WEX Inc. (NYSE:WEX) Q1 2024 Earnings Call Transcript

WEX Inc. (NYSE:WEX) Q1 2024 Earnings Call Transcript April 25, 2024

WEX Inc. misses on earnings expectations. Reported EPS is $3.46 EPS, expectations were $3.47. WEX Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: [Call starts abruptly] to the WEX Q1 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Steve Elder, Senior Vice President of Investor Relations. Please go ahead.

Steve Elder: Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO; 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. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we refer to as ANI, adjusted operating income and related margin as well as 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-ended December 31, 2023, filed with the SEC on February 23, 2024, and subsequent SEC filings. 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. The first quarter marked a strong start to 2024 for WEX. We delivered another quarter of impressive financial results including record high revenue for the first quarter, which is a testament to the resilience of our diversified business model in any economic environment. Earlier this month, we hosted our Annual Spark Conference where we brought together industry leaders to demonstrate how our cutting-edge solutions can help simplify the business of running a business. At the event, we showcased how our customers and partners can unlock the full potential of WEX’s solutions, highlighting the power of our innovative technology across employee benefits, fleet management and corporate payments.

We had record attendance at Spark, which underscores the invaluable role our services played for our customers. Now let’s discuss our first quarter results. During the quarter, we achieved revenue of $653 million, an increase of 7% year-over-year. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, Q1 revenue grew 10% year-over-year. Total volume processed across the organization in the first quarter grew 9% year-over-year to $57 billion, driven by strong performance in corporate payments. Adjusted net income per diluted share in Q1 was $3.46, an increase of 5% compared to the same quarter last year, as a result of strong quarterly revenue and share repurchases. Excluding the impact of fluctuations in fuel prices and foreign exchange rates, adjusted EPS grew 14% year-over-year.

As a reminder, earnings growth was impacted by exiting our interest rate swaps in December, which Jagtar will discuss later on the call. Each of our business segments demonstrated robust performance during the quarter. Our Corporate Payments segment remains very healthy and continues to grow at a strong pace as purchase volumes increased 29% year-over-year. The travel business continues to grow at a faster pace than the overall market. We have solidified our virtual card offering as a best-in-class solution and build strong long-term relationships with our clients. This approach has positioned us as preferred payment solutions provider to our partners, driving sustained growth and customer loyalty. To that end, we recently signed a new long-term agreement with Booking.com, and this agreement distinguishes WEX as Booking’s preferred partner.

Booking.com first became a WEX customer in 2013, and we now process payments for Booking.com in more than 20 currencies. We’ve also renewed our agreement with HBX Group, one of the largest B2B TravelTech ecosystems in the world. HBX Group and it’s a combination division known as Hotelbeds, has been a WEX customer for many years. Going forward, we expect to serve a larger share of their total volume as they consolidate relationships. The continuation of these long-standing partnerships demonstrates the strength and reliability of WEX’s enterprise-grade technology platform, our broad currency offerings and our deep payments expertise when delivering world-class travel payment solutions globally. Among our more than 800,000 active customer relationships worldwide, we are proud to work with eight of the top 10 online travel agencies globally.

In the Benefits segment, overall SaaS account growth was lower than normal this quarter, primarily due to the previously mentioned loss of a Medicare Advantage customer. Still the core business continues to perform well and we grew accounts excluding the declines in Medicare Advantage account, 8% compared to last year. We are now serving 8 million HSA accounts. According to the 2023 year-end report by Devenir, the overall number of HSA accounts grew 5% last year to 37 million. So we continue to perform well compared to the market growth. Based on the overall number of HSA accounts at year-end, this also means that approximately 20% of all HSAs in the U.S. run on the WEX platform as of the end of Q1. We also continue to integrate the Ascensus Health and Benefits line of business that we acquired last September.

This acquisition positions us for accelerated growth and innovation in the rapidly evolving benefits landscape. Finally, in our Mobility segment, we continue to be a market leader in this space across all of our core markets, and are focused on maximizing the value that we provide to our clients. In addition to the many small businesses that signed up with the WEX in the quarter, we also renewed our agreement with Shell to manage its portfolio of commercial fleet cars across North America. This represents a continuation of agreements first established in 2018. In our over-the-road truck business, the market continues to be challenged. But over the Red payment processing gallon volumes increased by 1% in Q1 for the first year-over-year increase in the past five quarters.

Our go-to-market engine continues to add vehicles to the platform with an increase of 4% versus Q1 last year. Jagtar will provide you with the details, but we are pleased to see sequential increase in the revenue growth this quarter. Now I’d like to highlight the progress we’ve made executing against our strategic initiatives, further solidifying our position as market leader. We continue to be focused on supporting our mobility customers as they transition to EV and hybrid solutions and manage their vehicles in a mix fleet world. We have more than 600,000 mobility customers globally. Our expansive reach, coupled with our expertise and our innovative offerings, positions us as a trusted partner for our customers as they evolve their fleet.

While we’ve all read about the slowdown in consumer EV shipments, we continue to invest in this area and roll out our integrated mix fleet solutions because customer interest remains steady. In Q1, we launched the general availability of our at-home reimbursement feature set to complement our public charging access, where we have brought acceptance. We believe that fleet made up of traditional ICE vehicles, hybrids and EVs will be present for years to come. Our solutions are designed to support these mixed fleets with integrated reporting and data. At our Spark Conference, we pulled together our most innovative customers with our product development teams in more than a dozen early-stage energy innovation startups. I was left with great confidence that we’re helping the industry think critically about how to help customers unlock significant value by integrating EVs properly and how to operate a mixed fleet with WEX as their trusted partner.

In Q1, we launched the pilot for an enhanced acceptance offering for our North American Mobility customers that combines the best of WEX’s fleet solution with a broad acceptance of the Mastercard network. With this offering, customers can manage all of their vehicle-related purchases, including fuel, parts and services, car washes, parking tools and roadside assistance, all with the same data, controls and integrated experience that helps simplify the business of running their business. This helps the small business owner better understand the expenses related to each vehicle, while at the same time, having the controls of a closed loop card to closely manage what is able to be purchased. While it’s early days, we have hundreds of customers enrolled in the pilot, and are actively gathering insights to inform future product features as we continue to expand the program and increased mobility spend beyond fuel.

Furthermore, we completed our strategic acquisition of Payzer, a leading cloud-native field service management software in November. As we continue to integrate Payzer into the WEX ecosystem, we remain confident that the platform complements and significantly enhances our existing mobility offerings, supporting our efforts to expand our total addressable market and deliver high value to our customers. During the first quarter, we launched our first marketing efforts with Payzer targeted at current WEX customers, and we’re testing different sales techniques to drive the best results. We’re focused on both targeting Payzer’s customer base and marketing the WEX field service management customers. We continue to be very excited about the long-term prospects and are tracking well with our integration efforts.

Last quarter, we announced that we achieved $75 million of cost savings on a run rate basis through the end of 2023. As we start 2024, we remain very confident in our ability to achieve the full $100 million of our run rate cost savings goals this year. As a reminder, roughly half of these savings will be reinvested and have been front-loaded in our year to drive long-term growth in the business in key areas such as digital products, technology and risk management capabilities and tools, generating sustained cash flows to power our strategic growth investments and maintain our solid balance sheet with low leverage remains a top priority for WEX. We continue to do share repurchases as an important and attractive element of our capital allocation strategy, underscoring our commitment to drive shareholder value.

Consequently, during Q1, our Board expanded our share repurchase program by authorizing an additional $400 million in repurchases, reflecting our unwavering commitment to delivering long-term value for our shareholders. Advancing technology innovation through the business remains a priority. As our ongoing efforts in this area continue to drive cost savings in our margins, while demonstrating our commitment to drive long-term sustainable profitability. From an AI perspective, our initial use cases that I updated you on last quarter have yielded positive results, and we’re taking steps to accelerate our AI capabilities and support additional use cases in the business. A main area of focus is our customer service operations where we’re experimenting with new technologies and driving efficiencies for better customer service.

We’re currently working on reimagining our IVR systems and flows to enable customers to fulfill payments faster and with more accuracy. The advancements we have made with voice-to-text and text-to-speech technology in this area will enable us to apply our learnings and many other areas going forward, particularly as we work to reinvent our call center experience. One area we’re particularly excited about is the application of AI in our Benefit business. We’ve been able to leverage AI to deliver personalized targeted messaging to the HSA account holders. And by using predictive analytics, we’ve helped our customers optimize their HSAs, enhancing their ability to pay and save for health care. In closing, I want to reiterate that WEX is well positioned to continue driving solid financial performance in any macroeconomic environment as we have proven over the last several quarters.

An executive standing in front of a large monitor that shows payment processing information.

We expect to deliver strong revenue and adjusted earnings growth this year. We remain focused on delivering accretive EPS, driven by high marginal contribution of incremental revenue to our business. Our reengineering efforts that are delivering efficiencies across the enterprise and pricing optimization initiatives that yield strong drop through to our bottom line. Finally, we’re in a privileged position to make strategic growth investments in our business, while also buying back shares to deliver the most value to our shareholders. This is supported by a solid balance sheet with low leverage. As we look ahead to the rest of 2024, I remain confident in WEX’s ability to drive growth across the business in the near and long term, backed by our strong position in the market and strategic initiatives in place.

With that, I’ll turn it over to Jagtar to walk you through this quarter’s financial performance in more detail. Jagtar?

Jagtar Narula: Thanks, Melissa, and good morning, everyone. We reported a strong first quarter with record high Q1 revenue. Our adjusted EPS results show continued execution against our strategic initiatives even against a year-over-year decline in fuel prices. Now let’s start with the quarter results. For the first quarter, total revenue was $652.7 million, a 7% increase over Q1 2023, with more than 80% of revenue for the quarter recurring in nature. We had strong contributions from both Corporate Payments and Benefits, while lower fuel prices impacted reported growth in the Mobility segment. As a reminder, we define recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, income from custodial HSA cash assets, transaction processing fees and other smaller items.

In total, adjusted operating income margin for the company was 38.5%, which is up from 37.6% last year, driven by margin increases in both Corporate Payments and Benefits segments. From an earnings perspective, on a GAAP basis we had net income of $65.8 million in Q1 or $1.55 per share. Non-GAAP adjusted net income was $146.7 million or $3.46 per diluted share, which is an increase of 5% over last year. Our first quarter results were solid and set us up well for the remainder of the year, as we continue to navigate a year-over-year decline in fuel prices as well as a significant increase in debt costs due primarily to higher interest rates. Like we have discussed in previous quarters, our HSA custodial cash balances allow us to mitigate the impact of higher rates.

As a reminder, we also exited our interest rate hedge positions in December, leading to an increase in interest cost this quarter. Exiting our interest rate swaps in December resulted in an $11 million cash impact to interest expense and a 7% drag on earnings per share. In addition, the foreign exchange rates and lower fuel prices resulted in a negative $20 million impact to revenue this quarter versus last year or an approximate 9.5% drag to earnings per share. Our ability to continue to grow earnings per share despite the drag from exiting the swaps and lower fuel prices is a testament to our diverse vertical focused businesses, strong recurring revenue and balanced interest rate exposure, allowing us to sustain durable through the cycle revenue and earnings growth.

Now let's move to segment results, starting with Mobility. Mobility revenue for the quarter was $339 million, a 1% decrease from the prior year. Fuel prices are strong, but have retreated compared to last year, with the domestic average fuel price in Q1 of $3.56 versus $3.86 in 2023. The Q1 fuel price was slightly higher than our guidance, but the benefit we received in the U.S. was almost entirely offset by $2 million of negative spreads in Europe versus our expectation. While Mobility revenue declined approximately $3 million year-over-year, fuel prices had a large impact. The year-over-year 8% fuel price decline and reduced spreads in Europe decreased segment revenue by an estimated $21 million or 6%, while the underlying business continued to perform well.

As we expected, excluding the change in fuel prices, revenue growth accelerated from Q4. Similar to last quarter, payment processing transactions remained roughly flat year-over-year, which was in line with our expectations. Local customers in the U.S. were approximately flat compared to last year, and over the road payment processing transactions were slightly above year ago levels. As Melissa noted, this is the first quarter in some time that OTR transactions have increased, reflecting stabilization in that business. Note that despite the fact that this was a leap year, we actually had one less business day in Q1 than last year. Overall, we were pleased that both payment processing transactions and total transaction growth rates improved from Q4 2023.

Next, let's turn to late fees. The net late fee rate decreased 4 basis points versus the prior year. Finance fee revenue decreased $10 million or 13%, which reduced segment revenue in total by 3%. The previously mentioned decline in fuel prices, a 20% decline in the number of late fee instances and a 7% slowdown in our factoring revenue caused the decline in finance fee revenue. We believe the decline in late fee instances reflects the tighter credit policies that we have put in place. While these tighter policies reduce our late fee revenue, they have also resulted in significantly lower credit losses and taken holistically our positive earnings impact to the company. I will touch further on credit losses in a moment. The net interchange rate in the Mobility segment was 1.31%, which is up 8 basis points over our 2023 net interchange rate.

The increase reflects continued benefits from the interest rate escalated causes contained in various merchant contracts, the rate benefit from lower domestic fuel prices and higher rates earned from merchant contract renewals at favorable terms. The Mobility segment adjusted operating income margin for the quarter was 38.6%, down from 40.5% in Q1 2023. The decline in fuel price this year is the primary reason for the lower margins. Moving on. Credit losses decreased $24 million in the Mobility segment versus last year, and were in line with our guidance range at 15 basis points of spend volume, which compares to 32 basis points last year. Loss improved significantly compared to last year as expected. The changes that we made to our credit policies a year ago have had the intended impact in terms of reducing losses, especially with over-the-road trucking customers.

The year-over-year decline of 17 basis points in credit loss rates more than makes up for the 4 basis point decline in our net late fee rate, and underscores the positive overall impact from the credit changes we made a year ago. Turning now to Corporate Payments. Total segment revenue for the quarter increased 17% to $122.5 million. Purchase volume issued by WEX was $23.9 billion, which is an increase of 29% versus last year. The net interchange rate in the segment was down 9 basis points sequentially, related to the timing of revenue recognition for network incentives earned in Q4 of last year. We continue to see strength in consumer travel demand that drove strong results in Corporate Payments. Travel-related customer revenue grew 30% compared to last year.

The interchange rate for travel-related customers is down from Q4 due to the timing of incentive recognition. Outside of travel, our non-travel customer revenue was up 7%, driven by a 26% increase in purchase volume, showing some reacceleration in our partner channel and continued positive growth in our direct channel revenue. Similar to last quarter, over half our non-travel corporate payment revenue growth came from our direct channel. The Corporate Payments segment delivered an adjusted operating income margin of 52.7%, up from 46.9% in Q1 last year, driven by continued acceleration in volume. Finally, let's look at the Benefits segment. We again achieved strong results in this segment with Q1 revenue of $191.2 million, which is an increase of $26.3 million or 16% over the prior year.

As we expected, SaaS accounts were flat in Q1 versus the prior year, with the loss of the Medicare Advantage customer that we mentioned last quarter. Core market dynamics of this business continue to be strong as exemplified by the underlying SaaS account growth, excluding the declines in Medicare Advantage accounts, which was 8% year-over-year. The Benefits segment purchase volume increased 10%, leading to a 6% increase in payment processing revenue. We also realized approximately $51 million in revenue from the custodial HSA cash deposits that were invested by WEX Bank and from funds held at third-party banks compared to $37 million last year. Approximately $8 million of the revenue increase in the Benefits segment is due to the average interest rate earned on these balances, increasing from 4% last year to 4.8% this year.

The Benefits segment adjusted operating income margin was 41.5% compared to 39.1% in 2023. The custodial revenue from the invested HSA cash deposits has very high incremental margins. It is the primary driver of this increase. Now I will provide an update on the balance sheet and our liquidity position. We remain in a healthy financial position and ended the quarter with $780 million in cash. We have $463 million of available borrowing capacity and corporate cash of $176 million as defined under the company's credit agreement at quarter end. The total outstanding balance on our revolving line of credit and term loans was $3.2 billion. The leverage ratio, as defined in the credit agreement, stands at 2.6 times, which is near the low-end of our long-term target of 2.5 to 3.5 times.

Leverage generally increases slightly in the first quarter of each year. Our ability to invest in the business and return capital to shareholders while also maintaining conservative debt levels puts us in an enviable position. Next, I would like to turn to cash flow. WEX generates a significant amount of cash each year. Using our definition, adjusted free cash flow was negative $205 million in Q1. The first quarter of each year is seasonally low for us, and the timing of the end of the quarter falling on a weekend resulted in an estimated $190 million cash flow impact and caused an even larger negative number than normal for the quarter. We expect this will reverse in Q2. Our primary discretionary use of cash so far this year has been to repurchase shares.

We repurchased 353,000 shares at a total cost of $74 million during Q1. Since restarting our share repurchase program in 2022, we have repurchased approximately 3.9 million shares at a cost of $662 million, which equates to an average cost of $169 per share. Looking forward, 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 and full year. The first quarter was another good quarter for us and as a result of improvement in some macro factors, I'm pleased to share that we are raising our guidance for 2024 to reflect those factors and trends. Starting with the second quarter, we expect to report revenue in the range of $675 million to $685 million.

We expect ANI EPS to be between $3.75 and $3.85 per diluted share. For the full year, we expect to report revenue in the range of $2.73 billion to $2.77 billion. We expect ANI EPS to be between $16.10 and $16.60 per diluted share. For the full year, these updated ranges represent an increase of $30 million in revenue and $0.20 of EPS compared to the midpoint of our previous guidance. The major moving pieces compared to our prior guidance are updated fuel price and interest rate assumptions and the impact of share repurchases completed. Consistent with our prior guidance, we expect Mobility revenue growth to accelerate through the year, as we lap credit changes that caused higher attrition and lower finance fee revenue. As we noted last quarter, we are also implementing a number of pricing changes that will help the second half of the year.

We also expect corporate payments revenue growth to slow as we progress through the year. In addition, we expect a greater proportion of our cost savings program to flow through to net income as we have front-loaded the reinvestment we intended to make. In conclusion, we delivered another quarter of growth in our financial results, and I'm especially proud that we were able to do this in the uncertain economic environment that we are operating in. With that, operator, please open the line for questions.

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