Q4 2024 WEX Inc Earnings Call
Hello, and welcome to the works fourth quarter and full year 2024 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 and if you would like to ask a question. During this time. Please press star one on your telephone keypad.
Speaker Change: I would now like to turn the conference over to Steve Elder Senior Vice President of Investor Relations you may begin.
Speaker Change: Thank you operator, and good morning, everyone with me today is most of the Smith, our chairman and CEO and Jack <unk> our CFO.
Speaker Change: The press release, we issued yesterday afternoon.
Speaker Change: Slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at <unk> zinc dot com.
Speaker Change: New this quarter, we have also posted supplemental materials, which include detail around our performance to assist investors with understanding our results.
Speaker Change: Copy of the press release and supplemental materials have been included in an 8-K, we filed with the SEC yesterday afternoon.
Speaker Change: As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income, which we sometimes refer to as a ni adjusted net income per diluted share adjusted operating income and related margin.
Speaker Change: As well as adjusted free cash flow during a call. Please.
Speaker Change: Please see exhibit one of the press release for an explanation and reconciliation of these non-GAAP measures.
Speaker Change: The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis due to the uncertainty in the indeterminate amount of certain elements that are included in reported GAAP earnings.
Speaker Change: I would also like to remind you that we will discuss forward looking statements under the private Securities Litigation Reform Act of 1995.
Speaker Change: Actual results may differ materially from those forward looking statements.
Speaker Change: As a result of various factors, including those discussed in our press release and the supplemental materials.
Speaker Change: And the risk factors identified in our most recently filed annual report on Form 10-K.
Speaker Change: And our subsequent quarterly reports on Form 10-Q, and other SEC filings.
Speaker Change: 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.
Melissa: With that I'll turn the call over to Melissa.
Melissa: Thank you, Steve and good morning, everyone. We appreciate you joining us today.
Melissa: Before we dive into our results I want to highlight a new resource we've introduced for investors as Steve mentioned, we posted a supplemental material documents in the IR section of our website and filed with the SEC yesterday. After the market closed this document consolidate key quarterly disclosures and commentary.
Melissa: Providing details to better understand and analyze our performance, while allowing us to focus this call on strategic and forward looking priority. We plan to provide these supplemental materials quarterly moving forward.
Melissa: We're here to review that document at your convenience.
Melissa: With that let's move into our quarterly and full year performance.
Melissa: Let me start with the full year results revenue of $2 6 billion for the year with a record high and grew 3% compared to the prior year, despite a headwind of 3% from fuel prices and foreign exchange rates.
Melissa: Adjusted net income per share increased 3% year over year, excluding the impact of lower fuel prices and foreign exchange rate differences revenue grew 6% and adjusted net income per share grew 11% year over year.
Melissa: Now turning to fourth quarter results.
Melissa: We delivered revenue of $637 million for the quarter, a decrease of 4% year over year, excluding the impact of fluctuations in fuel prices and foreign exchange rates Q4 revenue was flat with the prior year.
Melissa: Adjusted net income per diluted share was $3 57.
Melissa: A decrease of six 5% compared to the same quarter last year.
Melissa: Excluding the impact of fluctuations in fuel prices and foreign exchange rates Q4, adjusted EPS grew 5%.
Melissa: Taking a few steps back from our reported results I'm excited to take some time to discuss actions, we've recently been undertaking to accelerate growth.
Melissa: I'll also share our perspective on where the business stands today and where we're headed over the next few years.
Since our founding we've been helping customers and partners of all sizes simplified the business of running their businesses.
Melissa: And then the ability to streamline operations and optimize workflows.
Melissa: Can focus on what matters most.
Melissa: With works customers grow their business save time and build confidence.
Melissa: With worldwide business spend measuring in the trillions of dollars combined with continued technology innovation and the relentless focus by businesses on efficiency. We are in an exciting segment of the economy with strong growth prospects.
Anymore. In addition to the strong sector tailwind.
Melissa: At its core is a great business, we have a long trajectory of growth exceptional margins and we generate strong cash flows underpinning our business is an impressive set of technology assets.
Melissa: However, our growth has slowed in recent quarters.
Melissa: Certainly macro factors such as fuel prices FX rates and the trucking recession in our mobility business have negatively affected our growth.
Melissa: Also saw pressure from one off factors such as the contract renegotiations with our large travel customer and the loss of the Medicare advantage customer and the benefits segment.
Melissa: While these external factors impede our near term growth rate, we would be remiss to ignore the factors that were within our control.
Melissa: We are deeply examined the reasons why recent performance has fallen short of our targets.
Melissa: One conclusion from this review is that our portfolio of software assets and payment processing capabilities as untapped potential where we can accelerate growth. This is especially true in the corporate payments segment, where we have experienced more volatility in growth via.
Melissa: By addressing the untapped potential with increase in targeted investments. We believe there is tremendous opportunity to strengthen our competitive position and accelerate our revenue growth moving forward.
Melissa: We also believe that despite our healthy investment and highly effective sales and marketing organization.
Melissa: Size of the markets, we sell into presents an opportunity to do more and we're addressing this with renewed energy and additional investment as a result, we have already begun adding additional sales and marketing resources to areas that we feel are both strategic and have high growth potential.
Melissa: All segments, the payback period, or two years or fewer and there was a strong LTV to CAC.
Melissa: To be clear these growth acceleration actions stemmed from our view that our currently reported growth rates.
Melissa: Not match the scale of our ambition the capabilities of our team for the opportunity in front of us.
Melissa: This is a very important issue to meet personally.
Melissa: With that said, we are adjusting our long term organic revenue growth targets from 8% to 12% to the 5% to 10% range to reflect updated market insights.
Melissa: In addition, as a result of the change in our organic revenue growth targets. We are also updating our long term adjusted earnings per share target to a range of 10% to 15%.
Melissa: We believe these updated long term ranges considered the current state and trajectory of the markets. We operate in while also reflecting our opportunity to remain highly competitive with our product offerings.
Melissa: Recognizing that we will take a bit of time for our investments in product and sales to bear fruit. We expect our reported results will be below these updated target this year.
Melissa: I'll walk you through some of the additional investments, we're making to accelerate our growth many of which are fully underway, let's discuss the details of these initiatives by segment.
Melissa: In mobility.
Melissa: Very competitively positioned with strong modes, we are a closed loop network in the U S covering more than 90% of all fuel locations and the 80% of all charging locations.
Melissa: We own the entire technology stack and we have west bank as an integrated engine to handle all of the funding and compliance associated with issuing we all.
Melissa: We have a strong market share with broad distribution capabilities.
Melissa: We would expect to see continued growth in our solutions expand deeper into the market. We're also focused on new product initiatives that we believe can help infuse growth in this segment over time 10, four by wax, which serves independent owner operators in our fleet plus offering.
Melissa: <unk>, which provides extended network effective beyond fuel to local fleets are two of our most exciting new products.
Melissa: We also expect the migration to evs to present opportunities to us.
Melissa: To enhance our unit economics within our customer base recognizes that the transition to Evs will take place over an extended timeline.
Melissa: In addition, we gained valuable insights from our experience with Taser.
Melissa: While this asset has met the expectations. We shared last year. We believe it has the opportunity to contribute even more over the past year, we gained deeper customer insight enhanced sales tools and sharpened our cross sell and go to market strategies to deliver effective and scalable growth in 2025.
Melissa: Turning to our benefit segment and 2024, we experienced a moderation in growth largely reflecting an industry by leveling in the adoption curve for HSA eligible plan enrollment.
Melissa: Despite this broader trend a robust portfolio of assets, including benefit administration.
Melissa: Tumor driven benefit offerings and HSA custodial services.
Melissa: <unk> us for market, leading performance, while we continue to invest in strengthening our competitive position.
Melissa: We see a significant opportunity to unlock the next phase of growth for releasing new products and capabilities to drive greater engagement with consumers and employers.
Melissa: For example, as a record keeper of these HSA, we can utilize our vast data set to create more tailored support helping employees better understand utilized and contribute to their accounts.
Melissa: By applying advanced technology like AI to our rich data assets we have.
Melissa: For consumers to make more informed benefit decisions, which in turn can drive higher participation greater funding levels and stronger outcomes for employers employees and works.
Melissa: We're actively investing in ways to capitalize on these opportunities and we're optimistic that these efforts will accelerate growth over time in this segment.
Melissa: Now, let's turn to the corporate payments segment. This is the smallest of our three segments and growth with lower than historical trends in 2024, and we expect will remain lower in 2025 is also a segment with a large addressable market, where we have a lot of the right assets to win.
Melissa: While acknowledging this volatile performance I'll spend a few minutes looking forward at our growth expectations to begin.
Melissa: There are two key solutions that drive this segment's revenue.
Melissa: The first solution is our embedded payments offering which began by serving the travel industry is now leveraged its capability to support a broad range of industries, requiring an integrated scalable payment solution.
Melissa: The unique combination of West Bank and our technology platform enables a one stop seamless payment experience with west handling the full spectrum of card management banking services compliance and settlement.
Melissa: We've been making targeted investments to broaden our corporate card capabilities provides customers with greater flexibility in funding their accounts and enabled broadened issuance and settlement in local currencies.
Melissa: We believe these advancements that allow us to expand both with existing customers as well as increase our competitiveness and acquiring new business.
Melissa: Last quarter, we signed several new customers and grew our sales presence in order to accelerate customer acquisition for this product suite.
Melissa: Over time, we anticipate that our investments in our embedded payments product will deliver a substantial boost to our market share in transaction volume, while net interchange rates for this product will likely continue to decline as our customers and volumes grow our scale cost structure, and resulting economic model ensure.
Melissa: That revenue growth will remain highly accretive to our overall margins.
Melissa: We also plan to leverage many of the same technology enhancements to improve the software product portfolio and our direct accounts payable business with this product we provide a software solution to mid market corporations that are looking to digitize their AP payments. Since this solution is sold directly to the end.
Melissa: <unk>, rather than being white labeled our wholesales to other providers. It possesses a higher net interchange rate than what we received for our embedded payments offering.
Melissa: The white space for this market is substantial and we see an enormous opportunity for growth.
Melissa: Further our investment in product development, we will maintain and enhance the strong growth. This product has already achieved.
Melissa: Purchase volume for this product has increased by more than 100% from 2022 through 2024, although off a relatively small base.
Melissa: The returns we achieved on our sales investments here are high and very predictable and we're looking forward to making this a more meaningful portion of the west story in the coming quarters.
Melissa: Our corporate payments suite spanning embedded in <unk> solutions.
Melissa: Bridges, a unified infrastructure that allows us to have the scale and the economic model to profitably pursue wholesale volume, while also selling high margin direct business.
Melissa: With both wholesale and retail capabilities, we are well positioned within our industry.
Melissa: Taken as a whole we expect corporate payments revenue to contract slightly in 2025 due to foreign exchange rates and onetime headwinds that we previously discussed we anticipate the declines will be in the first half of 2025, followed by a return to growth in the back half of the year in 2026.
Melissa: Expect to Reaccelerate growth as we lap these headwinds and continued to build momentum and embedded payments and direct AP.
Melissa: Pulling this all together across our three segments, we have identified several key opportunities in our product portfolio, where we can continue to elevate our capabilities and drive impactful outcomes as I mentioned, a few moments ago. The process to make this reality is already in flight and we look forward to the benefits it brings.
Melissa: These new solutions to the market.
Melissa: We have the talent internally to build these products.
Melissa: We're always on the lookout for assets, we believe could accelerate our strategic objectives.
Melissa: The other leg of this growth acceleration process is related to our go to market investments.
Melissa: Our solution, providing exceptional value to customers as shown by our enviable retention rates as a result, we've concluded that works has an opportunity to further enhance our growth momentum by ensuring we're getting our solutions in front of more potential customers and converting them to west clients.
Melissa: Accordingly, we will be stepping these efforts up to have more feet on the street to sell the portfolio of software and payment assets that we're enhancing while these investments will impact our short term profitability as you will see in our 2025 guidance, we're highly confident that over a two year horizon that will deliver strong returns and.
Melissa: Position us for a reacceleration during 2026 driving growth aligned with our refresh long term targets.
Melissa: In closing before I turn the call over to Jack I want to reemphasize my confidence in the trajectory of wax.
Melissa: We have significant business tailwind as a result of the robust market sectors in which <unk> operates.
Melissa: I also believe we have the right initiatives in place throughout the organization to drive strong performance over the long term.
Melissa: Across the enterprise, we're focused on winning new business, retaining and growing our existing customers and driving productivity and our cost structure.
Melissa: We continue to enhance and optimize our solutions in our portfolio, while we invest in capturing new business.
Melissa: These exciting investments and growth opportunities are underpinned by our business with a solid balance sheet low leverage strong cash generation exceptional margins enviable customer retention and continued growth. We believe these characteristics are a recipe for shareholder value creation and we remained.
Melissa: Committed to making that happen with that I'll turn it over to Jack to walk you through our financial performance in 2025 guidance in more detail <unk>.
Jack: Thank you Melissa and good morning, everyone.
Jack: <unk> also mentioned we started the new format this quarter, which we published supplemental materials yesterday afternoon.
Jack: Contains more information about our reported results and relevant.
Jack: Which we typically have addressed on this call to assist investors with better understanding analyzing our results.
Jack: Consequently.
Jack: In effort to shift the focus of these earnings calls to our most strategic items I will keep my remarks Bruce.
Jack: Total revenue in the quarter was $636 5 million.
Jack: Which was down 4% versus last year.
Jack: The impact of foreign exchange rates and lower fuel prices reduced revenue growth by four 2% year over year.
Jack: Revenue was slightly ahead of the midpoint of the guidance range, we provided last quarter.
Jack: Adjusted earnings per share was $3 57.
Jack: Down six 5% year over year.
Jack: <unk> reduction of 12% from lower fuel prices and foreign exchange rates.
Jack: Adjusted EPS was also slightly ahead of the midpoint of the guidance range, we provided in October.
Jack: In our mobility segment revenue declined one 4% during Q4.
Jack: This includes an unfavorable impact of seven 6% due to fuel prices and foreign exchange rates.
Jack: The softness in same store sales that we called out last quarter persisted again this quarter has improved compared to Q3.
Jack: Our payment processing rate of 136% was up approximately 10 basis points year over year, primarily due to the pricing initiatives, we discussed all year.
Jack: There was also some benefit in our payment processing to lower fuel prices, which was partially offset by the lower interest rates.
Jack: Is there a benefit segment total revenues of $186 9 million rose four 9% on a year over year basis.
Jack: The growth rate from the first half of this year is due to lapping the sensus acquisition, which closed on September one 2023.
Jack: SaaS deferred growth of two 5% was in line with recent industry trends will adjusted for the loss of a Medicare advantage customer at the beginning of the year.
Jack: This is the final quarter that this will be an issue.
Jack: Custodial investment revenue, which represents the interest we earn on the cash balances we hold for custodial partners.
Jack: Rose 17, 9% it was nearly $210 million for the full year.
Jack: Despite the fact, the fed lowered interest rates late last year. This interest income line has remained fairly steady since nearly 80% of investments and deposits are fixed rate instruments.
Jack: Turning to our corporate payments segment.
Jack: Revenues of $104 $3 million declined 22, 7% year over year, which was in line with our expectations.
Jack: There are several moving pieces to the segment results this quarter.
Jack: First purchase volume declined on a year over year basis in large part because of the contract renegotiation that we have discussed in prior quarters, which has progressed in line with our expectations.
Jack: Separately.
Two larger customers or temporary volume reductions in the fourth quarter, which were largely in line with expectations.
Jack: In both cases annual volumes increased while Q4 was down.
Jack: We feel confident in the value of our offering and our competitive positioning with the customers.
Jack: We recently signed a contract extension with one of them.
Jack: So I would point out the volumes can swing from quarter to quarter.
Jack: Third the prior year benefited from a true up of approximately $8 billion for incentives we received the schemes, which did not repeat this year.
Jack: Finally on the positive note.
Jack: To call out the direct purchase volume, which includes our AP automation solutions grew more than 25% from Q4 2023 to Q4 2024.
Jack: This is one of the key focus areas that most of the discussed earlier.
Jack: Turning to invest for the future.
Jack: Let me transition now to the balance sheet, our balance sheet remains strong and our leverage ratio of two six times was once again at the low end of our long term range of two five to.
Jack: To three five times.
Jack: This gives us important flexibility and how we optimize our capital structure.
Jack: During the fourth quarter, we returned $106 million to investors and we spent an additional $40 million of share repurchases in January.
Jack: We remain open to both share repurchases and strategic M&A that will consistently approach Oliver options with an eye towards generating the greatest long term return for our shareholders.
Jack: Turning now to guidance.
Jack: Life, Melissa mentioned as part of these growth acceleration actions, we're making significant investments in new product development and sales and marketing.
Jack: We will pay for some of these increased investments through efficiency measures and temporary cost actions across the business, but the amount of incremental investment, we're making will exceed these cost reduction measures.
Jack: As a result, you should see an approximate $25 million increase to our sales and marketing expenses.
Jack: In addition to the natural expense growth in the business.
Jack: Melissa also mentioned that we are adjusting our long term organic revenue targets.
Jack: As previously.
Speaker Change: 8% to 12% range to a more sustainable 5% to 10% range. Additionally.
Speaker Change: Additionally, we are updating our long term adjusted earnings per share target to a range of 10% to 15%.
Speaker Change: These ranges exclude the impact of changes in fuel prices foreign exchange rates and interest rates as well as any potential acquisitions.
Speaker Change: We view this range is in line with the market growth for the segments and products. We competed.
Speaker Change: We expect 2025 will be below this revised long term range as we ramp up our investments and focus on our new product initiatives.
Speaker Change: Now, let's move to 2025 revenue and earnings guidance for the first quarter and the full year.
Speaker Change: Starting with the first quarter we.
Speaker Change: We expect to report revenue in the range of 625 million to.
Speaker Change: $640 million.
Speaker Change: We expected adjusted net income EPS to be between $3 <unk> and three.
Speaker Change: $3 50 per diluted share.
Speaker Change: For the full year, we expect to report revenue in the range of two six to $2 66 billion.
Speaker Change: We expect adjusted net income EPS to be between $42 65 and 50.
Speaker Change: <unk> $15.25 per diluted share.
Speaker Change: There are many assumptions that go into guidance at the beginning of the year, which we have included supplemental materials.
Speaker Change: In closing we are enthusiastic about the changes we're making.
Speaker Change: We expect our near term revenue and earnings growth will be below the long term aspirations, we have for works.
Speaker Change: We strongly believe that these investments will help <unk> realize its full potential generating long term returns as they take hold.
Speaker Change: With that operator, please open the line for questions.
Speaker Change: Thank you if you would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question simply press Star. One again. Please ensure you are not on speaker phone and that your phone is not on mute when called upon thank you.
Sanjay: Your first question comes from Sanjay <unk> with <unk>. Your line is open.
Speaker Change: Thank you and good morning.
Sanjay: I guess I'm, just trying to get a little bit more color on the long term outlook change Melissa maybe you could just build a.
Speaker Change: Little bit by segment, what your new expectations are.
Speaker Change: By segment and then do you feel like early in the long term.
Speaker Change: Target range, you could do better than what Youre expecting post this year, maybe you can talk about that.
Speaker Change: Sure sure.
Speaker Change: Just to be direct.
Speaker Change: The 8% to 12% organic guide, we thought that was proper at the time.
Speaker Change: And the context of the market has changed I would say primarily in two areas.
Speaker Change: First.
Speaker Change: Within travel.
Speaker Change: We have seen great penetration within our travel customer base and the return to normal weather.
Speaker Change: Within our travel customer base, which still represents a large part of corporate payments.
Speaker Change: So we feel like that is more normalized and then secondly, with just more important within our benefit space. There has been adoption of Hs phase.
Speaker Change: More companies have adopted consumer directed healthcare plans and so the growth of HSA is at a market level has decreased still growing but at a lower rate and our custodial products, which we've had really great benefit of have seen much more penetration within our portfolio.
We expect in the mid term that are benefit growth rate would more closely tie to account than it has historically so those are really the two primary drivers that are having us.
Speaker Change: Look at our long term growth targets and reset them to the 5% to 10%.
Speaker Change: From a segment perspective, just answered that question.
Speaker Change: Not seeing material differences across the different segments, and so we're not giving out long term growth targets for the individual segments.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: You talked a little bit about the portfolio of software assets that have untapped growth potential and I think direct payments that sort of.
The area, where there's the most promise.
Speaker Change: Maybe you can just talk about where exactly you're going to compete.
Speaker Change: As we think about.
Speaker Change: The size of the market, who your competitors would be how easy is it to win against those competitors because I know you've mentioned the payback periods two years or shorter you mean like how do we get comfortable with that.
Speaker Change: Yes, actually I would say it a little bit differently. When we look across the portfolio, we see opportunity across each of the segments, we're adding in.
Speaker Change: Sales and marketing investments are across all three segments benefits, our small business offerings within our mobility products that branding corporate payments.
Speaker Change: Corporate payments, specifically I will double click on.
Speaker Change: Do see an opportunity there that we've had the most amount of volatility in our earnings growth there, which is why we're double clicking on it.
Speaker Change: There's two different parts of our product set our embedded payment products that is built off.
Speaker Change: A world class virtual card issuing capability, we're operating at scale.
Speaker Change: We actually just rolled out a new product offering called flexible funding, which enables our customers to maximize their working capital and really excited about this we rolled it out in Europe.
Speaker Change: Are in pilot stage in the United States, We have signed several new customers in the fourth quarter of 2024, So those will get implemented throughout the course of 2025 and so.
Speaker Change: If we look at our ability to play in that space. We've just broadened the aperture from travel customers to look across many different segments that where they need to facilitate a payment.
Speaker Change: On the AP side, we've been really focused around improving stickiness in the customer experience and we will continue to enhance the products that we have there. We have had great success note Jack talked about over 20% growth in spend volume with our <unk> direct product in the fourth quarter and so we.
Speaker Change: Now that we've had some time behind us we've been able to see the returns that we're adding more salespeople into that product offering it's really geared towards the mid market and so both of those offerings, we feel very confident and we're just continuing to build our capability and building our sales momentum there.
Speaker Change: Can I just sneak in one last one I'm just looking at page or slide 17 in the supplemental slides that you guys gave and it talks about the onetime items.
Speaker Change: <unk> to 5% of the Eni decline.
Speaker Change: Under the impression that like some of that you guys were able to offset Chuck Todd maybe you can just talk about that did something change in terms of that because.
Speaker Change: I know thats sort of a one time.
Speaker Change: Because of that large.
Speaker Change: Customer.
Speaker Change: In terms changed but maybe just talk about that I'm, sorry, if I Miss understood such as.
Speaker Change: I think you hit it right.
Speaker Change: This really refer that one time.
Speaker Change: Customer change so we highlighted here from both the revenue impact.
Speaker Change: And the EPS impact.
Speaker Change: Randall and basis.
Speaker Change: Obviously, we're taking some cost actions to help with that which shows up a little bit on the underlying growth of EPS column.
Speaker Change: I would just remind you that that business is a highly scalable business. So the the customer impact.
Speaker Change: It was a tough one to bear, but it shows up in the call.
Speaker Change: Got it thank you.
Speaker Change: Sure.
Dan <unk>: The next question comes from Dan <unk> with Mizuho. Your line is open.
Dan <unk>: Hey, guys. Thanks for taking my question really appreciate it.
Dan <unk>: A question and a quick follow up so just in terms of Melissa in terms of the macro I believe that last quarter, you called out that customers were buying fewer gallons per business day, which has been associated in the past with the slowdown in the macro.
Dan <unk>: Hopefully I didnt hear it wrong, but I think you were talking about the trucking recession can you maybe help us explain or explain to us like what is actually going on out there and is there any leading indicators year or hopefully not in terms of the overall macro and then I have a quick follow up thank you.
Dan <unk>: Sure happy to so when we measure same store sales were measuring two different things the economic impact from the businesses, having less or more demand of fuel.
Dan <unk>: And then secondly impacts or fuel efficiency. So we measure attrition separately just to be clear about that what we saw in the fourth quarter of 2024 is that we were trending back to more historical norms with negative two 8% across our North American fleet business.
Dan <unk>: To put that in perspective it normally.
Dan <unk>: <unk> of it is GDP growth offset by fuel efficiency.
Dan <unk>: And so it tends to hover around and around zero something slightly less a lot. So Q3 seems to be more of an outlier and we're returning to more normal standards on the over the road business, we were negative 1% in the fourth quarter. So that also showed a little bit of sequential improvement.
Speaker Change: Got it so it seems like good news and then a question follow up is.
Speaker Change: Can you maybe highlight some of the returns youre getting on the sales and marketing investments and how should we think about that thank you.
Speaker Change: Yes, I'll start and I'm sure Jack will jump in here from a sales perspective.
We feel really good about the returns in each of our segments. The returns are under two years and we stepped back and looked at different mechanisms to accelerate growth. This is one that we feel very confident in and I'd love for you to talk a little bit more about the yes. Let me let me talk about the returns on how we thought about it.
Speaker Change: I think Melissa highlighted the key point of this is.
Melissa: And we see this across multiple areas of our business for every dollar we invest we would expect a return of $1 two years or less in some cases.
Melissa: And so if you take that and you take kind of a very high retention rates we have.
Melissa: Our retention rates in the mid <unk>.
Melissa: As Melissa talked about our script.
Melissa: In the enviable position that would that would imply.
Melissa: Imply.
Melissa: Lifetime lifetime right.
Melissa: Customers in the 15 to 20 year range, so lifetime value of that is pretty high relative to the dollar and tested and so as a result of returns on that are very strong.
Melissa: So as part of.
Melissa: Our thinking on the growth of the company, who has put more wood behind the arrow is fully to land and we decided to invest sales and marketing to capture the realized returns we're getting.
Melissa: Appreciate it thank you.
Dave Koning: The next question comes from Dave Koning of Baird. Your line is open.
Dave Koning: Yeah, Hey, guys. Thank you.
Dave Koning: I guess my first question corporate yields have been up on purchase volume in the last couple of quarters and I believe it has to do with the change in.
Dave Koning: How some of those volumes get recognized.
Dave Koning: Revenue method do you expect that through this year. It should continue to be up a couple of bps year over year, and maybe just describe that a little bit.
Dave Koning: Yes, we would expect.
Dave Koning: The <unk>.
Dave Koning: Purchase.
Dave Koning: The rate to be for 2025 to be.
Dave Koning: Somewhat comparable to 2024, we think from an overall standpoint in total rate will be roughly flat year over year.
Dave Koning: Across both travel and non travel segment.
Dave Koning: We're getting some benefit from the customer transition as you put it out there.
Dave Koning: Okay. Okay, and then I guess my follow up HSA accounts I know this year was down.
Dave Koning: Yeah.
Dave Koning: The loss of some accounts and that anniversary. So I think you only grew 3% accounts. The prior three years were all kind of 11%, 12% are you, saying now kind of somewhere in between the next few years not quite as elevated this in the past because we've hit penetrate and but but obviously better than the last year like how should we think of that.
Dave Koning: So the latest <unk> report, which is tracked market growth was putting market growth in mid single digits and so there has been this dia celebration around account growth that's happened over the years.
Dave Koning: A couple of years ago, we had rolled out our new custodial product and we've gotten a lot of benefit of that over the last two years I think their business grew from about $500 million to $700 million over $700 million over the last couple of years, so over 40% growth.
Dave Koning: And that's been driven both by good account growth, but also the big adoption from our custodial and perspective, and so as the market.
Dave Koning: Right has slowed Thats why were saying that we expect to see more moderation in growth in the segment and mid term.
Dave Koning: Got you. Thank you.
Dave Koning: The next question comes from Andrew Jeffrey with William Blair. Your line is open.
Andrew Jeffrey: Hi, Good morning, I appreciate you taking the questions.
Andrew Jeffrey: I mean, I guess, a couple of high level questions.
Andrew Jeffrey: Specifically as it pertains to travel and benefits I guess, starting with travel.
Andrew Jeffrey: What gives you the confidence that volumes come back it seems like this business has been moving away from works for the last couple of years just from the standpoint of you talked about two specific customers, but broadly the market seems to be getting more competitive with new entrants.
Andrew Jeffrey: And it seems that your customers are more willing to multi source. So why should we have confidence that volumes do come back and that just isn't a slippery slope.
Speaker Change: Two five.
Andrew Jeffrey: Thanks.
Andrew Jeffrey: The volume itself, we've actually seen.
Andrew Jeffrey: Volume growth across the population and I would say from a multi sourcing perspective, that's been true for many years and I don't feel like that actually is a new trend. This transition that's happening with one online travel customer that is the first time that we've seen that we do believe that unique because of the banking lie.
Andrew Jeffrey: Absent that are required.
Andrew Jeffrey: And the scale that's required to do that and so from a confidence perspective, we have a lot of conversations with our customers. We feel good about where we set contractually with them.
Andrew Jeffrey: And we do anticipate the growth of that part of the business to be.
Andrew Jeffrey: More likely do you expect to see the travel.
Andrew Jeffrey: The travel market itself to grow.
Andrew Jeffrey: We've embedded that in our long term guidance.
Andrew Jeffrey: Okay. So the market growth expectation and then in in benefits.
Andrew Jeffrey: I certainly appreciate the.
Andrew Jeffrey: The maturation of that market.
Andrew Jeffrey: Whats so again is it.
Andrew Jeffrey: I'm, just trying to understand where how you grow faster than the market I guess would be would be the question. It seems like it's very much tied to market growth and from that standpoint.
Andrew Jeffrey: Endpoint.
Andrew Jeffrey: Or was it distinctive and is it a business that perhaps shouldnt be part of wax anymore.
Andrew Jeffrey: So let me actually be clear one of our objective function is always outgrow the markets that we're in.
Andrew Jeffrey: Something from a sales and marketing perspective, where we're highly focused on that travel will be a little bit unique in the fact that we are we are.
Andrew Jeffrey: Our more penetrated within that part of the population, but outside of that including benefits. Our expectation is that we will outgrow the account growth.
Andrew Jeffrey: You would see that.
Andrew Jeffrey: Through all of the different revenue levers that we have so the SaaS growth is one piece, but purchase volume is typically running ahead of that.
Andrew Jeffrey: Yes, where we are the custodian to actually bring in incremental revenue associated with that we're still seeing that that puts that part of the business doesn't isn't materially different than that 5% to 10% long term growth rate that we have for the whole company. So we're not distinguishing the individuals segment.
Andrew Jeffrey: Okay, and if I can sneak just one last one into Jack-tar just for clarification.
Speaker Change: The one time items to Andres question those is that five.
Andrew Jeffrey: Yes.
Andrew Jeffrey: All this large OTA or is there anything else in there.
Andrew Jeffrey: So it's all of the larger tier.
Andrew Jeffrey: Okay. Thanks.
Andrew Jeffrey: The next question comes from John Davis with Raymond James Your line is open.
Hey, good morning, Jeff barge upon on margins I think the guide implies somewhere around down 300 basis points year over year, maybe talk a little bit about what you would expect the longer term understanding this year was impacted by lower fuel prices, the onetime customer or sorry, the one time items and the investments, but how should we think about.
Andrew Jeffrey: Walt return operating leverage embedded in the business.
Andrew Jeffrey: Yeah, So our intention is with.
Andrew Jeffrey: With the revenue and EPS growth for long term revenue and EPS growth of also talked about the margins would start to create upward over time.
Andrew Jeffrey: Obviously, it's down a little bit in 2025.
Andrew Jeffrey: From the investments, we're making we're doing what we can from a cost.
Andrew Jeffrey: <unk> standpoint.
Andrew Jeffrey: To fund those investments in fund balance, we're finding some sort of onetime savings.
Andrew Jeffrey: In 2025.
Andrew Jeffrey: That will.
Andrew Jeffrey: Impact margins, a little bit in 'twenty, six, but we'd still expect it to be fairly manageable and then going forward, we expect margins to start to increase.
Speaker Change: Okay, and then just bigger picture diving into corporate payments, if you breakout travel and non travel we talk a lot about travel and non travel piece used to grow healthy double digits mid teens, but more recently has been growing slower.
Speaker Change: Or where do you think you can get and what's the goal on the non travel piece kind of work for that growth gets it.
Speaker Change: So we have two goals one is related to having more of the business be direct and we've talked about the fact that we're going to increase volumes with our embedded payment business. It's great great scale that drives a wonderful margin expansion the direct business itself gives us the opportunity to.
Speaker Change: One all of the economics, and so from a rate perspective, we like what that does to the portfolio.
Speaker Change: And so we're focused on both increasing their overall growth rate, but also.
Speaker Change: The rate and the blended price at that and that gets affected by that.
Speaker Change: Thanks.
Speaker Change: A long term perspective, again, we're saying segment individual segments for Sanger similar at least in the mid term to that 5% to 10% growth rate.
Speaker Change: Our expectation obviously is that the.
Speaker Change: The travel part of that segment will grow slower than the rest and again, we're really excited about the products in the marketplace. What we've seen for contract signings. We think we'll end the year with a lot of good momentum.
Speaker Change: As we lap.
Speaker Change: This customer migration for online travel agency and so we're excited about where we're going with this product.
Speaker Change: Okay. Thanks.
Speaker Change: Your next question comes from Ramsey El <unk> with Barclays. Your line is open.
Ramsey El: Hi, Thanks for taking my question.
Ramsey El: Could you give us a bit more color on the nature of the volume reductions of the two large customers.
Ramsey El: Are those in travel and sort of what is the what is the kind of context or backstory there.
Ramsey El: Sure.
Ramsey El: We actually had talked about this when we provided guidance we had one within travel and one outside of travel that are bolt embedded payment customers.
Ramsey El: That temporarily had following reductions.
Ramsey El: It kind of like step back within this part of the business.
Ramsey El: These customers are engaging with us and things that are mission critical to their business.
Ramsey El: So it is not uncommon for them to have multiple providers and that's been true.
Ramsey El: For many many years, sometimes they move volume around in order to hit minimum commitments. So that they can reach thresholds on incentives.
Ramsey El: And we saw that happened in the fourth quarter again, with one and travel and one outside of travel. The one that's outside of travel is a customer we just renewed their contract.
Ramsey El: One in travel that customer actually grew over the course of the year, but it was pretty lumpy and were working them to try to have that be less lumpy in 2025.
Speaker Change: Got it okay that makes a ton of sense and then just a follow up from me I guess as you move to Reaccelerate growth with the plan you've laid out how should we think about M&A fitting into that strategy is there a way to accelerate your path with M&A and I guess the flip side of that question losses have you given the segment level volatility have you reconsidered.
Speaker Change: Shedding any assets or streamlining simplifying the business.
Speaker Change: That'd be great. If you could respond yes sure both both good questions in terms of I'll answer the second one first yes, we're always stepping back and looking at the business itself.
Speaker Change: Embedded payments products, and AP products, which house, both our travel customers and our non travel customers. All set on the same technology stack, it's a very integrated offering and it gives us the scale in order to play even more effectively.
Speaker Change: Outside of travel so think of that is taking all the product advantages that we have in the scale advantages that we have and applying them outside of travel.
Speaker Change: And so it really is a very integrated thesis.
Speaker Change: So.
Speaker Change: As we think about the business.
Speaker Change: The ability to make sure that we're leveraging the scale of Prost and utilizing our technology and our product capability across is something that we've been very focused on over the last several years.
Speaker Change: And we feel like we're actually seeing the benefits of that coming through.
Speaker Change: Albeit in small amounts.
Speaker Change: This year and it's something that we felt like we can build on that as we go throughout the course of the year.
Speaker Change: Got it. Thank you I also wanted to applaud the release of numbers the night before and all the additional disclosure I think that's a smart way to do it and we appreciate that.
Speaker Change: Thank you. Thank you.
Speaker Change: Next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Speaker Change: Okay.
Speaker Change: Tien Tsin, perhaps your line is on mute.
Speaker Change: You are correct. Thank you Tom.
Speaker Change: Good for everybody.
Speaker Change: Most I just wanted to ask on this decision too.
Speaker Change: More than sales because I feel like your new logos in your signings over the last.
Speaker Change: Several years has actually been quite good if I think back.
Speaker Change: So I don't want to label it as under investing in sales. So is this really more of a pivot to.
Speaker Change: To go more direct more down market, maybe more into software I'm, just trying to better characterize it beyond just investing more in sales because again I don't feel like you've underinvested in sales, but tell me if I'm if I'm wrong there.
Speaker Change: Now when we look at the growth of the business. We've had really strong results historically right in sales and marketing its one of the places that have today is a core strength of ours.
Speaker Change: Really strong customer retention rates as Jack said.
Speaker Change: What we've experienced is been a slow down more in that same store sales.
Speaker Change: Across for different reasons across categories. So it's caused us to step back and say, we have really great sales momentum and have tremendous returns. We think that we can just we can do more.
Speaker Change: And we've had experiences that we have a high level of confidence in that so.
Speaker Change: It's causing us just to sit back and reflect.
Speaker Change: And add more into both our sales and marketing capability really again across all of our different segments.
Speaker Change: Got it and then within mobility I know that the outlook is different than what you'd laid out the mid term and I know youre not updating segment, but I presume the underlying drivers are still the same as there are different.
Speaker Change: Now from you on the EV transition for example, and how that might impact your midterm outlook.
Speaker Change: We're very bullish about the EV transition.
Speaker Change: What we've learned so far in the marketplace as the products that we have are resonating we know that we have an ability to charge more.
Speaker Change: Because the value proposition gets more complicated and so I'd say if anything each year, we get more excited about that opportunity, we think thats going to take time, though to actually transition into our base.
Speaker Change: Which is why we don't see that having a big impact.
Speaker Change: In the mid term, but we do think it will have an impact over time.
Speaker Change: And then on top of that I would say that historically the driver has been.
Speaker Change: Vehicle growth or.
Speaker Change: Or transaction growth I guess translated differently and we have seen that be a little bit more muted for a bunch of reasons. The trucking recession is one of them.
Speaker Change: We have been very disciplined around pricing, we expect to continue to be disciplined around pricing as we go through 2025, what we're saying is that on top of that.
Speaker Change: We're adding in more marketing capability, because we're seeing really strong returns from our direct channels in particular, and that's going to take some time to show return, but we have really good.
Speaker Change: Evidence that sits behind that and we have products that we've rolled out it will take some time to create adoption.
Speaker Change: But it's another areas that over time, we feel very confident that we're going to see new sources of revenue I'd say I feel much more confident.
Speaker Change: Now about <unk> as an example, we've learned a lot over the course of the last year.
Speaker Change: It's really been great insights that have us alter our marketing and engagement our engagement strategies are incentives.
Speaker Change: And you can see the benefits of that coming through now and all of these things that are relatively small in size, but will accumulate as you go through the course of the year and give us confidence as we go through the next several years.
Michael: Thank you Michael.
Michael: The next question comes from Andrew Baum with Wells Fargo. Your line is open.
Speaker Change: Hey, Thanks for taking the question just wanted to dovetail on the investments in 2025 and check my math on the 5% I.
Speaker Change: I believe that implies $40 million in total and then you carved out the $25 million for sales marketing does that mean that the remainder 15 is attributable to two <unk>.
Speaker Change: Product and.
Speaker Change: Does that have the same LTV to CAC is the sales and marketing does or should we expect the returns to be predominantly just under 25.
Speaker Change: Just point of clarification is that return on revenue or EBIT.
Andrew Jeffrey: So Andrew.
Andrew Jeffrey: Andrew Let me start.
Andrew Jeffrey: LTV Chuck returns I talked about or specifically on the sales and marketing investments we're making.
Andrew Jeffrey: You are correct. There is another kind of 15 to 20, that's showing up as depreciation on products investments that we're making so just to clarify.
Andrew Jeffrey: The capitalized new products and investments that we're making in those new products were started over the past year or so and so we're seeing the depreciation show up we would expect the returns on those investments show up from.
Andrew Jeffrey: From the sales of new products and those are.
Andrew Jeffrey: Embedded into the <unk>.
Andrew Jeffrey: The sales outlook that we've given.
Andrew Jeffrey: And then the.
Andrew Jeffrey: It's EBIT right the return.
Andrew Jeffrey: Yes so.
Andrew Jeffrey: The returns that I talked about.
Andrew Jeffrey: The LTV to CAC would be that would be margin return right. So yes that was closer to either correct. Okay and then on the follow up.
Andrew Jeffrey: I appreciate that we're not giving segment level growth rates here.
Andrew Jeffrey: But I'm getting from investors.
Andrew Jeffrey: Is there does.
Andrew Jeffrey: This is the rationale around that just the lack of visibility in the near term on where these things go.
Andrew Jeffrey: All of those kind of know the market drivers.
Andrew Jeffrey: The general growth rates of each sector.
Andrew Jeffrey: What I'm trying to get better confidence in your sense of the visibility for each of these lines.
Andrew Jeffrey: Okay.
Andrew Jeffrey: I would say it differently I think that the.
Andrew Jeffrey: The.
Andrew Jeffrey: Segment growth rates himself at least in the midterm, we don't see deviated materially from the company's growth rate.
Andrew Jeffrey: And for different reasons, you could go through each of them.
Andrew Jeffrey: Let me talk about each of them for a moment.
Andrew Jeffrey: With mobility.
Andrew Jeffrey: Historically, we've talked about it being 4% to 8%.
Andrew Jeffrey: So again.
Andrew Jeffrey: Again, not materially different than the long term range for the company level within corporate payments.
Andrew Jeffrey: We have reached this point of saturation within the travel part of the portfolio.
Andrew Jeffrey: Again, we expect to be growing.
Andrew Jeffrey: Similar to a market growth rate, we see a lot of opportunity when you get outside of travel, but it's a smaller part of the portfolio. So it's going to take some time for them to accumulate up into having a more meaningful impact in the segment. So we do think that that segment growth rate will increase over time.
Andrew Jeffrey: And but if I give you a midterm I would say I wouldn't make it materially different than the five to 10.
Andrew Jeffrey: And then on the benefits.
Andrew Jeffrey: Segment.
Andrew Jeffrey: Again, we're seeing this continued growth we love this part of the business, it's got great macros that behind it but account growth.
Andrew Jeffrey: At a macro level is slowing.
Andrew Jeffrey: And because we've seen such good penetration never custodial assets that we expect that in again in the midterm that that part of the business should be growing closer to account growth.
Andrew Jeffrey: And so again not materially different than that 5% to 10% right now in each of these areas, where increasing product innovation in our mobility business.
Andrew Jeffrey: Putting more into marketing and our benefits business, we have some wonderful data assets and we're really focused on engagement and how we can use those assets.
Andrew Jeffrey: Applying AI to create.
Andrew Jeffrey: Different product experiences since that we are very bullish about that part of the business and what we can do over time to effect the growth rate there.
Andrew Jeffrey: And then corporate payment.
Andrew Jeffrey: Again huge Tam that we feel like we have some really great right to win and we're building our product capability, but also adding in sales capability and so in each of the areas. We feel like this growth acceleration plan.
Andrew Jeffrey: We're focusing on but in the midterm, we're saying we don't expect to see.
Andrew Jeffrey: Significant deviations within each of the segments to our overall corporate growth rate.
Speaker Change: That's great I appreciate the additional color muscle.
Speaker Change: The next question comes from Daniel <unk> with Wolfe Research Your line is open.
Daniel: Alright, Thank you for taking the question.
Daniel: Again on the direct AP side, maybe if you could help define for us the target customer size, you're looking at within the mid market.
Speaker Change: They are not these are domestic or international visitors and what industry vertical <unk> currently have exposure to here as we kind of lay out the competitive landscape. Thank you.
Daniel: Sure.
Daniel: So in the mid market.
Daniel: You look across the customers that we're doing business right now.
Daniel: Wouldn't actually say, there's an industry specific component to them. They are the customers that are.
Daniel: Wrapping across existing customers that fit within our mobility business.
Speaker Change: Insurance health care.
Speaker Change: There's actually quite a wide variety of the customers that fit within that portfolio and it's relatively small it's growing it's growing really nicely and.
Speaker Change: That aperture will probably only increased over time.
Speaker Change: What we're providing for those customers.
Speaker Change: His AP automation.
Speaker Change: And again the place that we've been focusing around is.
Speaker Change: It just went out with a fully redesigned user experience. It's a product that's been selling anyway, but we feel like we have an ability to sell more as we continue to enhance the offering that we have.
Speaker Change: That is all the time, we have for questions I will turn the call to Steve elder for closing remarks.
I just wanted to thank everyone for joining us this morning, and we'll be out and about there are other follow up questions that people have so thank you very much.
Speaker Change: This concludes today's conference call. Thank you for joining you may now disconnect.
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