the far left are consumer grade viral lead gen features and helps us sort of continue to grow user base on the free product. And then as you go right, you see more and more enterprise-grade features.

3:23 And taken together, this allows us to hit the market really hard, acquire them profitably, and then keep on growing with them such that we can build on our transactional and subscription revenue with companies as they keep growing as well. So that's a recap on business strategy and why we are who we are and why our business is built for the long haul. With that said, I'm going to hand it back to Ryan. Great. Thank you, Anu. So let's talk about some 2022 highlights. We had strong growth despite some tough headwinds. So Expensify remains resolute despite the economy. As everyone knows, if you're watching the headlines, a lot of companies are laying off employees. Some companies are pivoting. They're changing their business model.

4:10 They're go-to-market. At Expensify, we are steadfast in an economic storm. We're hiring. We've been hiring the entire time since the pandemic. We continue to hire. We're generating a lot of excess cash. We have $1.2 million in revenue per employee, which is quite high. We're also just focused on the future. We're still executing the same plan. We're not changing. If the economy gets shaky, we don't need to pivot into something completely different. We just keep moving forward. And as you know, we've been buying back shares as well. So some of the things that we did in 2022 that we want to talk about is that we spent a lot of energy supercharging the accounting channel. and people always ask, okay, why accountants?

4:55 Why accounting firms? Why SMB accounting firms? So one thing that's important to note is even a small accounting firm is an enterprise-sized opportunity. Each firm has dozens of accountants. Each accountant has dozens of SMB clients. Each of the SMB clients has multiple employees. In some cases, a lot of employees. So when you add up all the employees managed by or in all the customers of the accounting firm managed by all the accountants, Even a small firm can be a very large revenue opportunity for us. Some things we did to help supercharge the accounting channel is we announced the Expensify CPA card with accountant-specific perks. We have assigned partner managers to the 500 largest partner firms, which is over half of all of our partner revenue, which is now overseen by a partner manager. And we've announced ExpenseCon 3, where we're bringing together 100 of the top minds in accounting.

5:46 And you may have seen our announcement that we're going to have a headline speaker, George Clooney. So we're very excited about that. The previous two ExpenseCons have been very successful for us, and we're excited for ExpenseCon 3. And to meet Mr. Clooney. Now let's talk about how we've supercharged our sales efforts. So we have scaled our account managers so that nearly all revenue is now overseen by an account manager. We've added onboarding phone support so all customers that want to talk to someone through the onboarding process can get a response within two minutes or less and be on the phone with them very quickly. Most customers did self-service, and if you wanted to call, you kind of had to be a larger customer. At this point, anyone that wants to get on the phone can get on the phone, and they can get on the phone quickly, which has been a great development for us.

6:34 We've also created an outbound SDR program. This is something that didn't exist at all, and now we've built that, so it's kind of a zero-to-one type of function, and we're working with multiple vendors built to scale that SDR program efficiently. This might be new to some people, but we're also supercharging what we call our contributor community. So we talk a lot about Expensify Chat, and it's this new platform we're building, and we're building it on a programming language called React Native. And we made the very exciting decision to open source that, which means external engineers can work on Smith, Expensify Chat. And what we've done is something very unique is that we are paying these open source contributors. Normally in open source, it's just volunteer work.

7:22 So we have, it's transformed how we work. So our internal engineers, which are incredible, incredible people, they will design a feature, break it out into little pieces, they post those pieces into Upwork, and then very quickly, within minutes, we'll have five, 10 proposals, and then our engineers then project manage all these contributors working together and they're able to ship features much more quickly, much more efficiently. And we think it's pretty unique. It's not really done by many people and certainly not in a paid manner like we're doing. So this is, we think, over the long term, going to be a very competitive advantage for us. And we currently have hundreds of React Native engineers active in our contributor community. And in 2022, we paid out over a million dollars to those engineers.

8:12 And if you're a React Native engineer listening to this, we'd love to work with you. So check it out. All right. So now let's get to 2022 and Q4 financial performance. We had a great year. In 22, we did $169.5 million in revenue. Our year-in-year revenue growth was 19%. on the Expensify card, the gross interchange was 6.8 million and the growth on the Expensify card was 118%. And just a reminder, that interchange is not included in that revenue number. We also generate a lot of cash. Our operating cash flow was 32.9 million. Our free cash flow was 26.3 million. We break out free cash flow from operating cash flow because we do hold on to some customer funds, and that's not really our money. We're just holding it, and it's basically in transit. So if you want to talk about the money that we actually generated, it's that free cash flow number, the $26.3 million.

9:07 On a GAAP basis, we had a net loss of $27 million. Now, we've talked about this before. That is primarily driven by stock-based comp, and that stock-based comp is primarily driven by a pre-IPO grant we did that went effective on the IPO. And we get questions about this because the stock-based comp is quite high. You value a grant based on the value of the stock at the day of grant. So at that day of grant, it was $42 a share. So every share that vests as we record a $42 expense. So it is significantly higher than what the stock is right now, which can make the stock-based comp maybe look higher than what you're expecting. But as we've discussed in the past, that stock-based comp is decreasing over time. If you look at the earnings release, we have a forecast on how that is decreasing over time.

9:54 Now if you take out stock-based comp, we have a non-GAAP net income of $25.3 million and adjusted EBITDA of $42.5 million, which are very healthy numbers. So we're very proud of our performance in 2022. Now let's talk about Q4. Q4 revenue was $43.5 million. Our average paid members were 779,000. Picard, we had gross interchange of $2 million with interchange growth year-on-year of 91%. We generated a lot of cash in Q4, too. It's kind of a theme with us. Our operating cash flow was $6.6 million, and our free cash flow was $6 million. In Q4, our GAAP net loss was $3.4 million.

10:42 Again, this is driven primarily by the stock-based comp, which is driven by the grant that we discussed. And for the quarter, it was about $10 million. So when you take out the stock-based comp, our non-GAAP net income is $7.1 million, and adjusted EBITDA, $11.2 million. So as you might recall, we are currently not giving guidance, but we are giving information on the month that has happened thus far. In the past, we've disclosed that, and we're disclosing it here. One thing we've discussed in the past is that we have two types of users, and we've talked about this, but I get a lot of questions on this in the calls, so I want to make sure that we all understand. We have subscription-based users who are locked in for 12 months. They pay every month for 12 months.

11:32 And then we have pay-per-use users, which are activity-based. So if they use it one month, they pay. If they don't use it the next, they don't pay. And they pay a higher price. Since the pandemic, we have seen the percentage of pay-per-use users as a percentage of all users increase substantially to about 35% of all users, which is higher than it's ever been, which has introduced a level of volatility in the revenue that we haven't seen before. and we've discussed this on the last fall. I've actually highlighted the last three Januaries on this chart in yellow and you'll see that volatility kind of show up. We usually have a good Q4 and then in January we see a drop in that and many more. So we're working on increasing the percentage of users on subscription as percentage of all users.

12:41 because that will reduce the volatility. So we started working on this push for annual subscriptions in Q4, and I'm happy to report that we've already had some signs of early success. So in Q4, new users are trending more towards annual subscriptions versus pay-per-use. In previous quarters, if you look at new users, we were adding more pay-per-use users than subscription. In Q4, we reversed that trend. So I do think that we've started to see success in our efforts, and we expect that success to continue throughout 2023. and we are increasing subscription through a number of different ways. Our sales team is now focused on subscription instead of pay-per-use. Previously, the sales team, they were just focused on getting users and we didn't really care if they were subscription or pay-per-use.

13:29 Now they're solely focused on subscription. Similarly, our account managers are also focused on converting customers with pay-per-use users to subscription, and they're prioritizing the customers that have the highest percentage of their employees on pay-per-use and working on getting those over to subscription. So the volatility is great when it goes up. Sometimes it goes down, and we would like to decrease the volatility in the revenue that we've been seeing. So the good news is that this isn't a – An impossible problem. It's very easy to solve. Movement motor subscription, we know how to do it. We have started doing it. It's showing success. So we think this volatility is a temporary issue that is easy to solve. It's just going to take some time to solve it, and we're already seeing progress.

14:18 To summarize, in 22, we had steadfast performance in uncertain times. We had strong free cash flow, and we were profitable on an adjusted EBITDA basis in free cash flow. Our paid members continue to grow. The Expensify card's up nearly 120% from last year, and we have an exciting product roadmap that opens up more use cases among our customers. Now, we'll turn it over to Anu for Q&A, but before I hand it over to her, I wanted to highlight that we are now hosting a frequently asked questions and FAQ on our Investors Relations page. We get a lot of emails from investors, institutional and retail, Schaffer to investors at Expensify.com. And a lot of them are the same questions. So we're going to just start posting those questions on that page with answers. So if you have questions for us, please email investors at Expensify.com. We will post your answers and sorry, your questions and our answers on that page.

15:14 And we'll be updating that throughout the quarter. So that's a great page to check out if you're curious about Expensify and you have questions maybe we didn't answer in this call. So Anu, if you want to kick off the Q&A. Amazing. So first up, we have Koji from Bank of America, please. Hey, guys, can you hear me okay? Can you guys hear me okay? Hey, Koji, how are you? Hey, guys. Hey, thanks for taking the questions. You know, I know you guys are not specifically guiding to 2023, but I wanted to ask you a question on margins, you know, specifically adjusted EBITDA. I mean, you finished kind of at a 25% EBITDA level, margin level. So I just, you know, is there anything to call out that would make that adjusted EBITDA margin level swing meaningfully to the up or downside from that level this year?

16:11 So our adjusted EBITDA is heavily influenced by our sales and marketing spend. And we have decreased the amount we are spending on marketing, but increased the amount we've spent on sales. But the overall level is probably going to be pretty consistent throughout the year. So I wouldn't expect a huge shift, but if there's a change, we'll definitely let everyone know. Got it. Got it. Okay, cool. And then just a second question from me, you know, thinking about the share buybacks. Could you remind us, you know, how much is left on the share buyback program from here? And if you run out of that share buyback program, are you thinking about maybe potentially expanding it or introducing a new one? Thanks, guys. Great question. So we did about – we did 10, and then we did an additional, I think, two. So we're at 12. So we have about $38 million out of that $50 million authorized.

17:05 And – The idea was just to authorize enough shares for a year or two, three, and then when we use that up, make another evaluation. So we do intend to use that, and I have nothing to announce now, but when we use that, we'll let you know. If we're reauthorizing more, I mean, at this point, I expect that we would, but we will be sure to let you know. Got it. Thanks, guys. Thanks for taking the questions. Thank you. Thank you. Next up, we have Raquel from JP Morgan, please. Hey, Raquel, are you there?

17:59 Uh-oh. Okay, we'll circle back to her. Let's go to George at Citi. Hey, George. Okay, hopefully it's not a technical glitch, but let's try Mauro at Piper Sandler. There you go. Awesome. So I just have a couple of questions. First one is around the progress getting customers to go from pay-per-use to subscription.

18:45 Have you seen any pushback from customers on that as you've sort of ramped up efforts to get that shift to happen? And then the second thing is, is there a target mix of paper use that you're thinking about either for 2023 or for the longer term? And the reason I ask that is because I imagine you'd still want to take advantage of the potential upside you could see from paper use once customer activity does improve. Yeah, great, great questions. So, no, we don't really see a lot of pushback. Actually, what we find is most customers didn't realize that they had so much pay-per-use and they're happy to increase the subscription. It's more just kind of letting them know. Expensify is not very expensive and it's no one's job to micromanage your Expensify bill. So a lot of times people, when they sign up, let's say they do 50 subscription and then a year or two later, maybe they have another 50 in pay-per-use and they just haven't thought about it since they originally signed up.

19:43 And there hasn't been a lot of pay... A lot of pushback. And in terms of an ideal mix, I think that's pretty hard to say. Historically, it's been around 20%. So I think that's kind of where we're initially shooting for. But you're absolutely right that we love having the pay-per-use because if a customer wants to grow super fast and shoot up or they want the flexibility, that's definitely an option for them. We never want to get in their way or create friction. So we do like having the pay-per-use, but we want to... obviously have as many subscriptions as we can. So I think it got a little bit out of balance, and we're just kind of gently pushing it back into balance. Okay, got it. And then just one last thing from me. Can you remind us what your industry exposure looks like today, particularly as it relates to companies in the software vertical? Thanks.

20:35 Sir, can you say the first part of your question again? It was a little quiet. Yeah, so just trying to get a reminder on what your industry exposure looks like, maybe as a percentage of revenue. Great. So we have an extremely diversified customer base. We have no customer that represents even 1% of revenue. We are certainly very popular in some industries, technology, media, nonprofits, stuff like that. But I think different from some other and many more. I'd say we're very well diversified. There are some, I wouldn't say there's one major industry that we make a lot of revenue from.

21:42 Cool, going to the next person. Daniel from BMO, please. Hey, good evening, everybody. How you doing? Hey, how's it going? I'm great. Thanks for taking the questions. So I want to go back to the pay per user comment, the 35% of the customer base that's pay per use. If you track those pay per use customers over time, what percentage of them actually pay you more than their subscription fee would be if they convert it? So I guess I'm just understanding, you want to understand like how many of these are like one-time users or how many have been on the platform for a long time and just spend and spend and spend more so than they would have on the subscriptions. Okay, yeah, that's a great question. So the way the math works out, so pay-per-use actually is twice the rate of subscription, or said another way, you get a 50% discount for going on subscription versus pay-per-use.

22:38 So you're right. If someone is active on paper use 12 months out of the year, they end up paying us more. But what we see is that they're actually – the break-even point is six months, and we see that they're active in general less than six months. So if I had a button right now that I could push that would convert all paper use to subscription, I would definitely push that because that represents more annual revenue for us. So we would prefer to have them on subscription. I don't think – To go back to your previous question, I don't think that goal is to get it to 0%. Customers do like the flexibility that it provides, but we think it's probably too high right now. And we're thinking 20% is probably a better place for us to be in terms of revenue volatility and all that. And part of the dynamic here is also what Brian touched on earlier.

23:26 Because the number, our actual price is quite low, companies, as they keep growing, they're don't really look at their bill or review their bill or review their total spend because it's actually materially not significant to their spend overall. So what happens is somebody like, I don't know, just throw out a number like Instagram as a company started off really small, is paying us, never really increases their subscription size, continues on and on and on, grow into a much bigger company. And what you're trying to prevent is that one day they open up their bill and think that they're paying expense by too much. Like we want to take care of them. So if it looks like they're just actually committed users in that they stick around for more than six months and it would work out better for the company to go to annual, it benefits both Expensify and the company to make them go to annual. And that's really how we approach it.

24:20 It's as much a retention tool as it improves our financial volatility. Great point. Great. That's really helpful. And then You mentioned a little bit about the importance of freelancers in the workflow. Just maybe could you expand a little bit on that? I've noticed maybe in terms of per job expense, it feels like that might be going up. Is that because it's getting harder to attract freelancers or because the skill set you need is higher? Just help us think about what that spending could look like in the year ahead. you know, given the importance of both getting the chat out but also doing it in this cost-efficient manner.

25:08 So, go ahead, Anu. Sorry, I was just wondering, when you say the cost per job is going up, like, what do you mean for us? Like, something in our financial statement? Yeah, I mean, I just, so, like, I track the jobs that you post and it seems like, you know, it feels like sometimes, you know, in the last couple months, the amount that you have to, like, post the job for seems like it's higher So what is driving that and how concerning is that from a cost perspective for you? It's a great question. Actually, that's not of concern at all, but I'll tell you why. The reason we increase the amount that we pay for a job is if a job has been sitting out there for a certain period of time. And I think Ryan was talking about this when he was presenting this specific use case. It's like when you post a job, there is so much hungry talent out there.

25:57 that I have literally posted a job and I haven't even moved off of the page and I see four proposals come in. So there's a lot of supply that is soaking up the demand. So when a job sits out there with no proposals, it's not because there is no engineer out there that can like sort of bandwidth issue. It's more that the job itself is actually too complicated. So the vast majority of people are like, I don't know how to fix this. So they avoid that job and go to other jobs. So When we increase the price, it's because it's sitting out there and it sits out there because it is actually a more complicated bugger, a more complicated task. So the increase really just like kind of brings us on par with now we need a type of engineer that has more experience, more talent. And so it kind of just pays for the time and it scales nicely.

26:45 So we only increase it when that happens. It sits out there for a while and then it keeps on doing that. At some point, increasing it doesn't make any sense and we pull it internally. and we use that as a gauge, sort of like we do the first, second responders. Like if the question is tougher, it goes to the higher skilled person, think of it similarly. The total check, so to speak, that we got for Upwork is still so small that even from an audit perspective, it's just insignificant. So there's a lot of room to grow in that space. It's basically like price discovery, right? Like if no one's willing to do it for a thousand bucks, but we do at 10,000. Some engineers don't want to, you know, they have, they value their own time at certain rates and if it's very hard, you have to move it up and we don't know exactly what that is so this is a price discovery mechanism.

27:35 Sort of like surging or something, yeah. Yeah. Gotcha. And then maybe just one last one on the card. Can you remind us how much you spent out in travel and rewards this quarter and just in the update on the transition with regards to Marketta, sort of the question you get every quarter. Thanks. Thank you. Of course. So I don't think that we release the specific reward dollars we paid, but all I can say qualitatively is our cashback is still not material to the interchange that we're bringing in. If we do break our cashback, it will be in the 10Q, but I don't think we do. Okay. Yeah. Oh, it is.

28:20 I just don't remember off the top of my head. But it is still the same structure. It's 1% if you spend $25,000 at least. It's 2% if you spend $250,000. And the vast majority don't spend $250,000. So it's kind of tiered to make it aspirational to put all of your spend on the card, which is the real challenge because it's a big behavioral change. In terms of moving it over to revenue, I think we've been kind of reporting on the progress of that project We've got all of the contracts nailed down. I think we are probably there or 99% there in terms of getting the accounting treatment nailed down. So that was the bulk of the challenge. Now we're in implementation mode. What we'll do next is launch it on ourselves, so to speak, like move all of the Expensify employees onto the new program, test it, and then start the transition.

29:14 And we have, you know, without talking about our future plans too much. We have exciting ways to incentivize our existing cardholders to move over to the new program because that's really what we want. We want to be able to migrate everyone over as fast as possible and sunset the old program and more to come on that in the following quarters. Cashback for the year is $2.8 million. Awesome. Great. Thank you both. Yeah, that's actually, it's contra revenue, so it shows up that way. The anomalies continue. Thank you both. Thank you. Good to see you. Cool. Now I have to see who else is left. Next up, we have Eric from Lake Street.

30:01 Eric. Hey, guys. Got a couple of questions here. I know You're not giving a revenue guidance anymore, but it is to me in Q4, we kind of, this is a milestone because the revenue growth was only 8% and you guys have historically been a double digit grower. How should an investor view the, you know, just the 2023 outlook? Do you guys view yourselves as, and given the current volatility for SMB, do you view yourselves as a double digit grower? Yes, I think so. We're going to continue to grow. I think it's – I mean, if we go into recession, recession is not good for anyone, but we – I think we're better positioned than most in that we are profitable, we're cash flow positive, and we don't need to fundamentally change anything about our business model.

30:57 We are layering on sales, but anything that will be helpful has been – The SDRs are very new, but they're really starting to come online. So we'll start to see hopefully some greater results from that in 23. So, yeah, I think that we are well positioned going into the next year. And I understand you haven't stepped away from your long term growth outlook, but obviously the near term is a different different playbook. Yeah. Okay. The The interchange fees, I've heard you say in the past that in 2023, you're talking about interchange fees of around $2.25 million, and then that's stepping up to around $5.25 million in 2024. Are those still good numbers?

31:44 So that's... You're asking for guidance. We don't give guidance. But I'd say the card is growing very well, obviously. So we don't expect that to dramatically slow down. It's a big focus for us. And all of our sales team members are pitching the card alongside the subscription. So we think it's going to continue to perform. Okay. And then you've made a big investment in account management. I think at the end of Q3, you had 41% of customers have been kind of touched by account management. And in today's press release, you said substantially all. As you are reaching out to these accounts, is the account management program being tweaked?

32:34 Because I got to imagine we're getting into Much smaller account sizes as we get down into the remainder of the install base. The main goal of the account management program and really the job of the account manager is to be more proactive in terms of supporting the customer. What I mean by that is a lot of the time churn doesn't happen because the price is too high. It doesn't happen because they are looking for some feature that we are missing. It's because they have implemented Expensify on their end in some way that is too janky. And so it's not quite working for them. And they think, therefore, the product is not working for them. And they start looking for other alternatives. So what we're trying to do is use our account managers to sort of get in there early, make sure the setup is actually working for them.

33:24 And if it isn't, like, how can we help them set it up so they never need to think about their expenses ever? because once you do that, no price is too high to pay and then it's smooth sailing and they're never going to take a sales call from a ramp or a break. So that's really the idea. And I think it equally lends itself to 10% company, but also 500% company like a good setup is what is the primary goal of account managers. But then other goals are things like looking at their bill, making sure that if they have high pay per use, then making them cost optimize their bills so they can go to committed seats to the extent that works for their business. Generally just taking care of the customers so they feel that Expansify is in their corner.

34:09 That's really it. I think you've used the conversion rate of like when you touch a customer, they convert to subscription at 2x the control group. Is that still a good number? That was what the early results that we saw. That's a good question, and maybe something we can post on our FAQ. I don't know the exact – that was true at one point. I don't know if it's true right now. I know that we have been successful in reversing the trend, so it's some good rate, but we can actually probably follow up with you. But to put maybe a finer point on what Anu just said, a lot of our customers self-service, and small businesses grow quickly. Their needs change, so when they'll self-service – Smith, and so on, with some sort of setup that works for them.

34:55 Their needs change, and then they don't go back and kind of update their setup. So that's when we say, when we say janky, what she means is basically their needs have changed and they don't update it. So the account managers are basically saying, hey, is everything still working for you? Is anything frustrating you? And let's make sure you have the right configuration that works for you and your new needs. They just want to clarify a little bit. That makes sense. Like a 10-person company grows to 100, and they never look again at how they set it up. It just doesn't work anymore, but no one told them to think about that. That's really the opportunity. You go from no approvals to approvals to, like, a multi-level approval, like that type of stuff, yeah. Got it. Thanks for taking the questions. Thank you. And I think that's it.

35:43 Great. Thank you all for joining us. We love doing these. We love talking to you. If you have any questions, please follow up with us at InvestorsExpense.com. We're going to be posting your questions, like I said, on our Investors Relations page. Maybe your question will get featured on there. Thank you all, and we'll see you next quarter. Bye, everyone.