WEX Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the WEX Q1 2024 Earnings Conference 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

I would now like to turn the call over to Steve Elder, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO and Jangtar 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 ks 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.

Speaker 1

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 ks 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.

Speaker 1

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.

Speaker 2

Thank you, Steve, and good morning, everyone. We appreciate you joining us today. The Q1 marked a strong start to 2024 for WEX. We delivered another quarter of impressive financial results, including record high revenue for the Q1, 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.

Speaker 2

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 Q1 results. During the quarter, we achieved revenue of $653,000,000 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.

Speaker 2

Total volume processed across the organization in the Q1 grew 9% year over year to $57,000,000,000 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 Jack Tarr will discuss later on the call. Each of our business segments demonstrated robust performance during the quarter.

Speaker 2

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 built 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.

Speaker 2

Booking dotcom 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 travel tech ecosystems in the world. HBX Group and it's a combination division known as Hotel Beds 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.

Speaker 2

Among our more than 800,000 active customer relationships worldwide, we are proud to work with 8 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 8,000,000 HSA accounts. According to the 2023 year end report by Devenir, the overall number of HSA accounts grew 5% last year to 37,000,000.

Speaker 2

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 WAX 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.

Speaker 2

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 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.

Speaker 2

But Over the Road payment process in gallon volumes increased by 1% in Q1 for the 1st year over year increase in the past 5 quarters. Our go to market engine continues to add vehicles to the platform with an increase of 4% versus Q1 last year. Dactyar 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 mixed fleet world.

Speaker 2

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 fleets. 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 broad acceptance. We believe that fleets made up of traditional ICE vehicles, hybrids and EVs will be present for years to come.

Speaker 2

Our solutions are designed to support these mixed fleets with integrated reporting and data. At our Spark Conference, we pull together our most innovative customers with our product development teams and 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 tolls and roadside assistance, all with the same data, controls and integrated experience that helps simplify the business of running their business.

Speaker 2

This helps a 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 increase mobility spend beyond fuel. Furthermore, we completed our strategic acquisition of PACER, a leading cloud native field service management software in November. As we continue to integrate PASER 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 Q1, we launched our first marketing efforts with PASER targeted at current WEX customers and we're testing different sales techniques to drive the best results.

Speaker 2

We're focused on both targeting PASER's customer base and marketing to 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 $75,000,000 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 $100,000,000 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.

Speaker 2

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 view 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 $400,000,000 in repurchases, reflecting our unwavering commitment to delivering long term value for our shareholders. Advancing technology innovations 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.

Speaker 2

Our 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 in 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.

Speaker 2

And by using predictive analytics, we've helped our customers optimize their HSAs, enhancing their ability to pay and save for healthcare. 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. 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.

Speaker 2

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. Jack Tarr?

Speaker 3

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 Q1, total revenue was $652,700,000 a 7% increase over Q1 2023 with more than 80% of revenue for the quarter recurring in nature.

Speaker 3

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 $65,800,000 in Q1 or $1.55 per share. Non GAAP adjusted net income was $146,700,000 or $3.46 per diluted share, which is an increase of 5% over last year.

Speaker 3

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 costs this quarter. Exiting our interest rate swaps in December resulted in an $11,000,000 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 $20,000,000 impact to revenue this quarter versus last year or an approximate 9.5% drag to earnings per share.

Speaker 3

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 $339,000,000 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.

Speaker 3

S. Was almost entirely offset by $2,000,000 of negative spreads in Europe versus our expectation. While mobility revenue declined approximately $3,000,000 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 $21,000,000 or 6%, while the underlying business continued to perform well. As we expected, excluding the change in fuel prices, revenue growth accelerated from Q4.

Speaker 3

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 Q1 in some time that OTR transactions have increased, reflecting stabilization in that business.

Speaker 3

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 $10,000,000 or 13%, which reduced segment revenue in total by 3%.

Speaker 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 are positive earnings impact to the company. I will touch further on credit losses in a moment. The net interchange rate in Mobility segment was 1.31%, which is up 8 basis points over our 2023 net interchange rate.

Speaker 3

The increase reflects continued benefits from the interest rate escalated clauses contained in various merchant contracts, the rate benefit from lower domestic fuel prices and higher rates earned for 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 $24,000,000 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.

Speaker 3

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 $122,500,000 Purchase volume issued by WEX was $23,900,000,000 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.

Speaker 3

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.

Speaker 3

The corporate payment 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 $200,000 which is an increase of $26,300,000 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.

Speaker 3

The Benefits segment purchase volume increased 10%, leading to a 6% increase in payment processing revenue. We also realized approximately $51,000,000 in revenue from the custodial HSA cash deposits that were invested by WEX Bank and from funds held at 3rd party banks compared to $37,000,000 last year. Approximately $8,000,000 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 and is the primary driver of this increase.

Speaker 3

Now I will provide an update on the balance sheet We have $463,000,000 of We have $463,000,000 of available borrowing capacity and corporate cash of $176,000,000 is defined under the company's credit agreement at quarter end. The total outstanding balance on our revolving line of credit and term loans was $3,200,000,000 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 times 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.

Speaker 3

WEX generates a significant amount cash each year. Using our definition, adjusted free cash flow was negative $205,000,000 in Q1. The Q1 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 $190,000,000 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.

Speaker 3

We repurchased 353,000 shares at a total cost of $74,000,000 during Q1. Since restarting our share repurchase program in 2022, we have repurchased approximately 3,900,000 shares at a cost of $662,000,000 which equates to an average cost of $169 per share. Looking forward, we will continue to manage capital allocation between organic investment, M and A and returning capital to shareholders. Finally, let's move to revenue and earnings guidance for the Q2 and full year. The Q1 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.

Speaker 3

Starting with the Q2, we expect to report revenue in the range of 6.75 dollars to $685,000,000 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 dollars to $2,770,000,000 We expect ANI EPS to be between $16.10 16 $0.60 per diluted share. For the full year, these updated ranges represent an increase of $30,000,000 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.

Speaker 3

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.

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Ramsey El Assal with Barclays. Please go ahead. Ramsey?

Operator

All right, your next questions come from the line of Sharik Sumar. Please go ahead.

Speaker 4

Yes. Hi. This is Sharik. Shayk. So on the benefit side, I believe your guidance still remains around 10% to 15% for 2024.

Speaker 4

I mean given the potential pipeline of HSAs and even the interest rate dynamics and potential driving impact, I mean can you help us understand the cadence for the full year? And how should we think about the drivers for growth in 2025? I mean, do you think that we could be able to maintain these levels? Or would there be some tougher comps in 2025? Thank you.

Speaker 2

Let me start and give a little bit of context here. I mean, this year, one of the things that we've talked about that's going to impact the year is the loss of the Medicare Advantage account. When you exclude the Medicare Advantage accounts loss, we had grew our total accounts 8%. So I think that will run through the course of this year and will affect the growth rate for this year. Now that being said, we feel good about how we're growing accounts excluding that compared to what's happening overall in the marketplace.

Speaker 2

So as you transition into next year, we expect to continue to see strong account growth and then have that be compounded by additional custodian revenue as well as some of the other ancillary fees that we are continuing to earn across the portfolio. So we do think we've talked about our long term guidance range of 15% to 20% in that segment. And we think this year, we're going to have some anomalies that are going to affect that.

Speaker 3

Sherry, I'll just add with regard to your question about 2024. So we came roughly a little ahead of our guidance range for the year. So we just expect benefits growth to be sort of balanced over the course of the year for precisely the reasons that Melissa sadly saw. Good benefit from Ascensus and HSA accounts in the Q1. Going through the rest of the year, we should see an uplift from the normal midyear onboarding that we see if HSA accounts and continued good performance on the HSA assets.

Speaker 4

Thank you so much. Yes, one follow-up on the easy side. Is there any color that you could provide on the economics or on any potential dilution that we could expect or if you see that? And secondly, on the competitive dynamics, I mean, where do you see it from your seat? Where do you see WEX stand at this point of time?

Speaker 4

Like, are you thinking that are you ahead of the curve in terms of investments? Or do you see that there is still some patch up that you need to do versus other peers out in the market?

Speaker 2

We continue to be very bullish about the impact of EP disease in our portfolio for a couple of reasons. First of all, we see this as a new revenue opportunity and so far that has proved out to be true. So we're earning subscription fees for access to the networks that we've created both in the United States and Europe. And we've talked about the fact that we've rolled out at home reimbursement capability, which we think is market leading and earning subscription fees associated with that. And then as we okay, the net of that, we talked about this between 1% and 1% and 1% and 1% So kind of the net of that, we talked about this between $1,500,000,000 $2,000,000,000 additional TAM and say from what we've seen so far, we

Operator

do believe that this is going

Speaker 2

to be additive and it's a great way to transition the portfolio into a different source of revenue over time. From a competitive perspective, we feel really good about where we sit competitively, in part because what we're hearing from our customers as they're going through this migration, you've got government fleets that are going through the migration, some of the largest fleets that have sustainability requirements and then a bunch of other people that are testing in this market place. And what we know from talking to our customers is that when they are having these mandates, they're not really sure what to do next. And so we're working in much more of a consultative fashion than probably we'd anticipated. And I think that's just indicative of the fact that they're on the commercial side, people are looking for options and we feel really good about the capability that we've built.

Speaker 4

Thank you so much. That's helpful.

Operator

Your next question comes from the line of Ramsey El Assal. Please go ahead.

Speaker 5

Hi. Can you guys hear me now?

Speaker 2

We can.

Speaker 5

Hello. Yes, you can. Sorry about that. Hi, if you can hear me, I think you can. You mentioned that the net interchange rate in the corporate segment, I think, fell due to timing of revenue recognition from network incentives from last year.

Speaker 5

Can you elaborate on that a little bit? And also just help us think through how interchange rates should trend for the next couple of quarters?

Speaker 3

Yes, sure. So Ramsey, what I was referring to is the decrease we saw from Q4 of 2023 to Q1 of 2024. You'll recall from the last earnings call that in Q4, we have revenue recognition related to the volumes incentives we have with the associations. And that caused the interchange rate to increase in Q4 and then back coming down to Q1, it normalized. Going through the balance of the year, we expect interchange rates to be flat to slightly tick up from the Q1.

Speaker 3

There'll be some dynamics with the booking contract, but we expect flat to flat, slightly to tick up as we go through the year.

Speaker 5

Okay. And then a quick follow-up. It looks like in the Q2 guidance, you're expecting credit loss to be a bit higher than it was in Q1 and also for the full year. I'm just curious what the dynamics there are in terms of maybe a bit of an uptick in credit losses in Q2?

Speaker 3

Yes. We've built some pretty sophisticated models that help us forecast where we think credit losses are going. And we're just looking at slightly higher charge offs in the Q2 based upon recent trends. Nothing too alarming, but we expect as a result of those charge offs that we'll be raising reserves in the quarter. And then as you can see from the forecast of the guide, we expect that to trend down over the course of the year.

Speaker 3

We've put into place some new functionality in Q1. We had a new credit adjudication model. In Q2, we've got a new automated credit line monitoring system that's going into place. So we expect credit losses to be relatively contained as we go through the year, but we're expecting an uptick in Q2.

Speaker 5

Got it. Thank you so much.

Operator

Next question comes from the line of Sanjay Sukarni. Please go ahead.

Speaker 6

Thank you. Good morning. So yes, congratulations on the renewals with Booking and HBX. I guess as we think about and I think Jadhtar, you mentioned it a little bit. There's probably going to be some impacts as we look at the yields and anything else.

Speaker 6

Maybe you could just help us think about the P and L impacts in terms of volumes and the take rates and such as we look out this year into next?

Speaker 2

Yes. Let me start just a little bit around the specifically the contract with Booking. Now we're there are going to be some short term headwinds, but also long term opportunity associated with the new contract. We couldn't be more pleased to sign this contract. Booking.com, it's the largest online travel agency in the world.

Speaker 2

It's a uniquely sophisticated partner. And we're going to continue to be their primary and virtual card partner. But going forward, they're going to continue to rely upon WEX's best in class payments technology platform and they'll be going to be transitioning and performing certain activities in house related to a portion of the virtual card program. And we've contemplated this obviously in our guidance and Jack Der will talk more about that in a minute. But I just want to reiterate, it's a great outcome from both companies.

Speaker 2

The partnership has allowed us to scale together, and we're really excited about the opportunities that we have long term.

Speaker 3

Thanks, Wesso. Hey, Sanjay. I'll talk a little bit about what this means for interchange rate in the Corporate Payments business. So just a reminder, right, we've I've said that we've included this in our guide for the year. And I think I previously said in the last earnings call that we expect our corporate payments revenue to grow in the high single digits this year.

Speaker 3

And this new contract does not change our expectations. So if you look at what we did in the Q1, we grew 16% year over year in corporate payments. And so that as I said in my prepared remarks implies that we expect to trend down over the course of the year. This booking contract doesn't change that expectation. It's embedded in that outlook.

Speaker 3

So let me start with the accounting impacts to this. So today, booking volume is recorded as payment processing revenue, and it will continue to be under the existing contract. But as it transitions to the in this new program, it in this new program, it will no longer be recorded as payment processing revenue and instead it will be recorded as account servicing revenue. So the result of that will be that volume that transitions to the new program will not be included in our purchase volume metric that we report or net interchange rate, although you will still see it included in our total volume metric that we publish. So we're obviously in early days of this transition and much remains to be seen on how it flows through the timing factors.

Speaker 3

But our current expectation, as I said earlier to Ramzi, is that our total interchange rate for corporate payments for the full year will be stable to slightly up from the rates that we saw in the Q1. And while the timing could still shift, what we're currently expecting is that corporate payments purchase volume will grow in the high single digits of the year, inclusive of that reduction in reported volumes related to the booking transition. So with that, that rate and volume that gives you our expectations for corporate payments purchase revenue and then the remaining bridge to our full year guide is really the expected corresponding increase that we expect in the account servicing revenue related to booking. So just to reiterate what Melissa said, we're really excited about this contract. We've got a great customer, a long term relationship.

Speaker 3

This continues that long term relationship and we see additional revenue opportunities working with them. So we're really excited about this.

Speaker 6

Okay. And just to clarify, you guys see this as net accretive to the growth rate on a go forward? I know there's transitory stuff this year, but as we look out 2025 onwards, is this renewal net accretive, stable or dilutive to sort of revenue growth in that segment? And then I have one quick follow-up on just something you said, Jagdhar.

Speaker 2

It's a headwind in the short term. We think it's a benefit over the long term.

Speaker 6

And when you say short term, you're talking about even into next year or just mainly this year?

Speaker 2

Well, as it goes through the migration, so it's going to be period of time. And again, this is a piece of the portfolio that they're going to bring in house and the timing of that is uncertain.

Operator

So we're giving you our

Speaker 2

current expectations. So it's really going to depend on how much transitions, when it transitions. And so again, we're giving you our current thoughts right now.

Speaker 6

Got it. Got it. And then just, one of the questions I've gotten is just that back end EPS guide. It seems like the revenues and EPS sort of de linking a little bit. Jugger, you mentioned you sort of front ended the investments and front loaded the investments, but the back end you get the cost saves.

Speaker 6

So that's more you have a decent amount of visibility into that EPS trajectory in the back end assuming the revenues are correct. Is that right?

Speaker 3

That's right, Sanjay. So we've got if you look at the back end, it's roughly based on what we got at Q2 in the full year, you're talking about a $75,000,000 increase in revenue in the second half and that's related to the things we've talked about pricing, volume, etcetera. And then you've got the cost reductions that we have talked about repeatedly that we expect to start flowing through in the second half, whereas we front loaded the cost reductions we've seen with some of the investments that we've talked about before.

Speaker 2

We also have this step up in credit loss we were anticipating in the Q2?

Speaker 1

Yes, correct.

Speaker 6

All right, great. Thank you, guys. Appreciate it.

Operator

Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.

Speaker 7

Great. Thank you very much. I wanted to ask just how we should be thinking about the mix between travel and non travel revenue and corporate payments over near to medium term, especially with some of these model transitions, etcetera?

Speaker 2

So right now, about 55%, 60% of revenue is travel and about 70% of the spend volume relates to travel. The rest obviously is non travel. Over time, we are expecting from a spend perspective, and again, in this case, I will talk about total spend just to make it cleaner, that you wouldn't see a big deviation. We've seen, obviously, like a big up tick over the last couple of years in travel spend with the rebound from the pandemic. We do think that that will continue to normalize as you progress through the course of the year.

Speaker 2

And I think Jagtar talked about the moving parts of how the pieces are going to move through our P and L in a way that you can actually go through and do the math to give you the current expectation.

Speaker 3

Yes, I'd just add. So as we I gave sort of what we expect for total volume purchase volume through the year. I would say that, we expect the rates of non travel purchase volume to be fairly stable over the course of the year. So the real net to that in the total volume number I gave is really the booking transition.

Speaker 7

Got it. Got it. Got it. And then I just want to touch quickly on in the benefit side and the HSA, just so you have a better understanding what's happening there. You've seen growth there in cash assets, but that seems to be getting to normalize.

Speaker 7

And the growth has still been quite strong though came in at 14% I think in the quarter. Well, so you've spoken to Devenir's HSA estimates in the past, but curious how you're thinking about the level of HSA growth we should be expecting in for the rest of 'twenty four and mid 'twenty five? And as part of that, I guess tied into that, what kind of assumptions are you making about rate cuts and impact on yields on those balances for the rest of this year?

Speaker 2

Let me start and Jack Turner, you hit the rates at the end of the year. Yes. So as we go through the course of this year, we anticipate outgrow the marketplace in terms of our account growth. So it really focused around continuing to move our sales through our pipeline and making sure that we are delivering that through the course of this year. So our objective is to outgrow what's happened from a market perspective.

Speaker 2

And then, as we have added in the custodial rights capability to be able to make sure that we're earning accretive revenue associated with that as well as you've added through the XSENSUS acquisition the ability to add in additional products like compliance products. We have our benefit administration products. And so we're continuing to cross sell those across the portfolio, including our capability, which has been really strong cross sell that we've had since we added that capability. And from a rate perspective, do you want to talk about that?

Speaker 3

Yes. So what we've included in our guidance and I think it's our earnings presentation is that we've basically forecasting in line with the market expectations. So at the beginning of the year, we had said 5 rate cuts is what we expected. We've changed those as I think market expectations are now down to about 2 rate cuts this year. So that's what's included in our guide.

Speaker 3

I would say with regard to the balances, the majority of our balances are in fixed rate instruments. So we don't expect any rate cuts to impact those. The part of our portfolio that's been floating, obviously that's part of our revenue guide increase for the balance of the year since we're expecting less rate cuts as we go through the year. But as I've talked about in previous calls, we tend to manage the fixed versus floating rate exposure so that it's effectively P and L neutral once you take it all the way through the P and L and look at corporate debt. So while we'll have some revenue impact, it doesn't have a bottom line EPS impact.

Speaker 7

Great. Hey, I appreciate all the color you guys.

Operator

Your next question comes from the line of John David with Raymond James. Please go ahead.

Speaker 8

Melissa, obviously, you called out the ex, the account growth and benefits ex the loss of the Medicare Advantage customer being about, call it, 1,500,000 accounts or so. How should we think about the revenue impact within benefits this year of that customer loss?

Speaker 2

It's still a couple of percent in the course of the year for the full year.

Speaker 8

Okay. So a couple of points to benefits growth, just to be clear?

Speaker 4

Yes.

Speaker 8

Okay. And then just, Jack Tar, on mobility margins, first time, I think margins have dipped below 40% in a while, and I know you called out lower fuel prices. But maybe just help us think about what the trajectory of margins from here in Mobility and how we should think about the full year? Any color there would be helpful.

Speaker 3

Yes, sure. So we should expect margins to improve overall as we go through the year. I think, right, we've got higher fuel prices that we're forecasting over the balance of the year. We're expecting improvements in late fees as we go through the year. Some of the drag that we've seen will become less of a drag.

Speaker 3

And then we're expecting a better interest rate environment as we go through the balance of the year. So all those things should help margins. We'll have a little bit of an impact in Q2 because we are forecasting those higher credit losses, but that should improve as we get into the second half.

Speaker 9

Okay. Thanks guys.

Operator

Next question comes from the line of Nate Svensson with Deutsche Bank. Please go ahead.

Speaker 10

Hey, I just kind of wanted to follow-up on that last question there. I was hoping you could remind us some of the underlying assumptions on the revenue growth within mobility. So I think before you had talked about 8% macro adjusted growth, including about 2 getting better in the back half of the year, but maybe some of the other assumptions like gallons of fuel growth, expansion in payment processing, great. Any way for to help us frame that would be helpful.

Speaker 2

So, Dexter is going to go into that in detail. But before he starts, one of the things that was really important to us was to see the step up in the Q1. He talked about the fact that we had an impact of negative spreads in Europe that impacted the quarter, which offset the positivity that we had for steel prices. But in terms of revenue growth, going from our growth in the 4th quarter to the incremental growth that we saw in the Q1 was part of the plan that we had as we were progressing through the course of the year. So we are pleased with the number that we posted this quarter.

Speaker 3

Yes. I'll jump in here. I just want to emphasize what Melissa just said, right? So we've guided to top end of our long term range, so call it 8% growth. In mobility, Q1, we saw 5%, which was a tick up from below 2% that we saw Q4.

Speaker 3

So that was and sorry, that's ex fuel prices. That's exactly what we expected to do and we were quite pleased to see that. So as we think through the rest of the year, high end of our range at 8%, PACER is expected to contribute too. And the rest of it comes from the things that I talked about in the previous call that we saw come to start to come to fruition in Q1. So part of it is the pricing levers that we've pulled.

Speaker 3

We saw that coming through in the rate in the Q1. Part of it is the impact from the credit losses that we saw a couple of years ago and the actions that we took last year dampened both volume growth because of higher attrition as well as late fees because of improvements in the credit in the portfolio. Both those items we expect to lap this year. We didn't quite see it as much as Q1 because it's more of a Q2 and beyond item. So we should start to see that as we go through the year.

Speaker 3

So those three things that I just mentioned, fuel prices sorry, late fees, volume and pricing are all we're expecting in Q2 through Q4 of the year.

Speaker 10

Super helpful. Appreciate the color. I guess my follow-up, maybe a 2 parter on corporate payments. I think last quarter you had talked about a better virtual card attach rate within your travel business. So I guess any update on how that trended this quarter and how you see that going forward?

Speaker 10

And then I guess the second part, you had a couple of comments in your prepared remarks on this, but more color on your direct sales efforts in corporate payments. So any additional information on the benefit you're seeing from the direct sales force or selling your AP product into midsize businesses would be helpful. Thank you.

Speaker 2

Yes, we'll tag team on this one too. So, we don't continue to see the benefit of the migration to the merchant model, which I think is what you're talking about within our European customers. And so that has been a benefit. Although I will say in the quarter, the oversize of the growth came from outside of Europe in this particular quarter. And most of the increase in spend volume was because of transaction growth.

Speaker 2

So rates seem to have normalized. It was only about a 4% increase in rate year over year. So again, it feels like we're getting back into more of a normalized environment. In terms of sales, half of the growth came from our direct sales outside of travel in our corporate payments business. And so we feel good about how we continue to build the pipeline there and continue to execute and deliver and that we've got a sustained growth engine at

Speaker 4

And I would say that's true

Speaker 2

within travel too as well. We continue to And I would say that's true within travel too as well. We continue to build the pipeline we have there, working with our existing customers, look for opportunities. You talked about some of that during the call, but it's an area that we're going to continue to focus on as well. Yes.

Speaker 3

I'll just add to that, that we were extremely pleased in the growth of that direct business, because this quarter this is the 2nd quarter in a row where over half of our non travel related payment processing revenue came from the direct business. And overall, if I look at our payment processing revenue trends for non travel, this is the Q3 of it trending upwards. So we were quite pleased to see that continuing trend.

Speaker 9

Thank you. Appreciate it.

Operator

Your next question comes from the line of Mihir Bhatia with Bank of America. Please go ahead.

Speaker 9

Good morning and thank you for taking my questions. Maybe I actually wanted to start by going back to following up on Sanjay's question. You mentioned some of the short term headwinds from the booking renewals. But can you just talk about the longer term opportunity there? Like is there additional volume you'll be getting for them from them longer term?

Speaker 9

I'm just trying to understand the benefit for WEX from the renewal beyond obviously locking up such a large customer, but what is the opportunity side of that contract renewal look like?

Speaker 2

Yes. Let me talk about a couple of things here. First of all, I think it's important to distinguish Booking because it is a highly sophisticated customer, unique capability set in this marketplace. And so what we're doing with them, we feel like is a great partnership. We're bridging them to their capability.

Speaker 2

In terms of the opportunity for us, again, this long term relationship, we are the primary provider over that long term. We are continuing to work with them on other areas across their portfolio, which we do believe will create opportunities.

Speaker 9

Okay. And then maybe like switching to guidance a little bit, right. Just trying to understand big picture, right. Your fuel what's changed here, right. The fuel price assumption increased like $0.09 which based on the framework you get gave last quarter should be about $0.27 of EPS, right?

Speaker 9

But EPS is only going up $0.20 Looks like revenue guide is increasing more than just the fuel price tailwinds from that framework. So it looks like you're maybe getting a little bit better revenue than you expected at the start of the year, but costs are maybe coming in higher. Is that the right way to think about it? I'm just trying to understand what's changed really if I remove the macro or the fuel impact?

Speaker 3

Yes. So what I would say, here are 2 items. So if I start with revenue, 2 macro items are impacting revenue. 1 is fuel prices. The other one is interest rates.

Speaker 3

And as we said in the last call, right, I assumed originally 5 rate reductions this year. Now we're assuming less than that. So that has a revenue impact because of merchant contracts and HSA assets. So the fuel related changes you see flow through to earnings, the interest rate related changes you see on the revenue line. But as we've talked about before, we manage our business to be interest rate neutral at the EPS level.

Speaker 3

So you don't see those flow through to changes because they're basically counteracted by interest cost increase that we expect in the corporate debt. So largely the fuel is flowing through. We had in the Q1 market movement that impacted our first quarter number. That was about $2,000,000 And so that's largely the delta that you see between the $0.27 you'd expect and what you're seeing in the actual EPS increase.

Speaker 9

Thank you.

Operator

That concludes our Q and A session. I will now turn the conference back over to Steve Elder for the closing remarks.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today. We'll look forward to sharing our progress in the second quarter coming up soon. Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
WEX Q1 2024
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