Nick Tooker; Investor Relations; Expensify Inc
Anu Muralidharan; Chief Operating Officer, Director; Expensify Inc
David Barrett; Chief Executive Officer, Founder, Director; Expensify Inc
Aaron Kimson; Analyst; JMP Securities
Nick Tooker
(technical difficulty) Risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Forward-looking statements in the earnings release that we issued today along with the comments on this call are made only as of today and will not be updated as actual events unfold.
Please refer to today's press release and our filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today's call management will refer to certain non-GAAP financial measures. While we believe these non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release or the investor presentation for a reconciliation of these non-GAAP financial measures to their most comparable GAAP measures.
And with that, I'll hand it over to Anu to get us started.
Anu Muralidharan
Thank you for that intro [Nicky]. I am pretty excited to walk all of you through our third quarter financial performance. And highlights, notably, we've made some pretty key strides towards stabilizing the business, improving the core fundamentals and also laying down a stronger foundation for our future growth. So let's dive into the details.
First off revenue in Q3 total revenue came in at $35.4 million. This is a 6.3% increase quarter-over-quarter and we also beat the street consensus forecast. So we're pretty excited about that, pretty proud of that. Now, admittedly, this was a 3% decrease year-over-year and that reflects some lingering challenges in the business. But on near term momentum makes us more optimistic about the upcoming quarters. And the new expensify platform is also expected to continue to pick up and contribute towards that revenue group.
In Q3, average paid members came in flat quarter over quarter at 684,000 and that represents a 5% decrease compared to the same period last year. Interchange from the Expensify Card was $4.6 million and that was a whopping 48% increase compared to the same period last year. And that is a pretty key highlight this quarter and I will get into some more details on that in a few slides.
Let's talk a little bit about cash performance. A standout highlight for Q3 was our free cash flow performance which came in at $6.7 million. Now operating cash flow which includes the timing of customer funds came in at $3.7 million. Net loss was $2.2 million in Q3 with non-GAAP net income of $5.4 million. Last but perhaps the most exciting is our adjusted EBITDA which came in at $9.7 million.
Now, the continued improvement in profitability and free cash flow, it's driven by two things, a higher interchange take rate as we start moving more and more of our spend towards our new card program. And also our continued focus on our core cost efficiency, which continues to show effects in terms of profitability.
Let's talk a little bit more about free cash flow and get into our free cash flow guidance a little bit. Now, given our very strong performance in terms of adjusted EBITDA and free cash flow. Last quarter, we increased our free cash flow guidance for the year from $11 million to $13 million to $15 million to $16 million. This quarter, we are going to do that again. We're going to increase it again and we are giving you a free cash flow guidance for the year of $19 million to $20 million. So again, free cash flow performance, profitability improvements have been a key highlight this quarter and we're very proud of the fact that our continued efforts to stabilize the business is showing results.
Now, as promised, let's talk a little bit more about those Expensify Card updates. This is one of our very exciting growth drivers, Expensify Card and interchange revenue from expensify card increased. 48% year-over-year.
The launch of the New Expensify Card program has been very well received and the migration effort if I may say so has exceeded even our expectations, 94% of our existing card spent has already been migrated to the new program, which is pretty incredible given it's been less than a year since its launch. And the new program is all new customers on the card are bringing directly on board to the new program.
Now, the new program allows us to earn 20% more interchange. So it has a higher take rate and this is expected to further bolster our revenue growth in the coming quarters. So let's break down the details of the interchange this quarter in a little bit more detail.
The existing old program generated a net interchange of $0.9 million. Our new program generated interchange of $3.7 million and so taking together total interchange came in at $4.6 million. We are pretty committed to getting that 94% spend number that's been migrated to the new program up to 100% before the end of year. We have a lot of, you know, irons in the fire and they're all going pretty well. So we feel pretty confident that we can hit that 100% number. Now last but not the least that we do every quarter. We give you a look ahead on paid active uses.
October's paid active uses came in at 693,000, which is a 1% improvement versus the Q3 number. And we're pretty excited about that. We're hopeful that the trend continues and we see a much better Q4 in terms of paid members and subscription revenue.
With that I hand things over to David to talk a little bit about business highlights.
David Barrett
Thanks for that Anu. So at this point as well, I typically go through the road map and talk about basically the new developments we've had since. But I would say for the Q3 quarterly highlights right now, I'd like to talk about what we've learned on the road.
So as mentioned last quarter, we put a lot of work into taking the product out to market and we've been at a couple conferences and got a lot of real world feedback from customers and the feedback has been great. I think in the process, we sort of learned some really key things with the value of New Expensify and why it's going to create so much value in this market.
We call it kind of the 80%-20% advantage. And so if you really think about it, what we found is that expense management historically, has only ever been able to automate about 80% of the workflow. And that's basically as much of the workflow you can automate and the information that's on the transaction itself. The either off the credit card transaction or off the receipt.
But at some point, there's a remaining 20%. And the 20% is where all the actual pain of expense management is. And that's the information that isn't on the transaction itself. It's information you have to go and actually ask a human about not asking a human is the part that everyone despises because that's where you actually have to go nag your employees or your employees to get nagged by our accounting team. And no one likes that part. And that part is because it's information required to code the Expensify that only a human knows.
And so the first part of New Expensify is trying to automate the process of gathering that 20% by streamlining the conversation around it. And that's why we have this what we call a chat centric design for new Expensify. Because historically, you think about if you need to get this information, you do it by emailing someone and then you're operating at email speed and email speed is super slow, like I don't know about your inbox, but if you email me, I'm not even going to see it for days or maybe weeks. And so anything that you're asking me via email is going to be days or weeks behind. But if you text me or chat me, I'll see it respond instantly.
So New Expensify design is about trying to get expense management to happen at chat speed. And that's why basically bringing the chat process into the product so that people engage with the product quicker and get faster answers to the humans.
So step one and New Expensify I is just about making that last 20% the most painful 20% of expense management happen at chat speed. So you can actually close the books faster. But the second part of that is enabling us for the next generation of AI. Now I know that AI is talked about everywhere and a lot of it's all made up. But I think the really key example of where AI works incredibly well because most of that 20% of the discussion is about information which already exists in chat somewhere.
And so for example, imagine like you're an accountant and you see a purchase that's at some club in Vegas, for example, you could look at this and be like is this obvious fraud? And you have to go track that employee and ask them and say, well, actually, no, it's for as at a conference in Vegas and I took a client as dinner. So it's actually very clear expense.
Now, normally you have to wait around by emailing them wondering if there's fraud for days or weeks until that person responds. The response itself might only take a couple of seconds for the person to do. But you have to wait days or weeks for that couple of seconds to be spent. With Expensify new design and a chat centric design trying to bring the organizational chat onto the Expensify platform that puts us into a position for our AI to see the conversation that happens both before and after the expense. And the odds are at some place in that chat conversation. They mentioned that they were going to a conference in Vegas, taking a particular client to a particular club. They either said it before or they probably after.
And so in the future, Expensify AI design, it is going to be searching, not just the conversations that sends to you, but starting all the conversations that you had leading up to and after the expense itself to see if we can answer the question automatically and do the coding automatically. So, expense goal is not merely to streamline that last 20% but truly to automate that last 20%. We're aiming for the world's first -- or industry's first 100% automation expense management.
We're not there yet. You can start to see how our chat centric design starts to get us there. So maybe to summarize, let's say Q3 was a fantastic quarter. It's really showed that the business has remained stable. And in particular, we say New Expensify is being powered on the foundation of Expensify Classic. And the Classic foundation is strong, it's profitable and provide an incredible resource for building New Expensify on top of it.
As you can see, we've increased our free cash flow guidance once again and again, we keep finding more and more efficiencies in the organization and that's been really, really powerful for us. The Expensify Card itself almost fully deployed, I think, as you mentioned, much faster than we really expected. And we are all --we still feel very confident that we're on track for full deployment by the end of the year in 2024.
New Expensify is in market. It's a real product, it is generating revenue and we're going to be the first in the market, we think to get to that -- what we think is going to be the new bar 100% automation expense management by bringing the chat centric flow into the product itself.
And then finally, Expensify Travel is actually it's in market as well making revenue and we're getting great reception. So again, it's been a fantastic quarter built on a few different fantastic quarters coming up to this. And so we have a strong foundation, things are really good and we're very, very proud of this quarter.
So with that, I think we'll turn it over to questions.
Nick Tooker
Fantastic. I believe Aaron you're here from JMP. We'll get started with your question.
Aaron Kimson
Yeah, that's great. Thank you guys so much. I guess the first question just off of your last comment there, Dave. For Expensify Travel, any idea on what the revenue contribution is today and how do you -- how big a piece of the business do you think that can become over time?
David Barrett
Well, I think it can become quite big because, I mean, travel and expense [team] is the entire category. And so I think that we're seeing that it's just becoming sort of table stakes for expense management in general. And so every one of our customers I think has basically a travel requirement. And so I think it has the potential for actually offering quite a lot of lift. Now, we're still getting started with it. We're rolling it out. We've got great early traction, but I don't think we have anything we're sort of ready to share at this point.
Aaron Kimson
Okay. That's helpful. And then switching to capital allocation. So the company bought back 646,000 shares from [David] [234] share on August 28. And that was the only stock the company bought back in 3Q. Can you help us think about how you plan to manage the buyback going forward between repurchasing shares in private transactions like that one versus buying shares in the public market where your stock super liquid.
David Barrett
I'd be curious for your thoughts on this, but my quick thoughts are, I think that we're very opportunistic. I mean, we've built up quite a cash reserve that we can use and deploy very quickly and so I don't think we know exactly the best way to deploy it in the future. But as we've shown we're pretty flexible and I think we're investigating all opportunities. But anyway [Anu] what you think of that.
Anu Muralidharan
Yeah, I agree. We're pretty bullish on the company. We, you know, a lot of what, my business or like financial highlights focused on was really just getting the core fundamentals to a really strong place and now that we are in that place where we feel like the business is kicking off cash and doing it reliably. And we're optimistic in terms of growth, I think in the future quarters, we should be a little more bullish in terms of doing buybacks, but we don't have anything concrete to share just yet.
Aaron Kimson
Okay, thank you guys.
Nick Tooker
Perfect. Steven, I believe you're here with Citi.
Hey, great. Thanks for taking the questions here. I guess -- I want to ask on the sub user side and good to see that, see that tick up and stabilize and I guess. Curious if you have an idea of maybe what's helping support that check up, like is there something that you feel like you've done that's helping drive that number in the right direction or does it feel like the macro is getting better? Just kind of how would you kind of articulate maybe what's going on there?
Anu Muralidharan
Yeah, I can take this. So, we are like I was saying, we're pretty optimistic going into the future quarters as New Expensify, sort of ramps up more and more and we start to send more and more of our traffic there that, conversion is going to perform much better and new customer growth is going to do better. But -- and I think we've talked about this in the past quarters, the really big driver for paid member growth in general over the years has always been existing customers increasing their usage on Expensify.
And there were only really, there were really only two years that particular metric was stressed, that was in 2020 peak COVID and then 2023 and largely when customers are still using the product, but they're not expanding. It's, and we've looked at the correlation between that and churn try to see if it may be an early indicator, but it isn't. Largely it seems driven by macro.
So we all know that, last year and even, some parts of this year have been, there's been a lot of news about layoffs, companies aren't expanding overall. So that kind of makes sense that metric is stressed and we talk about this more next quarter so that we have a full year's worth of data. But we're seeing some of that existing customer usage expansion sort of rebounding. So I think that's definitely giving us some tailwinds.
Okay. All right. That makes sense. And then maybe on the go to market side. And I know there's been some, I guess evolution of what that looks like through this year. So, how are you kind of seeing the most recent kind of changes resonating and how are you kind of viewing the efficacy of some of those investments?
Anu Muralidharan
You mean on the new platform specifically?
Yeah, just in terms of the go to market and the trying to capture new users and customers and all that.
Anu Muralidharan
Yeah, so we've always had the most amount of success with organic channels. So like SEO, word-of-mouth, it just the strength of our brand. So we see a vast majority of our new sign ups and even just visitors coming directly to us and that kind of continues and it's a really good leading indicator always that we are never starved for leads.
So we continue to keep on doubling down on improving conversion, like improving sales efficiency, but also the product's ability to convert better and better with our new platform. We're still in early days. What we're doing is sending all of the smaller leads to our new platform in order to really dial in conversion so that we can keep what's working, improve what's new and then start to redirect all of our new leads to the new platform.
And that effort is probably going to take us the next few quarters and we'll have, more substantial numbers or specific numbers for you down the line. But overall, I think our go to market and that's part of why we're able -- business is able to kick off cash. So effectively is because we are doing really well in organic channels and word-of-mouth and continuing to focus on conversion. So that's sort of still the focus of our go to market efforts. Did that answer your question?
David Barrett
And maybe I could add to that a little bit. I would say, I think that I agree with everything that Anu just said. And I would say a big part of the go to market strategy is building a product that just inspires leads and customers more and just to give kind of like one anecdotal example.
So we go to a [suite] world every year and we go with basically the same pitch, same product and things like this. It's always been a very, very good conference for us because [Netsuite] is a major partner of ours, we do very well in that channel. And so we went to the same conference with the same size booth. But this year we were pitching New Expensify rather than Expensify Classic. And that produced about 61% more leads out of that conference.
Again, everything was the same except for the platform. And so I think we see that the major strategy for launch growth is really just to launch a platform that inspires and captures the imagination of customers better, which translates into more viral lead generation through word-of-mouth and higher conversion. And so I think these are very cost effective ways to increase the conversion of our existing organic lead structure and then double down on those organic leads.
Okay. That's great. That's helpful contact and a great example there. So, appreciate that and appreciate you taking my questions here.
Nick Tooker
Fabulous. Eric from Lake Street Capital. I believe you're able to join us.
Yeah. I had a question regarding the interchange from travel traction. You had obviously a nice shift here Q2 to Q3. Are we seeing any green shoots in interchange from the travel offering that you guys have? And if not, when should we see that?
Anu Muralidharan
I don't think we're breaking it out in that degree of detail. And if I'm being honest, do you mean like travel as a product doesn't always -- like a customer that is using travel as a product isn't always using our card. So there's -- I'm not sure what the connection is between those two from an interchange perspective.
Yeah, it was just, to the extent they're using the card to book [travel].
Anu Muralidharan
Okay. Yeah, I think that is probably not meaningful because that's a pretty, subset of what we would look at both in terms of card spent travel and travels total spent on card.
David Barrett
Yeah, maybe I would say one of the, I think advantages that we have in the market place is our card agnosticism that we support all third party fee and card fees. And so I think it's great and I think things do work best when you use the Expensify Card in conjunction with Expensify Travel, but there's no requirement to. And so certainly, I think a lot of our sense by travel, customers just continue using their existing corporate card program and that's fine. We make money other way.
Okay. And then the second question is regarding the increase in the free cash flow, I joined the call late, but were there other -- were there cost efforts taken to the point where you had maybe a reduction in force or are these more on the cost of goods side where you're continuing to squeeze costs out of the business?
Anu Muralidharan
Yeah, it's the latter. We didn't have any workforce decrease or anything like that. We are continuing to operationally get more efficient and that is the second driver. So there was the higher interchange take rate but also operational efficiencies taken together, gave us a higher free cash flow margin.
Got it. Thanks for taking my questions.
Nick Tooker
Fantastic. That was everyone we have on the call live.
David Barrett
Great. Hey, well, it's been a real pleasure. Thank you so much for joining us for this call. We're very excited about this quarter's results and we can't wait to talk to you next quarter.
Anu Muralidharan
Thanks everyone.
