Western Union's Ersek Pleases With The Progress They Made In The Third Quarter

Image The Western Union Company (NYSE: WU) reported financial results for the 2013 third quarter. The Company also affirmed its full year financial outlook provided on July 30, 2013, with the EPS outlook narrowed to the higher end of its previous range, and announced plans to significantly increase investments in compliance and regulatory capabilities.
"I am pleased with the progress we made in the third quarter," said President and Chief Executive Officer Hikmet Ersek. "The strategies we implemented to strengthen consumer money transfer are driving positive results. We are on track with our financial outlook for the year, and have narrowed our earnings per share outlook to the higher end of our previous range."

Ersek added, "Our business continues to generate strong cash flow and margins, and in the third quarter we produced our highest quarterly consumer-to-consumer transaction growth rate in three years. Electronic channels delivered robust growth, and now represent 5% of our total revenues, while Business Solutions generated a double-digit constant currency revenue increase."

Third quarter revenues declined 1% compared to the prior year, and were flat on a constant currency basis. Consumer-to-consumer (C2C) revenues declined 2%, or 1% constant currency, as transaction gains were offset by the impact of previously implemented price reductions in certain corridors.

Western Union branded C2C transactions increased 10% in the third quarter, compared to a 7% increase in the second quarter. Total C2C transactions increased 9% in the third quarter, which compared to a 3% increase in the second quarter. The total C2C transaction growth rate improvement relative to the second quarter is attributable to additional traction from the pricing investments, increased growth in non-priced corridors, and a less negative impact from the Vigo and Orlandi Valuta brands, which have been affected over the past year by compliance related actions implemented in the third quarter of 2012.

Consumer-to-Business (C2B) revenues increased 3%, or 9% constant currency, and Western Union Business Solutions revenues increased 6%, or 10% constant currency.

GAAP operating margin was 21.0%, which compares to 25.7% in the third quarter of 2012. The margin decline relates primarily to the impact of pricing and other strategic investments, lower compensation expenses in the prior year quarter, and higher compliance costs. Earnings per share of $0.39 compares to $0.45 in the prior year period.

Progress on 2013 Key Strategies

Strengthen consumer money transfer

The pricing investments intended to regain customer momentum continued to drive increased transaction volumes and usage. C2C transactions increased 20% in the third quarter in the corridors in which pricing investments had been implemented prior to the beginning of the quarter. Excluding digital, C2C transactions in these priced corridors increased 14%. Entering the third quarter, substantially all of the major planned pricing investments for the year had been implemented, although there may be adjustments in the remainder of the year.

In Mexico, the previously implemented pricing investments contributed to a 24% increase in Western Union branded transactions in the third quarter. Total transactions, including the Vigo and Orlandi Valuta brands, increased 15%.

Electronic channels revenue increased 24% in the quarter. Westernunion.com online money transfer transactions increased 68%, and transactions from electronic account based money transfer through banks increased 55%.

A major focus behind strengthening consumer money transfer is increasing channel options to meet the needs of new consumers and offer added convenience to existing customers. Recent developments include a multi-year agreement with Walgreens, the largest drugstore chain in the U.S., to offer Western Union money transfer and bill payment services at over 8,000 locations beginning in 2014. The Company also renewed and expanded its long-standing agreement with La Banque Postale in France, expanded direct-to-bank money transfer services to China from various markets, added new mobile money transfer agreements in Nigeria, Tunisia, Nepal, and mobile money transfer services in the U.S. with U.S. Bank, and introduced an enhanced mobile app for westernunion.com.

Increase customers and usage in business-to-business

Western Union Business Solutions revenue increased 6%, or 10% constant currency, compared to the prior year quarter. Strong performance in Asia Pacific and the U.K. drove the third quarter growth. Other highlights included the launch of options products in France, and continued expansion of the international student payments business. Business Solutions now represents 7% of total Company revenue.

Generate and deploy strong cash flow for shareholders

Year-to-date cash flow from operating activities totaled $811 million. The Company returned $89 million to shareholders in the quarter, consisting of $20 million of share repurchases and $69 million of dividends, and has returned $543 million year-to-date through September. The Company continues to expect full year share repurchases and dividends to total nearly $700 million, which represents approximately 7% of current market capitalization.

Compliance and Regulatory Investments

The financial services industry, including money services businesses, continues to be subject to increasingly strict legal and regulatory requirements. Western Union works with various regulators around the world on evolving requirements for customer, transaction, and agent risk assessment, control, and reporting, and conducts ongoing reviews of its own programs. While the Company has increased its investments in compliance considerably in recent years, significant additional investment in 2014 is now anticipated in light of the current environment and our internal reviews of the increasingly complex and demanding global regulatory requirements.

As a result of the increased investments, Western Union expects its compliance related expenses to increase from approximately 2.5% of revenue in 2013 to a range of approximately 3.5% to 4.5% of revenue in 2014, based on preliminary reviews of the programs. Although the Company is in the early stages of its 2014 budgeting process, it still expects revenue growth in 2014, but no longer expects growth in operating profit due to both these incremental costs as well as potential business impact from new compliance procedures. The Company will pursue additional efficiency initiatives to optimize its overall cost structure.

2013 Full Year Outlook

The Company affirms its full year outlook for 2013 provided on July 30, 2013, with EPS narrowed to the high end of the previous range, and increases to EBITDA margin and operating cash flow:

Revenue and C2C Transactions

   -- Low single digit constant currency revenue declines
   -- Consumer money transfer pricing investments of approximately $300 million,
      or 5% of total Company revenue, are reflected in the outlook
   -- Mid to high single digit Western Union brand C2C transaction increases
   -- Overall C2C transaction growth approximately 2 percentage points lower
      than the Western Union brand due to declines from Vigo and Orlandi Valuta
      resulting from compliance related actions

Operating Margins

   -- GAAP operating margin of approximately 20%
   -- EBITDA margin of approximately 25% (the previous EBITDA margin was
      approximately 24.5%)

Tax Rate

   -- Effective tax rate of approximately 15%

Earnings per Share

   -- GAAP EPS in a range of $1.38 to $1.43 (the previous range was $1.33 to

Cash Flow

   -- Cash flow from operating activities of approximately $1 billion. The
      previous outlook of approximately $900 million included $100 million of
      anticipated final tax payments relating to the agreement announced with
      the U.S. Internal Revenue Service in December 2011. These payments are
      now expected to occur in 2014 and beyond.

Additional Statistics

Additional key statistics for the quarter and historical trends can be found in the supplemental tables included with this press release.

Non-GAAP Measures

Western Union presents a number of non-GAAP financial measures because management believes that these metrics provide meaningful supplemental information in addition to the GAAP metrics and provide comparability and consistency to prior periods. These non-GAAP financial measures include revenue change constant currency adjusted; Consumer-to-Consumer segment revenue change constant currency adjusted; Consumer-to-Business segment revenue change constant currency adjusted; Business Solutions segment revenue change constant currency adjusted; 2013 EBITDA margin outlook; and additional measures found in the supplemental schedule included with this press release.
Last modified onSaturday, 06 May 2017 10:07