Expensify IPO Filing: Key Insights & Details

Expensify's IPO Filing and Market Conditions

Late last Friday, Expensify submitted its initial public offering (IPO) paperwork. This adds the company to the increasing number of technology businesses seeking to become publicly listed during a period characterized by high valuations and successful recent IPOs.

For instance, GitLab completed its IPO just last week. The DevOps platform increased its anticipated price range, ultimately pricing above expectations and experiencing a surge in share value upon commencement of trading. Currently, it represents a favorable climate for technology companies demonstrating growth potential to enter the public market.

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Expensify is a company that fits this description, although it has faced challenges over the past year and a half. The expense management company, headquartered in Portland, Oregon, experienced difficulties during the COVID-19 pandemic. As will be detailed, the pandemic affected both the company’s growth rate and its customer retention rates.

Fortunately, conditions have improved for Expensify since then. Further details regarding the company’s journey can be found in a comprehensive series of articles written by Anna Heim.

Today, we will analyze the financial details of this profitable and expanding technology company, which has not secured significant primary capital investment since its Series C funding round in 2015. The company was previously valued at approximately $143 million, according to PitchBook data, during that $17.5 million raise.

This earlier valuation requires updating, necessitating new estimations.

Analyzing Expensify's S-1 Filing

We are examining Expensify’s S-1 filing, focusing on the company’s performance in 2019, 2020, and the first half of 2021. This analysis will consider the impact of COVID-19 on its operational results and subsequent recovery.

We also aim to determine how the company achieves profitability and how its focus on small and medium-sized businesses (SMBs) has proven advantageous. This focus has been a benefit, rather than a hindrance.

Let's begin a detailed examination!

How Expensify Generates Revenue

Let's begin by examining Expensify’s revenue model.

The company primarily targets SMBs, which are small and medium-sized businesses. Historically, venture capital firms have often considered businesses focused on SMBs to be less valuable compared to those serving larger enterprises, due to typically higher churn rates and limited opportunities for upselling.

However, Expensify’s performance demonstrates that substantial success can be achieved by marketing software to SMBs, provided an effective go-to-market strategy is implemented.

According to its S-1 filing, Expensify utilizes a “viral, ‘bottom-up’ adoption cycle.” This involves individuals initially using Expensify’s software for personal expense tracking, which then leads to wider adoption within their organizations and ultimately generates consistent recurring revenue.

This self-service sales approach results in lower sales and marketing expenses than would typically be anticipated given the company’s growth trajectory.

Expensify reports that, as of June 30, 2021, approximately “95% of [its] revenue originated from recurring monthly payments automated through credit cards.” This self-service model is characteristic of smaller contract values, aligning with expectations for SMB clients.

Therefore, Expensify currently operates as an SMB SaaS provider. The company also explores additional revenue streams, which will be discussed subsequently. Now, let’s analyze the company’s growth.

The Impact of COVID-19 on Expensify’s Performance

In 2019, Expensify achieved revenues of $80.5 million, translating to a net income of $1.2 million. While representing a relatively small net margin, the company’s ability to remain profitable while expanding is noteworthy.

However, 2020 saw a shift, with revenues reaching $88.1 million but resulting in a net loss of $1.7 million. This outcome was less favorable, as the 9% revenue growth experienced was considered insufficient to garner significant attention from public investors.

A notable recovery occurred in the first half of 2021 (H1 2021), with Expensify generating $65 million in revenues. This represents a substantial increase of 60%, or $24.4 million, compared to the same period in 2020. This performance indicates a strong turnaround for the company.

The resurgence from the slower growth of 2020 appears to be linked to a diminished impact from COVID-19. Expensify’s own assessment of the situation in 2020 highlighted the challenges faced:

The situation was particularly challenging.

Despite this recovery, Expensify has yet to fully regain its pre-pandemic levels of paid members. The company attributes its recent revenue growth “primarily [to] a pricing change implemented in May 2020,” as stated in its S-1 filing.

This pricing adjustment involved increasing costs for customers who did not utilize the Expensify card for at least 50% of their approved expenses. Furthermore, all new Expensify customers onboarding after May 1st have been subject to the revised pricing structure.

Is it detrimental that Expensify’s recent growth is largely attributable to a price increase rather than an expansion of its customer base? Not necessarily. In fact, it suggests a degree of pricing power. The company successfully raised prices during a period of business difficulty and restored growth as a result.

A key question remains: will the company’s lost paid members return? Alternatively, will they be acquired by the numerous corporate spend startups actively competing for market share? Expensify, providing expense management and bill payment solutions, faces competition from companies like Brex, Ramp, and TripAdvisor. The market is highly competitive.

Nevertheless, Expensify continues to demonstrate robust performance. In Q2 2021, the company reported revenues of $35.3 million, an 88% increase from the $18.8 million recorded in the pandemic-affected Q2 2020. Furthermore, Expensify has generated approximately $15 million in net income year-to-date, indicating growth in both revenue and profitability.

Determining the valuation of this performance is the next step.

Expensify’s Revenue and Profitability Trends

2019 Performance

Expensify concluded 2019 with $80.5 million in revenue and a net income of $1.2 million. This demonstrates the company’s capacity for growth while maintaining profitability.

2020 Challenges

The year 2020 presented difficulties, with revenue increasing to $88.1 million but resulting in a net loss of $1.7 million. The 9% revenue growth was considered inadequate for attracting substantial public investor interest.

H1 2021 Recovery

A significant turnaround occurred in the first half of 2021, with revenues reaching $65 million. This represents a 60% increase, or $24.4 million, compared to the first half of 2020.

The Role of COVID-19

The improvement in 2021 is largely attributed to a lessening of the impact of the COVID-19 pandemic. Expensify’s internal assessment in 2020 reflected the severity of the situation.

Pricing Strategy and Revenue Growth

Despite not fully recovering its pre-pandemic paid member numbers, Expensify has experienced revenue growth. This growth is primarily due to a pricing change implemented in May 2020.

Details of the Pricing Change

Customers who did not use the Expensify card for 50% or more of their approved expenses experienced a price increase. New customers since May 1st have also been subject to the higher pricing.

Implications of the Pricing Change

The ability to raise prices during a challenging market and still achieve growth suggests that Expensify possesses considerable pricing power.

Competitive Landscape

Expensify operates in a competitive market, facing competition from companies such as Brex, Ramp, and TripAdvisor, among others.

Q2 2021 Results

In Q2 2021, Expensify generated $35.3 million in revenue, an 88% increase from the $18.8 million reported in Q2 2020. The company has also achieved nearly $15 million in net income so far this year.

Determining Expensify’s Value

Expensify distinguishes itself as a remarkably lean organization, particularly when contrasted with many startups at similar funding stages – Series B and C. Its streamlined structure contributes significantly to its impressive profitability.

The company’s profile is undeniably compelling. It’s uncommon to discuss operating leverage positively during an S-1 analysis of a software company, yet Expensify demonstrates a clear ability to increase revenues without a proportional increase in costs. This indicates a fundamentally sound business model.

Future expansion is a key focus for Expensify. The company anticipates broadening its market reach through its corporate card, initially launched in early 2020, and the introduction of further products. Expensify’s stated goal, as outlined in its filing, is to expand its Total Addressable Market (TAM) by delivering features that engage all employees monthly, thereby increasing both membership and revenue per customer.

Growth in international revenue is also becoming increasingly significant, rising from 9% in 2019 to 10% in 2020 and reaching 11% in the first half of 2021. This growth is occurring alongside a rapidly expanding overall revenue base, making the absolute dollar increase in international revenue even more noteworthy.

These factors suggest that investors could reasonably project continued rapid growth for Expensify without incurring substantial operating losses. This leads us back to the central question: what is Expensify actually worth?

The answer, quite simply, is a substantial amount. A considerable valuation is justified.

Here are some key figures:

• Q2 2021 revenue: $35.3 million.
• Q2 2021 year-over-year growth: approximately 88%.
• Q2 2021 annualized revenue run rate: $141.2 million.
• Comparable market multiples: 87.7x to 95.9x.
• Estimated IPO valuation range: $12.4 billion to $13.5 billion.

Establishing appropriate comparable companies for Expensify presents a challenge. According to Bessemer’s Cloud Index, Expensify’s growth rate falls between Bill.com (85.9%) and Snowflake (104.4%), which currently have enterprise multiples of 95.9x and 87.7x, respectively.

However, both of these companies are currently operating at a loss, making a direct comparison imperfect. Nevertheless, the resulting valuation estimates for Expensify are remarkably high. Is a post-IPO valuation exceeding $10 billion realistic for the company?

Further clarity will emerge with the release of Q3 2021 results and the initial IPO pricing range. Currently, we can confidently state that Expensify holds significant value and is poised to generate substantial returns for its existing investors.

Further updates will be provided as they become available.