EXFY - Expensify Gears Up For Platform 2.0 Approach

2023-12-12 17:03:18 ET

Summary

• Expensify, Inc. sells software for expense data collection, tracking, and management for individuals and businesses.
• The company is preparing to launch its new Expensify 2.0 platform, which combines features similar to that of WhatsApp and Venmo.
• The company's financial performance has been declining, with decreasing revenue and increasing operating losses.
• Until we learn the initial user response to its new platform launch, I remain Neutral [Hold] on Expensify, Inc. shares.

A Quick Take On Expensify

Expensify, Inc. ( EXFY ) sells software for expense data collection, tracking and management for individuals and businesses of all sizes.

I previously wrote about EXFY with a Hold outlook in July 2023 as the firm transitions its platform to generate more frequent use by its customer base.

However, although the platform is beginning to roll out, we won’t see the results of its new Chat/Finance approach for some time.

I remain Neutral [Hold] on Expensify, Inc. until we learn more about the initial response from users on its new system.

Expensify Overview And Market

Oregon-based Expensify has developed a freemium platform for expense information collection, management, and payments for businesses and individual users.

The firm is led by founder and CEO David Barrett, who has been with the company since its inception and was previously the 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

• Chat

• New Expensify - preparing to launch.

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

According to a 2020 market research report by Grand View Research, the worldwide 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 primary reasons for this expected growth are the continued globalization of many businesses requiring employees to keep track of their expenses away from the office and for compliance, regulatory and anti-fraud 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 Trends

Total revenue by quarter (blue columns) has dropped sequentially due to decreasing activity by users; Operating income by quarter (red line) has worsened further into negative territory because of dropping gross profit margins and rising SG&A as a percentage of revenue:

Gross profit margin by quarter (green line) has fallen in recent quarters as a result of higher user card cashback activity; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have risen sharply more recently due to falling revenue but a constant cost structure as the firm ramps up to launch its New Expensify platform:

Earnings per share (Diluted) have dropped markedly in recent quarters due to the worsening revenue and expense dynamics described above:

(All data in the above charts is GAAP.)

In the past 12 months, EXFY’s stock price has fallen 75.45% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) gain of 46.4%:

For balance sheet results, the firm ended the quarter with $89.1 million in cash and equivalents and $56.7 million in total debt, of which $23.1 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $7.5 million, during which capital expenditures were $1.2 million. The company paid $41.2 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Expensify

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

(Source - Seeking Alpha.)

EXFY’s most recent unadjusted Rule of 40 calculation was negative (45.3%) as of Q3 2023’s results, so the firm’s results have worsened substantially, per the table below:

(Source - Seeking Alpha.)

Commentary On Expensify

In its last earnings call (Source - Seeking Alpha ), which was not attended by the CEO, it covered Q3 2023’s results, and management’s prepared remarks highlighted its primary customer base as being very small companies of up to 100 employees in size.

The company is preparing to launch its Expensify 2.0 product, which it views as a cross between WhatsApp and Venmo.

While EXFY has been seeing subscriptions to its existing product grow, the activity-based part of its revenue has been dropping due to macroeconomic headwinds, according to management.

The firm’s Expensify Card is growing but is producing higher cashback costs, pulling down revenue in the process.

I prepared a chart showing the frequency of a variety of terms and keywords used by analysts and management:

The chart indicates that the company continues to face significant "challenges" and "headwinds" in the current business environment.

Analysts questioned the leadership about development expense reductions, pay-per-user dynamics [PPU], and cost of goods sold trends.

Management said that R&D and G&A expense reductions have started in mid-Q4, or at least an increase in efficiency in its open-source community activity.

The company has seen its PPU revenue, as opposed to subscription revenue, fall back down toward more normal levels, even if they are elevated.

The cost of goods sold is expected to decrease but not until 2024 and subject to a "dynamic environment" through that time.

For the quarter’s results, total revenue dropped by 14.1% YoY, while gross profit margin fell by 9.4%.

Selling and G&A expenses as a percentage of revenue increased year-over-year by 7.9%, a negative result, and operating losses worsened sharply to $14.9 million for the quarter.

The company's financial position is reasonably good, with plenty of liquidity, some debt and good free cash flow. However, a material amount of the debt will need to be refinanced within the next twelve months, so interest expense may rise.

EXFY’s Rule of 40 performance has been quite poor in the most recent quarter, with revenue decline combined with heavy operating losses dragging down the results.

Management didn’t disclose any customer or revenue retention rate but did say that ‘we’re seeing paid customers stay with us…but their activity is decreasing.

Looking ahead, the full-year 2023 revenue decline is expected to be 10.8%.

If achieved, this would represent a reversal versus 2022’s growth rate of 18.8% over 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has fallen substantially, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include a strong uptake of the firm’s New Expensify platform.

However, although the platform is beginning to roll out, we won’t see the results of its new Chat/Finance approach for some time.

Investors interested in EXFY would essentially be betting that this new approach will be successful.

While that may be the case, I don’t think we have any data yet, so I remain Neutral [Hold] on EXFY for the near term.

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