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

Sounds a lot more intuitive as well. So that leads on to the discussion more of how FLEETCOR's tech stack side has continued to evolve. And I know pre-COVID, there was a notion that FLEETCOR was going to invest a bit more into the tech side of things. And last call, you talked about a new client UI and an increasing API capabilities as well. Now how should we think about tech spending levels going forward? What are some of the areas where you think FLEETCOR is prioritizing tech investments today?

Yes. So we've got basically 4 pillars of change in our IT organization going on. So the first one you mentioned is around what we call unified customer experience or UCX. And this is how do you take a customer experience and make it as much digital as possible, whether it's through sales. And then you get to an application and how do I make that end to end with no human intervention. How do I automate all the credit checks real time, so you can get that? How do I then service you? How do I make the product itself less about a physical piece of plastic and more about a digital app that provides all the reporting, the alerts, communications with other drivers, whatever it may be that your business needs? So whether it's in fuel cards, lodging or in our corporate payments business, our B2B payments business, how do I take Nvoicepay, the virtual card and T&E stuff at Comdata, the cross-border stuff at Cambridge, bring that up into a unified user experience. So when you sign on for any one product, you can easily add the others, but get one view of your relationship with FLEETCOR. These are the types of things that we're working on in terms of a unified customer experience across all of our lines of business. The second thing -- second pillar, I'd say, is around core system modernization. What does that mean, Charles? We bought a lot of businesses and they have custom-built platforms that are fit for purpose. They're the best at what they do, but some of them have been around for some time. So what are we thinking there? Our thought is to reduce the footprint of those systems. So let's say the system does 10 things, 5 of them give me incredible competitive advantage, and there's so much secret sauce in there that I want to keep those. But the other 5 may be more generic functions. What I want to do is keep the 5 in the core, take the other 5 basically turn off, and then put in more cloud-based standard stuff that would then connect to my remaining smaller core through API. So an example of that would be, "Hey, Charles, you got a fuel card system that does amazing transaction processing at scale and an amazing pricing engine regarding wholesale prices of fuel and taxes and all the other stuff you got to do.” But then it has a little customer invoicing module. Believe me, there are lots of companies that provide customer invoicing modules, right, that do a little customer billing. I don't need that. Take that out, I don't want to support it. Take me to, as an example, an Oracle billing solution that I can use both for my fuel card billing system as well as for my lodging, et cetera. So reduce these various core systems down to their essence of what they do the best and then take standard stuff and just plug it in through APIs that's more generic in nature.

It seems like that would also help the whole cross-sell opportunity as well.

Absolutely, particularly once these APIs are in place. Again, you can provide a unified customer experience starting to go across the different product lines. Good point. The third area in terms of the 4 pillars for IT is around what I'll call the data services, to building the data lakes to give us better access to that. Whether it's ourselves in terms of getting access as well as our customers or our partners to help with advanced analytics and things. We're just getting started there, so lots of opportunity. And then lastly, the point that you touched on around APIs. We've gone with MuleSoft as a standard globally, using that as kind of our layer to create these APIs that will then go to those core systems then to our own accounting systems and such as well as then partners. So when we sign up a-- let's say, I'm going to go sign up a new partner in corporate payments. Today, if that person says, "Hey, I'd like to have the Nvoicepay capability plus some of the -- I like [indiscernible] and T&E cards from Comdata, and I want the cross-border capability from Cambridge. Can you give me all 3 of those?" In the past, I'd say, yes, of course I can. We just need to integrate to all 3 systems separately. Once we create this AP high layer, we'll be able to integrate once to that layer, and then you'll have access to all 3 systems. So all of that is now in play and in process. So we're very excited about it. Obviously, it's a multiyear journey across all these things, but very, very excited about the future.

That's helpful. Good commentary there. I want to dig into, before we run out of time here, I want to dig a little bit into fuel cards, corporate payments and then maybe a bit on tolls. First, let's take a look at fuel cards. Your same-store sales were pretty good this year, particularly compared to some of your peers. Now I guess you can make the argument that the large enterprise and perhaps even the co-branded opportunities, at least in North America are fairly saturated. So I feel like there's going to be more of an emphasis, certainly on the competitive front, in small fleet. How do you think about the competitive environment right now for small fleet, both in North America and also international as well? And if you were to break out those 2 vectors, international and North America, where do you think investors are more likely to see the next big growth opportunity for FLEETCOR?

Yes. So in terms of focusing on organic growth, we still think there's plenty of opportunity in basically all the markets that we operate in. I was looking at North America small fleet, still more than 50% of the accounts that we sell are on general purpose credit cards or cash, some kind of a reimbursement thing. That's 50%. Of the remaining, unclear of the percentages, but it's a hodgepodge of something. Some competitive fleet cards. Some of it's their own back-office fueling. Some of it is still house accounts with merchants, which we think is very inferior, given the coverage and the reporting capability there. And so we think there's still plenty of runway here in North America. When you shift international, there are some markets where it's the U.S. 15, 20 years ago. Go to Mexico, Russia, some of these other places, there's still lots and lots, probably ridiculous amounts of runway. So if you went then into say, the U.K., where we have a pretty big position, I'd say there is still some growth that we can get purely from fuel cards. But there, you have such an established base that some of this cross-sell opportunity is really where we're going to be focusing going forward.

That's great, that's great. And then let's talk about corporate payments a little bit. If I think about the full AP setup that FLEETCOR currently has right now, at least I think most investors think of that as more vertically focused in certain areas. Can you talk about what is the growth strategy in perhaps expanding into other verticals or more of a horizontal type of offering? And then I think it would also be helpful if we can discuss how are you thinking about your direct versus your reseller opportunity and how is that progressing in the last couple of months.

Sure. So in terms of horizontals versus verticals, we really like the vertical play. And the reason we like that, a couple of things, is first the ecosystem it creates. And so, one, when you get deep into verticals, they have specialized ERP systems. Yes, of course, you can use Oracle and SAP. And if you're a big company, you will take that and customize it for your industry as such. But down in the mid-market where you want things a bit more out of the box, you are looking at more specialized ERP systems. And so as we integrate with those systems, it becomes easier to sell the next client. So Pete, you're on this construction ERP. Well, so is Jim. He's been my client for years. So I'm already integrated. So your implementation is going to be way easier. That's one side of the ecosystem. Another part of it is the vendor side. So being in construction in a big way, we've already enrolled so many construction-related vendors, the lumberyards, et cetera, et cetera, right, the plumbing supply shops, et cetera. It makes it easier for me to penetrate your AP file. And so when you look and you say, "Wow, Charles, I got to pay x number of invoices. How many are going to accept virtual cards?" "Well, I've already signed up 25% of your vendors because Jim is in the same industry. So don't worry about it. I got 25 or 8, and I'm going to get some more now." And so that penetration is what creates the revenue opportunity for us as well as rebate opportunities for clients. The third part is around sales, marketing and customer referrals. So again being deep in a vertical, speaking their language, understanding how those businesses think, where they go, the trade shows whenever they ever come back, but where you market, et cetera, all of those things play into that ecosystem. So creating that strength builds, it's almost like a breeder reactor, so to speak. I get more vendors when I get more customers. I do more ERPs, which give them more vendors, et cetera. You keep doing that. It's also key -- mentioned around direct versus kind of the reseller channel. We think there's enormous opportunity, and we're going to keep investing in our direct channel. But resellers, given the size of the opportunity, there's no point not trying to find other ways to distribute. And so our reseller focus, particularly in the full AP market, has been around vertical ERPs. So go to someone and say, "Look, not only will I integrate with you, but now will you become a referral partner or even a reseller to your installed customer base so they can just press the easy button and outsource their payments to me?" But you have to get the customers aware that the functionality is there. You're going to get their approval, right? And then we got to get their vendor -- work their vendor list on the other side to get enrollment. So that's kind of our approach. We want to be really deep in verticals to create the ecosystem. And we're going to do that both direct and through resellers that are essentially the ERP partners that we're integrating with.

That's helpful. That makes a lot of sense as well, particularly with the ERP integration and how you're thinking about that. I think it was talked about a little bit on last call about potentially thinking about going further down market in AP. Would FLEETCOR need to have more of a self-serve solution, maybe self-onboarding solution, to facilitate that? How would you envision building out that capability further down market?

Yes. We do think it is a refinement of the product. And so we do think that it needs to be tailored for that market. We are investigating the build/buy/partner kind of approach. And depending on the speed and such, we'll determine how much we're willing to pay to buy, or take our time and build, whatever it may be. But what I'd tell you is we are determined to move further down market. And we think that in doing so, it creates enormous cross-selling opportunities into the small businesses we serve in fuel cards, lodging. And it's the customers as well as the merchants that we serve in those places. Think of hotels that you can sell virtual cards and other types of corporate payment stuff, too. So we think there's a lot of opportunity there as we move down. The question -- your question, which is a good one, do you build it? Do you partner for it? Or do you buy? And I'd say we're evaluating that every day depending on what's in front of us. So stay tuned, stay tuned.

We'll be eager to hear about that. I think one last question on corporate payments. I think we've talked about revenue per transaction has been a little bit volatile. How do you see that trending over time with the underlying category mix evolving, particularly now that you've added AFEX to the platform? If you can give us a sense on that, that would be helpful.

Yes. I'd say there, Pete, the -- in that business, we really look at it more on a, what we call, keep versus spend. So how many basis points in terms of the value of the transaction are we keeping? So if it's, say, a $1,000 transaction, am I keeping 1%, 0.5%, whatever it may be, 50 basis points? And what I'd say is that's generally kind of stable as I look across the businesses. Obviously, if I move further down market, that may shift a little bit. It does differ between our direct versus reseller channels. But when I look at kind of corporate payments, I look at the FX stuff versus kind of the more domestic stuff, not a big difference. And so the driver of what you might call revenue per transaction can be transaction sizes can be different, right? And so therefore if I'm keeping, say, 50 to 60 basis points, but my transaction size went from $1,000 to $100 per transaction, that would have a meaningful impact in revenue per tran. But the way we really think about is more on that basis point keep, which I'd say is probably not going to shift too much based on what we've seen so far, again keeping that balance, both direct and reseller growth.

That's helpful. I think I got time for 1 or 2 more here. I'm going to just jump back to operating expenses a little bit and how you see margins progressing potentially as we get into '21. Operating expenses declined 9% year-over-year in Q3. FLEETCOR is looking for a 12-point decline exiting this year. A good portion of that is certainly volume related. But can you frame where you're seeing some fixed cost reductions? And what degree do you think these cost reductions will be permanent?

I'd say, Pete, it's pretty limited. And speaking candidly, it's limited. We got a lot of volume stuff. We got some FX help. So the FX creates a headwind in revenue, but it helps you from an expense perspective. Stock compensation is down, given where the stock price is today. There's a bunch of things that have kind of moved to help us in that regard. Of course, we have tried to balance our spending, right? I've reduced call center activity. I've reduced a bunch of things. But when the business comes back, a bunch of it’s going to come back. And where it doesn't, I'm going to look to make certain investments. So what I mean by that is do I want to see FLEETCOR's operating margins expand to its -- sure, but I'm not going to -- not invest in sales, marketing, IT, product development, et cetera. That's -- so what I would say is we balance. If revenues are down 10%, I need to bring my costs down, right? Some of it comes for free, some of it doesn't. And where I can flex, I do. But when that business starts pouring back in, I want to take some of that money and put it towards sales and marketing, product development, IT. We think that's a good return for investors long-term, shareholders like me. So I want to make sure that people aren't thinking we're going to save our way to prosperity. No, but we're going to balance, balance revenue and our expenses to invest enough to grow the top line as fast as we can.

I think I have time to squeeze in one last question here. Last quarter, you announced that the Board authorized a $1 billion buyback in the stock, but that doesn't hinder your ability to do medium or even large M&A, right? I just want to get a sense of how you think about your capital position right now relative to potential M&A opportunities coming down the line?

Yes. So the Board did increase our authorization by $1 billion. It doesn't mean we're going to go spend it. We may never, but we're just authorized to do it. We always look for M&A first where it makes sense. And we love the accretive deals like AFEX that come our way. We'll take those all day first. We are looking at other more what you might call strategic type of in it buys where it may give us a product capability. So we are looking at some of those opportunities right now. The thing we want to do is just have the flexibility that if for whatever reason we decide the deals don't make sense, if from a return perspective we just don't think that the price is right or our ability to manage it post could get the right kind of return, okay, then we have the option to buy back stock. That's not my first protocol. We've always taken the approach of accretive or really smart M&A first, and then fall back on the buybacks when -- at the time that it makes sense. On your point around bigger, more strategic, really big kind of deals, something with a $3 billion-plus kind of price deck, I'm going to have to refi all this stuff anyway, right? But for what we're looking at right now, we're fine.

That's great. That's great. Well, Charles, thank you so much for participating at Citi Fintech X. It's been great having you, and we'll go on to the next session. Thank you.

Thanks. Thanks, Pete. Enjoy it.