Expensify Inc (EXFY) 2022 Q3 法說會逐字稿

Welcome, welcome, welcome to the Q3 2022 earnings call for Expensify. We are a fine team here. We have Anu, our Chief Operating Officer; Ryan, Chief Financial Officer; David, I'm the current CEO; Trent from Technical Accounting. And so before we get started, Anu is going to take it away with a bunch of legalese.

Before we begin, please note that all 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 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 a reconciliation of these non-GAAP financial measures to their most comparable GAAP measures. And with that, back to you, David.

Thank you for that fascinating introduction.

(inaudible)

That's right. Keeping it real. And so that's what we do. We talk again about our long-term strategy for anyone who has been following along. This is the same thing we've been talking about during the IPO. The strategy is the same. It's designed for all market conditions, and it's the same strategy we're working through my -- review how that goes.

Fundamentally, Expensify is based upon 3 major pillars for long-term success. First, we believe the market size is enormous. We think that every business in the world has to do the functions that we do, but only a tiny, tiny fraction of them are currently doing anything. So we view the market as almost entirely untapped and our strategy is to go after all of it. So it's a fundamentally different opportunity and business model than any of us in the market.

Second, we go after with a completely different business model. It's fundamentally word-of-mouth-driven bottom-up acquisition model where individual employees download the app for free and pull us into the organization. So every employee is a door to every single customer as opposed to just knocking on CFO's door.

And then fundamentally, we think that we can link 1 billion people through finances in the same way the Instagram can link 1 billion people through people -- or through photos or something like that, same thing. And so anyway, a big opportunity out there, and we are really gunning for this giant opportunity.

Second, we think that the market is broken up into sort of four major parts. And everyone talks about the enterprise market and obviously, we're a player up there. But the bulk of the opportunity is really in the SMB and mid-market. And so we think that our business model is unique and that we can capture small businesses and then grow with them up to whatever size they go, and we can profit from them from every scale. And so the way that we acquire those customers comes basically, we use advertising in our free plan to seed our funnel with small businesses and then we use our sales and account managers as well as our partner program to engage with them and get them to leverage our full functionality. And then all of this is to drive high-margin subscription revenue.

And so all this means that we have an incredibly efficient lead generation model. We have a super-efficient sales model, and this contributes to our high profit margins. And the way this works, basically, as a reminder, is everyone else in the world has an exclusively top-down business model where they just are calling the CFO, the Fortune 1000 or whatever it is. And then that CFO makes a decision as a gatekeeper before anyone else in the organization learns the product.

Expensify is different. Employees learn about Expensify from their friends and the colleagues, things like this. They will download the app for free without waiting to be asked, without asking permission and they'll just start using us. This turns every expense report into a highly targeted marketing message directly to the decision-maker who will then roll it out to the rest of the organization. It's a completely different business model than everyone else in the industry. And that's how we're able to get completely different results.

We think that we have the only product that can reach the full market. And so we can look across the board. Again, all this functionality has been around forever. There's a million different players that do different subsets of this. But we think we're the only ones that can do all of that. We can scale up to the real enterprise to support the large requirements of the large multinational public companies, but we can also scale them to consumer-grade design. They have been -- some of it's simple enough for individuals to adopt for sole providers and so forth.

We have a real global reach. We're already generating revenue in multiple markets around the world. And so this is a natural artifact of our business model. We allow ourselves to be pulled everywhere that has this problem, which coincidentally is everywhere. We don't just have our own card product. We also have a native travel booking product as well. And of course, all of this is free. And so all of this is basically about building a chat first pre-accounting solution that provides a wide range of functionality, everything from not just expense management and corporate cards, but also invoicing, bill processing, payroll and so forth, all for $9 a seat.

And so again, this is the same strategy we've been talking about for a long time. We're making very good progress along that. The latest is that we think that our chat functionality is really now live and being used by active customers. And so the sum of all of this is that we have sort of 3 different ways to monetize the users. First, we have viral functionality that provides natural lead generation as we grow through the social networks and friends groups of employees, transaction revenue through our corporate card and other products. And then, of course, we have high-margin subscription revenue for everything else.

And so we're trying to triple dip from all of these different things in order to make sure that we're getting the maximum value out of every single lead. So strategy is unchanged. The market and the world is sometimes complicated and dynamic, but fundamentally, our strategy, and we think our differentiation is that we have the luxury of being able to focus on the long term. And so others are sort of scrambling to adapt. They lost their funding sources or their economics would get inverted or whatever it is, fundamentally, everything is the same here at Expensify. We're still focused on the same strategy and to focus on the same vision.

And so I kind of talk about it a bit. Obviously, the market's been pretty nuts right now, as you can tell. But Expensify is pretty steady. We're still hiring, and we remain hiring throughout. We're still generating cash despite all of this. We're still focused our energy on the future, and we're also buying back shares because we believe so strongly in the future of the business. And so we kind of dive into some of those.

One is that we have our sales team to give you an update on some of this. Now this is new. We've been talking about doing it for a long time, but just to kind of give an update on where we are. We've got about 70 salespeople, which are focused on onboarding new customers. And so this is a group that we've been building for a long time, and we've rolled them out to about a sizable fraction of our organic lead source, but we haven't run out of or sort of exhausted our own leads. So the focus right now is about fully engaging our sales team to take care of our existing lead channel.

And then on top of that, in parallel, we are building an SDR group that's designed to do outbound calling into getting more leads. And so the first people are calling are just now conference list, things like this, and naturally calling into our 14 years of like failed trials, churned customers and everyone else that basically there, and then we're going to do the same list buying everything else. So yes, a lot of the same tactics are the same as you can see us in the industry, but our lead source is actually quite different, and that's the differentiation there because we're not calling the same people that everyone else is calling. We're calling people that already know something about Expensify. So it's a much warmer lead source. And so we think it's showing much better results.

Next is we've mentioned our account management group. So this is a group that, again, has been growing steadily over time. Right now, customers that account for about 41% of revenue are being actively managed by an account manager. And so we're still scaling that up. We're targeting about 90% coverage by the end of the year, but this is something that's basically methodically moving up coverage to this.

Now a main function -- the account managers obviously do a wide variety of things. They focus on retention, ensuring that every customer sit correctly, cross-selling all of our different functionalities and so forth. But one particular function that's useful to this call is that they're also moving our pay-per-use customers over to annual subscriptions. Now pay-per-use is valuable and that it's billed at a higher rate, but it's volatile.

And especially in market conditions like this, we see higher people usage. So we really want to have slow and steady growth into the future. And I think the key to that is having annual subscriptions and having as much as possible in a steady sort of committed revenue base. And so the account managers are not just there to accelerate expansion of our existing customers and retain them, but also stabilize revenue, we get out of them.

Next we'll talk about the accounting channel. Again, we've talked about the accounting channel a million times. It's very important. It remains important. About 50% of the revenue that we get from the accounting channel is now being overseen by what we call a partner manager. And so the partner managers are dedicated points of contact, they talk directly to the accounting firms and then provide on-site training, will talk to the accountants and things like this.

And so again, we're expanding this out. The goal is, of course, to get complete coverage. We're working our way up to this. There's a lot of accountants out there and we work with tons and tons of them. And so one consequence of this, which has been kind of interesting, is that as we engage more directly and proactively with the accounting firms, we're finding a lot of accountants in these firms that have not yet actually gone through our training and don't really know much about Expensify.

They might even have Expensify clients basically under management, but they've never taken the time to get what we call Expensify approved. It's going through our Expensify university and so forth. And so a lot of this has been finding a bunch of opportunity where there are existing accounts that use Expensify, but just haven't gone through a training and haven't gotten our certification. And that means that they haven't been giving their approved accounting discount to clients. And so as we're kind of cleaning up a lot of this, it's had a revenue impact, which Ryan is going to talk about in a bit.

But fundamentally, the partner managers are about building out deep loyalty in this industry, such that we can extract the maximum lead generation, the retention in the long term. And we've mentioned that we're building up towards our event called ExpensiCon. ExpensiCon is a time when we can really demonstrate how much we care about these accounting channels as well as spend really close time to understand their needs and respond to those needs. And so ExpensiCon, it's been very exciting for this industry, and we can keep pushing towards it.

Next, we've been talking about all of engineering is really focused on building a next-generation platform. And so this is what we talk about when we're of the many ways that we're focused in the future is that we feel that fundamentally, the future is going to be owned by whoever has the most robust pre-accounting platform that can do all this functionality in a highly seamless way.

Everyone else out there is scrambling to stand up basically their existing products probably given the economy, maybe we'll see some acquisitions in there as people try to sort of Frankenstein together their own platforms of basically much of different products that kind of assemble these check boxes. That might work in a top-down sales manner where basically if someone is buying based off of a checklist, but that sort of fragmented product experience doesn't work in a bottom-up manner. It has to be a highly integrated experience.

And we're the only ones who has to -- again, the luxury of being in, to devote our engineering resources based on this long-term vision because we're convinced that the long-term market is going to be owned by whoever can capture the viral dynamic of this market, and that can only happen with a highly integrated product.

And so where we are right now is our chat platform is really robust, and it's being used on a daily basis with live customers and all these different teams we talked about. So for example, our SDRs, when they're calling to a customer, they're not just calling on the phone, they're actually creating what's called an Expensify workspace and then they're reaching out to them via Expensify. So the conversation of basically learning about the product is happening on the product.

Likewise, when does a lead, the demo happens in the platform, and they can -- our sales team can actually sit down and work with them on the platform to configure their product to make sure that it's perfect for their needs. The handoff to an account manager likewise happens inside of the product. We have a chat room made with all of the administrators in the finance team so that they can talk about the configuration and then our account manager can talk alongside with them.

And then, of course, finally, the partner managers. When we are working with these accounting firms, we'll create a chat room for the entire partnership, basically on our platform so we can directly engage with all the accountants in platform about how to promote more Expensify. It's a super seamless integrated experience that we're very, very proud of. So it's -- that's in live in youth today.

Next up, we're really working on bringing a level of polishing of stability to the mobile experience such that we can advance towards using this for employees. Again, it's a long-term road map, we talked about again and again. The road map hasn't changed. It's very, very exciting and making good progress along.

And then finally, let's talk about payroll. You might have seen that actually we've launched payroll, it's live. Now we've been using it ourselves for like almost 2 years now. And now we're onboarding customers onto it. Now we're still a little constrained. We haven't gotten all our money transmission licenses. We're still working on New York, Texas, Hawaii, Massachusetts. So there's still -- we can't support every single customer, especially customers that have across multiple states. But it's a very powerful solution and we're very proud.

In fact, this solution has been refined for a lot of very sophisticated needs, the kind of needs that we need as a large part of the company. And our -- most of our engineering focus in the payroll product is about simplifying it down for the smaller businesses, hourly workers that have different payroll requirements sort of scheduling requirements tend on that kind of -- contractors and so forth. So payroll is live, it's in market, and so we're excited about that. But again, we expect this to be something that grows over time.

And so maybe -- and not really the product that something we're very excited about is that buybacks. So we think that right now is a great time to be buying Expensify shares. And we think that so much that we got authorized for a $50 million share repurchase in May. In September, we made our first purchase about $4 million. And now actually starting tomorrow morning, a sort of open market, we're going to be buying back up to $6 million basically as quickly as we can. And so -- and then it still is $40 million for opportunistic buybacks as we go.

Now we've said that we're going to do buybacks. We think that a great -- we have a business that generates a ton of cash. And this cash is not competing with our customer acquisition. Everything we have is fully funded. In terms of our growth initiatives, we feel are fully funded, and yet we still make more money. And so we think a great way to return that value back to shareholders is by repurchasing shares. This is a strategy that's not -- that we intend to do consistently over time. And so we've demonstrated it a couple of times now. This is something you're going to see again and again going forward. And with that, I'll turn it over to Ryan.

Great. Let's talk about the numbers. So we had an increase in paid members in Q3, 761,000. Also, I want to talk a little bit about the preplan. Now we're not going to give updates every quarter, but we said we'd update you when we hit some milestones. So we crossed the 15,000 customer milestone for the preplan, so there's 15,000 different companies currently using the preplan.

Revenue was $42.5 million, which is a very slight decrease from last quarter, and I'll talk about that next slide. And on an annualized basis, our revenue was $170 million. So Q3, we did see some downward pressure on our ARPU, but we -- that is expected, and we believe it would be temporary. So David mentioned, our partner managers engaging with our accountants, we're finding that while there's a ton of accountants using Expensify, not all of them are part of the program. So as we engage with them, we're getting them enrolled in the program so they get our preferred pricing, so that does put some downward pressure on the ARPU. But we ultimately believe that should be a good thing because we see that accountants within the program grow our business way faster than accountants outside of the program. So this is a good long-term change.

Also, we saw some currency headwinds just due to the strength of the U.S. dollar and also the Expensify Card. So card volumes growing, you've probably seen that in the release, but also our cash back is contra revenue. So as the interchange grows, cash back also grows and that the contra revenue pulls down the revenue number. However, as we've talked about every call, our interchange is still not categorized as revenue yet. We believe it will be shortly, but not yet. So basically, we are getting all the downside of cash back, which pulls down revenue, but we don't get to -- we don't have it being pushed back up by the actual interchange. So it's still cash coming into the business, but in terms of how it's being presented, it doesn't push up revenue.

And also, a third thing, we're seeing more and more actual cardholders and cardholders get discount on their Expensify subscription. Again, they generate more cash through the interchange than they would in the discount. So it is a net positive, but we have a couple of things pulling it down, but without interchange to push it back up, that just creates downward pressure. So it's a little confusing, but the actual net-net is that everything is growing. We're adding cash and things are good.

Speaking of Expensify Card, year-on-year interchange growth was 115%, and our gross interchange was just under $2 million and $1.9 million. So I want to talk a little bit about cash flow. So our operating cash flow was negative $0.9 million, but I wanted to talk about free cash flow this quarter because operating cash flow includes customer funds, customers move a lot of money through our system. And due to the timing of payments and when the quarter ends, that actually can distort the number a little bit.

Usually, it's very consistent. But due to the timing, the customer funds actually push operating cash flow negative. So when you look at actual free cash flow and you pull out customer funds, no customer money, just pure money that we've generated, we saw a positive $4.7 million for Q3. On a GAAP net loss basis, $8.2 million. Non-GAAP net income, which is net loss with taking out stock-based comp, you get a positive $5.1 million. Adjusted EBITDA was $9 million with an adjusted EBITDA margin of 21%, which is quite strong.

We maintain our long-term guidance on a multiyear basis. We still believe that we can grow 25% to 35%. Obviously, the economy is a little challenging now, but we still believe on a multiyear period that this is the right measure.

So to summarize Q3, we think the business is extremely healthy. We have strong free cash flow and we're profitable on an adjusted EBITDA basis. Our paid members continue to grow, Expensify Cards up 115% last year, and we're seeing very strong enthusiasm from our customers for our product road map, which is chat, payroll.

And just to leave you with some good news here. So Q3 was a little slow, but -- we don't normally do this, but we thought that we would give you a little teaser on how Q4 is doing. So October was our best month ever again. So in October, we had 783,000 paid members, and we expect revenue to come in between 14.3 and 14.7 just for the month of October. So we don't give guidance, but given kind of the volatility in the market, we thought we'd throw you a bone and give you a little teaser on how Q4 is doing so far.

So that's all for the slides. Now we'll jump over to Q&A. I think, Anu, you want to take it away?

So first off, we have JPMorgan, Raquel.

I want a little more color on how average paid members came in this quarter. Would you guys say it was within your internal expectations? And then is that number kind of coming in softer than 2Q, a function of some additive churn, softer sales? How would you kind of categorize that?

Yes. Great question, Raquel. So as you can actually see -- so this chart is actually broken up monthly. So one thing that we're noticing when the market is -- that the pay-per-use -- the volatility of the pay-per-use can swing a little bit more than we'd like, which is why we have this focus on account managers. Previously, we didn't really have account managers really engaging with our clients that much, and now we're really making that a focus. And a big goal of that initiative is to convert more pay-per-use users to subscription, which should reduce any volatility that we see or at least lessen the volatility that we're seeing, and we view that as a good thing. So you can see that Q3 came in a little softer than expected versus the end of Q2, but it also kind of rubber banded right back and better than it was before in October. And as we get more and more of our users as a percentage on subscription revenue, we should see that volatility decrease.

And just a follow-up for me on gross margins also coming in a little bit softer. I think we spoke about it in prior quarters, that also being a function of you guys adding more account managers. So not looking for guidance here, but would it be fair to say that given you're trying to kind of ramp that up, that, that would continue and persist into 4Q and beyond?

That's a good question. So yes, I think that we will continue expanding out the account management program, and that will obviously have a cost with it. But I'd say I wouldn't expect that to be a super significant cost fundamentally. The team we feel is pretty fully staffed. I think that right now we're not focused on -- we don't -- it's less about hiring more people and more about increasing the efficiency and the engagement with the people we currently have. And so I wouldn't view it as, because we have x percent coverage right now that's going to be twice as much to get more. I think it's more about -- we have plenty of time. It's really about just increasing the -- improving the efficiency and the processes that we have internally.

Next up, we have Koji from Bank of America.

I wanted to ask kind of on the new SDRs and the capacity that you're doing, the account management teams. So when we look at the third quarter results, is it fair to assume that the costs associated with those -- the increased capacity to get there, is that all incorporated within the third quarter results? Or should we anticipate more of that to come?

Basically, you're saying were they all hired at the end or were they at the beginning of the quarter? Is that basically...

Is the third quarter a good representation of the increased capacity from a cost perspective?

Well, going forward, we should see more SDRs.

Yes. We are going to see more SDRs because that's still the less -- the least mature of those organizations. But I would say the guides and the account managers are pretty mature at this point. Now as the SDRs scale up their ability to generate more leads, at some point, it will outpace the capacity of our existing team, and then that will cause more sort of sales hiring. But we still need to -- we would have to scale up the SDR team first before we need to scale up the sales team, I would say.

Got it. Okay. And then I wanted to spend a moment on the slide right here that you have this October best month ever again. I mean $783,000, that's a pretty good number. Considering the fact that it does feel like the economy and overall SMB sentiment is a little bit worse off today than it was maybe in previous months, so maybe talk a little bit about what you're seeing out there that is driving that subscriber growth in October.

So the volatility of pay-per-use kind of makes the story little confusing, right? So we're adding customers throughout the entire quarter. But because pay per use, if people are expensing less, then that number can go down. So as you can see, at the end of Q2 and then at the start of Q3, we saw that actually decrease. And that's not a churn of any of customers. That's just kind of a decrease in activity amongst our existing customers. But we continue to add customers throughout the whole time. So I'd say that when SMBs are struggling, we could see some lower activity, which is why we've really -- we're addressing that by -- with the account managers and this focus on moving people to subscription because we want to reduce the volatility that pay-per-use introduces into our revenue.

Next up, we have George from Citi. George, we can barely hear you?

Can you hear me okay?

We're just going to listen very, very carefully.

Is that any better?

No, but go for it.

Okay. Sorry, I'll try to speak up a little bit. Just wanted to ask on the growth equation between user growth and ARPU. Which one you feel is more macro-sensitive? And which one you feel is a little more under kind of your guys' control?

Which is more under our control, ARPU or user growth?

ARPU, I guess?

Well, (inaudible) macro sensitivity.

Macro sensitivity, I see.

Expenses is definitely more leading indicator. ARPU, we're not -- we influence ARPU be a price change, for instance, or we influence ARPU went over time in the mix of our business change that if more people choose subscriptions versus people use -- if more people go to the free plan versus not. But payment, that generally reacts faster, expansion with existing companies or contraction, more new customers, et cetera. That's the metric.

I would say maybe we have -- maybe I didn't understand this question. But we have, I would say, more control over paid members because ARPU, there's the volatility of what percentage of our company is going to exceed their subscription in overages. So that's -- I'd say we are trying to rein in the volatility of the pay-per-use segment by getting more people on subscription. So I mean I'd say we have less control over that, which is why we are rolling out the account managers and taking this because we want to reduce that volatility.

Yes, I would love more control over both.

Yes.

Got it. Got it. And then one follow-up on the macro sensitivity piece. Have you seen any change in customer behavior on either up-tiering or down-tiering?

Okay. Good question. So no, we have not. We just looked at this. So the mix of people on the plan or control plan has been consistent. We haven't seen any change there.

Yes. And one reason to think about that is it's not that you choose to upgrade as you like the product more, rather you upgrade as your company gets more sophisticated. And so there's really not a downgrade case where it's like, "I just don't want to -- I don't like these features as much." It's kind of like your business just needs these features, and so you just kind of have to stick with it. So you do upgrade over time, but it's more of a ratchet function. And it's also a slow function as a basis as your business itself matures.

Again, you laid off half of your staff, you wouldn't downgrade your plan.

That's a great way to put it.

The business requirements are actually still the same.

Yes, that's a great way to think about it.

Next up we have -- Sorry. I couldn't hear you. I didn't mean to speak over you. Next up, we have Brent from Piper Sandler, please.

This is just Mauro jumping in for Brent. So I just wanted to double-click on the factors that we saw influenced revenue growth this quarter. You called out a lot of things kind of internally around the subscription management change. What can you point to in terms of macro-level factors that may or may not be influencing customer activity during the quarter? Anything just kind of more macro-level recessionary headwinds that might have influenced activity?

I think with the -- obviously, inflation is high. You watch the news, right? This hurts SMBs by more than anyone else. I think I just saw something at Bloomberg that like 30% of SMBs are having trouble paying the rent. But yes, so I'd say that the reaction -- how that translates to us is in a -- we're seeing our customers be less active as a percentage of their employees and be -- if they're on subscription, they pay the same rate. But if they have a -- they're mostly pay-per-use or they have some percentage of their users on pay-per-use. And those employees aren't using the program because they're not expensing something, they're not traveling, or whatever they're doing because money is tight, then we see their activity go down. So we're not seeing a churn-off, but we are seeing -- what we did see in Q3 was an overall kind of decrease in the number of pay-per-use users.

Yes. And let me build on that -- just say a little bit about it. I think the SMB is also, I think, to a degree, affected by sort of the overall sentiment and emotion of macroeconomic sort of policy and geopolitics and things like this. So it's like -- if you look at this chart, which is kind of convenient to have on the screen, every time we're below that green line, something huge happened in the world. So like the first time it was like COVID. And then like we kind of pick back up, then Omicron. And it picked back up. And then you can even see this most recently. And it's like Russia invades Ukraine. And I think that's -- it takes the world time to react to these huge, huge monumental changes happening. And I think everyone just pauses a little bit.

Again, they don't churn off. They're like, "Well, we're just going to pull back a little bit to reassess what's going on." And then a few months later, it was like, "Oh, okay, we're good now." And so I feel like a big part of this is also about -- again, the business model performs when the economy -- it performs in a stable fashion when the macroeconomic situation is stable. When something comes and gets a big -- kick in the stomach to like to the world, it takes time for everyone to absorb that. And that's, I would say, when our model underperforms this green line. But normally, we just keep going.

I think -- so it's not all doom and gloom.

Yes. I mean, yes, exactly. Yes, we're -- people have absorbed the impact, we understand. Essentially, it's like what is it -- like how do we coexist with a Russian invasion and the massive inflation and so forth. People are like, "Okay. I get it. I get what -- I've adjusted my business. I've done the things I need to do, and now it can get back to growth." And I think that's why we're seeing such a good October.

Okay. Yes, very helpful color there. I guess last one for me. Just on that pay-per-use topic, I'm not sure if you've disclosed this or if you can give any additional color here, but how much business today roughly is pay-per-use versus subscription? And is there a steady-state mix of where you'd like that to be over the long term?

Yes. Good question. So pre COVID, it was in the lower to mid 20% of users. And what that generally means is, if you have 100 employees, roughly, your subscription is probably at 75 and you had 25 -- and over to 25 employees is generally what I mean. Since COVID, we have seen that number come up to lower 30%, which is higher than it's ever been, which is, I think, in the IPO, people asked like how is it going to go? And we said, "Well, it's never been 30, so it probably won't hit 30." And we've been over 30 for several quarters now. So we are stepping in and we're going to address that. And we're -- with the account managers, we're going to try to do this big push for a subscription because it's gotten bigger than we ever expected, yes.

And as it gets bigger, the volatility, it's more -- that's not really what we want to happen. So we're stepping and addressing that.

And it's a retention challenge. Like the subscription gets too expensive, (inaudible) the customer to show.

Cool. Moving on to Daniel from BMO, please.

Ryan, maybe you can spend some time talking about what exactly were the timing issues on the settlement. Like did the quarter end on a Friday and you didn't settle? Or I guess -- like what is that -- what does that mean conceptually, the timing issues?

Yes. So it's -- they're not the issue. So this is something that's always been in the business, but as customer funds go in and out that's recorded on our balance sheet, how much we have in, how much we're owed, that type thing. And it's generally been consistent. But occasionally, it can -- if more cash goes in or out, it can -- it changes this number, which is -- so you see operating cash flow is a negative. But why we've cleaned it up, which is why we're talking about free cash flow, and we'll be reporting on this going forward because we've seen that it presented itself negatively and it doesn't really tell the whole story, right?

So the company generated almost $5 million free cash flow, but operating cash flow doesn't tell that story because it's distorted by customer funds, which has no real impact on our cash position or the strength of the business or anything like that. So we're going to just -- we'll be showing free cash flow going forward to make it less confusing to everybody.

Okay. And then can you remind us about how you approach risk management? I mean, clearly, SMBs are under stress. You mentioned that for several quarters now. How do you make sure that, that stress doesn't flow through to your business in terms of bad debt or anything like that.

So we have two different types of settlement for the Expensify Card. We have daily settlement and monthly settlement. Daily settlement is incredibly safe, very low-risk settlement. What it basically means, you swipe your card, we will extend you at least 24 hours of credit, and then you pay us back the next day and then we pay Visa using the funds that you just -- we just collected from you. So the timing of how much -- the length of time it works is getting very low. And we've seen that any losses there are exceedingly small.

Now monthly settlement is higher risk, but we also -- we've moved billions and billions of dollars over the last 10 years. So we've gotten really good at risk management. So we have a number of -- actually, I am new here. I'm going to let Anu talk about this, but a -- we have a number of fraud detectors. But yes, I would say monthly settlement is a little bit higher risk than daily settlement, but we're not seeing any uptick at all in terms of default. But Anu, if you want to add to that.

Yes, sure. So the first thing is, by and large, most of our card customers are on daily settlement. We launched monthly. We still didn't see a huge amount of customers go from daily to monthly. And then we're also seeing on an overwhelming basis, new card adopting companies stay on daily. So I think monthly has this effect that is available. It helps us compete in the market with other card providers because we are apples-to-apples, but it seems to have been a rumor that we need monthly in order to serve the marketplace, which is always a theory, now it's been proven. So that's one.

But in terms of who gets monthly settlement, who's eligible to stay on monthly settlement, think of it as if we have a greater degree of visibility into their filings, which we do through a variety of ways, cloud, balance, assets, that these are some ways through which we know what's going on in their bank account. The greater the degree of visibility we have, the bigger your limit can be and the greater access to monthly settlements you could keep and maintain. That's how we sort of play around with our risk.

And at the same time that we want to be this diverse, we also want to offer a good user experience. So I'm always learning that every month we learn from delinquencies that we see. We have adopted various ways of collecting or within the law, but creatively holding out usage of our platform over getting feedback. And they've all been largely quite successful for us, knock on wood. But we're always watching the space, as you have a good point. As we go into a recessionary market, we want to be careful with this.

I think just one more point. The purpose of the Expensify Card is not to extend credit to companies that don't have resources to support it. We are just giving them an avenue to spend the money they already have, so it's not as risky. It's an efficient method to disperse the cash that they already have. So it's not like people are running their business off of their Expensify Card and that they need the credit in order to make rent or anything like that. It just we monitor bank balances, and we always make sure that they have enough cash to pay off their card or we increase their limit.

And maybe just to add a finer point on the reason why companies like -- off the cuff, it seems like everyone would want monthly settlements because it like, why wouldn't you want to borrow a month's worth of credit? It just feels like there's like no downside to that. But we'd say most companies have the money. They don't actually need the credit. And so we say, "Well, if you do daily settlement, we can offer you much, much higher limits because it's so much lower risk for us."

And so it's a question of do you want to optimize for timing of cash flow or do you optimize for the highest level of spend. And most customers are like, "Well, actually, I have the money. I don't really care about the cash flow. I would like the highest possible limit." And that's one reason why everyone goes for the daily options because it's fundamentally just a better experience for a customer and it's low risk for us.

Got you. Maybe if I can squeeze in one more. Ryan, what's the latest time line in terms of cleaning up the financial reporting with regards to the Marketo contract and the interchange fees?

Great question. So we are so close -- and I was really -- I knew you're going to ask this, and I really wanted to tell you it was done. But -- so the latest update is we believe, currently, hopefully by the end of the year, we believe, hopefully, right? Hopefully, by the end of the year, we will be rolling out the new cards that have -- that will have the new treatment. One thing that's important to note is, once the new treatment is accepted by everyone, by the auditors, all that stuff, we'd still need to re-card. So we will spend probably a quarter or two sending out the new cards with the new treatment, but we believe that we can start sending out these cards by end of the year. But we'll have more updates.

I'm sure you'll ask this question.

More update. We'll have another update the next earnings call. I really thought it was going to happen at this time, and we're not quite there, but we're very close.

Cool. So next, we have Pat from JMP.

This is Jim on for Pat. How have you seen it evolve? And how do you expect to maintain that culture as can continue to grow?

Yes. Great question. So I mean, Expensify is a pretty special place, but that special place doesn't happen by accident. Everything we've done has been pretty methodical to construct an environment that really empowers everyone to deliver their absolute best. And so the question is, how do you maintain that over time? I think it's because we've -- we're not sacrificing it every day. And that sounds obvious. But like -- you talk to any founder, and they're like, "Yes, I want to build a business that I want to stay in forever."

But then they just build a business that sucks, that they just don't like and they're like -- and so over time, most businesses just compromise every day on the culture and just cannibalize basically the business. We haven't done that. We are very, very methodically invested in our employees and in that culture and preserving the pillars of it.

So one example would be our LT share structure. Now when we were going public, they were like, "Wow, this seems like you are really going overboard in order to create incentives for employees to focus in the long term. Market is in the up and up. Everything is perfect. Why would you even care? Everything is always going to be good. And we said, "Well, maybe things won't always be good."

Like when I started Expensify, it was at the bottom of the Greatest Depression since the Great Depression. And so we've seen hard times in the past. And we know the importance of a team that's willing to look past the temporary sort of distractions and noise in the market and stay focused in the long term. And so our LT share structure is just one example of why our employees, they're just focused in the long term. They see the same numbers that you're seeing, but they're looking at that green line. And they're like, "Cool. Green line is good. The green line is up into the right. And sure, maybe not every single month, maybe not every single quarter. But if you look at the trends, the trends are overwhelmingly clear."

And so we're all very committed to this future. We believe in the strategy. And we like each other because we work hard to hire the right people. We invest in our people. We do extensive performance management to get everyone up to the -- get the best out of everyone. So there's no single thing I would say that I'd point to for how we intend to scale it, but there's -- maybe, I guess, I would say there is no reason we couldn't scale it. There's nothing that we're doing that isn't designed to scale because we're -- we've been built from day 1 to be a long-term business. And so we've only put in place cultural components that scale profitably indefinitely. And so I'd say this is -- the reason we're able to do it is because we made a point to do it, and we never give up on that.

I'd say we also -- we hire methodically and slowly, which means that when the market turns on a dime and goes bad you don't have to lay off 20% of your company, which can't be good for morale. So we have enough -- more than enough people, and we're growing and we're not worried by this. We're doing the same thing today that we were doing -- the plan was a couple of months ago, and the strategy hasn't changed.

Yes. I mean, like this strategy works. Generally, every month is our best month. Now that's not 100% true, but it's 90% true. It's mostly true. And so I'd say it's a strategy that works, and we believe in it and we're going to keep investing in it.

Last, but not the least, Mark from Loop Capital.

Can you hear me okay?

Yes. Great. Thank you.

Ryan, a question for you. Last year during Q4, during the December quarter, the company saw an influx of oversubscriptions from pay-per-use customers. And I'm wondering if you expect any reoccurrence of that in the...

That is a very good question because last year, October was a little soft, and so was November, but December was gangbusters. And right now, we're seeing a strong October. November is looking good. I don't know about December. It is -- I can't tell you if December is going to be good or not. I would say the October performance is probably all the guidance we're willing to give on in terms of Q4, and it looks good. But I can't say whether we're going to have a gangbusters December or not because the pay-per-use could -- generally, we see people come in at the end of the year, more people than normal, to submit, but that's the downside of the pay-per-use. They pay more, but they're less reliable. So we're working on increasing the reliability of that.

Okay. Great. And then on the margin front, I know that you don't provide specific margin guidance at this time. But at kind of a high level, just give us a sense of how we should be thinking about how the firm balances revenue growth versus operating margins?

Yes, so I would say margins will probably stay similar. We might see a temporary downtick as we scale up some of our other teams. But I think long term we're going to see margins improve similar to when we introduced our concierge system. We saw margins go down and then go way up as the efficiency of that increase. We're applying everything we've learned from our customer support concierge system, and we are applying that to our sales motion. So I think we'll see a similar increasing efficiency over time, but we're still in the early days of that. So I'd say for the near term, it's probably going to be similar-ish. And then long term, it will get better.

That's it. We're good.

Great. Yes. Well, thank you so much. It's always a pleasure talking to you all. And so I guess we'll talk again in another quarter. So have a good day.

Thank you.

Thank you.