All right, we'll go ahead and get started. Good morning, everyone. Welcome to the Citizens Technology Conference. My name is Aaron Kimson. I'm a software research analyst here at Citizens. Really excited to have Expensify CFO Ryan Schaffer on stage with me today.
Hello.
Always good to be here with a fellow Ohioan. How's your day going, Ryan?
Going great. Excited to be here.
Awesome. We'll just jump right into it. I think a good place to start is you reported last Thursday, right, 4Q results. The business technically returned to growth on a GAAP revenue basis. 4Q adjusted operating margins were over 28%. You provided an initial guide for 2025, $16 million-$20 million of free cash flow. Can we start with maybe the top two or three takeaways you want investors to have for those that haven't had a chance to listen to the call? It was a busy earnings night last Thursday.
Yeah. Number one, I'd say that we finished our card migration, which means that all the interchange is going into revenue. That's been kind of a multi-year storyline that is finished. The kind of net net of that is when the card grows, our revenue grows now, which sounds very obvious, but that hasn't been the case for the last couple of years, which made kind of the financial story a little confusing. That's done, which is great. Also, our business has really kind of stabilized from where we saw it in 2023. I think 2024 was a much better year. Obviously, we were able to grow revenue, which wasn't the case in 2023. We're happy about that. We also launched our new travel product, which adds transactional revenue opportunities beyond just the card. It's great cross-sell and upsell and makes it more sticky.
We're really excited about that as well.
Awesome. Definitely want to talk more about Travel later. I think you've always had an ambitious product roadmap since the IPO. Where are you, Dave, and you and the rest of the leadership team most focused right now? There's a lot going on, right? You've got the F1 movie coming out in July. New Expensify, the new version of the product. Travel just launched.
Yeah.
Where are you guys focused?
Yeah, there's definitely a lot going on. Specifically, when I'm not talking to investors about the financials, I'm more focused on Travel. I'm kind of the executive sponsor of the travel product. The New is very focused on the sales optimization and also the product conversion of the first user experience. When someone comes in, how do we make sure they stick, they stay, they leave? Why did they leave? What were they expecting that they didn't see? David is very focused on AI and customer support. He talked on the earnings call kind of why those two mixing is really important, but that's kind of where his big focus is.
That's helpful. Can you help us understand the differences between New Expensify and Expensify Classic? At a high level, what's the right way to think about the proportion of the business that's on Classic Expensify versus New Expensify today? Maybe how you plan to migrate more towards New Expensify as you get all the functionality right in 2025?
Currently, our largest customers and larger customers are on Expensify Classic. We are migrating the smaller customers over first to New Expensify. Right now, the people on New Expensify are anyone that signs up that is not a big company. If you're a small company, you sign up, you're going to go on New Expensify, you'll never see Classic. Also, we are migrating our existing customers on the Collect plan, which is our lower plan. We are hoping to have migration done completely by the end of the first half of this year. We are going to start migrating the larger customers. We hope to have that done by the end of the year.
Got it. When you say not a big company, I mean, your sweet spot, right, is the SMB, I think 10-499 employees, and then VSB, so 1-10 would be the second largest component. What do you mean by not a big customer as far as if I'm a new customer today and I have 200 employees, am I going to get sent to New Expensify or the Classic version?
Today, you would be sent to Classic, but by this summer, you would be sent to New Expensify. As of today, you would go into Classic. The plan is that's going to change pretty soon.
Understood. You have a history of viral marketing events, most notably the Super Bowl ad in 2019, right? This summer, you have prominent placement in the new Apple Studios movie F1. Brad Pitt's the star in that one. I guess from a product perspective, it sounds like you offer a large amount of functionality for the price that consumers pay per month. How much do you think the movie advertising can realistically drive brand awareness and help the company from a distribution perspective?
Obviously, we think it can be really great. Otherwise, we wouldn't do it. I can maybe talk about the Super Bowl a little bit because that's kind of the most similar event that we've seen. The Super Bowl, we spent—the spot was like $5 million, and we spent double that advertising. So about $15 million total. The reason we did the Super Bowl is because it's an opportunity to get earned media. Basically, you have the media you actually purchased, and the earned media is like if someone on the news spoke about you for five minutes. What would five minutes cost, basically? What would it cost to get that equivalent placement? All the articles that come out, what would it take to actually buy an article on all those websites and all that?
For the Super Bowl, we spent $15 million, but we got $62 million in earned media. We got like a 4x return or 4x larger placement than we had purchased. We were pretty happy about that. The impact was we saw sign-ups spike over 1,000%. That persisted for about a year, and then it started to really kind of taper off. The awareness worked, and we saw an increase from it. It will be interesting to see how this plays out because the Super Bowl has like 100 million eyeballs on it, but it is only for 30 seconds. It is really contested because there are so many other people also. In that 30 seconds, you only see our logo twice.
Now, we did a really good job, and we got listed as one of the best ones that year because we built a whole music video. There was this engagement you could do. You see the ad and then go do all this other stuff with Expensify. That was maybe a little different than just a 30-second ad. The movie is basically two hours. I don't know if you've seen the trailer. Our logo is all, I mean, you see our logo more in the F1 trailer than you saw in our Super Bowl ad. It's a pretty prominent place. We're the lead sponsor. It'll be really exciting to see how that goes.
Yeah. Do you think that's realistically something? I mean, the business has kind of stagnated a little bit from a paid member account, right? Is that something where you can get a real tailwind? I mean, I think back to my days as a tour guide at Ohio State, right? My sophomore year, they won the national championship, and I guess we did again this year too now. Applications went through the roof. I was working nonstop, right? So many people wanted to go on tours. It is something that seems trivial but can have a real effect.
Oh, yeah. I mean, the whole idea behind this is that it's going to drive a lot of enthusiasm. The way we're kind of organizing the business now is we're going to have this huge marketing event. A bunch of people are going to see this movie. Some percentage of the market, they're going to Google or search on social or ask ChatGPT or something like, "What is Expensify?" We need to make sure that we're prepared for that because they're not super hot leads, right? They saw a movie, and they saw our name 400 times in those two hours, right? They look it up. How do we take that, educate them what we are, and then let them know that we are for you, basically, right?
They Google this and we're like, "Oh, we're a product for someone like you." That is our big focus right now to get ready for the summer.
Yeah. And then for ours, you, you're the CFO. You took about $35 million of OpEx out of the business in 2024, got a non-GAAP operating margin over 20% for the year, over 28% in 4Q. Can you kind of walk us through that journey? And then including some of the AI-related cost savings you realized in the fourth quarter. I think when we talked after the 3Q call, my impression was most of the cost optimization was done. And it seems like you found more. Is there more to go there?
Yes. Thank you for acknowledging my part in that. It was not all me. I played a large part. It was a big effort. Obviously, there is a lot of money. Thankfully, we do expense management, right? This is like the perfect tool for this exercise. I used Expensify. Basically, we looked at all of our dollars. What are we super happy with? What are we not happy with? We cut our SDR program. We cut a lot of our performance spend, which had an ROI, but the buyback period was just too long, just not very exciting. Doubled down on what was working, right? Like SEO, inbound content marketing, that type of stuff. Stuff that has historically worked really well for us. We cut some employee benefits and stuff like that. We had some kind of lavish perks that we cut back on.
That was kind of the initial slug of it. We had an all hands, we treated the employees like adults. They can see the financials. Now you're a private company, and you just keep telling them things are good. You are sweating in the back room like, "Oh, things are not good." They can see it, right? We were like, "Listen, we're spending too much money. We need to cut back." This was kind of a pretty somber all hands. We are going to cut all this stuff. We need your help to cut more, right? That is when we kept discovering these things. People are like, "Hey, I can automate. What about this? What about this? Let's add AI here and all this." David kind of got hooked into that. We just really doubled down on it.
As a specific example, we have this Concierge AI, which responds to customers. If it does not get it right or it is confused by the question, it escalates to a human. This is a not very trained human, just someone that can answer basic questions. If they do not know the answer, they escalate to someone more trained than them. If that person does not know, then they escalate to our actual staff, right? We have removed, we call them, so we had the AI, the first responders, second responders, and then our team. We actually removed the first responders completely. Now it is just one layer of AI. Then we have the trained outsourced people, then our people. That is a huge cost savings by being able to further remove more human elements. Honestly, it is faster.
It's better trained because the hardest part when dealing with a large support organization is our product's changing all the time. We're actively building it. This isn't like an entrenched enterprise software that's monolithic and doesn't change. It's changing all the time. It's challenging to get a large group of people to understand the nuances of, "Hey, we slightly changed this flow," right? They say the wrong thing. The AI, we update that help documentation when we're feeding it. It answers it better than our humans were and way faster.
Awesome.
If it doesn't get it, and if it's confused, it still escalates, which is fine.
Got it. One thing that jumped out for me just reviewing your 10-K this weekend. Your 2024 gross seat retention increased to 81% from 74%. Net retention decreased in 2024 by 13% from 99% - 86%. Can you help us understand the dynamics there?
Absolutely. What that means is basically our customer retention improved. Less customers left us. However, the size of that customer decreased. Our account management efforts, you can kind of control whether a customer returns or not. You provide a good experience. Sometimes they leave. You cannot do anything about it. You can control that. We improved in that aspect. It was a big focus for us. That is good. We cannot really control whether they are downsizing or whether they are doing well as a business. When we see they are not traveling as much or they are letting some of their employees go, laying people off, that is kind of something we saw in our customer base. We cannot control that as much. In a healthy economy, for most of the, I just celebrated my 12-year anniversary here.
For almost my entire time here, our net seat retention was over 100%. The customers, on average, would grow year- over- year, right? We are kind of seeing them contract, which makes it challenging to grow in that environment. We are working our way through it. Obviously, we grew this quarter.
Absolutely.
It's not insurmountable.
Yeah. Maybe switching to Travel a little bit. You announced Travel and GA on February 25th. I think you initially piloted that. I was looking back at notes in May of 2024. You had over 2,000 customers in the pilot in June. You were at least signed up for the pilot. Can you talk about your learnings as you went through that pilot program? Ultimately, how big of an opportunity can Travel be for you to do more with existing customers? I think you addressed it on the earnings call as far as how to think about from a revenue contribution perspective how it can grow.
Yeah. First, I'd say that once customers adopt, it takes them a couple of months to really get going. Everyone signed up, and we didn't really see a lot of volume. Then it spikes up, right? Maybe they don't have flights right when they book. It's interesting that there's kind of like a lag as maybe they're training or something. I thought that was interesting. Also, providing global travel is more complicated and took longer than we expected. I think that probably delayed us in going to, I guess, something I learned is it's much more complicated to offer travel globally than it is just in the United States. That put us back probably about three months or so as part of the delay. Also, offering T&E as a complete package is bringing in a lot of business.
A lot of customers just wrote us off before because they wanted T&E, and we only had E. Now we have T&E, and we're getting a lot of inbound interest from really large, exciting companies. I think it's not just selling travel to your existing customers. It's leading with travel and then getting the expense business too. I think there's a reason all these travel companies are starting to offer expense because they go hand in hand.
Yeah. It's interesting, the convergence between those two spaces. We'll see over time, I guess, which one's the right beachhead, right? Whether having travel first or expense first.
I think expense is harder. I think travel is on the cusp of maybe becoming commoditized. Not yet. I think banks get a bad rap because they're always so slow to adopt technology and all that. Travel's kind of worse, or it has been. Something that's interesting in the travel industry is they're coming out with, it's called NDC, stands for New Distribution Capability. It's basically an API you can call, and then you book directly with the airline. I think that a Plaid for travel is coming, and then it'll become super easy. I don't think there's going to be a Plaid for expense management. I do think in the long term, expense will be harder technologically than travel.
That kind of leads me into my next two questions, I guess, just to ask them very directly. Does the company believe the virtual agents may be able to solve for travel in the coming years? The whole corporate travel booking space could just kind of become commoditized if I say, "Hey, I want to fly a round trip from New York to San Francisco, Friday to Tuesday, stay at a hotel within a mile of the Ritz-Carlton.
Yeah.
An agent could do that. Is that realistic in your perspective?
I do think so. I don't know how soon it'll be because I think once there is broad adoption of NDC in the travel industry, then absolutely. Until that, you kind of have to go through the GDS, which is the more old-school way of booking travel. I'm getting kind of into the weeds in travel tech here.
GDS, what's that?
Stands for Global Distribution System, I believe. That feels, you know, when you go to the airline and it pulls up like a green screen, like a super old-school green screen, that's like the GDS, basically. I think that would be tough to do with an AI agent. I think as soon as everyone has an API where you can book directly, anyone can call that and then book directly, I think an AI agent could absolutely do that. I would still probably have some travel agents as an escalation. I would not go full, but I think that that's absolutely coming and probably in the next five years.
Okay.
Most of the major U.S. airlines have NDC, and we're starting to see more airlines in Europe and whatnot. I do think it's coming. I think that's kind of, it's not the AI point that's holding up. It's the travel industry modernizing. That's the bigger holdup, in my opinion.
Yeah. All right. I've got some more questions, but I'll go ahead and open it up to the audience. If anyone in the audience has questions, make sure I give people an opportunity.
Outside of travel, what products sort of enhance your sort of readings? What is the way you want to spend time on products?
Yeah. Great.
From that, like when you work with [audio distortion] on the report, the card, the corporate card, are there regulators in the fintech world where you've had a couple of failures where it's who's actually in control of the money? Do you have to interact with any of the banking regulators? Or is that just like [audio distortion] ?
Great question. First question was, what other products? I think next on our radar is Bills and Invoicing. We are very close to getting our money transmission licenses in all 50 states. We are just waiting on New York and Hawaii. New York is the hardest one and notoriously hard. We think we're going to have that by the end of this year. Hawaii just completely lost our paperwork because they do it all by paper and it's mailed in. We had to restart. That's just kind of a funny, weird thing. We'll have that soon. After that, we are going to be offering more like Venmo-style P2P money transmission between people. We have it right now, but if you're in New York, we block it. It's not the best experience.
We will be able to do like truly everyone in the United States, hopefully this time next year, depending on how things go. Your other question was, do we have to deal with regulators with the Expensify Card? Was that correct? Yes, we do. We have like a whole compliance team that deals with them. They have to take tests, and we have to provide evidence and all that stuff. I'm not super involved in that part, but I guess the answer to your question is yes.
Where to go here? I guess with the MTLs, right? Once you get all 50, I mean, you talked about having the potential to do P2P payments. I always ask you guys, I feel like, about payroll. That's exciting to me from the perspective of we talked about NRR being down. It's something where you could get all of your customers active every month and get the pay member count up. Revenue goes up. Is that a 2025 initiative once you get all the MTLs?
When we initially started talking about payroll, I think we underestimated how long the MTLs were going to take to get. We've seen companies, like Xero is an example, a cloud accounting firm, launch payroll when they didn't have all their MTLs, and it doesn't go very well. You think you have a great product, and then one of your employees moves, and all of a sudden you legally can't pay them. That's actually a terrible experience. We're waiting until we have all of our MTLs. We're hoping to have New York by Q1 2026. I think that we should, I think payroll might be more of a 2027 thing. I mean, we legally probably can't do it until 2026. There is going to be work involved in that. I think 2027 is probably more likely.
Yeah. That's really helpful, color. I guess the last question, you guys cleaned up the balance sheet. You've gotten it to the point where even if the top line continues to struggle, you've taken so much cost out of the business that it's a sustainable business, right? You've gotten to a place where you can play offense. I think you have $38 million in net cash. You have the buyback. You just refreshed the buyback last week. How do you think about that $16 million-$20 million of free cash flow that you guided to for 2025 internally? Is there a framework for a percentage of free cash flow that should be allocated to buybacks within a certain valuation range? I think you guys bought some stock back from the CEO in Q3 of last year. Q4, no buybacks.
Just what's the way that investors should think about capital allocation there?
I think you kind of hit the nail on the head. I do not want to reveal anything here, but basically, yes, we think the stock is, we personally think the stock is kind of undervalued, and it is good. That is attractive to us. A percentage of free cash flow, I am not going to say what percentage, but that is kind of the framework, basically. Under this level, we are going to apply a certain amount of the free cash flow towards buybacks.
That makes sense.
We will keep doing it until it hits our level or maybe keep going. I do not know, but yeah.
Yeah. All right. I think we're out of time, but thanks so much, Ryan. Thanks for coming.
Thank you very much.