Expensify, Inc. (NASDAQ:EXFY) Q3 2023 Earnings Call Transcript

Expensify, Inc. (NASDAQ:EXFY) Q3 2023 Earnings Call Transcript November 8, 2023

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

Operator: Over to the disclaimers. Before we begin, please note that all the information presented on today’s call is unaudited. And during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in those forward-looking statements. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. Please refer to today’s press release and our filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Please also note that on today’s call, management will refer to certain non-GAAP financial measures. While we believe these non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release or the investor presentation for a reconciliation of these non-GAAP financial measurements to their most comparable GAAP measures. Back to you.

Anu Muralidharan : Thank you. All right. So I want to kick this off with a reminder on how our business model works and what our growth strategies are. So first of all, of course, the very simple, acquisition of new customers, new companies that adopt Expensify in order to manage expenses and reimburse employees on our platform. Then, and kind of our biggest growth generator, is expansion of users, expansion of company size, maybe deploying to other subsidiaries, maybe of existing customers on the platform. And throughout the history of Expensify, this usage expansion among existing customers has been one of our primary growth generators. Then there’s increasing Expensify card adoption, but more generally cross-selling of our various back-office features to the companies that increases both their usage but also generates all manner of other revenue streams for us, of which interchange is on.

Fourth is adding new viral loops and this is really about engaging all of those free users, all the freemium customers on the platform that may not yet have the need for a business expense management software or may not have reached that activation point where they’ve decided to adopt business expansion — business expense software, but are using the product for whatever viral use case there might be, such as, maybe paying their friends or family or sending invoices to their few customers or whatnot. Like the point of this growth generator is really that it engages them way before they become ready to purchase a business expense product. And so when we get ready to make a decision, we are top of mind. And last but not the least, of course, tapping into international markets.

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Q&A Session

Most of the English-speaking world is fair game for the platform, so long as we have tax capabilities sort of baked in. And of all of our international markets, U.K., Europe, Canada and Australia are pretty big for us. And so leaning into those markets more is also a pretty solid growth generator. Now, I wanted to remind you what our — why should you believe in Expensify. What are the 3 key strategies that contribute to our long-term success? One is the market is enormous. Most of it is very untapped. So, it’s greenfield, and it’s there for the taking. Two is not any business model can succeed in this sort of market where most of the volume is at the bottom of the market. And what I mean by that is, most of the volume in terms of employees work at very small companies between one employee to maybe 50 or even 100.

And a top-down sales-driven strategy doesn’t really work in that segment of the market, because you just don’t have that return on investment on each deal. And so — and also a card-oriented strategy doesn’t work quite as well at the very bottom of the market, because there’s underwriting challenges. So you need a subscription-based model, which is able to engage users, end users even before they are ready to make a decision and then you need to enable them to sell Expensify into their companies. That bottom-up subscription-based acquisition model is the one that is primed for success. And those are really our 3 key strategies, and we talk about that all the time. But this time around, I want to show you some real data because I want to show and not tell.

So this is the latest available census data on just small business as a market. And I, for the sake of this visual, use small business is any company with between one to 250 employees or zero, one being the business owner, to 250 employees. And you can see here the companies with 2 to 10 employees and then the companies with 11 to 50 employees employ the largest chunk of the market. So most of the end users actually worked at really small companies. And if you even take up to 100, like that’s basically almost 70% of the pie. Why is this important? Because when you have a very small employee base. And that generally seems to be correlated with the annual revenue that these firms make because, of course, when you’re smaller, you’re making less revenue and as you grow, you scale up and you increase headcount.

So here, I want to show you single employee firms, what do they make on average a year per firm, $200,000; firms with 2 to 10, $450,000 so on and so forth. And I’m then extrapolating to, if that’s the revenue this firm made, then can we reliably underwrite them for the card. And part of the challenge isn’t that they are making less money and so they are default less, that’s just one part of it. The bigger part of the problem is there’s not reliable data sources out there that can help you even identify whether this specific company, at this size, is it making positive revenue, are they paying their bills? It’s really challenging to do that. You can use their bank data, but that’s, of course, limited in terms of just having the last 90 days of volume.

You just can’t reliably underwrite them and keep your default risk low. So a card-driven model kind of has to start at the 50-plus employee base segment of the market, but you have an insane amount of employees and employing volume at the lower levels. So you need something different in order to tap into that segment of the market. And that’s really a subscription-driven, bottom-up acquisition model. Now, this is sort of a peek into what sign-up volume looks like on Expensify in a way that we’ve never presented to you before. To the very left, you have the total sign ups. And this is — I used weekly sign up data to get this chart, but it’s a very consistent trend. Any week you look, month, year, this has been a very consistent trend on Expensify for a really long time.

So the chart to — the bar to the very left is totally sign ups. And then I’ve broke those sign ups down by public e-mails, because generally when someone signs up with a public e-mail, they’re looking to use Expensify for themselves. They’re not looking for a business use case. That is the vast majority of sign ups. Then I took private e-mails that couldn’t be enriched on Clearbit. And that’s, again, as I was talking about in the previous slide, with smaller companies and their underwriting potential it’s difficult to enrich VSBs because it’s just not so much reliable public data out there about them. So, if you bucket the sign ups into public e-mails and private emails that couldn’t be enriched, you could make the assumption — educated guess, that all the public e-mails are likely individuals and all the unenrichable private e-mails are likely very small business.

That then leaves 15% of sign ups that are actually private e-mails that could be enriched, that are decision makers that are looking to adopt Expensify for business. What’s insane about this is, this has always been the trend. All of the growth that we’ve ever seen has come from that 15% of sign ups, creating a free trial and converting to a paid product. This is actually exciting news, because that 76% and 9%, we do try to engage them on the existing products with individual use cases. But the existing product isn’t perfectly optimized for individual use cases, although they do have them. It’s much more optimized as a business expense product for a decision-maker to adopt, onboard and deploy the product to their company. So, we have a large majority of inbound interest that we are very ineffectively engaging today on the existing product.

Now what do we need to do to capitalize on this momentum? And I want to talk about this in this format of how does the user go through this journey as a free customer — as a freemium customer, if you will. So first, they discover the product, then they sign up. These 2 things, we are doing really well. Like we have a lot of brand cache. We have done a very good job of telling end-users you can adopt the product. Your company does not need to approve it. You can use it to scan receipts and organize yourself. And so that’s working. And we’ve done it for 10-plus years now and it continues to pay off. That’s a huge investment that’s already returning dividends. But we need to activate them. And what does activate mean? Activation is that moment where a free user has an aha moment, where they use the product to do something, it works, it makes their life easier and now they’re on the hook.

That needs to improve. While we do, do that, which is why we still see such enormous inbound interest on the existing product. Like I said, it’s not optimized for it. So discovering the features that create that aha moment is just not as intuitive, not has smooth as it could be. And then once they have the aha moment and they create a free trial, we need to convert. And once we convert, we need to actually scale their usage. Both of those also we’ve traditionally done really well, we continue to do really well. Our free trial to paid adoption conversion metrics are kind of best-in-class for SaaS free trial products, free trial based adoption products. And so we continue to improve that. And we’ve talked a lot with you about our onboarding specialists and how we are increasing visibility to onboarding specialists when you create a free trial.

So we want to keep improving that number, the percentage of free trial to paid adoption, and we already have the infrastructure to do that. That’s a project that’s well underway. And then scaling is a matter of retaining your customers. Because ultimately, you don’t decide when they add seats, because that’s for their business to decide when they hire more employees. But 2 ways that we could scale better, which we are working on. One is retain those customers. So when the economy picks back up and they start hiring, they automatically start growing on our platform. But two, is create use cases for the company that actually makes more of their employees active, and that’s the intention behind having a collaboration chat platform that the company can adopt, so they don’t need other app in order to collaborate across the company with their employees.

Introducing things like invoicing bill pay and payroll, which activates more of the company and scale their usage on Expensify and allows us to grow. So for the rest of this presentation, I want to talk a little bit about the activation step. And I want to show you how we do that better with our new product, Expensify 2.0, which we’ve been teasing for a long time. It’s been a long time coming, but we are kind of at the cusp of launching it to real users, and we have a lot of activation we did at conferences this year that are starting to pay off. So I want to talk a little bit more about that, and I want to continue the trend of showing, but not telling. So without further ado, I’m going to show you a little video that gives you sneak peek into the product that is very nearly ready for launch.

[Audio/Video Presentation]