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.

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.

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. Most of the English-speaking world is fair game for the platform, so long as we have tax capabilities sort of baked…

All right. So I hope that is as exciting to you as it is to us. Because the entire point is to engage the end user as soon as they come into the product and to give them so many different use cases that enhance their experience, enhance their lives, make their most painful tasks easier such that we activate them sooner rather than later. So on this slide, I want to go into this end user flow in a little bit more detail. And this specific flow is actually going to launch, maybe as soon as next week. So imagine an employee that isn't trying to adopt Expensify for their company, is just trying to make their process of maintaining these receipts, submitting to their employer a little bit easier. So they come into Expensify, that screen on the far left is where they would land when they sign up. So on that screen, they can create a new chat, find their manager, and within the chat interface with their managers -- so, now we're the third markup -- they can click that green button at the bottom, and that takes them to the screen, the fourth screen from the left and request money. Now, they can request money by manually entering the amount or they can scan a receipt or it can be a distance related expense, whatever, the options -- all of the same options that existed or exists on our current product will exist here. So for the sake of this, let's just -- let's take this example, let's go with the manual version. So the $20 for gas, click send, and now their manager asks this money request from them. How does the manager receive this? So assuming the manager is not an existing customer,…

All right. Thank you, Anu. All right. So let's talk about the numbers. So revenue was $36.5 million, which is a 14% decrease from the same period last year. That's driven by a number of things. One is a decrease in activity and our user base. And Anu just spoke about user expansion being one of the biggest growth drivers for Expensify. And in recent periods, we've actually seen the growth expansion decrease, that's in the 12, 13-plus years of the company, that's really only happened twice and once with in COVID and once it's right now. So in the history of the company, generally, our customers once they onboard, they stay and they grow. What we're seeing now is a decrease in activity from our customers, which is causing a headwind to revenue. Another issue -- and one thing I want to mention is that, we are seeing subscriptions rise. We're doing a great job. Anu mentioned our onboarding specialists, all of our conversion efforts, we're adding subscriptions. So our subscription base is growing, but the activity-based portion of our users have been decreasing due to economic headwinds, high interest rates. It's just tough for our customer segment right now. So that's provided -- accredited challenging environment for revenue growth. But there's also some other -- another factor there. Is that the card is growing so well and so fast and cashback is contra revenue. So if the card grows more and more, it pulls down revenue. And I'm going to talk a little bit about that because we have a solution that we're very excited about. Moving on, our paid members were 719,000 and our net interchange was $3.1 million, which is a 65% increase year-on-year and a 16% increase quarter-over-quarter. So we're quite proud of about that.…

Wait. We're going to switch over. Do we have Citi on the line to start us off?

You have Steve Enders from Citi. I appreciate you all taking the question today. I guess maybe to start here, I just want to ask on -- I think there was a comment in the letter that said that you're seeing clear skies emerging. I guess, what's giving that view? And I guess, what are you seeing out there that maybe is leading to that outlook. Can you maybe just kind of clarify that comment?

Yes. Great question. Also good to hear from you. I think there's a couple of things. First, we're starting to see some, I think, green shoots data that is giving us some optimism going forward. One thing we have at our ExpensiCon 3 conference this year and since then, we've seen a big uptick in the production from the accounting space. I think that's a positive factor. Also, obviously, the card continues to grow. The accounting treatment, while it's not a difference in cash. It's cloudy side of the accounting. The revenue treatment, so pretty soon here, we're going to be getting the actual revenue benefit from the card, which is something we've discussed a long time. So that's just -- that can't help. But be positive with, the card is adding to revenue instead of pulling down through cashback. And then also, our new platform is very close to going live for our customers, and that is something we've been working on for years. And so we are very optimistic in all the R&D investment we've made, in that over the last several years and the impact that's going to help in business. Do you have anything else to add to that?

No. That sums it up. We're just excited to start really testing and improving the virality and word-of-mouth that comes with putting customers on Expensify 2.0.

Okay. Great. And then on the expense reduction, for -- going into next year. I guess, what are the areas that maybe we should see those cuts taking place? Like, what is the spend that might be being pulled back? And I guess, as we think about that, should we see any impact going into getting -- going into 4Q for the OpEx cuts?

Great question. So for Q4, some of these cuts have been mid quarter. So I would expect, a slight reduction, but it's kind of -- you don't really start to see, I think, until Q1. But in terms of where it's going, it's going into, S&M -- reduction S&M, a reduction -- G&A. And also, reduction in R&D. But I want to touch on that a little bit. There's not a reflection on a decrease in actual development. As you know, we have a robust, open source community, and we compensate those people. And, we have basically done surge pricing on the community in order to gather a whole bunch of interest. And at this point, we have thousands of people working in on -- in the community, and we are pulling back on those prices. And so it's not a decrease in output, but it's an increase in efficiency there.

Can you repeat that? Did we have any more questions from Citi? Next up, we have JPMorgan.

First of all, I wanted to, ask about the dynamic with regards to your customers and, specifically, with regards to PPU, and the subscription based payments. Have you been able to reduce the ratio of PPU to a more normalized historic level? And that would be would you be willing to share what it is today?

So, great question. Thank you for it. It has decreased. I think, if you recall, just for people maybe that haven't been tuning into all the earnings, are -- we have two different types of billing, paid users, we have subscription users. They're billed every month, and that is at a discounted rate. And then we have activity based users that are billed at a higher rate. If anyone exceeds -- if a company exceeds their subscriptions, they get billed at the higher activity based rate. We saw a huge influx of growth and, therefore, subscription overages and our pay per use, which is what we call our activity based billing. Our pay per use users spiked to about 35% of all users, which is, quite high. Historically, it's been around 20%. So almost doubled. And in the last couple of quarters, we have seen those numbers come down. And so to answer your question, currently, they are at, I believe, 28% of that. Now that's a combination of our efforts to migrate people over to subscription users. But also we have seen as we've touched on in the presentation, just a decrease in, activity across users. So it's kind of a combo of both.

And, another follow-up, with regards to the investments that you've been making. We've obviously seen, a pretty heavy investments on the OpEx side, but, also significant expansion of your COGS, which led to a decline of -- reduction of gross margin versus historic levels. Is there a level that you feel would be a more normalized long term target for gross margins, once you launch the new Expensify platform?

That's a great question. So I don't have an exact number to give you right now. But in terms of COGS, we are expecting that decrease in '24. And we'll -- we're in a dynamic environment right now. So we are -- I think that's probably the extent I'm going to say that. We expect it to go down, but I don't have a hard number for you right now. We are being very agile right now with how things are going.

Next, we have Piper Sandler on the line.

It's [Hannah] on for Brent tonight. Just a few questions for me. First one for you Anu. Just what is left to bring that new Expensify 2.0 to market?

Did you -- sorry, just didn't catch the exact question. What is the timeline, is that your question?

What is left to be done on your end before it goes to market?

Yes. Basically, the way we approach launching anything, which is very much applicable to 2.0 as well, is to take an iterative approach because we don't want rebuild everything, and then launch everything in one go, because that would just delay getting it out to the user. Right? So what we've been doing through the course of 2023 is taking little features that are ready and launching them at conferences to beta audiences. And that's been going pretty well. But it's kind of piecemeal to just make sure that iteratively what we're developing is working as intended. What we're going to do quite possibly this month, if not as soon as next week, is launch the complete viral bottom up adoption flow to the market. And what I mean by that is an end user signs up to Expensify 2.0, is immediately presented with the options to either start chatting with somebody or send or request money from them, which are really like the major end user use cases. And if they start a conversation with someone and send a money request, and that someone is actually a manager at a company, then they will -- I mean, no matter who you are, they get dropped into the product and they can pay your money request. But then if they choose to pay using a business bank account, we are able to identify them as a company decision maker. And therefore, we create a workspace for them in the background and move that money request into that workspace and put both the submitter and the payer or approver as it is called in our existing product lingo into that workspace. So they're ready to start collaborating in that work space environment. And doing all that automatically gives them an onboarding…

Super helpful. And then for you, Ryan, it was encouraging to see that paid member number uptick to 730,000 in October. I guess how much of that would you attribute to seasonality, maybe, and how much would you attribute to maybe improving demand fundamentals out there?

I think it's it could be an element of both. So I like I mentioned, our subscriptions are increasing. I think we're doing a great job of increasing subscriptions. It's just been competing with a decrease in activity. So there's certainly a top line push, from our side that's competing with the activity or reduction of in our customer base. But in October we saw that subscriptions continue to go up and also, our pay per use users, we saw an increase there too. So it's -- I think it's an element of both. When we don't have the reductions, the decrease in activity fighting against the increase in subscriptions…

We grow.

We're growth happy.

Next, we have Lake Street Capital.

Just curious to know the -- you mentioned the, the Shareholder Letter mentions the pricing of competitors. Have you seen any -- just even anecdotally -- have you seen that pricing improve -- your relatively cheaper pricing, improve your adoption versus competitors?

Yes. So I think that -- maybe to give us more context to everyone on the call. So the environment that -- the environment has been challenging over the last couple of years because we've seen some well-funded startups raise a lot of money in a 0 interest environment and, spend that money. And now that we've been in a higher interest environment for some time, we're starting to see that they have to respond and their business model doesn't make sense anymore. So what we're seeing is our competitors introduce paid plans. These are people who were charging nothing for their product against our paid product. And which is -- that's just a challenging, head-to-head. Right? But what we have seen recently, which we're encouraged by is that they are trying to start charging, because businesses charging for their software makes a ton of sense. Right? There's a reason people charge for that for it. So the competitive environment is shifting over the next 12 months in a way that we think is very favorable to us. And also, it's important to note that they seem to be charging on a per see basis where we have a mix of subscription and activity. And, we think that we're going to end up being a less expensive on a blended, per seat basis. So we think the competitive environment is going to be easing up here in a couple quarters, so that's also another positive indicator that we're looking at when we look at the future.

Okay. And then the -- you had the balance sheet movement where you decided to pay off the $36 million of debt. Do we plan to be a cash burner in Q4 based on the current forecast?

It's kind of guidance. But, I'd say we expect to burn less, and we expect not to burn in 2024.

Next, we have Morgan Stanley. Give another second here. Maybe some muting issues. If not, we can come back at the end. Okay. Next, we have JMP Capital. Aaron, I believe I see you on the line.

So I appreciate the total customer account that you started giving in the 10-Qs in the first quarter this year. We don't have it for 3Q yet, but it's kind of been declining, right, from, yes, 1Q, 2Q. So I'm just wondering, can you distinguish what you're seeing a little bit between your VSB customers with one to 9 employees? And then your SMB customers with 10 to 500 employees. And is there any color you can give there since the time of the IPO on the relative portion of business that comes from kind of each of VSB, SMB, mid-market and enterprise.

Great question. So we've seen -- and this has been kind of consistent since COVID, really, is that the larger the company, the better they weather the storm. So we've seen a -- our smallest customers get hit harder than our larger customers. And, that -- that's both with in going out of business or also just reductions. So I think that -- I think we've said this before, and it -- those trends are holding true that the -- there's more customers. Ones and twos are certainly, not doing as well as they have historically, and the larger customers are more or less the same, or at least not, seemingly impacted to the degree that the under 10 the employees are.

But that's the mix -- I think you're asking, like, has the mix changed? Largely, the mix is still very -- is still the same. Like, it's excuse ever so slightly higher now versus at the time of IPO, but it's still not shifted enough to change our mix by any means. So the mix itself, I'd say it's largely still the same.

Yes. Definitely -- how the segments rank. Like if that the smaller customers are struggling more, so they become a smaller piece of revenue, but they were always the smallest.

Exactly.

1 to 2 is always the smallest size.

And then the acquisition funnel is also -- like, basically, you acquire the same mix as well. So when you lose, you lose the same mix. You lose smaller customers more than larger customers, and then you also acquire smaller customers more than larger customers, and we haven't seen any dramatic shift there.

That's very helpful. And then secondly, congrats on the interchange reclassification. I know that's been a while coming. So 2 things there. How should we think about the linearity of the adoption of the new Expensify cards and the one time boost to revenue that's going to provide as we go through 2024? And then will you continue to break out total interchange revenue during the transition so we keep tracking that growth that growth rate when some is GAAP revenue and some is not.

Yes. Great question. So in terms of how the adoption is going to go, it is tough to predict that, because we don't -- we're not going to force people. We're going to basically give them a deadline, because you need to shift by this date and, It's kind of a 2 phase approach. We need them to accept the new card terms, and then their old cards will turn off after a certain point. So If I had a guess, and this is, I guess, we will probably see a lot of people can wait until, like, the last day that we force them, just because of human inertia. So I would think that at least 50% are in the second half. Is that your…

I think so. So there's basically a decent amount of the portfolio their cards will expire naturally next year. So when it expires, we'll just send them the new card. So we don't have to ask them to change their cards. And then to Ryan's point, everybody else has to voluntarily activate the new card. And if they have this card on file at various vendors, they need to change them. So that's always a painful exercise for the customer. So after the first round of trying to get them to move over depending upon the reception. There are various things we could do, like, motivate them with a reward to switch over. Like, we might explore things like that. Because ultimately, we are incentivized to get everybody on one program so we can stop reporting 2 interchange lines, because things are about to get worse before they get better for this accounting treatment. But, yes, we'll continue to have a separate interchange line -- cash back line, so it makes you guys' modeling job easier, to the extent that any of this is easy. But want -- and we try our best to get everybody migrated as soon as possible, but by the end of next year at the latest.

Next we have Dan Jester from BMO.

Maybe to stick with the card. It was great to see -- so that sequential improvement, in the growth rate for the card. As you think about what's being successful there, is that more customers signing up for the card? Or is that you getting a greater wallet share of transaction, and the customers who had previously adopted the card?

That's a great question. No. The, amount of spend per domain on average is actually very stable. So almost all of those gains are new card adopting companies. For a minute, I thought where you were going to go was ask if those companies are all new Expensify adopters as well? And the answer to that is, no, it's a mix of existing Expensify customers adopting the card as well as new customers adopting the card out of the gate. So that's kind of how it breaks down.

And then a new -- in the past, you've talked about the strategy here about having your customers earn enough in cash back to offset their subscription fees. Are we seeing customers there yet and sort of, like, how close are we to that becoming a reality, especially as we go into next year with some of your, you know, competitors maybe in a bit of a different pricing environment?

Great question. And, actually, come to think of it something we just, like, should have mentioned in the deck somewhere, but we didn't. But we -- of the things that we did we, [I think presented in] October, so it's Q4. Did we lose them? Oh, I thought there was like a -- okay. Never mind. So we basically put out this product enhancement on our existing product, which takes the cashback you earned and kind of credits it towards your subscription bill. So that your subscription bill that you end up paying is minus your cashback. So you charge the lower amount, because you're already going to receive that cashback anyway. So instead of due doing 2 transactions being netted. But as part of that, we did something more, which is we showed every customer on Expensify based on the amount of money that the -- their employees are expensing through their policies. We took that amount, and we basically said if all of this was on the Expensify card, this is the amount of cashback you would have made, and that shows up now on the home page. And if you click on that, it basically tells you how we got that number. But also if you had gotten that cashback, what every user, seat on Expensify would have cost you in net terms. So a lot of customers it's zero, for a lot of customers it's $3, for some customers $6, so on and so forth. But it allows every customer to look at the unique value that they can get in terms of cheaper Expensify best plans -- cheaper Expensify by just adopting the company card. And the intention behind it was to get more people to actually take the card, get that lower price. Because when you see them at a price point that they consider a steal, your chances of retaining them are so much higher and just every customer you retain is -- because every new customer you're gaining costs you, I think, the conventional wisdom is twice as much as an existing customer. So that's kind of the motive behind doing all that. So we are hoping we'll see more benefits from doing it. We just launched it last week.

It's a big upgrade to the education demonstration of the value Expensify has and, fighting any [FUD] that might be out there about our relative cost to others. I think if you actually do an analysis, Expensify is way less expensive compared to some of our competitors.

Got you. And then just one last one if I can squeeze in. So for 2024, we should assume that there's going to be customers using new Expensify when it gets launched, but you're still going to be having customers use the old Expensify. Is that a correct assumption?

That's right. No night switches. We won't be forcing anybody into anything. What we want to do is really get as many new customers as possible adopting it from the bottom up, because that just tells us what the experience is truly like without the baggage of change. Alongside that, we'll have [Technical Difficulty]. So for anybody that wants to try the new product, they can click on the link and switch their experience over. But they can switch back if that's what they want. Like, it just allows them to try it. When they switch back, we have an initiative to ask them what they didn't like about it so we can improve it. So it's been ongoing effort of getting feedback from both new customers, but also existing customers who are proactive enough to switch. And once we get to a point where we can save with certainty that the new product performs really well and has a better experience, retains better, converts better, then we contemplate how we want to sunset the existing product. We're aways from that decision point.

Next up we have Loop Capital.

So, Ryan, I was wondering if you could just go into a little bit more detail around why the company, is sunsetting the SDR program, the out the outbound sales?

Great question. So as you know, we've historically grown bottom up, product led growth and when things slowed down with, like, COVID and kind of the tumultuous atmosphere in the last couple of years, we dialed up more of our sales efforts. We had a kind of a 2 pronged approach there. We have outbound, and then we also have a group of onboarding specialists. These are people that we didn't historically have. And we've been -- we've allowed those programs to mature a bit so we can properly analyze. It's tough to make a decision in the first 3 months of something that we've given enough time. And then, we just analyze the economics of what is -- how -- what is the output of an SDR, how much do they cost? Versus AdWords. How many how many leads does a dollar and marker? Not just AdWords. A lot of stuff. But what is a dollar of marketing…

Paid AdWords.

Right, get us versus a dollar towards in outbound. Sales representative and the economics that we're seeing. We made some really big improvements kind of in our in our marketing efficiency. So the -- we've just determined -- it wasn't a very hard decision. So we just determined that dollar spent in column A is way more than -- way better bang for a buck than a dollar spend in column B. So that's how we made that decision.

Okay. Great. And then, yes, I realized the company doesn't publish retention metrics, but I was wondering if you can just comment on churn in the business and how that's trending? I mean, is it relatively consistent with the decline in paid members?

No. We because we're seeing paid customers stay with us, decrease their activity. So the -- a decrease in users is not like a one to one correlation in decrease in customers because customers are staying with us, but their activity is decreasing.

And that's the biggest swing. That's always the thing that is responsible for growth, and it's always the thing that is responsible for lack of growth. Because there's a base of -- at last count 45,000 companies, 50,000 companies that pay us, so that's a big base. So if you onboard, I don't know, even 3,000 -- I'm making these numbers up. If you onboard even 3,000 companies, their first couple of months, they're not going to deploy it to the entire company. They will start team by team. So no amount of new acquisition will ever be big enough compared to usage expansion in my existing customers because the base of customers is very diversified and quite large. I'm guessing it does.

Next, we have FT Partners. Matthew, are you still on the line? Okay. Well, we will see you in the follow-up calls then.

That is everybody.

All right. Thank you all very much for joining us.

Appreciate it.

We'll see you next quarter.

Bye.

Good bye.