Expensify, Inc. (NASDAQ:EXFY) Q4 2023 Earnings Call Transcript

Expensify, Inc. (NASDAQ:EXFY) Q4 2023 Earnings Call Transcript February 24, 2024

Expensify, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator:

David Barrett: Welcome, welcome, welcome to the Q4 2023 earnings for Expensify. I’m David Barrett, CEO. We have Ryan Schaffer, our Chief Financial Officer. Let me turn it over to Nikki for legal Es.

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

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

Ryan Schaffer: Excellent. Thank you very much. All right. Let’s get started. First, let’s go over the fiscal 2023 financial fiscal year 2023 financials. We had revenue of $150.7 million. Our average paid members were $732,000 and we had a net interchange of $11.1 million. Our operating cash flow was $1.6 million. Our free cash flow was $600,000. The difference between operating cash flow and free cash flow is — we take out the customer funds, which can vary throughout the month, so the timing can throw that off a little bit. Our GAAP net loss was $41.7 million. Our non-GAAP net loss was $500,000, and our adjusted EBITDA was $13.2 million. Now let’s talk about Q4. We had $35.2 million in revenue. Our average paid members were $719,000 and we had $3.1 million in net interchange.

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Q&A Session

Cash used in operations was $500,000. Free cash flow was negative $3.6 million, net loss was $7.5 million. Non-GAAP net income was $3.1 million and adjusted EBITDA was $5.9 million. Obviously, these numbers are an improvement over Q3. As we discussed last quarter, I mentioned that we’re going to be implementing some cost-cutting measures. We did implement those, and we saw a pretty positive turnaround in terms of our financial metrics. Our operating cash flow improved by $4.9 million, which is a 90.2% increase quarter-over-quarter. Our free cash flow improved by $3.5 million, which is a 49.3% increase quarter-over-quarter. Our net loss improved by $9.5 million, which is a 55.9% increase quarter-over-quarter, and our non-GAAP net income improved by $9.8 million which is 146.3% increase quarter-over-quarter.

Our adjusted EBITDA improved by $9.4 million, which is a 268.6% increase quarter-over-quarter. So it’s a pretty stark difference from the third quarter to fourth quarter. So you can see the drastic impact in those cost-cutting expenditures that we did. As such, we’re going to be initiating a full year free cash flow guidance to provide a more clear picture on the cash impact from these recent cost reductions. That’s something that the investor community requested of us, and we’re going to be providing that. So our fiscal year 2023 operating cash flow was $1.6 million, and our free cash flow for 2023 was $0.6 million. In 2024, we’re projecting free cash flow between $10 million and $12 million, which is obviously substantially higher than we did in 2023.

We always show paid members for the first month of the quarter. So in Q1, in January, we saw payers of $690,000. We’ve highlighted January is usually a bit soft on users. We’ve highlighted previous Januarys in PINK. And as you can see, they’re usually a little bit down and this January is the same. I want to give a very exciting update on the expensify by card. As I mentioned earlier, the side card grew 63% to $11.1 million year-over-year. We’ve also added a new benefit to the card, our accounting partners who onboard their clients to the expensify by card now receive 50 basis points of revenue share for the clients. We’ve seen a lot of enthusiasm for the expensify card in the accounting channel. And now we have a little bit larger incentive for them to really spread the good word of the expensify card to the customers.

We also and this is the most exciting part — we’ve been talking about this for a while. I get questions on it every single quarter. We have established our new card program, which earns more interchange per transaction. All existing customers are expected to be transitioned by the end of the year 2024, and all new big and site card customers are being put on this new card program. That’s very exciting because it’s an improvement in accounting treatment. So previously, interchange was a contra expense in cost of revenue and not revenue, which is confusing for everyone. This is now more straightforward. It’s been put on the balance sheet in the manner that you would expect. And interchange going forward under the new program will be categories as revenue instead of a contra expense and cost of revenue.

And on top of that, we’re also earning about 20% more interchange fees. So if our same customers we didn’t grow at all and we didn’t have any increase in spend, the same transactions that we had in 2023 under the new program, that will be 20% higher. And with that, I will hand it over to David.

David Barrett: Okay. So as Ryan explained, 2023 was a pretty good year. In fact, I would say it was a great year for the things that are under our control, pretty much everything under our control is either stable or improved, but there was one glaring exception. So this chart — this complicated waterfall chart, let me walk you through it. And so what we can see here is kind of a breakdown of the major reasons that we gained and lost paid users over the course of the past couple of years. In 2022, we added 42,000 paid seats from new customers. And in 2023, we added about 43,000. So about the same between 2022 and 2023. Likewise, in the two years, in ’22, we lost about 62,000 paid seats to churn, basically customers leaving the platform, going out of business, whatever it might be.

And we lost about 62,000 in 2023 as well. So new customer acquisition for seats and also churn seats were basically the same year-on-year, but there was a big difference when it comes to customer expansion. You can see in 2022, our existing customers added about 85,000 paid seats. And that’s been a huge tailwind in our business model is that we’ve grown basically when our customers have grown. 2023 is kind of a brutal year for our customers. As you can see, these same customers lost 42,000 seats. So basically, in ’22, they added 42,000 — or they added 85,000 seats in ’23, they lost 42,000 seats. The net of that is over the past couple of years, we added about 4,000 active seats. But you can see as kind of a rollercoaster ride to get there.

So our business, the actual fundamentals of the business itself, do customer acquisition, customer churn and so forth, actually quite stable. It’s just the expansion and contraction of our existing customers themselves that hired people laid out on people wherever it might be. That’s what accounts for the huge swing basically in the paid seats themselves. So the year itself was actually we think, pretty good. It was a difficult year for our customers, and that reflects through basically our results. And so if you think about how the year self is spent, it was really kind of a year of planting and 2024 is a year of harvesting, if you will. And one of the things we really plan to invest in is basically expanding our SEO and the keywords themselves.

If you can think of it in terms of the top 100 SEO — top 100 search results for each keyword, we’ve really expanded kind of the broad breadth of the number of keywords that we’re going after because if you want to get in the top 10, you got to stop start in the top 100. And so you can see that we’ve had really, really sizable gains in the number of keywords that actually we rank for at all. Now if you dig into the keywords that were in actually the first page, that’s where we do even better. It’s like a really strong growth and actually the keywords in the first page. And so our SEO investment, which we’ve been strong in the past, so it’s a big sort of machine to improve, but it’s going to move proven pretty quick and really happy with that.

And so the results there is we’ve seen actually our SEO traffic itself really just increased as well. Again, we’ve always been strong from an SEO perspective. And so it’s sort of a big freighter to churn, but it’s been really improved, and so that’s been great. And so in 2023, we think we’ve really improved our SEO game and that’s, I think, positioned us really well for continued growth in 2024. Now if you talk about some of the functionality that we launched last year as well. What of my favorites has got global reimbursement. So as you recall, we have customers all over the world, especially some of our large multinational companies with entities in multiple tritictions. So one of the most common features we’ve had from our large enterprise customers is global reimbursement capability.

And so this is something that we launched last year, really have traction overall. You can see it’s been growing exponentially over since launch. Even in the past couple of months, we’ve seen a 35% increase in the number of enterprise customers taking up global reimbursement. So this has been a great sort of a feature that our customers have asked for a long time, and we’re really happy to have delivered. Also excited to talk about expensify chat. I know I’ve been talking about this forever. So we’re really, really happy with the traction we’ve had in the past couple of years here. Also excited to talk about expense by chat. I know I’ve been talking about this forever. So we’re really, really happy with the traction we’ve had in the past couple of years here.

And we can see that basically chat has been around for a while, and it’s been growing very quickly, especially in the past couple of months here, where we’ve seen that actually 7,000 distinct companies have started using chat internally. And so that’s just within the past year, it increased over 250% increase number of customers that are choosing to use expensify chat inside their company. And that’s actually a huge test of physical. This is — right now, it’s actually a different app. It’s a different website. You have to go to do expensify to get it. And so this is showing existing customers are going to a new website to use this new functionality. Now recall, right now, Chat is a free feature. And so we’re attracting the seats to make sure that we can charge for it in the future.

But right now, it’s actually just a free add-on to existing customers, but we’re really happy that customers are finding value in it, so much so they’re going through different apps of experience it. And so we think that all of this leads into a great future for a new expense pie. With that as time, you might recall that new expensify it’s a completely open source community that is contributing towards it. And that open source community has grown staggeringly over the past year. Within the past year, we’ve gotten over 100% or contributors to the open source repo itself into that rate. And so we’re actually having really strong growth in the community itself. — and which is building — it’s basically been a huge force multiplier to our engineering team to be able to pull on to not just random contributors around the world but true extra contributors from different agencies and so forth.

We’ve gone from being basically a small user of this reactive technology to probably the largest reactive contributor outside of Facebook beta. And so it’s actually been a really important year for us because this is a super powerful technology for the future, and we’ve established ourselves as the leading name in it. So with that in mind, I’d like to talk a little bit about the new Expensify itself. And so new Expensify, it’s a new technology to solve some old products. Now our strategy hasn’t really changed. It’s really about just doubling down and improving on the strategy that we’ve always had. And to kind of reiterate that strategy, Step one is we’re going to capture a huge untapped market. And so we think 99% of the global opportunity is really in the VSB, SMB and no one’s going after that right now.

We think that we can build a platform that can tap this untapped market and basically grow uncontested. We think the only way that can happen, though, is with the bottom-up viral strategy, where the customers themselves promote Expensify just by the virtue of using it, and then we can monetize that primarily through high-margin subscriptions. I tend break in — to dig in a little bit more to kind of talk about that. Step one, when we talk about the VSB, it really is a huge industry. We’re talking over 1 billion potential employees around the world in companies under 250 employees. It is a huge market. It is so much bigger than the current market, and it’s almost entirely untapped. Just digging into the U.S. alone, like 99.9% of all U.S. businesses are small businesses.

Again, this is not just a global phenomenon. It’s a local phenomenon in the United States. It’s a huge, huge opportunity. And it’s not like no one’s known about it. Thus no one has actually taken a business model that can actually incredibly go out and get it. And so that business model works through viral lead generation. And it’s not a new business model. Others have done it as well. So I’d say first is chat functionality is inherently viral. You can’t talk to yourselves. To use the product itself, you have to go talk to someone else. What’s at got to 1 billion users with 73 employees. We think the chat’s an incredibly viral use case, and that’s basically what the Internet was primarily built on. Likewise, payments, same thing. You can’t pay yourself.

You got to pay someone else. Payments are incredibly valuable, is godly viral. Venmo got to hundreds of millions of users because of this viral dynamic overall. And third, we’d say document management is inherently a viral function itself. Dropbox sort of introduced the entire consumerization of IT. The reciprocal reward program is a master class in how to grow viral. And so in case all of these document management and all of these, the three major use cases or chat, payment documents, that really is expense management. Expense management already exists in the intersection of those three. So it’s not that extensive is pushing into each one of these. Expensify has always done all of these because they’re very active of submitting the entry port to someone and you’re talking with your admin about the expenses, that is a chat application.

Likewise, it’s obviously a payment application because you’re getting paid for your centers. But it’s also a document sharing application. I mean the most obvious documents are receipts, which was millions and millions of but also there’s a bunch of other supporting documentation that goes into it as well. And so chat payments and documents, that’s really what expense management is, and we think that actually exist in sort of the overlap of these three incredibly viral use cases. And so when we think about building on top of that for a new Expensify, it’s really just doubling down on what these core strengths are and pushing a little bit into each of these different areas. Now we’re not going to dislodge or these players anytime soon. But we think we can take a bite out of the market.

More importantly, we can take the bite. It’s right next to ours. Wherever we see the intersection of sort of chat payments and document we think there’s a real opportunity to grow from there and no better place in the world for that is the accounting community because that’s what they do all day every day. In a particular accounting firm, sure, many of them are processing expense reports, but the bulk of the accounting firm is actually doing tax and compliance. And that’s just basically a ton of talking, a ton of Excel spreadsheet. So kind of the interaction around — between organizations, not just within their own. And so we actually think the accounting community is a prime opportunity for this key intersection, and we think new Expensify can be targeted directly to them.

So if we talk about basically what new Expensify is. Now again, we’ve been talking about it for a long time. And at its core, it’s fundamentally a chat system. As you can see, it deals very much like what’s apps, whatever it might be. You got your chats on the left, who you’re going to talk to you a major conversation, you can do threads, you can react. And basically, it works a lot like any the chat systems. But it’s kind of a few tricks out of the hood. One is it’s a universal chat system. You can just basically mention not just people in your workspace, you can mention any e-mail address or phone number and we’ll hold them direct into that chat room. And so think of like Slack, except without all that garbage about dealing with different workspaces and things like this.

More it’s like discord but without all the weird gamer stuff around it. Or it’s basically — it’s a more business-oriented, super flexible global chat solution designs where you can — anyone that has an e-mail address or a phone number, you can talk with them. And likewise, they don’t even have to use it yet. If you choose to talk to someone with the Expensify app via e-mail or text messaging, we will just e-mail them or text them. And if they respond to the email attacks, we’ll show that tool. So it’s a tool that you can choose to adopt as an individual, and you can use with 100% of people who have e-mail addresses and phone numbers and then we will communicate with them, however, is convenient for them. So it’s a very powerful chat foundation.

But it’s also, of course, a payments tool. Now it’s still basically the same chat experience. You can still talk to people and things like this. But a major part of talking to people is actually to share documents with them, share receipts with them, share payments requests and so forth. And then when you do that, they can click in to basically pay the payments. They can pull up their traditional sort of expense management sort of money page, we call it, where you can search by a reports and expense and things like this. So it has all the sort of same power that we’ve built up over the past 15 years doing expense management on a global basis. But presented to the chat centric context where every single data object can we talked about. So it’s not just about paying people.

And it’s not just about talking to people after the expense is done. It’s also trying to capture some of the conversation that led up to that expense overall. And so it’s — yes, it’s a chat tool. Yes, it’s a payment tool, but it’s also a document management tool. Because again, this isn’t with new. Expense management has always been about document management. And so now we’re fiscally bringing that more to the forefront, especially when you start thinking about accounting firms, which are doing a lot of document heavy task-based functionality. If you’re closing the books on a monthly basis, it means every month, you’re spinning up a whole bunch of conversations about each basically category and ledger different sort of tasks the ed to close out and so forth.

Now historically, you would use e-mail, Excel, maybe some sort of an issue attracting system, whatever it is. In our case, you can do all of that on the platform. You can take everything from the payments to the reconciliation and all of the discussions in between on the same platform. We just basically upload the files themselves and then we will store them permanently and securely inside of our cloud architecture. And so again, it’s a universal system, but that means it also becomes a universal document sharing system. If you need to chat with or see a document with anyone in the world, the e-mail text now we become a tool to do that. So these are not new use cases. As you can see, chat payment document management, these are not distinct experiences.