Expensify Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 7 speakers on the call.

Operator

Hello, everyone, and welcome to the q1 2023 Expensify Earnings Call. Today, you have, myself, Brian Schafer and Anuj Murr Lidharin. Our CEO, David Barrett, is laser focused right now on working with the team, to get everything ready for Expensicon, our conference next week, and we'll be doing a number of important product announcements there, and he is working side by side with the team heads down to make sure that everything is ready. So Today, Anu and I are gonna take you through the slides. And without further ado, let me throw it to Anu to read the legalese and take us through the business section.

Speaker 1

Thanks, Brian. Good afternoon, everyone. So first, the boring stuff. 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.

Speaker 1

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.

Speaker 1

So all that said, next slide, let's begin. I wanted to remind you and walk you through our long term strategy in brief. So start off with the 3 3 secrets to Expensify's long term success. First of all, the market is enormous, and we remind you of this every time, but Almost no one in the market is actually using any software product, which means the primary competition is really just Excel and paper. But the richest opportunity when you consider the whole market isn't enterprise companies, isn't the top of the market.

Speaker 1

Rather, it is all the small and medium businesses out there that have taken together the largest number of employees, and that's the value proposition. But the difficulty is how do you acquire these varied small businesses at scale? This is the 3rd and most well kept secret and why you should believe in us. We are the only company out there, the only product out there that has a viral word-of-mouth adoption model. And this allows us to absorb the lion's share of this market Profitably.

Speaker 1

And that's really our ambition. We are trying to build a 1,000,000,000 user platform and we hope you'll come along with us for that ride. Next slide. So not going to spend a ton of time on this, and we've shown this many times. This is probably by now your Most favorite slide, but this just illustrates again the richness of the opportunity as you go from enterprise, which is small concentrated, few companies, Large, in size to a huge range of small and medium businesses With a huge collection of employees taken together.

Speaker 1

Now, again, reiterating that when you look at the small and medium business market If you're looking at a company that has a top down sales driven business model, it's not easy or at all possible To profitably acquire the small and medium business segment. So you need a product led growth model. You need a viral adoption model and that's why we are interested. Next slide. So just a quick recap on how the bottom up adoption model works.

Speaker 1

So Expensify is one of the few products out there that solves a real pain point to a largely ignored segment of the market. That's the employee. So employees have a genuine need, and we are the only ones that built a product and continue to cater to this audience Even when their company has not adopted the product. So an employee can download the app, use it for free, And because it solves a real pain point for them and for free, they end up telling their friends, they end up telling their family, anybody that they know who has a job who likely has the same pain point. So what ends up happening is large swaths of individual users are using us for a business use case.

Speaker 1

Sometimes it ends up being various groups within the company. And so this is a tidal wave that ends up taking the company with it, And we are able to convert this company into a paying customer without ever reaching them with a salesperson. And that's really the beauty of the bottom up adoption model. It Can be executed at scale across the market because it doesn't depend on us increasing our headcount or spending sales dollars on it. Next slide.

Speaker 1

So while we acquire companies When they're small or at least relatively small, our philosophy has always been to never let a customer ever outgrow us. So we are really the only product that is free, caters to an individual, and so has consumer grade UX. But at the same time, we also have enterprise level scale. We have cross sell capabilities, so we have rich suite of features, and we also have global reach. Next slide.

Speaker 1

And you've seen this slide many times, but you know, we this is our robust roadmap and As you see it more and more, you notice that more and more features that are gray, which means they are planned, become green, which means they're in beta, And then go on to becoming blue, which means they are now fully launched. And the way to read this again is to go from left to right. Anything on the far left is aimed at getting more viral lead generation into the platform. And anything on the far right that's aimed at making the product, making the subscription richer For existing and targeted companies who are our customers. Next slide.

Speaker 1

So having recapped on the long term strategy and the value proposition of the company, I want to give you a few strategic q one updates before I pass it on Pass it on to Ryan for financials. So there are 3 things I wanna talk about today. Next slide. The first one is our accounting channel, and we've talked about this channel with you many times. But, again, as a reminder, we consider this channel to be our gold mine.

Speaker 1

That's because every accountant has the ability to bring bring us hundreds of customers who in turn represent thousands of paid members for us. Now not only is it a question of scale, it's also a question of quality because these companies are generally set up by the accountant Who is well versed in industry best practices, and we also train them so they're well versed in our product best practices. So these companies are ideally set up, and so they become extremely easy to support for us and also, as a result, Very easy to retain. So there's high retention in this channel. Now there are 2 things we've done and we've talked about in the past as well.

Speaker 1

1 is we've assigned a partner manager to the 500 or so accounting firms that are already on our platform. And these partner managers are all Expensify employees, and their job really is to give these accountants 1 on 1 support as they onboard new customers and white glove support, again, as customers end up having issues or need to, You know, evolve their setup because they're growing, so on and so forth. So we keep this channel very warm. We keep them very well supported because It is a great opportunity for us to disproportionately grow our paid members. We're also hosting Expense account And of course, as the name indicates, we've done it twice in the past.

Speaker 1

And the idea behind this to bring and this one is going to bring 1 40 of the industry leading That's accountants and large funds and we're going to bring them to Italy and we have thought leadership sessions, Trading best practices, understanding their pain point even more so we can fine tune our product to them and of course to have a good time because nothing else breeds Loyalty has a good time together, right? So that's the accounting channel. Next slide. We are also working on our sales efforts. And we've talked about this again in the past Every quarter because we've been working on it quite consistently.

Speaker 1

But this effort and this update always leads to a lot of questions around where sales fits in with our bottom up adoption model and product led growth model. So I want to address that head on. The way we think about our growth opportunity, the shining star of our growth story is really bottom up adoption, is product led growth. But we think of product led growth and viral growth sort of like a sailboat. When the wind is high, Everything is exponentially faster and the wind really can be thought of besides a lot of other things.

Speaker 1

1 of the primary drivers is macroeconomic conditions. So, of course, right now, given the macroeconomic conditions, wind is a little bit low. And what would be great, what It's a very good business is the ability to supplement that growth with something consistent, something steady, I'll beat modest, and that's what we consider our sales efforts to be. It's sort of like a motorboat that supplements the wind in our sails. And when the wind is slow, we want to be able to depend on the motorboat to keep going.

Speaker 1

And when the wind comes back, we can go much faster 1 once again. So that's the that's the strategic goal behind building the sales program. It's not intended to replace viral growth. It's not intended to even go head to head with it. It is intended to supply a consistent backup.

Speaker 1

Now all that said, let's talk a little bit about the results. We've been working on this for a little over a year. Our SDRs who are really the agents that we've hired, and, you know, we've been using a flexible outsourced model for all of it as a reminder. But our SDRs are really the people that we've hired who hit the phones and call prospect lists and get us more Direct outbound lead gen volume. And we've been ramping up this program more recently.

Speaker 1

And you can see they've really kind of settled into a rhythm in the Q1 of 2023. And you can see here from the green bars that our incoming lead Pipeline is growing very healthily as a result. We've also continued doubling down on our guides program, and you might know that externally as our setup specialists, and their their job is to absorb these incoming leads and to convert them At better and better rates. So we've been tracking the deals that guides win and how many paid members they convert. And what's been really encouraging is every month in the Q1 of 2023, the number of Paid members and the number of deals that our setup specialists have been able to convert has been consistently doubling.

Speaker 1

So every month it's Doubled versus the previous month, which again is a very encouraging, leading indicator for growth and just these efforts overall. Next slide. Now last but not least, I want to come back to What we're gonna do for product led growth. Now, of course, the macroeconomic conditions are not under our control, but it's cyclical. And what goes down must come up Just like what goes up must come down.

Speaker 1

So ignoring that for a second, what we wanna be ready with is as the market sort of For covers, we want our entire product road map to be complete, fully launched, and polished. Now that is a very ambitious Goal because we have a pretty robust roadmap as we've shared with you in the past. And so what we've done is leaned on an External contributor community, some more outsourced engineering resources to supplement our internal engineering team. And This graph shows you the number of jobs, the number of peep, pull requests, the number of engineering hours that we have been able to use the External community 4. And the idea behind this is not just to use them to launch new products, new features, But to also lean on them simultaneously to keep finding and fixing bugs so that we can move fast without breaking things or at least without Completely damaging the quality of the product that we are building.

Speaker 1

And again, as a reminder, the point of using contributors is to go fast when we want and slow down when we don't need to go so fast. So when you hire a lot of engineers, you are kind of Bearing that cost on your income statement for a really long time and, you know, at the risk of damaging morale, you can't really let employees go and hire them back quite as Fast, or as the market has shown us, it doesn't really work because other companies doing that makes the headlines and it's really bad press too. So what we do is lean on this contributor community, and there are no contracts. We basically just work with them on a per job basis. So We are able to sort of expand and contract much more nimbly, and that's the idea behind it.

Speaker 1

So those are the 3 major updates, our approved channel, our accounting channel, our sales channel, and our contributor community, and All, all of the progress we've made in the Q1 has been very encouraging and we think of it as really setting us up for success We go into 2023 further. So with all that out of the way, I'm gonna pass it back to Ryan to run us through the financials.

Operator

Great. Thanks Anoop. All right, everyone. Happy to see everybody again. I'd love to take you through the Q1 financials.

Operator

So revenue was, 40,100,000 that is just a tan hair down year over year. But one thing to consider is that Our cash back is contra revenue. So as the card continues to grow and it has been growing quite nicely, that actually pulls down that revenue number. If you were to, you know, adjust for cash back, you would see that revenue is actually higher. We have higher, you know, we have more users than we had last year, but actually the card is more successful hold down revenue.

Operator

So we get a a flattish, slightly down revenue year over year. Our average paid members were 747, up about 6% year over year and our gross interchange 2,300,000 for the quarter, which is up 85% year over year. So the card continues to grow quite nicely, despite kind of some, headwinds elsewhere in the business. Next slide. Our, operating cash flow was 7,600,000.

Operator

Our free cash flow was 10,200,000, which we're quite happy about. Our GAAP net loss was 5,900,000. Our non GAAP net income was 4,100,000. And the difference again between GAAP net loss and non GAAP net income is stock based compensation. And our adjusted EBITDA was 8,700,000.

Operator

Alright. So let's talk about what happened in q one. So our customer count was up in q one. However, we did see activity across our customers decrease, which resulted in a net decrease in, paid members from q 4. So basically, what that means is, let's say, the average customer, has 14 paid members, and we basically saw that decrease to 13 or, you know, 13.3, something like that.

Operator

So we we saw a kind of a decrease across the board, a small decrease, but we have so many customers that even a Small decrease in activity, kind of outstripped the increase in, net new we saw. So subscription members did increase in q 1, but our, paper use number decreased, with larger than the, growth in subscription. So this wasn't a big churn off of customers. It was just and average decrease in activity across the board. The good news is that we believe because it's not a big turn off for customers that we believe the activity decrease is due to economic conditions.

Operator

We think that is expected given the environment, ultimately, we think it is temporary. No one thinks the economy is gonna, you know, be bad forever. It's cyclical. Right? It's gonna come back up.

Operator

And as long as we retain these customers, when activity goes back up, you know, their user counts will increase. So, we wanna make sure we're retaining the customers. And if there's kind of some choppiness in terms of, their activity going up and down, we'll weather that storm, obviously, because we are cash flow positive, and it's just kind of a sign of the times. Next slide, please. All right.

Operator

So we don't give guidance, but what we do What we do do is that we let you know how the next the 1st month in the current quarter is trending. So As you can see in April, it's the, yellow bar furthest to the right. We're continuing to see some volatility. It actually looks remarkably similar to the, kind of up and down we saw in 2021, if you look over on the left hand side. But, as you can see, And every single one of these months, we are having, our subscription members increase, but the paper use is kind of going up and down a lot.

Operator

So, we are not through the woods yet on the volatility. Next slide, please. Let's talk about free cash flow. So we had a strong free cash flow in q1, 10,200,000 and People say, okay, what are you gonna do with it? You know, great free cash flow.

Operator

What do you do with it? So we, obviously, we're spending it more and more on sales and marketing, but also In q2, we're gonna take the free cash flow from q1. We're going to do a $3,000,000 buyback in the open market that starts tomorrow. And also we're going to reduce our debt by 8,000,000 And as Anew said, we are positioning ourselves for success in the future. Our sales efforts are starting to show some real results and free trials have seen a huge jump.

Operator

So we are optimistic for the future. We think that The investments we made there are starting to show kind of some early green shoots data that makes us quite encouraged. We're well capitalized, and our free cash flow is strong, and we're using that positive free cash flow to reduce our debt, and we're also returning value to our shareholders via buybacks. And very soon, we'll be starting the migration of our users to our NextGen platform. So nothing to announce today, but Expect more announcements from us soon during Expense Con 3, which is, May 18th 22nd.

Operator

We have a lot of product changes that we've been in the lab cooking for, for a while. So we're excited to get those out in the open here pretty soon. Next slide. And just as a reminder, This is the the future we've been building. A lot of our efforts, on the engineering side have been really focused on, this new platform we've been working on And not we've put so much work into it and not very many people have seen it yet, which is why we're so excited to start, getting actual paying members onto it.

Operator

And, But as a reminder that the super app that we're building right now is, it's expense management, Corporate Guard with cash back, invoicing, billing, chat, corporate travel management, personal travel management, p2p money transfer, bill splitting, and a personal wallet, all for $9 all in one app and coming to you very soon. So we're all very excited about that. Alright. Now we'll throw it over to q and a, and I believe our first analyst is Natalie Howe from Bank of America.

Speaker 2

Thanks. So my question for you guys is, So pay per user went down, and you guys have previously said that, they do pay a premium price and you're trying to find a good balance of Descriptions and pay per use, I think you guys have mentioned 20% would be your ideal number. Have these trends sort of Had you guys on the that path or have you guys started thinking about that balance earlier than you anticipated?

Operator

Great question. So yes, we are being successful in converting people over from paper use to subscription. We are seeing increases in subscription. However, We also saw a decrease in paper use this quarter. And again, that doesn't mean the customers left.

Operator

It just means that they had less employees that were active. So we are seeing paper use come down, but this quarter, it was kind of a little bit of column a, a little bit column b. We're moving people over to subscription, but also they they also decreased. So, yes, our our paper use percentage did go down, but part of that is attributed to general, less activity. Also part because we've been successful in converting.

Operator

So it's a little bit of both.

Speaker 2

Okay. Cool. Thanks. And then a quick follow-up. It appears that sales and marketing as a percentage of revenue went Down, but you guys mentioned you're doing, like, more investments into that SDR program.

Speaker 2

Can you provide a bit of color there?

Operator

Sure. So We've been we ramped down some of our marketing as we ramp up our our sales, but the They didn't coincide perfectly. So we added a 100 SCRs in q1, but a lot of those came on board kind of towards the tail end. So the the cost wasn't fully baked into the quarter. So we should expect to see an increase in sales and marketing in q 2, especially because we have ExpenseCon 3 also.

Operator

So it's kind of a, a double whammy there. We have our big conference and then also our SDR costs are made fully baked in for the full quarter. So we should expect to see an increase in sales and marketing going forward.

Speaker 1

Okay. Thank you. But that program is also getting more and more efficient. Like, All of our setup specialists and SDRs are getting more and more trained and becoming better and better. So we don't think that we need to keep ramping it up to get A higher ROI.

Speaker 1

So or rather, we don't need to keep ramping it up to get bigger results. We can just improve the ROI. So there's a little. So Brian, strike like we the full cost is not baked in, so q2 is going to come in a little bit higher on that cost alone. But I don't think I would expect that it's gonna keep ramping up because we are investing in the channel.

Speaker 1

We're investing in the channel not just in terms of growing The headcount of those agents, but also making them better and more, efficient.

Operator

Yeah. Yeah. That's a good point. We added a 100 SDRs in q 1, but then we are not adding a 100 SDRs in q 2. We are training and, you know, making more efficient and maybe even, you know, cutting low performers.

Operator

So, it's not a 100 per quarter that we are heading.

Speaker 2

Got it. Thank you.

Operator

Thank you. All right. Next, we have, Stephen Enders from Citi.

Speaker 3

Thanks for taking the question here. There you go. I guess I just want to Ask a little bit about the the new Expensify that you talked about both in the press release and hinted at in the in the in the call or in the Transcript here. I guess, what is the biggest change that we should be, I guess, looking for in kind of any early preview for How we should be kind of thinking about what that could potentially, look like, but from an app basis and how it might change the, the business overall?

Operator

Great question. So we are expanding the use cases in which you might use Expensify. So right now people use it for expense management or if you're on a business trip. You can actually go to new.expensify.com right now and sign up. There's also an app in the app store.

Operator

And What is available to the public right now is basically like Slack or WhatsApp type functionality and we have more product announcements again, coming in in expense country, but, very shortly we are going to be adding all the functionality that we have in our existing Expensify product onto the new platform. And then Once we have parity there, and then we're going to start launching into all of our new use cases. And there's a lot of really exciting, new use cases you can have when you have all these on on one platform. So it's, it'll be a mix of new functionality that we we haven't had and and also bringing existing functionality onto the new platform. And that will ultimately result in in more activity, basically.

Operator

So let's say, Maybe you don't go on a business trip, but you do talk to someone within your business through the Expensebite platform. That's activity as well. So we're trying to add use cases beyond, you know, I had an expense this month. So, I didn't have an expense. I wasn't active.

Operator

So we're we're just making it trying to turn expense line into something that you use every day instead of maybe once a month or or sometimes for some people less than once

Speaker 3

Gotcha. Okay.

Speaker 1

Having viral lead gen, like if we if the goal is to have bottom up adoption, Then you want to turn every one of your individual users into sort of your champion, right? And the more functionality we give them to live Easier lives, the more they're going to talk about us. So that's really both there are some features that are aimed at increased activity simply to turn more uses into paid members and there are others that are aimed at better viral agents. So it gives individuals more opportunities to talk about it. So there's a bit of both.

Speaker 3

Okay. So I guess, is the view here that it's, a, both to increase growth, the viral nature, but also to maybe to have a more consistent subscription User number instead of the paper use?

Speaker 1

Okay. Sure.

Speaker 3

Okay. That's helpful. And then I wanted to ask on the the credit card side. I mean, Yeah. Looks looks like pretty good growth here.

Speaker 3

But, I guess, where are we in in terms of the, the ramp up curve to having that move from Contrevenue to revenue and being recognized in a more traditional way.

Speaker 1

Yeah. So We have all of our like operational perspective. We have all our work done. So we have all the contracts done. We have the revenue recognition related like memos from the auditors.

Speaker 1

So the tough part is over. But as you probably noticed, like this Roadmap right in front of you and the slide I was presenting around like using contributors more and more in order to keep executing on this at more rapid pace. The challenge is always engineering resources and sort of prioritizing what is going to bring the most return to our business. So that's kind of where we are. Like we are right now working on implementing the new program, but then launching it Only to ourselves.

Speaker 1

So like moving all of the Expensify employees off the old program into the new program for our part. So that'll give us good testing ground because we are all super users of our card. Obviously, every single employee uses the card every single day. So we are going through the motions on that right now. And then once we are done with that, I think we'll start to build it out Or rather like launch it to specific companies.

Speaker 1

Maybe we launch it just to someone adopting the card new. So We don't we go to the recording exercise, but it'll have to get prioritized in a sense. But everything is about like what is going to get us the biggest bang for our buck From an engineering perspective. So that's going to be the consistent answer going forward because we are done with everything that We are actually done with everything that we don't control and now we control this. So it's about prioritizing it appropriately.

Speaker 3

Perfect. Okay. Appreciate the response there, and both of you for, taking the questions here. Of course.

Operator

Thank you. Alright. Next, we have, Mauro Molina from Piper Sandler.

Speaker 4

You can hear me okay. Yeah. So I just have a couple of questions around the, SDR initiative. So just first off, What sort of drove the decision to outsource the SDR functions out to that vendor that you mentioned? And in what scenario might it make sense for Expensify to Bring that sort of initiative in house over the the long term.

Speaker 4

And then second thing around that is, how long might you expect, this initiative to sort of how long might it take to reach sort of a breakeven or a flip to a positive ROI? Thanks.

Speaker 1

Yes. Good question. So let me start by just kind of Summarizing, like, our general approach to doing something in house versus outsourcing and SDRs are a classic example. Whenever we have a job that is repeatable, that you can write down and it's simple And someone can execute it over and over again. So it's a matter of doing it many times and it requires very little skill and is repeatable.

Speaker 1

That's when we outsource it because what we can do then is hire a large number of agents, give them a very clear set of instructions, Even diversify across multiple vendors, and that way, we have some negotiating power in terms of pricing, and we can get better bang for our buck. But what we then do is manage them internally. So we the way we've structured the sales program is we have internal employees on our sales team who do things like partner management with our accounting channels. They handle the most strategic pieces of the business, and then they manage the setup specialists. And so the setup specialists have something of a lower skill than our internal employees' job because they're converting incoming leads.

Speaker 1

So they need to be able to Anticipate and block and tackle, but it's not so high skill that they require the kind of training that And kind of experience in generalist tendencies that we've hired internal employees for. And then the setup specialists And our internal employees manage the SDR pipeline and their job is really very repeatable and they have a script and they hit the script and they just do it over and over again. So that's sort of how we've structured it and never say never, but I don't think the SDRs are the type of job The requirements or the type of job profile that we would ever take internally because we could do it much more cost effectively and ramp up and down much more easily If we outsource it. So so that's let me stop there and see if that answers your question.

Speaker 4

Yes. That's helpful, on that front. And actually, just as a follow-up to that part before, touching on the ROI, how long, How easy is it, so to speak, to ramp up the SDR headcount month over month or quarter over quarter? And that's all I have there.

Speaker 1

Yeah. So that's Also, very interesting question. So we started this effort late last year. I want to say, like, q4, like October, November. And we did, in fact, think that it could be like, we we told these vendors, we started with very few just to, like, test if this thing can work at all.

Speaker 1

And, You know, when we saw that it could work, we wanted to scale it to a 100. So we started with, like, 10 and then we wanted to scale it to a 100. And we did Notice that it took those vendors up to a month to hire them and then a few more weeks after that to just, like, give them some basic training and let them get the So that's why while we started this initiative and kind of announced that we're ramping up in q 4, we didn't fully ramp up till maybe mid q 1. So we were it's a it was continuous process. It didn't go from 10 to 100 overnight, but it went from 10 to 25 to 45, so on and so forth.

Speaker 1

So it seems like it takes them something of a quarter to get to a100. But that said, it's also behind us. And going forward, and I think we were responding to another one of your questions earlier, but We're not trying to keep growing the headcount. And this is where maybe I'll come back to your second question. The idea behind This entire arm of our growth model will be to make it yield something consistent, Something steady, something modest that we are happy with and to do it more and more cost effectively.

Speaker 1

So right now we have It's nearly 70 set of specialists and 100 SDRs. And the idea isn't even to maintain that. The idea is to sort of deploy that, identify the real winners And then very aggressively performance manage the bottom of the team, if you will, and then Keep optimizing so we can kind of identify the 20% of the team that contributes to 80% of output because that's generally how it Ends up being. So that's the challenge now. Like, over the next few quarters, that's what we're gonna be focused on, identifying the winners, identifying, You know, the loser, so to speak, and then being aggressive about managing this program for ROI.

Speaker 1

And I'll let Brian add anything that he wants to as well.

Operator

Yeah. I'd just say it's pretty flexible and that we can drastically, upscale and downscale the numbers intra quarter. So it's we're not locked into annual numbers or anything like that. It's very flexible, which is One of the reasons, we like it.

Speaker 4

Alright. Thank you all very much.

Operator

Thank you. Alright. Up next, we have, Daniel Jester from BMO. BMO.

Speaker 5

Thanks for taking Question, Daniel.

Operator

There'll be some thank you.

Speaker 5

So maybe on the paid I should be growth, there add pretty strong growth Really the avenue of growth.

Speaker 1

You kind

Speaker 2

of I

Operator

think there's a I think there's a little bit of an echo. Anu, could you mute yourself real quick? Sorry about that, Daniel. Could you could you repeat the question? Sorry about that.

Speaker 5

Is this better now?

Operator

Yes.

Speaker 5

Arsen. Alright. So on the free product, or the free the free trials, you've talked about growth there for a while. It's been pretty good for a bit. Is that can you give us any sort of like color about the conversion rate of those free to subscription?

Speaker 5

Or is it more important to look at those free trials as drivers of growth for interchange?

Operator

Good question. So the free trials I I see. So the free trials are not related to the free plan. So there's a free plan where you can use, like, basic simplified lite for free. You can run, you know, a simple business off of it for free.

Operator

The free trials are for the paid, the the paid program. So what we've seen is basically We've, you know, we're really focusing on our sales and marketing. We've seen a substantial increase in the number of free trials for the paid product in q1 versus previous quarters. And we're basically what we're saying is, that's some encouraging data because it's the huge lift in the free trials. So it's actually it's not related to the free plan.

Operator

I I understand that. Now that you said, I'm like, yeah, that is actually kind of, confusing. Yes. We have a free plan. And then when you are trying to pay for our product, we give you a free trial and we've seen those free trials increase substantially in q1.

Speaker 5

Got you. Okay. That is helpful. And then maybe, philosophically, I know you're not going to give guidance, But as you think about sort of the growth trajectory this year, obviously the macro is what the macro is. Do you think that interchange growth is really going

Operator

to be a big potential

Speaker 5

overall growth this year or maybe Kind of walk through the the puts and takes for the different variables in terms of getting the top line moving again.

Operator

Yeah. Great question. So Yes. I think now the interchange isn't revenue. I know a lot of people adjust for it in their models, but, by GAAP, it's not revenue.

Operator

But, Yes, interchange is growing well. And when we do get that moved over into the interchange line item, we think that it is reaching a point where it's going to be, you know, a good contributor to the top line revenue. Now in terms of the subscription, so we were adding new customers every every quarter. You know, subscription numbers are going up. The paper use has just been kind of all over the place.

Operator

So I think that if we continue to retain our customers and kind of continue to add more when this kind of Decreased activity from, you know, economic conditions stops. We're gonna be in a much better place in the future. So we're kind of just like waiting out the waiting out the storm and making sure that we don't lose, you know, our customers. And If their activity decreases, obviously, we, you know, we don't love that, but we wanna make sure we're holding on to the customers. And we do believe that As everything kind of opens up, you know, people are hiring activity overall increases.

Operator

Also, we're adding new use cases to our platform, which gives people more opportunity to be active on our platform, that we'll see those activity numbers increase. So we ultimately I believe that the decrease in activity is temporary. And but obviously, in the short term, you know, in q one, it did decrease, which Kinda hurts us a little bit.

Speaker 5

Okay. And then one more if I can squeeze it in. The product road map has been very compelling. You've You've made a lot of progress there. Can you just help us think about customer usage of the various products How that has trended?

Speaker 5

You know, I'm just trying to get a sense for what the demand pull for your customer base is for some of the new products that that you're launching and some of the new pipeline that, you know, we'll hear at ExpenseCon. Thank you.

Operator

Yeah. So I can't say too much because I don't wanna David's got all these big announcements lined up. I don't wanna spoil them, but basically. So Almost everyone uses Expense Management. Right?

Operator

It's Expensify. People know us for that. Also, we're seeing more and more People using the expense by card. Actually, all the kind of turmoil in the banking sector has been a big boon to us, card wise. We saw a lot of, you know, customers come over to the expense by card.

Operator

After that, you know, we are seeing people want to use the invoicing solution. I don't have any official numbers to to give there, but We have also, we're getting a lot of good feedback from the chat product and, but that's currently, you know, only available if you go to, you know, new docs and set.com. So we do have people actually actively using it. But I think that's kind of all the all that I can say right now without spoiling, you know, I would just say stay tuned. ExpenseCon is is coming up, May 18th.

Operator

So we're gonna have a number of announcements there, but we're excited to start migrating customers over to the new platform. We think it's going to be a big boon to the business and it's something we've been working on for the last couple of years. So we're all just excited to get in the hands of more of our customers.

Speaker 5

Great. Thank you very much.

Operator

Thank you. Alright. Next up, we have Sam Flynn from Lake. Now we have Mark Schappel from Loop Capital.

Speaker 6

Hey, guys. Can you hear me okay?

Operator

Yes.

Speaker 6

Perfect. Thanks for taking my question. Sort of 2 quick ones for you. The first thing, have you seen obviously, subs were up in the quarter, which is great, but just wondering if you've seen any turnover from your larger accounts?

Operator

So, churn has been quite low. It's the the decrease in paid members is more just kind of an overall decreasing activity across across the user base. What we see actually is most churn being in the smallest segments of the business to, like, the ones and twos, 1 and 2 employee businesses. And in general, the larger the business, the less likely they are to churn and the higher our Seat retention is so it's I think maybe the kind of the opposite. Right?

Operator

It's The the bigger customers are not churning, and the smaller customers, those are the more likely to go out of business kind of in an environment like this or kind of be there for a couple months and and bounce off type of thing. But they're also our smallest, the 1 in 2 customer segments is our lowest revenue customer segment. So in general, it's not from a turn off of customers, it's just the decrease in activity across the board, which we feel is attributed to the macro element.

Speaker 6

Perfect. That's helpful. I appreciate it. And then secondly, and then I'll hop up. Just wondering what sort of trends you're seeing in business travel recently?

Operator

I think we've seen a, a return in business travel, but also the As a reminder, business travel isn't a one to 1. Well, we don't need people to take, you know, 2 or 3 trips a month In order to be active on the platform, we need them to to expense one item. Right? They need to buy a cup of coffee from Starbucks or, you know, a dinner with a client type of thing, and then they're active on the platform. So it's not, if let's say travel increased 3 x, that doesn't mean our, subscribers are in getting increased 3 x.

Operator

We need the the unique number of business travelers to increase. We don't need the actual current audience of business travelers to travel 3x more. So it's a little different, I think, than what people expect. But one thing, a boon that Business travel does for Expensify is it creates more opportunities for word-of-mouth growth because you are experiencing the pain point that we solve. So the worst part of expense management is going on a trip or maybe back to back trips.

Operator

And you you have this huge pile of receipts and then you start complaining, you know, to your network. And then if you're complain about you have this problem, you're more likely to hear about Expensify and that creates an an overall lift. So business trouble is good for the business, but it's a little different than what The way you think is we're not like pulling transactional revenue off of business trips. We just business travel creates activity and that's how how we monetize.

Speaker 6

Great. Thanks again for taking my questions.

Operator

Thank you. And next I believe we have Sam Flynn from Lake Street Capital. Let's see. I think that Actually, no. My list is wrong.

Operator

Do we have, oh, that actually that is the end. That is the end of our call. Sorry. I was operating off of an old list. All right.

Operator

Well, thank you everyone for joining the call. We really appreciate it. We love talking about the business with you all. Just kind of as a closing, we're all very excited. I think we had a little bit of a shareholder letter in our earnings release from David, but We're all very excited about the future of the business here.

Operator

We've been, cooking in the lab for a long time on our our new platform, and it's so close to being released. So we are excited to get that in the hands of, all of our users and, we'll see you all next quarter. Thank you all very

Speaker 1

much. Thank you. Bye.

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Earnings Conference Call
Expensify Q1 2023
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