What happened
Shares of expense-management software company Expensify (EXFY -0.61%) plummeted to all-time lows on Wednesday after the company reported financial results for the first quarter of 2023. As of 2 p.m. ET, Expensify stock was down 18%.
So what
Expensify founder and CEO David Barrett doesn't beat around the bush, and his assessment of Q1 was no exception. Early in the press release, Barrett wrote, "This quarter sucked." And judging from the stock price movement, it appears the market agreed with this pithy assessment.
Expensify offers many free services, hoping that it can eventually get to one billion users via word-of-mouth marketing. And it also hopes to convert many to paying subscribers in time. The company gained customers in Q1, and users of its recently launched credit card were also up. However, Expensify users spent less during the quarter due to economic conditions. And the credit card actually lowers its revenue because it's free and offers users cash back.
Consequently, Expensify's Q1 revenue fell 1% year over year to $40.1 million. And that kind of growth doesn't excite growth investors in the least.
Now what
On a brighter note, Expensify generated positive free cash flow of $10.2 million in Q1 and expects to remain free-cash-flow positive. Management spoke of using this to reduce its long-term debt, which currently sits at $51.3 million. And it said it plans to repurchase shares.
However, regarding share repurchases, it should be noted that Expensify -- like many other small tech companies -- is free-cash-flow positive because it pays out significant stock-based compensation. It says it's planning on using $3 million to repurchase shares soon. But it also said it anticipates stock-based compensation of $9.3 million to $11.3 million in the upcoming second quarter.
In other words, the benefit of share repurchases is negated by the size of Expensify's stock-based compensation. Therefore, I wouldn't expect this to be a driver of shareholder-value creation, though it does mitigate some of the downside of stock-based compensation.
Rather, Expensify will likely only create shareholder value if paying customers increase meaningfully, driving revenue growth. And management will need to remain disciplined with costs.
Regarding the timing of an acceleration of the business, Barrett said, "When the economy comes back, all those new customers (and the old) will get active, and all will be well." That's certainly optimistic. But the timing of a macroeconomic recovery is uncertain and does little to inspire investors right now.
