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

Okay. Good afternoon, everyone. I'm Ashwin Shirvaikar, Citi's payments processor and IT services analyst. It's been a fantastic day of meeting, so far, today on day 1 of our 4-day event. And I'm very happy to introduce the next company in our lineup. It's my pleasure to welcome Western Union to our virtual stage. From the company, we have the CFO, Raj Agrawal. Raj, welcome, and thank you for being with us today.

Thanks, Ashwin. Great to be here again.

Yes, yes. Absolutely. Looking forward to a good discussion here.

I want to start with sort of your strategy of data. A little over a year ago, you hosted your Investor Day, you provided a 3-year road map of Western Union's new strategy. At a high level, can you kind of mark off the various elements and indicate the progress that you've made, particularly as it relates to how the pandemic might have affected the strategy or the timing of elements?

Yes. Yes. Actually, I would say, at a high level, our strategy has not changed. We rolled out various components of our strategy last fall. We continued to employ a digital-first strategy. So very much expanding our digital capabilities in westernunion.com, and that's -- you know how successful that's been this year. Secondly, we continued to focus on more broad distribution opportunities in our network, including these digital partnerships. And that's been also very successful. And I can -- we can certainly talk more about that in a few minutes. And then lastly, I would say we had a -- strong efficiency initiatives. So we started a restructuring activity last year, which really has paid huge dividends to us this year as we've gone through this pandemic process. And we're very much on track to save $150 million in 3 years, so in 2022. And that was one of the key drivers of the margin expansion goals that we had laid out. Obviously, the revenue growth is something we'll have to reassess. And I think we won't certainly get back to revenue growth, but this year has certainly been something that we did not expect. We were still able to expand margins this year. And I think the -- with respect to the pandemic, we have -- we certainly paused some investments during the course of the year, but we are bringing those planned investments back into the picture because we do want to exit this year in a very strong position and well positioned for growth as we go through the next few years.

Got it. Got it. And just in terms of the various assets that you own that make up Western Union sometime back, you divested Speedpay and Paymap, and that kind of made C2C more dominant as a whole. Do the other small pieces belong -- and I don't mean that in a detrimental way, I kind of mean from a strategic standpoint. Does business solutions or the stub business in the other line, maybe -- should it be separate from just C2C and focus on C2C?

Well, I think that -- if you think about the divestiture we did last year, the Speedpay business. It was really the largest, single, domestic business that we had in our portfolio, and we were pleased to be able to sell it to ACI. And we think it's better in their hands. Our focus continues to be cross-border, cross-currency money movement for a variety of different customers, and we really believe that the B2B business fits in well within that category. We're serving different kinds of partners. It's really education institutions, it's small businesses, it's other kinds of vertical segments. And we think it really has good synergies with the rest of our company. And it's the part of the business that we're very good at, which is cross-border, cross-currency money movement for businesses. And so it's very similar to the consumer side, but we think this is a nice area to expand. Clearly, the environment that we're in this year has put some pressure on the B2B business, but that's short term in nature. We do believe there are really good opportunities here longer term. And that's why we want to hang on to it. The other revenues that we have are relatively small. They're about 5% of our total company. And these are largely the retail, walk-in bill payments within the U.S. and in Argentina. And the retail money order here in the U.S., they actually are pieces of our business that our retail partners like in many ways. So they have some synergies with the rest of our retail business. That's why we like them. And so we think we have a good portfolio. Obviously, we'll consider whatever comes along, but we're pretty happy with what we have at this stage.

Okay. Okay. Got it. Let's talk about digital. And that -- so digital revenue growth has been, of course, very significant due to COVID, but it was already a pretty good growth rate before COVID. So how sustainable is the incremental growth that you're seeing? And the strategic part of that question is -- the moat in the physical business is pretty clear to see, right? No one else is even close to having the number of agents and partners that you guys have. The moat in digital, is that shifting? Is that -- I mean how do you keep fighting against the competitors that might be, say, digital native, maybe well funded by VCs, maybe less concerned with profitability?

Yes. Yes. I mean we feel very good about our digital business. It's growing beyond our expectations this year, given the environment that we're in. We had 45%, 50% revenue growth just in the digital business. And if you think back to what we've done now, last year was a little bit more than $600 million in size. And this year, just in the third quarter alone, we generated $230 million in revenue. So it's on pace to be a very large business. I don't expect that the 45%, 50% growth rates are going to last forever because we're now becoming a much bigger business, and we're -- we'll -- but we'll still have a very strong growth rate there. Last year, when we came into the year, we expected that the digital business could grow in the 20% range. It's at double that pace thus far. So it's growing very fast. So if we can get the digital business to stabilize out at some point and be in that 20% range, I think that would be very good for our business from a top line standpoint because we now have a very large business growing in that range. If it grows in that range, it could be a very nice contribution to our top line. So I feel very good about where we are. Growth rates are likely to normalize at some point and get back to where we thought. From a competitive standpoint, we really have a very strong competitive positioning. And remote also exists in this part of the business because if you look at what we have, we have a business that is -- with our wu.com business or even the digital partners, they're largely, digitally -- I mean, they are digitally initiated transactions, but most of the revenues we earn still today are from a retail payout transaction because that's the way customers want to continue to receive money, and that's the use case that we continue to see be very prevalent in our digital business. Having -- and that's not where the newer competitors are trying to play. They're trying to play in an account-to-account space, which is also a great growth opportunity for us. So they're not coming into our core space, what we do today, they are playing in the account-to-account space, which is also a great growth opportunity for us with -- we can pay out into accounts in more than 100 countries, and then 80 of them are real time in nature. And so we really are going to a place, Ashwin, where we can have digital everywhere in the world from a sending standpoint and from a receiving standpoint and make that real time in nature. That's the business that we're trying to create. And we believe we can do that better and faster and with more transparency than anybody else is going to be able to do, given our global breadth and the capabilities that we have. So we're on the right path here. And this year really has made that business even more successful than it has been in the past.

Right. Right. So your point being that omnichannel...

Absolutely. Absolutely. Absolutely. Yes.

It doesn't have to be so digital, that combination is really important.

The combination of the physical and digital is unmatched. And that's really what sets us apart from anybody else that's trying to do this. The -- letting people send money and receive money however they want, whatever is convenient to them, whatever use case makes sense, and we see that digital-to-digital being largely incremental to what we do, right? It's a new use case, higher principal amounts, typically, and then the money is used over a period of time.

Right. Right. So what are your top areas of digital investment then? Is it still the rolling out of countries? Or at some point, you sort of decide the 110 -- 101st country is not going to necessarily -- it's good, but it's not going to be that much incremental. So attrition of countries versus penetration of existing countries?

Yes, I would say that there are 3 key areas of focus of our investment. One is to continue to invest in the technology and drive improvements in the features and functionality of our platforms, which ultimately creates more retention of our customers, creates more stickiness and more retention. Secondly, we are continuing to invest in the acquisition of customers, so more marketing investment. We know this is going to be the lifeblood of the digital business on a long-term basis. And then lastly, there's a heavy focus on distribution. Not just geographic distribution, which right now, we have wu.com in more than 75 countries and additional territories, and we can pay out everywhere in the world into a retail location, into more than 100 countries into an account. We now have 50 countries that are mobile-enabled. So we're just adding more capabilities, again, on the sending and receiving side, different channels for customers, different ways of transacting. And then also adding geographies over time because even though today, the 76th geography or the next geography isn't going to be that meaningful, it may be more meaningful 5 years from now or 10 years from now. And that's the foundation that we want to continue to lay. We already -- as you said, we already have a presence in well over 70% of the cross-border principle from a digital standpoint of the market. And so we want to continue to lay that foundation on an ongoing basis.

Okay. Okay. Is there a good overlap between -- if I looked at your digital corridors versus your physical, would there be a good overlap between the 2? Are you essentially -- people from the same geography sending money to people from the same previous geographies?

Yes. I would say yes. I mean most of the key sending markets are sending markets regardless of channel that you're looking at. So if the U.S., for example, is a key sending market, we have people using retail and digital in a big way, right? Or Europe, for example, key sending markets there. So the channel is really based on use case and how people are comfortable transacting with the business. And typically, when money is going to touch an account, it's going to be multiples of what you might see in a typical retail transaction, right? Our average transaction size is around $300. But in an account-to-account transaction, it could be multiples of that number because it's just convenient sending it that way, and the money is going to probably sit in account for a period of time as it's drawn down. So that's more where we see the differentiation, not necessarily geography ones.

Got it. Okay. Okay. Switching gears a bit, and to talk about the distribution on the white label side. This has been something that has clearly shown its benefits. The strategy seems to make sense. Can you provide maybe some granularity on how it works? I don't know if you want to use a specific example like Saudi Telecom, or if there's a different better example, but yes, some idea of the economics of white label versus traditional.

Yes. There -- I'll compare westernunion.com to the digital white label because that's the best comparison I can make. The -- we have branded and nonbranded offerings. It's the same capabilities that sit behind the branding, regardless of how you brand it, but we have branded and nonbranded offerings. So westernunion.com is a branded service offering. Customers are looking for Western Union online or they're trying to find a way to send money, and that's the brand that they're familiar with. On the white label side, it's very much a partner's responsibility to engage with customers to acquire customers. We are not engaging directly with their customers. So they -- it's their customers that we are trying to serve. And so it's a very different sort of front-end process, but the transaction process ends up being the same. It's the same capabilities, whether it's branded or nonbranded. So in the wu.com side, you have a transaction that has a slightly lower revenue per transaction than retail, but it's got a higher contribution margin than what we've seen in retail, thus far, given the mix of business. And so it gives us a dollar contribution in wu.com that is about the same as we see in retail. And then mind you, it's a different customer, but we're seeing about a similar kind of dollar contribution. Now when you move over to the white label offering, because we are much more of a processor here, we're not acquiring the customer. We're not spending money on fraud losses or things like that, funding costs, for example. It really is a good customer that's being delivered to us with good funds so we are -- who are -- who we are facilitating the transaction for. And so we get paid a lower revenue per transaction there than the rest of our business, but we also don't have a lot of cost in that transaction process. So the margins are going to be much higher in that business just because of the way it works. It's a processing type of transaction. And the dollar contribution is also very good. It's an incremental transaction for us. So that's why as you look at our overall digital business, it's about 700 basis points larger than it was a year ago, Ashwin, right? We're -- it's now 21% of overall consumer revenues, and that was about 14% about a year ago. And at the same time, we've been able to drive higher margins even in the face of overall negative revenue pressure. So the business itself is very margin enhancing, and that's why -- and we really think we're going after large parts of the market this way, okay, by having a branded and nonbranded offering. It really gives us many different attack points, if you will, and capturing more share of that overall part of the remittance market that we don't play a large part in today.

Okay. Okay. Got it. Now just following up though on that, would the same dynamic hold true if it was -- regardless of who your partner was? I mean -- or is it different for, say, Saudi Tel versus someone else?

Yes. Yes. I think the -- it is going to be dependent on a number of factors. It's going to be dependent on the market that you're operating in. What are the market dynamics? And then obviously, the partner that you're working with and what you've been able to negotiate with them. But the concept, the conceptual part of it is the same from a white label standpoint. But we're going into market. We're asking the question, is it more important to have a branded offering or a nonbranded offering? Do you want a white label offering for your customer? Or do you want it to be Western Union-branded? So it really just depends. Saudi Arabia has some of the best conditions you could hope for, which is you've got millions of migrant customers in the market. You have the main telecom company that has a financial -- financially oriented arm of it that it uses for its customers. And most of these customers in the market are going to be using Saudi Telecom, and we're partnered with them as the main provider for the cross-border money movement, right? And so that's why it's been so successful. Now we don't need another Saudi Telecom in every single market. But we just need 1 or 2 more partners in each market, and that's really what gives us the opportunity here. So -- and I think the sales cycle itself is quite long in these partnerships. We have a good pipeline. We have a lot of partners that are in the pipeline, but they do take some time to sell to, right? And -- but it's been very exciting. It's grown really beyond our expectations again this year just given everything else that we're seeing. So we're very, very happy with what it's done.