WEX Inc. (WEX) Earnings Call Transcript & Summary

Thanks, everyone, for joining us today, both in person and online. My name is Cris Kennedy. I'm the research analyst here at William Blair that covers the fintech and payments space. For a complete list of research disclosures and/or potential conflicts of interest, please visit the website at williamblair.com. Next up is WEX, from the company, we have the CEO, Melissa Smith; and Steve Elder from IR is in the audience today. WEX does a lot of things, but at the core, they provide tools that help simplify the business of running a business. WEX has been coming to this conference for well over a decade, so we appreciate their continued attendance. And with that, let me pass it over to Melissa.

Thank you. You actually stole some of the thunder. So our purpose, and this is -- our purpose both internally and externally is to simplify the business of running business. We think about this at the core of everything we do. We want to make sure that we're moving the toil that people have at running their companies, whether they're small or large and meeting them where they're at in their stage of growth. So the way that we do that, we're really looking at how we can strip out complexity. And if you think about the markets we're in, we're intentionally in markets that are quite complicated. We're looking at places that we can remove complexity, and there's 3 different ways that we're focused on that. The first is that we have a Global Commerce Platform. So we think a lot about the underlying technology and making sure that we're presenting the technology in a way that's easy for our customers to consume. It's important that it operates at scale because in each of the markets we're in, we're market leading, and so we need to be able to both scale and be reliable. And then on top of that, we want to make sure that the solutions that we're offering are personalized that our customers are able to engage with us in an easy way so that they're seamlessly embedded and again, like those ways are going to be very different if you're a very small company, or if you're a really large company. So you may want to connect with us through an API. You may actually want us to hardwire into your code base, depending on what you have for underlying technology capability, but we are developing products that work for our customers in any of those different environments. And then the last thing is this idea that Insights that Power Success, there is a thread across all of our products. And I'd say increasingly important to us is the underlying data and data set that we have. The data enables us to create products that are unique in the marketplace because of the number of customers that we're doing business with across the platform. And that allows our customers to make more intelligent choices. And so it's been a big focus of ours over time. I'd say even more so now in the environment where you can supercharge some of the tools that are accessing data. So the system that we have right now, when I talk about the Commerce Platform, we're exposing it in different ways to different customer segments. And across all of this, we go into the marketplace built directly with our own sales force and through partners. So we distribute through partner channels. Those partners are different across each of the different verticals that we're exposed to but we believe fundamentally that having more avenues of distribution into the marketplace is a positive for us. On the left-hand side of this, we're going to simplify employee benefits. So this idea is that we're creating products that remove some of the complexity of being an employee. So we're offering those both to partners who are in the marketplace either because they're interested in a deposit that's associated with the account or because they are a broker or they're an insurance provider or they're a payroll company, but there's many different ways that we go into this marketplace, but what we're at the end of the customer experience. We're trying to ensure that they are buying products that are allowed under tax law. And that is fulfilled in a way that creates a record-keeping capability for the partner or a customer and is done in a very seamless way for the end employee. On the streamlining and receiving payments, we're integrating it into our customers to enable a payment in a very scalable way. So in that case, think of could be an online travel agency that's receiving a payment from a consumer and making a payment to a hotel. We're doing that at scale across the business, and we're making sure that we're doing that in a way that, again, is removing rework, is a highly automated process that we have across our portfolio that requires very little human interaction. And then on managing fleets and mobility, we're working with our customers there to eliminate misuse. Primarily people are worried about paying for things that are not a corporate asset. We're providing tools and expertise to make sure that doesn't happen and that vehicle is able to be utilized it in a very efficient way. So those customers cared about convenience and control, whether that's with an ICE vehicle or with an EV vehicle. And then across all of that, we're looking again at how we can distribute in the marketplace that gives the most avenues that lead to WEX. I talked about our growth profile. In 2023, we had 8% revenue growth, 9% adjusted net income growth. We're proud of the numbers in 2023 in part because it showed the resilience of the model. I'll talk about our long-term growth targets. And then what I have really appreciated over the last few years is the fact that we've been able to grow in many different environments. And you think about in 2023, we had a freight recession happening across our customer base. We had fuel prices that were dropping, interest rates that were increasing. And at that same time, we were able to grow the business growing revenue 13% last year, when you strip out the impact of fuel prices and FX. If you go into the first quarter, again, I would say some of those same continued trends. Fuel prices were down, interest rates were up, and we're still in a freight recession. And again, we continue to grow the business. Excluding the impact of fuel prices and FX, we grew revenues 10% in the quarter. I actually like zooming back out and say if you look over a period of time, a long period of time in this case, our CAGR has been pretty remarkable. So they've seen some volatility that goes into a year, based on fuel prices. But if you look at the beginning and the end point, that's about the same fuel price in both cases. And so this is a true growth rate. So growing 14% in that period of time. Mobility growing 10%, Corporate Payments 12%. And then our Benefits business from the point we entered it has grown 24%. So we feel really good about the growth that we have posted and continue to post across the business. And the way that we're thinking about the business is making sure that we're gearing the business to continue to grow, that 10% to 15% is our long-term growth target. The other thing that's interesting if you look at this page is the different segments of the business. So our Mobility business is still the majority of the business, but over time, you see how the business has become quite diversified. So we've seen growth in our Benefits business as well as Corporate Payments. So those are leading into our long-term targets. So you can see where we've been. We've been very focused on continuing to deliver on our long-term growth targets. In the future, we want to continue to be focused on delivering on our long-term growth targets. So we've said, we want to grow the business, and these targets are excluding the impact of fuel prices and FX, when you grow the business 8% to 12% organically, total growth of 10% to 15%. So there is an implied 2% to 3% pickup from M&A activity. Because the business model is quite scalable and we've been continuing to be focused around where we can find areas that we can use technology to increase that scalability, we think that you should see an incremental drop through from an earnings perspective, and that gets us to 15% to 20% earnings growth. Then if you look at the individual segments, again, what I had talked about historically, we've grown our Mobility segment, 10%. We're saying 4% to 8% on a go-forward basis. We've been very focused on how we can continue to bring in incremental customers. So we did business now with 19 million commercial vehicles globally. And when we bring in new business, we're really focused on how we can continue to deliver in a much more digitally enhanced way now than what we would have done historically. More than 50% of our leads are coming through digitally and those leads are coming through into the business, and that's a very wonderful engine that we have, and we will continue to have. On top of that, we've been really focused around areas of growth where we can increase our TAM exposure. One of those areas for us is the ability to purchase more than fuel. And we have a product that we have in the marketplace right now where people can not just buy fuel, but they can actually buy ancillary products. So we've combined our internal closed-loop network with Mastercard's open-loop networks. So as cards are getting reissued, they're getting reissued with the capability to pay per parking and to pay per tools. And for pay for all those vehicle-related services, there are customers that have said they actually would like to buy. On top of that, we have a beta product in the marketplace that allows our over-the-road customers to have access to our discount network. And so we're looking at areas like that where we can bring in a whole new source of customer base and expose it to a new set of products that increases our TAM. So we feel really good about our long-term growth prospects in our Mobility segment and the fact that we actually were looking at areas that we can increase that profile. In the Corporate Payments segment, if you look back, we've grown 12% historically. Again, we've got a tremendous platform here. When we go into the marketplace and we talk about our capabilities and our embedded payments products, it is a very strong product offering. And it is a product that works in a way that when we find new spend volume and move it through our base of business, that drops through very heavily from a profitability perspective. There's very little human touch involved in those transactions that investments are more on the technology side. So what we're looking at with this part of the business is continuing to find new sources of spend volume and pushing that through the business the way that we have looked at historically, both in travel and then outside of travel. And then we've been ramping sales force that's been selling a direct product as well. Those things are going to lead us to the 10% to 15% long-term growth targets that we have. In our Benefits business, you've got some tremendous macro that sits behind that business. Those things include the fact that health care costs keep going up to have an embedded positive inflation item that comes through. Account growth continues to be strong. And those account growths are coming from the market itself as you've seen this continued market movement to consumer-directed health care accounts. And as you get that shift to consumer-directed health care accounts, you've seen the portfolio grow. So account growth is another avenue for us. We also have incremental products that are cross-selling into this customer base, [our ] capability, benefit administration capability, compliance capability and the accounts themselves grow over time. So as a customer comes in, there's an account typically associated with any up growth with that. And so those things lead to the 15% to 20% long-term growth target. So again, we feel good about our growth prospects across all aspects of our business and are really focused on how we can continue to deliver the incremental volumes that we have historically and then look for new areas to spend across the business. So why we succeed? This is something that when we think about the things that are important to us, we've potentially identified markets that are large and growing and we are the market leader. So we've been focused around how we deliver products in the marketplace that are compelling for our customers. And if you kind of run across the business, we do business with 9 of the 10 largest oil companies in the world in our Mobility segment. We do business with 8 of the 10 largest online travel agencies in our Travel business. And we do business with over 50% of the Fortune 1000 across our Benefit products. So we've got really great customers across all, but we also do business with some of the smallest companies in the world, too. That's important to us as we continue to grow is that we have this great growth engine that sits across our products, which has allowed us to grow in pretty much any environment. Again, the fact that we're a leader is important to us, and it's an area that we'll continue to invest in our existing capabilities. The reoccurring revenue, so if you look across our product set, people are using our products on a reoccurring basis. So what that means is that if you're a -- if your company happens to have a vehicle, as an example, and you're using our products, you're typically using it 7 times a month. It's a pretty predictable methodology of how we're seeing incremental revenue come through. In our Benefits business, we're seeing SaaS fees associated with that, which, again, is a very predictable model. In our Corporate Payments business, this is coming from a consistent transaction volume base. And so across the business, we have a very strong revenue recognition model, but the fact that it's reoccurring is a benefit, obviously, to us from a predictability standpoint. All of these things create a great network effect. So as we are continuing to accrete [benefit] from any of our different offerings, it's enabled us to continue to invest. And that has created some wonderful network effect, both in terms of cost profitability, but also in terms of innovation. What we're able to do is we're taking our data and exposing it to AI, is enabling us the cost savings, I'm going to talk a lot about that. We've identified $100 million worth of run rate savings we expect to have by the end of this year. That's part of that network effect. This is being able to deploy, look for areas of savings or product capability and continue to invest. And that's all brought to light to the people. Whenever I talk to a customer anywhere in the world, the first thing they'll talk about is the person that they are working with. And so people do business with other people, and we think that that's an important part of our product as well.

We do have some time for Q&A. Maybe Melissa, I'll just start out one of the bigger announcements on the first quarter earnings call was the Booking.com contract. You've given a little bit more clarity of it, but can you just clarify what the expectation is for the impact to revenue growth as we look out into the next year?

Yes, love to. So just to kind of back up a bit. So in our Corporate Payments business, we have 2 products. We have an AP direct product, and we have an embedded payments product. That embedded payments product is what our Travel customers use. So when you were booking a hotel room, you're going to pay the online travel agency with your consumer card, but we're making a payment on their behalf to all the hotels around the world. It's very global product used in over 200 countries. Our competitive advantage is that the product we have issuing and settlement capability across more than 20 different currencies. We have the ability to actually handle a huge volume activity, including significant charge back activities. We have been working with Booking for a long time because we've been at this great relationship with Booking. We just had a contract renewal with them. We talked about this, and we wouldn't actually normally talk about this just because the way that the contract we've renegotiated is different than what we've had in the past. Historically, whenever they've had a virtual card being used across their portfolio, it's been us. In this new environment, that's still true. So they're still using our technology across their portfolio where they're making -- using a virtual card to make a payment on their behalf. What they've decided to do is in-source some of the services. They are very unique and the fact that they own a bank, they have also some -- compliance structures have been set up globally. We have this global compliance structure. And so we work with them to find this place where they'll continue to use our technology, but they're going to in-source some of the services and so what we talked about, if you look back over time, last year, I think that combined Expedia and Booking were 20% of the segment revenue. So it's like -- so [indiscernible] continued. This is a very unique thing that we're doing with Booking and we've said that in our guide, we provided a framework that we think how they're going to adopt, but it was an estimate. So we think that they're going to go in-source gradually through the third quarter, we're fully in the fourth quarter with our guide expectation and that we would see an incremental 1% headwind to our total revenue as a company next year. So it has an impact, just want to make sure we're talking about that. Note, at the same time, a very unique customer, and we feel really good about the relationship that we've built with them and the fact that we're looking at other pools of spend volume that we collectively can move into this program, which I think is going to create long-term opportunity for us.

Just a follow-up on that last point. There's new opportunities that you have with them? Is it geographies, other spend categories. Just talk a little bit about that and kind of what the road map is.

Yes. And actually, like if you zoom back out into the travel space, travel is going to continue to grow. So like we feel good about the -- like just the market growth from a travel perspective. Specifically in some of the areas in travel that we see opportunities still are like we do business with 8 of the 10 large online travel agents in the world. So looking at areas of spend where we're not in right now, which include certain geographies that we're not in right now, which our customers would like us to be in. So we've been working on acceptance in those locations. They also have been interested in -- there has been this migration industry-wide, particularly the European-based online travel agencies to the merchant model, which means that a consumer is paying the online travel agency instead of paying the hotel directly, which introduces our product, which creates an opportunity. So we've been working collectively at where we can actually also increase penetration of their total spend volume, but look for areas that we're just not in at all right now. And so we continue to be very bullish about this relationship long term.

Feel free to ask questions from the audience. Just if you can talk a little bit more about your initiatives to broaden the acceptance network and to expand mobility beyond fuel and what that means to your business?

Yes. So the work they're doing, we aren't developing new products, we're looking at what's really important to our customers, what problems can we solve for our customers. This one was like a nearer-term one is where our customers said to us, we'd actually like you. We would like to do business with you. We would like to be able to buy more with you. And so we have worked with them to identify very specific product codes that they want to open up. So what they've told us is we don't want to be able to buy everything. It's actually we would prefer not either because it becomes more of a general purpose credit card, that there are certain categories that they would like to, hence we have taken our network, combined it with Mastercard's network when cards are -- as people go through the renewal process, the cards will get replaced in the U.S. with this new card. And even though we have a mobile app that people can use to pay for their services, most of the people still are using Plastiq. And with that, it then allows people to do is then go into those different categories and purchase things in a way that they haven't historically. So we feel like it's an easy way of meeting just an untapped market need that we have with those customers. And so really, the big drivers are -- you have to go through a card reissuance cycles in order to get adoption and education with our customers that they have the capability to do it. Yes, I feel so much better sitting here today than I probably would have been sitting here 10 years, like a couple of years ago. And I feel better because we have products in the marketplace, we have pricing in the marketplace, we have a lot more visibility into what people need and what they're willing to pay for. So the initial set of products that we've been highly focused on with our customers has been this idea that what they want to be able to do is integrate their ICE vehicles because if you think about this, people are migrating parts of their portfolio. They're not making this like rapid change. And so they want to be able to integrate their ICE vehicle data and information and their EV charging information in 1 set of data and 1 bill, and so we've been really focused on those products. So we created an acceptance network in the U.S., and we've got an acceptance network in Europe. People pay a subscription fee to get access to that network. So that was the first product we put into the marketplace, and people are paying like what we thought we'd do. Right now, on average, we earn between $5 and $20 per vehicle and the average of that is $6. We have said going forward, these new products, we think will be in a similar range. And already, we're in that range with that limited products that we have in the marketplace now. The second product we rolled out was at-home reimbursement capability. So we have a product in the U.S. that allows, if someone who is charging at home, their employee can get reimbursed into their personal account for that. And again, the data, which is really important to our customers, they can integrate the data back into their other vehicles so they can track the total cost of ownership of that vehicle. And so the last part will be depot charging that will roll into the marketplace this year, which will then -- like if you think about that, that's all of the places that people can be using their EVs and they already have the ability to do that with ICE integrated together. And then behind that, we have a product road map of a large number of things that we see as opportunities in the space that we think that we can actually continue to monetize on. So what we're hearing from our customers and adoption for us, like I would say, we haven't seen a huge change in adoption trends. It wasn't in our space going really high, and it has -- it's still at a very small rate. Generally, it's government fleets. We do business with the federal government. We do business with over half of the state fleets. Those are early adopters and some of the largest fleets that have sustainability commitments that kind of on the early edge. And then there's a lot of toe-dipping where people are trying a product like ones and twosies and they're just experimenting. That's what we're seeing right now. So we feel, I would say, very good about where we sit competitively, the products we have in the marketplace, the fact that we're earning what we thought we would earn in this space, and we've got great albeit small but really great data to support them. Yes. Yes. And think about like everything that we're doing, it's going to be an incremental subscription fee associated with that. And we see a lot of opportunity around affecting things like we do with an ICE vehicle. We're helping our customers look for lower cost areas to actually fuel routing information. So there's a lot when you get into EV vehicles that where the time of day you charge where you charge as a huge variability in cost. And so we think that there are a lot of problems that we can help solve for our customers over time. Right now, they're just focused on acceptance and just convenience and control with the existing offerings. And I think the next wave of things will be much more about efficiency.

You spent a little bit of time on M&A, what your strategy is? Talk a little bit more about Payzer which you acquired last year and the opportunity.

Yes. So we've got 2% to 3% in our long-term framework for M&A. We've historically been very active in the space. We feel good about the acquisitions that we've done over the last few years. We've been more geared [indiscernible] think about us historically, we've done scale acquisitions and [indiscernible] kind of acquisitions, which were things that we've looked at instead of building a product where we purchased product capability. And this market, we've been at a [bias] to a share buyback. And so we've been much more active from a share buyback perspective. And so we have a bias right now towards that. We are still going through the process of testing the thesis of Payzer which we're excited about. So when we think about the places that we're making investments, both organically and inorganically, we've been really focused around continuing to move up into that software layer. So we're more involved with all of the operations of our customers and we're doing that as we build new products and move into the marketplace. Payzer is interesting for us because you kind of jump up a couple of [starts] into that software layer. And so what we wanted to prove out in this thesis was can -- do we have a right to cross-sell into our existing customers. We have 25,000 that sit kind of that direct space of where Payzer plays, which is field service management and where we can actually provide all of the integrated software tools that help them simplify the business of running their business. So I'd say we're still really early in this process. We have had success of taking our existing customer base, giving it to Payzer, letting that team run and close on those. So we're still building our own capability of doing the reverse of where we're cross-selling that capability into -- with our sales force, but we're learning every week. We're getting better at that, and we feel good about the fact we're growing the assets. And so what is interesting for us is that we felt that Payzer is a good size that we can test this thesis. And depending on how that goes, we could choose to either build more capability on that or do other M&A like that. And again, we're still in that evaluative stage right now.

Thank you for that. It looks like we are just about out of time. So I want to thank everyone for coming. Thank you, Melissa.