Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the WEX third quarter 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Steve Elder, Senior Vice President of Investor Relations for opening remarks. Sir, you may proceed.
Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO, and our CFO, Roberto Simon. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the investor relations section of our website at wexinc.com. A copy of the release and the slide deck have also been included in the 8-Ks we submitted to the SEC. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income or ANI during our call.
Adjustments for this year's third quarter to arrive at these metrics include unrealized gains on financial instruments, net foreign currency remeasurement losses, change in fair value of contingent consideration, acquisition-related intangible amortization, other acquisition and divestiture-related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, ANI adjustments attributable to non-controlling interests, and certain tax-related items. Please see Exhibit 1 of the press release for an explanation and reconciliation of adjusted net income attributable to shareholders to GAAP net income attributable to shareholders. I would also like to remind you that we'll discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1st, 2021, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa.
Thanks, Steve, and good morning, everyone. Thanks for joining us today. Before diving into our Q3 results, I want to thank our incredibly talented team around the world for their hard work and unwavering commitment to delivering value to our customers and partners. Despite the ongoing challenges of COVID, our team delivered another quarter of impressive performance. Turning to our results. Continued platform innovation and successful execution drove 26% year-over-year revenue growth, supported by double-digit increases in each segment. The top line performance also reflects 5% sequential growth versus Q2 as we continue to capitalize on positive trends across the business. Excluding the benefits of higher fuel prices and favorable foreign exchange rates, revenue growth was up 17% compared to Q3 2020.
Total purchase volume processed across the organization in the third quarter grew 93% year-over-year to $26 billion, which is a record for the company. As customer spend patterns improve, mobility rebounds, and we continue to win in the marketplace, our outlook remains very positive. This strong revenue growth, coupled with our ongoing commitment to scale our platform and realize operating efficiencies, drove year-over-year and sequential adjusted earnings growth of 54% and 6% respectively. Let me take a moment to unpack two of the key drivers that are supporting our strong year-over-year and sequential growth. First, customer spend patterns continued to rebound from the lows of last year. For example, we see a significant increase in travel-related volumes in Q3, which increased 85% from Q2 and were nearly 6 x last year's level.
We're also seeing a rebound in mobility, leading to higher volumes for our North American Fleet customers as more offices reopen. Second, we continue to win in the marketplace. During the quarter, we signed one of the largest U.S.-based multinational corporations specializing in package delivery, transportation, e-commerce, and business services. This new customer made the switch to WEX because of our ability to deliver our unique platform combined with industry-leading products for both over-the-road and local vehicles. We also continue to have great growth for smaller and mid-sized fleets.
The new marketing technology stack, which includes a cloud-based digital marketing engine targeted at acquiring small business customers, is proving very effective and resulted in a 94% increase in new North American Fleet customers through September compared to the same period last year. We started expanding this marketing engine to other parts of the business to support improved conversion rates and increase customer engagement in the European region. Within health, we had a key win with a large higher education institution encompassing the WEX benefits platform for CDH and COBRA administration, as well as our fully outsourced benefit administration platform and services. This institution chose WEX to help drive employee engagement and deliver a world-class experience to their multi-generational workforce.
I'd also like to note the signing of Stampli, an AP automation company based in Silicon Valley and a member of the Fintech 250 with more than $20 billion of accounts payable under management. They chose WEX for the versatility and reliability of our platform, as well as our payments expertise. The time of contract signing to the first transaction issued was only two weeks, showing the speed and ease of integrating with our technology. As we grow our addressable market, this strategy has resulted in strong market share gains and high customer retention rates. Through innovative technology and outstanding customer service, WEX provides a world-class digital experience that is resonating in the marketplace and underpinning our impressive results. We are nearing completion of moving the Corporate payments card issuing technology to the cloud. This will complete having all pieces of the Corporate payments platform in the cloud.
Our Cloud First strategy remains core to our ability to quickly scale the business and drive profitable growth. This is also a significant step in completing the integration of eNett and Optal, and allowing us to combine the platforms. The strategic investments we've made over the past few years to sunset legacy platforms and expand our modern commerce solutions are paying dividends, increasing the breadth of our core B2B commerce offering and deepening our customer reach. Regardless of size or scale, payment ecosystems can be complex, which is why we work to seamlessly integrate into our customers' workflows and create an intelligent, secure, highly scalable, and resilient infrastructure. With rapid expansion and adoption of the digital economy, our proven infrastructure enables customers to access our full suite of capabilities, including digital custom integrations, which simplifies and streamlines the user experience.
We're investing ahead of our customers to anticipate their needs, which will contribute to our next wave of growth. An example of how we help simplify payments for our customers is the ease in which they can integrate our embedded payment technology and customize it to their workflows, meeting their needs for secure, frictionless integration. This, coupled with our deep sector experience, makes these type of transitions seamless for our customers. Beyond integration, we are maximizing the value of payment optionality for our customers by introducing new flexible rates, expanding the number of merchants willing to use the product. This service is a win-win for our customers and WEX. This simplifies the payment process for our customers and allows WEX to capture new spend opportunities. This is another example of how we work with our customers to offer solutions that meet their needs.
The breadth and reach of our offerings make us the premier choice for B2B commerce. It is why we continue to win customers like AvidXchange, where we are now live with transactions. Another great example of the development of our tech platform is what we're doing to support electric vehicles. From our perspective, we believe the EV market opportunity for WEX is significant over the long term, and that we are well-positioned to support our customers through the transition. As our customers begin to transition parts of their fleets to electric vehicles, WEX will be ready for them, anticipating their needs. We will simplify the added complexity that is coming their way with mixed fleets, expand options to charge at home, solve the need for data-driven solutions, reporting, benchmarking, and payment systems. Our customers will need tailored solutions from a trusted partner.
They will need support to meet their goals around carbon reduction and understand the total cost of ownership, as well as the energy efficiency and cost savings of EVs. In addition, we will use our unique scale and purchase volumes to create further incremental value for our clients. Doing so will open new opportunities for WEX to continue to gain market share and to build on our unique and highly defensible position. One more example of progress in this space is the Element Fleet announcement earlier this month. Element is the largest pure-play automotive fleet manager in the world. It will use the combined offerings from WEX and ChargePoint to serve its customers. WEX's technology and consolidated data will be integrated into Element's analytics and dashboard program. This is a great demonstration of companies working together to meet broader environmental goals for Fleet Electrification.
In the longer term, our customers and partners are looking to us as their trusted partner to provide solutions for the future. We are actively developing new integrated payment products to better serve fleet managers and remain their trusted partner for future solutions. We plan to develop additional products and related services as the market is further defined and expands. For example, given our market presence, we are exploring how WEX can further play a role in the reduction of carbon emissions or benchmark in the efficiency of an EV versus a gasoline-powered vehicle through reporting and benchmarking, which can also open up new revenue opportunities. Beyond positioning us for long-term growth in the EV space, we're proud to support the transition to electric vehicles, which has the potential to bring important benefits for the environment and for future generations to come.
Lastly, I would like to highlight our efforts to increase penetration of HSAs by educating healthcare consumers at our National Health Savings Account Awareness Day, held earlier this month. There are an estimated 31 million HSA accounts with significant growth projected over the next three years. HSA Day is an opportunity to explain the benefits of using an HSA to increase their buying power and plan for unexpected health-related expenses, leading to better healthcare outcomes. We all know that healthcare costs are top of mind for most Americans, and our goal is to help educate consumers at various life stages. For example, we have targeted information for young people just starting out about how an HSA has benefits that go well beyond covering healthcare costs.
For this demographic, in particular, with benefits like triple tax advantages and investment accounts, an HSA can be a way to supplement both healthcare savings and retirement investments. Beyond end consumers, we are focused on helping the companies we work with to provide education, tools, and resources to their employees, so they can use health products to help alleviate rising healthcare costs and reduce income inequality. As we look ahead, the future is very bright for WEX. Strategic investment in innovation combined with our customer-centric culture has positioned us to continue to grow and capture market share. As volume continues to rebound and we leveraged our best-in-class growth engine, we remain confident in our ability to achieve our long-term growth targets of 10%-15% revenue growth and 15%-20% growth in adjusted net income per diluted share.
We remain committed to innovating across our technology platforms, accelerating our digital transformation, and delivering tailored solutions to fit our customers' needs. To that end, we must continue to evolve our organization to ensure we are best positioned to capitalize on the tremendous opportunity that lies ahead. As you may have seen this morning, we announced some changes to our executive leadership effective on January 1st to align our teams to enable us to better serve our customers by offering a truly integrated solution across the entire WEX platform. These changes will allow us to move our business closer to our customers' needs and preferences, keep our individuality and what makes our products special and unique while sharing best practices, and create a stronger go-to-market approach. Our goal is to create deeper customer relationships by offering them a one-touch experience as they make decisions across our entire product portfolio.
I am confident that these changes will allow us to secure our next phase of growth and better position us to achieve our strategic priorities. We're excited about the growth opportunities that this will drive across the business and the value it will ultimately unlock for our customers, shareholders, and other stakeholders. I look forward to continuing to update you on the success of our strategic initiatives and our expectations around the long-term impact they will have on the business. To that end, we're planning to hold an Investor Day in March of 2022. We'll provide more details in the coming months. In closing, I'm incredibly proud of our team's performance this quarter. As I've discussed time and again, WEX's people and culture are a significant differentiator and have proven to be a key competitive advantage as we navigate the current environment.
We'll build on this momentum, and we'll continue to drive long-term shareholder value while supporting our employees, partners, customers, and communities across the globe. With that, I'll turn the call over to our CFO, Roberto Simon, Roberto?
Thank you and good morning, everyone. As you heard from Melissa, the third quarter results were really solid, building upon momentum we saw in the year's first half. We had another record-breaking quarter with revenue surpassing the previous high by more than $20 million. The company's positioned for long-term sustainable growth, remaining agile in adapting to customer needs, effectively integrating acquisitions, driving innovation across the technology platform, and scaling the business. Starting with the quarter results on slide number 10. For the third quarter, total revenue exceeded the high end of expectations, mainly due to better-than-expected volumes in the fleet and travel businesses. Total revenue came in at $482.8 million, a 26% increase versus Q3 2020. From an earnings perspective, on a GAAP basis, we had a net income attributable to shareholders of $48.3 million.
Non-GAAP adjusted net income was $111.1 million or $2.45 per diluted share. This represents a 54% increase versus prior year, driven by higher revenues as well as robust adjusted operating income margins that I will discuss later. Turning to slide 11 and breaking down the revenue by segment. Fleet Solutions grew 25%. Travel and Corporate Solutions posted a 42% increase. Finally, Health and Employee Benefit Solutions was up 18%. Now let's move to segment results, starting with Fleet on slide 12. Total Fleet Solutions revenue for the quarter was $286.4 million, a 25% increase versus prior year, powered by strong volumes from new customer wins and renewals, higher fuel prices, and the recovery in the existing customer base. Payment processing transactions were up 11% year-over-year.
Over-the-road transactions maintained their strong growth up 17%. North American Fleet was up 11%, and the International Fleet business was up 4%. The net late fee rate decreased to 45 basis points in comparison to 48 in Q3 2020, continuing the trend of customers paying their bills on time. On the other hand, finance fee revenue was up 46% due to significant increases in volume and fuel prices. In Fleet, the average domestic fuel price in Q3 2021 was $3.23 versus $2.23 in Q3 2020. This increased fleet revenue by approximately $39 million and was partially offset by lower European fuel price spreads. Turning to Travel and Corporate Solutions on slide 13. Total segment revenue for the quarter increased 42% to $91 million.
Additionally, purchase volume issued by WEX was $12.8 billion, continuing the sequential improvement since Q2 2020. Travel-related customer volume represented approximately 70% of total spend. Breaking revenue down, corporate payment customer revenue was up 17%, led by continued strength in the partner channel. Revenue from travel-related customers was up 153% versus Q3 2020 and also up 70% sequentially, reflecting seasonality, increasing demand, and a significant contribution from eNett and Optal. We are pleased with these results and are well-positioned to capture future growth as the travel industry continues its global recovery. Finally, let's take a look at the Health and Employee Benefit Solutions segment on slide 14. We continue to drive a strong growth resulting in Q3 revenue of $105.4 million.
This represents an 18% increase over prior year and 27% versus 2019. The acquisition of Benefit Express contributed approximately $9 million in revenue, offset by approximately $2 million from Brazil, which was divested at the end of Q3 last year. SaaS account growth was 16% in Q3, including new accounts related to Benefit Express and the temporary COVID accounts we discussed last quarter. For the fourth quarter, the COVID accounts will fall off as we are transitioning back to employment-related growth. Now, let's move on to expenses and adjusted operating income margins on slide number 15. For the quarter, total cost of service expense was $179.9 million, up from $156.9 million in Q3 last year. Total SG&A depreciation and amortization expenses were $202 million, which is up $25 million.
In the Fleet segment, adjusted operating income margin for the quarter was 50.6% compared to 44.7% in 2020 and 48% in 2019. This is the second consecutive quarter with fleet-adjusted margins higher than 50%. The increase reflects revenue growth, higher fuel prices, and the scale in the expense base. Of particular note, credit loss in the segment continues to be low at 5.9 basis points of spend volume compared to 10.8 in Q3 prior year. Travel and Corporate payments delivered adjusted operating income margin of 34.1%. There has been steady improvement in the adjusted margin this year, starting with the 10% in Q1, 21% in Q2, and now 34%.
As expected, we continue to see high drop-through of revenue increases as the cost base is primarily fixed and continue to see benefits from the eNett and Optal synergies. So far, we have implemented approximately $30 million of run rate synergies. The remaining $10 million of the $40 million target relates to platform consolidation and back-end processing. In the Health segment, adjusted margin was 22.6% compared to 26.7% in 2020. It was down mostly due to the acquisition of Benefit Express and the timing of certain expenses. Finally, for the total company, adjusted operating income margin was 37%, which is up from 32.8% last year and up 70 basis points compared with Q2 this year. Let's discuss taxes on slide 16.
On a GAAP basis, the effective tax rate was 27.2% compared to -59.8% for Q3 2020. On an ANI basis, the tax rate was 25% for the quarter and 23.4% for Q3 prior year. Changing gears now to slide 17, I will provide an update on the balance sheet. We remain in a healthy financial position and ended the quarter with $533.8 million in cash, which is down from $852 million at the end of 2020. From a liquidity perspective, we've got over $665 million of available borrowing capacity and a corporate cash balance of $145 million, both as defined under the company's credit agreement.
At the end of the quarter, the total outstanding balance on the revolving line of credit, term loans, and convertible notes was $2.9 billion. The leverage ratio as defined in the credit agreement stands at 3.7 x, which is level with the end of 2020. We will continue to take advantage of the free cash flow generation to reduce leverage until it is within the long-term target of 2.5-3.5 x. Once that level is reached, we will evaluate all opportunities to deploy capital. To close out the call, we are extremely satisfied with the third quarter results, which positions us for continued success. Revenue and earnings guidance for the fourth quarter and the full year are on slide 18.
However, before I get into the specifics of guidance, I want to note that we have renewed the contract of a significant Corporate payments partner in Q4. This new contract will alter the accounting presentation from gross revenue recognition to net with a corresponding change in sales and marketing costs. There is no material impact on earnings from this change, but several of the segment metrics will change going forward. For Q4 2020, these would have resulted in a reduction in both revenue and sales costs of approximately $15 million. In addition, although domestic fuel prices have increased significantly, we are expecting the benefits to be tempered by spreads in Europe. All of this is reflected in the numbers I am about to give.
Starting with the fourth quarter, we expect to report revenue in the range of $468 -$483 million and adjusted net income in the range of $102 -$111 million. On an EPS basis, we expect adjusted net income to be between $2.25 and $2.45 per diluted share.
For the full year, we expect to report revenue in the range of $1.82 -$1.84 billion, and adjusted net income in the range of $400 -$409 million. On an EPS basis, we expect adjusted net income to be between $8.81 and $9.01 per diluted share. Now, let me walk you through a few more assumptions. Exchange rates are based as of the end of September 2021. We estimate domestic fuel prices will average $3.45 per gallon for the fourth quarter, and $3.12 for the full year. Both are based on the NYMEX futures price from last week.
The adjusted net income tax rate is expected to be between 24.5% and 25.5% for the fourth quarter and the full year. Finally, we are assuming approximately 45.4 million shares outstanding. With that, operator, please open the line for questions.
Ladies and gentlemen, the floor is now open for your questions. As a reminder, to ask a question, please press star one on your telephone keypad. Your first question comes from the line of Mihir Bhatia of Bank of America.
Hi, thank you for taking my questions, and good morning. I wanted to just start with the interchange rate, I guess, in the Corporate payment section. I imagine some of that is just being driven by the mix shift towards travel, but can you maybe provide a little bit more color on where you expect that to be? 'Cause I thought last quarter when we talked about this, the view was it should start stabilizing from here in the back half of the year. Just trying to understand what the drivers of such a big decline this quarter were and your expectations for next quarter.
Yes, of course g ood morning. If you recall what we have discussed for two, three quarters now, the rate is very much impacted by different reasons, but the most important one is if you look where we were in Q1 this year, our travel-related customer volume was 40% of the segment. In Q2, went up to 55% of the segment, and in this quarter is 70%. As you can imagine, because the travel rate is much lower than the corporate payments one, it has a material impact on the rate take overall. The second thing is, as you know, as the customers and the volume increases, we also have some tier rebates that may kick in. You see that from Q2 to Q3, we have improved travel volumes almost $7 billion. That's also a very material component.
What I would say to you is if you think going forward, as we go into Q4 and into next year, I'm gonna pro forma what I'm gonna say to you because as you know, we have renewed one contract with a corporate payment customer that will change the accounting presentation from gross revenue into net revenue. If you pro forma for that, the Q3, and we go into Q4, the numbers are gonna be very similar. The last point I would say is if you compare just the travel rate from Q2 to Q3, it's just slightly higher. You don't see it on the overall because of all the reasons I said, but from Q2 to Q3, you see a slight improvement.
Okay. Sorry, can I just go back to the contract? When your pro forma.
Yeah.
I guess, well, I just wanna make sure I understand exactly what you're saying. Can you provide a little bit more color there? Just trying to understand exactly what, I mean, I understand what's happening with the contract where it's.
Yeah.
You're moving from gross to net to gross. I'm trying to understand more the impact on the rate and how that is affecting the rate next quarter.
Yes. If you recall three years ago, we went through the revenue recognition changes, and through that process, some customers and some contracts that we had with some customers, we moved them from net revenue presentation to gross revenue presentation. Through the process of renewing a contract with a significant corporate payment customer, we have changed some of the clauses in the contract, and now the presentation is gonna be net revenue. If you look on the appendix of our presentation today, which is on page 20, what we have shown there is the pro forma, all the pro forma of the KPIs and metrics for the segment year-to-date September with and without the pro forma adjustment. If you look at the year-to-date numbers, the rate is down from 74 basis points to 55 when you pro forma that customer.
That's a 19 basis points reduction just by changing the classification from gross revenue into net revenue. The revenue goes down approximately $55 million. Operating expenses go down the same, and operating income is exactly the same with an improvement in margin.
Understood, t hat is, and then because.
Okay.
Just my last question. Just because Q4 you have pro forma'd this into your Q4 guidance, fair to say if this change had not happened, your Q4 revenue guidance would have been materially higher. If we take last quarter's numbers, $15 million higher, last year's numbers.
That-
It would, you know. Right?
That is correct, yes. If you think about our Q4 guidance, we increased the midpoint $10 million. If we wouldn't have had the accounting change, it would have been $25 million. Yeah.
Thank you.
Your next question comes from the line of Ramsey El-Assal of Barclays Capital.
Hi, thank you for taking my question this morning. I was wondering if you could give us a little more color on the new deal when you mentioned the large multinational corporation package delivery e-com. Is that an impactful deal in terms of should we be thinking about maybe like a timing and magnitude of a P&L impact? Or is it not sizable enough as to where it would be something that you would want to carve out or call out?
Hi, good morning. It is a direct customer on our fleet business and so we'd like to talk about some of the larger deals that we sign. It's not the same magnitude as what you would see if we sign a partner relationship though, where you're getting a bunch of customers bundled together. We're proud of the win. We think that you know it adds to hitting our overall growth objectives. I wouldn't say that you actually do anything specific for that one customer.
Okay, and Roberto , could you help us think through the Health segment? You know, SaaS accounts sort of cadence, understanding that, you know, COBRA accounts will roll off next quarter. How should we think about that in terms of both the revenue impact as well as sort of going forward, just in terms of the cadence of those customer adds? Should it grind higher after Q4 or how should we think about that?
Yeah. If you recall earlier in the year on the Health segment, we guided an organic growth of 8%-12% for 2021. If you think where we are today, year-to-date, and with the guidance that we have provided for Q4, we are gonna be in the middle. It's gonna be, you know, ±10% growth organically, which if you think how the industry has been doing in the year, we have to be really satisfied with that. On the SaaS accounts, we reported 16% this quarter. Obviously, you have some noise on the acquisition of Benefit Express, which added approximately 500,000 accounts, and then the temporary accounts from COBRA that we added last quarter. As we said last quarter, those COBRA accounts are gonna tail off as we get to the year-end.
At the same time, we are going now through the enrollment season. Obviously, as we end the enrollment season, we are gonna see some of those COBRA accounts gonna disappear, but at the same time, we're gonna be adding new SaaS accounts. I would say to you that as you think going into Q4 and then into next year, we should see, you know, growth rates similar to what we have experienced now in the past year, obviously for the growth rates that has been changing now in the market.
Okay, got it. Thank you so much.
Your next question comes from George Mihalos of Cowen.
Great, t hanks for taking my questions, guys. Just wanted to ask, as it relates to the fourth quarter and the corporate and travel business, obviously, I think you said this quarter it was sort of 70/30 volume, skewing towards travel. If I'm not mistaken, I think we talked about fourth quarter being kind of somewhat more similar in terms of the split. Excuse me, similar, more even, in terms of the split. Any updated thoughts as to how we should be thinking about that?
Yes, of course. You know that on the travel side, there is seasonality, and Q3 is, on the seasonality side, the highest. So you can see that on our non-reported numbers in this quarter. Now with $12.8 billion of spend being almost $9 billion from the travel side. As you move into the fourth quarter, the seasonality tails off on the travel side, so we should expect now the volumes from travel to compress. Because of the seasonality, it's still growing very nicely compared to last year, but compressed from a percentage, you know, or from a mix point of view in the segment. While at the same time, we expect the volumes from corporate payments to stay similar, if not higher than Q3, and obviously still a nice growth from 2020 from Q4.
I would guess, you know, if we had 70/30, this is gonna go down to say, you know, between 60% and 65% on the travel side.
Okay, t hat's helpful. If I could just sneak two more in. One, I'm just curious on the corporate payments business, if you're starting to see any sort of impact from supply chain disruption, if that is having an impact on some of your customers. Then related, more long term to capital allocation. I understand you're still looking to delever here, but any updated thoughts around kind of, you know, perhaps more aggressively returning capital to shareholders just, you know, given the current valuation and the pressure we've seen on the stock recently? Thank you.
I'll take the first one of those, and I'm sure we'll go through it together on the second one. Supply chain is interesting because it's affecting our customer base disproportionately. If you were to talk to our customers in the over-the-road part of our business, it's certainly have an impact and a pretty material impact on their business. A little bit less so across other categories, but again, then it gets pretty specific. We do business with companies that sit in so many different categories that it's disruptive to some, but not across all. We also hear from our customers really across all categories concerns around wage increases and labor shortages and that's impacting businesses across really almost every category.
Corporate payments specifically, it's not one of the major trends that we're hearing from that customer base, but it again, it becomes specific to the type of customer. In terms of return of capital, Roberto said this in his prepared remarks, but we're still above our long-term leverage targets. Our focus at the moment is to continue to pay down our debt. We will and continue to explore, you know, the best use of capital, you know, across the enterprise, you know, like we have historically in our conversations with our board.
Okay, thank you.
Your next question comes from James Faucette of Morgan Stanley.
Thank you very much. Can I just follow up quickly for clarification on the leverage point? So it sounds like you're looking to actively pay down debt, not just reduce the ratios via earnings growth. Make sure I understand that correctly. My kind of more specific question is from a segment perspective, particularly on Travel and Corporate Solutions, you seem to do quite well. I'm wondering how we should think about operating margins and where those are likely to settle out going forward. Has there been a structural growth element through the pandemic? That is, should we expect that segment to settle at a higher growth rate than maybe we've seen previously? Just trying to get a sense for where that could end up, especially given how well it's done.
I'll start. On Travel and Corporate payments, across that segment, one of the things that we've talked about is the fact that when we added eNett and Optal in, we picked up a number of redundant costs, and we've gone through a lot of effort to consolidate and integrate those businesses into WEX. At the same time, making sure that we're, you know, taking care of our customers and we're focused on growth over the long term. Roberto talked about the $30 million run rate synergies that we've had so far. We, you know, again, expect to have $10 million more. That business and you can see it coming through quarter by quarter, you know, as we've gone through the integration process.
At the same time, we've got the benefit of having a highly fixed cost structure, you know, which was not helpful last year. It's been actually quite helpful this year and helpful going forward as we see volume coming into the business that is affecting the margin and the margin profile positively. We think that trend is gonna continue into next year as we see more volume rebound within specifically our travel business and we continue to grow our corporate payments business.
Your other question was around leverage ratio, if I recall properly, and not pay down debt. As you know, we are a high growth company. We manage leverage ratio. The leverage ratio can be reduced or increased, you know, both with earnings or, you know, with the amount of debt. If you look at what we have seen in from Q2 into Q3, obviously earnings are improving significantly and at the same time, our total debt is down. Where we wanna be is within the range and making sure that we have enough free cash flow so we can allocate and have as much liquidity as possible.
Then when we get to the point where we are between 2.5-3.5 x, as Melissa said, we are gonna be exploring, like we have always done, any opportunity in front of us from, you know, M&A point of view, from a return to shareholders, anything that is available, thinking obviously on the short and on the long term, n o?
That's great. Thank you very much.
Your next question comes from Andrew Jeffrey of Truist Securities.
Hi, t hank you. I appreciate taking the questions. Melissa, a point of clarification in the Travel and Corporate payment segment. Did you note that supply chain is perhaps affecting corporate payments volume? I think Roberto said it's up 17%. Just wanna understand if that number is being depressed by macro.
I wouldn't say that. You know, from our conversations we're having with our customers, that's not like a prevailing conversation that we're having. Again, it gets pretty specific within customer categories. If you look at the growth of the business and how we're continuing to build, we're continuing to add on new customers and partners. We talked specifically about the fact that we're starting to see transaction volume with AvidXchange as we've gone through that implementation and expect that to ramp. Some of what you see for growth year-over-year depends on when things are signed, when they're ramping in that portfolio. I wouldn't say that there's been a you know, significant overhang from a supply chain perspective within that part of the business.
Okay. It sounds like that could accelerate with some of the new implementations. I wanted to ask specifically on the Stampli deal. Can you elaborate? Is that a virtual card issuing deal? Who are the competitors in those RFPs? Are you seeing the cloud native providers? How would you frame up your position in the industry?
Well, I would start with saying that when we're going into that business, we're providing a cloud-native offering. It's something that we have, you know, that we've built across the business, and we feel the technology that we have can compete with anybody else out there in the marketplace, with also a really great history from a reliability standpoint. I'd start with that. As we're going into these portfolios, that was an example of something where we're doing embedded payments, which we do across a number of categories in that customer base. They are using our virtual card technology capability. I think of competitors being, you know, there's a wide number of them, all names that I'm sure that you're aware of.
It's a highly competitive process whenever we're in there bidding and winning these businesses.
Great, t hat's a nice win.
Your next question comes from Tien-Tsin Huang of J.P. Morgan Chase.
Thank you so much. Melissa, I think you were talking about some pricing initiatives or modernizing pricing, in corporate payments. I think you were talking about it sort of along the same lines as modernizing platform and moving to the cloud. Can you just maybe elaborate on that and what that means for your front book as well as your back-book, pricing-wise?
I think that, Tien-Tsin , I think what you're referring to in the prepared remarks, we talked about introducing a new piece of technology to our customer base where we can give variable rates to the merchants. That's probably what.
Yes.
You're referring to.
Yes.
Yeah.
Sorry.
What we're doing is expanding merchant acceptance, and allowing people to purchase through different schemes or products that we're using. This is within Corporate payments. I wouldn't refer to it as pricing modernization. It's more around increasing acceptance and so that we can have more volume pushing through the network. As part of what is interesting when people come and want to partner with WEX, the ability to extend that network and network of offerings is, you know, part of the advantage. This is more important as our ability to sign new partners and the partners to be able to push through more volume across the business than I wouldn't describe it as pricing modernization.
I'd describe it as product expansion.
Yeah, n o, forgive me for that. It sounds like it's, yeah, for supplier recruitment, partner recruitment.
Yes.
-This is a way to-
Yes.
To accelerate that.
Yes.
Got it. Thank you for that clarity.
Yeah, particularly when you've got large ticket items, and so, you know, specifically when you get into kind of some of the niche payments where you might not get acceptance, it allows other optionality for our customers.
Understood, s orry if I misunderstood it up front. I know George and others have asked about supply chain and driver shortage and whatnot. Is there a way to quantify that? Because we're definitely getting questions about how to maybe frame that and consider the pluses and minuses there.
Yeah.
Looking ahead.
On the fleet part of our business, we would hear that again, if you think across a category. For their over-the-road customers, this is something that we definitely are hearing from that customer category. It's really affecting the ability for them to move goods. Goods are coming across in very expensive ways and unpredictable ways, and so that's definitely affecting the over-the-road part of our business. I'd say again, the issue there is compounded by underemployment. We've got drivers that have moved from over the road into local categories. You've had a number of drivers that have chosen to retire.
I'd say across the business, when we talk to customers, we hear more about that as a fundamental issue is underemployment and the ability to recruit talent to meet the needs and the demands that they have in their businesses as more of a systemic issue as well as just cost of employment and how that's factoring through in terms of you know pricing and pricing changes across categories. That's kind of the broader issue. In terms of can we quantify that, I'd say that would be really difficult. It's something that you're hearing across categories, but it's not something that I would be able to give you a number on.
Okay. We'll just be tracking it then. Thank you for the time.
Yeah.
Your next question comes from Darrin Peller of Wolfe Research.
Hey, t hanks, guys. You know, can we revisit the Corporate payment segment for a minute just 'cause I know it's a key area that a lot of investors focus on as a differentiator long-term potentially. First of all, just to remind us of the dynamics in your corporate payments volume, just looking at those slides six and seven, it looks like there's a bit of a trend line down from third quarter versus 2019 and then year-over-year it looks negative a little bit. I'm curious what the dynamics are there into October. If we can add on to that, probably more importantly, bigger picture, your strategy there, software centric, virtual card centric, just revisiting your view and vision for that business.
Yeah, sure. I'm gonna talk first about your second question. From a where we're going with that business. We if you look at it where we've had a lot of success with this concept of embedding payments, and we're doing that across, you know, multiple different customer categories. And you know, we've really built out our capability around processing, doing that in a very efficient high uptime cloud-based platform, which allows our customers the ability to choose the pieces of functionality. They can choose to use our card issuing capability, our virtual card capability. They can go across and then choose to use processing as well. What we're finding is that as we go into the marketplace, people are selecting pieces and components of our functionality or bundling them together.
You know, from our perspective, you know, both are good. They both work well for us. We're continuing to bring in new volume, and that volume for us is highly profitable. In terms of software, you know, we've really focused primarily to date around more of the infrastructure and how we can support that. We will continue to build out our capability over the long term. One of the places that is particularly interesting to us is you look at our captive customer base that we have across the business. I think, you know, people know us as having large customers, and we talk a lot about those in these earnings calls.
We have over 400,000 small customers that sit in our business who've largely migrated to a digital world through our tools and are interested in doing more with us. We see that as a really huge opportunity for us in the future to continue to bring those customers along and to meet more of their needs, you know, over time. Where we're going will evolve, but we've been pretty focused to date around this concept of embedded payments. We're also ramping up our direct sales force. We've really grown historically through our partner channel. We think it's time for us to have a larger direct sales force, and so we've been adding to that resource pool, and we'll continue to do so throughout this next year. You asked about volume on corporate payments.
Just remember last year, we're coming off some big comps. Q3 grew 41%. Q4 last year grew 56%. Just illustratively, we had $2.3 billion in spend in Q4 2019 and $3.6 billion in Q4 2020 for corporate payments. It had seen some tremendous growth year-over-year. We also have some partners that split volume with providers, and that can cause some variation. Final reminder, I said this earlier, but with AvidXchange, new customer that we're just starting to ramp transaction volumes. They've gone through the implementation process, and we'll see the benefit of that coming through more in the fourth quarter.
Okay, t hen just when you think about the follow-up to the M&A discussion earlier, I mean, would this still be the primary area you'd want to focus on going forward when you know you're in the right leverage position or other? Would you put it, you know, would you put other areas on top of it? Thanks again, guys.
Yeah, w hen we go through M&A, one of the things that we do is step back and look at how we want to deploy capital in aggregate. Instead of looking at M&A transactions individually, we look at how would we like the business to evolve over time, and we stack a bunch of different transactions against that to get a view of, you know, do we like what that looks like? Does it push us closer to our strategic goals? Do we like how it looks from a financial perspective? It's been part of the discipline process that we've gone through historically. I'd say we still go through that process on a regular basis. We're not solely focused on Corporate payments.
You know, we have been increasing the amount of organic investment we have in that business because we think that we have a lot of opportunity there. Some of the M&A within that category has been, you know, pretty expensive. We've had a bias towards building within that category over the last few months. That being said, we continue to explore options in the marketplace. We're, you know, always going to be having an active M&A pipeline. We will look across what's gonna again move us closer to our strategic objectives, what's gonna actually continue to build our already strong growth rate, and to continue to diversify the business. Corporate payments is one category of that, but I wouldn't say it's the only one.
Okay, t hank you.
We have time for one more question. Your final question comes from Sanjay Sakhrani of KBW.
Thanks, g ood morning. I guess I'm gonna follow up on Travel and Corporate a bit here too. I guess my question is, if we think about future renewals, and I know it's sort of dynamic, how are they gonna feed into the yield going forward? Are we gonna have more of these types of accounting differences? And where does the yield stabilize? And maybe we could just parse apart travel as well as corporate volume, because I know Avid's coming on. Is that gonna be good for volume but maybe dilutive to the yield? I think, you know, as people are trying to figure out sort of what the yield trajectory is on a go-forward basis as a baseline. Thanks.
Sanjay, I'm gonna try and do my best here, obviously. The most important thing for us, as Melissa has said, and we have said, is growth and profitability. You know, we wanna continue growing. We have been doing really well. You know, Melissa gave a couple of points on the corporate payments noting we compared to 2019 volume-wise. Obviously all of that has been reflected in revenue and adjusted operating income. If you think where we are today, especially in these three quarters. Now you recall Q1, we had an adjusted operating income margin of 10%. We went to Q2, 21% or 22%, and now it's 34%. If we adjust it for the accounting presentation, it's probably gonna be another three to four points improvement. The first thing is growth, revenue growth, and profitability growth.
If you enter into renewals, on the travel side, we don't have customers where the revenue presentation could be gross or net, so any renewal on that part of the business will not be subject to accounting changes. It's more on the corporate payment side. What I would say to you is that as we move along, most probably, most of the renewals or the new partners that we are onboarding are gonna be on a net basis. Therefore, your margin is gonna improve significantly because most of the revenue is gonna fall all of it to the bottom line. Your rate obviously is gonna be lower. Again, I don't think we need to focus on the rate today. We need to focus on the revenue growth, on the profitability growth, and on the margins growth.
That's how we are now envisioning going forward, this part of the business for us.
Just, I guess, when we think about Avid and its impact on the corporate yield, like is there a significant one or it's not one that, you know, has a material impact?
I mean, it's a net presentation. Obviously in Q4, as Melissa said, now we signed them three to six months ago. We were in the implementation phase. They are starting now to really ramp up, but we are not gonna see the real benefit until next year. It's net. Therefore, being net, the rate is gonna be much lower than the overall corporate payments. But it will depend, as we have said. I mean, the travel business, how much it recovers next year compared to this year, that's gonna have a significant impact on the rate. On the corporate payments, which customers are growing the most, the partner ones or the ones that, you know, we present the revenue on a net basis. All of that is gonna have a significant material impact on the rate up or down.
Therefore, that's why we wanna make sure now that we give the metrics that are key for us, which is volume growth, revenue growth, profitability growth, and obviously the profitability margin.
Okay.
As you know, the more volume also that you have, you know, the more purchasing power you have, no, as a company overall. That's also very important for us.
Yeah, 100%. I think there's a lot of confusion around, you know, how things have been.
Yeah.
Um-
Yeah.
You know, given before and maybe just on a go-
Yeah.
Forward basis, if we can get more of that.
Yeah.
That would be helpful.
Exactly. I think that not talking about that, not about the growth in dollars, not about the take rate up or down because it's gonna be very valuable. I mean, a customer in travel compared to a gas station is probably 20 to 1, not the take rate. It's very valuable. Yeah.
Yeah, unfortunately.
The only thing I'd add to that is that a lot of the work that we've done over the last several years was to create a more fixed cost structure with that part of the business. We did that very intentionally because we wanted to make sure that we were able to be competitive, not just from a technology and a product perspective, but also from just a cost perspective. We feel really good about the cost that we have in that part of the business, and you can see that come through as we see incremental spend volume going through the business and that dropping through. I think, you know, it's part of why we're not as focused around the actual rate is because of the scalability that we have in the model.
Yeah.
If you think through that end, Sanjay, in Q2, if I recall from the numbers, so from Q1 to Q2, the margin or, you know, the drop-through was like 95% sequentially. In this quarter, revenue was up $11 million and AOI was $14 million up, so it's like 130%. That's what just Melissa said. That's what we are focused. Now we have a very fixed cost in that part of the business. Everything is, you know, all the technology is in-house, and it allows us now to play on that angle to get more volumes, revenue, et cetera, no?
If you go into next year, as we have the ability to continue to take costs out, you know, specifically as we continue to integrate eNett and Optal, and at the same time increase volume through the business and see kind of the leverage of both of those things, which is what Roberto was referring to in the third quarter.
Okay, great. Look forward to more disclosure around that. Just final question.
What more disclosure do you want from volume revenue?
How about my five-year target? Just one last follow-up on.
Yes.
The fleet business. I guess, where are we with the SME recovery? Because I know that's a big profitability driver inside that business. I mean, is it still pretty early in that? I mean, should we see further tailwinds as hopefully the reopening occurs?
You know, it's the fleet businesses is interesting because it's such a composite of so many different kinds of businesses. What we've seen in the over-the-road segment, the larger over-the-road companies did better, you know, particularly in the kind of the heat of the pandemic. Smaller businesses right now are taking advantage of what's happening from a labor market perspective. In the North American Fleet business, which is the more local part of the business, the smaller businesses actually did pretty well through COVID. It was actually the larger companies which shut down their, you know, their offices and their travel that have lagged and continue to lag.
You can see that in our volume trends that we've had this kind of mixed shift where volume has largely recovered, but there are larger transaction sizes and they're skewed more to the over-the-road part of the business. You know, that being said, there still is some captive recovery that we have coming within the account base relating to office reopenings. We do think we have some opportunities still remaining there, even though, you know, our volumes are back to pre-COVID levels.
Okay, great. Thank you very much.
We've reached the allotted time for Q&A today. I will now turn the floor back over to Steve Elder for closing comments.
Thank you, operator. Thank you everyone for hanging with us a few extra minutes. We appreciate your time, and we'll speak to you again shortly, when we release our fourth quarter earnings.
Ladies and gentlemen, this concludes today's event. Thank you for your participation. You may now disconnect.