Hello, welcome to the Expensify Q3 2023 earnings. I'm Expensify CFO, Ryan Schaffer, and with me, I have Expensify COO, Anu Muralidharan.
Over to the disclaimers.
Before we begin, please note that all 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 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 those 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 reconciliation of these non-GAAP financial measurements to their most comparable GAAP measures. Back to you.
Thank you. All right, so I wanna kick this off with a reminder on how our business model works and what our growth strategies are. So first of all, of course, the very simple acquisition of new customers, new companies that adopt Expensify in order to manage expenses and reimburse employees on our platform. Then, and kind of our biggest growth generator, is expansion of users, expansion of company size, maybe deploying it to other subsidiaries, maybe of existing customers on the platform. And throughout the history of Expensify, this usage expansion among existing customers has been one of our primary growth generators. Then there's increasing Expensify Card adoption, but more generally, cross-selling of our various back office features to the companies that increases both their usage but also generates all manner of other revenue streams for us, of which interchange is one.
Fourth is adding new viral loops, and this is really about engaging all of those free users, all the freemium customers on the platform, that may not yet have the need for a business expense management software, or may not have reached that activation point where they've decided to adopt business expansion, business expense software, but are using the product for whatever part of use case they might be, such as maybe paying their friends or family, or sending invoices to, their few customers or whatnot. Like, the point of this growth generator is really that it engages them way before they become ready to purchase a business expense product. Last but not the least, of course, tapping into international markets.
Most of the English-speaking world is fair game for the platform, so long as we have tax capability sort of baked in. Of all of our international markets, UK, Europe, Canada and Australia are pretty big for us, and so leaning into those markets more is also a pretty solid growth generator. Now, I wanna remind you, Why should you believe in Expensify? What are the three key strategies that contribute to our long-term success? One is the market is enormous. Most of it is very untapped, so it's greenfield, and it's there for the taking. Two, is not any business model can succeed in this sort of market, where most of the volume is at the bottom of the market.
And what I mean by that is most of the volume, in terms of employees, work at very small companies between one employee to maybe 50 or even 100. And a top-down sales-driven strategy doesn't really work in that segment of the market because you just don't have that return on investment on each deal. And so, and also a card-oriented strategy doesn't work quite as well at the very bottom of the market because there's underwriting challenges. So you need a subscription-based model which is able to engage users, end users, even before they are ready to make a decision, and then you need to enable them to sell Expensify into their companies. That bottom-up subscription-based acquisition model is the one that is primed for success. And those are really our three key strategies, and we talk about that all the time.
But this time around, I wanna show you some real data, 'cause I wanna show and not tell. So this is the latest available census data on just small business as a market. And I, for the sake of this visual, use small business as any company with between 1-250 employees or 0, 1 being the business owner to 250 employees. And you can see here the companies with 2-10 employees, and then the companies with 11-50 employees employ the largest chunk of the market. So most of the end users actually work at really small companies, and if you even take up to 100, like, that's basically almost 70% of the pie. Why is this important?
Because when you have a very small employee base, and that generally seems to be correlated with the annual revenue that these firms make, 'cause, of course, when you're smaller, you're making less revenue, and as you grow, you scale up, and you, you know, increase headcount. So here I wanna show you single-employee firms, what do they make on average a year per firm? $200K. Firms with 2-10, $450K, so on and so forth. And I'm then extrapolating to, if that's the revenue this firm made, then can we reliably underwrite them for the card? And part of the challenge isn't that they are making less money, and so they're default risk, that's just one part of it.
The bigger part of the problem is there's not reliable data sources out there that can help you even identify whether this specific company at this size, is it making positive revenue? Are they paying their bills? It's really challenging to do that. You can use their bank data, but that's of course, limited in terms of just having the last 90 days of volume. You just can't reliably underwrite them and keep your default risk low. So a card-driven model kind of has to start at the 50+ employee base segment of the market, but you have an insane amount of employees and employee volume at the lower levels. So you need something different in order to tap into that segment of the market, and that's really a subscription-driven bottom-up acquisition model.
Now, this is sort of a peek into what sign-up volume looks like on Expensify in a way that we've never presented to you before. To the very left, you have the total signups, and this is... I used weekly signup data to get this chart, but it's a very consistent trend. Any week you look, month, year, this has been a very consistent trend on Expensify for a really long time. So the chart to the bar to the very left is the total signups, and then I broke those total signups down by public emails, because generally, when someone signs up with a public email, they're looking to use Expensify for themselves. They're not looking for a business use case. That is the vast majority of signups.
Then I took private emails that couldn't be enriched on Clearbit, and that's again, as I was talking about in the previous slide, with smaller companies and their underwriting potential. It's difficult to enrich VSBs because there's just not that much reliable public data out there about them. So if you bucket the signups into public emails and private emails that couldn't be enriched, you could make the assumption, educated guess, that all the public emails are likely individuals, and all the unenrichable private emails are likely very small businesses. That then leaves 15% of signups that are actually private emails that could be enriched, that are decision-makers, that are looking to adopt Expensify for business. What's insane about this is, this has always been the trend.
All of the growth that we've ever seen has come from that 15% of signups, creating a free trial and converting to a paid product. This is actually exciting news because that 76% and 9%, we do try to engage them on the existing product with individual use cases, but the existing product isn't perfectly optimized for individual use cases, although they do have them. It's much more optimized as a business expense product for a decision-maker to adopt, onboard, and deploy the product to their company. So we have a large majority of inbound interest that we are very ineffectively engaging today on the existing product. Now, what do we need to do to capitalize on this momentum?
And I want to talk about this in this format of how does a user go through this journey as a free customer, as a freemium customer, if you will. So first, they discover the product, then they sign up. These two things we are doing really well. Like, we have a lot of brand cachet. We have done a very good job of telling end users, "You can adopt the product. Your company does not need to approve it. You can use it to scan receipts and organize yourself." And so that's working, and, you know, we've done it for 10+ years now, and it's continues to pay off. That's a huge investment that's already returning dividends, but we need to activate them. And what does activate mean?
Activation is that moment where a free user has an aha moment, where they use the product to do something, it works, it makes their life easier, and now they're on the hook. That needs to improve. While we do do that, which is why we still see such enormous inbound interest on the existing product, like I said, it's not optimized for it. So discovering the features that create that aha moment is just not as intuitive, not as smooth as it could be. And then once they have that aha moment and they create a free trial, we need to convert, and once we convert, we need to actually scale their usage. Both of those also, we've traditionally done really well. We continue to do really well.
Our free trial to paid adoption conversion metrics are kind of best in class for SaaS free trial products, free trial-based adoption products. And so we continue to improve that, and we've talked a lot with you about our onboarding specialists and how we are increasing visibility to onboarding specialists when you create a free trial. So we wanna keep improving that number, the percentage of free trial to paid adoption, and we already have the infrastructure to do that. That's a project that's well underway. And then scaling is a matter of retaining your customers, because ultimately you don't decide when they add seats, because that's for their business to decide when they hire more employees.
Two ways that we could scale better, which we are working on: one is retain those customers, so when the economy picks back up and they start hiring, they automatically start growing on our platform. Two is create use cases for the company that actually makes more of their employees active. That's the intention behind having a collaboration chat platform that the company can adopt, so they don't need another app in order to collaborate across the company with their employees. Introducing things like invoicing, bill pay, and payroll, which activates more of the company and scales their usage on Expensify and allows us to grow.
So for the rest of this presentation, I wanna talk a little bit about the activation step, and I wanna show you how we do that better with our new product, Expensify 2.0, which we've been teasing for a long time. It's been a long time coming, but we are kind of at the cusp of launching it to real users, and we have a lot of activation we did at conferences this year that are starting to pay off. So I wanna talk a little bit more about that, and I wanna continue the trend of showing but not telling. So without further ado, I'm gonna show you a little video that gives you a sneak peek into the product that is very nearly ready for launch. All right.
So I hope that is as exciting to you as it is to us, because the entire point is to engage the end user as soon as they come into the product, and to give them so many different use cases that enhance their experience, enhance their lives, make their most painful tasks easier, such that we activate them sooner rather than later. So on this slide, I want to go into this end user flow in a little bit more detail, and this specific flow is actually going to launch maybe as soon as next week. So imagine an employee that isn't trying to adopt Expensify for their company, is just trying to make their process of maintaining these receipts, submitting to their employer, a little bit easier. So they come into Expensify. That screen on the far left is where they would land when they sign up.
So on that screen, they can create a new chat, find their manager, and within the chat interface with their manager, so now we're at the third mock-up, they can click that green button at the bottom, and that takes them to the screen, the fourth screen from the left, and request money. Now, they can request money by manually entering the amount, or they can scan a receipt, or it can be a distance-related expense, whatever. The options, all of the same options that existed on-- exists on our current product will exist here. So for the sake of this, let's just, the sake of this example, let's go with the manual version. So they... $20 for gas, click Send, and now their manager has this money request from them. How does the manager receive this?
Assuming the manager is not an existing customer, which, if they are, then they will receive it in both email and in-app notification. But for the sake of this example, let's assume they're not. They see this email. So it's really clear Alice is requesting $20. Like, the call to action is really clear. They come in, the email is designed in a manner that kind of invites them to click on it. So when they click on it, they can sign up into the app and pay this employee immediately. So manager clicks on it, they are dropped into the in-app experience, into the direct message with Alice, and they hit Pay. Now, it's possible that some VSBs are not looking to adopt an expense product for the entire company just yet. All they wanna do is pay this employee, and that's the end of it.
They maybe don't have a business bank account yet. So if that's the case, they can choose to just pay with their personal bank account or a debit card, and it would feel like any other P2P transaction. But if they choose to pay with the business bank account, then we know that they're a business that is at a stage that might be ready to adopt the product. So first we take them to connect their business bank accounts, of course, and complete the action they came here to complete. But after that, we will take that expense, we will create a workspace for this manager, and we add the employee and the manager to that workspace, and we put the expense into that workspace as well. So in this screen, you can see we've kind of created the workspace.
We've put the manager and the employee in there, and then we've moved the expense over, and we leave breadcrumbs on the direct chat between the two of them to let them know what we've done. So right here, behind the scenes, in a very intuitive and smooth fashion, we've upgraded their experience to be a business use case, and then Concierge and the assigned onboarding specialist will continue that conversation with them to see how they can onboard the rest of the company, what their needs are. Does this fit where they are today? Because this is not an irreversible action. It just encourages them down a path that we think is best practice. So that's the product, and, like I said, we've been talking about it for a long time.
The entire point of building it is, I wanna put in perspective, to engage this vast amount of inbound momentum we already have from end users and very small businesses. And we need to find a way to activate their experience sooner rather than later, and we're optimizing the new product to do exactly that. And we believe that, of course, the first iteration of anything is going to have a lot of opportunities for growth. But we believe that as we continue iterating, tweaking, and refining that workflow, we are going to activate the bottom of the market in a much more effective manner than anybody else can. And this isn't about competitors, really. Like, sure, we can do better than competitors, but this is about unseeding inertia. This is about taking the greenfield opportunity, and that's still where our sights are firmly set.
I wanna do a brief Q3 business update, and then I'll hand over to Ryan. So this quarter, we've remained pretty focused on SEO and paid digital advertising. And the reason we got at the very top of this slide is because, as I said, we have all this inbound momentum. We're trying to capitalize that inbound momentum on Expensify 2.0, but we could always use more inbound momentum. But as we go to the bottom of the market, it is not for the taking using a sales-driven strategy. And so the more dialed in our organic efforts are, and the more we can bring down that cost per click on our digital efforts, the better we can capitalize on that bottom of the market and user momentum. And so that's really our number one priority. We've been to several key conferences and events.
That's because we continue to grow our presence among the approved, accountants community, so the accountants that onboard small businesses, and that's still pretty relevant as you go to the bottom of the market. 'Cause when someone starts a business, they are really focused on how to grow that business, and they outsource all of the back office to these accountants. So it remains a pretty key channel. So we've done a bunch of conferences, and we've used those conferences to demo beta experiences on Expensify 2.0, which we call activations, in order to get some early feedback on how the product does in terms of engaging the end users. 'Cause all of that learning is gonna help us launch something which is that much more effective. And last but not the least, a pretty important update.
So keeping with the theme of everything I've been talking about in terms of which segment of the market is interesting and what are the unit economics of that segment, we've decided that the ROI is just not there to go after these segments with outbound salespeople. And, you know, we've talked about this a lot, but we didn't want to throw it away without experimenting with this idea, so we tried it out. It works in the middle to top of the market, but the ROI that we're seeing with our digital advertising efforts is so much higher and so much more of a fit in terms of where we wanna go, that this doesn't seem like a good area to keep putting money into. So we've sunset that. We've remained very invested in our onboarding specialists. They're doing a fantastic job of converting free trials.
We wanna keep increasing that number 'cause that just increases the ROI of all the efforts upstream as well, which is a key focus. And then platform updates. Like I said in the previous slide, the accounting partners remain very vital to business, both in terms of middle market but also small businesses, so we continue to invest in them. Whenever they deploy the Expensify Card for their clients, we give them 50 basis points as affiliate revenue. Some of them keep that. Their business model allows them to keep that. Others don't, and those that don't, pass it through to their customers, so it still makes its way down channel to either a partner or the end user, and all of that is very good for loyalty and, you know, retention.
The net interchange we got from the Expensify Card increased 16% quarter-over-quarter, 65% year-over-year. It's our shining beacon of hope. It's growing amidst all the chaos in the market. And so now the effort that we've been invested in, in terms of getting that interchange to revenue, is almost near fruition. Ryan will talk more about that in his update. We built a feature called Insights. It's actually kind of a little trick. We always had it. It was buried in the Expenses page into one of the views, so nobody used it, but everybody asked. People are always asking for it.
So, some product manager in our company came up with this genius idea, to pull it out and put it in the left-hand nav, and now it's being used by a lot of companies, so easy win right there on our existing platform.... And then last but not the least, we launched P2P. We launched it at Money20/20. Now you can actually go on New Expensify 2.0, and you can sign up, and you can chat with a friend, but also send and receive money from them in app, which was a pretty big deal. We are using our own MTLs on about 90% of that. Like, we still have two states, New York being one of them, a pretty major one, to get our MTLs on, and we use our bank's license for those.
But that's a pretty big one, a pretty big win. Sometimes you work on something for so long that when you finally have it, you almost forget how difficult the journey was, but it's been a long time coming. We're very proud of that. So I think that's it for platform updates, product updates, and just a conversation about business strategy. I'll hand it over to Ryan for financials.
All right. Thank you, Anu. All right, so let's talk about the numbers. So revenue was $36.5 billion, which is a 14% decrease from the same period last year. That's driven by a number of things. One is a decrease in activity in our user base. Anu spoke about user expansion being one of the biggest growth drivers for Expensify. And in recent periods, we've actually seen the growth expansion decrease. That's in the, you know, 12, 13+ years of the company, that's really only happened twice, and once was in COVID, and once is right now. So in the history of the company, generally, our customers, once they onboard, they stay, and they grow. What we're seeing now is a decrease in activity from our customers, which is causing a headwind to revenue. Another issue...
Oh, and one thing I want to mention is that we are seeing subscriptions rise. We're doing a great job. Anu mentioned our onboarding specialists, all of our conversion efforts. We're adding subscriptions, so our subscription base is growing, but the activity-based portion of our users have been decreasing due to economic headwinds, high interest rates. It's just tough for our customer segment right now. So that's created a challenging environment for revenue growth. But there's also another factor there, is that the card is growing so well and so fast, and cashback is contra revenue. So as the card grows more and more, it pulls down revenue. And I'm going to talk a little bit about that, because we have a solution to that, that we're very excited about.
Moving on, our paid members were at 719,000, and our net interchange was $3.1 million, which is a 65% increase year-over-year, and a 16% increase quarter-over-quarter. So we're quite proud of that. Our operating cash flow was -$5.1 million, that is, including customer funds. Our free cash flow was -$7.1 million, that excludes customer funds. Our GAAP net loss was $17 million. Our non-GAAP net loss was $6.7 million, and our adjusted EBITDA was -$3.5 million. All right, so interchange. Get this question every quarter. My favorite topic, I'm going to be sad when I can't talk about it anymore, but, we're going to talk about it right now.
So we expect to start issuing our new Expensify Card with the new revenue treatment before the end of the year. Now, as a reminder, if you haven't been tuning in to all these quarterly updates, Expensify is stepping in as the program manager for the Expensify Card. So there's a couple benefits to that. One is that we get 20% more interchange. Right now, we get about 2%. We'll be getting 2.4% because we're not sharing it with our current program manager. We'll be able to keep that ourselves. But also, and the most exciting, I mean, more, more interchange is exciting, but what I'm very excited about is that the accounting treatment is different under this new program, and that we will be able to count our interchange as revenue.
Right now, it is a contra expense and cost of revenue, so we still get the cash, but the accounting treatment's really not what I think most people expect, and it has this weird dynamic where as the card continues to succeed, it is pulling down revenue and not adding to revenue. So accounting treatment-wise, it's still the same amount of cash into the business, you know, including obviously we're getting 20% more interchange, but going forward, we will be able to count the interchange from the card as revenue, so it'll no longer pull it down, it'll push it up. So that will be, I think, a welcome change, for many, and I can stop talking about this every quarter.
So this transition from the old card program to the new card program for all members is expected to start very soon in Q4. And we're going to expect to be finished by end of 2024. We're giving them some time to transition over, because the last thing you want to do is anger all of your customers by saying, "All right, nice switch. All of your cards are off. You got to use this new card." So we're going to gracefully transition them, you know, over a several quarter period, but we expect that to be done by the end of 2024. All right, so now I want to talk about expense reductions. Reducing our internal expenses is an area of focus for us right now. We're adapting to the current economic conditions.
The percentage of customers, this is based on our internal data, who are citing their business closing or their business downsizing as the reason for reducing their subscription size, has jumped nearly 50% from earlier this year. So a pretty big jump, and I think it's telling on the conditions out there for SMB customers. It's a challenging environment, and they are our customers, so that challenge kind of makes its way to us. So it's tough out there, but as Anu said, we have a lot of plans, and we're really excited for the future. But there is, you know, some headwinds to growth there. How are we adjusting to that? We're controlling our internal costs. So you might have seen in our release, we've reduced our debt by $36 million in October.
That's reducing our projected Q4 and fiscal year 2024 expense by about $1 million in Q4, a little under $1 million in Q4, and $3.8 million for fiscal year 2024. So that's just an expense we don't need. The money was sitting in the bank, so just costing us substantially. So we've paid that down, so that should increase our cash efficiency. We've also done a series of internal expense cuts, and we expect to reduce our operating costs by $15 million in 2024. These changes combined give us confidence that we will be cash flow positive for 2024 and beyond. No, we share this every quarter. Basically, we don't give guidance on next quarter, but we do tell you how this current quarter is going.
So for Q4, some good news, we actually saw a nice jump in paid members in October. Like I said, our subscription members are increasing. We're doing a lot of good things there, a lot of good news. But the decrease in paid members from the activity-based pay-per-use user segment has been outstripping that. That is not the case for October, so we are seeing an uptick in paid members in October, so we're very excited about that. Summarize Q3, our net interchange increased 16% quarter-over-quarter, 65% year-over-year. The Expensify Card continues to grow. We remain in a rebuilding phase as we continue to transition to our new platform in Q4. I need to spend a lot of time talking about all the benefits of that, so we're very excited to get that out in the wild.
The early reception to this new platform, as we've been kind of going around to conferences, doing activations, demoing it, has been very positive, and we continue to push forward on our ambitious and aggressive roadmap. Internally, we're focusing on eliminating costs, and we expect to be free cash flow positive in 2024 and beyond. Now we'll take it to Q&A. Thank you all for joining us, and let's hear from some analysts. Thank you.
One take, baby.
Great. We're gonna switch over. Do we have Citi on the line to start us off?
Hey, great. You have Steven Enders from Citi. Appreciate you all taking the question today. I guess maybe to start here, I just wanna ask on—I think there was a comment in the letter that said that you're seeing clear skies emerging. I guess what's giving, you know, that view? And I guess what are you seeing out there that maybe, you know, is leading to that outlook? Can you maybe just kind of clarify that comment?
Yeah, great question. Also, good to hear from you. I think there's a couple things. First, we're starting to see some, I think, green shoot data that is giving us some optimism going forward. One thing, we had our ExpensiCon 3 conference this year, and since then, we've seen a big uptick in the production from the accounting space. I think that's a positive factor. Also, obviously, the card continues to grow. The accounting treatment, while it's not a difference in cash, it's cloudy is kind of the accounting the revenue treatment. So, pretty soon here, we're gonna be getting the actual revenue benefit from the card, which is something we discussed a long time. So that's just, you know, that can't help but be positive when the card is adding to revenue, instead of pulling down through cashback.
And then also, our new platform is very close to going live for our customers, and that is something we've been working on for years, and so we are very optimistic in all the R&D investment we've made in that over the last several years and the impact that's gonna have on the business. Do you have anything else to add to that?
No, that sums it up. We're just excited to start really testing and improving the virality and word of mouth that comes with putting customers on Expensify 2.0.
Okay, great. And then on the expense reduction, for, you know, going into next year, I guess, what are the areas that maybe we should see those, those, those cuts taking place? Like, what is the, the spend that might be being pulled back? And, I guess, as we think about that, should we see any impact going into Q4 for the OpEx cuts?
Great question. So, for Q4, some of these cuts happened mid-quarter, so, I would expect a slight reduction, but it's kind of... You don't really, really start to see, I think, until Q1. But in terms of where it's going, it's going into S&M, reduction in S&M, a reduction in G&A. And also, reduction in R&D, but I want to touch on that a little bit. There's not a reflection on a decrease in actual development. As you know, we have a robust open source community, and we compensate those people. And we have basically done surge pricing on the community in order to gather a whole bunch of interest. And at this point, we have thousands of people working in the community, and we are pulling back on those prices.
It's not a decrease in output, but it's an increase in efficiency there.
... Okay, perfect. That's, that's helpful. Thanks for, thanks for taking the questions.
Can you repeat that? Did we have any more questions from Citi?
No, I think, I think good on our end. Thanks for taking the questions.
Thank you.
Great. Next up, we have JP Morgan.
Hi, everyone. Thank you for allowing me to ask a question. First of all, I wanted to ask about the dynamic with regards to your customers and specifically with regards to PPU and subscription-based payments. Have you been able to reduce the ratio of PPU to a more normalized historic level? And would you be willing to share what it is today?
So, great question. Thank you for it. It has decreased. I think if you recall, just people maybe haven't been tuning in to all the earnings, we have two, different types of billing, paid users. We have subscription users, they're billed every month, and that is, at a discounted rate. And then we have activity-based users, that are billed at a higher rate. If anyone exceeds, if a company exceeds their subscription, they get billed at the higher activity-based rate. We saw a huge influx of growth and, therefore, subscription overages in our pay-per-use, which is what we call our activity-based billing. Our pay-per-use users, spiked to about 35% of all users, which is, quite high. Historically, it's been, you know, around 20%, so almost doubled.
In the last couple of quarters, we have seen those numbers come down. So to answer your question, currently, they are at, I believe, 28% of that. Now, that's a combination of our efforts to migrate people over to subscription users, but also we have seen, as we touched on in the presentation, just a decrease in activity across users. So it's kind of a combo of both.
Okay, perfect. And another follow-up with regards to the investments that you've been making. We've obviously seen pretty heavy investments on the OpEx side, but also significant expansion of your COGS, which led to a decline or reduction of gross margin versus historic levels. Is there a level that you feel would be a more normalized long-term target for gross margins once you launch the new Expensify platform?
That's a great question. So I don't have an exact number to give you right now, but in terms of COGS, we are expecting that to decrease in 2024. And we'll. You know, we're in a dynamic environment right now, so we are. I think that's probably the extent I'm going to say. We expect it to go down, but I don't have a hard number for you. Right now, we are being very agile right now with how things are going.
Understood. Thank you very much.
Great. Next, we have Piper Sandler on the line.
Awesome. Hi, guys. It's Hannah on for Brent tonight. Just a few questions from me. First one for you, Anu. Just what is left to bring that new Expensify 2.0 to market?
Sorry, just didn't catch the exact question. What is the timeline? Is that your question?
Or what is, what is left to be done on your end before it goes to market?
Yes. Basically, the way we approach launching anything, which is very much applicable to 2.0 as well, is to take an iterative approach because we don't want to wait, build everything, and then launch everything in one go, because that would just delay getting it out to the user, right? So what we've been doing through the course of 2023 is taking little features that are ready and launching them at conferences to beta audiences. And that's been going pretty well, but it's kind of piecemeal to just make sure that iteratively, what we're developing is working as intended. What we're going to do, quite possibly this month, if not as soon as next week, is launch the complete viral bottom-up adoption flow to the market.
What I mean by that is an end user signs up to Expensify 2.0, is immediately presented with the options to either start chatting with somebody or send or request money from them, which are really like the major end user use cases. If they start a conversation with someone and send a money request, and that someone is actually a manager at a company, then they will. I mean, no matter who you are, they get dropped into the product, and they can pay your money request.
But then if they choose to pay using a business bank account, we are able to identify them as a company decision maker, and therefore we create a workspace for them in the background and move that money request into that workspace and put both the submitter and the payer or approver, as it is called in our existing product lingo, into that workspace. So they're ready to start collaborating in that workspace environment. And doing all that automatically gives them an onboarding specialist and of course, there's always concierge and both conversations with both of those parties is also in that user's left-hand nav, keeping everything sort of really in one place and in a very accessible and a very intuitive way.
This is really our first real-world experience to looking at how the product takes, to seeing how customers use it, and start conversations with them about how to improve it based on their very real-world experience. That's what we're very excited about. Then the fast followers, and I'm not comfortable giving you timelines just yet, but the fast followers from there will be how do we upgrade from the entry-level plan to a more advanced plan as the company matures, or maybe is actually big and we upgraded them based on the assumption that they're a starter, and then they quickly get to upgrade to a more advanced plan based on their use case.
More collaboration-based use cases, like, maybe it's a very small business or maybe even a side project, like maybe it's a group trip you're planning, or maybe it's a community center, like planning events, like those kinds of use cases, creating groups without needing a workspace and collaborating, paying and splitting expenses. These are all things we iteratively keep pushing, and the intention behind it is, of course, to get real-world data on each of them, so we can start to really tease the ideal design for this product. And then along the way, we start migrating existing users, but all of that comes later.
Super helpful. Thanks for that. And then for you, Ryan, it was encouraging, encouraging to see that paid member number uptick to 730,000 in October. I guess, how much of that would you attribute to seasonality, maybe? And how much would you attribute to maybe improving demand fundamentals out there?
I think it could be an element of both. So, like I mentioned, our subscriptions are increasing. I think we're doing a great job of increasing subscriptions. It's just been competing with a decrease in activity. So there's certainly a, you know, a top-line push from our side that, you know, competing with the activity or reduction of in our customer base. But in October, you know, we saw that subscriptions continue to go up and also, our pay-per-use users, you know, we saw an increase there, too. So it's, I think it's an element of both. When we don't have the reductions, the decrease in activity fighting against the increase in subscriptions-
We grow.
-growth happens.
Okay. Makes sense. Thank you.
Thank you.
Great. Next, we have Lake Street Capital.
Sorry, yeah, just had to turn off the mute there. Just curious to know, you mentioned the shareholder letter mentions the pricing of competitors. Have you seen any, just even anecdotally, have you seen that pricing improve your relatively cheaper pricing, improve your adoption versus competitors?
Yeah, so I think that maybe to give more context to everyone on the call. So the competitive environment has been challenging over the last couple of years because we've seen some, you know, well-funded startups raise a lot of money in a zero-interest environment and, you know, spend that money. And now that we've been in a higher interest environment for some time, we're starting to see that they have to respond, and their business model doesn't make sense anymore. So what we're seeing is our competitors introduce paid plans. These are people who were charging nothing for their product against our paid product.
Mm-hmm.
Which is, that's just a challenging head-to-head, right? But what we have seen recently, which we're encouraged by, is that they are going to start charging because businesses charging for their software makes a ton of sense, right? There's a reason people charge for it. So, the competitive environment is shifting over the next 12 months in a way that we think is very favorable to us. And also, it's important to note that they seem to be charging on a per seat basis where we have a mix of subscription and activity, and we think that we're going to end up being a less expensive on a blended, you know, per seat basis. So we think the competitive environment is going to be easing up here in, you know, a couple quarters.
That's also another positive indicator that we're looking at when we look at the future.
Okay. And then you had the balance sheet movement where you decided to pay off the $36 billion of debt. Do we plan to be a cash burner in Q4 based on the current forecast?
That's kind of guidance, but I'd say we expect to burn less, and we expect not to burn in 2024.
Got it. Thanks for taking my questions.
No problem. Good talking to you.
Next, we have Morgan Stanley. Give another second here. Maybe some muting issues. If not, we can come back at the end. Okay. Next, we have JMP Capital. Aaron, I believe I see you on the line.
Hey, thank you guys for the question. So I appreciate the total customer count that you started giving in the 10-Qs in the Q1 this year. We don't have it for Q3 yet, but it's kind of been declining, right? From Q1 to Q2. So I'm just wondering: Can you distinguish what you're seeing a little bit between your VSB customers with one to nine employees and then your SMB customers with 10-500 employees? And is there any color you can give there since the time of the IPO on the relative portion of the business that comes from kind of each of VSB, SMB, mid-market, and enterprise?
Great question. So we've seen, and this has been kind of consistent, since COVID, really, is that the larger the company, the better they weather the storm. So we've seen our smallest customers get hit harder than our larger customers. And that it's both within going out of business or also just reductions. So I think that I think we've said this before, and the trends are holding true, that the smaller customers, ones and twos, are certainly not doing as well as they have historically, and the larger customers are more or less the same, or at least not seemingly impacted to the degree that, you know, the under 10 employees are.
But that said, the mix of. I think you're asking, like, has the mix changed?
Mm-hmm.
Largely, the mix is still very is still the same. Like, it skews ever so slightly higher now versus at the time of IPO, but it's still not shifted enough to have changed our mix by any means. So the mix with sell-side stays largely still the same.
Yeah, definitely.
Got it.
How the segments rank.
Yeah.
Like, it's that the smaller customers are struggling more, so they become, you know, a smaller piece of revenue, but they were always the smallest.
Exactly.
1-2 is always the smallest size.
And then the acquisition funnel is also skewed, like, basically, you acquire at the same mix as well. So when you lose, you lose the same mix. You lose smaller customers more than larger customers, and then you also acquire smaller customers more than larger customers, and we haven't seen any dramatic shift there.
That's very helpful. And then secondly, congrats on the interchange reclassification. I know that's been a while coming. So two things there: How should we think about the linearity of the adoption of the new Expensify cards and the one-time boost to revenue that's gonna provide as we go through 2024?
Mm.
And then will you continue to break out total interchange revenue during the transition so we can keep tracking that growth rate once some is GAAP revenue and some is, some is not?
Yes. Yes, great question. So in terms of how the adoption is gonna go, it is tough to predict that. Because we're not gonna force people. We're gonna basically give them a deadline. You need to shift by this date, and it's kind of a two-phase approach. We need them to accept the new card terms, and then their old cards will turn off after a certain point. So if I had to guess, and this is a guess, we will probably see a lot of people wait until, like, the last day that we force them, just because of human inertia. So I would think that at least 50% are in the second half. Is that yours?
Yeah, I think so. So there's basically a decent amount of the portfolio. Their cards will expire naturally next year. So when it expires, we'll just send them the new card, so we don't have to ask them to change their cards. And then to Ryan's point, everybody else has to voluntarily activate the new card, and if they have this card on file at various vendors, they need to change them. So that's always a painful exercise for the customer. So after the first round of trying to get them to move over, depending upon the reception, there are various things we could do, like motivate them with a reward to switch over. Like, we might explore things like that.
Because ultimately, we are incentivized to get everybody on one program, so we can stop reporting two interchange lines, because things are about to get worse before they get better for this accounting treatment. But yeah, we'll continue to have a separate interchange line, cashback line, so it makes you guys', you know, modeling job easier, to the extent that any of this is easy. But we'll try our best to get everybody migrated as soon as possible, but by the end of next year at the latest.
Perfect. Next, we have Dan Jester from BMO.
Great. Thanks for taking my question. Maybe to stick with the card, it's great to see sort of sequential improvement in the growth rate for the card. As you think about what's being successful there, is that more customers signing up for the card, or is that you getting a greater wallet share of transactions in the customers who had previously adopted the card?
Oh, that's a great question. No, the amount of spend per domain on average is actually very stable. So almost all of those gains are new card adopting companies. For a hot minute, I thought where you were going to go was ask if those companies are all new Expensify adopters as well, and the answer to that is no. It's a mix of existing Expensify customers adopting the card, as well as new customers adopting the card out of the gate. So that's kind of how it breaks down.
... Okay, thank you. And then, Anu, you know, in the past, you've talked about the strategy here, about having your customers earn enough in cashback to offset their subscription fees. Are we seeing customers there yet? And sort of like, how close are we to that becoming a reality, especially as we go into next year with some of your, you know, competitors may be in a bit of a different pricing environment? Thank you.
Great question. Actually, come to think of it, this is something we just, like, should have mentioned in the deck somewhere, but we didn't. Of the things that we did in October, so it's Q4. Did we lose them? Oh, I thought there was like a... Okay, never mind. So, we basically put out this product enhancement on our existing product, which takes the cashback you earned and kind of credits it towards your subscription bill, so that your subscription bill that you end up paying is minus your cashback. So you, you charge the lower amount because you're already going to receive that cashback anyway. So instead of doing two transactions, we net it.
But as part of that, we did something more, which is we showed every customer on Expensify, based on the amount of money that their employees are expensing through their policies. We took that amount, and we basically said, "If all of this was on the Expensify Card, this is the amount of cashback you would have made," and that shows up now on the homepage. And if you click on that, it basically tells you how we got that number. But also, if you had gotten that cashback, what every user seat on Expensify would have cost you in net terms. So a lot of customers, it's $0. For a lot of customers, it's $3, for some customers, it's $6, so on and so forth.
But it allows every customer to look at the unique value that they can get in terms of cheaper Expensify, best plans, cheaper Expensify by just adopting the company card. And the intention behind it was to get more people to actually take the card, get that lower price, because when you see them at a price point that they consider a steal, your chances of retaining them are so much higher. And just every customer you retain is - because every new customer you're gaining costs you, I think the conventional wisdom is twice as much as an existing customer. So that's kind of the motive behind doing all that. So we are hoping we'll see more benefits from doing it. We just-
Yeah.
Just launched it last week.
It's a big upgrade to the education demonstration of the value Expensify has and fighting any, you know, FUD that might be out there about, you know, our relative cost to others. I think if you actually do an analysis, Expensify is way less expensive compared to some of our competitors.
Gotcha. And then just one last one, if I can squeeze in. So for 2024, we should assume that there's gonna be customers using new Expensify when it gets launched, but you're still gonna have, be having customers use the old Expensify. Is that a correct assumption?
That's right. No knife switches. We won't be forcing anybody into anything. What we wanna do is really get as many new customers as possible, adopting it from the bottom up, because that just tells us what the experience is truly like without the baggage of change. Alongside that, we have... So for anybody that wants to try the new product, they can click on the link and switch their experience over, but they can switch back if that's what they want. Like, it just allows them to try it. When they switch back, we have an initiative to ask them what they didn't like about it, so we can improve it. So it's an ongoing effort of getting feedback from both new customers but also existing customers who are proactive enough to switch.
Once we get to a point where we can say with certainty that the new product performs really well and has a better experience, retains better, converts better, then we contemplate how we want to sunset the existing product. We're, we're a ways from that decision point.
Great. Next up, we have Luke Capital.
Hi, thanks for taking my question. So, Ryan, I was wondering if you could just go into a little bit more detail around why the company is sunsetting the SDR program, you know, the outbound sales?
Great question. So as you know, we've historically grown bottom up, you know, product-led growth. And when things slowed down with, like, COVID and kind of the tumultuous atmosphere of the last couple of years, we dialed up more of our sales efforts. We had a kind of two-pronged approach there. We have outbound, and then we also have a group of onboarding specialists. These are people that we didn't historically have, and we've been, we've allowed those programs to mature a bit so we can properly analyze. It's tough to make a decision, you know, in the first three months of something. So we've given it enough time, and then we just analyze the economics of what is what is the output, you know, of an SDR? How much do they cost versus AdWords?
How many leads does $1 in marketing—Not just AdWords, a lot of stuff. [crosstalk] But what does $1 of marketing, right, get us versus $1 towards an outbound sales representative and the economics that we're seeing? We've made some really big improvements kind of in our marketing efficiency. So we've just determined, it wasn't a very hard decision. We just determined that, you know, $1 spent in column A is way more than way better bang for our buck than $1 spent in column B. So that's how we made that decision.
Okay, great. And then, you know, I realize the company doesn't publish retention metrics, but I was wondering if you could just comment on, you know, churn in the business and how that's trending. I mean, is it relatively consistent with the decline in paid numbers?
No, because we're seeing paid customers who stay with us decrease their activity. So, a decrease in users is not like a 1:1 correlation in decreasing customers, because-
Mm-hmm
Customers stay with us, but their activity is decreasing.
That's the biggest swing. That's always the thing that is responsible for growth, and it's always the thing that is responsible for lack of growth. Because there's a base of, at last count, 45,000 companies, 50,000 companies that pay us. So that's a big base. So if you onboard, I don't know, even 3,000 – I'm making these numbers up. If you onboard even 3,000 companies, their first couple of months, they're not going to deploy it to the entire company. They start team by team. So no amount of new acquisition will ever be big enough compared to usage expansion of my existing customers, because the base of customers is very diversified and quite large.
Thank you.
I'm guessing it does.
Great. Next, we have FT Partners. Matthew, are you still on the line? Okay, well, we will see you in the follow-up call then. That is everybody.
All right. Thank you all very much for joining us.
Appreciate it.
See you next quarter.
Bye.
Goodbye.