WEX Inc. (WEX) Earnings Call Transcript & Summary

So welcome to Citi's 14th Annual FinTech Conference. My name is Aditi Balachandran and I'm with Citi Research, and I have the pleasure to introduce Melissa Smith, Chair and CEO of WEX. Welcome, Melissa, and thank you so much for coming. I think just before we get started, can you just give us a little background information about WEX and just introduction toyourself?

Sure. I'd love to. So WEX has been around 40 years and we are very focused. Our purpose is to simplify the business of running a business. When we think about our business, we're really at the intersection of payment intelligence and workflow optimization. We do that across a number of different industries. And when we think about our platforms are there to reduce a lot of the friction that our customers experience in their day-to-day work lives and we have over 600,000 customers across the world.

Amazing. Perfect starting. So before we dive into SMB Mobility, there's been overall segment headwinds from a same-store perspective. Firstly, with the challenged backdrop, related to volatility in the freight arena. And more recently, we're seeing some macro-related headwinds in WEX's local fleet business. So from your perspective, what's WEX's expectation on the glide path for these 2 areas, and we believe we've hit a trough?

Yes. So about 50% of our revenue is in this mobility arena. If you look at CrossRoads business, the over-the-road customers, which is about 1/3 of the portfolio, had been in this rolling recession for actually quite a while now for a couple of years. And you can see that reflected in the cash index and in pretty much any of the freight indexes. And so we have seen headwinds in terms of macro for a bit of time. The way that we think about this is we're really focused on the things that we can control. So we're focused on sales, some new sales that we're bringing in, which we are having a really great year and then customer retention. You asked about some of the trends we're seeing. Over the last month, we've seen more stability in that last quarter. So when we reported Q3, we reported the fact that same-store sales were down, but they were down pretty consistently with what was in Q2. So I believe that if a quarter makes pattern, they were seeing more stability in that. We're very confident in the medium term. We're very confident in the actions we're taking and it really just in our past, what we've been focused on is if we continue to retain customers and we focused on bringing in new accounts, and these things are cycles that we just have to transition through.

Yes. So I guess can you talk about some more of the success that we're seeing on the go-to-market side and perhaps how some of the new products are resonating in that category.

Yes, love to. One of the places that we're seeing really great momentum and really excited about is in the small business arena. We've seen 12% or accounts coming in year-to-date in that small. And if you look at the mobility marketplace, a disproportionate number of customers sit in that small arena and think of that as fleets that have less than 25 vehicles. So we're really excited the momentum we have there. We think it's a flywheel. We perfected the marketing that we're seeing. Those customers are on board. At the same time, we've seen really good momentum in the large end of the marketplace as well. We continue to have a really strong sales year, bringing in new accounts and larger size, and we're really excited about the win of BP, which will be rolling into our portfolio next year. So really strong momentum across each of these things. Also, one of the things that we're really focused on is how we can expand our reach and some of the areas where we've added new product into the mix or our 10-4 product, which is geared towards owner operators of over-the-road vehicles. There's about 500,000 of them out there. We have a product that allows them to get access to our network, and they can purchase fuel at a much lower rate than they could on their own. So they're saving on average about $300 a month, which is wonderful and also a customer base that's still -- so new sales are going strong. We're seeing some nice product extension capabilities and all of that, we feel like it's a pretty strong flywheel.

Yes, the trends are just really improving. So I guess, how should investors, I guess, frame that improving performance? And is it just really a function of WEX having more control in driving SMB growth versus the local fleet go-to-market, which is hardly move the needle?

Yes. The way that we think about this is we are very focused around the levers that we can control. So that's new sales. And for us, new sales motions are really very specific based on the segment of the marketplace. Going after the small business market has been very much market digitally driven. And so we've done a lot of work around perfecting that motion. We see -- when we actually spend the $1 in that arena, we get $4 worth of revenue in 24 months. And so really, really strong returns. And so we've been really focused around how we can continue to refine that motion. It's a large part of the marketplace and having a lot of success there. When you get into the mid- and larger customers and those are more feet on the street, people that were actually making contact with customers bringing them in and part digitally, but much more human involved in that motion. And so when we look across the enterprise, we're really focused around each of those things and at the same time, making sure we are retaining customer relationships. The macro element of the business is something that we say, okay, we're reporting on it. We're going to tell you what's happening with that part of the business. That's going to move over time, but we're highly focused around the things that we can affect. And that you can control.

Yes, exactly. Perfect. So I wanted to switch gears a little to corporate payments. The segment is nearly upon lapping Booking.com transaction transition, which resulted in a decline of 2% approximately of high-margin revenue. So first, can you discuss some of the underlying trends that you're seeing in the travel payments business outside of the transition portion? And I guess, how should investors think about forward growth here after lapping some of the tougher comps?

Yes. So just to reiterate, it's really good to have this behind us. So largely completed the lapping in Q3 of this year of that large online travel customer. If you look at the performance outside of that, you talked about the 2% negative, that's 2% of the company, right? So it's been pretty meaningful. And if you exclude that, you've seen really good growth within our travel customer base. So now that we've gone through that lapping period, we feel pretty excited about the future. And what we're focused on, specifically in travel, we're really focused on how we continue to integrate heavily within those customers. So think of this as these products are very automated. And so if they're highly integrated in their customer systems, there's an API call that's happening. It's facilitating a payment. It's happening in a really seamless way. But that's been facilitated by all the work we've done in creating the technology, the global compliance structure. And now we're focused on how we can continue to integrate in those customers, add in new sources of spend volume for those customers. And for us, those are extension into other forms of payment like airfare and car rental extension into geos that we're not in right now. And so there are markets that we've been working with online travel agencies to extend our compliance capabilities so that we have a product in all of the geographies that they want to span.

Got it. And was there some of those geographies that you can -- if you can talk about that?

Yes. Like an example is Brazil. And so it's a marketplace. And if -- so with the online travel agencies, we're facilitating largely hotel payments, but other sources of payments on their behalf. And because their models are so global in nature that they are very keen on us being in every market they're in. We have really strong global capabilities, but there are some markets that we need to set up the compliance infrastructure in order to actually meet their needs. Once we do, there's -- their volume is there, we just actually need system. And so we've been working with them to prioritize what are the highest and most important markets and then adding those in.

Got it. And how should investors and how should we think about revenue retention and pricing trends in the travel payments going forward?

Yes. So I'm going to exclude what happened with this large travel agent, I'm just going to say that, that's a bit of an anomaly. If you look at our customer base, we have incredibly high revenue retention across the customers. We tend to have particularly in spend volume where there's a lot of complication, which is a lot of the global spend volume, a really high customer retention rates. And across actually all of corporate payments really focused around how can we continue to build on that. You're going to see some mix in terms of what happens in rate. We tend to be a little bit less rate focused because it's such a scalable part of our model that what we are trying to do is drive long-term profitable growth. And because it's such a highly automated product, because we have largely the compliance structure set in place, our objective function is to move more spend volume into the product. And you're going to see mix can affect the rate when we go up to large customer renewals that can affect the rate. And at the same time, you see a very highly profitable new source of revenue as we add more spend volume.

Got it. So the direction of virtual card unit economics remains also an important topic that we've discussed. So we're going to get into the nontravel payment side of the segment shortly. So just curious to hear what your longer-term view on the direction of travel payment unit economics are. And what are some of the levers that WEX can toggle to improve unit economics in the travel payments business?

Yes. So unit economics in the travel business is a very high incremental drop-through rate. So again, when we think about the unit economics here, what we're focused on is are we going to be able to continue to add new volume into the base. We do business with 8 of the 10 largest online travel agencies in the world. And continuing to add more volume in drives huge incremental margin. And so that's, I would say, the biggest focus for us. We've actually seen pretty good rate stability though in the course of this year. And I think that is -- you've seen this one customer migration that's happened in the course of the year. But within the rest of the base, some of that's mix depending on what size customer is spending, you're going to see a little bit of a mix difference in terms of the blended rate. But overall, we've seen some pretty good rate stability. And so when we think about this going forward, the machine in our mind is adding more incremental volume, do that and have that drop through at a very high incremental rate. We'll see some rate degradation that will happen over time. And we're okay with that because we think that at the end, you're seeing really high incremental margins.

Got it. So now to as promised, the nontravel payment side. So that makes up 40% to 50% of the business. So can you discuss some of WEX's initiatives here and particularly focused on the partnership side.

So I'm really excited about this part of the business for many reasons. But one of them is that it continues to diversify what we have in our corporate payments business. So as we continue to add outside of travel, it actually reduces the exposure we have to travel itself. And so really excited about that. The 2 places that we've been really focused on, first has been extending the product that we have in travel outside of travel. So there is an embedded payments product. We did work around creating very flexible funding model so that when customers come on, they can minimize the amount of credit exposure they have to us, but also cash that they have tied up that product is selling really well in the market. It's a U.S.-based product. We have had really strong sales. We're in this implementation phase right now. And what I like about that is you actually see new look glide path into 2026 because we have customers signed and now we're just in the implementation phase. And so that is continuing to show growth. The second part for us has been an AP direct product that we have. It's about 20% of the Total segment that we grew spend volume last quarter, 20%. This is something we started maybe 3 years ago, and it has continued to perform really well. We ramped more salespeople into it this year. We're seeing really strong return associated with that. And so over time, what you will see is that we're seeing higher growth in those 2 parts of the business. There's a little bit of legacy volume that sits there. So think of products that we sold into our mobility customers that are growing much slower. But as these newer parts of the business become bigger and bigger, you are going to start to see the whole, the whole segment up. So what we'd like about this is just creating greater diversification in the customer base. It's also going to continue to grow and evolve that segment up in terms of revenue growth. And so far, the investments we're making, both in terms of new product and in terms of salespeople are playing out really, really quite well, we're excited about that.

That's really great to hear. Super excited to see that going forward as well. So again, switching gears. So WEX's benefits business continues to enjoy solid positioning amongst admits the secular tailwinds from rising health care costs and also for more people opting for the high deductible coverage complemented by HSAs. So how does WEX think about the secular runway from here?

Yes. So there's some really great tailwinds in this business. There continues to be this move to consumer-directed health care. So HSA accounts are still growing 5-ish itself. And we do that through just strong sales motions that we have out in the marketplace. In addition to that, we've got -- we became a custodian, again, probably 3 or 4 years ago. And that added a new source of revenue for us, highly profitable. We've been able to add that in. And so when you look at this part of the market, you've got really great macro tailwinds associated with that. Our products continue to resonate really well in this marketplace. And the biggest differentiator that we have here is the idea that you can have multi accounts that sit on one technology stack. So if you're an employer like we are that has both traditional health care plans and a high deductible plan. So you have both HSA and FSA accounts, you can actually have all of that sitting together. If you have COBRA capability, if you have a benefit administration need, we can meet all of those needs. And so think of that as kind of a one-stop for our customers. We also go into the marketplace both directly and with partners. And so distribution channels come from either our partner relationships or our salespeople that are going to the marketplace directly. And so we look at this part of the business, it is a really great, reliable grower for us.

Yes. And then I think going along with that, so are there -- so 7 of the 10 HSA providers rely on WEX's tech solutions. So do you think there's some market share opportunities outside of the top 10? How are you thinking about that to drive growth.

Yes. So we love being in the partnership business. We do it across everything that we do at WEX. So in that case, as you said, we are the technology provider. So they're in the marketplace selling. We're providing the technology that they're selling. It's great because we actually get growth with those partners. So as they grow, we grow with them, and that's an important relationship. And then we have salespeople that are out in the marketplace bringing in customers directly to us. And so when you think about growth, typically, we're growing faster with that direct channel because we have more control over it. But we value all of the relationships that we have because I think all of them are an important part of the growth that we have as a company, and it gives us more paths to WEX. Frankly, if you think about what we do across the company, we have multi-version, multichannel distribution, and we do that because it gives more ways for people to come into the company. And it's a very scalable model.

Yes. So I know you mentioned the custodial business. So I want to dive a little more into that. It continues to be a strong contributor for WEX, where you've also been active on the M&A front there. So can you discuss WEX's strategy towards growing the custodian asset growth?

Yes. Yes. Well, when we started in the business, we acquired an asset in 2014, I think it was quite a long time ago, but that's when we actually started in the benefits business, and we bought a company called Evolution1, relatively small company, but that was the foundation of what we -- when we started in this space. And then as we built this over time, we went into the direct channel through an acquisition as well. And then on our own, not through an acquisition, became the custodian. And as we became a custodian, what it enabled us to do was just reap much better economics than what we were doing through a third-party relationship. It's really important because it allows us to leverage our bank. And so when we established the bank, it was for the purpose of financing for our mobility business. Largely, it was easier compliance structure, but also really great way to low-cost finance the needs that we had in the mobility business. We're leveraging that bank also in the benefits business, which gives us premium economics. And so when we became a custodian, it allowed us to accrete more economics in part because of our bank. And so as we think about this business, when we bring on a customer, if they're coming through a partner channel, often it's a SaaS fee. And so they're keeping the custodian revenue often but not always because often they're a bank themselves. If they are coming in directly to us, then we are typically the custodian as well. And so just another source of revenue, highly profitable revenue. And so when we look at this business, we went back to our customers and migrated them into our custodian accounts. So we saw this big pop in growth associated with that. Now as customers come on, it kind of naturally goes to either us as the custodian or if they're a partner to a third-party bank. And the net of all that is quite profitable.

Got it. And how are you thinking about M&A in the future? Is that something that you're thinking about?

Yes, it's a really great question. When we have looked at M&A, historically, we had done quite a bit of M&A. Over the last couple of years, we've been much more geared towards moving money into share buyback. When we think about capital allocation, first, what we think about is how much should we be investing internally. And I would say like that -- we've seen some really great returns in investing in sales and marketing and product first order. Second order for us is kind of -- think of the North Star as what is the highest risk-adjusted return for us. And in some periods of time, that has been M&A. In some period of time, that has been share buyback. Right now, when we think about our leverage, we generate about 80% to 90% of our adjusted net income drops through to cash flow. So this company throws up for a tremendous amount of cash. We've used that to buy back stock. We're about 3.25x levered right now.

Your target is 2.5x.

2.5x, right. Yes. So we're -- in the moment we're in, where our first order has been pay down debt. And then second order has been internal investment. And then third order for us has been let's look at what's going to have the highest risk-adjusted return as that share buyback...

Okay. Got it. And if you are -- what types of companies are you looking at?

So historically, the places we've looked has been either a scale play. So something that we think is just going to have high accretion rates because you're going to bring it in absorb it and have significant synergies associated with that. We've also looked at product extension. So things we would either buy or build, we can look at buying. We've had more of an emphasis on building, I would say, over the last few years, but that is an area of investment. And then for us, geographic expansion. So areas that we felt like it would be easier to extend our reach through a purchase than those have been places we've looked. And that we've had more of a bias between our benefits business and corporate payments in terms of what you think of those segments.

And I -- what about the geographic expansion, I know you mentioned like the compliance surrounding it. Just talk us through how that works and everything. I know it's probably tough?

It's actually -- when we think about one of the core value differentiations that we offer to our customers, compliance actually is a really pretty big deal. Any segment you're in, you care a lot about that. But when we started our Corporate Payments business, -- we -- our customers were global. And so we very quickly marched around the world. And when you're an issuer in other countries, you have to be recognized by the Central Bank in that country. And so if you look across the world, we have a pretty intricate set of regulatory entities that have been set up to meet our customers' needs. right? Yes. And so it also has allowed us to move money cross-border for our OTA customers in a way that's very affordable for them. And so when we talk about being really good at the very complex transactions, it's a combination of the global scale that we have. Within our virtual card engine, we have hundreds of products. So think of -- if you're sitting in some country, you might pick a certain Mastercard or Visa product that you want to use within that country. And that will help maximize whatever your use case is. And so a combination of the product capability that we have, the compliance structure we have and the stability that we have has enabled us to really leverage this with our global accounts and now extend that capability into areas outside of travel.

Got it. That's really great. So there's been some outside pressure calling for WEX to consider splitting the business from core WEX and this is in relation to the health benefits. We got a track there -- but management and Board have come to the conclusion that it's better to be together. So can you elaborate more on this rationale and how WEX Bank is a key factor in this decision?

Sure. Yes, happy to. So each year on the things the Board has done is look at business configuration. This year, we went deeper. And so this year, we brought in 2 independent investment banks running -- sorry to say this -- and they went actually really quite deep and looked at a number of different combinations -- to the company. We started with no sacred cows. And they came back and said, the company is better together. If you look across the business, we are leveraging the same technology infrastructure. The bank is a huge part because there's an advantage of using the bank across every part of the business, the global compliance structure, fraud, all the various kind of back-end systems. We're also cross-selling across the portfolio, surprisingly more between benefits and mobility than you might think.

Okay. Interesting.

And as well as we've been on this multiyear journey to continue to streamline our technology with a focus on looking across the enterprise and saying, where do you have like-for-like and creating best-in-class systems. And each year that we do that, it further integrates the systems together.

Okay. Can you talk more about those cross-sell opportunities that you mentioned a little bit? Really curious to hear more.

Yes. The cross-sell opportunity, happy to. Actually, like one of the -- when we first started, there was a cross-sell between a mobility customer and corporate payments. I think of that as kind of like your original sell. Over time, what we found across the enterprise, our COBRA capability, is something that we are selling often into our mobility customers as well as we talked about our field risk management systems. That's something that we're cross-selling into our mobility customer, which is actually kind of amazing because you have -- I would say this took us a little bit a while to get it right. But it's 10x the revenue per customer that you get with a mobility customer itself. So it's like a meaningful upsell capability for us. And so if you look across the enterprise, what we're focused around is where are there use cases that are helpful to that end customer and exposing those to the customer. And so they're happening kind of like all across the business.

Got it. How does your partnership pipeline look for each of the segments?

Yes. So sales pipelines this year have been really very strong, both in terms of partner and in terms of direct. So I can walk through each of those. Mobility for us -- so mobility, we sell on behalf of now 10 of the largest oil companies in the world with BP coming on. That's something that when customers come to us, they come to us because we have an ability to sell better than they're going to be able to sell their products because we have marketing expertise. We can look at what's unique to that customer that's going to resonate in the marketplace. And so that's why they come to us that those continue to -- and I would say across both OTR and our North American mobility business, we've been strong sales as well on the direct side. Corporate Payments is more -- it is more direct. Where we have a partner channel, I would say that, that is when I talk about the things that are bringing down some of the growth rate in our Corporate Payments segment that's one of the places like you're selling around it and much more effectively on the direct side, which is where you see that 20% spend volume increase. On benefits, we are in the heart of open enrollment. Things are going very well in open enrollment, both in terms of service, but also in terms of sales. It's still early. But so far, what we're seeing coming in the partner channels is what we would have expected coming through those partners. And we've had a strong sales year in terms of our direct business. And so when I think about one of the things that I feel has gone particularly well for us this year, we've had really strong sales.

Awesome. I think that's it. I think would you like to just give like a little BP explanation of I know it's really exciting.

So one of the things we do in our mobility business is we will go out and operate on a white label basis for other -- for oil companies. We do it for -- think of all the top 9 now oil companies. The one that we were missing was BP. BP is going to be onboarding next year. That's where in the marketplace at the end of this year selling. But then we will move the portfolio over [indiscernible] next year. It's going to add between 0.5 and 1 point of growth in the 12 months following the conversion. So very excited about that.

Congrats for that. I think with that, I think we're good for the session. Thank you so much, is for joining us and enjoy the rest of the conference.

Thanks a lot.