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

Great. Good afternoon and early evening to everyone. I’m Tim Willi with Wells Fargo Securities. Pleased to have with us this afternoon, Western Union, CFO, Raj Agrawal; and then Head of Digital, Shelly Swanback, who is also new to the Executive Committee and a recent addition to the company. So thrilled to have them for a little bit of time after a long day at meetings. One quick housekeeping for anybody out there listening that wants to e-mail me a question, you can reach me at [email protected]. If you don't have my e-mail, either way, just shoot me something, we'll make sure to get it in conversation. So Raj and Shelly, thanks so much for the time. Appreciate it.

Thanks, Tim.

I thought we can start, Shelly, you're obviously new to the Executive Committee, and I think you’re sitting in a seat that's pretty important to financial services in Western Union, in particular, around digital and products. So I wonder if you could just give us a little bit, I guess, your background, sort of a little bit of a high level view of how you think about digital and then sort of leering that into the work that Raj and the management team have been doing prior to your arrival without trying to leverage Western Union's immense platform.

Happy to. Well, so I spent my first 28 years of my career at Accenture. Most recently, in the last 7 years, built a business called Accenture Digital. And so I've been immersed in this whole world of digital transformation for the last 7 years. And the business that we built had really 3 segments in it. The first was all around changing business models, changing business functions and processes using the latest and greatest of all the new data science techniques, advanced analytics, artificial intelligence, machine learning. The second part was all around customer experience. So we built what we call a customer experience agency, helping companies across industries globally, really reinvent, reimagine, redesign their customer experiences and how do they use technology then to enable and implement those experiences. And the third segment was really focused all around using mobile technology, which evolved to really being focused in this whole Internet of Things, IoT space, again, across industries. Looking at being able to make processes more efficient and, in some cases, completely reinvent business models. And so that's what I spent the last 7 years doing, building that business inside Accenture, consulting with CEOs and their teams across industries. And so I thought it was a fun opportunity to join Western Union as the President of Product and Platform and be part of the transformation journey that's ahead of us here at Western Union. And I also have to say it was pretty special to have an opportunity to join an organization that's just so purpose driven. And so I'm really looking forward to seeing the world through this lens of financial inclusion and being part of that purpose.

That's great. And I apologize, I botched your title earlier in the introduction, product and platform, absolutely.

No problem.

So Raj, the company has done a tremendous amount of work over the years, looking at the digital landscape, wu.com, white label, a lot of work has been done. And Shelly is now with you, and I think sort of maybe, correct me if I'm wrong, but it just seems like this is just a little bit more focus and weight behind the effort to really bring in somebody to sit in that seat and really drive a bit more product and strategy. So could you maybe sort of discuss how you all thought about it and came to a decision that having some additional high level talent in place to really drive the strategy above and beyond what you were doing was really -- there was some room for impact to happen, if you will.

Well, I think the timing was just right, Tim. We really set out last fall to create more of a platform strategy, and we knew that when we did our Investor Day, we talked about a lot of the good things that we wanted to accomplish and we knew that we needed to hire someone like Shelly that had a broad array of skills that could help to focus the organization, the technology organization, the operations aspect of what we do and really bring more things to market, and really aggressively bring them to market. And I think you're seeing some of the impacts of that already. Shelly has only been here since the beginning of this year. Unfortunately, she's had to spend most of that time remotely with all of us, but she's already having a great impact. I think it also brings new thinking to the executive team and the executive team discussions, which is something that's also very important to us beyond just the role that she plays, just bringing another strong thinker to the organization and helping us to guide the way here. And a lot of the things that you're seeing coming out, whether it's Saudi Telecom investment or more digital expansion or more capabilities, more deep relationships with customers that we're driving for, it's because of the level of discussions that we're having and we haven't been sitting still, I would say, Tim, in this environment. We really are pushing forward with all of the key strategies that we have, and Shelly has certainly been a big part of that.

Yes. And I don't think anybody questions the platform of Western Union, the data, the reach, the scope is something that all kinds of opportunities for sure. And I guess, Shelly, now being sort of in the role for, where we’re at 10, 11, 12 months, could you describe a little bit about how you're thinking about the road map and sort of your viewpoint having been in there now to build upon what Raj and Hikmet and others had been laying the groundwork for that could be really accelerated, just extra sort of viewpoint or push or there was a diamond in the rough here and to really move on this effort. What do you see as the opportunities for Western Union right now?

Yes. Well, first of all, I agree with Raj, I think the timing was just right, maybe minus the COVID part, but none of us could have planned for that, I suppose. But I think -- I guess, I see a big opportunity to take advantage of what I think is a really unique set of capabilities and assets, right? So we talked a lot about digital, which is super important to the growth and trajectory in the future. But one of the things that I'm excited about is not many organizations have this combination of physical and digital. Every industry, every organization, particularly large organizations like ours are trying to find the magic combination of physical and digital. And so we have something that is unparalleled, I think, from that perspective. We also have a very loyal customer base, right, that trusts us. We have a brand that's very trusted across 150 million or so consumers. And so that's a great thing, a great set of assets for us to leverage, including our platform, as you said, which is not just technology, right? It's our compliance programs. It's our licensing structure. Being able to operate in 200 countries, 130 currencies is a big deal. I think the opportunity for us now, we're spending a lot of time and effort right now modernizing some of our technologies. We're also, as Raj said, kind of taking this view of, technology isn't just IT over there, right? In the heart of what we offer, our products is technology. And so really looking at this from a product, a platform perspective and looking at this end-to-end, I think is a big opportunity for us. And as we are modernizing our technology and moving faster to be able to test things like we're doing in the market right now, new products, some of these are -- we're offering and testing vis-à-vis other partners. And then, of course, we'll have opportunities to consider what other products we add to the mix for our Western Union customers. So I think a huge opportunity ahead of us. Super excited.

Yes. Agree. There should be a huge amount of opportunities given the reach of the company and the customer loyalty. Raj, I'm not going to bug you with modeling questions and margin expansions, organic growth rates. I guess you got plenty of those during your one-on-ones prior to this. So I'll try to keep it high level and stay away from the quarter-to-quarter stuff. One of the things that I think about over the last couple of years with Western Union that investors have tried to understand. And again, staying away from like the ground level numbers, but trying to tie it into the strategy and the future is -- Shelly just said that you're one of the few companies with massive physical distribution, a big brand that I think is an advantage in a digital world, where there are lots of digital brands, but maybe not a lot to have the brand equity of Western Union. And trying to figure out how to allocate the resources between the 2. I know there's a lot of internalization of cost centers and divisions and P&Ls, and Western Union has done a great job of managing margins in a good way of not letting them see severe pressure and reinvesting. So if we think about like the next leg in this dynamic, fintech, financial services, global world, that margin, that investment discussion, how has it changed? Or how do you think it changes as we move forward from this point, given the pace of change in competition and evolution in the environment right now?

Yes. Tim, we have some natural positives in our -- in the cost structure of our business. About 55% to 60% of our costs are variable in nature. So when we think about physical distribution or digital distribution, the physical distribution, we largely only pay for if there's a transaction going through that part of the business, right, with the agent related commissions. So that part of the model sort of takes care of itself, where the cost savings initiatives that we currently have, which are very much on track through 2022, and that was a key driver of the margin expansion goals we set, those are very much on track. And we really put lean management into the processes of the company, wherever it is in the operations areas that report to Shelly or other parts of our global organization because we want that to be a continuous improvement to the company. So we're always looking for efficiencies to drive that cost optimization. At the same time, we want to invest in the right areas of the company. And so it's always a balance of where do we put the next dollar of investment, what's going to be the right kind of payoff and we have those discussions every single day. We had that discussion this morning again with the executive team. So it's something that we're always looking at. Margin expansion, I continue to see as a key objective for the company, but so is revenue growth. So as we laid out last fall, we wanted to grow the top line of the company. Obviously, we didn't plan for what's happening this year, but we believe the company will get back on track once we get through COVID, and we are continuing to drive margin expansion. Even in the environment that we've been in this year, we've been able to drive margin expansion. And so I think that's going to continue to be the case. And as we think about where the growth is going to come from, Tim, the retail business is probably going to be a stable business for us. But as we get more growth in digital, that can also be margin-enhancing to the company as we've shown before, right, because the digital transaction, if it comes from an account and gets paid out to an account, it's a very profitable transaction for us. And it can also be a low-cost transaction, and a low-cost transaction for the customers also. I see all of those components, the strategy for top line growth and expansion and the cost optimization is continuing to drive the key things that we want to achieve, which is good top line growth and then good margin expansion for the business over the next 2 years.

And maybe just to add, as we think about as we're advancing our technology capabilities and modernizing our platform, we're very much focused on kind of a long-term direction where we're headed, but trying to do everything day-to-day is in that direction. So that -- it's not one big giant transformation program. We're transforming along the way and modernizing quarter by quarter by quarter. And that's an important way of being able to make investments for the future, but have them also paid off for today.

Yes. No, that's a very good point. I mean there's definitely a balancing act for larger companies versus the smaller. There's that dynamic and sort of that balancing act versus some of the competition that maybe has a different -- a profit motive is not necessarily there versus whatever eyeballs or whatever they're looking for, which, I guess, sort of brings me to another question. Competitively, there's been a long held belief that I would agree with, which I think others do, that money transfer, money movement, highly complex, highly regulated, regulation is not dropping, and Western Unions of the world, et cetera, have these big barriers. Given all the money you've spent on this, when you look at the landscape today, 9 to 10 months into a pandemic, the world changing, do you feel competitively that you're actually maybe starting to see a break away a little bit? I don't know if prior to pandemic people necessarily felt like that thesis was playing out from a competitive perspective, maybe it wasn't small ways that aren't just as visible to outsiders. But is there anything that's happened in this environment where you feel like we're finally seeing the tide go out on some competitors or some markets, and it feels like the breakaway is going to happen competitively.

Yes. Let me just start. Absolutely. We believe that our competitive position as we exit this crisis is going to be stronger than it was coming into the space, Tim, or coming into this year. Digital, for example, in the third quarter is at a run rate of over $900 million in revenue, which is far beyond our expectations. And it's because of the foundation that we had laid over the last several years, and that's really beginning to pay off. We never expected to grow 45% or 50% as we have been in the last couple of quarters. That's way beyond expectations. And although it's not likely to stay at that elevated level, it's still going to be a very strong grower for us. And if you have a business that's well over $900 million in size, and you can still grow it at a strong pace, it becomes a significant contributor to the top line of the company. And that's really something that we're pleased with. We've, at the same time, been investing in the business. We have been expanding our digital touch points, more geographies, more mobile capabilities, more account payout. We have 100 countries that we can pay out to accounts in a real-time basis. So all of these things require investment and continued focus, which is something we've continued to do during the course of this year. And as we exit this year and hopefully, the pandemic shortly thereafter, I think the business really is going to be positioned well. Because if you think about the composition, you have a strong digital business that will be a big contributor to the top line. We believe that the retail business will become a flattish to slightly growing business once we're past the overall COVID environment. And we also believe that the B2B business can be a grower again for us. Last fall when we did Investor Day, we believe that, that business could be in the mid-single digits area in terms of growth. And so those things are still achievable. We just need to get past the COVID environment that we're in. And that also supports our margin expansion objective. So we really believe that the things that we've done to lay the foundation, the technology investments and upgrades that we're making, and Shelly can speak to those. We really are well positioned as we go through the course of next year.

Yes. So Shelly, I guess, Raj just mentioned technology upgrades, things of that nature. So I guess he just pushed the next question to you, so to speak. So what would you highlight for us in terms of like if there's 1 or 2, or whatever it is, like, these are the things where these technology upgrades are going to unlock a lot of value and opportunity for Western Union, that customer base, that product road map.

Yes. Well, so I think like many large organizations, right, we have a number of transformational technology initiatives underway. So where it makes sense, we have a lot of focus on modernizing our technology by moving into the cloud. And in those areas, that's important because it will be more flexible and more scalable for us in the future and actually less expensive as well in terms of maintaining that. Now not every technology application or part of our platform is created equal, so we're being very conscious about which pieces we move to the cloud more quickly. The other thing is we're starting to use some newer technologies on the market to add into our technology estate so that we can innovate faster. We can test products faster in the market. Obviously, we're doing a lot to stay -- to continue to build out our distribution network. You probably saw the announcement that we have 100 real-time connections in 100 countries. Now that will continue to be a focus. And so we're starting to leverage some new technologies to do that quicker. I think that will begin to pay off for us. And one of the areas that we made a lot of progress on, like they say, never make -- never lose the opportunity to leverage a good crisis, right? So we took advantage of what we were seeing in COVID and took that as an opportunity to act with some urgency on a few things, one of which is putting in a new data foundation. And so one of the things that we're starting to see pay off for us is the ability to have all of our data in the cloud and be able then to see those correlations between not just our internal data sets, but external data as well and leveraging our new artificial intelligence, machine learning platform, leveraging Snowflake and SageMaker and all the latest and greatest tools. And so those are just a few areas that I would point out that we're working on right now that we're starting to see some good benefit. Back to maybe Raj's point earlier on margin, we're also starting to use technology in new ways to create cost efficiencies and kind of change the cost structure of our business in certain areas through automation, through things like virtual agents and the like.

That's very helpful. And that'll be -- yes, interesting to see how all those things begin to really play out because they do make a ton of sense around specially the cloud and the digital and the data. And again, there's so much data running through Western Union. And I remember years ago, discussion of the Western Union loyalty program, as an example, which made all the sense in the world, and it seems like those are the kinds of things that still sit out there to really manage the retention and the repeat usage, especially in a digital world. Shelly and Raj, STC, I don't want to forget about that investment. So I'd love to hear about that investment, the opportunity and how you're thinking about it strategically. I want to try to tie it in a little bit to capital, Raj, as well. There haven't been a lot of acquisitions at Western Union. Recently, you've got the cash flow, the balance sheet. You've always talked about it. So here's an investment in something, not an outright acquisition. So maybe we could just first start with like the business case and sort of the thought process behind them. And then Raj, maybe we could talk about if this is a new way to think about capital, it's not outright buying something, but just supporting and investing in things that could build an ecosystem that is going in the same direction as Western Union?

Yes. Yes. Let me start the -- Saudi Arabia, I would say, or Saudi Telecom Pay is the great -- the best partner you can have for what we're trying to accomplish because in Saudi Arabia you have millions of migrants that have a need to move money. You have the primary mobile telecom provider in the market, it's STC Pay and STC, and we're partnered with them. And we're providing those money transfer services to them, which has been a hugely successful partnership for us. So as we thought about the investment, this was something that came our way. They were looking for a strong global partner to make an equity investment in STC Pay. STC Pay itself is a very strong -- it's a strong digital player. It has big expansion plans. They plan to -- currently, their portfolio is made up of money transfer, which is something we provide, and that's about 75% of their revenues. And then another 25%, which has really just come up in the last year or so is from their e-wallet product that they have and the transactions that go through that part of the business. They have goals, Tim, of expanding into credit cards, debit cards, and also lending products, and this is all within Saudi Arabia. So we're certainly going to participate in that growth with our equity investment. And they also have expansion plans into other markets like Bahrain, Kuwait, UAE, and we're going to be the preferred provider for the money transfer services. So if we can replicate the same kind of success that we've had in Saudi Arabia in these other markets, it really is a win-win opportunity for us, and we think that they're going to be a highly valued digital player over the next few years, which is very good for us. And then the last thing I would say, Tim, is that as a part of the equity investment we made, we also negotiated an extension to our commercial agreement, and we're now the sole provider for money transfer services that on a white label basis to Saudi Telecom Pay, which is very good for our business. So very pleased overall, and it really just continues to support our digital strategy. In terms of investment, the way we made the investment I think we're open to any kind of M&A transaction. This line made sense to do an equity stake, but we're also open to doing a full acquisition of the right kind of business or the right kind of technology or mobile capability. It just depends on what it does to support the strategies of the company, and I don't think it's a model for everything we might do in the future, but it's certainly one option that we have as we look at different opportunities.

I'm going to just add, I mean, I think it's a really strong opportunity. STC Pay was a really strong opportunity for us because we're already doing business together. We have a partnership. And so we know we've had success together in one market. They have capabilities and we have capabilities that are complementary to go expand into the other markets that Raj mentioned. And I think they have aspirations to expand the product set. And as we work together, it's also an opportunity for us to learn in the market and evolve together. So I think we're always looking for opportunities that will help us scale faster or accelerate our capabilities, our products, our technology faster. And this is one opportunity. And of course, where as Raj, as you said, we're looking for other opportunities that might manifest itself in different ways.

Let me skew this question on the heels of that discussion. So e-wallets are a growing phenomenon. I think they're probably a little bit more established and bigger outside of the U.S. when you look at a lot of -- going back to maybe the beginning of like M-PESA or something like that, right? But when you think about it, almost it seems like any kind of fintech-ish kind of start-up right now. They sort of want to go-to-market with one product. Is that a customer acquisition but then ultimately expand into other adjacent offerings around the consumer side? So maybe they lead with a lending product, and then over time, they've got an investment product and a deposit product, or they go the other way around. You've got this tremendous asset, hundreds of millions of customers, a huge brand, a big digital platform, global reach, compliance, direct connections, how does Western Union think about sort of the digital financial services platform or the e-wallet of the future, whether it be for developed or emerging markets or populations? It seems logical but maybe there is something about it from a complexity standpoint that doesn't really put you into that mode. But just sort of curious about other products and offerings that maybe are easy to layer on in a digital world versus where Western Union was 10 years ago when we were still sort of analog?

You want to try to answer that, Shelly?

Yes. I would -- certainly, part of the conversations that we're having as an executive team is what else can we do to leverage the digital business and customer relationships that we have, as you said, Tim. I think, first of all, I think the needs of our customers, they do vary in some parts of the world, in different regions, and so one of the things that we're always very focused on is making sure that we're meeting the needs of those customers in those particular regions, just like STC Pay is a great example, of why that partnership made a lot of sense. One of the things specifically for wallet is actually we see wallets as -- it's a big part of our digital -- bigger and bigger part of our distribution network right now in our digital business. It is something that we talk about and think about in terms of what other role we might play in that space and what other products that we might be able to offer to our customers. We have a few tests underway right now. We've talked publicly about the one with AXA, which is an insurance product that we're offering in France vis-à-vis a partner. And part of one of the reasons that we're spending a lot of time and investment on modernizing our technology is so that we can test those new product ideas more quickly.

I'll also say, Tim, that we have a bank in Austria, I think you may be familiar with it, but that also gives us a platform to test out different kinds of financial services or products for our customer base because we have a customer base. Obviously, we want to meet their needs. As Shelly said, which is a customer that needs to move money cross-border, cross currency, but we know that they have other needs as well, particularly in the financial services side, so why not be able to -- why not provide them other kinds of add-ons that would be very natural for us to provide because they trust the Western Union brand. They know who we are, as you said, Tim, and it really carries a lot of weight with many of the customers that we already serve. So it's a natural extension for us to be thinking in that direction. And that's absolutely something we have a lot of discussions about internally.

Yes. No. I think, again, just where we're at in the digital world with the digital distribution and acquisition versus where things were 5, 10 years ago, back in '07 when Western Union sort of came public. It's just a different world in terms of ease to market and customer acquisition is, my guess, versus people walking into a grocery store or a convenience store. It's not the most elegant way to cross-sell a financial service or something along those lines versus where we're at now. Yes, we've got a couple of minutes left here. Just -- not a modeling question, but B2B, it's obviously been a business that I think people had a lot of questions about in terms of performance and growth, and I think every quarter, you try to give a lot of clarity about the impacts. When you think about that business and we think about other competitors that are in the market that talk about the rate of growth of their business, it seems like Western Union does lag a bit. And I'm wondering if there's maybe a simple way to sort of compare and contrast, just to clarify, if there is like why the Western Union business is sort of at a different growth trajectory than what we [Technical Difficulty], and I'm not insinuating others might be embellishing. Maybe they are. And maybe that's the answer, but just sort of want to try to level set, so people understand the nature of that.

Yes. Yes. No, absolutely. When we -- if I dial you back to Investor Day about a year ago in the fall, we actually set an objective for the B2B business to grow in the mid-single-digit range. Obviously, we didn't predict COVID this year and global trade is unfortunately declining at mid-teens this year, which is a key growth driver for our B2B business. So putting this year aside, I really do believe that the B2B business will be back to that level once we get past the COVID environment. And that's really how we think about the business. We have done a number of things inside the company to position that business for success. I know we've upgraded some of the platforms and consolidated some of the technology, back-end applications that we have there as well. EDGE platform, the digital platform we have, we've migrated a number of customers to this on the smaller side. It does a couple of things, Tim, it creates more stickiness with that customer base. And it allows us to free up our sales resources to go after larger value opportunities. So customers on this platform can do some of their own basic transactions, they can do cash flow forecasting, those sorts of things. And then we can go at the larger opportunities in the vertical segments like education and financial institutions, which actually have been growing fairly well over the years. That's an area of focus. And then we need global trade to go back to where it was or to be better than it is this year. And I think that will be a good formula for that business to get back to success. And I think the -- when you look at our B2B business, there's a large portion that's traditional FX services or hedging oriented, which is not the big grower in the company. The other part, which is the faster-growing business, which is the [indiscernible] payment, the mass payment opportunities, these kinds of things are really where our focus is, and that's going to drive the better growth longer-term for this business. And we're going to get back to growth in this business. It's just a question of time. And I can't speak to the other competitors. We also try to manage the business very tightly. We didn't take a big write-down like one of the other competitors did on one of their businesses like this either. So we certainly think that the business can perform better, and we're positioned well to do that once we get past this environment.

Awesome. I appreciate the insights. With that, we've used our 30 minutes. Very much appreciate the time, Shelly and Raj. I always appreciate the insights and the candor. So thanks for your participation today and for the conversation. Have a great evening.

Thanks, Tim. Thanks so much for having us.

Thank you.

Thank you.