EXFY - Expensify: Upside Potential Is Attractive If We Look Beyond FY23

Summary

• EXFY is an AI-based expense management platform with enormous potential in the SMB space.
• EXFY is shifting towards direct sales in 2023, which should provide more leverage to manage existing relationships and actively pursue new business.
• The upside potential is attractive, particularly if we look beyond FY23 and into FY25.

Description

As I mentioned before, the total addressable market for Expensify ( EXFY ), an artificial intelligence-based expense management platform, is enormous. The model's potential in the SMB space is highlighted by the rapid growth rates and exceptional profitability for a company of this size. The platform's blockchain architecture, in my opinion, sets it apart from competing software and positions the business for rapid growth. Even though the 2020 rollout of the Expensify Card coincided with the height of the pandemic, I still think it presents a good opportunity for the company to increase revenue beyond what can be achieved through subscriptions alone. As for 4Q results, with pay per use volatility persisting, EXFY reported 4Q22 revenue of $43.5 million and non-GAAP EPS of $0.07, both of which were lower than expected and operating metrics. Average paid members have continued to decline from the previous year, while average revenue per paid member has remained relatively stable in recent periods. Conversely, as a result of operating leverage, margins moved significantly higher. I believe the importance of the EXFY initiative to convert those users to subscriptions was further highlighted by the fact that paid members decreased in January due to the seasonal decrease in pay per use. Another highlight in FY23 is that EXFY will rely more on direct sales. Overall, I think EXFY is a promising profitable grower, and I believe the GTM initiatives could contribute to its success in 2023. My original recommendation to invest in EXFY still stands.

GTM strategy

Because of its potential significance in FY23, I think this worth a deeper discussion. As I mentioned in my last post , EXFY's main targeted segment is SMBs, and its bottom-up adoption model is what sets it apart from the competition. With the shift in GTM, there are two results of EXY's shift toward direct sales in 2023:

1. EXFY will have more leverage in the event of a deterioration in the macro environment. In other words, EXFY is better able to manage its existing relationships, relying on onboarding support and account managers to increase customer retention and value, while also actively pursuing new business.
2. On the other hand, the need for EXFY to hire multiple teams of sales reps, which can be costly, particularly in the beginning when these reps are not productive, may impact the P&L.

Positives

Despite a weaker-than-anticipated top line, EXFY printed a strong adj EBITDA margin of 25.7%, which was higher than the consensus estimate of 23.2%. EXFY's strategy is also evolving away from depending on pay per use income. The current percentage of pay per use customers is 35%, but EXFY long-term goal is 20%. While pay-per-use models can generate twice as much revenue as subscription models, they also have less predictability and greater revenue volatility, as I like to point out when playing devil's advocate.

Negatives

As mentioned above, average paid members and revenue per paid member operating metrics were not great. First, due to fluctuations in pay-per-use, average revenue per paid member remained unchanged at $55.8 over the preceding three months. Second, annual growth in 4Q average paid membership was 9.6% to 779K, down from a 14% increase in 3Q. More importantly, January's paid members figures (745k) were not fantastic either, which was driven by seasonally lower pay per use.

Valuation

EXFY is currently trading at 3.4x forward revenue, which is close to the lowest it has ever traded since its IPO. When compared to its average (since IPO), this represents a 50% discount, and when adjusted for the new interest rate environment, it still represents a discount on a valuation basis. The trough valuation today, I believe, is due to the weak FY23 outlook and a change in GTM strategy, which may impact the near-term margin expansion trajectory. However, I believe that if we look beyond FY23 and into FY25, the upside is appealing. Consensus forecasts $250 million in revenues in FY25, and applying the current multiple of 3.4x forward revenue in FY24 results in an enterprise value of $850 million, implying a share price of $10.80, or a 27% increase. If we assume that multiples will rise, the upside could be even greater.

Summary

In conclusion, while EXFY faced some challenges in 2022, I remain optimistic about its long-term prospects. Its artificial intelligence-based expense management platform, blockchain architecture, and focus on SMBs set it apart from competitors and position it for rapid growth. Additionally, its shift toward direct sales in 2023 should provide more leverage to manage existing relationships and actively pursue new business. While the need to hire multiple teams of sales reps may impact the P&L, EXFY's strong flow through and evolving strategy away from pay per use income are positives. Despite a current trough valuation, I believe the upside potential is attractive, particularly if we look beyond FY23 and into FY25. Therefore, my original recommendation to invest in EXFY still stands.

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