EXFY - Expensify Pins Hopes On High-Frequency Use Platform

2023-07-18 14:25:34 ET

Summary

• Expensify, Inc. provides expense management and related software and services to businesses and individuals.
• The firm's top line revenue growth has flattened recently while it continues to produce operating losses.
• Management is seeking to consolidate its software offerings into a single platform that fosters frequent use rather than just monthly expense-only accounting use.
• I'm Neutral [Hold] on Expensify until management proves it can reignite revenue growth while achieving operating breakeven.

A Quick Take On Expensify

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

I previously wrote about EXFY with a Hold outlook.

Until management proves that it can reignite revenue growth while achieving operating breakeven, I remain Neutral [Hold] on EXFY.

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 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.

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 the 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 Trends

• Total revenue by quarter has plateaued in recent quarters; Operating income by quarter has remained negative.

• Gross profit margin by quarter has trended lower in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter have been volatile but trended lower more recently, as the chart shows below.

• Earnings per share (Diluted) have remained negative, though they have made some progress toward breakeven in recent quarters.

(All data in the above charts is GAAP.)

In the past 12 months, EXFY’s stock price has fallen 60.63% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 34.02%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with $111.2 million in cash and equivalents and $66.9 million in total debt, of which $15.6 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $28.9 million, during which capital expenditures were only $0.4 million. The company paid a hefty $47.7 million in stock-based compensation, or SBC, 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.)

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 Rule of 40 calculation was 4.3% as of Q1 2023’s results, so the firm’s performance by this metric has dropped since Q3 2022’s results, per the table below.

(Source - Seeking Alpha.)

Commentary On Expensify

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results , management highlighted its "bottom-up adoption" sales and growth strategy, as the firm’s software is aimed at individual employees.

The firm has also ramped up its outbound sales efforts via its SDR (Sales Development Representative) force to work on the top of the sales funnel, resulting in an increase in its lead pipeline as of the quarter’s end.

However, leadership admitted to a difficult market environment, hoping for a market that "recovers."

Management did not disclose any company, customer or revenue retention rate metrics but did say that its larger customer base segment produced lower churn.

Total revenue for Q1 2023 dropped 0.7% year-over-year, and gross profit margin fell 4.3%.

Selling, G&A expenses as a percentage of revenue fell 14 percentage points year-over-year, a positive signal indicating lower expenses to retain the same revenue, while operating losses were reduced by 43.8% from Q1 2022.

The company's financial position is moderate, with liquidity almost double that of its debt load and nearly $29 million in free cash flow for the trailing twelve months.

Looking ahead, management did not provide any forward guidance, either for Q2 2023 or for the full year.

EXFY’s Rule of 40 performance has been worsening and is in need of significant improvement.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Challeng[es][ing]" three times, "Macro" six times and "Volatil[e][ity]" two times.

Analysts questioned company leadership about the firm’s new version of its platform.

Management responded that the new system would incorporate existing functions but also add new use cases, including communications and other more frequent actions rather than the current infrequent or once-per-month use case.

Regarding valuation, the market is valuing EXFY at an EV/Sales multiple of around 3.5x on TTM revenue growth rate of 10.3% against a median Meritech SaaS Index implied ARR growth rate of 21% ( Source ).

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 8.8x on July 2, 2023, as the chart shows here:

So, by comparison, EXFY is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of July 2, 2023, due in part to its lower growth relative to the index.

Risks to the company’s outlook include a lumbering economic slowdown that may be underway and lengthening sales cycles which may reduce its revenue growth potential in the near term.

While Expensify, Inc. appears to be moving in an interesting direction with its focus on making its platform more of a daily-use type of system, we’ll need some time to see that come to fruition.

As of now, revenue growth is flattening, and the company is still generating operating losses.

Until management proves it can reignite revenue growth while achieving operating breakeven, I remain Neutral [Hold] on EXFY.

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