The Western Union Company (WU) Earnings Call Transcript & Summary

Okay. Great. Sorry about the delay. Again, we're happy and excited to have Raj Agrawal here from Western Union, who's the CFO. I'm Bryan Keane, I'm the senior analyst in processors and IT services at Deutsche Bank. And so I think the format for a virtual fireside chat will be, I'll fire off to Raj a few questions. And if you have any questions you want to submit, you can submit it through the portal or you can e-mail me directly.

And with that, Raj, I will turn it over to you and just ask kind of a bigger picture question, just thinking about the strong recovery in the C2C remittance growth from about down 21% in April to plus 6% in June. And it also remained strong in July at plus 10%, but underlying growth there normalized for holidays. In the Middle East, growth was similar to June. But just trying to figure out -- that was a bigger rebound than I think maybe most experts expected and probably than you guys expected for remittances. And just wanted to get your thoughts on that and how sustainable that recovery might be.

Yes. Bryan, thanks for having us today and really appreciate the time. And yes, I think we're very pleased with the trajectory of the business and the turnaround. We didn't really know what to expect in late March and in early April. And -- but we were also very pleased to see the significant turnaround that the business has had. And throughout the second quarter, as we had mentioned before, retail improved sequentially. And obviously, we got significant acceleration in growth in our digital business, and that has continued to stay very strong. So we're very pleased with where we sit. Yes, the normalized growth was closer to what we saw in June in terms of transactional growth. And I would say, Bryan that the one part -- the big positive that's come out of all this is that the digital growth has far exceeded even what we were expecting coming into this year, obviously. And most of those customers are still new to Western Union. They've not used us in the past 1 to 2 years. And so we're getting incremental business, customers, revenues, transactions that we wouldn't have otherwise had. And in the quarter, we generated $220 million of digital revenue, which is higher than we've ever achieved before. So it's on a run rate -- that's quite strong. So we feel very good about where things are. We'll see some small grow over impact as we go into third and fourth -- finish out the third and fourth quarter, but still expect very strong growth in the digital side overall.

When you mean grow over impact, are you just saying tougher comps or certain issues? What are you calling out exactly, Raj?

Yes. Yes. I just -- some type of comps. I mean the digital white label business largely began in the latter part of the third quarter or third quarter and then we saw more of the impact in Q4. So you're going to have a natural grow over last year's digital label business. And then we did have some higher pricing in place for the wu.com branded offering. And this year, as we've said before, we are going after customer growth and revenues and transactions, and that's why we've had some success there. So yes, we'll start -- we'll see some of that. But if you really put it in context, Bryan, last fall, in September, we said that we expected digital to grow in the 20% range, but clearly, we're way above that. We grew 50% in the second quarter, so way above what we were expecting. And so even if it comes off a little bit, possibly in the third and fourth quarter over here, it's still going to be way above what we had expected coming into this year. So we feel very good about our positioning and where we're headed.

Can you walk us through some of the trends you're seeing by region? Some seem like they've recovered nicely and then others like Lat Am still seem to be weaker than I would have expected.

Yes. I mean I would say, generally, we saw a sequential improvement throughout the second quarter in all of our regions and all of our channels, even though some regions were weaker than others. So that's the backdrop that we just have to take into account. Within that, in the North American region, our outbound business actually had growth in the second quarter, revenue growth. And we -- and that was largely offset by continued declines in our U.S. domestic business, which here really didn't improve in the second quarter. And I think the good thing there is that it's becoming a smaller and smaller piece of our overall revenues, and that was about -- the U.S. DMT business was about 5% of total revenues in the second quarter. And I expect that given the pace that it's declining, that it's going to be a smaller piece by the time we exit this year of total revenues. And if you look at Europe, we saw some good improvement in certain geographies, actually better to -- back to pre-COVID levels during the course of the second quarter, which was quite impressive, like Germany and Switzerland and some are even better. And they have good social safety net programs. So I think the economy there will turn around and could be better for our business as we move forward. The Middle East, I'd say, Saudi Arabia was a key growth driver there, but that was offset by just the services impact -- services sector impact in UAE. The white label partnership, along with Europe, also grew in -- quite well in the Middle East, and that had some nice transaction trends behind it as well. And then Latin America, to your point -- and the way we look at the regions, the regional performance is really on an outbound basis. So Latin America outbound was -- the economies were quite soft to begin with and COVID didn't help the situation. So they were quite weak in the quarter. They did improve as we exited the quarter. And some of the policy decisions and governmental policies that were in place have made it more challenging to turn around too quickly. But we expect that eventually, things will get back to normal there as well. And then -- so then Asia Pacific is a small outbound opportunity there and just same COVID impacts during the course of the quarter. So -- and I think within all of those, digital did quite well. The -- I would say, Latin America has relatively less digital business from an outbound standpoint. So that's an area that we're certainly focused on increasing.

Pricing has -- sometimes you guys have increased price. Sometimes you've changed price to drive transaction growth. How do you think about pricing in the model right now? And when you look at it through the traditional business versus the digital business?

Yes. I mean we really want to look at the business and have looked at the business in a more dynamic way. So you're absolutely right, we're always looking at ways of modifying pricing that ultimately will translate into better lifetime value with our customer base. And so we have 20,000 corridors or country pairs that -- where we will increase pricing or decrease pricing depending on what's needed from a customer standpoint, and that drives overall long-term value. And we continue to do that, particularly on the digital side. We -- overall, in the market, from a market standpoint, we haven't seen any significant pricing pressure, anything of that sort, and it's been quite stable on a global macro basis. And particularly in this environment, I think other companies are probably less quick to move on any wholesale price changes, and it's been stable for a while. So our goal really has been to go after more customers and more customer acquisition, and that's really how our price strategy is designed. And it's complex in nature. As you alluded, we have thousands of corridors. We have many different channels. We have different kinds of pricing mechanisms we can put into place, and we really try to do the best we can to maximize the overall value.

Western Union talked a lot about, last quarter, share gains. Can you tell us a little bit about how you're measuring that? And it seems like you guys are taking share versus some of the -- maybe even the fintech digital competitors.

Yes, I believe we are absolutely taking share, and I'll let the numbers speak for themselves. Through the first half of the year, we were up low single digits on cross-border principal growth, and that included more than 20% cross-border principal growth in June as well as in July again. So clearly, we're growing much faster than anybody expects this year. We do expect the overall market to decline from a cross-border [ driven ] standpoint, but not as much as the World Bank has said and others have said as well. But given our performance thus far through the month of July on the cross-border principal, we're certainly heading in a different direction. We continue to have growth in the principal side and that's good. And so that means that we are taking share, both in retail and in the digital side. The digital business, we had a business that was more than $600 million in revenue side last year. And even though the market is very fragmented and large for us to go after, we're probably the -- one of the largest digital providers in the market, even though it's very fragmented. And so being able to grow at a 50% pace even in the second quarter on revenues, it just means -- it certainly means to us that we're taking share in that space as well as the traditional part. And I think on the digital side, just to add a little bit of color, we did say most of the customers there are new to The Western Union Company. So a lot of the customers are coming to us with new needs. They don't classify themselves as remittance senders, and so their new needs have been created or if they are coming from other parts of the digital market, like banks or other digital providers. So let's see how the rest of the year goes, but so far, it's been quite strong from a cross-border principal standpoint.

Raj, could you help us parse out the size and growth between digital, the wu.com and the third-party white label? And maybe talk a little bit about the yields on those 2 business segments.

Yes. Absolutely. The overall growth, as you may know, was almost 100% on transactions and then revenues were up 50% in the second quarter. For the total digital business. Wu.com is the lion's share of that -- within the digital number and grew at about 50% on the transaction siding about 34% on revenues, constant currency. So very strong growth across the board. The wu.com business is very similar in -- I would say, in overall yields to our retail business than to the total company. So it's in the same ballpark as retail. Obviously, you have a lot of different combinations of how you're funding the transaction and how you're paying it out and the corridors that are involved. But think of it as similar in profitability and yield to our retail business, which is what we've been saying and largely incremental to us, obviously. And then on the white label side, it is a different business model, right? We are not paying for the customer acquisition. We're not incurring the fraud losses and other expenses that go with customer acquisition. We are really facilitating the processing of the transaction. So we play a -- more of a processor role. So we -- the starting point on revenue per transaction for us is smaller than the rest of our business because of that, right? It's also incremental to us, for the most part, but the starting point is lower. But we also have very low cost in processing that transaction, depending on where it's going. And so the margins can be higher overall from a percentage standpoint on that business than the rest of our business. Now I would say, Bryan, that it's early stages. We're still learning from these partnerships, but we're very excited about them and continue to push for more of those. So I think the last thing I'll say is that if you think about the size of the digital business, it's about 900 basis points larger today as a percent of consumer revenues than it was a year ago. Last year, in the second quarter, digital revenues were about 13% of revenues. This year, they're about 22% of revenues. So with that growth in digital and with the significant revenue pressure that we had from the top line, overall, as a company, we were still able to increase margins. So this theory of digital transactions not being profitable is just false. We really have been able to drive good profitability in the business with the significant digital growth, and we really feel good about that, what it means for us for the future.

You mentioned the digital revenue growth was up 50%, transaction growth up 100%. I think it improved to 115% in July. We had PayPal's CFO on earlier. He was talking about elevated transactions, electronic transactions continuing. The big question is, how sustainable does this look, this kind of push towards digital? Or is this kind of a onetime spike?

Well, we believe that the business is here to stay. And so we'll be exiting this year at a much higher level in terms of absolute revenue dollars than we had expected coming into this year. And we believe we can get significant growth from that new higher base. Will it stay at the current levels that it's at? It's -- I don't think that's likely. It just depends on how the market evolves. But certainly, we're not going backwards from here, Bryan. I think we're going to continue to grow digital very well. We expect to grow extremely well going forward. And that's also going to be a key part of the overall growth in the market as well. So I would say I agree that we think that the digital business will continue to have strong growth trends going forward, and -- but we're just going to be operating from a higher base and that we didn't expect coming into this year.

Got it. Got it. If we looked at wu.com, the monthly actives growth accelerated from 15% in the first quarter to 45% in the second quarter. What strategies does WU have to acquire new digital customers and then get them to engage and monetize those customers going forward?

Yes. I think you hit it right on the head. I mean we love the fact that we're getting so much customer growth on the digital side because that's the easiest channel for us to engage with customers in. So the 45% growth that we had in the second quarter means that those customers have likely created some kind of an account relationship with Western Union, and we now have the ability to engage with them and maybe provide them other offers or provide them other services that might be close to them for things that they need. That might even be beyond money transfer. So the AXA partnership that we have, the pilot that we're running on the insurance side, that's just one small example of the kinds of things that we'll try to do to engage more with our customer set. And we also throw them FX alerts because foreign exchange rates are changing or we'll try to be more personalized in nature. If they are a customer that sends money to somewhere in Africa, we want to be able to alert them. We want to tell them that -- something that makes more sense for them from that corridor standpoint. We also have loyalty programs that we're always running where customers can accumulate points or maybe lower cost services from us or other kinds of things that they can buy with those points. So a number of different things that we're looking at. Obviously, we're going to continue to market to them and acquire new customers as well as engage with the current customer base. Now that we've acquired all these customers, it really is important for us to continue to engage with them and really provide them a broader array of services or partnerships that might be -- provide those services to them if we can't do that directly. So it really is a wealth opportunity for us to go after.