Welcome to the Q1 2023 Expensify Earnings Call. And today, you have myself, Ryan Schaffer and new Anu Muralidharan. 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 everything is ready. So today, Any and I are going to take you through the slides. And without further ado, let me turn it over to Any to read the legalese and take us through the business section.

Thanks, Ryan. 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 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. We 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 the most comparable GAAP measures. So on that note, next slide, let's begin. I want to remind you and walk you through our long-term strategy in brief. So let's start off with the 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 1 in the market is actually using any software product, which means the primary competition is really just excel and paper. But the opportunity when you…

Great. Thanks, Anu. All right, everyone. Happy to see everybody again. I'd love to take you through the Q1 financials. So revenue was $40.1 million, that is just a tad hair down year-over-year. But 1 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 adjust for cash back, you would see that revenue is actually higher. We have higher -- we have more users than we had last year. But actually, the card is more successful, that pulls down revenue. So we had a flattish, slightly down revenue year-over-year. Our average paid members were 747,000, up about 6% year-over-year, and our gross interchange is $2.3 million for the quarter, which 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 $7.6 million. Our free cash flow was $10.2 million, which we're quite happy about. Our GAAP net loss was $5.9 million. Our non-GAAP net income was $4.1 million and a difference, again, between GAAP net loss and non-GAAP net income is stock-based compensation. Our adjusted EBITDA was $8.7 million. All right. So let's talk about what happened in Q1. So our customer count was up in Q1. However, we did see activity across our customers decrease, which resulted in a net decrease in paid members from Q4. 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 13.3, or something like that. So we saw kind of a decrease across the board, a small decrease, but we have so many customers that even…

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 subscriptions and pay per use. I think you guys have mentioned 20% would be your ideal number. Have the -- these trends sort of had you guys on that path? Or have you guys sort of thinking about earlier than you anticipated?

Great question. So yes, we are being successful in converting people over from pay-per-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. It just means that they have less employees that were active. So we are seeing paper use come down. But this quarter, it was kind of a little bit of come a, little bit calm. We're moving people over to subscription, but also -- they also decreased. So yes, our pay per use percentage to go down, but part of that is attributed to general less activity and also in part because we've been successful in converting. So it's a little bit of both.

Okay. Cool. 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. Can you provide a bit of color there?

Sure. So we've been -- we ramped down some of our marketing as we ramped our sales, but they didn't coincide perfectly. So we added 100 SDRs in Q1, but a lot of those came on board kind of towards the tail end, so the cost wasn't fully baked into the quarter. So we should expect to see an increase in sales and marketing in Q2, especially because we have ExpensiCon 3 also. So it's kind of a double whammy there. We have a big conference and then also our SDR costs are mutually baked for the full quarter. So we should expect to see an increase in sales and marketing going forward.

But that program is also getting more and more efficient. Like all of our set of specials and SDRs are getting more and more trained and becoming better and better. So we don't think that we need to keep ramping up to get a higher ROI, rather we don't need deep ramping it able to get bigger results. We can just improve the ROI. So there's a little -- so Ryan said the full cost is not maintenance, so the 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 going to keep ramping up because we are investing in the channel. We're investing in the channel launch in terms growing the head count of those agents, but also making them better and more efficient.

That's a good point. We added 100 SDRS in Q1, but we are now adding 100 SDRs in Q2. We are training and make it more efficient and maybe even cutting low performers. So it's not 100 per quarter, how we are at it. All right, next, we have Steven Enders from Citi.

I guess I just want to ask a little bit about the new Expensify that you talked about both in the press release and in the call on the transcript here. I guess what is the biggest change that we should be, I guess, looking for and kind of any early preview for how we should be kind of thinking about what that could potentially look like as might change the business overall?

Great questions. 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. And what is available to the public right now is basically like Slack or WhatsApp type functionality. And we have more product announcements again, the company in on ExpensiCon 3, but very we are going to be adding all of 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 exciting new use cases you're going to have when you have all these on 1 platform. So it's -- it will be a mix of new functionality that we haven't had and also bringing existing functionality onto the new platform. And that will result in more activity basically. So let's say maybe you don't go on a business trip, but you do talk to someone within your business through the Expensify platform, that's activity as well. So we're trying to add use cases beyond this month. So I didn't have Expensify, I wasn't active. So we're just making -- trying to Expensify is something that you use every day instead of maybe once a month or sometimes for some people less than 1 month.

Having vital leadgen, is the goal is to have bottom-up adoption, then you want to turn every 1 of your individual users in to 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 growth. There are some features that are in that increased activity to turn users into paid members, and there are others that are aimed at better variation to reduce individual more opportunities to talk about it. So there's a bit of a both.

Okay. So I guess is the view here that if they both increase growth, the viral nature but also maybe to have a more consistent subscription user number in paper use.

Yes.

Okay. That's helpful. And then I wanted to ask on the credit card side. I mean it looks like pretty good growth here. But I guess where are we in terms of ramp-up curve to having that move from contra revenue to revenue and being recognized in a more traditional way.

Yes, so we have all of our -- like an operational perspective, we have all our works done. So we have all the contracts done. We have the revenue recognition related like memos from the auditors. So the tough part is over. But as you probably noted, it's like this road map right in front of you. And the slide I was presenting around using contributors more and more in order to keep competing on this at a more rapid pace. The challenge is always engineering resources and sort of prioritizing what is going to be the most return to our business. So that's kind of where we are. Like we are right now on implementing the new program, but then launching it only ourselves. So like moving all of the Expensify employees of the old program, into the new program for all for. So that will give us a good testing ground users of our products every single employee uses of the account 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 started to build it out or rather launch to specific company, maybe we'll launch to someone adjusting the now. So we don't go to the recording in the side what we have to get prioritized in a sense, but everything is about like what is going to 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 this is the priority.

All right. Next, we have Mauro Molina from Piper Sandler.

So I just had a couple of questions around the SDR initiative. So just first off, what sort of drove the decision to outsource the SDR functions out of 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 long term? And then the 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 flip to a positive ROI?

Yes. Good question. So let me start by just kind of commenting like our general approach to doing something in-house versus outsourcing and SDR is 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. The matter doing it many times. And it requires very little scale that is repeatable. That's when we outsource it because what we can do then is hire a large number of agents, giving 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. Well, what we then do is manage them internally. So we structure the sales program as we have internal employees and our sales team who do things like partner management with our accounting channels. We handle more strategic pieces of the business. And then they manage the subspecialists. And so the subspecialists have something of lower skill than our internal employees job because they are converting incoming leads. 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 general tendencies that we've hired internal employees for. And then the question is and our internal employees, the SDR pipeline. And their job is really very repeatable and they have a script and the they hit the script and they just do it and over again. So that's sort of how we structured it and never say never, but I don't think the SDRs are the type of job 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 easily if we outsource this. So that -- let me stop there and see if that answers your question.

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

Yes. So that is also a very interesting question. We started this at late last year. I want to say like Q4 like October, November. And we did in fact think that it could be, like we told these centers that we started with very few just in attaching to work at all. And when we saw that it could work, we wanted to scale it to 100. So we started with like 10 and then we wanted to scale it to 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 hit the firms. So that's quite a while we started this initiative and kind of announced that we're ramping up in Q4, we didn't fully ramp up until maybe mid Q1. So we were -- it was a continuous process. It didn't go from 0 to 100 overnight, but it went from 10 to 25 to 45, so on and so forth. So it seems like it takes them something of a quarter to get to 100. But that said, it's also behind us and going forward, and I think we were responding to this another 1 of your questions earlier, we're not trying to keep growing the headcount. And is where maybe I'll come back to your second question. The idea behind this entire arm of growth model will be to meet yield something consistent, something steady, something modest that we are happy with. And do it more and more cost effectively. So right now, we have 77 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% team that contributed 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 going to be focused on identifying the winners, identifying the losers, so to speak and then being aggressive about managing this program for ROI, and I'll let Ryan add anything that he wants to as well.

Yes. I would just say it's pretty flexible and that we can drastically upscale and downscale numbers intra-quarter. So it's -- we're not locked into annual numbers or anything like that. It's very flexible, which is 1 of the reasons we like it. All right. Up next, we have Daniel Jester from BMO.

So maybe on the paid growth there [indiscernible] had pretty strong growth [indiscernible] it looks like [indiscernible] really the avenue of growth --

I think there's a little bit of echo. I know you talk real quick, sorry about that, Daniel. Sorry, can you repeat the question. Sorry about that.

Is this better now?

Yes.

All right. So on the free product or the free trials, you 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 or is it more important to look at those free trials as drivers of growth for interchange?

Good question. So the free trials -- 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 Expensify Light for free, you can run a simple business off of it for free. The free trials are for the paid -- the paid program. So what we've seen is basically we are 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 basically, what we're saying is that 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. I understand that -- now that you say that might get it is actually kind of confusing. 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.

Got you. Okay. That is helpful. And then maybe philosophically, I know you're not 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 to be a big potential overall growth this year? Or maybe kind of walk through the puts and takes for the different variables in terms of getting the top line moving on?

Yes. 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, 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 a good contributor to the top line revenue. Now in terms of the subscriptions. So we're adding new customers every quarter. Subscription numbers are going up. The pay per use has just been kind of all over the place. 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 economic conditions stuff, we're going to be in a much better place in the future. So we're kind of like in the waiting out the storm and making sure that we don't lose our customers and if their activity decreases, obviously, we don't love that, but we want to make sure we're holding on to the customers. And we do believe that as everything kind of opens up, people are hiring, activity overall increases 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 believe that the decrease in activity is temporary. And -- but obviously, in the short term, I think Q1 did decrease, which kind of hurts us a little bit.

Okay. And then 1 more, if I can squeeze it in. The product road map has been very compelling. You got -- 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? 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 you're launching and some of the new pipeline that we'll hear at ExpensiCon 3.

Yes. So I can't say too much because I do want to -- David has got all the big announcements lined up. I don't want to spoil them, but basically almost everyone uses expense management, right? It's Expensify. People know us for that. Also, we're seeing more and more people using Expensify card. Actually, all the kind of turmoil in the banking sector has been a big boon to us like card-wise. We saw a lot of customers come over to the Expensify card. After that, we are seeing people want to use the invoice and solution. I don't have any official numbers to give there. But we have -- also, we're getting a lot of good feedback from the chat product. And -- but that's currently only available if you go to new.expensify.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 -- I would say stay tuned, ExpensiCon 3 is coming up on May 18, so we're going to have a number of announcement 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 it in the hands of more of our customers. All right. Next up, we have Sam Flynn from -- no, we have Mark Schappel from Loop Capital.

Can you hear me okay?

Yes.

Perfect. 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?

So churn has been quite low. It's -- the decrease in paid members is more just kind of an overall decreasing activity across the user base. What we see actually is most churn being in the smaller segments of the business. So like the 1 and 2, 1 and 2 employee businesses. And in general, the larger the business, the less likely they are to churn and higher our net seat retention is. So I think maybe the opposite right. The bigger customers are not churning and the small 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 of months and bounce off type of thing, but they're also our smallest the 1 in 2 customer segment is our lowest revenue customer segment. So in general, it's not from a churn off of customers. It's just the decrease in activity across the board, which we feel is attributed to the macro element.

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

I think we've seen a return in business travel, but also the -- as a reminder, business travel isn't 1 to one. We don't need people to take 2 or 3 trips a month in order to be active on the platform. We need them to expense 1 item, right? They need to buy a cup of coffee from Starbucks or a dinner with a client type of thing, and then they're actually on the platform. So it's not -- if you say travel increased 3x, that doesn't mean our subscribers can increase 3x. We need the unique number of business travelers to increase. We don't need the actual current audience of business travel to travel 3x more. So it's a little different, I think, than what people expect. But 1 thing -- a boon 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 that trip or maybe back-to-back trips and you have this huge pile receipts and then you start complaining to your network. And then if you're complain you have this problem, you're more likely to hear about Expensify and that creates an overall lift. So business travel 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 the business trips. We just -- business travel creates activity, and that's how we monetize. That's the end. That is operating off of old list. All right. Well, thank you, everyone, for joining the call. We really appreciate it. We love talking about the business now with you all. Just kind of as a closing, we're all very excited. I think we had a little -- a bit of a shareholder letter in our earnings release from David, but we're all very excited about the future of the business here. We've been cooking in the lab for a long time on 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 much.

Thank you. Bye.