Wise Group plc (WISE) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Matt Briers. I'm CFO of Wise. So I've probably met and spoken to many of you before. We're going to spend half an hour talking through recent news file, which is an update to our financial guidance. So I was just going to give you the headlines to what's [indiscernible], what's behind this. But then let's use the balance, the 30 minutes just Q&A. And Martin Adams is here -- is watching the question. So if you feel kind of -- if you raise your hand, ask the question, then Martin will call you out. And let's try to just get these -- many of these answered in half an hour as we can. So what are we seeing? What's been happening here? As we saw in -- what you're seeing with Wise, generally, the mission we're on, transparency and learning the cost of international money movement for our customers, is resonating really strongly. And what we've seen for a few quarters now is that we're seeing really strong take up from most of our customers. They're more and more [ capitalized ] the segment. At the same time, what we're seeing in the wide world, the loss was on market volatility. We've seen increasing interest rates. So a lot of questions we've had -- what impact is happening, and we're starting to see some of that interest come through. And as we've always said, we're working on how to share that back with our customers. So what does this mean for our financials? Well some of it -- the volume growth and the strong revenue growth that we saw in Q1 was actually continuing now. We've seen that come through in Q2, such that we've seen volume growth of 47% we expect for the first half of the year. We're still finishing up this week as you know. And that's flowed through to revenue growth at around 54% versus the first half of the previous year. And there's a lot of factors driving that. But fundamentally, it's the -- this is core volume growth with the uptake of the Wise account, driving revenues, both cross-border conversion revenues and the other fees we get [ from all those accounts ]. This is really strong fundamentals of business. On top of this, revenue growth for the year is going to be supported by increasing levels of interest income from our customer balances. As many of you are aware, we have really significant customer balances. These are the money that customers hold with us in their Wise accounts. We are now going to present that income -- whereas previously it was actually a cost because many of those balances were in euros, we're now going to present that income as part of our total income alongside the revenue for our conversion fees. That's a quite important change that helps us better manage our economics and business. And then we're going to continue to share much of that benefit from that interest income with our customers. We've always done this. We share the cost savings we make on our cross-borders [ with back ] with our customers as well as the shareholders. And we're going to do that as we settle this interest income. But we will also invest some of that in -- growth in our teams. And growing our teams, whether servicing or operational teams, but also our product teams over time. So let's just [indiscernible] -- fundamentally, we now expect total income growth of between 55% to 60% year-over-year for this financial year. That's for the last 6 months -- or the next 6 months. And that's an increase versus what we described last month. So there's an increase in our guidance for the year, and it's on the back of very strong volume growth that we see in the management business but also somewhat supplemented by some of this interest income, much of which will have passed back, but some of which will cover growth in our investments. The rest of our guidance actually stays the same. We still will, as you've learned over time, invest as much as we can down to the 20% EBITDA margin. And remember now, as we've clarified it here, that EBITDA margin is now a percentage of the total income. So it's all of the revenue we have plus whatever we pass -- we don't pass through back to customers. That would be interesting. We still look at that 20% as an EBITDA margin. But obviously, we expect the total income or revenue of the company to grow faster. So I'm going to pause there and start to take questions. I'm sure there's many. We just have to do this in half an hour.

Thank you, Matt. [Operator Instructions] First question, we've got, Matt, is from James Goodman. If you could go ahead and ask your question, Mr. James.

Great. Yes. Apologies if I've missed it in the statement. But just in terms of the new guidance then for the year of 55% to 60% but now including the interest income alongside the revenue, what's the expectation within that between revenue and interest income, i.e., how much is the existing underlying revenue assessment that you've made changed? And I suppose the other way of looking at that or asking that is GBP 17 million of interest income already basically for Q2, only a small part of Q2 looks like a fairly high sort of run rate percentage returns. So maybe you could also answer the question by what sort of rate of return you're seeing on those customer balances now with the financial mix of assets that you're holding. That's the first question. The other question is just is partly linked to that really, probably linked to the answer to that. But are you already adjusting the cost base higher as a result then of the higher total income presumably you must be in order to maintain an EBITDA margin unchanged, even though it's now over a higher total income base? And how are you adjusting then the cost base so quickly?

Thanks, James. So let me just play that. So a few questions there. So one, within the first question, [ I might say ], which was how do you think about the mix or within that growth, how much of that is going to be interest income versus [indiscernible] revenue? Secondly, like what content of interest income are we expecting to be in. That's quite a separate question. But given that, how are we investing [indiscernible] investing and still expect to -- this EBITDA margin at around or above 20%. So really like the way you just mechanically replace for people to think about this is we have this revenue base that's growing as a function of volume [indiscernible]. And what will happen as we get more and more interest income, some of our interest income will effectively -- as we think about that altogether in our income, total income, some of it will enable us to reduce down the price on some of our other services, whether that's -- that could be many things we decide to do, whether it's cross-border payments, special payments or other services. We're not explicitly able to pay interest on balances. So almost, to some extent, the more that we see interest income growing, the more capacity we have to offer at a lower price on some of our core products, remember our mission that we're on, while still retaining this very healthy revenue growth. So -- and the reason I -- when you think about this, it's just the expense of which interest rates increase and always we see balance [indiscernible] remember like that. We do -- we are aware of the risk that some customers may get better rates or want to move their money elsewhere. So there's a fair amount of uncertainty around the confidence that this interest rate -- this interest income will grow soon. It would be remiss of me to make a prediction on this right now. Rather, we have confidence in this revenue range based on the underlying growth that we see in our volumes and the revenues. I mean we see volumes having growth near 50% for the first half of the year, and that momentum is very helpful. And then actually, to the greater extent -- this interim interest income growth, to the greater extent, we can share some of that -- much of that back with -- the benefit of that with our customers through other mechanisms. There will be some of that interest income that we will use to more than cover costs of other investments that we may choose to make in our products, our operations, whether it's in servicing our customers, giving the best service, whether it's funding in slightly larger engineering teams. But there's going be a balance of these things. And then obviously, a marginal mix will [ go ] down, this -- to at or above 20%. So James, I can't give you a sense of the concept, but the fundamental driver of this upgrade in July is really actually the fundamental performance of the business that we've been investing in over the last 3 or 4 years. And that tells you much about the product that we're building, the proposition we've put up for our customers. It's really supplemented and then enhanced effectively with our product [indiscernible] capacity, the greater extent that we generate interest income from these balances. So [indiscernible] question was that so -- okay, so you have this revenue growth or total income growth, this amount this quarter. What -- how will we invest in that? Well, one thing we did importantly for it is [indiscernible]. In a world where it's incredibly volatile, like I'm sure this wasn't that the -- well, it's not the only thing I [indiscernible] is that we're seeing a lot of volatility over the last months in our products. You've seen us actually have to increase prices on some routes. And that's because we've seen a lot of volatility in FX, and that means we maintain high spreads, so we may experience gains or losses on our product. So actually, we've seen a gross profit margin for the first quarter, which is lower than the previous first half of the year, which we expect still finishing the quarter -- the half year than the previous [indiscernible]. What I mean is that -- so that margin is slightly lower than we saw last year. So that partly sets down the gross profit growth for the year. And then we are growing on OpEx. And as you've seen, we've grown that over the last year and that we will keep investing in the long term. And we're able to do that, and we've put some [indiscernible] on this. We've got plenty of things to build and plenty of ways to improve sales to our customers. And honestly, as you see, there's plenty of pressure on costs around. Well, so that's -- so we're in a very healthy place by being able to grow business this fast and onboard a lot of new customers every quarter while still maintaining this very healthy EBITDA margin and growing the business much faster than we've expected.

Thanks, Matt. So our next question comes from the line of [indiscernible].

Can you maybe comment back on what you're seeing in terms of the Wise account balances growth so far in the first half? I know you had some really strong gears, obviously, and it's becoming more of a benefit now. But where is that sitting at the moment? And then second, in terms of the customer benefits, how do you think about -- have you sort of spread that across the different kinds of routes? Is that more going to be across based on the spread of deposits? Or how do you think about that? And then finally, just looking at what you said on the first half volume and revenue growth, it implies about 72 basis points of take rate on -- in 2Q, which is obviously an uplift from what you had in 1Q and in previous years. So is there anything which is driving that take rate up as well?

Let me just check that. I might just -- [ if you ] want to get to the third question, let's just check that. The first 2 questions were what we see on Wise account balance is and where might we think about kind of returning some of this reinvesting in our customers, what kind of benefit we're -- well. So on the Wise account balances, I mean, we won't review the numbers there. This was growing quite quickly through last year as you saw, and in fact, these were growing around [ 8% ] last year year-over-year. Now we've got a very healthy momentum [indiscernible] use Wise account, spend on the Wise account, moving money in and out of Wise account. But I think now it's like probably not the time to comment on what we're seeing in the growth rate. But we're right in the middle of a massive inflection point once a decade, maybe even stronger from interest rates. So I think what we're seeing now could be different to what we're seeing in a month or 2 months. But what we do know is that usage of the Wise account as a place to do international banking is continuing to grow. And the adoption of that is very healthy. But those balances have continued to grow, but I think what we've seen in the last 3 or 4 months, especially as we're expecting some quite material changes in interest rates on the market with the yield [indiscernible] in the next 3 months, and that could change. So we'll just keep monitoring it. And I expect [indiscernible] to be very different -- actually, very contingent on countries [indiscernible]. And then on what we're going to do actually for our customers, these are in the works. And we're not -- on the one hand, we want to move quickly as we do on everything we do at Wise, but we're going to be very cautious to make sure that we do this in a way that's fair, understood and transparent for our customers and, obviously, consistent with what our mission allows and what our mission expects. So I expect us to do a range of things, and that could affect the price to pay conversions. It could affect that -- the cost that you -- even to charge for an account or how you want to spend on a car, a range of things across different customers in different geographies, and we'll probably test our way into this. But we're trying to do things that are logical for our customers to understand and feel like there's a real benefit to doing more with why they came to Wise, which is lower cost, more convenient, faster, moving money around the world internationally. I think on the third question, which is like what are we seeing on the take rate really in that, we really just talked about aggregate revenue numbers and aggregate volume numbers here. I'll not go into the detail on this now, whether it's cross and other or personal business. We do -- we will still do our normal quarterly trading update, which we'll give you a bit more detail under the hood. But the big takeaway from today is that total volume or total revenue growth has been very healthy. There's no radical shifts in the dynamics there that we've seen. And that is fundamentally driving the health and the strength of what we're just seeing through the rest of the year.

Excellent. Let me just ask so that we can get through, I guess, give as many people the opportunity as possible and try to limit your questions to one. The next question, that comes from Josh Levin.

Just -- since I only have one question here. In recent months, you've been raising prices due to AML costs and FX volatility. I guess if this interest income, if you could see it coming through, why raise prices only to now lower them?

Good question. And thanks for the question, Josh. We don't generally do things in a blanket way, Josh. So -- and then we tend not -- we tend to try make these decisions as we go. So what I'm saying now is the beneficiaries of the interest income, where we decide to [ register ] that may not be banker. It may not be specifically where we were experiencing that cost pressure before. And then the other thing is we believe in managing our -- the profitability of our business is -- well, for me, [indiscernible] and these fundamentals of what we do. So we recognize that if we go from a -- hopefully, a higher price in the past to a lower price in the future, that line may be spreading when you zoom out but actually is not necessarily linear when you zoom in because we can't necessarily predict when this interest income will flow through. We've definitely seen an acceleration in the movement of the yield curve over the last weeks and months. And we take the principle of if we know we've got to do this in the short term, we take that pay now for customers and then recognizing that if we need -- if we would then reduce them in the future, we will. So anything is our customers understand that we charge them a fair price. And if you see benefit in some way in the future or those costs go away, we drop those prices together. A great -- it's a debate we have internally, Josh, absolutely for that. But you need to be careful with you're not always hoping that something better will come in the future. Give some discipline in the team, and that keeps us focused on those costs that have increased, whether it's market volatility or cost of servicing, like we still need to address that. We can't just rest on our laurels because we have to have this other interest income. We're still going to work out how to engineer our way to this cost. And taking that price action is the right pressure points to that.

Thanks, Josh. Next question comes from the line of Kim Bergoe.

Matt, just one question for me. So obviously, you're talking about when we try to model this out, we obviously need to have an estimate of what we think the balances are going to be. And you talked about that and said, well, now we're -- you can get interest in other ways, maybe it will be more tempting for people to move elsewhere. So we'll see where the balances go. Could you talk a little bit about how you will try to make sure that the people who have balances and earn interest on them that they see that they are getting the benefit? So how are you going to link that? Just because I guess that will make it easier for us to try to sort of model where we think this is going to go going forward.

That's right. Let me try and make it a little bit easy for you as well, which is that the revenue guide we've given of our income of 55% to 60%, like much of that is -- if you think about the momentum we've got in the core business that we've always had is going to drive a lot of that revenue growth. What's going to happen is like the more our interest income grows, the greater we can still execute our revenue for the lower price. So really, a lot of what you'll be modeling is actually how much can it reduce prices but still achieve that level of growth, if that makes sense. So there is clearly sensitivity to this number depending on how much our balance grows, but it's probably given our intention to reinvest much of this interest income with our customers really like the rate to which interest rates go up and/or balances grow or [ strike ] really going to the rates at which we can reduce price for our customers. So on the one hand, it's very important for all of our customers and will affect what happens. On the other hand, our confidence around this guide depending on this. That said, there was a lot of uncertainty around this. We're not allowed and we are not supposed to appropriately pay our customers or tell them that the [indiscernible] interest or incentivized for it to hold more and more [ value than this ]. But there are reasons for that, different ones [indiscernible], but fundamentally, we're not a bank. All we can do is really to reinforce and give customers the value of what we've committed to do, which is building an account, which is very convenient, very fast to move around the world but also like to transfer at very transparent prices as low as possible in our commitment to driving out those costs. So we trust that people who come to the same reason [indiscernible] on that as a result of building this product. We believe that's the best strategy here given that we can't directly reward interest income. So really, this is a key -- an execution and a communication challenge for us. But that's what we've done all the time. We've always communicated to our customers transparently what we do with the money that they're paying for our services. And this is really going to test that as the extension of what we're going to have to do. So if you're a customer, Kim, hopefully you'll understand this. Some customers, no doubt, we'll optimize for a direct interest, and that's fair enough. Remember, in the U.K., we have our Assets products. And of course, we'll -- our strategy in the long term is to try and -- trying [indiscernible] the customers the opportunity to sort of return, but we're not there yet. This is all part of our strategy as to how we can build that around the world.

Excellent. Thanks, Kim. Next question comes from the line of Mohammed Moawalla.

Just one for me. I just wanted to understand the dynamics on the gross margin. Obviously, you saw increased FX volatility. How should we think of that sort of gross margin evolution? I know you're still sort of pushing to price increases in some markets to counteract this volatility. How should we think about gross margin for this year? And then sort of do you see that sort of working back to your economic trajectory over the next couple of years?

Great. I -- so we have seen increased costs through the volatility. Every participant in the market will have seen us increase cost of moving money around the world and costs of [ covering expansions ] have increased. That's real. And this has started a compression of this gross margin. And so the thing -- we actually sort of reversed it this last year. But actually, this is -- as we said in the last quarter, some of this has come back. So how do you think about that? Well, when we reprice, we don't necessarily reprice to reverse to a gross margin as a percentage of revenue. We reprice to make sure that we have an EBITDA. So that may not mean that we kind of always come back to solving for gross margin. So what that means is this running -- the gross margin we've run out, and I'm still very happy with the EBITDA level that we're running to, but it's a different gross margin from what we've seen before. I mean we put prices up to cover some of those costs. But fundamentally, we've got a healthy cash-generating business that's driving the absolute growth value very quickly on the volume [indiscernible]. The volatility we see in the market today, I don't see it changing. We don't know everything we're seeing around this. It's not just in the U.K. but over around the world. We're certainly not coming out of the end of the [ storm ]. So without -- I'm not guiding here on gross margin but the conditions that are driving this. And the price structure we've got in place is robust today. But we're not trying to solve for a higher gross margin over time. We're trying to solve to make sure we have a healthy and sustainable EBITDA margin whilst investing an awful lot of the growth. And it's much more of the same that we invested in the past to get us to a very healthy growing business today with a very healthy EBITDA margin. So I tried to answer that, Mo, but [indiscernible].

Right. [indiscernible] to the rest of it.

I don't know, Mo. I might just ask you to repeat that question. It's either our connection or yours. I'm hoping [indiscernible] for everyone else. So just try and repeat it. Sorry.

[indiscernible] Yes. Is it safe -- sure. Should we just assume what you have for H1 for the second half of this year? Is that a [indiscernible]?

We've seen this level gross margin in the first half of the year. I think it's [indiscernible] that have driven that. I'm not -- we're not expecting any radical shifts for the rest of the year in those dynamics, notwithstanding pricing changes and these things, which should -- we don't see a radical shift in those dynamics over the second half year. We have guided that. That should give you a sense -- what this should give you sense of is the rate of which so far our gross profits can grow and ultimately give you a more sense of [indiscernible] how much we're investing as well as a matter of capacity to invest if there's somebody who wants to drive down this 20% plus EBITDA margin.

So next question comes from the line of [ Adam Wood ].

Just for me, could you just give us a little bit of help in terms of the assumptions you've made on the second half on rates and balances? Are you more kind of saying, well, let's say with where we are now in terms of rates and where the Wise account balances are? Or have you made of assumptions that they continue to improve through the second half and give you a higher level of income? And on passing that on, on pricing, are you comfortable using something like interest income that could be temporary to subsidize pricing where, in the past, I think you've wanted to use permanent improvements and efficiency to do that, so you wouldn't have to see pricing go backwards if things went the other way against you?

Good questions, [ Adam ]. The first one is, what are our expectations on this going forward? Well, we only look at the yield curve, and this is reasonably -- reasonable confidence in this until various politicians change the world. The -- so we'll look at that, and we'll look at various momentums that we might have in our balances. And obviously, we need to drive -- think of scenarios where those balances don't grow and if other things were more attractive or yield kind of grows faster. But really, really given that much of this interest income will help us on price, but really, what we're trying to predict is the rate at which we can drop prices rather the rate at which our total revenues will grow, if that makes sense, [ Adam ]. So really that's been a major sensitivity, and we need to make this kind of judgment for. And you can see that, that GBP 17 million of net interest income as growing, you can work out -- the interest rates have really only been coming online, and they're not damaged, steady all the way through the quarter. So it's going to be healthy momentum in balance that do grow during the rest of the year, but we'll provide more. You'll see more of this detail over time. The second question is an interesting one, is when we worked out and may have taken a view on how much interest income do we see flowing through and how can we rely on, should we -- what should we do with that? And clearly, some of that will fund investments, and effectively a margin on this is going to flow through 20%. If you think of anything we spend on investments, then margin there is going to come through. And then some of that it's going to go to customers. And the reality is it's like whether customers become dependent on this or our costs, our salary bill as -- or even our flows to the bottom line does, we need to balance this. And I think if we can -- unfortunately, I don't think interest rates are going to go back to 0 anytime soon. So we need to be very careful to not overcommit ourselves on this. I don't think they're going to go [indiscernible], but we do need to be careful not to overcommit ourselves. So the fundamental is going to come down to communication to our customers, so how well do they understand like their pricing and where some of these benefits are coming from. And we think fundamentally, like we believe that sharing economics with customers is not as to where we are today. We could have easily got some [ degree ] here in the early days, and we've not built the business that we built today in any -- we're not looking anything like that [indiscernible] successful either way. So this is just another example of why we stick to that discipline and if you think about that over the next 3 to 5 years, like this absolutely has to be something that gives us more confidence in achieving -- fulfilling on the process we've given our customers achieving that over time, which should give us more confidence in a very long time. So this is what we want to achieve. That's the judgment for [indiscernible].

Thanks, [ Adam ]. We've got time for one more question, which will come from Fredrik Windrup.

It really relates to the longer-term top line guidance here. You've clearly, over the last number of periods, been well above the -- above 20% target. I think your answer to the last question was that you basically have accelerated your ambition to reach the promised targets of 0 rates essentially to customers. But how do you think about the sustainability of the medium-term top line guide now that you have what seems to be at least an incremental growth driver in interest income on top line?

Thanks for the question. And always, let's talk about long term. When we -- the fundamental thing we're still very focused on is increasing the volumes, [ that means through ] Wise. And we're in everything we invested. As a few, so how do we help more people move that money around the world? There will be -- this year maybe -- well, we'll see. We've seen actually an acceleration in the top, not the interest income, just the volumes moving first. And that's great news. If we can continue to do that, then we'll do very well and kind of -- that's our goal, to maximize the amount of volume that our customers [indiscernible]. We've got into about 20% CAGR on [indiscernible]. Now this interest income, much it should really flow through us. Yes, there's going to be investment. There's going to be much that this should flow through in our -- from being able to offer that value and lower costs to our customers are still being very healthy cash-generative business over time. So it should give us confidence in stating that level of growth or above over that period of time now. Interest rates will come, and they could follow that through. So they could be year -- it will be very clear as to how much of our income is coming from interest over time. And I want to make this very transparent and clear to everyone, so we understand that. I think if you look at the -- over the long term, rather, in each individual year, you should have confidence that we can continue to drive out to above that level. And next year, if balances don't grow or interest doesn't grow, then it clearly will have an [indiscernible] when balances drop and interest [indiscernible]. So we just need to be very clear and transparent of where this sits in our business and how we make price choices so far. But really, it doesn't change what we're trying to do, so we don't do the thing to say that we're an interest income business, but still, in this business, we're helping people move and manage their money around the world in the most convenient, fast, cheap way possible, is just something that's helping us maybe go a little bit [indiscernible] as well.

Just a quick follow-up. At what point -- now that you're exceeding that 20% CAGR rate in these currently, at what point would you consider revising the medium-term top line guidance?

[indiscernible] we're pretty focused on that, and it's going on the world right now and how we're working through these many changes and what we're seeing. And we've got great growth mentioned around what's happening this year. But I'm not commenting or talking about that right now. But thanks for asking. Okay. Well, everyone, thank you for the time. I appreciate -- there's lots going on in the world right now. And -- been going on, so I won't keep you any longer. But just a recap, it's just like 1 more percent along path that we're on. And hopefully, what we laid out is clear, and I'm sure we'll speak to more you soon. We will have a trading update later in October as we planned. We will give you a bit more detail around the specifics of the volumes and revenues and what customers have done with us in the quarter. And then obviously, we've got our half-year results at November. But thanks for the time. Enjoy the rest of the day and speak to you soon.