WEX Inc (WEX) 2010 Q1 法說會逐字稿

Greetings! And welcome to the Wright Express Corporation's 1st Quarter 2010 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Elder, Vice-President of Investor Relations for Wright Express. Thank you. Mr. Elder, you may begin.

Good morning.

With me today is our CEO, Mike Dubyak, and our CFO, Melissa Smith. The financial results press release we issued earlier this morning is posted in the investor relations section of our website, at WrightExpress.com. A copy of the release has also been included in an 8K we submitted to the SEC.

In the news release, I'd like to call your attention to the summary of 1st Quarter 2010 performance metrics on Page 2. To allow more time for your questions on today's call, we will not be reviewing the seven metrics listed in the press release in our prepared remarks.

As a reminder, we will be discussing a non-GAAP metric -- specifically, adjusted net income -- during our call. For the first quarter of 2010, adjusted net income excludes non-cash, marked-to-market adjustments on our fuel-price-related derivative instruments, the amortization of acquired intangibles, and the tax impact of these items.

Please see Exhibit 1, included in the press release, for an explanation and reconciliation of adjusted net income to GAAP net income, and the additional factors that were adjusted in the prior-year period.

I'd 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, most recent Form 10K, and other SEC filings.

While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not rely on these forward-looking statements after today.

With that, I'll turn the call over to Mike Dubyak.

Hello, everyone. And thanks for joining us.

We again posted solid results this quarter, and see positive signs in the economy as the year rolls out.

Total revenue was up 22% from Q1 last year. Adjusted net income grew 46%, and exceeded our guidance. This year-over-year growth was driven by higher fuel prices, continued strong results in our MasterCard program, and lower operating interest expense.

Given the improving economic trends, we believe it will be easier to see the positive impact of our organic-growth initiatives, going forward. Thanks to our continual investment in sales, marketing and customer service, we've been able to sustain our traditionally high customer-satisfaction levels, and keep our voluntary attrition rates low, while adding new Fleets to our portfolio.

Refueling activity, or same-store sales in the first quarter of 2010 were essentially flat with Q1 last year. This marks a significant improvement from the year-over-year declines we've seen for the past few quarters.

Reflecting trends in the overall economy, we're continuing to see areas of strength and weakness across our various SIC codes.

Customer activity in Q1 was decidedly stronger year-over-year in the transportation and manufacturing sectors. It was weaker in the construction sector, with business services and other verticals continuing to bounce along the bottom.

Unlike last quarter, there were no significant differences in same-store sales patterns from region to region.

Although we've seen stabilization in fueling volume, existing customers are still in the process of reducing the number of vehicles in their Fleets. As a result, our total vehicle count was down approximately 200,000 from Q1 last year. This was despite the fact that we added nearly 500,000 new vehicles in 2009, and another 100,000 vehicles this past quarter.

We believe our vehicle count is a lagging indicator of volume, as it takes time for Fleet managers to adjust the size of their Fleets for the ebb-and-flow of their businesses.

Looking at the first quarter specifically, the average number of vehicles in our large-and-midsized Fleet portfolio was down 7%, year-over-year. In small Fleets, our average vehicle count was flat with Q1 last year.

Our Wright Express direct channel continued to improve, with the average vehicle count up 1% from Q1 of 2009. We experienced stronger results in inside sales, and sales of WEXSMART units in the quarter.

Looking forward, as more economic data points come out, we're becoming increasingly confident in our second half of the year. Based on the modeling we have done on our customer base to determine the drivers of their behavior, along with the expected improvement in the economic environment, we expect to see transaction growth in the second half of the year.

We have several key advantages in driving organic growth. According to a third-party research study of Fleet prospects, current customers and competitors' customers that we commissioned during the fourth quarter of '09, the Wright Express brand is perceived as the Number-1 Fleet card program in the country.

We're clearly doing some things better than our competitors, because we scored higher than any other Fleet card provider in terms of brand impression and long-term customer satisfaction. This results in better organic growth performance and lower voluntary attrition.

For example, the customer satisfaction is hugely dependent on perceptions related to customer service and card acceptance. We lead the industry in both of these areas, thanks to the quality of our service organization and the scope and functionality of our proprietary closed-loop network.

In addition, our unique financing model enables us to be very efficient in providing attractive credit terms to our customers, while managing risk.

As a result of these advantages, we have very low attrition rates. Our voluntary attrition for the first quarter of 2010 was 1.7% compared with 2.5% for Q1 last year. This remains well below our target, and at levels similar to those we experienced before the recession.

Our strong brand positioning is integral to our value proposition, and an important differentiator for us in a Fleet-card market that remains significantly under-penetrated and addressable for long-term growth.

We've invested over the years in world-class, front-end capabilities to capture this potential. The new marketing campaigns we've launched in 2010 are producing solid results. And our Fleet and MasterCard new-business pipelines are looking very good as we move through the second quarter.

We have ambitious growth goals for our diversified businesses, as well. And we've been successfully executing against those goals.

In aggregate, our diversified businesses led by MasterCard contributed nearly $18 million of revenue in Q1, or 22% of our total. We expect this contribution to grow to approximately 30% of our total revenue over the next few years.

This reflects an important change in our business model. A strategic shift toward businesses that reduce the model's fuel-price sensitivity, and at the same time, enhance our customer-value proposition.

As an enterprise, Wright Express has successfully expanded beyond the fuel-price sensitive core Fleet card business in the US. This expansion is best evidenced by the success of our MasterCard product, which continues to be the fastest-growing part of our business.

During the first quarter of 2010, our MasterCard revenue grew 57% from Q1 last year. Our single-use account MasterCard product continues to grow in the online travel and insurance-warranty markets.

Increased purchasing volume from our online travel customers contributed the majority of the MasterCard year-over-year growth in Q1. Our MasterCard purchasing card product also performed well in the first quarter -- contributing double-digit purchase volume growth.

We continue to make good progress during the quarter in our ongoing rollout, with one of the world's largest online travel companies. We expect this program to continue expanding over the next few quarters.

In addition, we're developing targeted marketing campaigns in the insurance and warranty vertical, and seeing positive results in our pipeline.

The growth in our purchasing card demonstrates that it adds value that our small- and medium-sized business customers need more than ever, as they look for ways to cut their operating costs.

At the same time, it creates opportunities to cross-sell into our core Fleet business, which adds to its value as a product offering.

Geographic diversification is also part of our strategy. We've targeted a group of major and mid-major oil companies with Fleet card portfolios in Europe, the Asia-Pacific region, South America and Africa. These large portfolios have the potential to shift to outsourced transaction processing solutions.

We're negotiating with several of these companies in an effort to win this business and penetrate the market. One of our core strategies is to sign long-term contracts with major oil companies, and subsequently layer on more and more services that can generate growing revenues over time.

To put the total available market in perspective, we estimate the 15 key issuers in Europe process approximately 1 billion business-to-business transactions annually. Our plan for 2010 includes a small revenue contribution from our first international oil company transaction processing relationship.

We believe we can penetrate a significant share of this market with our international transaction processing model. At the same time, we'll also continue looking at card program alliances or acquisitions that can diversify and expand our international presence.

Thanks to the strength and resilience of our business model, we have the liquidity and cash flow necessary to support our organic growth and diversification initiatives, while maintaining the strength of our balance sheet.

We expect to maintain our bias toward being conservative with our cash, while generating the highest possible returns.

We're continuing to target internal reinvestment as our highest priority, followed by exploring alliances, mergers or acquisitions that represent strategic opportunities to accelerate our earnings growth.

In our view, these could include transactions that expand our core business within adjacent markets, or that further diversify our revenues -- either by vertical market, or as I just mentioned, by geography. We'll also continue to consider stock repurchases as a potential use of our cash.

Above all, whether in the way in which we manage the business or the way in which we deploy our cash, we remain committed to leveraging our competitive advantages. Capitalizing on our market opportunities and continuing to deliver consistent results in quarters and years ahead.

With that said, I'll turn the call over to Melissa for a review of our financial results and guidance. Melissa?

Thanks, Mike. And good morning, everyone.

Looking back on our five years as a public company, we have continued to deliver strong earnings growth. We have a proven track record in delivering solid results quarter-after-quarter.

The first quarter of 2010 was no exception, as A&I once again exceeded guidance, driven by MasterCard spend, gains from the hedge and credit loss.

For the first quarter of 2010, total revenues increased 22% to $83.8 million, from 68.5 million for the first quarter of 2009. Near the midpoint of our guidance range of 82 to 87 million.

Net income to common shareholders on a GAAP basis was $18.6 million, or $0.48 per diluted share, compared with $11 million or $0.28 per diluted share in Q1 last year.

Our non-GAAP adjusted net income for the first quarter of 2010 increased to $23.7 million, or $0.61 per diluted share -- exceeding the high end of our guidance range, which was $0.53 to 0.58 per share. Non-GAAP adjusted net income for Q1 last year was $16.3 million, or $0.42 per share.

Our A&I this quarter included a cash benefit from our derivatives program. Hedging remains an important part of our business model. We expect to continue purchasing derivatives in the future as a means of reducing our exposure to fuel-price volatility.

As Mike said, however, our business model has become less and less sensitive to fuel prices over the past five years. I'd like to expand on this for a minute before I delve further into the quarter's results.

At the time of our IPO -- in February 2005 -- approximately 64% of our total revenue was impacted by changes in fuel prices. Five years later, it's down to approximately 50%. Looking at it in another way, despite the significant growth in the size of our Fleet portfolio during the same period, we've now hedged around 25% fewer gallons of refuel annually than when we went public.

This reflects two drivers. First, the success of our hybrid pricing strategy. And second, MasterCard and our other diversification efforts continue to grow. With that as background, I'll discuss our financial results in detail.

Our net payment processing rate for Q1 2010 was 1.78% -- 3 basis points higher sequentially. We implemented some new payment-processing rates during Q1, increasing the average rate by 5 basis points. You will continue to see the benefits of these higher rates in future quarters.

The offset of 2 basis points is primarily due to higher fuel prices, and the impact that had on our hybrid merchant contracts.

Consistent with Q4, approximately 60% of our transactions in the first quarter were at merchants with hybrid contracts. Three basis percentages of fueling dollars paid to large Fleets and leasing companies were flat, compared to the sequential fourth quarter.

We continue to see strong growth in our MasterCard segment this quarter. Total purchase volume was up 31% from Q1 last year, to $853 million -- exceeding our internal forecast by more than 70 million.

Revenue in the MasterCard segment was up by 57%, to 10.4 million. MasterCard represented 12% of our total revenue and 11% of total A&I in the first quarter of 2010. Up from 10% and 2%, respectively, in the first quarter last year.

The MasterCard net interchange rate for Q1 was 1.06% -- up 13 basis points year-on-year. Primarily due to higher interchange rates adopted by MasterCard last year.

Late fees for the quarter came in where we expected. However, we did see very different customer behavior during the quarter. In January, we had very high late fees as a percentage of dollar volume, and they trended down through March to below levels we had seen for the last year. This downward trend has continued into April, so we are planning on lower late-fee revenue as a percentage of spend volume.

Moving on to operating expenses, we're continuing to keep a tight rein on our underlying cost structure. At the same time, we've focused our incremental spending on our growth initiatives -- including research, marketing and international business development.

On a GAAP basis, our total operating expenses of $51.7 million for Q1 were lower than we expected, and only slightly higher than the $49.2 million we reported for the first quarter last year.

Looking specifically at credit loss, we're continuing to see good results from the steps we have taken to improve the portfolio of credit quality. Although the environment has remained challenging, we've been able to offer 30-day credit terms to most of our customers, while controlling bad debt and minimizing our voluntary attrition.

As in Q4, Fleet credit loss for the first quarter came in better than we expected, at 21 basis points, compared with the 24 to 29 basis points we assumed in our guidance. This was somewhat higher than the 17 basis points we reported for Q1 last year, but within our historical loss range of 11 to 22 basis points.

During the quarter, we did have one significant bankruptcy, as we disclosed when we gave guidance. But favorable results in credit loss this quarter mainly reflect an improvement in our aging, compared to what we expected.

Delinquency rates in 9 of our 10 largest industries declined compared to Q4.

On a total basis, including both Fleet and MasterCard, credit loss for the first quarter was up by $1.7 million from Q1 last year, to $5.9 million. Total charge offs in the quarter were $6.1 million, and recoveries were $869,000.

Consistent with prior quarters, the majority of the charge offs came from customers with balances less than $30,000.

As of March 31st, balances due 30 or more days represented 1.4% of the portfolio, or about $11 million. All in all, we feel that we've continued to execute extraordinarily well in managing our bad-debt expense.

Looking at other key expense lines, salary and other personnel costs for Q1 were $19.6 million -- up 1.8 from the first quarter last year. Mainly due to increases in our international headcount.

Operating interest expense again was a positive factor in Q1, declining by $2.7 million, or 65% year-over-year to 1.4 million. Our average operating debt level -- including CDs and Fed funds -- was $472 million, compared with $427 million in Q1 last year.

Net of virtually all of our higher-rate CDs have matured. The interest rates on our CDs and Fed-fund borrowings have stabilized at a relatively low level. The rate for Q1 was 1.2% -- down from 1.3% in Q4.

Our effective tax rate for Q1 on a GAAP basis was 37.5% compared with 36.9% for the first quarter last year. Our adjusted net income tax rate this quarter was 37.5%, compared with 37.8% for Q1 a year ago.

We adjusted our international tax structure, which reduced our overall tax rate for the year by 1%, compared to the guidance we gave you last quarter. Therefore, we now expect our tax rate to be between 37 and 38% for the year.

Turning to our derivatives program, during the first quarter of 2010, we recognized a realized cash gain of $5 million before taxes on these instruments, and an unrealized loss of 6.8 million. We concluded the quarter with a net derivative liability of $668,000.

I mentioned last quarter that we completed our purchases for 2010 with a weighted average price range at $3.04 to $3.10. As we announced last Tuesday, we've also hedged 80% of our exposure through the second quarter of 2011 -- 53% of our third-quarter 2011 exposure. And 27% of our fourth-quarter 2011 exposure.

For the periods we have completed purchases in 2011, the average price we have locked in at the top end of our collar is $2.93. Our most-recent purchase locked in a range of $3.03 to $3.09 per gallon, for the last three quarters of 2011. This suggests the market expects that prices will be higher in 2011 than in 2010.

Turning to the balance sheet. We have ended the first quarter of 2010 with a balance of $112 million on our revolving line of credit, and a leverage ratio of 0.65-times EBITDA. This compares with one-times EBITDA at the end of Q1 last year.

During the quarter, we initiated a redemption call on our preferred shares, and they were subsequently converted into common shares.

One of our main uses of cash last year was the reality transaction that we announced in Q2 of 2009. As a reminder, we've prepaid our tax-receivable liability to Realogy for $51 million in cash -- generating a gain of $136 million in the transaction.

This transaction adds between $10 and 15 million annually to our cash flow for the next 10 years -- which is equivalent to more than $0.25 of cash earnings per share.

Capital expenditures for the first quarter were $6.7 million. Our anticipated CapEx for 2010 is in the range of $20 to 25 million. Up from actual spend of $17.8 million in 2009.

We've continued to invest in our new-product and efficiency initiatives. We're also continuing to invest in our international business, which accounts for the majority of the increase, year-over-year.

I'll conclude my prepared remarks with some key assumptions in our financial guidance for the second quarter, and updated guidance for the full-year 2010.

Reflecting the current economic trends, our guidance now assumes that volume in our existing customer base -- or same-store sales volume -- will be neutral to positive for the year.

Credit loss for the second quarter is expected to be 12 to 17 bps, and full-year is expected to be in the range of 17 to 22 bps. This loss rate reflects the favorability we experienced in Q1, but no other meaningful changes to our assumptions.

As we mentioned on our last call, we believe that recoveries of amounts previously charged off will return to more normal levels in 2010 compared to 2009. And that the aging of receivable balances will remain consistent.

Interest rates remain low, and we expect to continue to benefit from this. We've assumed interest-rate increases throughout the remainder of the year, based on the LIBOR curve.

We continue to recognize some of the development revenue from our international business in our quarterly results, and have included a small amount of international transaction processing revenue.

Although it remains in place, we have not included any potential EPS upside from our share-repurchase program. The fuel-price assumptions are based on the applicable NYMEX futures price. Let me remind you that our forecast reflects our view only as of today, and are made on a non-GAAP basis, as Steve discussed earlier.

For the second quarter of 2010, we expect to report revenues in the range of $86 to 91 million. This is based on an average retail sales price of $2.94 per gallon.

For the full year 2010, we expect revenues ranging from $358 to 368 million, based on an average retail fuel price of $2.88 per gallon. In terms of earnings for Q2 of 2010, we expect to report adjusted net income in the range of $24 to 26 million, or $0.61 or 0.66 per diluted share.

The expected adjusted net income for the full year 2010 is in the range of $93 to 99 million, or $2.39 to 2.54 per diluted share on approximately 39 million shares outstanding.

With that, we'll be happy to take your questions. Melissa, could you processed with q-and-a now?

Thank you.

We will now be conducting a question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the * key. To be sure we can take as many questions as we can, we will be allowing one question and one follow-up per person. Please re-queue to ask more follow-up questions.

Our first question is from Bob Napoli with Piper Jaffray. Please proceed with your question.

Thank you, and good morning.

A question on the transaction trends through the quarter. Just wondered if you could give some of the growth metrics? Same-store sales, if you will. January, February, March and into April, that gives you the confidence that we're going to be seeing improving trends, going forward?

Yes, Bob. We talked on our last call that January we saw an uptick across a number of SIC codes. February, that turned around and went negative. And then basically it came back to neutral in March.

We don't know if it's the weather, but we think it could be weather-related for February that caused the downward trend in the SIC codes. But clearly, as I said, it came back to where manufacturing and transportation really showed strength; a lot were just bumping along the bottom.

But we've done a lot of work over the years, working with some outside people on really doing regression analysis on our SIC codes, and the reaction of different economic metrics that really could affect what's going on with our customer base.

So I think it's the combination of understanding if the economy continues to expand and get stronger, along with that, the work that we've done on our SIC codes and our customer base, to have the confidence in the second half of the year to see existing customers finally start to move off kind of the bottom that we've seen now in the first quarter, into more producing positive results in the latter half of the year.

Yes. Thanks.

And the international side? I mean you sound increasingly optimistic. Can you give a little more color on the amount of people you're working with, and the markets and the market size?

I mean how far away are we from actually starting to generate some -- to having announced signed contracts? Where you're actually doing some real business there?

Yes. I think as we said on the prepared remarks, that we look to start doing some transaction processing on a small scale this year. Which would mean sometime this year making some level of announcement.

But it's really going to be a couple of years, as we start to bring these different partners on. As we continue to hopefully win them in the marketplace that we would start to see meaningful transactions. So it's going to be a couple of years before we actually see meaningful transactions that start to contribute to our overall revenue growth.

Thank you.

Our next question is from John Williams with Goldman Sachs. Please proceed with your question.

Good morning, guys.

Good morning.

Good morning.

To jump in.

I noticed that your guidance -- you've brought up your earnings expectations a bit more than your revenue. It looks like your revenue stayed in the same range, basically.

What's the driver of the upsides? Improvement in EPS that you expect for the year? Does it mean like higher fuel prices and just a little bit of improvement in credit losses?

Yes. There are four major things that are impacting our guidance from the previous guidance.

The first is the change in our tax rate assumptions. We said we refined our thinking on the international. And that had about a 1% benefit to our tax rate.

In addition to that, we've got 1 basis point that we moved up in the range of credit loss. So those two things are expense-related.

We also increased our expectations with MasterCard spend. But at the same time, we reduced our expectations of late fees. And those are the two things that are impacting revenues, primarily.

Got it. Thanks.

The other question, I guess, is about credit quality. Correct me if I'm wrong, but I think you said 1.4% were showing 30-days delinquent or more.

I guess how do we think about delinquencies flowing through to charge offs? Is there some sort of an historical way that you guys have seen that play out that we can think about when we're modeling? Thanks.

Yes. When we're modeling and actually looking at our allowance, we'd look at the history of what has moved to charge offs over the last three months.

And so we have a very specific view. And that's why you see volatility from period-to-period in our provision.

Going into the second and third quarters, we typically see a reduction in our credit loss. And that's primarily because our charge-off rate's reduced over the next couple of quarters. And then we would typically see a pickup in the fourth quarter.

And so if you look at the amounts that are past-due, there's a percentage of that that will ultimately move to charge offs, but it's not consistent.

Thank you.

Our next question is from Tom McCrohan with Janney Montgomery Scott. Please proceed with your question.

Hi, guys. A couple of questions.

On the leading versus lagging indicator, Mike, you talked about Fleet size not being a good leading indicator -- more of a lagging indicator. I wonder if you can kind of expand on that.

And if in fact it is a lagging indicator, what is the leading indicator that you guys are tracking?

What I think we said was the number of vehicles -- number of cards -- is kind of correcting later than the market starts to move on transactions.

So our transactions were neutral for the quarter. But we still saw the Fleets reducing some of their unused vehicles or vehicles that aren't working for them anymore. So that was the couple-hundred-thousand vehicles, we said, that were shed from the existing customer. So that was the lagging indicator.

Just saying that vehicles lag probably what we're seeing in transaction trends -- which are flat at this point. And we see those going up.

So it was more that than anything else.

Yes. Okay. Just trying to compare this year versus last year. I mean last year this quarter was a pretty difficult time in the economy. You had transaction growth decline a little bit this quarter, year-over-year. So I'm just trying to reconcile that, given the improvement in the economy.

Okay.

If you look at our individual assets, because I think it tracks pretty well with what Steve reported in other places, we see favorability in areas that you'd expect. And then as an example, the contractor trades is still showing some negativity, year-over-year.

Yes. Okay. That makes sense.

And on the funding side, Melissa -- the $406 million of deposits. How much of that is -- ? What's the duration of that? How much will roll over this year? Next 12

Yes.

The average duration is about 9.5 months from the end of March.

(inaudible)

I'm sorry. Go ahead.

No, that's okay.

Thank you.

Our next question is from Tien-Tsin Huang, with JP Morgan. Please proceed with your question.

Hi.

My first question, I wanted to -- I guess the large portfolios that you'd mentioned -- I think you said $15 billion or so. When do you think decisions will be made on some of those opportunities? And is there a way to frame -- are they primarily outsourcing contracts? Or are they also portfolio acquisitions, potentially, as well? Just the mix, there.

Well, there could be a mix. We talked about 15 major -- mid-major oil companies. We see a number of them that are looking to outsource in the next couple of years. And in that mix, you have everything from purely just transaction processing to transaction processing with some of the contact-center work, as well. And there may be a few that they're also looking for portfolio outsourcing.

So it's a mixed bag. And again, that's going to play out over the next couple of years in what we see.

Okay. But anything eminent there? Or is it really just the span over the next 24 months?

The eminent ones for us look like they would be primarily processing. Just transaction processing. The others I think will take longer to play out and longer to put in place.

Okay. Got it. Just want to make sure.

Then on my obligatory question about the discount rate.

I guess gas prices were up a little bit, and the discount rate, sequentially, was basically flat. So any guidance there on how we should model that, going forward? Because it's trending a little bit differently than how we anticipated.

Yes. We actually renegotiated some of our contracts, to increase the rate. And you saw the benefit of that in the first quarter. And that's something we think will continue through the rest of the year.

So the rate was up about 3 bps, sequentially. Up 5 because of the renegotiations, and then down 2 because of the price of gas.

And just as a note, you see that in our disclosures in the back. But we reclassified electronic discounts that we had been showing as operating interest in the past, up into revenue.

So we've shown the rate adjustment in our disclosure.

Thank you. Our next question is from Robert Dodd with Morgan Keegan. Please proceed with your question.

Just going back to kind of the leading-indicator thing.

First, is there a metric you can give us either in the future or give us some color now on kind of sales and leads that you're seeing? Is that up year-over-year? Even with vehicles shrinking a little? Or is there any color you can give us on that for a future outlook?

Yes. Clearly on sales leads. We clearly have seen in the first quarter, Robert, where response rates are up over the last year. Close rates are up over the last year. And we've also seen our improvement rates go up over the last year.

So all of those are positive signs, where a lot of that is small business.

And we've also -- and we mentioned that our telematics -- our WEXSMART product -- also had a very strong first quarter. So it shows us that small businesses are making decisions again. Ready to invest some money in their business again.

And you've seen information where auto manufacturers are saying small businesses are at least turning their vehicles over and buying new vehicles. So it at least gives us confidence that these small businesses are at least making decisions, where a year ago, they were not making any decisions.

And a lot of those numbers I talked about -- lead-generation, closed rates -- are very strong, compared to last year at this time.

Got it. Thank you.

On the MasterCard product. Have you had to change any contract or terms on those cards to comply with some of the fine print on the card act? On the reloadable versus single-use -- gift versus non-gift?

Things like that.

Have there been any changes there? Or is it just business as usual? Also, I thought you used sort of a partner to do some of the processing there? Has anything changed with that relationship, given the finicky rules that are in play now?

Yes. There's been no change to us. I mean the changes have been consumer-related. We're business-to-business. We're not revolving. You're right; we use a processor to do transactions. But it's really issued through our bank. And that's where we would feel the impact if there was any impact. And there has been no change.

Great. Okay. Thanks.

Thank you.

Our next question is from Greg Smith with Duncan Williams. Please proceed with your question.

Yes. Hi. The account-servicing fees were down pretty sharply sequentially, and down year-over-year. Is that just a function of the vehicles? Or is there some pressure on your ability to charge those fees?

There's a combination of the impact of vehicles. Which would be the primary driver.

And then in addition to that, the revenue that we're receiving on international right now is tied into development revenue. So as we're doing work for these private-labels, [oil] companies were charging for that.

So it's a little bit lumpier, as a result. So it depends really on the work effort in that quarter. Those are the two primary drivers.

Okay. And then just on the interchange fee on the MasterCard product. If you add new customers in there, is there any possibility you fall into different interchange buckets? Or is it all going to be pretty similar because the vast majority is kind of online travel?

The MasterCard interchange rates are obviously based on MasterCard, and it's a pretty complex grid. So it really does depend on where people are fueling; the size of the transaction.

So there can be some changes in the rate. But the biggest impact to the change in our rate in Q1 was just a greater mix in international. And that had a lower rate associated with it.

Thank you.

Our next question is from Tim Willi with Wells Fargo. Please proceed with your question.

Thanks. Good morning.

Two questions about margins. First one -- Mike and Melissa -- could you just remind us or give us a framework to think about the international operation and its profit curve?

You talked about a lot of prospects over the next couple of years. I think you talked about this on the last call. But how should we think about that as a profit center, as you sign new customers?

Will there be some incremental scalability that will immediately be recognized? Or is this something where you'll probably keep margins pretty flattish as you continue to build out that marketplace? Even with the customer growth?

Yes. I think the answer is, it depends how successful we are.

We need clearly to bring on some customers with our new processing program that we're putting in place and we're hosting in Vienna. So if we're just doing transaction processing, then those are going to be pretty stable revenue and earnings numbers.

But as we talk about long-term contracts, we're looking to sign long-term contracts like 10 years. And then over time, we would like to layer in more of the different contact-center capabilities. I even mentioned, I think it was Tien-Tsin that asked if there was some that even have receivable funding that would change the revenue model.

But those are further out. A couple of years before we start to see contact centers, potentially. A year or so -- a couple of years out -- if we'd start to see anybody looking for financing of receivables.

So it's hard to give you an answer. Except I'd say first you're going to see processing revenue -- which are lower transaction fees. Because all we are is a transaction processor feeding back into their systems.

Okay.

And then in the US, just thinking about as the recovery progresses. You've obviously taken some measures over the last year to 18 months around headcount and expenses. Things like that.

How do you think about the incremental margin of the core business as we move through the recovery? As opposed to what that margin or incremental margin might've looked like prior to the recession.

Do you feel like there are expenses you need to bring back in? Or is it probably in a position to be a higher incremental-margin business, as you've just gone back and retooled and looked at things closer?

I don't think that there's been a significant change in the incremental margins for our business.

When we made changes in staffing, it was because we had seen the decline in transaction growth. And we wanted to make sure that we brought down our staffing to the level of the volume that was running through our business.

But generally speaking, I don't think there've been significant changes in the margins. And in the places that we're spending money, it's mostly reinvesting in things that we think are going to bring growth. Like marketing initiatives.

We talked about international, as Mike spoke, as more money allocated to research. And so those are the places where we've been spending incremental dollars.

Okay. Thank you.

Thank you.

Our next question is from David Parker, with Lazard Capital Markets. Please proceed with your question.

Good morning.

Could you just comment on the progress that you're making with some of these state government contracts that are coming up for renewal, and how that impacts your goal of adding about 400,000 vehicles for this year?

Yes. I would say this -- that some of that is baked into the 400,000. We have nothing that we can announce, because nothing's been signed. But we feel very bullish about our success in the state-government business and what's in the pipeline. And at least where we think we're going to land with a few of these.

So it could add slightly to our 400,000, but I mean it's really kind of baked in. But with upside potential, if we are successful with a few of these that we are getting positive signs on.

And the point I'll make is, what we've done is, we've taken what we really did with the GSA and leveraged that across now some of these government businesses. So far it's been playing very positive for us.

Great. And then if you could just comment on your competitor. One of your leading competitors recently filed an S1 registration to go public. Any thoughts on that potential change? The impact to the industry? And just how you differentiate from that competitor, specifically?

Yes. I would say that we weren't surprised by them filing. We weren't surprised by some of the data we saw. We pretty much have kept track of what they've been doing both domestically and internationally.

We probably feel it's positive to have another peer that's closer to our model in the marketplace.

We know the differences. We are larger than them on the domestic side. Do things a little bit differently; but we both process private-label programs. Were both have kind of our own universal card. They play their universal card more with the smaller Fleets. We do ours across small, midsized and large.

And then they have their international program, where they've done a number of acquisitions in different countries, and have grown that piece of their program pretty significantly.

So those are kind of what we look at as the differences. We know they do things a little bit differently in how they finance their receivables and we finance our receivables. So there are differences.

But the model itself is very similar.

Great. Thanks, Mike.

Thank you.

Our next question is from Paul Birdali with PB Investment Research. Please proceed with your question.

Good morning.

I just want to follow up on the revenue guidance. It looked like it actually came down a couple million dollars, given the higher fuel prices and the improved [telematics] transactions. Just a little bit surprised, there.

I know you mentioned the late fees coming down, but that seemed like a pretty big number to offset. Just curious if there's any other color you can give there.

Yes.

The late-fees change was pretty significant. Because the change in customer behavior that we saw between January and March was pretty significant.

It brought late fees as a percentage of the spend volume down to levels we hadn't seen in over a year. And so that was the most significant negative.

And then partially offsetting that were the -- as you said -- the price of gas and MasterCard spend.

Okay.

And then just another question on the revenues. The other revenues in the quarter was a couple million higher than we were expecting. Just curious what drove that, or if there was anything unusual in that number.

Yes.

Mike talked about the telematics business performing well in the quarter. And you see that reflected in other revenue. It's grown year-over-year pretty significantly. And we're starting to see some pretty good traction there.

So that's more of a decent run rate, given what you're seeing in that business?

Yes. Actually, it will compound.

The hardware sales are split out separately. So what you see in there is the monthly revenues that we're getting. And so as we add new vehicles, you should see a model similar to what we do in our own business. You take the run rate and you're adding new business to it.

Right. Okay. Great. Thank you.

Thank you.

Ladies and gentlemen, as a reminder, it is *1 to ask a question at this time.

Our next question is a follow-up from Bob Napoli with Piper Jaffray. Please proceed with your question.

Thank you.

And I know you said up front that you were being very conservative with your balance sheet. But your leverage has declined so much, and your cash flow is so strong. And you've been content to just deleverage.

But obviously, you're looking at other. You're well below target leverage ratios.

At what point will you start buying back stock? Or how long will you wait to see if you get an attractive acquisition before you start returning cash and other methods to shareholders?

Yes. I think, as we've said, we'll continue to invest in our business -- which we're doing. We are looking at acquisitions and there are opportunities. But you can't really time all of those, and things don't always go as you plan.

But that's our bias. Because we believe there is a pipeline of opportunities on the acquisition side. So that is where we're being careful, in terms of making sure we have the liquidity to do that.

But there will be a point in time. We also have 67 million still in our cash-repurchase authorization. So we will look at that, as well, depending on what the stock price is.

On the acquisition side, what are your primary goals? Or I guess how would you prioritize what is the most attractive to the long-term value of this company?

Well, I think clearly, we're going to do everything we can to make sure in our core US or North American market, that we're going to be as strong as possible.

So are there acquisitions there that can diversify us? Strengthen us with adjacent markets? All of that.

If there's opportunities on consolidation, we would look at that, as well.

But even international, we started with our processing strategy. We think that was smart, to get a platform which was a purchase.

And we started to say that could be leveraged with the window of opportunity we saw with the major oil companies that came about even faster than we expected, and with more of them than we expected.

But then looking at other alliances or acquisitions that could even expand the international opportunity and diversify the international opportunity.

So I think it is looking at the core, looking at the international, but still looking at diversified opportunities.

Thank you.

Ladies and gentlemen, it is *1 to ask a question at this time.

Our next question is another follow-up from Robert Dodd with Morgan Keegan. Please proceed with your question.

Hi, guys.

Just a question about aging rates on credit quality.

How far are you? Your aging rates have been declining for a while, in credit quality. If you're not at all-time lows here, how far are you off that? The lows (inaudible) ideas there.

And if those aging rates move back to historic averages, how much of an affect would that have? Obviously (inaudible) but how big of an impact would that be on stocks?

Okay. Let's take that in pieces.

The first part of your question was related to the aging. And if you recall, last year, we saw improvement in the aging in the first quarter. The second quarter of last year was kind of the benchmark of when it looked the best, and then it declined slightly in Q3 and Q4 of last year. And then it had improved again in Q1 of this year.

So we're pretty comparable to the first quarter of last year, right now.

And in terms of impact, it'd be a couple million dollars, roughly, of credit loss -- if you were to move it to a historical level.

Okay. Got it. Thank you.

Thank you.

Mr. Dubyak, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Well, thank you, Melissa. And I appreciate everyone tuning in on a busy day. So we look forward to talking with you again next quarter. That concludes our call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.