WEX Inc. (WEX) Earnings Call Transcript

Yes, there are some applications where there is a crossover. But I'd say, generally, the behaviors -- there's a lot of behaviors that are different. I mean if you're a consumer fleet, I mean if you're a business fleet, you're typically not single sourcing with one particular OEM. And so you're just working through a different level of complexity as opposed to a consumer who will often be -- they're all in, in one particular brand name. And the way that we've thought about the product offerings is to have an open architecture where you can plug in a lot of different applications. So API, connect, demand, expose that to our customer segment so they can pick which pieces of functionality that they want to use and what they don't. And that's been our primary focus.

Okay. No, thanks for going through that. So let's pivot to Corporate Payments or let's do Travel and OTA. I'm sure you've gotten a lot of questions around Booking. I know that was a big topic at the meeting. I know you've got a lot of large OTAs as clients. I know Booking is unique. They've got a bank. They took some elements in the house, so there'll be some negative impact there. But why is this a one-off? Why isn't this a risk that we could see this extend into other OTAs?

Yes. So you're right. We do business with 8 of the 10 largest online travel agencies in the world. Booking is very unique in the fact that they have built out a great deal of payment expertise internally over time. As you said, they own a bank. And this has been a process that we've worked through for a long period of time with them of saying these are your assets. This is what we have for our underlying technology into how do we make this work and the way that's the best for both parties. And we like where we landed. We're excited about the relationship that we have with Booking, they're a great partner of ours. The way that this is going to happen, and I would say there's uncertainty in terms of timing, so when we gave a guide, we gave like our best view of that. But the expectation is that there'll be minimal impact to the second quarter of bringing in house some of the treasury services that in the third quarter that you start to have more of the migration and full effect in the fourth quarter. And so we think that this will have a negative -- you get a headwind for 4-ish quarters. And at the same time, we've been working with them to find additional pools of spend that we can actually move through this business. And so they're a great partner. They've been migrating over from their agency model to the merchant model. That trend will continue. And so that's been something that we have benefited from. And then on top of that, we're looking at areas of spend in other parts of the world that we can bring into this relationship as well as other spend categories. So it is very unique. So like the way that we think about this and the way that we look at our customers [ set ]. This is a unique relationship. What we're doing is unique to them because of where they are in their space, and we're excited to continue to provide the underlying technology. We have gotten some questions around impact. So one of the things that we have -- if you look at the impact next year, we think it's an incremental headwind of about 1% revenue growth next year. So I think some people are coming up with a bigger number than that. So to the total company, this is not a huge impact. To the segment, it will be more meaningful.

Of course. Okay. No, thanks for clarifying the one point. But with them taking a little bit more in-house, I would imagine they're going to end up taking on a little bit more risk. And so that takes off some of the cost burden and the risk burden on you. So I imagine there's some offset there, correct? On the bottom line?

Yes. No, It is a very scalable product, right? So it's not -- but yes, there -- from a built-to-funding perspective and from a risk perspective, there is some offsets to that. And at the same time, one of the things that we've been talking a lot about, and I'm sure you'll ask me at some point is about the cost savings initiatives that we've had. We're really focused on how we can pull through $100 million of savings by the end of 2024. And so this will be a negative impact to us in '25, but we also have some positives, some good guys that are running through, too.

Yes. No, I do want to talk about the cost saves, but just thinking about the virtual card market is a lot more -- I'd say better understood in the investment community now and we're hearing a lot more about load management and playing one-off of the other. So you won a lot of that business in the OTA business from my understanding around performance and lower error rates and things like that beyond price. So where are we now if we're thinking about how do you win in a jump ball situation beyond price?

Yes. We win based on functionality. So when -- in the embedded payments products, which is what our travel customers use, it's a combination of the -- if you look at our virtual card platform, our payment platform, we have a huge number of products that sit below that, which enables people on a global basis to tap into functionality in a way that is quite easy. We have settlement capability and currency issuance capability across over 20 different currencies, which -- and then locks down some of the fraud risk you have. We have the ability to handle chargebacks at a significant volume. And then as you talked about, uptime matters a lot and reliability. So when we look at how we compete, it's a combination of all of those things that actually matter to our customers and the level of complexity that we can deal with, and I would say, and particularly cross-border volume, which is really quite complex and is required in infrastructure from a compliance perspective on a global basis or ways that we compete in this space. And so we feel good about the underlying products we have, our ability to price that in the marketplace and they continue to be competitive. We take that same product. And with a few of the -- less bells and whistles is something we apply within the fintech space. And so that same embedded capability is something that we have built upon and are exposing in other areas outside of travel, which is another place that we're really bullish about our ability to compete for many of the same reasons.

Okay. So competitively -- the last one on this. So competitively, how do you stack up versus some of the upstarts that are out there talking about their virtual card platform?

Yes. No. We stack out very well. Again, in terms of sophistication of the product, the reliability of the systems, the ability to handle transactions on a global basis, we feel really good about where we stack up.

Okay. I mean you mentioned taking out the $100 million. So we'll talk about that now. So I know there's some reinvestment that you're doing. I think you said, what, half the savings you're going to reinvest, but any other block step changes that maybe we can expect out of WEX with respect to margin or cost takeout?

Yes. Look, you can actually see it coming through now. So if you look at where our margins have moved over the last year, you can see like incremental drop-through that has happened because of the work we've done. We did that reinvestment, we did front-load in the course of the year. So when we gave our guidance, you see more of that dropping through as you get to the back part of the year. But it's a series of activities that we've taken where we're looking at where can we use technology to actually reduce something that may have been happening on either a manual or a suboptimal process way. So it's process technology, but the technology tools are so much better now that we have an ability to create a flywheel. So we've been able to really actively work on either process change or places where we may have more than one item consolidating that together. And like an example of like with our call centers. We started with this idea of a lot of process work then we migrated to AI-based tools which are allowing us to do wrap-up work in a much more efficient way. And now we're migrating to that next level of the information that we're collecting from that AI tool allows us to even better inform how to service a customer in a way that deflects the call that actually creates a better customer experience. And in that process, we've taken the money that we were saving from that and created a data team and an AI team, which are -- it's not a small investment. It's a pretty big investment. But that can happen behind the scenes because we're moving money from something that was much more repetitive in nature and moving into something that is enabling even more work. And that's when I talk about it being a flywheel, that team of people is then looking for the next order of opportunity.

Got it. So the opportunities you can absorb something like a Booking. So you have enough room to do that, expand margin in Europe, reinvesting in productivity, which will drive better results as well, right? I think that's the genesis of it all.

Yes. It's productivity, but it's also looking at ways that we can enhance the product set, too. So when we think about -- I think of that as defense and offense, right? On the defense side, like we've had 60 active experience across the company that were AI-based last year, and they're all in different phases, and that will just create more momentum. But then on the product side, it's really important that we're embedding AI capability from a product perspective. And we have products that are in prototype that are starting to roll into the marketplace.

All right. Good. Before I open it up, I just want to ratify a few more, if you don't mind, Melissa, just on the benefits. Your long-term growth target is 15% to 20%. Build that up for us, how do you get there?

Yes. So you have underlying market growth, and our intention is to bring on more accounts than what's happening in the marketplace. So that is -- at this point in time, that moves into either high single digit or double digit depending on the year. On top of that, we are seeing higher growth from our direct business, which has -- gives you a positive mix from a revenue perspective because we're the custodian of those accounts. The custodian accounts themselves are growing faster than accounts because people's balances grow faster as they age. Spend volume is growing faster than account growth because health care costs keep going up. And then we have a bunch of different products that we've been cross-selling into the mix, our [ Kroger-based ] product benefit administration, most recently our compliance products. And so it starts with the base of the account growth, and you have -- start adding on all these incremental pieces.

So a lot of that -- the tail part is really the aging and the maturity of that book. But from a pipeline backlog standpoint, are you in the hunt for these deals to get there in the midterm?

Yes. Yes. Actually, it's interesting. Last year, we had way more just no decisions than normal. And you could see that, like our accounts grew excluding the impact of Medicare Advantage, with 8% and the industry grew 5%. I think like -- so we felt good about where we stand. We were getting more than our fair share from a customer perspective. But we're not seeing that same thing play out this year, at least so far this year. So we feel good about the sales cycles that we're in.

All right. Let me -- we're at the 5-minute mark. Any questions from the audience before I do last 2 or 3 more? Happy to take them, I don't want to hog the time. Anyone? Andrew, go for it. Yes. Just 1 to 2 more.

I wanted to ask a bit more about the enhanced acceptance product you mentioned before. So I think you started selling that in 1Q, right? And just how fast basically can that get cross-sold into the basin? Is there any new issuing of cards that you have to do? Or is that something you can kind of just implement directly into the cards you have out there?

Sure. So the product is a combination of our closed loop network in Mastercard's network, and so it does require a card reissuance. So at this point, we're doing that. As cards go through the renewal cycles, we -- from a customer perspective, we started testing it to see what happened from a behavior perspective. And we saw actually like a big stratification of accounts. We had very active users. It also helped us look at where people are trying to use the product and can't. So there are other codes that we should be opening up because they are important to our customer segment. And then we have customers that weren't using it at all. And so we're working on how do we actually make sure the customer is aware of what they can do and are helping them through that process. So I'd say we're still very early in the cycle. But we see this as a meaningful opportunity for us because we know from talking to our customers that there is a segment of our business that wants this. And so as we go through the course of this year, say we're learning a lot more about that, and we'll have a better idea of how that will play out into next year as this year progresses.

Was there any implications to WEX from the network litigation settlement with the interchange reductions and surcharging?

Yes. It's relatively small. So it's not applicable, obviously, to our closed-loop network. So it's -- you start to get into a relatively small part of the overall portfolio. And a lot of the maturity of our contracts are keep rate based. And so it's pretty small.

Surcharging, does it matter? Or could it be an opportunity, if you work with the merchants?

Yes. I think that, that is to be seen. Right?

Okay. I know it's early. I know we get a lot of questions on your Corporate Payments side, the direct side of the business. How big is it today? What do you do today? Why can't that be a bigger business sooner rather than later?

Yes. We have built a sales force. We added 25 salespeople and wanted to test out the business case, which has worked. So they're doing a wonderful job of growing the business. And I think you would expect that we will add to that. But at this point, we have 25 salespeople. So it's relatively small but growing and starting to have an impact of the overall growth rate of the Corporate Payments segment.

Right. Some of that is cross-sell, but also new sales as well. That 25 is new.

Yes, because we -- historically, we were just doing cross-selling of the product on a direct basis, and so the 25 salespeople is a new thing.

You're at the lower end of your target leverage ratio. I know WEX has done a lot of deals that have been quite accretive over time. Has your appetite to do M&A change at all? I know you've been so focused on, again, the cloud migration, the cost side of the equation, building up things around EV, now this Payzer acquisition. What's next for you on the inorganic front?

Yes. So we've done a number of deals even post-pandemic. I think the thing that has been different in that period of time is historically, we've done a combination of scale plays and then growth-related plays. And a lot of the scale plays we've transitioned to share buyback. We're big believers in buying our own stock in the environment that we're in right now. And so we continue to look for assets that are growth-related assets that fill strategic need that we have where we think is better than to actually build it. So we'll continue to look for those types of assets because we -- one of the things that we looked at is we can do both, we can actually buy back stock, and we actually can do an M&A. And so we've got this 2% to 3% in our long-term framework. But when it comes to something that is purely just for the math, at this point in time, that money is moving to share buyback.

Okay. Share buyback it is. So let me get you out with -- I know there's a lot of talk about the macro and demand and tech trends. Is this a favorable demand environment for WEX in your mind versus this time last year?

Well, it's interesting. I would say we had 3 years of like really good macro. I would say this is a good macro. It's not bad, it's not great environment. And I say that because their pockets of over-the-road part of customer base is not good. Everything else actually is still holding in there and pretty good. And so our products are definitely playing well in the space. Our sales are strong. But from an existing customer base, I would say it's good but not great.

Terrific. We should close it out there. Melissa, great to see you. Thank you for spending some time with us.

Thank you.

Thank you, Melissa.