Elevator Pitch
Expensify, Inc. (NASDAQ:EXFY) shares are awarded a Buy investment rating.
With my earlier September 27, 2023 update, I evaluated Expensify’s financial outlook and valuation multiples. My attention turns to EXFY’s latest Q4 2023 financial performance and its free cash flow guidance in the current write-up.
I am impressed with EXFY’s fourth quarter bottom line beat and its free cash flow growth outlook for this year, which were positive surprises. Moreover, Expensify might also surprise the market in the future with a better-than-expected top line performance and a new buyback program. The stock’s mid to high single digit forward FY 2024 and FY 2025 free cash flow yields are sufficiently attractive to justify an upgrade in my rating for Expensify from a Hold to a Buy.
Recent Quarterly Bottom Line Came In Above Expectations
EXFY disclosed the company’s most recent fourth quarter financial results on February 22 after the market closed.
Expensify’s Q4 2023 bottom line performance was a major surprise. The company recorded a positive normalized net profit of $3.1 million or an EPS of $0.04 per share, which was a substantial turnaround as compared to its Q3 2023 non-GAAP adjusted net loss of -$0.08 per share. Furthermore, EXFY’s bottom line for Q4 2023 surpassed expectations in a big way, taking into account the market’s consensus fourth quarter normalized net loss per share estimate of -$0.05.
The company’s revenue decreased by -19% YoY and -4% QoQ to $35.2 million in the fourth quarter of last year. EXFY’s actual Q4 2023 top line was roughly in line with the sell side analysts’ consensus revenue forecast of $35.3 million (source: S&P Capital IQ). This implies that it was better-than-expected profitability, rather than higher-than-expected top line, that was the key factor which led to Expensify’s fourth quarter bottom line beat.
Expensify shared at the company’s Q4 2023 earnings briefing that it initiated “some cost-cutting measures” in the recent quarter which had a “drastic impact” on its profit margins and cash flow.
EXFY’s actual Q4 2023 EBITDA and EBIT margins were 16.6% and 13.1%, respectively. In contrast, Wall Street had anticipated that Expensify would register negative EBITDA and EBIT margins of -3.0% and -6.9% (source: S&P Capital IQ), respectively in the fourth quarter of last year prior to the company’s actual results announcement. Separately, the company’s operating cash flow and free cash flow were better by $4.9 million and $3.5 million, respectively on a QoQ basis for Q4 2023 as indicated in its results presentation slides.
The company’s most recent fourth quarter bottom line performance was good, and its financial prospects might be even better as detailed in the next section.
Positive Free Cash Flow Growth Outlook
Expensify expects to generate free cash flow amounting to $11 million this year as per the mid-point of the company’s guidance. This represents a significant increase in EXFY’s expected free cash flow for 2024, as it reported a modest free cash flow of approximately $555,000 in the prior year.
EXFY’s disclosures and management commentary offer support for the company’s bullish view regarding its free cash flow growth prospects.
In the company’s Q4 2023 results presentation slides, EXFY revealed that its cost reduction “measures were implemented halfway through the fourth quarter” of 2023. Expensify also stressed at its fourth quarter results briefing that it “sees a greater impact of the cuts in Q1 (2024) and future quarters.”
In other words, it is clear that EXFY’s above-expectations bottom line and free cash flow improvement for Q4 2023 aren’t fully reflective of the positive effects associated with its cost reduction initiatives.
Potential Surprises With Revenue Growth And Capital Return
There could be positive surprises in store for investors with regards to Expensify’s actual top line expansion and the potential initiation of a new share repurchase plan in the future.
EXFY’s $11 million free cash flow guidance for FY 2024 is largely driven by its cost optimization moves, instead of a better top line performance. At its Q4 2023 earnings call, Expensify emphasized that “there’s some conservatism baked into” its FY 2024 free cash flow guidance as this guide “does not rely on macro environment improving.” This implies that if the economy turns out to be healthier than expected, there might be upside for EXFY’s actual revenue and free cash flow this year.
On the other hand, Expensify didn’t rule out having a new share buyback program sometime in the future. Specifically, EXFY mentioned at its most recent quarterly earnings briefing that it doesn’t have “anything to announce at this point in time” with respect to new shareholder capital return initiatives. But it acknowledged at the latest results call that share buybacks will be a “pretty good move” considering its “share price and generating the cash flow that we expect to.” Expensify’s undemanding valuations make it more likely that the company might consider returning capital to shareholders going forward.
Based on its last done share price of $2.16 as of February 26, 2024, EXFY’s $11 million free cash flow guidance is equivalent to an enticing FY 2024 free cash flow yield (free cash flow divided by market capitalization) of 5.9%. Also, the stock’s consensus FY 2025 free cash flow yield is even higher at 9.9% as per S&P Capital IQ data.
As a comparison, Expensify’s historical consensus next twelve months’ free cash flow yield was in the 1.5%-5.5% range (source: S&P Capital IQ) for the one-year period between mid-2022 and mid-2023; the consensus free cash flow yield forecast for the stock turned negative between late-2023 and early-2024. As such, EXFY’s current free cash flow yields are appealing on both an absolute and a relative (compared to history) basis.
Final Thoughts
I view Expensify, Inc. shares as a Buy, rather than a Hold, now. I have a positive opinion of EXFY’s FY 2024 cash flow guidance and Q4 bottom line. A new share repurchase plan and above-expectations top line could be potential catalysts for the stock.