WEX Inc. (WEX) Earnings Call Transcript & Summary

The 2023 Raymond James TMT and Consumer Conference. My name is John Davis. I lead the payments and fintech coverage on the research side here at Ray J. We're excited to have WEX CEO, Melissa Smith; and Head of IR, Steve Elder, with us this morning. We'll do a fireside chat. So I'm trying to keep it as interactive as possible. Any questions in the audience, just raise your hand, and we'll get to them. But first off, Melissa and Steve, thanks for joining.

Thanks for having us. Great to be here.

So, Melissa, obviously a very uncertain macro environment. Lots of questions. You got Mobility business, you got travel business, been about a month since you reported. So just curious kind of updates on November, things tracking as you expected, seeing pockets of weakness, strength? Just any kind of quarter-to-day update would be great.

Yes, it's been the most anticipated recession ever, right? If we look at our business, we continue to see really solid trends. The one place that has continued to have some softness, but I would say, equivalent to what we've seen over the last few quarters is the over-the-road segment, which is about 30% of our Mobility business. But even with that, spot rates have stabilized. And so I'd say it's kind of a stable part of the portfolio. And then if you look at across the business, we see continued strength in our travel trends and our customer signings and our existing customer volume. And so I'd say the quarter is playing out largely the way that we had anticipated in terms of the U.S. and the economies that we're in, continue to operate actually quite strongly. .

So fair to say things are kind of stabilized, not getting better but not getting worse on the Mobility side.

Yes.

I mean I want to dive in a little bit. You mentioned OTRs, 30% of Mobility. And I feel like that's gotten a lot of airtime lately. But we'll talk about the other 70% of Mobility. Kind of what are you seeing there, what are the trends? What been overly focused on [ Mobility ] there?

Yes, I'd love to. And we're very bullish about the Mobility segment and what we're doing in that part of the business. So in the third quarter, you saw some things that will get lapped. So I want to talk about that and then I want to talk about longer term. So within the quarter itself, we saw the fact that we had about 20% less late fees across the portfolio, that's largely related to an effort that we have had over the last year around really focusing around the credit quality of our customers that are coming in. So working on the credit models, we're extending credit, tightening credit standards. Also going all the way upstream into digital marketing to make sure that we're bringing in customers that are the best customers possible. And so it's been a really concerted effort. One of the downstream effects of that, as you've seen late fee revenue drop 20%, some of that is fuel price related but about 10% of that is really related to the underlying health of the portfolio. We think about it as a positive, but it's going to have a little bit of an overhang for a couple more quarters until that lapse in terms of the segment. The second thing within third quarter, there were just last fueling days. And so that was quarter specific. You talked about the over-the-road marketplace. But what we've really been bullish about is the continued strength of the sales engine that we have. So those customers that we're signing are even higher quality. They're staying even longer. And so we feel great about a lot of really hard work that went in to optimize the way that we're moving business in, the way that we're doing it digitally and what the downstream effects of that are in terms of the overall portfolio health. We feel really strong about the way that we're adding to that customer set. So when you think about Mobility, we've got this great asset base, since we've been really thinking about how can we actually add more TAM, more capability to that customer segment. And so we've been adding in functionality. We have a product called Chip Plus, which enables our customers to buy things that are very discrete beyond fuel. We've been waiting for Chip adoption at the fueling locations to roll that out. But from a product perspective, it's a great product opportunity where we can take our existing customers, based on their feedback, allow them to purchase more. Been really focused on what we can do in EV, and we see that as a $1.5 billion to $2 billion TAM. And I think we just feel increasingly positive about the opportunity that brings. And then we're looking at other [indiscernible] I'm sure you'll ask about Payzer. It's an opportunity for us to also extend the capability we have with that customer segment, increase the revenue per vehicle that we have in that segment. And so we feel a bunch of smaller activities and then some larger, more strategic ones are building on the opportunity we have in this segment.

Okay. Yes. So I think if we zoom out, you've kind of talked about that being a 4% to 8% growth segment. We're a little bit below that today or kind of in the back half. But if I'm hearing there's some transitory kind of timing issues. You don't necessarily need macro to get better for growth to accelerate back into that target range next year?

No. So the transitory pieces will potentially work their way out as we anniversary some of the comps. We are assuming, as you get into the back part of next year, that the over-the-road segment will get into more of a normalized level. But when you look at the segment and where we think we're going to be from a growth perspective, we feel really good about our long-term growth targets. And if anything, we're looking at how can we actually beat that. .

Yes. I want to touch on EVs, obviously, I joke with Steve all the time, I feel like people are really worried about it -- more worried about it in 2019 than they are today, I think given part of your success in kind of some early proof points. But maybe just talk about the opportunity of having kind of mixed fleets, the complexity, how that enables you guys to potentially drive even more kind of a higher yield or monetization per customer than you have today, maybe some of the early proof points that you guys have pointed out?

Yes. Yes. So we had talked about this in our Investor Day, and we feel even more strongly about it now. You're talking about proof points. Right now, we charge on average $6 per vehicle per month. And that's like if you take it across all our revenue divided by the number of vehicles, it's kind of a blunt object, but that's the math. And we've said that on EV, we will be able to charge between $5 and $20. As we've gotten into the marketplace, the way that we're thinking about this, first of all, we start in a strategic advantage because we know from our customers what they want as they go through this migration is to integrate their ICE vehicles with all the information on their EV-related vehicles. And most of them are going through this transition over time as their vehicles come up for end of life, then they're considering, do I replace that with an EV. So this is going to be quite a long period of time where people are going to have a combination of both ICE vehicles and EV vehicles. So they got this mixed fleet environment. So as we're in this mixed fleet environment, they want all of the data associated with the fleet integrated together. So our first set of products have been very focused around the ability to give people access to charge with the network, being able to do at-home reimbursement and then depot charging. And in the way that we're pricing that are subscription-based fees with the products we have in the marketplace right now, so we have initial offering where people pay for access to the network, and the tools that we have that make that easier for them. And then on top of that, we're in a testing phase and anticipate rolling out fully the at-home reimbursement capability this year, and then next year have depot charging. So those products will each have subscription-based fees associated with that. To your point, like we've learned already, we're in that $5 to $20 range with a relatively small part of the products that we anticipate having into the marketplace. And so the products we know are resonating, we're getting great feedback from our customers, we're actually doing an overview for our Board this week of a customer experience on an EV product life cycle, which I'm really excited about because we're getting great feedback from that customer segment. So -- and then the last thing I'd say is we actually hired an outside company to come in and looking at the pricing, that $5 to $20. And they have validated and, if anything, actually feel quite bullish about the opportunity that we have in the space in order to package it. Because we have an ability to create incremental savings with each of these offerings that we've put into the marketplace.

Okay. Great. And then we kind of started to touch on earlier, but maybe just talk about the recently acquired -- or the Payzer acquisition, looks like you paid about 7x revenue for that business. I know you're excited about it and talked a lot about it on the call. But maybe just content it down, the cross-sell opportunity, why you're so excited about it, and kind of why it makes sense for WEX?

Yes. So we were looking at areas, and we did this in our Benefits business. We acquired an asset that was specifically related to consumer-directed health care, and we build upon that so that we cross-sold more products that we acquired into that original customer base. Been really successful. We, as a company, looked at where else can we do that across our portfolio. We identified field services management for 2 reasons. We like the growth of the -- it's growing 20% to 30% from a market perspective. If you look at our fleet customers, that 500,000 we have in the United States, the small customers, there's a lot of concentration in that field service management category, not like if we have any concentration. So we liked the overlap we have with our customers. And so we've identified field services management is a category that we were interested in. We then looked into the marketplace, at assets. We really liked Payzer because of their level of integration they have with their OEMs, which allows the customer to dynamically order. And so if I'm at a customer location, I can actually order products needed to complete the service they have at hand. I can schedule and I can make payment. And so we see an ability to extend the offering that we have with our customer, where we're providing a piece of the simplification they have for their business and do more within that customer segment. And Payzer has about 3,000 customers, if you look at the size and scope of our customer base, we actually can have a pretty meaningful impact to the growth trajectory. So there's a lot of things that we liked about this. And we feel like it's an opportunity to learn really how much can we penetrate our existing customer base with new offerings. We also strategically like this migration, and you can see this with our Benefits business, where a large part of the revenue is coming from SaaS related fees. We think we have that same migration with EV where you can actually migrate revenue to more monthly-based fees. And with Payzer, that same idea, you can actually integrate more into the SaaS related fees by adding from the payment capability to moving upstream into more of the workflow management.

Sounds exciting. Maybe shifting over to corporate payments. Maybe just remind investors how that breaks out between travel and nontravel as a percent of that segment?

It's a little -- travel is, also it moves around a little bit, but it's about 50% to 60% of the revenue in the segment and about 80% of the spend.

Okay. Yes. I really wanted to focus in on travel there because it seems like you're making some pretty significant strides from a market share perspective. I think in the third quarter, grew 35%. So I think it's -- the word travel I think means a lot of things to a lot of people. And clearly, there was a COVID recovery benefit in travel, but your base continues to outpace expectations, I think, broadly. So maybe talk about what exactly you're kind of doing in travel to gain share. Obviously, you have more of an APAC exposure now than you did a few years ago. But just what's going right? How should we think about kind of normalized growth of the travel business? At some point -- well, the word normal because I don't know what's normal anymore. So just how should we think about normalized growth there and what's going so right?

Yes. So we've grown spend, that's about 50% higher than it was prepandemic. So we feel very clearly we're outpacing the market. We have the privilege of doing business with 8 of the 10 largest online travel agencies in the world. And those relationships are really embedded on our technology capability, fulfilling really complicated payment work streams in an integrated way with those online travel agencies globally. So the product itself continues to be really important to us and to our customers. We are very focused around how we can help them maximize the use of the product set. So I would say there's 2 things really that's bridging the fact that we're outgrowing the marketplace. One, the customer segments themselves, we have some that are migrating more of their spend volume to the merchant model. And when they do that, we're a benefactor of that because that's where our model actually doesn't play because that allows -- we're -- in that model, there's a payment that's made to the hotel. The second thing is we are very integrated with those customers, looking at ways that they can use products that maximize their use of our product set, but also for them, the overall economics, the way that they're settling on a global basis. And so that active management with the customers is the second part of why you can see that we're outpacing the travel spend.

Okay. And maybe just flipping over to the nontravel side, I think growth has been a little bit more challenged there I think last quarter. But if we think about at a high level, I know Steve and I have a conversation, you've talked about as well, look, you're not going to have an AvidXchange every year. But what's the key to getting that segment historically had grown healthy double digits plus -- what's the key to kind of getting that back into growing kind of at a faster clip?

Yes. So when we say segment growth, this is including travel, so we said 10% to 15%. And the way that we think about this internally is we have an embedded payments product, which includes travel, but also nontravel like Avid is an example of that. And then we have an AP Direct product. And both of those 2 things we're really focused on how do we gear that long term. We have invested -- we'll continue to invest in embedded payments product capability. And we have a pipeline of customers both on travel and outside of travel that are important to us to continue to actually bring into the business. We also are focused on new spend categories within the travel segment, of areas like we were very focused on hotel, but how do we expand that into airline, house rentals, new categories of spend is another area of focus to us. But the embedded payments product, I know people look at it as a lower take rate than it is. It is also set up in a way that's highly scalable. So our job is to find new pools of spend and push that through that pipe. And really the place that we're investing is on the technology side, is highly automated what we do, and we feel very strongly about our capability there. So feel good about our ability to hit long-term growth targets there. On the AP Direct side, we've been building over the last year, maybe 18 months, a direct sales force that actually -- they're delivering against what we expected them to deliver, which is the second part of this. Because within that part of the portfolio, we also are distributing through financial institutions. Those are growing single digit. So it's really important to the growth outside of travel that we're growing our direct piece at a higher clip. And so far, what we're seeing for performance, I would say that we are.

And there's been a lot made of kind of the competitive landscape on Corporate Payments. And obviously, there's lots of different flavors of corporate payments. But on the travel side and maybe on the nontravel side, like how do you think about the competitive environment? Who do you usually -- if you're winning business on the travel side, who are you taking that share from? And just there's been a lot of post-COVID concern about price competition. So just curious kind of what you're seeing there.

Yes. I would say maybe 8 years ago -- a long time ago, we looked at this part of the market and said, it's really important to be highly scalable. And we were very focused around the structure of this business, that it was largely a fixed cost structure. It was a negative of that during the pandemic, but it's largely been a very positive thing for us. And the reason why we did that is because you can see that there will be some pressure that will continue over time. And our job, again, is to make sure that we're moving enough volume through that you can see the benefit of that coming through from a profitability perspective. And so I'd say there is pressure and will continue to be in the way that we think about that in that segment of the business. At the same time, we have a highly scalable model, and sharing back over time with our partners and customers, I think, is actually fine from where we want to do from a long-term profitability perspective. Competitively, the place that we have really large moats around our cross-border capability. It's highly complex, and it's an area of expertise that we have that we feel very strongly about. We also feel very strongly about just the underlying technology capability that we have in that space and how we're competing from a tech to tech perspective with others in the space. We compete with financial institutions and banks and then smaller startups. And it's been an interesting rationalization period of time over the last year and so -- which is great. Because what we're finding is even more opportunity as a result of that. People do care that they're doing business with somebody who is going to last. And so we have the credibility of having been around for a long period of time. We have the technology capability of being able to compete with anybody. And we have a building sales strength in that part of our business.

Okay. Great. And we'll transition over to the Benefit segment, which I think you highlighted it at an investor event earlier this year. It's definitely getting more attention from investors, but probably not enough. So I think in the quarter, grew very nicely. But even excluding the kind of the interest income benefit there, still kind of in that targeted 15% to 20% range. How do we think about the building blocks of that, whether it's account growth? Just how should investors -- and we'll talk about this in a second, but just only a kind of a normalized basis, how should we get comfortable with that kind of 15% to 20%? What kind of account growth do you need just the building blocks to get there?

Yes. It's a great macro environment for that business, is really stable. And there's multiple sources of growth, which is part of what makes it really interesting. And the ability to -- you're adding it -- as we add accounts, those accounts are coming with assets associated with those. Those assets tend to build over time. And so you get an accretion from assets growing faster than the accounts. So you have account growth, assets are growing faster than accounts. Spend volume is typically growing faster than accounts because health care costs keep going up. . And we have such a wide distribution. We were able to get business from all parts in the marketplace through our partner channels where we're very focused on our underlying technology and product capabilities and how they can win in the space, to our direct market where we're going to the business directly or through brokers. And so that multichannel approach is part of how you can see us continue to build our accounts. Those accounts then -- one mechanism of our revenue growth, the second mechanism above that is account size growing. And then we have the ability to, as we move into next year, we're going to have some interest rate benefit that's going to continue.

Right. Yes, it's actually my next question, just going to the interest income side. If you think about -- I think you guys locked in decent chunk of deposits at 1% to 1.5%. And so even if rates stabilize or even go down a little bit, you guys should continue to have a tailwind from interest income for at least '24, maybe in the '25. So maybe talk a little bit about how your portfolio is kind of laddered and maybe when some of those big chunks kind of roll off.

Steve was dying for this question.

Yes. I mean, like you said, we started doing this just a little over 2 years ago and our first $1 billion we invested, and we thought we [indiscernible] at the time, but we got 1.5%, and it was great at the time, but obviously, market rates are much, much higher now. So that -- throughout the portfolio, including that first $1 billion, it's designed as a 4-year duration, which is about a 6-year weighted average maturity profile. So as those assets mature, that first $1 billion, obviously, no matter what happens to rates next year, they're probably not going below 1.5%. I'll go on a limb there. So we'll get some benefit from that. And we've still got about -- we've got about $3.8 billion in total deposits, but about $1.1 billion of it is off of our balance sheet. It's at third-party banks, some of which just floating, some of which is fixed, kind of half and half, call it a little bit more floating. But we also have the opportunity to bring that on balance sheet over time. If we think that's going to get us a better yield, then maybe not balance sheet.

You guys, suffice it to say, should be a tailwind for probably at least a couple more years.

Yes. And as Melissa said, the deposits tend to grow a little bit faster than the accounts too, because on average, as the accounts get older, the balances get a little bit bigger, too. So you get a total benefit there.

One of the benefits it's had for us is just the interest rate hedge across the organization. And so we were talking earlier about what a benefit that has been in this year, in particular, we had rising interest rates. And from a balance sheet optimization perspective, our treasury people spend a lot of time looking at those 2 things, the puts and takes. And we're actually in a really good spot right now. .

Okay. Great. And then moving over to margins. You guys have a $100 million cost cutting plan, $75 million exit rate this year. Maybe talk a little bit about where that's coming by segment or what portions of the organization that you're kind of rationalizing?

Yes. So we started this about 18 months ago, and really the focus was company's in a great spot, how can we make sure that we have the scalability to hit our next phase of growth? We think a lot about how we continue to make sure that we're growing the business. And kind of the byproduct of that has been cost savings. And so as we've gone across the organization, we've looked at where is there something that was done in either a process that's done many ways within the organization or done manually, and how can we automate that. So we've had an automation engine kind of working across the business, looking for opportunities. And it's like a series of small things that have accumulated to some really large savings. We've also been really focused on the risk functions. So we've done things like we've used artificial intelligence combined with our wonderful finance team here who have looked at micro segments of profitability. And so combined, our own internal intelligence with the underlying technology to be smarter about how we're actually decisioning, moving that information up into how we're marketing, making our fraud algorithms that much more intelligent. So using AI embedded in that, so that we're not denying credit, so we remove some of the false positives, is the place we continue to really be heavily focused. And so it's a combination of things that are on the risk side, automation tools across the enterprise. We're also really focused around our call centers, of where we can lift some of the calls that are happening within the call center into either self-service or more automation. And so all of those things are accumulating up. You asked where it gets reported. Corporate Payments segment is, talked about that being already largely automated. So we had already gone through and taken most of the opportunity out there. So think of that as going into the other 2 segments largely.

Okay. If you zoom out to think about normalized margin expansion, obviously, you guys guided to, call it, 10-ish percent revenue growth and 15% to 20% EPS growth. So as we have to take that rate benefit aside because that can go up and down, but obviously, it will be a benefit for the next couple of years. But how do you think about is this 50, 100 basis points, how do you guys think about, on the corporate level, kind of the natural operating leverage and how we should think about it as investors and the analysts who want to look at the business?

Yes. We spend a lot of time, we spend a lot of time on that, as you might imagine. So we're looking at is where is there natural drop-through, so want to make sure that that's happening. So you're getting the leverage as we bring on new customers. And then the places that we spend our management time around is how much should we invest internally in sales and marketing capability and how much should we be spending on our product and technology. And those are levers that we have around how much do we want to reinvest within the business. But underlying, as you said, we're -- our long-term guidance is 10% to 15% revenue growth, 15% to 20% earnings growth, is something that you're going to continue to have some margin expansion. And then a little bit of that will come from like share buyback or some of the work that we're doing with the cash that we throw off.

Melissa, that's a great segue to kind of the next topic and capital allocation. You just bought Payzer, the leverage, balance sheet is still relatively healthy, leverage well under 3x. How should we think about the leverage? With the stock trading where it is, I assume buybacks is probably a very high priority. But how do you think about capital allocation, balancing kind of continuing to invest in the business organically as well as doing M&A with buybacks, and just any thoughts there?

Yes. So as we have this privilege of throwing off a lot of cash, so start with that, right? So it's great. As we are going through our process, we look at how much do we invest internally. And then when we're looking at M&A, we look at product extensions, geographic extensions and scale plays. In the market that we're in right now, instead of scale plays, we've been deploying capital much more in share buyback. And to your point, we feel really bullish about our stock. We've been buying back stock throughout the course of this year. In this quarter alone, we bought back $150 million worth of stock. And so we're very bullish about the underlying stock. We also -- when we thought about the convert for us, that was another way of being bullish on the stock, is to actually buy out the convert. And so in the course of this year, share buybacks, the purchase of the converts have been really forefront in our mind. And then we had deployed capital also on M&A. And when we had increased the size of our share buyback, we had looked at the portfolio and said, we're throwing enough cash that we can do both. We can deploy money into M&A, but we also can deploy money to share buyback, and you've seen us do that.

Great. We have just a minute or 2 left here. Any questions in the audience? All right, Melissa, we talked a lot about the business margins, capital. What are the 1 or 2 things that you want investors to leave this conversation with? If you had to boil it down to 1 or 2 points when we think about WEX, how should we -- what do you want to take away here?

We have built an amazing commerce platform that we are exposing vertically to these different areas. And I -- we feel really bullish around our ability to grow in each of the verticals. I know there's been a lot of focus around Mobility within the last quarter. And we sit with -- feeling some of that is transient, and we have a huge opportunity ahead of us in that segment. So if is there anything else that we feel very strongly about the growth that we've had across the portfolio, but I would say we feel increasingly strongly about that 4% to 8% and how we can drive even oversized growth in the Mobility segment based on the activities we've taken in the course of this year.

Okay. Great. So I think we're to wrap it there. Thanks, Melissa, thanks, Steve.

Thanks, JD.