WEX [WEX] Conference call transcript for 2023 q1
2023-04-27 15:52:06
Fiscal: 2023 q1
Operator: Hello and welcome to the WEX Q1 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) I will now turn the conference over to Steve Elder. Please go ahead.
Steve Elder: Thank you, operator and good morning, everyone. With me today is Melissa Smith, our chair, CEO and President and Jagtar Narula, our CFO. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release has also been included in an 8-K we filed with the SEC earlier this morning. I’d also want to mention that we are renaming our existing segments in connection with the rebranding initiatives. The Fleet Solutions segment will now be renamed to mobility. The Travel and Corporate Solutions segment will now be renamed to Corporate Payments and the Health and Employee Benefits Solutions segment will now be renamed to benefits. There are no changes to what is included in each segment. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income, or ANI, and adjusted operating income and related margin and adjusted free cash flow during our call. please see Exhibit 1 of the press release for an explanation and reconciliation of these non-GAAP measures. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Annual Report on Form 10-K for the year end of December 31, 2022, filed with the SEC on February 28, 2023, and subsequent SEC filing. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I’ll turn the call over to Melissa.
Melissa Smith: Thank you, Steve and good morning, everyone. We appreciate you joining us today. WEX is off to a great start in 2023. We’ve continued our long track record of delivering exceptional financial results and performing well across the dynamic macroeconomic environments. Revenue for the first quarter came in at $7 million above the midpoint of our guidance. An adjusted net income per share beat the midpoint of our guidance by $0.11, revenue growth of 18% and adjusted earnings per share growth of 15%. This quarter represents the eighth consecutive quarter, these metrics each grew 15% or more. Last week, we held our annual SPARK Conference, a customer event, which unites leaders across the mobility, Corporate Payments and benefits industries to showcase how our platform of specialized solutions can help them overcome complexity and reach their full potential. SPARK has historically been focused on our benefits business, but was held as a joint conference across all of our solutions for the first time this year. This highlighted the ongoing transformation of our business as we discussed unifying product team around data, payments and digitization. Our message to customers centered on WEX’s unique ability to address the challenges they see in their businesses. These challenges are experienced across many industry verticals and include personalizing employee benefits, navigating the complexity of mixed fleet features, and removing the friction caused by inefficient payment processes and systems. WEX can help simplify these challenges today when we are innovating to anticipate and address those of tomorrow. we had record attendance at SPARK, which shows the importance of our solutions and how they resonate with customers. I am excited by the positive response and the momentum we’re seeing across the business. We continue to invest in our platform to help our customers meet the demands of their markets, its employees and customer base. our investments in data and advanced analytics, for example, are benefiting customers across our platform and we’re providing critical flexibility that allows them to choose from a suite of customized solutions that best sets the unique needs of their business. At the same time, we’ve been moving aggressively to the cloud, which increases peak market of innovation and enhanced scalability for our customers. We currently have approximately 85% of our cloud migration completed. We expect to reach our overall cloud goals later this year, allowing us to further leverage shared technologies across product sets. Before jumping into performance for the quarter, I’d like to quickly address the recent disruption in the banking industry. First, it’s worth noting that the failures of Silicon Valley Bank and Signature Bank had very minimal impact to our business. Neither of these banks were customers or partners of WEX and we had minimal deposit exposure. They were not a party to our credit facility, nor counterparties to our hedging relationships. As the banking industry cope with significant move when the deposit flows since the recent bank failures, our custodial HSA cash deposits and certificates of deposit have shown themselves to be extremely stable. This is thanks in partthe contractual limitations to early withdrawals and is also evidenced that the market for these funding vehicles continues to remain strong. Now, let’s turn to the financial results. Turning to our performance in the first quarter, revenue increased 18% year-over-year to $612 million. This increase of $94 million year-over-year was primarily driven by the growth of 36% in both our Corporate Payments and benefits segments. on an organic basis, which excludes the impact of fluctuations in fuel prices and foreign exchange rates. Revenue in the quarter grew 19%, compared to the prior year’s period. Once again, beating our long-term organic growth target of 8% to 12%. strong quarterly revenue, paired with the scalability of our business model in a superior funding model, resulted in adjusted net income by diluted share of $3.31, an increase of 15%, compared to the same quarter last year. Total volume process across the organization in the first quarter grew 17% year-over-year to $52.3 billion, driven by strong performance in our Corporate Payments and Benefits segments. During the quarter, we repurchased approximately 525,000 shares of WEX’s stock for roughly $93 million resulting in a small EPS benefit in the quarter. Now, I’d like to recap our business highlights in the quarter. On the benefits front, we completed a very positive open enrollment season. We signed one of the largest administrators of multi-employer benefit funds in the Midwest. This administrator made the move to WEX in order to offer the benefits of our card programs in their long-time clients for their health reimbursement arrangement plan. This administrator has more than 100 multi-employer clients allowing for a large market reach. in Corporate Payments, we signed a part of one of the largest healthcare systems in the United States. As you may recall, we’ve added to our direct sales force in this business and are starting to see a positive return with more than 40 deals signed in the first quarter. We also continue to benefit from a rebound and travel volume globally. benchmarked against 2019, we are seeing improvement versus Q4 in all regions with the largest gains coming from Europe. Overall travel-related purchase volumes pro forma for the eNett acquisition was up 29% versus 2019, with approximately half of the growth to the number of transactions and half to the value of each transaction. in a mobility, we’ve recently signed a renewal with one of the most popular states in the country, showcasing that our array of products continues to be a leading value proposition. I’m proud of our strong execution this quarter and believe we remained well positioned for the future as we deliver on our strategic priorities. Let me start with an update on our electric vehicle initiatives. We’ve been listening closely to the evolving needs of our commercial customers. They’re asking us for simplified solutions to manage their mixed suite and are looking for a single card or app on a single credit line, on a single dataset, all managed and controlled through a single view. This feedback has informed our electric vehicle strategy, which consists of giving fleet managers the tools to plan their energy transition, manage their vehicles in a mixed fleet environment, and help ensure their EVs can be conveniently controlled and charged across a distributed environment. To this end, our Mobility team is currently expanding our DriverDash mobile app, which helps fleets find ceiling locations on the go to include EV charging stations in Europe. This furthers our goal of putting tools in the hands of drivers that simplify the process of determining where, when and how to charge. We’ll build on this launch by focusing on learnings and rapidly innovating our offering for the U.S.-based customers. more broadly as we drive our strategy of simplification and convenience in in the EV space, the first phase of our EV product rollout is focused on en-route charging. We have a solution that is live in Europe in the United States. We also signed acceptance agreements with five of the 10 largest public charging networks in the U.S., all of which were in various stages of implementation. Our objective is to create a universal network of EV charging stations similar to our fuel acceptance network. We believe these new agreements will be a win-win for wax and our network partners giving the significant relationships we have with the government and large fleets. Our next phase will turn to at-home reimbursement. We’ll be piloting an at-home reimbursement product this quarter and expect to have a broader rollout in the second half of this year. Again, this is consistent with our strategy of ensuring electric vehicles can be charged conveniently while simplifying payments and reimbursement for organizations. There’s a significant pipeline and development beyond that with an overall vision of enabling managers to grow their fleets and have a unified experience using our products no matter how their vehicles are powered. We’re also encouraged by early cross-sell conversations as we begin the new year. Our focus on cross-sell continues to gain traction with more than 60 signed contracts during Q1. Most of these expanded relationships are mobility customers to whom we were able to sell a benefit solution. Next, let me turn to our operational improvement. We remain focused on enhancing the scalability of our platform and are on track to capture $100 million in run rate operating efficiencies by the end of 2024 with approximately half of these savings being reinvested in the business. As part of this initiative, we’ve been looking closely in a number of areas of our company using improved processes, data and technology. One of the areas I am excited about is the planned improvement in the customer experience by creating a more seamless digital journey, which has the added benefit of saving costs. We have a dedicated leader for this initiative with dozens of cross-functional teams inside of WEX, who are focused on execution and has the full support of me and my entire management team. Finally, before turning the call over to Jagtar, I wanted to highlight that we will host the investor event to provide an in-depth understanding of our benefits segment, including the product set, opportunity and financial profile. As you will hear from Jagtar, we had terrific results in benefits this quarter and we’re excited to share more about the sizable, fast growing and profitable business with you on June 1st. Registration for the webcast of the event will be available on the Investor Relations section of our website in the coming weeks. With that, I’ll turn it over to Jagtar to walk you through this quarter’s financial performance in more detail.
Jagtar Narula: Thanks, Melissa and good morning, everyone. We started off the year with a solid first quarter achieving strong top-line growth while delivering with a dependable execution that our employees, partners, customers, and shareholders have come to expect. As with prior quarters, this quarter showed the strength of our global commerce platform, the competitiveness of our offerings and the power of our business model. Now, let’s start with the quarter results. For the first quarter, total revenue exceeded the midpoint of our guidance by $7 million due to a combination of strong Corporate Payments purchase volume and a very good open enrollment season in our benefits segment. total revenue came in at $612 million, an 18% increase over Q1 2022 with more than 80% of revenue for the quarter recurring in nature. As a reminder, we defined recurring revenue as process payment processing and account servicing, revenue from our factoring business, transaction processing fees and other smaller items. In total, adjusted operating income margin for the company was 37.6%, which is down from 39.2% last year, largely driven by much higher margins in both the Corporate Payments and benefit segments, offset by lower margins in the mobility segment. From an earnings perspective, on a GAAP basis, we had net income attributable to shareholders of $68 million in q1. non-GAAP adjusted net income was $145.8 million, or a $3.31 per diluted share. This represents a 15% increase over the prior year. Now, let’s move to segment results starting with mobility. Mobility revenue for the quarter was $342.3 million, a 7% increase over the prior year, powered by solid volume growth from new customer wins and renewals, and an increase in the interchange rate earned on payment processing transactions. Payment processing transactions were up 4% year-over-year. We saw a solid mid-single-digit growth from our local customers in the U.S. while we had a small decline in over-the-road transactions to the freight market conditions. The freight market is an area we continue to watch closely. As you’ve seen our metrics, the net late fee rate was up slightly versus the prior year mostly as a result, the new ExxonMobil small business portfolio added late last year. We had anticipated the trend of higher late fee rates that we saw at the end of last year to continue in Q1 that did not materialize. and overall, finance fee revenue was up only 3%, which includes a 33% slowdown in our factoring revenue, which is related to the freight market conditions I just mentioned. The domestic fuel price in Q1 2023 was $3.86 versus $3.90 in 2022. We estimate the year-over-year impact of fuel prices increased segment revenue by approximately $1 million, including a benefit of approximately $6 million for European fuel price spreads. The net interchange rate in the mobility segment was 1.21%, which is up 10 basis points from Q4 of last year. We saw higher rates earned from a number of merchants due to renewals at favorable terms. The impact of interest rate escalator clauses contained in various merchant contracts and the rate impacts from a reduction in fuel prices versus Q4. The segment adjusted operating income margin for the quarter was 40.5%, down from 50.2% in Q1 2022. Higher credit losses versus the prior year were the primary reasons for the lower margin. Let me briefly address the increased credit losses, which were within our guidance range at 32 basis points of spend volume including approximately 4 basis points for fraud losses. The elevated loss rates in the over-the-road trucking business that we have seen over the past two quarters are starting to abate. The delinquency rates are improving and we expect loss rates to trend down going forward. The local fleet customers in the U.S. continue to have marginally elevated loss rates, compared to the last couple of years, but are in a relatively normal range. Delinquencies here also continued to improve. fraud losses in the segment, which we’ve spoken about a bit in prior quarters were down 39% from the Q4 of last year and continued to improve. the fraud remediation activities that I’ve spoken about in prior quarters, which include working with the truckstop operators, continuing to enhance our fraud detection tools and releasing the fraud focus product enhancements appeared to be delivering a fraud reduction impact as intended. We are pleased with this result and are working diligently to continue on this track. Turning now to Corporate Payments. total segment revenue for the quarter increased 36% to $104.8 million. Purchase volume issued by WEX was $18.6 billion, which is an increase of 58% versus last year. The net interchange rate in the segment was down 10 basis points sequentially, predominantly due to the timing of incentives for the networks in Q4 last year, as well as travel customers contributing a larger percentage of total purchase volume in q1. Breaking down the segment further, travel-related customer volume represented approximately 71% of the total spend and grew 84% compared to last year. Revenue from travel-related customers was up 87% versus Q1 2022. This reflects continued strength in the consumer travel demand and we are very pleased with these results. Non-travel-related Corporate Payments’ customer volume grew 17% versus last year and the revenue was up 4%. This was led by continued growth in the partner channel. We also saw volume growth in our direct channel and we are pleased to sign more than 40 new direct corporate Payments’ customers in the quarter. The corporate Payments segment delivered in the adjusted operating income margin of 46.9%, up from 36.7% in Q1 last year. There has been significant improvement in these margins and volume accelerates. Our business model here is very strong and revenue drop through for this segment is high given our relatively fixed cost base. Finally, let’s take a look at the benefits segment. We continue to drive strong growth resulting in Q1 revenue of $164.9 million. The $43.8 million increase represents 36% over the prior year. We were very pleased with our SaaS account growth, which was up 14% in Q1 versus the prior year. A reminder that we view this as an important metric, since it represents the underlying growth and usage of the platform and drives other areas of the business such as payment processing and HSA deposit growth. benefits segment purchase volume increased 18% leading to an 18% increase in payment processing revenue. We also realized approximately $37 million in revenue from the custodial HSA cash deposits that were invested by WEX Bank and funds held at third-party banks, compared to $9.5 million last year. Approximately, $26 million of the revenue increase in the segment is due to the average interest rate earned on these balances increasing from 1.24% last year to 3.98% this year. This income makes us less sensitive to interest rates as a company, as the revenue offsets higher interest expense in other parts of the business and serves as a natural hedge. The revenue is highly accreted to earnings, enabling us to perform well across a range of interest rate environments and providing some stability to navigate economic cycles. The benefits segment adjusted operating income margin was 39.1%, compared to 29.3% in 2022. The custodial revenue from the invested HSA cash deposits is the primary driver of the increase in margin, but if this is excluded from both periods, the core operating margin would still have increased nearly 1%. Shifting gears now, I will provide an update on the balance sheet in our liquidity position. we remain in a very healthy financial position and ended the quarter with $922 million in cash. We have $776 million of available borrowing capacity in corporate cash of $149 million as defined under the company’s credit agreement at quarter end. At the end of the quarter, the total outstanding balance on our revolving line of credit, term loans and convertible notes was $2.7 billion. The leverage ratio as defined in the credit agreement stands at two and a half times, which is at the bottom end of our long-term target of two and a half to three and a half times. Next, I would like to turn to cash flow. WEX generates a significant amount of cash each year with Q1 typically being the lowest seasonality. using our definition, adjusted free cash flow was negative $61 million through Q1, which is $16 million better than 2022. The beginning of each year is typically a week time for cash flow due to the timing of some payments. Also, as we noted last quarter, our deposit balances and as a result, our reported adjusted free cash flow were about $150 million to $175 million more than we would normally expect, which were reversed during Q1. Our primary use of free cash flow this year has been to repurchase shares. We will continue to manage capital allocation between organic investment, M&A and returning capital to shareholders. Finally, let’s move to revenue and earnings guidance for the second quarter in the full year. The first quarter was a very good quarter for us. and as a result, I am pleased to share that we are raising our guidance for 2023 to reflect those results, as well as the benefit of share repurchases completed to-date. Other than macro factors like fuel prices and interest rates, we are largely maintaining our previous guidance for everything else. Starting with the second quarter, we expect to report revenue in the range of $613 million to $623 million. We expect ANI EPS to be between $3.45 and $3.55 per diluted share. for the full year, we expect to report revenue in the range of $2.45 billion to $2.49 billion. We expect ANI EPS to be between $13.85 and $14.25 per diluted share. These updated ranges represent an increase of $20 billion in revenue and $0.25 of EPS, compared to the midpoint of our previous guidance. As I complete my prepared remarks, I would like to emphasize how pleased we were with our Q1 results. We have allowed these results to flow through to our guidance increase for the year while largely maintaining our previous guidance for the remainder of the year. We continue to execute well on both growing revenue and becoming more efficient servicing our customers. With that, operator, please open the line for questions.
Operator: Thank you. We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Sanjay Sakhrani with KBW. Please go ahead.
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A - Melissa Smith: Yes. With that, the business one, let’s say, similar to the way that we look at everything else. we are looking at where do you want to continue to build and we’ve had a bias of buildings just again, because of what’s happened with multiples. So, we have ramped the investments that we’ve made in that part of the business over the last couple of years. and we’re fine doing that if we see an opportunity within that space, and we’ll continue to look at where should we build, where should we partner, where should we buy. So, we’re continuing to sell in the marketplace. We have product roadmap of what we intend to deliver into the marketplace. And we will evaluate whether or not we should continue to do that from build perspective or if there are opportunities to buy. And I’d say that’s true across every part of the business. We just did that same process.
Operator: This concludes the question-and-answer session. I will turn the call to Steve Elder.
Steve Elder: I just wanted to thank everyone again, for hanging with us as we go a couple of minutes long here and we’ll look forward to speaking with you again, in about three months. Thank you.
Operator: This concludes the conference call. You may now disconnect your lines.
