Expensify Inc

NASDAQ:EXFY

Earnings Call Analysis

Expensify Shows Growth in Revenue and Cash Flow Amidst Market Challenges

In Q3, Expensify reported revenue of $35.4 million, marking a 6.3% quarter-over-quarter increase, though down 3% year-over-year. Average paid members remained stable at 684,000, a 5% decrease from last year. Notably, interchange from the Expensify Card surged 48% year-over-year to $4.6 million. The company achieved free cash flow of $6.7 million, leading to an updated guidance of $19 million to $20 million for the year. The new Expensify platform is gaining traction, with 94% of card spend migrated to it, expected to enhance future revenue growth, contributing to the goal of 100% automation in expense management.

Revenue Growth Amid Challenges

In Q3, the company reported total revenue of $35.4 million, marking a 6.3% increase from the previous quarter. However, it experienced a 3% decline year-over-year, reflecting ongoing challenges within the business. Despite these challenges, management is optimistic, anticipating a rebound in future quarters supported by the new Expensify platform, which is expected to enhance revenue growth.

Interchange Revenue Surge

A significant bright spot in Q3 was the interchange revenue derived from the Expensify Card, which reached $4.6 million. This represents an impressive 48% increase year-over-year. The strong performance of the new card program has driven a higher interchange take rate, which is expected to contribute positively to future revenue growth.

Improved Cash Flow and Profitability

The company achieved free cash flow of $6.7 million for Q3, with operating cash flow standing at $3.7 million. A net loss of $2.2 million was reported, while non-GAAP net income was $5.4 million, reflecting improvements in profitability. The adjusted EBITDA also showed positive performance, coming in at $9.7 million. Management highlighted that these gains stem from a higher interchange take rate and ongoing operational efficiency efforts.

Increased Free Cash Flow Guidance

The company raised its full-year free cash flow guidance to a range of $19 million to $20 million, up from last quarter's estimate of $15 million to $16 million. This upward revision reflects confidence in stable cash generation and operational improvements observed in recent quarters.

Membership Trends and User Migration

Average paid membership remained flat at 684,000 quarter-over-quarter, but this represents a 5% decrease compared to the same period last year. In a positive development, October’s paid active users saw a slight uptick to 693,000. The management aims for a complete migration of card spend (currently at 94%) to the new program by year-end 2024, which could bolster future membership growth.

Strategic Growth Initiatives

Management discussed the strategy behind the New Expensify platform, designed to automate the traditionally cumbersome areas of expense management. The chat-centric design aims to streamline information gathering and enhance user interaction, planning to pave the way for 100% automated expense management. Initial responses to this new platform are promising, with early user feedback encouraging.

Optimism for Q4 and Beyond

Looking forward, the management expressed optimism for Q4, driven by stabilization in existing customer spend and increasing engagement with the New Expensify platform. The positive trend in paid member growth reflects an expected rebound as more customers adapt to the new features.

Use of Capital and Share Buybacks

The company completed a share buyback of 646,000 shares at a price of $234 each during Q3, highlighting its commitment to return value to shareholders. Management signaled a more bullish outlook for future buybacks, dependent on continued strong cash performance.

Earnings Call Transcript 2024-Q3

[Operator]

[ Abrupt Start ] -- risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold.

Please refer to today's press release and our filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

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

And with that, I'll hand it over to Anu to get us started.

[Anuradha Muralidharan, executive]

Thank you for that intro, Mickey. I am pretty excited to walk all of you through our third quarter's financial performance and highlights. Notably, we've made some pretty key strides towards stabilizing the business, improving the core fundamentals and also laying down a stronger foundation for our future growth.

So let's dive into the details. First off, revenue. In Q3, total revenue came in at $35.4 million. This is a 6.3% increase quarter-over-quarter, and we also beat the street's consensus forecast. So we're pretty excited about that, pretty proud of that.

Now admittedly, this was a 3% decrease year-over-year, and that reflects some lingering challenges in the business, but our near-term momentum makes us more optimistic about the upcoming quarters. And the new Expensify platform is also expected to continue to pick up and contribute towards the revenue growth.

In Q3, average paid members came in flat quarter-over-quarter at 684,000, and that represents a 5% decrease compared to the same period last year. Interchange from the Expensify Card was $4.6 million, and that was a whopping 48% increase compared to the same period last year. And that is a pretty key highlight this quarter, and I will get into some more detail on that in a few slides.

Let's talk a little bit about cash performance. A standout highlight for Q3 was our free cash flow performance, which came in at $6.7 million. Now operating cash flow, which includes the timing of customer funds, came in at $3.7 million. Net loss was $2.2 million in Q3 with non-GAAP net income of $5.4 million.

Last, but perhaps the most exciting is our adjusted EBITDA, which came in at $9.7 million. Now, the continued improvement in profitability and free cash flow is driven by 2 things: a higher interchange take rate as we start moving more and more of our spend towards our new card program and also our continued focus on our core cost efficiency, which continues to show effects in terms of profitability.

Let's talk a little bit more about free cash flow and get into our free cash flow guidance a little bit. Now, given our very strong performance in terms of our adjusted EBITDA and free cash flow, last quarter, we increased our free cash flow guidance for the year from $11 million to $13 million to $15 million to $16 million. This quarter, we are going to do that again. We're going to increase it again. And we are giving you a free cash flow guidance for the year of $19 million to $20 million.

So again, free cash flow performance, profitability improvements have been a key highlight this quarter, and we are very proud of the fact that our continued efforts to stabilize the business is showing results.

Now as promised, let's talk a little bit more about those Expensify Card updates. This is one of our very exciting growth drivers. Expensify Card and interchange revenue from Expensify Card increased 48% year-over-year. The launch of the new Expensify Card program has been very well received. And the migration efforts, if I may say so, has exceeded even our expectations. 94% of our existing card spend has already been migrated to the new program, which is pretty incredible given it's been less than a year since its launch. And the new program is -- all new customers on the card are being directly onboarded to the new program.

Now, the new program allows us to earn 20% more interchange, so it has a higher take rate, and this is expected to further bolster our revenue growth in the coming quarters.

So let's break down the details of the interchange this quarter in a little bit more detail. The existing old program generated a net interchange of $0.9 million. Our new program generated interchange of $3.7 million. And so taken together, total interchange came in at $4.6 million.

We are pretty committed to getting that 94% spend number that's been migrated to the new program up to 100%, before the end of year. We have a lot of irons in the fire, and they are all going pretty well. So we feel pretty confident that we can hit that 100% number.

Now, last but not the least, as we do every quarter, we give you a look ahead on paid active users. October's paid active users came in at 693,000, which is a 1% improvement versus the Q3 number, and we're pretty excited about that. We are hopeful that the trend continues, and we see a much better Q4 in terms of paid members and subscription revenue.

With that, I hand things over to David to talk a little bit about business highlights.

[David Barrett, executive]

Thanks for that, Anu. So at this point, as well typically go through the road map and talk about basically the new developments we've had since. But I would say, for the Q3 quarterly highlights right now, I'd like to talk about what we've learned on the road.

So as mentioned in the last quarter, we put a lot of work into taking the product out to market, and we've been at a couple of conferences and got a lot of real-world feedback from customers. And the feedback has been great. I think in the process, we sort of learned some really key things with the value of New Expensify and why it's going to create so much value in this market. We call it kind of the 80/20 advantage.

And so if you really think about it, what we found is that expense management, historically, has only ever been able to automate about 80% of the workflow. And that's basically as much of the workflow you can automate from the information that's on the transaction itself, either off the credit card transaction or off the receipt.

But at some point, there's a remaining 20%. And the 20% is where all the actual pain of expense management is. And that's the information that isn't on the transaction itself. It's information they have to go and actually ask a human about. And that asking a human is the part that everyone despises, because that's where you actually have to go nag your employees, or if your employees to get nagged by your accounting team, and no one likes that part. And that part is because there's information required to code the expense that only a human knows.

And so the first part of New Expensify is trying to automate the process of gathering that 20% by streamlining the conversation around it. And that's why we have this, what we call a chat-centric design for New Expensify, because historically, you think about, if you need to get this information, you do it by e-mailing someone.

And then you're operating at e-mail speed. And e-mail speed is super slow. Like I don't know about your inbox, but if you e-mail me, I'm not even going to see it for days or maybe weeks. And so anything that you're asking me via e-mail is going to be days or weeks behind. But if you text me or chat me, I'll see it respond instantly.

So New Expensify's design is about trying to get expense management happen at chat speed. And that's by basically bringing the chat process into the product, so that people engage with the product quicker and give faster answers to the humans.

So step one in New Expensify is just about making that last 20%, the most painful 20% of expense management. But the second part of that is, enabling us for the next generation of AI. Now, I know that, AI is talked about everywhere and a lot of it's all made up. But that's a really key example of where AI works incredibly well, because most of that transition which already exists in chat somewhere.

And so for example, imagine like you're an accountant and you see a purchase that's at some club in Vegas, for example. You could look at this and be like, is this obvious fraud? And you have to go track that employee and ask them and say, well, actually, no, it's for -- I was at a conference in Vegas, and I took a client at dinner. So it's actually very clear expense.

Now, normally, you have to wait around by e-mailing them, wondering, if there's fraud for days or weeks until that person responds. And the response itself might only take a couple of seconds for the person to do, but you have to wait days or weeks for that couple of seconds to be spent.

With Expensify's new design and a chat-centric design, trying to bring the organizational chat onto the Expensify platform, that puts us into a position for our AI to see the conversation that happens both before and after the expense. And odds are at some place in that chat conversation, they mentioned that they were going to a conference in Vegas, taking a particular client to a particular club. They either said it before, or they probably said it after.

And so in the future, Expensify's AI design is going to be searching, not just the conversations that sends to you, but searing all the conversations that you had leading up to and after the expense itself, to see if we can answer the question automatically and do the coding automatically.

So Expensify's goal is not merely to streamline that last 20%, but truly to automate that last 20%. And we're aiming for the world's first -- or industry's first 100% automation expense management. We're not there yet. You can start to see how our chat-centric design starts to get us there.

So maybe to summarize, I'd say Q3 was a fantastic quarter. It really showed that the business has remained stable. And in particular, we'd say New Expensify is being powered on the foundation of Expensify Classic. And the Classic foundation is strong, it's profitable and has provided an incredible resource for building New Expensify on top of it.

As you can see, we've increased our free cash flow guidance once again. And again, we keep finding more and more efficiencies in the organization, and that's been really, really powerful for us. The Expensify card itself almost fully deployed. I think, as you mentioned, much faster than we really expected. And we still feel very confident that we're on track for full deployment by the end of the year in 2024.

New Exenseify is in market. It's a real product. It is generating revenue, and we're going to be the first in the market, we think, to get to what we think is going to be the new bar, 100% automation expense management by bringing the chat-centric flow into the product itself.

And then finally, Expensify Travel is actually -- it's in market as well. It's making revenue, and we're getting great reception. So again, it's been a fantastic quarter, built on a few different fantastic quarters coming up to this. And so we have a strong foundation, things are really good, and we're very, very proud of this quarter.

So with that, I think we'll turn it over to questions.

[Operator]

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

[Aaron Kimson, analyst]

Yes. I guess the first question, just off of your last comment there, Dave. for Expensify Travel, any idea on what the revenue contribution is today? And how do you -- how big a piece of the business do you think that can become over time?

[David Barrett, executive]

Well, I think it can become quite big because, I mean, travel and expense team here is the entire category. And so I think that we're seeing that it's just becoming sort of table stakes for expense management in general. And so every one of our customers, I think, has basically a travel requirement. And so I think it has the potential for actually offering quite a lot of lift.

Now, we're still getting started with it. We're rolling it out. We've got great early traction, but I don't think we have anything we're sort of ready to share at this point.

[Aaron Kimson, analyst]

And then switching to capital allocation. So the company bought back 646,000 shares from Dave at 234 a share on August 28. And that was the only stock the company bought back in 3Q. Can you help us think about how you plan to manage the buyback going forward between repurchasing shares in private transactions like that, one versus buying shares in the public market where your stock is super liquid?

[David Barrett, executive]

I'd be curious for Anu's thoughts on this, but my quick thoughts are, I think that we're very opportunistic. I mean, we've built up quite a cash reserve that we can use and deploy very quickly. And so I don't think, we know exactly the best way to deploy it in the future. But as we've shown, we're pretty flexible, and I think we're investigating all opportunities. But Anu, I'd be curious what you think to that.

[Anuradha Muralidharan, executive]

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

[Operator]

Stephen, I believe you're here with Citi.

[Steven Enders, analyst]

I guess, I want to ask on the sub user side, and good to see that ticking up and stabilize. And I guess, curious, if you have an idea of maybe what's helping support that tick up?

Like is there something that you feel like you've done that's helping drive that number in the right direction? Or does it feel like the macro is getting better? Just kind of how would you kind of articulate maybe what's going on there?

[Anuradha Muralidharan, executive]

Yes, I can take this. So we are -- like I was saying, we're pretty optimistic going into the future quarters as New Expensify sort of ramps up more and more and we start to send more and more of our traffic there that conversion is going to perform much better and new customer growth is going to do better.

But -- and I think, we've talked about this in the past quarters, the really big driver for paid member growth in general over the years has always been existing customers increasing their usage on Expensify. And there was --so we really -- there were really only 2 years that, that particular metric was stressed. That was in 2020 peak COVID and then 2023.

And largely, when customers are still using the product, but they're not expanding, it's -- and we've looked at the correlation between that and churn to try to see, if it may be an healthy indicator, but it isn't. Largely, it seems driven by macro.

So we all know that last year and even some parts of this year have been -- there's been a lot of news about layoffs. Companies aren't expanding overall. So that kind of makes sense that, that metric is stressed. And we'll talk about this more next quarter, so that we have a full year's worth of data, but we're seeing some of that existing customer usage expansion sort of rebounding. So I think that's definitely giving us some tailwinds.

[Steven Enders, analyst]

That makes sense. And then maybe on the go-to-market side, and I know there's been some, I guess, evolution of what that looks like through this year. So how are you kind of seeing the most recent kind of changes resonating? And how are you kind of viewing the efficacy of some of those investments?

[Anuradha Muralidharan, executive]

You mean on the new platform specifically?

[Steven Enders, analyst]

Yes. Just in terms of the go-to-market and trying to capture new users and customers and all that.

[Anuradha Muralidharan, executive]

Yes. So we've always had the most amount of success with organic channels. So like SEO, word of mouth, just the strength of our brand. So we see a vast majority of our new sign-ups and even just visitors coming directly to us. And that kind of continues. And it's a really good leading indicator always that we are never starved for leads. So we continue to keep on doubling down on improving conversion, like improving sales efficiency, but also the product's ability to convert better and better.

With our new platform, we're still in early days. What we are doing is sending all of the smaller leads to our new platform in order to really dial in conversion so that we can keep what's working, improve what's new and then start to redirect all of our new leads to the new platform.

And that effort is probably going to take us the next few quarters, and we'll have more substantial numbers or specific numbers for you down the line. But overall, I think our go-to-market -- and that's part of why we're able -- business is able to kick off cash so effectively is because we are doing really well in organic channels and a word of mouth and continuing to focus on conversion. So that's sort of still the focus of our go-to-market efforts. Did that answer your question?

[David Barrett, executive]

And maybe I could add to that a little bit. I would say -- I think that -- I agree with everything Anu just said. And I would say a big part of the go-to-market strategy is building a product that just inspires leads and customers more. And just to give kind of like one anecdotal example. So we got a Suiteworld every year. And we go with basically the same page, same product, and things like this. And it's always been a very, very good conference for us because NetSuite is a major partner of ours. We do very well in that channel. And so we went to the same conference with the same size booth. But this year, we are pitching New Expensify rather than Expensify Classic. And that produced about 61% more leads out of that conference.

Again, everything was the same except for the platform. And so I think, we see that the major strategy for long-term growth is really just to launch a platform that inspires and captures the imagination of customers' better, which translates into more viral lead generation through word of mouth and higher conversion. And so I think these are very cost-effective ways to increase the conversion of our existing organic lead structure and then double down on those organic leads.

[Operator]

Eric from Lake Street Capital, I believe you're able to join us.

[Eric Martinuzzi, analyst]

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

[Anuradha Muralidharan, executive]

I don't think we're breaking it out in that degree of detail. And if I'm being honest, do you mean like travel as a product doesn't always -- a customer that is using travel as a product isn't always using our card. So there's -- I'm not sure what the connection is between those 2 from an interchange perspective.

[Eric Martinuzzi, analyst]

Yes. It was just to the extent they're using the card to book travel.

[Anuradha Muralidharan, executive]

Yes. I think that is probably not meaningful because that's a pretty subset of what we would look at, both in terms of card spend, travel and travel total spend on card.

[David Barrett, executive]

Yes. Maybe I would say one of the, I think, advantages that we have in the marketplace is our card agnosticism that we support all third-party card fees. And so I think it's great. And I think things do work best, when you use the Expensify card in conjunction with Expensify Travel, but there's no requirement to. And so certainly, I think a lot of our Expensify Travel customers just continue using their existing corporate card program. And that's fine. We make money other way.

[Eric Martinuzzi, analyst]

And then second question is regarding the increase in the free cash flow. I joined the call late, but were there other -- were there cost efforts taken to the point where you had maybe a reduction in force? Or are these more on the cost of goods side where you're continuing to squeeze costs out of the business?

[Anuradha Muralidharan, executive]

Yes, it's the latter. We didn't have any workforce decrease or anything like that. We are continuing to operationally get more efficient, and that is the second driver. So there was the higher interchange take rate, but also operational efficiencies taken together gave us a higher free cash flow margin.

[Operator]

That was everyone we have on the call live.

[David Barrett, executive]

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

[Operator]

Thanks, everyone.