Wise Group plc (WISE) Earnings Call Transcript & Summary

Great. Well, good morning, everyone. Welcome to the 2023 Barclays European Fintech & Payments Conference. It's great to have you back with us this year back in a virtual format. It's my pleasure to kick off the day with Matt Briers, CFO of Wise back with us again. And I think for the last time, unfortunately, for us, with the Barclays Payments & Fintech conference. But Matt, morning, and thanks so much for joining us.

Good morning. Thanks for having me. You can always organize another conference for the next few months, still.

Well, perhaps we'll have you back as a sort of guest speaker in future years.

Let's kick off with the macro environment and pricing, get right into it. I know that you being some ways hesitant to talk too much to the near term, but I think it's an interesting place to start given the macro. Q1 was a very resilient quarter. From a volume perspective, I think we saw a GBP 1.5 billion sequential increase in TPV. And the question is, do you expect further volume additions of this sort of magnitude as we go over the coming quarters? Or at least, can you speak to some of the high-level trends that you're seeing as we progress through your Q2?

So thanks, good place to start. So you're right, before we dive too much into the short term, what is fundamentally -- and we spoke at the full year results, what's really driving our growth is really just a compounding active -- number of active customers that are active on our platform. We've seen that growing around 30% year-over-year. And over the very long time, we see that what has been driving the volume growth in the income platform and will continue to do so in the future. You've seen over the last year, volatility comes through as to how much customers are moving on the platform. So definitely, as we kind of look over the long term, we obviously expect sequential improved increases in volume. We haven't seen any major shifts in what we're seeing in the macro. So the fundamentals that we've described are still the same. We're still seeing very healthy compounding growth in active customers and no real change to the dynamics that we've been seeing post to this, so we really focus on that because we know that, that kind of massive market and compounding growth in customers into that what's really helping us.

Yes. That makes a lot of sense. And so let's move to the VPC, volume per customer. We've been talking about this now for a couple of quarters. Obviously, in personal, there's been this effect, which has been well referenced by you that dipped slightly further in the quarter. But it was also, for me, quite surprisingly soften the business actually. I know there's some seasonality there, but nonetheless, in the quarter. So how much of the dip in VPC do you attribute here to factors such as mix? Why is the expansion into other regions? And how much do you think is macro? And are we expecting to really stabilize from here?

Yes. So as we've seen over the last -- over the last many years, actually, VPC on a quarterly basis can be quite volatile. But over the very long term, if you look back over the last 4 or 5 years, it's relatively stable and has been mildly increasing, like you take the biggest step picture view. And that really comes down to product that we're building relationships with customers. But it's always going to be quite volatile in the short term. And you know the recent volatility we've seen is really by people moving fewer and larger payments. And that's definitely got something to do with macro. This time last year, we've come out of COVID. We've come out of a very positive to enter a more conservative business and consumer sentiment. And we've also seen this time last year massive USD strength and FX volatility, all of these which are there were here last year and they're not here this year. So as we talked about these VPCs, really the primary drop we've seen year-on-year is a function of less people moving really big payments through Wise. Will that come back? Well, we can conject and expect that the economy is cyclical. But we're not trying to time that or guess when the timing if that comes back. We did signal that we would expect Q-on-Q tick-down, a steady tick-down in VPC, and we saw that in the first quarter. And that's a function of many things. Yes, there's some regional mix as we go into different markets. There's also a dynamic around our accounts. As people move, use the account much more often, but over a year, they definitely over their lifetime, they definitely move small volume, but they have a different -- they're doing less big onetime transactions and more regularly used than they can, which actually this ongoing relationship with the customer, which is supporting the active customer growth and the services they take from us is very healthy. So no real change. I think on business, as you point out, like there may be some seasonality, but again, there's just some -- there's some noise relating to economy in here and also just the real -- the FX rates that we're seeing playing through to the pound reported numbers.

Yes, okay. That's helpful. And it sounds like not any particular sort of regional development. So let's move to the take rate, which has been very strong. It's ticked up -- was I think, sequentially 1 basis point. You're already up 9 basis points. Let's talk a bit about the drivers of that and maybe your expectations of take rate longer term because we have on the one hand, Mission Zero, on the other, we have the increasing prevalence of ancillary revenues, interchange, the assets, products, et cetera. So it would be helpful to deconstruct that a bit.

Yes. So there's lots of things going on, interesting things going on in our what the income -- revenue and income that we get from our customers. But Wise, it is very hard started is with Mission Zero, saying, how do we offer the fastest, cheapest and best way to move money around the world? And Mission Zero is how do we make those as cheap as possible for our customers to save as much money versus the alternatives? And the big move in or take -- one of the moves in our take rate is actually an increase on the cost across -- moving money across borders over the last year. If you look over the long term, it's come down. And if we look forward over the long term, we hope to continue to bring that cost down. But also, the heart of Wise is we believe in running a profitable and also high-quality service to our customers and one that's profitable for our shareholders, and these are nonnegotiables. So as we've expanded and as we continue to offer our services, we've actually added servicing capability to our teams, such the customers this year, at the end of this year, got radically better service than they did earlier on last year. The response rate, if you need to call up for a problem on your account is much quicker. The e-mail response rate, the call response rate, the ability to onboard customers faster in more countries has actually improved. And so this all reflects in actually the rate at which our customer rates is growing. So if you see the compounding customer base of 30%, you can see that, that's -- as we know, 2/3 from word of mouth. And the word of mouth out is really inspired by price, that's for sure, so they understand what they're paying and is it cheap, but also the service and the Net Promoter Score. So actually, these are investments which are actually driving growth. And yes, we've got 5,000 or 6,000 people inside the house that are pretty religious about dropping prices and not proud. Not happy if we have put the prices up but are incredibly happy that we're able to offer a brilliant service that we're proud of. And that's what's driving our growth, and we're doing that profitably. Then of course -- and we're -- trust us, we're working really hard to say like how do we kind of bring that cross-border price back down again profitably, right? So how do we engineer away these service needs? How do we -- any transactional cost? And then the second thing is these customers that are onboarding more and more of them are using is Wise accounts. And when they use the Wise accounts, they do many, many more things as you know, so they might be using our card. They might be making domestic payments. They might be using our assets, product. The relationship is getting deeper, but we're also getting more revenue from these customers, and that's also pushing up. And that's probably been the real big change if you look across 2 to 3 years. Since we listed, for example, that's been a big shift in the amounts -- in the relationship and the revenue per customer that we're getting. What will happen going forward? Well, as I said, we'll continue to put downward pressure in the industry, not just in Wise on cross-border take rates. It's going to be harder and harder to compete in this industry, and we'll also build stronger relationships with our customers, which will lead through to this other take rate, net-net going up.

Okay. Understood. And let's maybe come back to some of those drivers of growth, but I think it's a good moment to talk a little bit about the interest rate dynamics in the business and where we are there. You've been much more explicit now about how Wise thinks about the additional interest and how that might drop through. I mean maybe we'll start with a question on how successful you feel you are being currently, in passing back the proportion you'd wish to pass back to your customers. And how is Wise is continuing to increase that proportion as we move through the current Q2?

Yes. So we have to look at this in the whole as to like how much interest that we earn. Do we pass back to our customers versus what proportion of our customers can we give access to an interest-earning product? And it's slightly nuanced. But we're doing -- I think, overall, we're doing pretty well. So you can see at the last set of results that we were passing an increasing share of this interest is going back to customers, but it's still way less than half of the interest. In Europe, we do a great job. We can -- the regulatory regime means that we follow this framework that we've shared, where you can add a really healthy cashback on your balances. In the U.K., it's much harder. We still, from a regulatory perspective, can't offer interest on your holdings, but we can offer you access to our assets for assets product, where you can opt in at an amazing rate on your assets interest products. And that's been really popular, and it continues to grow really fast. So actually, from a customer perspective, they've got the ability to earn interest if they're really sensitive to this. So from a growth and relationship perspective, this excellent. And then in the U.S., we're somewhere in between, actually, where if you hold dollar balances, there's many hopefully on the call many of you know, you can earn, I think, around 25 bps short of the Fed rate, instant access volume balances with FDIC insurance as well. And we're working hard at extending that to pound and euro balances for our U.S.-based customers. So we haven't made massive changes this quarter, so I still expect a significant amount of interest to be on our P&L. But we're so -- we're definitely making progress from a customer perspective, where those care, definitely have the option to earn interest, which means their relationship with us is going to [ endure ].

One, I think very important somewhat mechanical, question off the back of this something I discuss a lot with investors who want to look at the longer-term investment case is the fact that this interest income has been such a big boost to your total income growth. Over time, interest rate will normalize, clearly. And given the increasing proportion that you passed back could even become something of a headwind to the business in terms of year-on-year growth from '25 onwards. So I guess the question is, how do you think about that in the context of your over 20% total income growth? So what gives you the confidence there?

So I mean fundamentally, what gives us confidence that we'll compound, and then I think we're then talking about various -- the various kind of points of measurement like where is the growth. And I'll come back to that because clearly that's going to be there's been some very, very positive dynamics in the business over the last couple of years. So the fundamentals are yes, massive market opportunity. We've got a -- we've got these products that customers love that are joining us, and they're compounding -- you've seen the customers compounding -- number of active customers compounding at 30% into a massive market opportunity. We've got a really healthy -- a really strong infrastructure. You've seen in the media in the last couple of days kind of SWIFT, et cetera, like the proof points that show that what we're building is super hard to replicate, which gives us confidence over that 10 years that our ability to win and compound, and we're doing that profitably. So that fundamentally, the question is it gives us confidence to compound it to a big opportunity. The -- and then if you look at like this forward-looking -- what gives us confidence in that is all of those things together. Now clearly, as you look at -- even if you just look at this -- last quarter's volume growth versus the year before, we're lapping very strong volume growth last year. This year, we've got very healthy interest income balance. So we're going to have to, at various points -- for the period that we set looking forward, we're confident of that 20%, there will be periods like where you'll be able to find this quarter versus that quarter where we're going to have to think fundamentally, what are the underlying growth drivers of this business? It's the compounding number of customers. It's the dynamics of the volume, the take rate and the interest income. But these things give us confidence that if you look 3 to 5 years ahead, we're going to have a business that's generating a very healthy cash flow but will continue to allow us to continue to invest in these -- in products and growing customers. So no doubt, you'll have to think of smart ways to look at this. The investors on the call are going to have to look through some of these lapping issues. But if we look over the longer term, we expect to see these compounding numbers.

I think that makes perfect sense. I think it's just about being prepared for those lapping issues as opposed to...

It's on growth, and it's also going to be on profitability because as we said, we're not going to rush. And as we've laid out this framework for how we're returning this interest to our customers, but only do that responsibly. If we were purely worried about the optics, we may have taken a different path. But we think about this as owners of the company and as responsible custodians of where this capital is being invested, and we'll consciously make smart decisions rather than just purely managing an optic. So we're going to have to look through those when we get to that point.

Very clear. You mentioned the SWIFT news flow, perhaps a good juncture just to touch on that. I mean one thing that we've often discussed on these calls is the platform proposition from Wise. It's been growing, but the rest of the business has been growing quickly, too, and I don't have the sense that it's become a hugely bigger proportion of the business since IPO. So there's lots of potential there. We've talked about you trying to attack -- attack maybe the wrong word, but get into larger bank propositions over time as well as traditional banks. And I think the SWIFT news flow is perhaps a step in that direction. So is it worth just elaborating on that?

We're definitely not in the business of attacking banks. It's dangerous -- and actually [ a little ] help. So our platform, we said -- every time we say we've got over 60 partners, we've definitely announced another 10 or many more partners. So we're really focused on growing the number of banks and partners that are using the platform. That's continuing to grow our health -- very healthy pace. But we've been really focused on how do we get some larger banks onto this platform. And the challenge with -- if we go to a tech-minded forward-thinking bank or platform, we're very used to starting from scratch and just integrating through API extracted into Wise. But actually, we can speak to -- Barclays, for example, I think this might be useful. I'd like to test it. Or I'm confident that I need my -- the governance and the company to see a test on this. There's a huge opportunity, but we'll roll it out slowly, but the barriers to actually integrating are quite high, right? So actually, what this SWIFT integration makes -- is wonderful as this -- as a bank, you already got this pipe, but essentially, think about it as getting on to a road network or a -- you've already got an on-ramp that you're using that gets onto this network. So actually, what the SWIFT integration helps us do is we're using all of the existing pipes that the bank has in order to get on to the corresponding banking network. But instead of hooking up to a classic correspondent banking network, they're hooking up to Wise, right? So it makes it really easy for larger banks is initially just really pointing connect from point A to point B rather than having to really start from scratch. And actually, it works really well because you still go to pretty much the functionality of the Wise network that helps you really -- helps break down on these barriers to start using Wise. And that is not the only barrier. It will still take time, but -- it's also SWIFT is a pretty awesome network in itself. So we can work with SWIFT, which, in effect, is working with banks as well. And it's a kind of great things for SWIFT we hope, but also a great thing for Wise as to kind of get confidence in what we've built.

Yes, absolutely. Let's come back to another point just around the custodians of capital and how you invest. So we've been pretty clear here on the proportion that you want to reinvest back into the business. We've seen hiring accelerate massively over the past 12, 18 months or so. Clearly, you've benefited from this interest income, which wasn't in the original plan perhaps. So I guess the question is, how are you ensuring that you're generating the same level of return from these elevated investments off the back of the interest income as to what Wise was previously investing at?

Sure. Maybe try and debunk a bit of a myth though, if I can or a couple for you, James.

Please.

So fundamentally, we invest really at the rate at which our cross-border kind of payments volume. That's the primary thing we looked in this behind. And really, this is the core driver of what really pays for our investment. And we hired really fast in our product teams, but really in our servicing teams over the last year, as you have seen. The good news is we haven't had to hire as fast in some of those teams over this last year. And we definitely saw this change in volume dynamic over this year coming, and we're able to manage our -- cut our cloth and manage our hiring appropriately. So we still continue to hire. But actually, we've -- we believe only -- believe being profitable are not hiring ahead but hiring in line with, if that makes sense. And this interest income that is coming through, we're definitely not funding growth teams and product teams with this interest income, as we said at the half year. Rather, this will pay for the economics of -- the marginal economics of the products. We'll use 1 percentage point of interest for this, but we're really not becoming more and more dependent on that, right? We're not today investing significantly in products. We're not today using that for G&A. So really, I think I can be confident and U.S. investors can be confident that actually, we've got -- at its core, we've got a very profitable but very resilient volume-based kind of cash generator, which is funding all of our investment, and we'll invest behind products that continue to grow that going forward. So actually, we're not becoming dependent on this interest income. So if you go then back to the question around investments, we continue to invest in things that solve this problem of moving and managing our money around the world. So we judge our products and I'll judge our investments by the number of customers and the impact that has on our cross-border volume and the business that those customers are doing with us over time, rather than it would be very easy just to build things that maybe attract all balances attract or interest. That's quite a dangerous -- and maybe more dangerous game to play, if that makes sense. And then if you just look at the things we're building and look at payback, we shared, I think, 18 months ago, we spent GBP 300 million or GBP 400 million cumulatively over the last 10 years in our product engineering teams, and that's generated at that point of GBP 500 million annualized gross profit run rate. Now that's grown a lot since then. And we haven't -- we [ actually ] spend more. So the track record we've got in building products that generating a really high cash generation is pretty good. And the principles and the formula for that isn't changing anytime soon.

Understood. That's helpful. I mean if we were to look at the way your margin targets have developed over time, I think we could argue that we had an upgrade of sorts when you slightly changed the capitalization policy in the business. I think we could argue that we've had an upgrade certainly when you moved interest income to total income, and it was over the proportion of it, clearly running ahead of the 1% at the moment. And you've been clear that as long as interest rates are above 1%, you're going to have more than 20% margins. What's the potential for Wise, and maybe it's a question for your successor, but to think about actually a medium-term margin target or guidance that's actually going to be above the 20% that we currently see?

I mean if my successors has got a more predictable view of long-term interest rates than me, I should go and do a different job. But yes, she should go do a different job. Don't know who that is yet. So -- and I think what you can understand is -- and as you understand that for every percentage point of interest rates that are sitting at higher than 1%, there's going to be an additional EBITDA. So really, like giving a medium-term guidance for this interest rate is -- it's maybe -- it's helpful, but I think you can work through what does that look like based on -- I think the 10-year [indiscernible] is 4.4% on pound. It's probably a bit higher on the dollar, a bit lower on the euro, right? So I -- clearly, if this plays out, then that will play through to higher EBITDA margins over time. So I think what we've given is a construct as to how to think that turn out to work that through. But I think predicting where those rates will be over that period of time is a little value add, if that makes sense. Quite clearly, like what it tells The Street, if you step back, is we care about -- we care deeply about profitability, all the way down, as you can see with -- even with stock comp, we care about the cash generation -- we care about paying for that. And we are bottom line profitable, which actually is a capital-generating business as the most popular. And that's been growing as you point out. But at the moment, understanding this fundamental [indiscernible] of profitability of 20%, plus whatever impact on his interest is -- should give people confidence that we can continue to invest down to that significantly, and we've got a long way to go, but we're going to do so very profitably along the way.

Yes. Let's come back a bit to what you can control then in terms of the growth drivers of the core business. And the one I wanted to touch on was geographic expansion. We recently saw a move into China for expats. So can you talk us through this? And maybe any other plans for notable geographic expansion where it's left?

Yes, China is an interest. It's very early. And anyone you've seen our -- followed us for a long period of time now that when we get started in the market, it typically takes a while, and we kind of -- we find our way in. So we've been sending money to China through various -- it's obviously a very complex -- of all the markets, it's potentially huge but very complicated. And it's going to need to find the right [ pattern ], and we're sending money to China for a while. Actually now, there's a -- we feel there's a product in a market segment that we can serve reliably and competitively, which is expats in China, which is a very different focus from local players to the main population of China. So we'll see how this goes. And the product needs a lot of development and a lot of feedback from customers as it grows. It's very early days. So don't expect next quarter of me to say, "Oh, here's some growth, and it's thanks to China." It's just -- I think this is a proof point that there's many things in the very early stage of the company that compound over this medium term. On the outside of China, we continue to do the same work in India, which is very hard and long dated. But if you look in Brazil, we've been working there for 8, 9 years, and you can see that really now bearing fruit, where you can see that's really impacting the customer growth that you only need to spend a little time on [ insides ]. They have popular the product is in Brazil and how competitive and useful it is to the population. And we have a portfolio of these markets that we'll continue to work on, and this will compound over time.

Yes, I was going to touch on Brazil actually because that's clearly a region that's becoming quite material for the numbers. I guess the question I have off the back of that is just coming back to this VPC topic and some of the complexities in the KPIs that we've had historically, and you reported just the way those have developed. I mean isn't it reasonable to expect users of the product in places like Brazil to have a lower VPC? And therefore, my question is, over time, is it really right to judge Wise on number of customers and VPC, or should we increasingly focus in your view just on the overall volume development of the business?

I think it's new. I don't think there's a right answer right now. So really, what do we focus on is the number of customers, there's a volume of those customers move and then the products economics or the units economics of those customers as well. How volume is they are, how much income they generate of revenue and income they generate? So yes -- to answer your first point, yes, like we do see different countries having different volume per customer. U.S. is very hard. Brazil is maybe lower than average, but still significant. So I was very interested as to what impact this route mix is having on our VPC, and it does have an impact on it, but it's nothing like what we've seen from the lot higher, bigger and smaller payments over the last year. But it may be having mild downward pressure on VPC. That said, like these customers are profitable, these customers -- it's a huge market we're growing into. So it should continue to drive volume. It will continue to drive our revenue and income over time. The most important thing is we're acquiring kind of growing customer base that is on a unit level very profitable, and that will continue to compound up over time like it shouldn't -- we're definitely very excited to have Brazil, and it's definitely quite accretive to the health system. But yes -- so for now, we definitely should understand these volume dynamics, but also the revenue dynamics and the income dynamics as well. This is very important when you look over the overall base.

Yes. It's clear, certainly very encouraging. Look, we're going to leave it there. In the interest of time, we've got a tight schedule for investors today. I know Wise is doing other meetings over the course of their day. So lots of topics that we can dig into further, but Matt, it has been a really great run through some of the key trends for me. Thanks for coming and joining the conference again. All the best.

Always been fun time with you, James. See you, now.