WEX Inc. (WEX) Earnings Call Transcript & Summary

Yes. So for the benefits of folks that don't know the the 1 beautiful beautiful Bill act, expanded eligibility for HSA for certain kind of retiree oriented accounts. And so that essentially expands our total addressable market for HSA accounts, which is a big component of our benefits business. because those are largely individual accounts, those are not accounts that we would sell directly through our direct sales force, right? Our direct sales force is targeted at larger like employers and the like. They're not going after individual customers. So where we expect that to happen is our partner channel, and that is 1 of the beauties of our business model of having both a strong partner channel and a strong direct channel with that market expansion. We expect that to happen out of our partner channel. And our partners are addressing it. They're kind of varying stages of where they are with the incremental accounts that come forward. I think what you'll see is you'll see that translate into SaaS account growth, over time as individual partners is going to address the market opportunity

Yes. But the takeaway is it's TAM expansionary, but it's time, right? It will be through the partner channel. Very interesting. Yes. Maybe last one, specifically on benefits. We get asked a lot about the strategic rationale between -- before having Wexbank as part of the overall portfolio at WEX. So there are a ton of benefits spent time talking about this on earnings calls other public forums. So it's lower funding costs, economics with regards to the HSA business, regulatory capabilities, et cetera. But maybe for investors that may not fully appreciate the value of having Wex bank within the family of asset? Can you walk through advantages it provides you both in the Benefits business and maybe other areas of WEX as a whole and why that would be difficult for others to replicate.

Sure. So Wex bank for those who don't know, it's a Utah-based industrial bank. It's got a Utah charter, but it's governed regulated by the FDIC as well. And as you mentioned, Nate, there's quite a number of benefits that come with owning the bank. So if you look across our lines of business, 1 that you mentioned was the funding cost, right? We fund the bank through a combination of broker deposits, federal home loan bank funding, et cetera. These are significantly lower cost of funding sources than things like securitization or using our credit lines or things like that. So the bank gives us a distinct competitive advantage from a funding standpoint that we're able to pass along either into profitability of the company or into pricing for customers, right? So there's a competitive advantage -- for the benefits business, the bank is also -- we are the nonbank custodian for the deposits that people leave in their HSA accounts, which we utilize the bank or employ come off of. And we know that if we place those deposits with a third-party bank versus place it with Wexbank, there's a 50 to 100 basis point difference in a [indiscernible] because basically, you're cutting out the middle math, right? So that is, again, a distinct competitive advantage that's the bank is. But outside of the financial advantages, I think there's other advantages that sometimes folks don't fully understand -- so WEX Bank brings a regulatory and compliance infrastructure because it's a regulated entity. That's important for us in delivering our business is important for our customers. So that infrastructure comes with a bank, and it's important. And then the other really important piece of the bank is we are both the issuer and the processor. When a customer wants to come to us to do a payment business, whether it's travel or something else, right? We are -- embedded payments is a great example of this. We are essentially the vendor that's on the hook for everything. right? If you were kind of 1 of our competitors, you'd essentially work with a third-party bank to deliver the business. And whenever you have multiple parties trying to deliver business to a customer, right? There is the -- when something goes wrong, how quickly does it get solved because there's multiple parties involved, where when it's WEX, we are the 1 accountable party. We're bringing all the pieces to the table, and we're working directly with the customer when there's a problem where they need a solution that we can help them solve, et cetera. And that's a distinct advantage the WEX Bank brings that you don't have your competitor working with a third-party bank

Yes, I think it's relatively easy to understand, yes, it helps with funding costs, you get a higher yield on the HSA deposits, but I do think it's underappreciated. there are ancillary benefits in corporate payments in mobility that helps having that. Exactly. Okay. So we -- it's a high-level VOX. We went through each of the segments. This is the Deutsche Bank Technology Conference, so you're not going to escape without some questions around AI. I think there's so much focus, at least within my coverage on like what AI is doing in terms of cost savings, right? I think 1 of the things that I've appreciated about the comments that you at WEX have made is there's a lot of focus on the product opportunity associated with AI. You've talked about claims AI, actionable insights and the list is much longer than that, but I'll just stop at those 2. So maybe you can talk about what you are seeing on the product development side. from AI, how you're incorporating it into the development of those products, how clients are seeing that in the delivery of those products and how you think that evolves for.

I think you brought up some great examples. So I think -- so we do believe we'll have significant cost savings options as well preface with that. But when we turn to the product side. One of the things that I think people don't fully appreciate is the amount of data that WEX has access to, right? If I just think across our segments in mobility, we know exactly how organizations use their vehicles. We know where drivers fill up. We know how much they fill up, we know where they drive. We have a lot of data on that, right? If I turn to the corporate payments segment. We know how consumers travel. We know where they travel. We know when they travel. We know how organizations spend their money. We know what they spend their money on. Same thing in benefits, right? We know how employees utilize their benefits, right? We know are they making optimal decisions or not, right? And so all that data can be utilized to create solutions for organizations or their employees or consumers to help them make better decisions, whether it's tools that provide insights to offer decisions or whether, ultimately, we get to the point where an agentic AI tool is actually implementing the decision for you. So I think some of the cases that you have just talked about are the early ways we're doing that, right? We've created Insights tool for our mobility segment to allow mobility customers greater insights utilizing this data. we're creating tools and mobilities in the benefit segment that allow an employee to better understand benefits utilization. What are the benefits that are offered by my employer, what specific situations around me as an employee and the data that we might have about some of your health circumstances and how should you utilize that to make a more informed benefits decision, claims AI is the other example that you talked about. So I think you're starting to see us utilizing this data to actually create the solutions that leverage AI that will be real value add that ultimately we'll charge for, right? We'll create value out of and earn additional revenue on. So I think we're in the beginning stages of this journey, but this is a pretty exciting journey for next few years.

Yes, for sure. And you preempted my next question on monetization, so I'll skip over. But now we're finding the product market fit. -- monetization comes once you found that product market that your clients are realizing the benefits from these products, et cetera. Maybe the other thing related to sort of AI and product development, I think you had talked about a 50% increase in product innovation velocity due to AI integration. Can you just expand on that a little more? Like, what does that mean like product innovation velocity? Is it internally you're creating to create 10 new products a year. Now you're creating 15 new products, again, just making the numbers up like. Is that what you're saying, what are the benefits you're seeing? Like are you able to roll products out faster to clients? Are you able to test things, get them into beta? Just more color on that would be helpful.

Yes. So product innovation philosophy is essentially measuring the amount of time it takes from I want to go something built -- go build something to -- it's in the hands of the customer, right. that length of time is essentially propitiationof local, right? And through the use of AI, we've been able to accelerate that. It's whether we used AI to better gather insights as we're going through a discovery phase product or a feature or a function, all the way through, we're building the product, and now we're using AI to accelerate our build capabilities. And so through the use of AI, we've been able to go faster. And I think you've actually seen that when you've looked at WEX, right, like headcount is down in 2026 from where it was in 2023, but yet, we are innovating at an accelerated pace. We've announced more products in the market. So you can actually see the impact of that coming through. which we're excited about. And we'll continue to enhance that over time, but we've clearly made progress over the last couple of years.

Yes. Super interesting stuff. So maybe we can bleed AI discussion into more kind of the long-term financial profile of the business. So I think you've talked about WEX being a structurally higher margin business over the long term than you are now. Part of that is AI, other parts of that or operating leverage automation, all the good stuff that we always talk about. So maybe you can talk about like how far we are into this journey between where you are now and where you think the company -- this structurally higher margin profile WEX is -- and like where we are in that journey? What else you need to do? Is this just something that will take time as you see the benefits of AI operating leverage? Or what steps do you need to take to accentuate that.

Yes. I think there's a few pieces -- so 1 start about -- let's start with where we are today, right? Like if I look at today, if I look at 2026, we've said we were going to improve operating margin by 75 basis points this year and over 100 basis points in the back half of the year is when you look over year-over-year, and we are on track to do that, right? And that's been the result of a number of investments that we've made over the last couple of years that we are continuing to focus on. One is product investments, right? We have a set of products that we've invested in. that are built for scale, right? We can add incremental revenues to these products without the corresponding incremental costs. And so that creates operating leverage, which you will -- you are seeing in the results of the business, right. And then on top of that, we have the investments that you just talked about and things like AI that will continue to provide cost efficiency for us going forward. And so when I think when you look at those 2 things together, I think we are on the journey, 75 basis points this year, a good part of the journey, but I think you'll continue going forward, both those pieces of it, both the leverage that we've built into the model, plus increasing benefits from AI.

Makes sense. I have a few more questions. I'm going to ask 1 about the long-term growth framework. I do want to open it up for questions after that. So I'll ask 1 more question and open it up and then we can wrap up after that. So we talked -- touched on this a little bit earlier, but long-term growth framework, 5% to 10%. As you think about that target over a multiyear period rather than just the next few quarters, can you talk about the main building blocks across each of the segments and what gives you confidence that you can sustain growth in the 5% to 10% range, both on an aggregate company basis and then within each of the segments.

Yes. This is, like I said, something pretty excited and pretty proud about. And I think when you look at the momentum of the business, like if I just walk through the segments, if you look at mobility, we talked about our -- my thoughts on kind of getting to the range earlier and the visibility we have to it. If we look at what we talked about earlier, pricing, where we are in new customer acquisition, the investments that we're making in retention and the hopeful future benefits we get from improvements in the macroeconomic environment. I think the 1 theme that you'll hear through this as we talk through how we get there is that there's multiple avenues in each of our get there. And you just heard that mobility, whether it's pricing, new customer acquisition, retention, we have multiple avenues to get to get in the range -- if I look at the corporate payments segment, we've talked about embedded in Direct earlier, right? Those are significant large TAM expansion sort of TAM opportunities. We've got a great product. We are basically taking something that we've built today and expanding into new markets. having success with it, I think that's an exciting value opportunity for us. And then in the Benefits segment, we talked about earlier, we've got a great set of products. We continue to invest and enhance it. I think you'll see us roll out new capabilities in our products over time. Combine that with a very, very strong rev go-to-market model. I think that's something that's underappreciated about our benefits business. right? You take our direct sales model, you take our partner channels, which are very tightly integrated partner solutions. So a very sticky set of partners. We have a very strong go-to-market motion, combined with a very strong product. So again, that gives us confidence about the market as well. And that's without even mentioning the OPBDA expansion of the TAM. So I think we see multiple opportunities in multiple paths to continue our growth and be in the target range.

It feels like we're in a situation where there's good things happening in each of the segments. It's just let's get all of those good things working at the same time -- so as promised, if anyone has questions, feel free to raise your hand and Jagtar can answer anything you have.

Scott Barishaw from Deutsche Bank. Thanks to the conference. Absolutely. Nate did a great job asking a lot of questions on each of the businesses. spoke about AI, you sort of wrapped it up into a little bit on sort of where the growth is in the segments. I was hoping you could maybe just riff a little bit on like which of the 3 segments you spend the most time on, what you're most excited about going forward? Obviously, mobility is the biggest, probably a little more than 50% of the revenue benefits second and then corporate payments third. But like where do you spend your time? Where do you see the most AI opportunity? Where do you -- from here, like as investors like where can we get most excited to help drive the story forward?

That's a really good question because when we look at it, we are genuinely excited about investment opportunities across all of our businesses. all 3 -- it's like asked me, which went children my favorite, right which my wife would shoot me if I ever respond to that question. Look, honestly, I think the challenge for us is much more along the lines of we see significant investment opportunities and growth opportunities across all of our business -- like literally, I sit there in executive meetings and we look through investment options and where we see growth avenues. And it's not like it's all benefits or it's all in corporate payments. We see it across even mobility, which sometimes the market uses kind of the low-growth part of WEX. We have very broad reach, extensive customer relationships. And the result of that is what we consider to be pretty significant tan expansion opportunities. So the challenge for us often ends up being -- we have big desires to pursue many of these investment opportunities. We're trying to balance how much we invest in the year, the organizational capacity to pursue these investments, the financial profile of the company of wanting to manage the financial profile so we can balance growth investments while driving margin expansion at the same time. So I know this isn't sort of saying, hey, benefits is my favorite, but I honestly do think there are significant opportunities across the portfolio.

I mean that's great. I mean I guess a quick follow-up to that then is if maybe it's where you operate in, I mean, all the companies you operate in such competitive businesses. Is there an area where you feel really good about taking advantage of competition maybe being a little bit weaker? Or something -- is there something -- is there an angle from that side where competition not to name names, but Corpeyis doing something they like where you feel that WEX can really take advantage of the situation in a business or something along those lines? Maybe that's an unfair question, but I figured I'd ask.

Yes. So I would say if I think across our businesses, we have very, very strong moats across our business. So I think that gives us pretty distinct competitive advantages, right? We have the scale of our mobility business, which is allowing us to move more into kind of parts of the market where maybe our competitors are less focused on right now. We've talked about that in some of our earnings calls. right in our Benefits segment, again, we have a very, very strong suite of offerings that we are able to sort of bring to our customers, not just point solutions, but a holistic set of solutions that some of our competitors are unable to bring. And I think that's allowing for very robust win rates for that market. And then I think it's the economic profile of the business as well. We talked about the high incremental margins of our business. We will -- as we talked about pricing earlier, we price to value, right? We think we bring a lot of value, and we think there's pricing opportunity as a result. But we're also mindful of the competitive environment where we need to be, right? And we are able to use the pricing lever to win business when we have to, right? But we've been able to do it while maintaining a strong margin profile. And that's essentially the scale nature that we've built on our business.

I will allow others to ask questions, but 1 of the things you said just on this move into other parts of the market that competitors haven't focused on historically. So maybe like 2 questions on that earlier in this discussion, you had talked about some of the supply side impacts within the mobility business. At the same time, you're also talking about like, hey, let's go focus on smaller fleets? Is there any sort of like inherent conflict in that? Like, obviously, you're not going to be focusing on some of those like mom-and-pop fleets that have been impacted by the administrative changes. But like how do we understand the dynamic between the 2? And then the follow-up question that I get asked all the time by investors, is just like opportunities to expand the credit box within mobility, right? And I think a lot of those -- like those discussions are tied the same. So maybe you can just, one, just talk about like, hey, that move down market. How does that conflict or not conflict with supply side changes then how do you think about the credit box opportunity within mobility more generally?

Sure. I'll hit both of those. So on the kind of moving down market, what I would say is whenever we've looked at the market, there is a sizable opportunity there, whether you're in the over-the-road segment or whether you're in what we call the local fleet segment, which is not the long-range trucks, there is a sizable unaddressed market opportunity there. And we have spent the last couple of years enhancing our credit granting capabilities, our digital marketing capabilities, all with the desire to be able to attack that segment of the market more efficiently. And so we believe we've done a good job of that. And so whether it's the local fleet side, where we believe we're able to capture kind of smaller customers more efficiently with good credit adjudication that maybe we would have been able to do 5 years ago or it's the over-the-road side where there is a significant segment of that trucking population that's still there even right, with some of the supply changes that are not customers that we would grant credit to today, maybe in the future, but could utilize our set of solutions outside the credit box. And that essentially is what the 104 offering is, so it's given us the opportunity to expand who we address because there are sizable opportunities there. Specific to your question around the credit box, look, this is something -- and we've talked a lot about this with investors. We've enhanced a lot of our credit capabilities over the last several years, over the last 4 or 5 years. We ought to adjudicate like when fuel prices increased this year, we automatically raise credit lines for a large swath of our customers because of enhanced credit monitoring capabilities that we've built. So we think we've gotten really good at that. I think I do get a lot of questions around, do we enhance the credit box. I'll say it's something we look at all the time, right? We continuously evaluate what's the right level of credit? How do we balance kind of the revenue opportunity that comes from giving more credit with the risk that comes through, right, what's the implications for desaltefault. So I think it's something we routinely do, and I think we're good at the increase [indiscernible]

Yes, for sure. And then the clarification is that what we have seen to date in terms of expanding the credit box for lack of better from has been that sort of mechanical or automatic increase associated with higher fuel prices, but anything expanding the credit box beyond that is still something you're evaluating [indiscernible] Got it. Got it. Yes. Is anyone else have additional questions? We have a couple of minutes left. If not, I can wrap up with a few questions. I don't see anything. So I will ask on capital allocation, right? I think Scott in the audience had asked about some of your organic investment priorities, I think you've done a very good job on leverage. You're obviously throwing off a ton of free cash flow. I think the messaging, at least as I've interpreted is that you're going to be focusing on buybacks as the highest priority near term use of cash. Does that still hold? Obviously, the stock has had a nice little run so far year-to-date. What would need to change either in terms of where the stock price goes or what you're seeing in the M&A market for the debate between buybacks and M&A to change at all?

Yes. So just to remind everybody, we announced kind of last earnings call, we basically did what we said we were going to do. We were planning to getting leverage back below 3x, and we would reinitiate stock buybacks. We got there a quarter earlier than we expected, high fuel prices helped. So we have initiated stock buybacks, and we have stated that the vast majority of our adjusted free cash flow will go towards buying back stock. So the stock price has gone up a bit since we announced that. I would say it's still from all the work we do, it's still highest cost return opportunity in terms of deploying capital. So we will continue to march on the plan that we had going forward. I would say that M&A will continue to be something that we evaluate. I would -- what we would want to see from an M&A standpoint is a strategic opportunity and enhances the strategic capabilities positioning of the company. at the same time on our risk-adjusted returns basis being equal to or better than the stock buyback, right? That is what we evaluate. And to the extent we view our stock more fairly valued, we'll -- that makes M&A something a bigger part of the equation potentially. But from what we see right now, it's squarely in the stock buyback.

Makes sense and very clear. So we have less than a minute here, so we will wrap up with one. Maybe tying it back to the high-level question that we started off with the differences between how investors or management view the company. I think high level when you are on this stage 2 years, 3 years from now, what do you think is going to be most different about WEX from the WEX of 2026 versus the WEX in 2 to 3 years? And what do you need to do to successfully sort of deliver and execute on your strategy to effectuate that change?

Look, I think WEX is on a good path in right? And if you think about all the things that we have talked about over this call -- or over this conversation between right, the capabilities of new products and how AI can be incorporated in the efficiency enhancements that AI will bring to us. And like I said, the new products that we're bringing the scale that's embedded into our model. I think WEX executing along the lines of what we just talked about. You will see a company in 2 or 3 years, which had a crystal ball, but he knows what's going to happen out in the world. But in terms of the pieces that we can control. I think you will see a company that more resilient, larger size, higher scale, all the things that the pieces that we've talked about coming into place.

Makes sense. Standard of execution and -- we'll look forward to tracking it along the way. So everyone, join me in thanking Jagtar for his time. I really appreciate it.

Appreciate it.