Corpay, Inc. (CPAY) Earnings Call Transcript & Summary

Yes. So we do. So for all -- we have over 1 million suppliers in our network, and we know how to pay them and who accepts and under what conditions. We work with Flint when they don't accept virtual cards. And it might be an issuer who says, hey -- and it's usually not a cost of acceptance issue, it's a process issue. And so Flint has -- it's not that many, but it's maybe 50 clients where he is the AR system and he catches the payments, and so he can adjust it and make the process easier. So in instances where a vendor won't accept virtual cards for some reasons, and they will through his matching, then we'll use him. But it's only on the volume that we can put through ours. So it's not even 1% of our volume.

That's helpful. Thank you for explaining that. I guess, sticking with supplier networks, and what are your thoughts on Mastercard Track, and I mean even Visa's partnership with Billtrust, right? Because I think Mastercard's idea is to plug into all these different AR and AP providers, right, similar to having issuers and acquirers on the C2B side, which are then connected to the network. And I think Mastercard can then use the network to move data across, right, from buyers to suppliers in a somewhat standardized format, right? The data is coming in a near standardized format. So how do you think about that impacting FLEETCOR's business if Mastercard is able to scale that Mastercard track.

I mean, one, we're a big Mastercard partner and the largest Mastercard issuer. So if they succeed in standardizing data and improving card acceptance, we should benefit. I think the big question to ask is how easy is that task, right? There are so many iterations of people that you'd have to involve. I mean we alone have 1 million suppliers. There's how many acquiring companies. And you say, well, there's First Data and TSYS. No, First Data may be 1/3 direct and then 2/3 ISO, I'm making that up. And those ISOs, you have to get each 1 of them to agree. Then there's multiple ERP systems and there's multiple AP systems. And then you have customers, and they have all the issuers. So think of the permutations of that and getting everyone aligned to do that, I think it's a very, very hard task. So if they're successful, great. Personally, and I may be wrong, I take the under, I don't think it's going to happen. But it's a good vision. It'd be great if it could happen, but I think it's a very hard challenge. And then even if they create a standard, how do they enforce a standard. So while Mastercard and Visa are great companies and we respect them highly, they don't really enforce their standards today with vendors. You're supposed to -- if you accept a credit card today at the front of your store and you do it in the back office, you have to accept, but some vendors don't. And they don't enforce or penalize in any way. And so it's a question of how do you get everyone to adopt the standard and then how do you enforce the standard. And I think the combination of those 2 is a very, very hard task.

Yes. No, it makes sense. It's worth monitoring, for sure. I guess last question on suppliers, then we can move on. But what type of integration does the supplier have to go through in order to receive virtual card payments? I mean, does that create a barrier to entry in that business? And just trying to get a better understanding of how hard that supplier network is to replicate.

Yes. It's -- so it is multifaceted. So one, they have to accept card, obviously, to accept the card payment, so they have to have an acquiring relationship, right? Sometimes we go into a supplier and we get them booked up on to acquiring platform and referred to an acquirer. So that's the first thing. But like I said before, what you really need to understand is how do they accept card, under what transaction side permutations, for which clients and how is the remittance formatted, what are the needs for it to be ingested by them. And that's the nuance. The other nuance is, think about a company, FLEETCOR, so we would probably have 20% churn in our vendors every year, right? And so you have to have constant pressure on re-enrolling the new vendors to capture that spend. And that's a continuous process. So it's not something a bank, frankly, does very well. They can get the staples of the world that might accept virtual cards. But are they going to get the 50% long tail that really will make the difference to a client when we pitch them that, hey, xyz bank can get you $100 million in spend, we can get to $200 million in spend, and therefore, you're going to make more money. That's really -- the long tail sauce is where the value comes in.

And are you -- can you talk about the -- are you using automation to enroll suppliers? Or I mean, do you guys have a team of people calling on businesses and trying to figure out if they accept card? What's that process like?

So when we onboard a new customer, we get their, hey, this is my AP file and these are the vendors that I pay. We match that vendor file against our acceptance base. And to the extent there's any gaps, we would campaign them. We call them, we mail them, we email them, and we'd follow-up and disposition them to accept or not the card. And if they don't accept the card, then we also have a proprietary network we pay them over, so we have Comdata Direct. And so if they won't take a card or the cost of acceptance as the barrier, we are one of the biggest proprietary network companies in the world. FLEETCOR has 17 proprietary networks. We have money transmission licenses in all 50 states. $20 billion of payments in North America go through our Comdata proprietary network. And so it's -- we have that option to toggle to pay the vendor and monetize the payment.

No. That's helpful. John, one question that we get a lot is just on the interchange and the incentives in the AP ecosystem and the B2B ecosystem more broadly. I mean how do you think about the sustainability of the interchange rates on virtual credit cards? Because, I mean, they're 2.5%, which is great. Everyone could take a share of that. And I think it's really driven automation on the AP side. And so are there risks to the interchange rates coming down?

I mean it's possible. I don't have a crystal ball. But like I said, I think we monetize payments to businesses in several different ways. So we have our own proprietary networks. And we are monetizing global payments over our global payment ecosystem now, which is almost unmatched by anyone else today. And so we think there are a lot of permutations to monetize payments. What happens to interchange? I don't know.

Yes. I figured I'd ask it just because we're getting it a lot. Maybe switching gears, John, to the Cambridge business. Maybe you can start out with the types of companies that you're targeting in this business? And what's the problem that you're solving for those clients? And where do you think you're adding the most value?

Got it. So like I said, with our Comdata and that's [mostly a] business, where we go direct and we go through partners. On the direct side, we target sort of [$10 million] to $2 billion in revenue sized companies, so the full spectrum, but probably not Fortune 1000 companies. On the direct side, we're partnering with banks. So people probably don't realize this, but many banks have gotten out of the sort of in-country branch bank network. So like Citibank or BofA might have had a branch bank in São Paulo and one in Thailand, and they've just gotten out of that business. And so they don't -- they're not up to date on the regulatory requirements to make payments in countries, the KYC issues. And so they use us for long tail currency payments. If it's going U.S. to U.K., okay, they could do that. But if it's going U.S. to Brazil, it's going U.S. to India, U.S. to China, they'll use us for the long tail. So we've signed up 4 of the 10 largest banks in the past 2 years for our services, and we have a lot more in the hopper. And that business is growing really, really nicely. And it's a great business because it's on exotic currencies. So if you're trading in AI or rupees, the spread on those currencies on transactions is 2.0 to 3.0x what it is on a major currency. And so there's a lot of juice there as well. So we like that. And then in terms of fintechs, we mentioned Bill.com uses both Cambridge and Comdata. There's several more examples like that. So what value do we bring? So I think, like I said, today, banks have 95% market share in cross-border payments. In consumer, they have 65%. So we're just replaying that movie. And how are we going to replay it is these companies that if you're not a Fortune 1000 company, you're just underserved by the banks. They don't call on you for your cross-border needs. They make you come to them. And when you come to them, you're going to a branch bank or you're calling them on a 1-800 number. We have experts focused and advising those CFOs, treasurers for non-Fortune 1000 companies. So we advise them on how to manage their risk. We offer them competitive rates on their FX services, and we give them great service. And then the icing which really makes this business model super attractive and recurring is that we have custom tech that integrates with their ERP system. So the vast majority, I'm talking over like 75%, 80%, of our payments are done electronically, either through their ERP or through an online portal. They don't call us. This is done -- it's very automated. It makes it very sticky, recurring and it makes it very low-cost transaction for us.

Yes. This seems to be really high incremental margin type of business, if you don't have -- no, that's really exciting. Just that comment on the exotic pairs, I mean does the AFEX business that you just acquired, I know there's exposure in Asia Pacific. Are there a lot of exotic payers? And I guess, is there an opportunity to kind of increase that revenue yield of that business?

Yes. I mean, it brings -- it gives more in-country locations. It gives more banking relationships, counterparty banking relationships. And it gives us more scale to be like I -- we believe now the premier cross-border payments company that's not a bank. So yes, absolutely.

Okay. And then the share gains, you take most of the share gains in this -- or I guess, where the revenue growth is or new logo growth is coming from, you think like 90% of that is essentially just banks -- the correspondent banking channel.

That's right.

And what's the cost savings that a customer might see when they make that conversion?

The beauty is there is some. I'd have to quantify it. But that's not the reason they come to us. They come to us for the service, for the IT integration and the expertise that they're not getting. If you're managing a $500 million business, that's a real business, and you might be an exporter and you have real risk issues that you need to manage. We help them do that and do it with a real expert, a senior expert. You just won't get that service at a bank.

No. That makes a lot of sense. Seems like a great opportunity to continue gaining share. Maybe one last question on the Cambridge business. I mean, what are your thoughts on TransferWise's strategy where they're essentially matching flows in different corridors, right? And the money isn't actually moving across borders, right? Is that something that you can do and maybe you're already doing it? And I guess, how do you think about that? Because that could structurally lower your cost, right, versus running a corresponding banking system in the background that's more efficient than what the banks are doing.

Yes. I think TransferWise has done a fabulous job marketing that concept, but it's nothing new or innovative. We do that every day, all day and have done it for 20 years. And so given our scale, we have matching offsetting flows all the time. Over 60% of our payment flows are netted. So the money never actually goes across the pond. And so by acquiring AFEX, we have more offsetting countries so that we can net, which lowers our costs, like you said. So it's something we've been doing forever. And our scale, it's scale that allows you to do that, right? You have clients in the U.S. sending money to France and you have clients in France sending money to the U.S. and you net them, right? It's scale that allows you to do that, and we've built that scale.

No, that's amazing, that's a great point. Okay. Maybe we could switch over -- I think we have 15 minutes or 10 minutes left or so. Maybe we can switch over to the AP outsourcing business. I just want to dig into the sustainability of the growth in that business because I think the growth slowed a little bit from where it was running in April. And I think it's now in the -- call it, the mid-20s in June and July. So I was curious, what drove that slowdown? And what's a good normalized growth rate for that business?

Yes. So 2 things drove it. So one is delay in AP payments I talked about earlier. So you're 60 to 90 days delayed. So NVP hit the bottom of COVID in May and June. When we showed data last time, it was April. That's one. The second thing is when we acquired NVP, we had our million supplier database, and they had their, whatever, 100,000 supplier database. And then we took all their spend, their $20 billion in spend, and put it against our database and dramatically increased Mastercard spend. And so in -- since the April reporting, we've had -- we hit the bottom of COVID, and we lapped that incremental thing. So we think the long-term growth rate for our full AP business is in the mid-20 s to mid-30s range.

No, that's helpful. [indiscernible] here a follow-up question or comment of taking the virtual card penetration up on that acquisition. I mean, what was it before you acquired the business? And then where did it ultimately get to?

It's pretty high. So depending on ticket size, ticket size and virtual card penetration would be inversely correlated. But for, say, a payment below $25,000, like 1/3 of the payments would be paid with a virtual card. So we improved that probably 25%, rough math, by applying our vendor database against their vendor database. So it was massive synergy, massive.

So it basically went from 10 percentage points up to 30, 35, call it.

No, no, no. I'm saying 1/3. So if it's 35 now, it would have been 20-something before.

I see. Actual percentage increase. Thanks for clarifying that. And maybe on this like full AP outsourcing business, do you have total control over how the payments are made and so you can really push that virtual credit card penetration? Is that the right way to think about it?

Absolutely. So it's a trust model. We take over the whole AP process for the customer. They send us the money into a trust account. And then we guarantee that, that payment will be made and we'll service any questions. And the customer is done and then we decide how to pay it. That said, the customer can say, hey, this vendor is a strategic vendor. I have an early pay discount with them. Don't put a virtual card on that, and we'll track that and not do that. But yes, it's one of the beauties of the model.

And you guys had solid sales months for full AP earlier this year. So maybe talk about the onboarding process and the implementation process. How does -- how long does that take? And when might those new customers start contributing revenue and volume?

They're starting to -- the sales have been phenomenal. They're growing over 100% a year-over-year. And we put the NVP product in over 100 Comdata sellers' bags. And so I just had a review with the sales force yesterday and now Comdata's sales force is selling as much direct full AP as NVP is. Now it's a bigger sales force, and so that's going to change over time. But we took a sales force at NVP, and we 10x'd with the Comdata infrastructure. So how long once we sign a client to first dollar revenue can be as short as 3 weeks and as long as 2 months. It depends on the integration and how better our backlog is. And so the thing that we have to focus on is, hey, we have to have the ERP teams built ready to integrate and develop to the ERP of the customer if we don't have it already. And then we have to get the onboarding and vendor enrollment people growing with that pipeline. So we're constantly adding to that team.

That makes sense. And how much of a conflict of interest -- this is another question we get, John, how much of a conflict of interest is owning Nvoicepay, right? Because you have that full AP business, but then you're also a back-end issuer, right? So how do clients view that conflict of interest? Or it's not an issue at all?

No. I mean, so who are we going after? We're going after either regular old businesses that want to electronify their payment process. We're going after fintechs or software companies that aren't monetizing their payments today. They're a software company. Or we're going after ERPs, ditto. They're a software committee not monetizing payments. And so we don't find any conflict.

And can you remind us of the average customer sizes for the Nvoicepay business, either like in terms of revenue and...

Total revenue?

Just how do you like stack against some of these other players, right? Like we speak with Avid, we speak with MineralTree, we speak with OnPay Solutions, like all these players are -- like they're mid-market. Curious like where you stack up against them.

Yes. I think people, when they say mid-market, they mean like a smaller company than we do. I think if we look at NVP's clients, they would range from the smallest being $15 million of revenue. And that would typically be in a situation where we're natively integrating to the ERP. So like in the auto industry, it might be an auto dealer group with $15 million of revenue. And we have clients up to like MGM with $6 billion, $7 billion, $8 billion of revenue. So it can span the whole gamut. I think the -- what we're seeing with the Comdata sales is that Comdata would be more $25 million to $1 billion in revenue and a little bit more in that 100-ish range that they're really selling into. So we think the solution implies down to like $15 million of revenue, probably, and we're having great success, both at the top and at the bottom.

Great. And I think we have just a few minutes left. So John, maybe you could talk about the changes that you made on the selling side and the go-to-market to manage through the COVID environment.

A lot more Zoom, a lot more of this. We actually did a study on how to go-to-market in this new paradigm. And I think we're seeing -- it was really -- most of these businesses are face-to-face selling. So in the beginning, peak companies took a pause, but now everyone's engaging like we are right now. And it creates unique opportunities because now if you have a new seller or if you have a really important client, the big boss, manager can join the call and put the pressure on and cover -- how to call in Texas, New York and L.A. all in the same day. And people are actually buying and getting -- you said and they're saying, holy moly, I may not get on a plane ever again. So it makes the importance of like your electronic marketing collateral and your webinar technology, I think, really important. We've had amazing success on our webinars in this COVID environment. I mean clearly, this COVID environment is saying, paper-based AP processes are great, but we're not going to the office. And so let me change that. So that's been a tailwind behind us. But we're viewing it very positively. Now we can recruit a guy and sit in Kansas City to sell in L.A., I mean that's a sea change.

Yes. We're all getting [indiscernible], that's for sure. Maybe last question, John. Can you talk about the progress FLEETCOR is making cross-selling the corporate payments capabilities into the other lines of business within FLEETCOR? And I think the -- probably the biggest opportunity is on the fuel card side. And so maybe talk about what are some of the successes you're having and the challenges you're facing doing that?

Yes. So I think for the client on the fuel side or the hotel side, that would be sort of $15 million of revenue and up, we are making efforts to cross-sell to those and having success. Then when you get into the local business where you might have a real micro company, like a 15-employee type company, our service is a little bit too white gloved, integrating into the ERP, more we do the service versus self-service to cater with that. And so we're actually in the process of deciding whether we develop for that market. We can -- there's a path to modify our platform and make it more self-service to go down-market to attack fuel or we could partner with someone to do it. And we have I think it's like 600,000 fuel clients that would be in that micro bucket. So it's a massive opportunity.

Great. All right. We'll stay tuned for that. We'll have to leave it there. I think we're right up against 12:35. So John, thanks again for taking the time. Jim, I appreciate it. And I look forward to doing this again, hopefully, after COVID and [indiscernible] in person.

Great. Nice to meet you again. Thanks.

Bye. Take care, John. See you, Jim. Stay safe, and chat soon. And that's going to do it for our conference this year. We'd like to thank all the speakers.