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

Great. Good afternoon, everybody. My name is Bob Napoli. Welcome to the 41st Annual William Blair Growth Stock Conference. For a complete list of disclosures, please go to williamblair.com. I am the analyst that covers the fintech space for William Blair. We're excited to have with us this afternoon FLEETCOR Technologies, John Coughlin, who runs, I think, the most exciting division. He's the President of the Corporate Payments, Group Head of Corporate Payments. John has been with FLEETCOR since 2010 prior to the IPO, became Group Head of Corporate Payments in 2019. Prior to that, he headed the M&A group. And I think probably did more than 30 deals as part of the M&A group.

And speaking of M&A, you just closed a relatively large transaction today. I think the wire just came out a few minutes ago, you closed the AFEX transaction. So maybe just -- just on that, maybe just give 2 minutes on AFEX and how that fits into your corporate payments business?

Sure. So we announced that deal, I think when was it? September or October, I mean it was ages ago, and it took forever to get regulatory approval in like 20 countries. So -- but -- so we've had a lot of time to plan and get ready for it. So we're out of the gates strong. But the simple reason we did it is we had a cross-border business that's strong in North America with presence in Europe and Asia, and they were the inverse. They were strong in Europe and Asia with a presence in North America. So combined, we'd argue we're the largest preeminent nonbank cross-border fintech out there. So we've got great geographic coverage. Clearly, we've got scale. We're going to consolidate systems. And so we'll put more dollars against one system than the same dollars against 2 systems. We've also announced we're rebranding the whole card payments division, we'll be consolidating marketing spend. And we have the playbook. We bought Cambridge, we doubled the profitability in 2 years while growing at 30% a year. So we have high confidence in our ability to execute on this. And we like the space. I mean, basically, you got a space that's growing with global trade at 6% to 8% a year, and banks have over 90% share of that. And so if you look what's happened to cross-border on the consumer side, banks lost about 40% of their share. And so we're hoping that movie replays on the B2B side as well. But the majority of our wins are against banks, and we go to them with laser-focused distribution. So we have combined over 200 salespeople in the market trying to sell this globally. We have dedicated tech that's more robust and can do more things than the bank solutions. And we typically offer better rates as well. So it's sort of a win-win solution for the customer. So good space, helps broaden our global footprint. And later, when we talk about this Roger acquisition, which I'm sure we'll get into, we see a huge opportunity to cross-sell that to our AFEX's base.

Great. Thank you. Maybe give an overview of FLEETCOR's Corporate Payments business. And I mean the segment -- virtual card, T&E, like maybe just the segments? And if you can give any relative sizing of the segments to the...

Okay. So we have -- we're about 20 -- now with AFEX, 22%, 23% of FLEETCOR revenue. We have a very broad product suite. We think we're unique with that breadth. So we have AP automation, which includes the Invoice Pay Solution, and Comdata's virtual card solution. We have expense management software, and we have a variety of mobile purchasing cards to control employee spend. And then we have the cross-border business with Cambridge and AFEX. And now we have Roger renamed Corpay One, which is SMB bill pay. So we would argue we'd have the broadest solution set in the industry. And the difference between us and other players is that most other players are domestically U.S., North America focused, we're global. So I just talked about AFEX and Cambridge, we have operations in 12 countries, big sizable centers, and we send payments to 145 countries. And so we think we're unique in our global breadth of the business. So roughly, it's sort of a little tiny bit more than 50% cross-border now and then the rest is AP automation focused with card products as well. Card products of the total thing would be like 12% or something?

Okay. When you say card products, you're talking about both credit and debit? Or...

Yes. So just within my division, clearly, FLEETCOR has tons of card products. And so within my division, we have purchasing cards, sort of T&E cards, those cards, that would be 10%, 12%.

Okay. Which pieces of your business are -- what are you seeing today? Which pieces are growing the most? Where do you see the biggest opportunities for growth?

So the fastest-growing now is our AP automation platform, which was the Nvoicepay platform. That grew 40% in COVID last year. It's budgeted to grow north of that, close to 50% this year. It's selling an incredible high portion, over 50% of revenue in sales. And so it's continuing to grow. And so we've got a great, unique product in the market. And with this unification theme we're on, so you've probably seen that we're going to rebrand all these 5 LOB's Corpay. I've also unified the distribution on -- by geography. So on the -- so the domestic corporate payments business, it's one. Sales force now, it's one marketing team. And so now you've got -- when we brought Nvoicepay, they had 10 or 8 sellers, now we got like 125 or something like that, selling the thing. So you've got way more feet on the street, putting pressure on a great Product. But that's the fastest growth. But the other businesses are growing nicely as well, too.

What is -- how would you compare -- who would you compare Nvoicepay to in the competitive universe. I mean, whether an AvidXchange or -- I mean, the broad group of players out there?

Yes, it's in that universe sort of Avid, Tipalti, MineralTree, Bottomline a little bit.

Yes. Yes. Okay. And what is -- I mean, the growth is being driven by great product and just more sales, much more bigger investment in the sales force.

Yes, distribution. And I think our key vertical ERP integrations. And so we've got several vertical ERP integrations. I can give example like Viewpoint Construction, which has like 40% market share of construction ERPs, we're natively integrated into their solution. So getting the leads and onboarding the customer when it's in the workflow already is easy, it's sticky, and it's a great partnership with them. And we're replicating that with several vertical ERPs.

Interesting. The penetration of virtual card within that segment is -- I mean if you look at Avid, they're probably 40%, somewhere in that range is what they talked about really high versus Bill was maybe 5% is and growing pretty fast. Is there -- can you talk about your strategy with virtual card, with real-time payments, cross-border payments, penetration rates?

Yes. So Avid won't typically pay the full file. So if there's any ACH, they don't pay it, we pay ACH. But even with paying ACH for tickets under 25,000 an invoice, we're like 35% of payments in like high 20s of payment volume. So it's still high penetration. But what we like is we see the full file every month, right, and our vendor database is growing all the time, and we're always matching that against that to penetrate spend. But like you said, we also offer cross-border services through the Nvoicepay platform and through Corpay One. And so that is still early days penetration there. And I think we've got some more room to go there, but it's low single digits penetration. So I think there's a lot of win there to hopefully tap in the future. Particularly if we take some of the existing Cambridge invoice solutions, so we have a division within Cambridge called GEG, and it's sort of a vertically focused AP automation solution where we do the invoice automation and just the invoice, put it into their ERP and then pay those bills for law firms. And those law firms are doing it for their cross-border payments. So say you have an engagement with a client and the client, and it's a pass-through bill and you get the bill from the other lawyer, you're subcontracting with in real in Brazil. But we all know real has been moved quickly, right? And so, hey, you already told the client, it's going to be a $30,000 for that lawyer. You don't want the FX to go against it. So we ingest invoice, put it into the ERP and then lock it in a forward contract. So it stays at constant rate. If we could put that technology into Nvoicepay and then into Roger, and that's the idea, we think that can open up a lot of more runway for us.

When we think about -- you used to disclose revenue per transaction. I think if you go back a couple of years ago, it was like $8 per transaction. I know you have a mix of a lot of different businesses. But is that -- that revenue per transaction number?

It sounds -- for my business, that's low. So I mean, the average virtual card ticket is probably $2,800, and we're making -- depends whether it's direct or not, or say, 1% plus on that. So there's $280 right there. On the cross-border side, the average ticket is similar. It's like $4,000, and we're around 1% range, too. So...

Okay. But that's the only -- like you're saying only about 12% of your business today is it does -- or that's for the...

No, no, no. That would be for -- the average ticket side on the AP automation side would be -- that's on virtual card, it is $2,800. And then on the cross-border side, the average is, say, 4,000x the 1%.

Okay. And your penetration rate on virtual card in AP is around 30%, something like that. Is that...

For NDP, so on the Comdata virtual card side, as opposed to taking the full file, we would go into their AP file originally and say, "Hey, what can I match up against your vendors? And I get that every quarter or something. And I would only pay the virtual card solution." What we're doing is pushing more and more of our sales away from just pure virtual card to full AP. Why? Because we get more of the file, constantly, we're integrated and it makes the customer process easier and the value proposition higher and rates stickier and get contracts stickier.

Great. Okay. That's very helpful. What's the right growth rate for the overall business? And with the -- over the long term?

That's a million-dollar question. I mean certainly, the TAM is there. I think we're targeting 15% to 20% would be what we try to target. There's a lot of people -- nonpublic people who aren't valued on into to try to make it 30% a year. But think of the scale that we're doing that at. So we have a $650 million business. You grow 15% to 20% a year, you earn $1, $115 million a year in revenue, right? So we're creating the new fly wire every year, right? And so we're growing at a pretty big scale. There's no one at our scale, right, in terms of growth rate. So if you look it from a dollar basis, we're blowing away everybody else at a growth rate. But yes, we target 15% to 20%. And we think we can do that with a good balance of growth and profit margin.

And I mean your margins -- I mean, FLEETCOR obviously has great margins. The segment margins for corporate payments, is it generally in line with the corporate average, a little below or...

Yes, a little below. It's -- but still healthy. I mean, I think the secret that you mentioned, I ran M&A. And so yes, when I was running M&A, we bought 37 companies and to buy 37 companies, you got to look at 5 to 10 companies for everyone you buy. So we've looked under the shorts of hundreds and hundreds of companies and payment companies all across the world. And you learn what works and doesn't work. And what I could say universally is that people are bad deployers of expense, right? The 80/20 rule applies. 20% of the calories deliver 80% of the benefit, and then people just spend money because they don't want to show a profit. It's almost a bad word sometimes of some of these fintechs. I mean, literally, I was a strategy consultant, early days of eBay. They absolutely didn't want to show profit because then you have something to value them on, right? So this is all about just hide the money. And so -- when we buy companies, like look at Cambridge, look at Nvoicepay, those things have been grown, Cambridge has grown 30% a year pre-COVID; Nvoicepay, 40%, 50%. But we're making great margins on those businesses. It's proof that you can do both. When we look at companies, the biggest culprit is just the distribution spend, like, I would say, universally half of distribution costs don't pull their weight. And people just don't analyze it, just keep throwing more and more money at it as opposed to trying to optimize it. So we try to optimize it and still deliver value for the shareholders.

That's helpful. I asked Ron this question on the last earnings call. But I think you kind of -- I mean, I said, should you grow -- take your margins down to grow faster? And...

Right. Well, I would invite you, Bob, to my next budget meeting because, of course, any operator will take more money. So yes, I'll take some, but it probably wouldn't take us to the spend levels of some other people who are just, frankly, burning cash.

Okay. Thank you. Appreciate the answer, the direct answer. So Roger, and I mean, what is the strategy behind? So Roger is based in Europe, and I think it's focused on the SMB market for AP automation. And the idea -- and I think is it selling through accounting channels over in Europe? And what's the grand strategy and to invest behind Roger to?

Yes. So I think Roger is a really unique suite of products, and it really captured -- captures all the elements and products we offer within all of card payments. So what's in the platform. So clearly, it's AP automation. It has invoice automation adjusted into the ERP and then queues it up, is integrated with QuickBooks, Sage and Xero. And we'll pay those bills and a whole bunch of modalities. So we'll give the software away for free right now to customers, and we'll make money by paying the bills of virtual card and sending their cross-border payments. But with that, we're also offering a Corpay card. And that Corpay card has robust expense management software associated with as well. So the really -- the product is -- I mean, the way you guys can understand it quickly is, it is sort of Bill.com plus Divvy they bought, plus Comdata plus Cambridge. And we see the opportunity to sell that to the existing customer base. So we have hundreds and hundreds of thousands of customers, I don't know what the official number is now. Yes, 600-ish thousand. And if you look at the fuel business, those tend to skew smaller. So our existing AP Automation Solutions probably aren't a good fit for those micro customers, right? It's too robust a solution. But this solution is, "Oh, my God, I used my phone, I got a bill, just forward it to CorpayOne.com," its ingested into ERP, and we pay it. You can look it, set your controls on all your cards. You can pay your AP in any modality, whether it's domestic or foreign. And they would have a card for employees to spend money and you can control what they spend right here, and they would have a credit line. And so when you think about that credit line, it's a way to monetize or double the economics we get with the customer. Let me give you an example. So we might say, "Oh, you want to send that payment to XYZ vendor in Europe, and you want to put that on your card." What do you mean, I can't put it on a card to pay the vendor in Europe. No, you're right, you can't. But you can put it on your card and you can pay the merchant discount rate. So it's a form of advance to them, right? And we know, based on their history, what they spend, and we see their bank account information within the platform. And so it's a good credit proposition. And so you could double, triple the rate you make on every transaction by advancing the money earlier. We do that right now at Cambridge. We look at our customer base, and we say, okay, what percent of it do we feel really comfortable about, and we call it fast track payments. And we are basically putting terms on the payments. Okay, you want to send this payment, we'll send it, you could pay it in 30 days and the rate to pay it at 30 days is X. So that right there, tripled the economics of that transaction for us. You don't want to do that for everyone. But we think it's a really interesting proposition. So again, you would go to a fuel customer, you say, I can give you 1 piece of plastic that has a fuel card, all the capability of fuel card, plus purchasing and lock down employees individually how you want them, manage their spend through the platform and have 2 in 1 and have AP automation and FX, all in 1 package. So I think it's a really compelling value prop to our customers. And I think it applies to our business as well. So in the past where we might have only sold a purchasing card to one client, we'll sell on the purchasing card plus the Corpay One platform for free. Hey, that's okay. It's a great value. On the cross-border side, we have a ton of long tail small customers, and we deal with them today online, and we're basically managing their cross-border payments. This could become the platform to manage all their payments, domestic and international for those customers. So instead of pointing them to Cambridge link, which is our online solution, we can just point them to Corpay One and expand the spend that we're managing.