Expensify filed to go public late last Friday, adding its name to the growing roster of technology companies looking to list during this period of hot valuations and strong recent debuts.
GitLab, for example, went public last week. The DevOps giant raised its price range, priced above that interval and then shot higher once shares began to trade. It’s a great time to go public for tech companies with growth stories.
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Expensify is one such company, though things have been turbulent this past year and a half. The Portland, Oregon-based expense management company had a tough COVID-19 cycle. As we’ll see, COVID impacted the company’s growth rate as well as its retention metrics. But things have since turned around, fortunately.
For more on the Expensify story, our own Anna Heim wrote the definitive series on the company.
This morning, let’s get into the guts of this profitable, growing technology company that hasn’t raised material primary capital since its 2015-era Series C. The company was valued at around $143 million, per PitchBook data, in the $17.5 million fundraise.
That valuation is a bit out of date, so we’ll have to come up with some new estimates.
So we’re digging into the Expensify S-1 filing, looking at its 2019, 2020 and H1 2021 results through the lens of COVID’s impact on the company’s operating results and its rebound. We also want to understand how the company is profitable, and how its SMB focus has turned out to be more of a boon than a burr.
Let’s have some fun!
How Expensify makes money
Let’s talk about Expensify’s business model first.
The company mostly sells to SMBs, or smaller companies. Venture investors have historically viewed SMB-focused businesses as less valuable than those selling to larger customers, as the latter tend to have lower churn and better upsell metrics. That may be true, but Expensify’s results indicate that you can actually do quite well selling software to SMBs, provided you have the right go-to-market motion.
In the company’s case, that means a “viral, ‘bottom-up’ adoption cycle,” per its S-1 filing, in which individuals start to use Expensify’s software for their own expenses, and the product spreads from there to eventually generate tidy recurring revenues. This self-serve method of selling product means that the company doesn’t have as expensive a sales-and-marketing function as we might expect given its growth rate.
And, per Expensify, in the June 30, 2021 quarter, some “95% of [its] revenue came from recurring, automated monthly payments made via credit cards.” Self-serve is a dead ringer for smaller contract sizes, or what we’d expect from SMBs.
So, SMB SaaS. That’s what Expensify is today, though it does have some other revenue ideas that we’ll talk about later. Now let’s talk growth.
How COVID slowed Expensify for a period
In 2019, Expensify turned $80.5 million in revenues into $1.2 million in net income. That’s a modest net margin, but the company managed to not lose money while growing, and that’s to be applauded.
In 2020, the company turned $88.1 million worth of top line into $1.7 million worth of net losses. That’s not as good. Posting 9% revenue growth is not what companies like Expensify want. It’s far too low, frankly, to attract much public investor attention. But growth has accelerated since then.
In the first half of 2021 (H1 2021), Expensify generated revenues of $65 million, up some 60% or $24.4 million over what it managed in the first half of 2020. That’s strong. We lack preliminary Q3 numbers, though the S-1 filing indicates that we should get them before the company lists. From our currently H1-limited vantage point, however, things turned around this year at Expensify.
The bounce back from 2020’s anaemic growth can be attributed to smaller COVID impact, it appears. Here’s how Expensify discussed COVID and its business results in 2020:
After a steady increase in paid members over multiple years prior to the COVID-19 pandemic, the average number of paid members on our platform declined 15% from 742,000 in the quarter ended March 31, 2020 to 630,000 in the quarter ended June 30, 2020 and we have rebounded to 639,000 paid members in the quarter ended June 30, 2021. Our activity is still recovering from May 2020 as the United States and certain other parts of the world continue to rebound from the COVID-19 pandemic. The amount of expenses incurred by the paid members remaining on our platform has also declined. In 2019 and 2020, our annual gross logo retention was 88% and 86%, respectively. In 2019 and 2020, our net seat retention was 119% and 98%, respectively.
Brutal.
Sharp-eyed readers will note that Expensify has thus far not managed to fully recover its paid member totals from before the pandemic. How is the company posting such growth? Per the S-1, its recent revenue growth came “primarily [from] a pricing change implemented in May 2020.”
That pricing change, it turns out, meant that customers who were not using the Expensify card in “50% or more of their approved expenses” saw the price of the service rise. Also, every new Expensify customer since May 1 has paid the higher price.
Is it bad that Expensify’s recent growth is more due to a pricing change than customer growth? Not really, frankly. I’d actually say that it’s a somewhat strong signal. Expensify had the pricing power to raise prices during a difficult market for its business and get back to growth on the back of the change. If those customers return, Expensify could have a neat growth story ahead of it.
The flip side of that argument is whether the company’s lost paid members will return. Or if they will get swept up by the host of corporate spend startups hungry to take on their business. Expensify, which offers expense management and bill payment services, competes with Brex, Ramp and TripAdvisor, among others. It’s a busy market.
Still, Expensify is posting strong numbers. It generated revenue of $35.3 million in Q2 2021, up 88% or so from its pandemic-impacted Q2 2020 result, a more modest $18.8 million. And the company has posted nearly $15 million in net income so far this year. So its revenues and profitability are both rising.
What is that worth? Let’s find out.
How do you value it?
Expensify is an odd company in that it’s very small. Many Series B and C startups are larger, in human terms. It’s lightweight, and that’s a big reason why it is as profitable as it is. Here’s the company:
For the six months ended June 30, 2020 and June 30, 2021, our revenue has grown from $40.6 million to $65.0 million, respectively, but our headcount has remained consistent, with 134 employees as of June 30, 2020 and 140 employees as of June 30, 2021.
Damn! Color me impressed.
It’s a little rare to discuss operating leverage in positive terms in an S-1 teardown of a software company, but here we are. Expensify has shown that it can grow revenues without boosting its cost structure to a similar degree. In other words, that means that its business is healthy.
And it has big plans for the future. It expects to expand its market with its corporate card (“launched fully in early 2020,” per the company), as well as more upcoming products. In its filing, Expensify writes that it intends to grow its “TAM by launching features that will be relevant to all of [its] customers’ employees every month, resulting in more paid members and more revenue per customer even at the same paid member price.”
International revenues are also picking up revenue share at the company, rising from 9% in 2019 to 10% in 2020 to 11% in H1 2021. Underneath those numbers is a rapidly rising revenue base, too, making the gross dollar growth of international revenues more impressive than the percentage figures might lead you to believe.
All that is to say that investors could argue themselves into believing that Expensify could keep growing at a quick pace while avoiding deep operating deficits. This brings us back to just what Expensify is worth.
A lot? A lot. It’s worth a lot.
Some numbers:
- Q2 2021 revenue: $35.3 million.
- Q2 2021 YoY growth: ~88%.
- Q2 2021 run rate: $141.2 million.
- Market comp multiples range: 87.7x–95.9x.
- Implied IPO valuation estimate: $12.4 billion–$13.5 billion.
It’s a little hard to come up with a good set of comps for Expensify. Per Bessemer’s Cloud Index, Expensify is growing at a rate that’s between Bill.com’s 85.9% and Snowflake’s 104.4%, which have enterprise multiples, respectively, of 95.9x and 87.7x.
But they are both unprofitable, so it’s not a great comparison to make. Still, the valuation numbers that come out of the calculation for Expensify are pretty bonkers. Could the company really be worth more than $10 billion in its IPO?
We’ll know loads more when we get Q3 2021 numbers and its first IPO pricing range. For now, what we can say with confidence is that Expensify is worth quite a lot and is about to make its private investors very wealthy indeed.
More when we have it.
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