Oh, okay. Well, hello everyone. We're Expensify. We're very excited to be doing our first quarterly earnings call with you right now, but before we get started, let's cover some boring stuff. Oh, of course, we gotta press that thing right there first, and then we'll cover some boring stuff. Take it away.
Before we begin, please note that all of the information presented on today's call is unaudited, and during the course of this call, management may make forward-looking statements within the meaning of the federal securities law. These statements are based on management's current expectations and beliefs, and involve 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 non-GAAP net income, adjusted EBITDA, and adjusted EBITDA excluding the IPO-related bonus, which are 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 non-GAAP net income, adjusted EBITDA, and adjusted EBITDA excluding the IPO-related bonus, to their most comparable GAAP measures. That was very high stress, but with that, let me turn the discussion over to David.
Thank you for that fascinating introduction. Maybe quick introductions, and we'll get started. I'm David Barrett, the founder and CEO of Expensify. We have Anu, our COO; Ryan is our Chief Financial Officer; and of course Trent is our senior technical accountant. We have the whole dream team here to answer any question you could conceivably have, but to get started, let's review why we're here. Technology, we love it. Here we go. At a very high level, you know, as a reminder, many of you know this of course, but there's a lot of people on the phone here who haven't really heard the spiel, so I'm gonna give a kind of quick overview. At a very high level, we do expense reports that don't suck.
I know it's a bold vision, but we're making the world a better place one expense report at a time. Now, if you're considering of investing in Expensify, there's sort of like three main things you need to know. Now, we could go on forever, and truly forever about the advantages of the product and all this kind of stuff, but there's kinda three main things you need to know. The first is that we feel that there is an absolutely enormous untapped opportunity, and that we're going after not just the sort of tip of the industry, like the snowy north of the enterprise, we're going after the entire market. Our view is that the market is absolutely enormous, because every single business on the planet has some kind of expense management problem.
Yet if you were to add up all of the customers of all those kind of traditional players, it adds up to maybe 200,000 companies in the world. That's out of hundreds of millions of businesses in the world, however. The way that we see it is virtually no one is using anything. The real competition for Expensify isn't Concur or something like this. It's basically a manila envelope. It's email and Excel. Basically most of the world is doing nothing at all, and we're going after a global opportunity, not just the small enterprise corner of the market. We're going after the you know, Fortune, you know, 100 million businesses out there. Now, the question of course is, as a mature industry, how has everyone missed this huge opportunity?
That's because we think that it cannot be achieved through traditional sales models, and Expensify's primary differentiation as a company is that everything is all in on a completely different acquisition model than everyone else in the industry. We call it our bottom-up adoption model. Whereas basically everyone else out there is employing some variation upon the same basic strategy, you know. You all know it or love it, or at least know it, and that's basically a salesperson calls into a company, like knocking on the CFO's door. Then it, you know, that goes to an SDR, BDR, maybe it goes through a commissioned quota-carrying salesperson, then it goes to, you know, an integration specialist, an account manager, some sort of thing like this.
It's a very scalable model, but it's also a very high cost of sale model. The traditional sales model has only reached a tiny corner of this opportunity because there's only a small subset of the market which can be acquired through that high cost of sale model. Our design is completely different. Everything starts with the individual employee downloading the app for free and then learning about it from a friend, basically through genuine word of mouth. They sign up their own company without permission, and then they just start submitting expense reports to their boss. Basically, every single employee is a different door to the company.
Whereas everyone else out there is all knocking on the same CFO's door, we have 100 doors into every company because every employee can onboard their company and then grow sort of virally bottom up. This means that we can reach companies that were never in the traditional market. We're reaching companies that basically were never searching for expense management. They were never thinking about this as a problem until some individual employee raised their hand and put it onto the agenda of the company. As a consequence of all of that, we think that we're building a platform that can reach a billion users. Now, we're not there yet. I don't know when we're gonna get there yet. We do think it's possible.
If it's possible to link a billion people through photography, we think it's possible to link a billion people through the financial conversations that basically connect us already. These are not creating new conversations. It's basically bringing currently offline conversations online into a common platform, and it works. This is a tweet that we just got, you know, a couple days ago from someone that we've never met just talking about how the Expensify bottom-up adoption process automatically closes customers at incredibly high volume at incredibly low marginal cost. The difference of Expensify from everyone else in the market is, yes, maybe, you know, we've got the best smart card.
Yes, we've got the best expense reporting, and all that kind of cool stuff. Most importantly is that we acquire customers in a completely different way than everyone else out there, and that allows us to reach the whole market, and the whole market is huge. We're gunning for to be a huge, huge player for a much larger market than anyone else even realizes exists. That's the quick spiel. Now let's talk a bit Q3.
Great. Well, thank you, David. I just wanted to say it's great to see everyone on the call. Thank you for dialing in. Let's get started. Back to Q3. We actually had these numbers in the S1, right? We had our Q3 flash. In terms of revenue, we disclosed we were looking at $36.6 million-$37.6 million, and we actually came in at the top end of that range, right, $37.4 million. We're very excited about that. In terms of paid members, we had 660,000-670,000 paid members. Again, we came in at the top range of that at 667,000 paid members. Very excited about how Q3 went.
In fact, Q3 was the best quarter for paid member growth that we've seen since the start of COVID-19. Since March 2020, Q3 was the best we've seen in terms of paid members growing. That puts us at a 73% year-on-year growth rate for revenue. The Expensify Card is doing fantastic, over 207% year-on-year interchange growth. That brings us to $150 million in annualized revenue. One thing that I did want to spend some time on was this IPO bonus that we did. This was in the S1, but it's causing the numbers to look a little different. I want to make sure we're all on the same page here in terms of you know, Expensify size, profitability, and how it looks going forward.
As disclosed in the S1, we had a $26.3 million IPO bonus to employees in Q3, and the purpose of that was for the employees to exercise their shares such that they can convert them into our LT shares. For those that don't know, Expensify has an LT share structure. That means long-term shares. These are shares that are not liquid, that require a long time in order to convert to common. The purpose of that is to align employees with a shareholder value. All of our employees are very heavily incentivized to produce long-term growth and not get distracted by the short-termism that going public can bring. We think that this bonus is actually probably the best money we'll ever invest in the company. We'll let the results speak for themselves.
Sure.
Our GAAP net income was a -$6.3 million net loss. When you add back in that IPO bonus, you look at a non-GAAP net income of $19.9 million. Similar with EBITDA, adjusted EBITDA of -$6.5 million. When you add in that IPO bonus, you get a $19.8 million adjusted EBITDA excluding that IPO bonus cost. The reason we think this is important to highlight is because one of the, you know, big pillars of Expensify's story is that not only do we grow fast, but we do it profitably, right? It's efficient, responsible growth. When we have this kind of IPO bonus, that can make the numbers not maybe ring true with the story we're telling.
We wanted to make sure that everyone understands that this is an IPO-related bonus. We're not going to IPO again. This is not really reflective.
Once is enough.
Yeah. Please, not again. The IPO bonus won't be coming again. We think that the EBITDA and the net income, when you account for the IPO bonus, is much more reflective on the fundamentals of the business. Now, when we look at a Rule of 40, when you're taking out the IPO bonus on a Rule of 40 basis, we're looking at 126%, which is obviously extremely high, right? That reflects our very high growth and also our profitability. The reason we do this bonus is because we have a very talent dense and very talented employee base, right? We're bringing in over $1 million in ARR per employee, and if you stack that up against our peers in the public tech markets, we are at the top of that range.
We have a great team. We've invested in retaining them, and we think that it's a great investment. Pass it back over to David.
Great. All right. As you know, or you might know, we have big vision. That vision involves a lot of development over a long period of time. Now Expensify is not just an expense reporting app, it's very much a payments super app. We're designed for every variation of a list of expenses that you give to someone to pay in return. Traditionally, all these different products up here will be seen as completely different industries, like completely different SKUs, if you will. For Expensify, they're all just different ways of using the same common platform. We've built a universal payment engine that can adapt for a wide variety of digital use cases. If you look kind of across the top here, I'm gonna highlight a few different colors. First, the items in blue.
These are functionality that in the Expensify app is already live and you can use. We're obviously still going to improve all of these, but these are real features that are in market today. You can use our Concierge Travel feature to book travel through chat. Of course, you can send an invoice to anyone else using Expensify and collect online. Likewise, whoever you send that invoice to, they receive our bill payment experience, where they can basically process bills and export in the ledger system and pay them online. Of course, we have, you know, a world-leading, a smart card, the Expensify Card, with a million different badges. Of course, we also have our expense management platform, which scales everything from sole proprietors up to large enterprise.
These are all features that we've built on this common platform that use the same experience across all of them. What we'll work on right now, I would say, are the kind of green bullets here. These are all items that already exist in beta or in internal use. Going from right to left here. We actually built our own payroll solution using the exact same technology we currently have. In our world, a paycheck is just an expense report submitted twice a month automatically for you, and then with some tax junk on top of it. We use our own payroll internally.
We haven't launched it yet externally, and so we're still working on it, but I just want you to know. Likewise, we have consumer wallet functionality built into the same app where you can send a money request to someone else and they can pay you, not just inside of the company, but, you know, with your roommates, your families, with your church group, and things like this. Expensify's design is much more like a LinkedIn or a Facebook than it would be like a Salesforce or Concur, in that basically our design is not just to be limited to the isolated silo inside of an individual company, but the connectivity between all companies.
Expensify is designed to be used, not just for submitting expense requests to your company, but for connecting companies through invoicing and bill processing, which lets us sort of leap virally between the, basically the accounting, the accounts payable departments and accounts receivable departments. We use wallet functionality from a consumer perspective to link companies basically through their consumer flows. Because if you work in a company that uses Expensify, odds are your friends work in companies that could be using Expensify, especially because every company in the world should be using Expensify. Of course, on top of that is all linked through our chat first design. Because our view is that every payment is a conversation between two or more people trying to resolve some underlying financial tension. Chat is infused throughout our entire product.
That means that you never have to leave the product to resolve some sort of conversation. If I send you an invoice, you can just chat back to me with an invoice. If I have a paycheck, you can talk to your finance team through your paycheck, and things like this. Chat is just a part of the experience because chat is a pivotal part of the payments experience itself. Now, all of this basically. I know we have off to the left some social functionality planned, off to the right, more accounting functionality planned. I just wanna give a quick update of here's where we are in terms of from a product growth perspective, from a roadmap perspective. All of this adds multiple layers of value.
Of course, we build this functionality because it lets us grow virally, and that's the key to our growth, is basically zero marginal cost growth throughout all these different industries. Of course, it creates all sorts of sort of transactional income as well. Basically everything from travel, invoicing, bill processing, all of this basically creates high value transactions or revenue. Likewise, of course, is the subscription revenue that comes from the top-end functionality. This is our product roadmap. This isn't new, but I just wanna remind you that it's all there. When we think about what's happened just in Q3 most recently, the first thing we did is we launched what we call our free plan.
Now, the Expensify Card's been out for a while now, but we built the Expensify Card primarily to service our existing customers. When we started, of course, we had this very mature expense management business, so we built the card primarily to cross-sell to existing expense management customers. What we just launched in Q3 is this new free plan, which allows new companies to adopt Expensify without having to adopt expense management. This means that you can actually adopt the Expensify Card as a card-first design. This is a brand-new thing. We just launched it, and we're gonna break out results maybe in the future, but not yet, because it's still too early here.
This is one of the things that gives us confidence kind of going forward, is that we've launched this new free plan, which allows us to be adopted in a new way by a whole new class of customers and that we haven't seen in the past. Likewise, we launched a new cashback built into the Expensify Card. This is to drive faster adoption of the Expensify Card because when you adopt a corporate card program, it's not like all your employees immediately switch over on day one. This is just one of the many tools that we use in order to drive faster adoption, and this is a new thing that we just launched in Q3. With that, back to guidance.
Great. Everybody's favorite part, guidance. All right. Let's talk about what we're looking at for Q4. In Q4, we are expecting revenues to come in between $38.2 million and $39.2 million. We are expecting paid members to come in at. Sorry, can you move that on the screen? I can't actually see. I wanna say the right thing. Yeah. Perfect. 673,000-691,000. Great. People always ask the question we get very often is, "What does growth look like going forward?
What's gonna be a driver of growth?" The way we've been describing it is we have a number of layers, and it all kinda comes together into a you know, a very tasty growth layer cake. At the beginning, you have, or at the bottom, that foundation, you have seat expansion. Everyone's familiar with you know, net dollar retention. Seat expansion is basically when your existing customers grow, which is a really unique and exciting dynamic that Expensify has. Generally, most companies, the most they ever get paid by their customers are at the beginning, and then over time, they pay them less and less and less, and eventually they churn. Expensify is the exact opposite.
The lowest a customer ever pays us is generally in those first couple months, and over time, they pay us more and more. A large driver of growth is the expansion of our existing customers. The next layer up, that you'd add on would be new customer acquisition. We grow virally through word of mouth, and every quarter, every month, we're adding a ton of new customers. Again, the quarter that they start won't be the highest they pay us, but we are adding, you know, buckets of new seats from, you know, tens of thousands of customers all the time. What we've added now in Q3, which is new, because we stopped advertising during the pandemic, but in Q3, we started our nationwide advertising back up.
We're in nine major markets right now, and in Q4, Q1, Q2, going forward, we're just gonna keep scaling those advertising. That's what we have currently, and this is what we're building. You add on that great foundation that we just discussed, and you add on the interchange growth from the Expensify Card, the lift that we're starting to see from bill pay and invoicing. David mentioned our payroll product. We're excited to get that in the hands of users. Then also, when you look at kind of the suite of functionality that we offer, it would be very expensive to replace each of those with a point solution, so Expensify is actually very inexpensive for the functionality it offers.
I'm not saying next year, I'm not saying in 2 years, but sometime down the line, we think we can do some interesting things with price as well. That is all the slides we have, and we wanted to leave some time for Q&A, so I'm gonna throw it back over to Anu to get us kicked off for Q&A.
Our first question is from Sterling Auty with JP Morgan.
Yeah. Thanks. Hi, guys.
See you, Sterling.
It's good to see you. A couple things. Maybe just to get started, was there actually a supplement that maybe you put on the website? Just wanna make sure, help us out with a little bit of the GAAP to non-GAAP reconciliation, because I think there's a couple of moving parts that I think all of us are gonna want to try to drive into our models so that we can get a true non-GAAP line item by line item. Was there a supplement on your website? I didn't see it when I checked.
Yeah. We'll be putting all that up on the website right after the call.
All right. Fantastic. All right. You know, we're starting to see the different variants of COVID, like Omicron, start to hit different regions differently. What are your thoughts and what have you kind of factored into, especially the paid member additions here for the fourth quarter for any potential impacts, you know, from COVID?
Yes. Great question, Sterling. What is important and when we're talking about how does the impact of COVID on our customer base, you have to look at what is the economy actually doing. In a situation where we have a variant spreading, but businesses are still staying open and businesses are still growing, we're not gonna see much of an impact there, right? Where we saw a very big impact was when everything's shut down, no one's traveling.
In a post-vaccine world, where COVID is a very real thing, I just got my booster last week, but COVID's a very real thing, but people are still traveling because they have more confidence that, you know, if they were to contract it, they're not gonna, you know, die because they've been vaccinated, we see less of an impact there. I think that the vaccines have been a huge boon to our business, basically, because it's given businesses and consumers the confidence they need in order to kind of go back to living their normal life.
Obviously, we're all very concerned about Omicron, but in terms of the impact it's having on, you know, people traveling and their day-to-day lives, I think that's still, you know, yet to be seen, but we're very confident that it's not gonna be anything like what we saw before.
Yeah. It makes sense. I wish I had gotten my booster. I was supposed to get it next week. Unfortunately, I contracted COVID, 2 days ago.
Ooh.
Oh. I'm so sorry.
Um.
Stay healthy.
Thank you. One follow-up would be, you know, can you talk to us. You've got the different pricing levels and attach rates with the card. One of the questions I get a lot from investors is just maybe talk to us about what you're seeing in the trends of attach for the Expensify Card as you went through the quarter. What are you thinking as in terms of what's embedded in your guidance?
Yeah. We did not. we didn't break out, basically, attach rate in our guidance. Directionally, we're seeing that new customers adopting the card, which is, you know, at a quick rate, which we're really excited about. We've added this free plan, which we're seeing a lot of pickup from there also. Previously, as David mentioned, you had to be a paying customer to adopt the card. Now, that's not the case anymore, so someone can come in and get the card for free without having a subscription, and they also get a suite of functionality that comes along with that. That's just another kind of boon to the growth of the card.
We plan to be breaking out more card stats in the future, but for now, just the 200% year-over-year growth is all we've broken out. One thing to point out, Sterling, which I'm sure you know, that revenue guidance did not include interchange in there. That was purely subscription revenue.
Makes sense. Thank you, guys. Appreciate it.
No problem. Thank you.
Cool. The next question is from Tyler Radke with Citi.
Good to see you, Tyler.
Hey, thanks for taking my question, and good to see you as well, and I like the physical layer cake as well as the virtual layer cake that you have.
Subtle, right?
Yeah. My question was just on the paid members. It sounded like you saw a lot of positive things in the quarter, you know, in terms of, you know, paid member growth starting to return back to historical levels. You know, you got about 2 weeks before you close up Q4, so presumably your visibility is pretty good on where you're gonna end up. I guess, why wouldn't we see kind of that, you know, the same number of net adds that you saw in Q3, especially heading into Q4, where, you know, we're not dealing with summer vacations and you know, some of the seasonality dynamics that might otherwise impact the Q3?
Obviously we put our guidance. I still think we're gonna see really good paid member growth in Q4, so I don't think that we're seeing a slowdown really there. Everything's looking good, you know, in the business. We're very encouraged with what we're seeing. You know, the range is what it is, but we feel very good about that range and our ability to you know, perform there.
Okay. Okay. Makes sense. Just with some of the changes, you know, headlines announced here in, I think in the September quarter, I guess first on the cashback, you know, incentives, the higher cashback incentives, just how are you thinking about that from a, you know, kind of payment economic perspective? Does this kinda lower your margins in the near term with the potential to, you know, just increase, you know, that card volume over time? Secondly, with this free tier, how are you just thinking about that impact on kinda near term paid member growth? Just as, you know, potentially, you know, users could go to the free tier before they become paid.
Great question. I'll take them last in, first out. Your question about free members. We think that the card can be a really good kind of tip of the spear, and we think that if we have these free members putting all their spend on the card, even if they choose to do that before they would sign up for a subscription, we think that that actually, on a, like, a net basis, is actually gonna be better for the business than if they had, you know, done it the opposite way. We're excited about kind of the opportunity the free plan affords our users.
The way it's designed is the free plan is great for a business getting started, but once at a certain point, we expect that the free members to upgrade to our paid subscription plan. In the customer life cycle, we still expect them to be card members and subscription members, but we think that what we've done is they will start off as card members and then upgrade to subscription.
If I can jump in there really quick. I completely agree with what Ryan just said, but I think the way to view the free plan is now we're starting the customer journey earlier than we would've normally, because historically speaking, the Expensify, like expense management is something that you think of at a particular time in your company life, and that's basically when you become a lower trust environment. If you think of a brand-new company, and it's basically just a couple of people with very high trust for each other, and there's no approvals needed, there's no sort of like questioning for like the receipts and things like this. Now the free plan is really targeting a new group of customers that haven't historically seen a need for expense management.
We're starting basically a little bit further earlier in the life cycle. To Ryan's point, the paywall is essentially once you experience kind of these trust issues inside of a company, start hiring more people, you've got different locations and things like this, then you need things like approvals, and you need sort of. You start to value some of the more sophisticated expense management. We don't view this as something that could. Not, you didn't suggest this, but I just wanna make clear, this isn't something that could really cannibalize existing revenue, because our existing customers have Expensify for more sophisticated functionality. This is supporting a new class of less sophisticated customers.
Got it. Thank you.
I think we wanna touch on the.
Oh, economics?
Margin.
Yeah. Do you wanna take it?
The short answer is once we've introduced cashback, it is going to degrade card margins to some degree. The nuanced answer there is the way we've designed those tiers for cashback, we have the 1% tier, which is achievable by enough companies, not all of them, but let's just say about 75% of companies that adopt the card. It's achievable, it gives you this, the good feeling of having earned a reward for your spend, and it makes you convert all of your company spend onto the card. Then the 2% is designed to be a bit more aspirational and targets larger companies who have way more than that $250,000 in spend.
It's incentivizing them to adopt the card across the company, 'cause the dynamic we've noticed is a company will roll out the card but won't give it to every employee, and there's really no reason for them to give it to every employee either because they're not trying to hit any kind of tier to earn a reward, 'cause they earn a reward across the board on other platforms and other products, which is why we've designed it in this manner so we get a little bit of what we want and the companies get a little bit of what they want. Yes, it's gonna take down margins, but it's not gonna take it down all the way.
We're also working on, and we told you this as part of the roadshow, we're working on becoming our own program manager, which gives us a little more margin room to play with. We win some, we lose some, and that's kind of where we're hoping to make some of our margin back.
Yeah, I think that's a very important point, in that it's not that it's basically a flat cashback for all spend. It's basically cashback if your program exceeds a certain target. If you don't, if you're a dollar beneath that target, there's no cashback. If you're a dollar beneath the second target, you only get the first target.
Right.
It's basically, it is achievable, and people do get it. It, we know, in the process it drives so much more spend on the platform, and so it absolutely is value add.
Got it. Gross dollar accretive, even if it's slightly percentage dilutive.
Yes.
Exactly.
Got it. Thank you. Okay. Appreciate it.
Awesome. Our next question is from Koji Ikeda with Bank of America. I hope I said your name right.
Koji.
Yeah. No, you're good. Thank you so much. Hey, guys. Hey, David. Hey, Ryan. Congrats on becoming a public company, and thanks for taking my questions. I guess I got a couple. First one for you, Ryan. You know, just thinking about the guidance methodology, you know, with the IPO launching in November, you know, the flash range coming in right about $36.6-$37.6 that you showed in the slides. You know, you came in right up below the top end. Thinking about Q4, you know, we're essentially done with December and we have that range of $38.2-$39.2. I guess, you know, how should we be thinking about the guidance methodology for Q4?
Mm-hmm.
More importantly, too, is as we go forward into future quarterly results, you know, how you are thinking about establishing that guidance methodology with the revenue?
Great question, Koji. We are, I would say, pretty conservative. We're both from the Midwest. Our intention is not to try to provide some sort of inflated guidance in order to get maybe some short-term boost. We've always provided in our forecast and in our guidance, what we believe is an achievable and realistic range. You won't ever see us putting out some big number, and then, you know, we hope we get there, right? We're always gonna be very grounded in reality and kind of what we're seeing, and that's what we're gonna communicate to the market. When we look at, I guess, to more thoroughly answer your question, you know, how are we figuring out our guidance?
We're looking at actuals, we're looking at how things are trending, and then we're just very simply just forward projecting based on a number of different scenarios on how, you know, the remainder of the quarter could go, and then that's how we design our guidance. It's very rooted in reality and it's not wishful thinking. It's very achievable.
Yeah. I feel like the Midwestern sensibility of, like, just we're building a business, we're focused on the long term. I think that there's a lot of attitudes for how you can use an earnings call, the kind of values out of it. One is that you can sort of try to inflate things and get credit for things you haven't done yet to drive short-term share movement, but that's not really our job, or that's not what we feel our job is. Like, we're working to produce very long-term value. Everything we do is really focused on sustainable, achievable growth and is achievable forecasts. I agree entirely with Ryan.
This is very much about trying to give a realistic presentation of the next quarter, and that's, I think, our intent that we're gonna do going forward.
Got it. Just to follow up there, just to be clear, so when you say, you know, achievable, do you mean you're gonna set out a range and it's always gonna try and, you know, maybe fall midpoint to the high end of that range or slightly above? I'm just trying to, you know, understand, you know, how to think about that, about that achievable goal.
Yeah. I don't think, Koji, we're gonna get into that granularity on, you know, what, well, you know, what percentile on the guidance we're gonna get to. I mean, the range is there to, 'cause we're saying we're gonna be in this range, right? If.
Fair enough. Yep.
Yeah.
No, I gotcha.
I know that's not exactly the answer you wanted, but I think we're gonna stick to that range.
Gotcha. Thanks, Ryan. Okay. Just last one from me. You know, the conversations with your payment processor, I know you've kind of been in discussions with them.
Mm-hmm.
I mean, you know, how is that progressing? Maybe when could we be thinking about a potential contract change or that, you know, that interchange revenue could be incorporated into GAAP?
Great question.
Yeah. It's going really well. It's progressing at a pretty good clip. I don't think I'm comfortable giving you an ETA just yet, but we think that in 2022 we'll have it all implemented, which is as close as I'm able to get to right now. Maybe in the next earnings call we'll have a little more granular ETA to share.
Yeah. We feel confident it's gonna happen, and as soon as we have a better date, obviously we're going to tell you well in advance, because the impact of that is that we would move interchange from a contract expense and cost of revenue up into revenue, and that's going to, you know, that's gonna change some things. We wanna make sure that you have significant, you know, advance notice. We will absolutely keep you in the loop there and let you know.
Got it. Thanks, guys. Appreciate the time. Thank you.
Awesome. The next question is from Brent Bracelin with Piper Sandler.
Hey.
How you doing? Good evening. A couple questions if I could here. Maybe we'll start with you, David, here on the free card strategy.
Mm.
Let's just think about, like, you know, Q3. You're just in the early stages of launching it. As I think about kind of the strategy here, it seems like it can go a couple different directions. One, you do have a very large installed base of free users. On the other hand, there's an even larger opportunity to go and acquire new users. So as you think about the 2022 plans, is the intent to target current free users, the non-paid users, and really try to monetize that installed base? Or do you really see the free card as an opportunity to kind of accelerate your footprint with new non-Expensify kind of customers today? Just trying to think through strategy for kind of next year.
Sure. I would say the free plan is overwhelmingly about new customer acquisition. I mean, obviously there's new customers can come through. We dial up, as Ryan mentioned, a tremendous amount of marketing, and the free plan is the key message of the marketing. There's a degree, of course, of new customers seeing an ad who've never heard of us before, signing up, onboarding onto the free plan, and then starting their kind of upgrade journey, if you will. Also, I would say the major markets that we're advertising in are also the markets that we're already strong in, and there's a tremendous amount of word of mouth kind of multiplier effect that happens when you just see the brand around. Because word of mouth basically requires two conditions.
One, that you have a product which is relevant to all your customers' friends. That's why we have such a wide diversity of use cases including consumer cases, because we want everyone to talk about us to their friends because there's something about the product which is relevant to their friends. Then secondarily, it has to be something that you're gonna get a good reaction from your friends. Like, no one refers bad movies. Like, it just looks bad on you sort of thing.
Part of having such a compelling sort of marketing campaign and all this functionality and the free plan and cash back and all of this is to get an exciting message out, not just to people who've never heard us before, but to remind the people who do know about us, and give us something to talk about. When they're walking along the street with a friend and they see a billboard or whatever it is, they see a bus drive by, and then they have some reason to turn to their friends like, "Oh yeah, actually, I Expensify. I use that." It's not just about. We don't, like, break out basically new ads from people who've never seen us before versus word of mouth kind of growth.
I would say the way to think about our advertising is it's trying to drive this idea of market consensus, where basically once we're in the market and everyone agrees that we're the best in the market, then you just capture the lion's share of new customers automatically. Yes, some will just see the ad, convert, and that's, you know, and it's like a very straightforward acquisition, but our view is a bit broader. It's about creating a conversation around us, creating an overwhelming sense that we're the best in the market, such that when inevitably the topic of expense management or payroll or invoicing or bill processing or consumer bill splitting, whatever this might be, if any of those comes up, we want to be top of mind so we're the one that they tell their friend about.
Totally makes sense. Very clear there. Then I guess, Ryan, building on that, a follow-up here on just the advertising spend as you think about rolling this up. Is this kinda gonna be a bit of a trickle in Q4 and then a big ramp in 2022? Or is the big ramp in Q4? Like, walk us through the good news is being a profitable company, you got a lot of room to invest, but just trying to think through how that's gonna roll through the P&L would be helpful. Thanks.
Without giving explicit guidance on marketing spend, I'll tell you kinda directionally how it's working. We really started ramping this up in Q3. We doubled down on that in Q4. I'd say in terms of if you're looking for, like, when's the stair step function or when does it kind of skyrocket, I'd say it's going to accelerate more quickly, probably starting in Q1, just because it, you know, takes time to, you know, kinda get the machine chugging, and we cut it off during the pandemic, so we're starting that back up. We expect Q4 to be, you know, greater than Q3, and really start to kinda get humming in 2022.
Okay. Very helpful. Thanks, guys. I appreciate the color.
Great. Thank you.
Awesome. The next question is from Pat Walravens with JMP Securities.
Hey, man. How's it going?
Hey, Pat.
Congratulations. First one. All right, I have two questions. The first one is the room you're in is so beautiful it almost looks like it's a virtual background. David, what is the Expensify Lounge? Why do you have it? I'll just put both questions out front. What's the Expensify Lounge? Why do you have these kinds of lounges? My question number two is pretty fundamental. Even though it's mostly greenfield for you guys, there are a gazillion of these vendors in either the card space or the expense space. Can you just sort of remind investors what your competitive differentiation is?
Sure. Maybe I'll take both of those in order. First off, I forgot to mention, yes, we are broadcasting live from the San Francisco Expensify Lounge, and as you can see, basically this beautiful, chic office on this 16th floor of the 88 Kearny downtown in the financial district of San Francisco. Now, there's a whole story that goes with this, and more time than I can allot in this particular moment. I would say our view is that the workplace is an incredibly important part of the future. I mean, COVID notwithstanding, people want to come back to an office. They don't want to come back to any office. They want to come back to a place where it's no longer a requirement to be in an office anymore.
The modern office has to compete with, you know, the your home office, cafe, whatever that is. We've created a space for not just our own employees, but basically once COVID is, and once the mask restrictions kind of allow this to happen, where essentially any Expensify customer will be able to come in and work out of our lounges around the world. Basically, think of it like high-end co-working lounge meets airport lounge, something like this. We're going to open this up to all existing customers so we can work beside them and really get to know them, they can get to know us, and of course, we can just have a great time. You know, we make a mean old-fashioned, great cappuccino, and so we have a great time here.
It's like there's gonna be more coming out about that in the future. I cannot wait to talk more about that once COVID is more in the rear view mirror. Of course, I would love to have another drink with you here. Secondarily, talking about differentiation. Yes, it is. There's one million players out there because this problem, again, is universal. Expense management is synonymous with business. Like every business has expenses, but only some have revenue. Way before you have an accountant or an accounting system, you've done something to keep track of your expenses. Of course, it's a huge market, and of course, there's a lot of people who see these problems. The differentiation really comes down to, again, as I said before, our ability to acquire customers.
It's easy, like, when I talk to new entrepreneurs, I always say that very few companies fail because they couldn't build what they set out to build. They fail because just no one cares. Like, building a product is hard, but it's also the easiest thing in a business. Getting anyone to realize the product you've built and to buy it, that is freaking impossible. I'd say, yes, we see a million players out there that successfully build a product because that's the easiest part of starting a company, but if you go across those millions of players, inevitably, they're very, very small because they struggle with the same exact problem, that is, how do we get anyone to care? If, whether there's one or 10 or 1,000 identical competitors, in our mind, it's just basically like one block.
It's basically one company with 30 different names with the same business model and the same product and same everything. Yes, we swim in the same pool with them, if you will, in the sense that like, I guess ostensibly we compete, but the way that we view it is it's a very, very large swimming pool, and this shallow end is super noisy. There is a whole bunch of players that are all fighting against each other over the same, very limited set of customers because those are the customers their business model will reach. We're just on the opposite end of the pool. We're like, we're over here in the deep end, like, you know, chilling on our floaty over here, and it's great. I think what's nice about this is because.
I don't know where I was going with that.
It sounds great.
I think it's great because we can go to their side. Like, we can go up the enterprise. We can fight over those very lean margins. We'll do your RFP sales process. We will sell the customer in whatever manner they want to be sold. We get all of their markets, but they get none of ours because we're able to acquire customers that don't want to go through an RFP process. They just want to onboard themselves. They just want a self-service, model, or they want a free product and things like this.
Again, the product differentiation we can go into why our card is better and sort of our Smart Limits and things like this. But from an investor perspective, the reason you would pick Expensify for your investor dollar over someone else is because you believe that we have a strategy which will capture more of the market faster and better unit economics in the long run. I think that's why, again, and the numbers speak for themselves. I think our differentiation is our business model far more than our products. Though I guess I would say our product is built in lockstep with that model to support and propagate that model.
The most important feature we have is the one that signs up the next customer because that's what makes the next customer easier to get than the last one.
Awesome. Thank you.
Sure.
Cool, our last question is from Yun Kim with Loop Capital.
Great.
Yun?
Yep. I'm pressing the button.
We're here.
All right, thank you. First, congrats on your first earnings call as a public company, although it feels like somewhat empty, knowing that, you know, we all already know the numbers. Yeah, it's not as exciting as some of the other public earnings conference calls this season. On your prepared remark, David, you mentioned that as the economy gets better and the T&E activity increases, you know, you are seeing the expand part of your business accelerate. Obviously, that should lead to more paying members within your existing customers. Can we also expect ARPU to perhaps get a boost as well when that business activity accelerates?
Yeah. Great question, Yun. Yes. As we see customers grow quickly, in general, they will exceed their subscriptions. Just as a reminder for everyone, we give a significant discount for customers that sign up for an annual subscription, but if you exceed that, the overage is at a higher rate. When we see customers grow very quickly, we do see more of them paying that higher rate, which pulls up ARPU. Now over time, we expect that they will increase their subscription size, thereby, you know, decreasing their amount they're paying per customer. When we see, you know, a lot of our customers grow very quickly in a short amount of time, that does pull up ARPU. You're right there, Yun.
Great. If you can just talk about your international business and what kind of trends you're seeing there. When I was doing some work on the S1 for the initiation, I saw you guys had a pretty good traction among a lot of these high-profile international cities, you know, which is kind of surprising, you know, given that, you know, most of your revenue is still based in the U.S. Just if you can just talk about your overall the traction that you have in the your business outside of the U.S.
Sure, yeah. We do about 9% of our revenue overseas, and that is not through some sort of intentional effort of ours. Our word of mouth viral business model, we just kind of spread. We have 10 million users and they talk to their friends, and some of their friends, you know, were overseas, and then we started to get customers in London and Melbourne and Sydney, and those people also have friends and they talked. Throughout, or over the last couple years, even though we haven't tried, we actually have a significant amount of our revenue, you know, in Australia, Canada, the U.K., New Zealand. I think that we'll continue to see this. I mean, Netherlands is a growing one for us. Yes, we are growing overseas, but it's not from
We don't have a sales force in the U.K. Now we have employees there. That's generally to provide time zone coverage for customer support and things like that, but there's no one at Expensify who's focused on growing revenue in the U.K. It is just growing on its own based on our business model. Similar to how our employees in Portland aren't focused on growing revenue in Portland. They just try to grow revenue in the business in general. We're very excited about the opportunity that presents itself in the international markets, and we think that we're gonna continue to do really well there.
Do you plan on spending incremental marketing dollars to expand international presence?
Great question. Yes. Yes, we do. We haven't yet, but that is on the roadmap.
Okay. All right. Sounds good. Congratulations. Thank you.
Thank you, Yun. Great questions.
That was the last question, so I'll hand it back to David to wrap up.
Great. Well, again, we've been very excited to be here, very excited to come to you live from the San Francisco Expensify Lounge. Excited to be a public company. As I think this has been quite a journey. As we said, we only do this IPO once. We're not basically the idea of serial entrepreneurs that are trying to just build something and then ditch it and do something else. We're here for the long haul. Our long-term stock plan, as Ryan mentioned, means that every one of our employees is really focused on long-term, sustainable, efficient growth. We intend to have these calls for a very long time, and I hope that we can have delicious cake at every single time. With that, I think that's it. It's been fun. Thank you.
Thank you.
Thanks, everyone.