EXFY - Expensify Contends With Uneven Growth And Increasing Operating Losses

Summary

• Expensify went public in November 2021, raising $262 million for the company and selling stockholders.
• The firm operates an online platform for collecting, tracking, and managing expense information for businesses of all sizes.
• EXFY has produced tepid revenue growth and increasing operating losses recently.
• My outlook for EXFY is on Hold in the near term.

A Quick Take On Expensify

Expensify ( EXFY ) went public in November 2021, raising approximately $262 million in gross proceeds for the company and selling stockholders from an IPO that was priced at $27.00 per share.

The firm provides software for expense data collection, tracking and management for businesses of all sizes.

Given EXFY's continued operating losses in a growing cost of capital and slowing economic environment, I'm not optimistic about the stock's upward catalyst potential.

I'm on Hold for EXFY in the near term.

Expensify Overview

Portland, Oregon-based Expensify was founded to develop a platform for expense information collection, management and payments for businesses and individual users.

Management is headed by Founder and CEO, David Barrett, who has been with the firm since inception and was previously engineering lead for Red Swoosh, a P2P file sharing company.

The company's primary offerings include:

• Expense management

• Expensify card

• Bill pay

• Invoices

• Travel

• Personal payments

The firm pursues free trial and paid subscribers through its online, self-serve platform that it markets through online advertising, social media, and word of mouth as well as through its outbound direct sales and marketing efforts.

Expensify's Market & Competition

According to a 2020 market research report by Grand View Research, the global market for travel and expense management software was an estimated $6.9 billion in 2019 and is forecast to reach $17.6 million by 2027.

This represents a forecast CAGR of 12.4% from 2020 to 2027.

The main drivers for this expected growth are continued globalization of many businesses, requiring employees to keep track of their expenses away from the office, and for compliance and regulatory purposes.

Additionally, software offerings are increasingly turning to AI and data analytics to provide real-time feedback for optimizing employee travel bookings and expense options.

Also, below is a historical and projected future growth trajectory chart for the U.S. travel and expense management software market through 2027:

Major competitive or other industry participants include:

• Bento

• Brex

• Divvy

• Emburse

• Expensya

• Fyle

• Happay

• Pleo

• Ramp

• Spendesk

• TravelBank

• Webexpenses

• Zoho Expense

• Coupa

• Others

Expensify's Recent Financial Performance

• Total revenue by quarter has grown according to the following chart:

• Gross profit margin by quarter has trended lower in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have risen recently:

• Operating income by quarter has remained negative in the last five quarters:

• Earnings per share (Diluted) have also been negative in recent quarters:

(All data in above charts is GAAP)

Since its IPO, EXFY's stock price has fallen 77.2% vs. the U.S. S&P 500 Index's drop of around 14.9%, as the chart below indicates:

Valuation And Other Metrics For Expensify

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

EXFY's most recent GAAP Rule of 40 calculation was 10.7% as of Q3 2022, so the firm is in need of improvement in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Expensify

In its last earnings call ( Source - Seeking Alpha), covering Q3 2022's results, management highlighted its focus on SMB and mid-market customers.

For SMBs, the company uses its freemium approach to attract SMBs to its self-serve platform.

For mid-market customers, EXFY has an in-house sales team that works to generate service restart from previously interested companies or individuals.

However, the firm is seeing higher pay-per-use dynamics in the current challenging economic environment.

As to its financial results, topline revenue rose 13.6% year-over-year and declined slightly versus the previous quarter.

Management did not disclose any company retention rate metrics.

The firm's Rule of 40 results have been disappointing, with its trailing twelve-month results at 10.7%.

Operating losses for the quarter worsened sequentially but improved year-over-year while earnings per share remained at a negative ($0.10).

For the balance sheet, the firm finished the quarter with $106.2 million in cash and equivalents and $67.1 million in debt and short-term borrowings.

Over the trailing twelve months, free cash used was $3.5 million, with only $0.6 million in capital expenditures.

Looking ahead, management did not give forward guidance, but October's revenue results indicated a potential return to sequential revenue growth for the quarter.

Regarding valuation, the market is valuing EXFY at an EV/Sales multiple of around 5.2x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.8x at October 31, 2022, as the chart shows here:

So, by comparison, EXFY is currently valued by the market at a discount to the broader SaaS Capital Index, at least as of October 31, 2022.

The primary risk to the company's outlook is an increasingly likely macroeconomic slowdown or recession, which may accelerate new customer discounting, produce slower sales cycles, and reduce its revenue growth trajectory.

A potential upside catalyst to the stock could include a 'short and shallow' slowdown or recession.

Given EXFY's continued operating losses in a growing cost of capital and slowing economic environment, I'm not optimistic about the stock's upward catalyst potential.

I'm on Hold for EXFY in the near term.

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