Well, hello, everyone. Welcome to the Q2 2022 Earnings Call for Expensify. We're very excited to be here broadcasting live from the heart of Expensify here in Portland. On this call we have me, I'm David, the Founder and CEO of Expensify. We have Ryan, our CFO. We have Trent from Technical Accounting. Also on the line is Anu, who is our Chief Operating Officer. Let's get started. Here we go. Cool. I believe that Anu is gonna kick us off with a fascinating tale of you know, legalese.
Anu, are you here and can you go through the spiel?
Yes, can do. Before we begin, please note that all the information presented on today's call is unaudited. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. 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 certain 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 the reconciliation of these non-GAAP financial measures to their most comparable GAAP measures.
That's it. Back to you, David.
Great. That was fascinating. Thank you so much. All right, so let's get started. As always, we always start with just a review of what makes Expensify special. As you might recall, or for anyone you know who's new to the call, there are basically three pillars of our success. The first is that we have enormous untapped markets. The way that we view it is the expense management space has been largely untouched. Of these, you add up all of the competition's customers, it adds up to maybe, you know, 200,000 companies in the world. There's hundreds of millions of businesses in the world, and virtually none of them do anything. The way that we view it is the market's almost entirely untapped and it's enormous. Second, we have a unique way to acquire customers.
It's unlike anyone else in the market that can reach that whole market. Third, we actually have the ambition of building a platform that can link 1 billion people by their transactions. That means if we think that if Instagram can link 1 billion people with photos, we think that we can link 1 billion people with money. The market is huge, and when we typically think about it, normally we think about just the enterprise subset of the market, the very sort of like tip of the iceberg, if you will. The bulk of the market is actually really in the SMB. Our business model is really focused on acquiring this vast, untapped SMB market, which has a huge revenue base, and it's basically the best and most profitable part of the market.
Finally, you know, we sort of have three or five different pillars of how we go after this market. First, on the outside, generating leads is basically we have our, you know, same advertising like others, but we also have a free plan that's basically making a very low barrier to entry for any new business, trying to capture businesses at the very earliest stage. When they're the the side hustle or just an idea, if you get them onboarded into a free plan of Expensify, give them reimbursements, corporate cards, and things like this, and that puts us in the pole position as the business grows. As their needs change, we're the first in line for those needs. We pair that with a very substantial real-time sales capacity.
Basically, every free plan and every new customer that comes on is assigned basically someone in real time to talk to them in person. Likewise, our top customers receive account managers to help them out basically and maximize retention over time. Of course, all of this drives incredibly high margin of subscription revenue. This is basically our multi-pronged strategy for capturing this huge, huge market. As for that acquisition model, as a reminder, it's unlike anyone else in the market. Basically everyone else in the market has what they call a classic enterprise sales model, the top-down model, where you have some sort of a commissioned quota-carrying salesperson reach the CFO or something like this, convince the buyer to buy, and then only after all of that does the employee actually learn anything. It's a traditional model.
It scales nicely. It only scales in the enterprise portion of the market, which as I said, is the smallest, least interesting part of the market. We have a model that goes after the whole market using a completely different strategy, where individual employees learn about Expensify from a friend or from our consumer-driven advertising in the outside world. They pull us into the organization and then just start using us internally. We turn every one of their expense reports into a highly targeted marketing message directly to the decision maker. We call this our bottom-up adoption model. We are the only ones to do anything like it in the market, and it's overwhelmingly driving the success of our business.
It's a very unique and differentiated way to acquire customers, and that's how we're able to grow in this huge part of the market that everyone else is struggling. When it comes to the actual product itself, again, you know, there's a lot of different players out here. We're the only ones that can make five important claims. First, we can support true enterprise customers. We have that enterprise scale. We can go to the very top of the market. But also we have a real consumer-grade design. We can go to the bottom of the market with the same platform. We can support the side hustle, sort of brand new solopreneur, all the way up to the Fortune 500 enterprise, you know, IPO requirements and things like this.
We have a global reach, so we can support the multi-entity necessities of a public or a large multinational company. We have not just native corporate card, but also native travel. You could just talk to our Concierge chat service and book flights, hotels, trains, whatever you need. Then finally, of course, it's also free. Everything in this list, whether it comes to card, travel, all this functionality can start with a free first plan and then grow with your needs. We're the only ones that can make these claims, and as we're gonna talk about in a bit, the market's shifting and we're more free than free, or we're the freest option out there, even more than now than ever.
We talk about this idea of 1 billion-member opportunity, which, you know, is easy to roll your eyes at. But the way that we see it is everyone on the planet that's spending money has a consistent set of problems. We've built a platform that tries to unite all of these use cases onto a single common platform. It's not just expense management. That's what we're the best known for. We have everything from an expense management solution, payroll solution, corporate cards, bill processing, invoice processing, travel booking, and also a consumer wallet and chat functionality, all on a common platform. The way that we see it is there's a continuous spectrum between unstructured chat on one side all the way to highly structured expense management, and every form of payment is just somewhere on this spectrum.
We wanna own every part along the spectrum because that's how we can extract three different types of value. First, many of these use cases are highly viral. If you're talking to people or anything else, every payment involves talking to someone else. Payments and chat are the same thing. When any sort of a chat-based conversation has to involve someone else, and that creates a viral lift opportunity. We grow because our users talk to other users and other, especially users in other companies, and thus, we're growing basically on the viral lift of our word-of-mouth basis. Second is to generate tremendous transactional revenue from cards and things like this. There's all these opportunities to shave a little bit off in order to sort of pad our bottom line.
Finally, of course, the bulk of our revenue is our subscription revenue. We have incredibly high margin recurring mostly on an annual commit revenue, and this provides a tremendous amount of built-in revenue growth from our kind of core revenue or revenue expansion model, if you will, with the transactional revenue on top and all this free viral lead gen. We, by offering a platform that spans the full range of functionality, we can sort of triple dip for the value that we get out of everyone.
Now, pretty much every call, we get some variation upon the question of like, "But really, like, what's actually different between you guys?" I think I just wanted to take a second here to talk about that our products and our business is just completely different than everyone else in the market in a few different ways. Now, to start, the market's crazy right now. I don't know if you've noticed, but it's, things are nuts out there. Whether it's because obviously there's, you know, the war in Ukraine, which has taken a tremendous amount of oil off the market, which is making energy prices skyrocket. There's the Ukraine blockade, so there's food prices are going up. There's COVID lockdowns throughout Asia, which is causing all product goods to go. Like, things are just nuts right now.
No one really benefits in the grand scheme of things from a difficult market, but we do better than most because we're built for a difficult market, and it plays to our unique strengths. One is among small businesses, default rates are soaring, or so we hear from others. When we talk to, you know, we see all these other card vendors out there, and they've worked very hard to acquire all these customers, and these customers are actually struggling. They, you know, acquire, lend basically these cards and then have dropped tens of thousands of risky customers. I mean, I think the most notable example is Brex.
Brex had to drop, I think, something like 50,000 customers because they just weren't making money off of them, and they were too much of a default risk. Now, they've actually started sending those customers over to us because we have a different business model. We can support those customers, and we can support them with a wider variety of use cases. To us, they're actually quite valuable. To them, they've actually retreated into the enterprise space, which again, is no surprise. They have an enterprise sales model, and so shockingly it really only works in the enterprise. I think Brex is the bellwether for all of these neo-card businesses. Basically, all of them came in with a card, realized this market's quite difficult to grow, get to work at scale, and I think it's retreating to the enterprise.
I think we see this again and again. Whereas they're really struggling because default rates, most of our lending goes to existing customers that are like long-term and highly creditworthy. We've not seen default rates spike. This has been a great thing for us. Second is that, whereas the interest rates are going up, the Interchange that they get is actually not. They were unprofitable companies in the first place, and their core cost is actually going up. We're different. We have incredibly stable costs, and because of our margin, our incredibly high-margin subscription revenue. Our revenue and our margins are very, very safe because we've been built for a software-first model, if you will. This drives basically much more capacity for revenue, protected revenue growth.
Third is, you know, when the markets are crazy, transactional revenue can change very quickly 'cause spending habits can move very quickly. Their business models were entirely based on the idea of stability in spending habits, and they're getting super spiky. On our end, we have auto-renewing annual subscriptions, and it is paid monthly automatically on a billing card, and so we don't have collections problems and things like this. Again, just a very, very different type of business model, and if you're wondering how is it that we can survive so well in this market, it's because we just have a different business model that's built for a market like this. It's built for the complex and dynamic needs of the SMB marketplace, and it wasn't just built to survive, you know, in just the summer months.
Like, when winter has come, we do great. Likewise, I would say it's not just about looking at the past or the present. We think that we're the best positioned for the future as well. Over the past couple of years, as you know, we've been investing tremendously in product. Where everyone else was just basically dumping cash into customer acquisition to get these thousands of customers which are worthless to them, and then to ditch them, like, we've actually just been pocketing our profits and then investing in a substantially improved product platform across the board. We think that we were the best before, and we think what we're about to bring online is by far better than anything else in the market. We think that we're investing in the future of this market and establishing a firmer position than ever.
We've always been a subscription-first business, and so they've basically been focusing on transaction-only models. We've actually, in the past couple of years, have really doubled down on our subscription model. As you know, we've adjusted pricing and thus, in the past couple of years, we've actually thickened our margins. Whereas they are going to have to frantically try to create some kind of subscription product based upon a software model which isn't very good. We've already basically done the hard work to ensure that our margins are strong before we go into difficult conditions, whereas they're gonna have to do all this basically under the gun.
Finally, we've been focused on SMB from the very start. They're, you know, discovering, just like many waves of competitors before them, that the enterprise sales model doesn't work very well outside the enterprise. We have had an SMB-focused business model from day one. It still works great. Again, these are just a variety of ways that we're just completely different than the competition out there. That's why we keep growing and thriving even when everyone else is basically, you know, fleeing away.
Second, we've invested a tremendous amount in our own employees. You talk to these other companies. I've talked to, you know, other founders and things like this. They're like, "Yeah, no, we hired 500 people this month," or something like this. I think the key thing is it's like, man, I can't imagine hiring that many people because that means you have a problem that can only be solved with people. People are the most expensive and difficult way to solve a problem.
We prefer to solve problems, either solve them so we don't have to solve them again, solve them through automation, or solve them through outsourcing. As a result, we have this very core team that we've retained incredibly well. It's been recognized. We won a zillion awards recently for basically the LT program or our LT Share program for how it retains employees, invests in them. We're recognized as one of the best workplaces and things like this. This shows up in our employee retention.
Like in a typical, you know, Silicon Valley startup, if you will, the retention is just a couple of years, meaning that if you're working there, you know, if you look to your left, if you look to your right, one of those people just joined and the other one's looking for a job. There's just no institutional knowledge, basically, in these companies. We have such a core, strong foundation of people. Our average person's been here over about five years, and our executives have been here over 10 years. We have a tremendous amount of stability inside of our company, and that enables to provide us a stability to our customers as well.
Finally here, the accounting channel has always been a big deal for us. I think that we've talked about it a number of times, and we've talked about how we're doubling down the accounting channel with, you know, account managers, with a CPA card and things like this. One of the tools that we found the most effective in the long run is just to meet up in person. We meet up in person as we go to conferences, but we think the best way to meet up in person is by hosting our own conference. We did this a couple of times in the past. We're very excited that we're hosting our third ExpensiCon next May. ExpensiCon is a conference unlike any other. This is not, you know, something in Vegas or whatever.
The first one we did was in Maui. The second was in Bora Bora. You know, it sets a pretty high bar to beat, but we think we've beaten it in Italy, where basically in Borgo Egnazia. Can anyone pronounce Borgo Egnazia?
Borgo Egnazia.
Yeah. Well, I'm clearly not Italian. It's just an incredible spot to be. The key to ExpensiCon is it's about bringing the best thought leaders in the industry together so that they can generally collaborate and talk together. The nice thing about the conference is it always pays for itself, or at least it has in the past. Every time we engage with our thought leaders, because they are revenue generators for us, we say, "Hey, we would love you to come to this conference. In order to do that, you have to get your customers up to a certain point." As a consequence, we've been able to pay for the past ExpensiCons before the event even hosts because everyone's ticket to get there required them to increase their revenue. It's been a very powerful technique.
Second, it's a way to really cement what we call market consensus. Market consensus is ensuring that wherever you look, you see Expensify's flag at the top. That's because when people look to the top accounting firms to set the agenda of the industry, and if we have them working with us, and we sit down, and we talk with their top people, they understand our philosophy and our view of the marketplace. We understand their deep needs. This basically ensures that everyone in the accounting industry is a champion for Expensify. This has been a really powerful thing.
Third, this has been a key way at different reflection points in the accounting industry to really hold out a new vision for how the future is going to be, and then get the top leaders and thought leaders and journalists and press in the industry to buy into that vision and start promoting that vision. Before we came on, the expense management was a highly manual process. With ExpensiCon 1, we introduced this concept of real-time expense reports. The idea that you should just scan a receipt, and then everything else happens automatically. Now we take that for granted, but that was something that we had to do and create this concept overall.
Second, for ExpensiCon 2, we introduced this concept of pre-accounting. Now, this is something that's been around for a while, but it's never been discussed in the accounting industry. Accountants didn't even view expense management as part of their job. Now we've worked with the accounting thought leaders to make it clear that no, no, all of the work that happens to formalize the accounting information before it gets to accountants, that's part of the accounting industry itself. It's called Pre-accounting. Now that's actually a formal concept that is taught in the actual accounting industry to firm up our place in the industry and then to ensure that we are a place in the industry.
ExpensiCon 3 is gonna be even better. We'll talk more about that in the upcoming months as we lead up to it. We're very, very excited for what's coming up because it's been fantastic for the past, and we're extremely confident it's gonna be fantastic for the future as well.
With that, let me turn over to Ryan.
Great. Thank you, David. All right. Excited to go through these numbers with you all. As you can see, Q2, we had a great quarter. We had 754,000 paid members. Our revenue was $43.1 million, and on an annualized basis, that's $172 million. I showed this chart last time, but now we've extended it. We've updated it. Before we showed that we did see a little dip in paid members from Omicron, but we saw the end of Q1, that really rebounding, and that rebound continued all the way through Q2. As you can see, if you just kind of take out that little pink bar there, that is, you know, a straight line up and to the right. We are fully recovered.
I think what's really exciting is this is the best quarter in company history. Our previous best quarter was Q1 of 2020, right before the pandemic, and we are actually above that previous high watermark with a higher price and, you know, just a substantially better company than we were then. The Expensify Card continues to grow at a rapid rate, 142% year-on-year growth, and then sequential quarter-over-quarter, 40% growth, which is obviously fantastic, and we're very excited about that. We wanna highlight kind of the strengths of our profitability. Our operating cash flow was $15.9 million. Our GAAP net loss was $8 million. That is primarily driven by stock-based compensation expense.
If you take that out, our non-GAAP net income was $6.1 million. Our adjusted EBITDA is $11.7 million, and that's an adjusted EBITDA margin of 27%. We've seen this slide before, but just we reaffirm our guidance, our long-term guidance of 25%-35% over a multi-year period. We still have a lot of confidence in that, especially given the results we've seen in the last quarter. Just to summarize the call, we had a strong cash flow, and we were profitable. We had the highest quarter for paid member growth, now exceeding pre-COVID numbers. The Expensify Card is up 142% from last year, and we believe we're more recession-proof than competitors with plenty of momentum.
With that, we will kick off the Q&A portion.
I believe this is my queue. Give me one moment. First we have J.P. Morgan.
Can they unmute themselves?
Do we need to unmute them or something, Niki? I see Mark has his hand raised.
Let's go to the next one. We'll circle back.
Okay. All right. Citi, perhaps. Okay. Let's see if I can just unmute someone. No, I can't do that.
Well, this is exciting.
Mark, do you wanna try to unmute yourself? Okay, there you go. Mark?
Hi. Can you hear me?
Yes.
Yes.
We're doing it. Hello.
Hi. Thank you for taking my question. David or Ryan, let me just start with you. You know, given the pretty good, solid 2Q results, and I think that's, you know, two consecutive quarters of good results here. Is the company thinking of reinstating or any plans to reinstate former financial guidance?
Not at this time. As David mentioned, it's kind of a wild time, I think, in economy, right?
I think I said it was nuts.
Yeah. You know, we have you know, we're going to recession, or we're already in a recession, but at the same time, you know, a jobs report just came out that was you know, better than expected. It's kind of difficult to anticipate exactly what's coming out. At this point in time, we're sticking to our long-term guidance. We do believe that you know, our current trends are gonna continue.
Yeah.
Okay, great. David, a question for you. I think last quarter's call or maybe the call before that, I think you mentioned that the firm was looking to add some outbound kind of an outbound sales motion to your sales processes. We're actually gonna call prospective customers. I realize it's still early days with that, but I was wondering if you could just bring us up to speed on or up to date on your outbound efforts.
Great question. We've staffed up that part of the team. We have all of them, basically onboarded and trained and all of that. Right now we're focused primarily on just giving the best possible support to our inbound leads. That's where our focus is right now. The expectation is that once we've sort of worked everyone through the training process through our inbound leads, and then also, especially as we deal with additional leads through the accounting channel, which we've been engaging a lot more in, then I would say with the excess capacity, then we would be turning to outbound.
We haven't really turned to outbound that much yet. That's more of like, again, sort of a future plan, but we have everyone very busy talking to our inbound leads so far.
Great. Thank you. I'll turn it over to somebody else. Thanks.
Great. Who's next?
I believe Dan raised his hand next. Dan, do you wanna go?
I do. Thank you. Can you hear me?
Yep.
Yeah. Hey, Dan.
Awesome. In terms of the growth profile of the business, the last maybe year or two, you really benefited from some of the change in pricing. I noticed in sort of the latest quarter, the revenue per user has started to stabilize. When you think about the 20%-25%, or sorry, the 25%-35% growth over the long term, is that gonna be driven predominantly by adding new clients, or is sort of price and mix still gonna be something that could be an uplift there?
Yeah, great question. I agree it's starting to stabilize. The price change has been finished for a full year now. Since then, any increase in, like a per user revenue, any increase in that has been people not signing up for the annual subscription. They've been exceeding their subscriptions, and that's billed at a higher rate. When we see the growth of our customers, they will generally exceed their subscriptions. We collect a higher rate on those, and then at some point it stabilizes out where they're, you know, renewing their annual subscriptions with the higher rates. I think we've talked about this in the past, where it's kinda cyclical. They will exceed it to some certain point.
They'll realize, "Wow, I'm really exceeding my subscription." All of our receipts remind them that they can decrease their price by signing up by increasing their annual subscription. I think it kind of it'll ebb and flow a little bit as people exceed it and then kind of realize what's happening and then sign up for the annual subscription. To be clear, we'd rather have them on the annual subscription versus just kind of this pay-per-use thing. That's, I think that is kinda stabilizing. It could go up more, but you know, we don't really anticipate that happening.
Maybe to build on that, I think that it's a reflection of kind of the volatility and sort of sentiment of our customer base, that they're like not willing to make an annual commitment. Now, again, we take it at a higher price, but I think if they're willing to pay a higher price in order to avoid making a commitment, I think you can infer some kind of customer or some sort of, like, market anxiety around the future as well. Going back to our comment about, like, things are still pretty nuts in this marketplace. I think we have a business model which can take advantage of that volatility, but we can still read that there's still a lot of volatility in the market.
Okay. Just maybe on the volatility theme, can you talk a little bit about about in terms of, you know, you mentioned your competitor's in a really tough spot. You're obviously very profitable and have strong cash flow. How are you thinking about maybe potentially using some of your strong profitability to maybe go and, you know, accelerate customer acquisition? Or is that not the plan given the macroeconomic volatility you cited? Thanks.
We are putting more money into our sales motion, as we've discussed. Now, in the past-- I said, we feel like we're kinda saturated on advertising, so we're pulling that back, kind of optimizing, running tests on the marketing standpoint. In terms of excess cash, I think we're looking at, you know, commissions and things like that, and seeing how we can play with that on the sales side.
Perhaps also on the conference side, something like ExpensiCon is an example of, though it's designed obviously to pay for itself, it's still a big swing. I think that we can use our extra cash to sort of invest more aggressively into the conference space. We go to a ton of conferences. We're going to more conferences, and we're showing up in a much bigger way for these conferences, and we're doing more direct engagement with accounting firms and so forth. There's a lot kinda behind the scenes that there's ways to spend money through these sort of quieter channels that we think are very effective.
Yeah, I mean, that's a good point. I'd actually just wanna take this opportunity to talk a little bit about the marketing spend a little bit. We have dramatically increased. I said last quarter that we're trying to decrease our advertising spend, but we've actually really ramped up our conference spend, which we feel really good about kind of the return there. We've been going to conferences for a long time. We have a good kind of conference execution strategy. In Q3, we actually ended up picking up a lot more conferences than what we were thinking. We actually should see S&M be relatively the same in Q3 as in Q2, but that's a shift in where the dollars are going.
Great. Thank you very much, everyone.
Thank you.
Koji, you're up next.
Hey, guys. Thanks for taking the questions. Great to see everybody. Wanted to ask you a little bit about a theoretical question here, you know, thinking about the long-term targets of 25%-35% growth. Just really trying to think, you know, what needs to happen in the end markets for you to kinda hit the high end of that 35% growth? Is it a function of just spending more, or does something need to happen, some sort of inflection in the end markets where you hit that 35% target?
Great question. I think there's a couple things. We got a couple irons in the fire, I guess, right? We are building our new kind of, more consumer-focused, platform, which we think is basically designed from the bottom up to just be viral hooks left and right, which we think is going to accelerate word of mouth. Another thing is the Expensify Card. Now, remember, that's not in revenue right now. We expect to move that into revenue, you know, in the near term future. One thing I wanted to talk about that we haven't spoken about yet is the impact of cashback. Right now we're in kind of a weird situation with the card, where the interchange is not considered revenue, even though it will be soon.
We are offering cashback, and cashback is considered a, it's contra revenue, so it actually decreases revenue. We are getting the downside of cashback, but not the upside of the interchange's revenue, which shortly, when we have all this kind of ironed out, that should be, you know, a lift on revenue as well.
Got it. Just one follow-up from me. Thinking about the Expensify Card, you know, and as the revenue increases on that and the payment volumes increase on that, I do recall you guys used to talk about how if there is a threshold met in the type of spend where the ARPU goes down or the subscriber fee goes down. Are you beginning to see that, and how should we be thinking about that as we model out ARPU and our subscribers and Expensify Card going forward?
Yes. Yeah, I mean, as more and more people adopt the card and they're using it regularly, we do give them a discount on that price. Now, that discount on price is offset by the increase in interchange. We'd rather pay someone or someone pay us the lower rate and generate the interchange 'cause we'd net out more in that scenario. Going forward, or we're already seeing it, then going forward, we expect to see it more, but it's still compared to the overall amount of members. I'd say it's not super meaningful, but you know, if we do our jobs right, we should start to see that come up kind of in the ARPU, I'd say.
I wouldn't model it to be drastic in the near term.
Yeah. To just jump in here, Koji. I think the effect on ARPU, you'll probably start to see it like quarter-over-quarter. Like, if you look at the implied ARPU right now, and if you take it quarter-over-quarter, you're probably seeing a very consistent number, give or take a few cents. You're probably gonna see a trend rather than some sort of, like, sudden change. As we see that trend, if it's materially going down on a consistent basis, let's talk more about it, but right now I don't think we're seeing that yet.
Got it. Thanks, everyone. Thanks for taking the questions. Appreciate it.
It's good to see you. Who's next?
Okay, let's see. What does it say hand raise? [Maura] , maybe. Sorry if I didn't say your name correctly.
Hi, everyone. Just jumping on for Brent here from Piper Sandler. Just two from us. You know, as we start to think about the potential for belt-tightening around budgets for travel and expenses given the macro situation, can you talk a little bit about what you're seeing from your vantage point? You know, if you are seeing kind of dynamics start to change, where would it be kind of most pronounced, either from a customer size or vertical perspective? Then I have just one follow-up.
I mean, I would say I think that everything got crazy with pandemic, and I don't know that anything's like really stabilized since then. Like, I don't know there's a consistent baseline to compare to. It's basically like things start to look good, then Omicron comes up. Things look good, then, like, war or, like, whatever it is.
You'd have to compare it to, like, 2019 or something.
Something like that. Yeah.
I mean, we've seen business travel increase. In general, spend is down from where it was pre-pandemic. Like, it's absolutely less on just like per customer basis. In terms of verticals, I don't-
I don't know that we'd slice the data in that particular fashion. I don't know if you have any insight into that.
No.
Okay, sounds good. As you mentioned, you know, the macro situation has kind of layered in an additional layer of uncertainty and crazy, similar to the way that COVID and Omicron did. With that understanding, you know, I know you don't offer guidance, but are you able to give any directional visibility into how card interchange or maybe paid member adoption has kind of been trending in July? Is it, you know, kind of too early for that?
So this--
Feels a lot like guidance.
This is basically like guidance in there. No guidance, right? I'd say that, barring any, I don't know, huge flare up of monkeypox or something to the level of, COVID or something, we're expecting, the trends that we've seen in the last several months to continue. I guess that's probably the extent of what we're prepared to say today.
All right. Thanks for taking my questions.
No problem.
Rob Kelly, you're up next.
Hey, guys. Thanks for taking my question. I just wanted some more color on kind of the gross margin contraction we saw this quarter and kind of what drove your cost of revenue up. I know you don't give guidance, but how we should think about it going into the back half of the year? Thanks, guys.
Yeah, good question. There's a couple things going into cost of revenue. I mean, server costs are like, OCRing all of our receipts, so when we see increase of that can increase cost of revenue. Also, we have an increase in the contractors that we use to support our customers. That's also in cost of revenue. Card processing, like the actual ordering the physical cards, the merchant fees that we pay, stuff like that. I think that's probably driving that the most.
Yeah. Plus also, like, I think I mentioned that we added more account managers for a wider range of our customers.
Yeah, that's the answer.
Yeah. I think that's probably there. I would say, we're still experimenting exactly with which customers are going to get them, which aren't. I think that we're pretty much fully rolled out at this point, but I don't know if we're gonna roll out further or not. I don't know the current status of that.
Yeah. Maybe just to. You asked for colors there. We'll give you some extra color. What we've done in the past is our Concierge engine is a hybrid of human and AI, and we've been able to get incredibly efficient to kind of leveraging those two. I'd say we're experts at that. We first did that with just customer support, so not account management, just you ask a question and someone either the machine answers it or a person assisted by the machine answers it. We're currently expanding that into sales, which is currently doing inbound sales, but the intention is to start using outbound sales with that Concierge engine.
Recently we are adding account managers, which is just a higher degree of customer service from what we've provided. That increase in account managers is probably the only new thing I'd say.
Thanks for the color.
Sure.
Cool. Patch, you're up next.
All right, cool. Hey, Bev. I like the bank. We gotta visit that at some point.
All right. You should visit. It's great.
Yeah, it looks cool. All right. You know, David, I'm super interested by your slide about a more difficult market highlights our unique strengths, and especially the default risks bullet, right? I would just love you to go a little deeper into- - That you haven't seen default rates spike, and your competitors have. I guess from the point of view of, you know, someone who covers software and not necessarily financial services, I mean, it seems like SMBs, it just seems like things would be harder for them, you know, and you guys have a lot of them. That's number one. Number two, what is the difference between. I mean, I know you said they're long-term customers, but is it also because, you know, Brex was focusing on venture-backed companies, for example, and you guys don't.
Just a couple more thoughts on that would be super helpful.
I'll take a swing at it, and then David can build on any cracks. A couple things there. We have a dramatically different underwriting methodology. What we'll do is we offer both monthly and daily settlement. Monthly is the 30-day card that you're used to, but we also offer daily settlement with significantly higher credit limits. But the reason that is superior is because we extend 24 hours of credit, and then we debit the customer 24 hours later. The way it works with us is, let's say they spend $1,000. The next day, we debit $1,000 from their account. And then, like, two days after that, we pay the network back. We are not paying with our own funds.
We are paying with the funds they gave us. We're not left holding the bill if they go out of business or just decide not to pay because they had a tough month. We are able to just pay back way more easily 'cause we're constantly just cycling this money through. We're not waiting 29 days basically and hoping that they pay, which is, you know, just increases the risk. I'd also say our default rates have remained the same, mostly, because, you know, we have a lot of discipline. We're a disciplined company, right? We've always been profitable for a long time. That takes a lot of discipline. We make smart underwriting decisions.
You know, a company that is kinda focused on growth at all costs might be a little more irresponsible, I guess, with their decisions. You know, I haven't seen the decks, and I haven't seen the data, but we've talked to a lot of investors, and a lot of those investors look at these deals. What we've been hearing is that, you know, they're seeing default rates in, like, 7%-8%, which is, like, wild. We're not seeing anything like that at all. That's kind of a little bit where that David's kinda commentary is coming from. I don't know if I missed anything there.
No, I think that's right. I think actually the mix of daily versus monthly settlement is actually kind of a key one. We launched with daily settlements, and that's the default configuration for Expensify, and the vast majority of customers are perfectly happy with it. They get higher basically spend limits. They can just spend more on the card because they cycle the money faster. Furthermore, we have extraordinarily lower default rates. That's our default configuration. We still have monthly settlements, obviously, and especially for the accounting industry, I would say the monthly settlements is particularly interesting. Anyway, so the defaults of our system are just different than the defaults for their system.
They've been driving people towards a monthly settlement option, which is just 3x more or actually more, because then they've been doing, like, a whole bunch of new customers were getting the 60-day option as well or something like that. They were just extending a tremendous amount of credit. I think that Ryan was being generous, but, like, no, they're totally nuts. Their sales motion was insane. Like, because we talked to people at conferences. They're like, and they'd be talking to their salespeople, and they're like, "How does this make any sense?" And the salesperson there, which is just some rando they hired to, like, run the booth or something like that, is just like, "Yeah, it just doesn't matter. Like, I just don't really care. I just need to get this deal."
That attitude has basically been, you know, play that out in a thousand conversations over, of course, multiple years. It's like, it's not a high quality customer group. I think that's, but whereas to Ryan's point, we're different in the sense that, we focus on, businesses that, like we're offering reimbursements, we're offering like integration with accounting partners, and most of our customers are paying on top of it. They're not just coming to us basically, like, just for free credit. They're coming to us first and foremost for our software solution and their real businesses. Then secondarily, they're like, "Oh, you got a great card too. That's super awesome." I think that it's just, again, a completely different set of customers.
We have, I guess, an additional point of leverage. If someone doesn't pay the card, we can turn off. We basically lock them out of Expensify, which they run their business on, so then they pay us immediately. Whereas if you're just a credit card and they say, "Well, you better pay us." They're like, "Eh. You know, maybe I won't." They don't have any, like, recourse there, right? We are crucial and fundamental to these businesses, so we're like the first [G&A].
Super interesting. Thank you.
All right. Is that the last one?
I think so, 'cause I still don't see Tyler, who's the only one left.
All right. We'll catch up with Tyler later.
Cool. Well, thank you everyone. I don't know if we have any cool finale slides. No, that's our finale slide. Cool. Well, as always, it's a pleasure. Thank you so much for tuning in. Just to reiterate, this has been the best quarter ever. We think that the pandemic is officially behind us in every way. We are exiting a much, much stronger company than we entered. It's been exciting, and I think we've got a lot more excitement coming up. Thank you all.
Thank you.