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

Hi. Good afternoon. It's Matt O'Neill, payments, IT service analyst for Goldman. Really pleased to have our last fireside chat this afternoon on the third day of our conference with Raj Agrawal, the CFO of Western Union. So Raj, thanks so much for joining us. I recognize that I think we are not quite at the 24-hour mark since you reported earnings. So I can only imagine you've just been in a constant discussion with the sell side and buy side. And I will do my best not to force a rehash of the quarter. But maybe just...

Yes, no worries. We appreciate it, Matt, and the opportunity to speak with you and everyone else. So thanks for having us and looking forward to the discussion today.

Yes, likewise. Maybe just as kind of a high level starting point. Obviously, the pandemic has introduced a lot of new vectors into the world, but also into the world of remittances. So can you give us a flavor of how you've kind of seen the evolution of the business kind of versus initial expectations? There's been some milestones along the way, at least in the announcements of the vaccines late last year, seen a big shift towards all things digital. Obviously, that's dramatically impacted your business. But how are you generally feeling about the business at a high level at this point?

Yes. At a high level, we feel very good about the trajectory of the business. We think it's really on a path to recovery, last year, as you said, that the market really had some seismic shifts, if I could say it that way. At least based on the World Bank data, the market was down 7%. And most of that decline -- more than that decline came from the retail part of the market. The digital part of the market that really took off and has grown by leaps and bounds since then. We've seen similar things in our business over the course of last year. As you know, our digital business really got on to a new playing field, and we're very excited about that. Our cross-border principle last year, Matt, grew by 12% compared to what the World Bank is saying. So we believe that we've taken a good share in the market over the course of last year. We think we've positioned our business really well coming into this year, and that's reflected in the outlook that we gave last night or yesterday afternoon in terms of how we see the business playing out. The World Bank has said again this year that the market is going to be down another 7%. Now probably, they're going to end up revising or updating the numbers as they get more data points. We see the market being a little bit better than that. We see our principal -- our cross-border principal growing again this year, and we believe that we're going to take more share this year in terms of the composition of our business. Retail, we think, will be more stable this year in terms of the retail part of the market, and so we're excited about this year. We think that the top line growth and the margin expansion, all those things is really where we want to focus our attention.

Got it. Yes. So I want to drill in a little bit on the dynamics between ultimately kind of transaction and revenue growth. But for a business like yours, which is really personifies the value of a network effect, transaction growth is kind of the -- arguably, the single most important driver in the business. And so we've seen you guys make some moves around the way label partnerships and the move to digital sort of deliberately or reactionarily thanks to COVID as helping to grow that transaction flow. So can we talk about what gets the transaction number further accelerated and the points and strategies that you guys are most focused on to kind of continue to see that positive trajectory in transactions?

Yes. I think you're going to see it this year. Although we gave a revenue outlook of mid-single digits, we also said that there's going to be a continued spread in the business between transactions and revenue. And the transaction growth is going to continue to be driven by the digital part of our business. We also believe that retail will grow this year. So that will be a contributor both on revenues and transactions, and clearly, the transaction growth, we're hopeful that it's going to accelerate beyond what we saw even in the second half of last year. So we are looking forward to that this year. It's all the pieces, Matt. So they're all sort of coming together. The digital white label will continue to grow well. The wu.com business is going to continue to grow well, and the transactions are going to be very strong there, again. Obviously, some quarterly variations this year, but for the year, we'll get some nice growth there. And retail, again, getting past the quarterly variations, we're going to have some really good growth there as well, I believe, particularly on the transaction side. So the network effect is working. We've signed a number of other partners that we haven't yet talked about, but some of them are going to be other banks that we can do the same kind of thing for. Some of them will be other fintech-type organizations that are similar to maybe STC. So we just haven't announced them yet, but they are coming, and not every single account is going to be as successful as STC Pay was, but we don't need it to be. We just need a partner and at least a partner in every single market, and will -- sort of the business will take care of itself. So we're very excited about the network effect and the things that we're doing. And we think our competitive positioning this year -- coming into this year has strengthened because of all the things we've done, we generated almost $900 million of cash flow last year, operating cash flow, it's going to be strong again this year. We've -- obviously, we're going to buy back stock again. We've also announced the dividend increase. So it just gives you a sense of the confidence we have in the business. Obviously, we're not through the pandemic yet, so we need to get it through the months there, but we do believe that the second half of this year will be better economically than the first half.

Yes. That makes a lot of sense. On the white label business, I personally like the strategy a lot. And obviously, partners like STC have been great kind of positive examples of the value of building those partnerships. How do you see that facet of the business continuing to evolve? It sounds like there's some more kind of imminently in the pipeline that are maybe not quite ready for prime time yet. But is this going to be a longer-term trend of seeing kind of more white label and becoming that enablement provider ubiquitously on a more global basis through these types of partnerships?

Absolutely. We're going to have more partners that we'll talk about for this year in the coming months. During the course of this year, we will have more activity there. We see the digital business in total getting to about $1 billion this year. We'll have partners. Again, they won't be as -- probably not as successful as Saudi Telecom because Saudi Arabia is a unique set of circumstances. It's one of the largest remittance markets in the world. You have the largest telecom provider and you have millions of migrants. So it's a perfect scenario there for us. But certainly, that's a key part of it. We also are thinking about Matt, the next evolution of what westernunion.com will be for us. So today, we have much more of a transactional-oriented relationship with customers even though they're creating an account, but we know that there's further opportunity to provide more products and services for our customers. They trust us. So the 9 million customers we have on wu.com have a lot of trust in Western Union and the brand, and we believe that we can extend our offerings with other things. We have a bank license in Europe, for example, right, in Austria. And so maybe our customers want an account relationship with us, a bank account relationship. Maybe they want a credit card or a debit card. Maybe our recipient also wants a bank account, and so these 2 customers, the sender and receiver, may transact with each other. Ultimately, our goal is to have more throughput or more cycles of the money that's going through our system. And so we'll be actually testing out something later this year, Matt, in that regard, and we'll have more to say about it by the end of the year in terms of what kind of uptake there is because that could really be the next evolution of growth for Western Union, providing more products and services to our current customer base.

Yes. The quintessential flywheel effect to these services.

Yes.

And so would that be like, conceptually speaking, I understand it's probably not quite out there yet, but I know Hikmet kind of talked about it a little bit last night and you brought it up here. So on the services side, conceptually speaking, is it something that you envision your kind of habitual customers have a WU app on their phone, and then you start to layer on services above and beyond a virtual digital remittance initiation or receipt?

Absolutely. Yes, that's absolutely the goal. We have a natural way to just extend what we're doing today because I put myself in the shoes of our customer because I am a customer of Western Union. And I would love to have a banking relationship with Western Union, where I have an account, and I'd love for my recipient to also have an account and it would make life a lot easier. Maybe my recipient can even pull money automatically from my account because I've allowed him or her to do that every month to pay their expenses. So you can really think about how Western Union can really make an easy step to providing these additional services. The main thing we want to work on, Matt, is having a great customer experience in that process, and that's really what we're spending time on today. We signed a number of agreements with other partners that are going to provide these services and that we're partnering with in addition to our own bank. So it really is something that we'll -- yes, we'll be testing out products and services later this year.

Yes. You could certainly envision a scenario where the sender who's doing -- so habitually has some sort of a direct deposit allocation and even sets it up almost like a subscription recurring business for them, right, as a kind of a bit per-month remittance because so many people do it, I'd say, this month and wants the paycheck.

Yes. Or maybe there are some regular monthly bills that I might pay directly or a customer might pay directly for their recipient, right, through this account offering. So there are lots of different applications that we can think about that makes sense for us. Now we're not going to go after a traditionally bank customer. It's going to be a customer that has been using our services where we can provide a natural extension for them to be partnered with Western Union.

Got it. And on that digital front, there was a number of stats last night, and a lot of them continue to, I think, impress the group. I think, first and foremost, 80% of the customers are still new or are not necessarily former cash customers. And I think one of my natural thoughts would have been around something like the pandemic, that, that would have been the catalyst to change, right, that somebody would have said, "Okay, it's safer. It's easier. It's more convenient. Let me stop going to the physical location. Let me start using the phone." In which case, that would be in the 20% of the people that are kind of coming to wu.com. So like, where are these customers kind of continuing to come from? And then what's their profile? Because clearly, the digital transactors are more frequent, more habitual. They send larger amounts per send, as we saw in this past year, probably, most clearly. And how is Western Union kind of continuing to find and attract those to the brand on the digital front?

Yes. It's a very good question, Matt. If you think about the composition of the remittance market, about half of it is with the banking space. So that's really where a large portion of the market is. Another 20% or so is with other digital providers. And then the remaining 30% is the traditional space, if you will, the retail part of the business. So the part of the market that we're going after with our digital offerings, whether it's white label or wu.com branded offerings is 70% of the remittance market. And we don't really have a big share there, even though we're now a very large business there on the digital side, we're going after that 70% of the market. So the customers that have been coming to us over the course of the last year are coming from the banking space. That's definitely a key source of customers. They're coming from other digital providers. And thirdly, they're coming from other -- they now have new needs that have arisen in this environment. So they now have a loved one or somebody in another country that now has a higher need to receive money because the need to receive money in this environment is as high as ever before. So we've actually had new customers who have said that they have never even used remittance services coming into our business. And I think that's true for all the providers. So that's where you're really seeing -- and maybe there's some formalization of some parts to the informal market as well that's happening there as well. So a lot of these things have really created the strong digital growth. And the great thing, Matt, is that most of the digital customers that we've now acquired that have created an account relationship with us say that they're going to continue to utilize us and that they're going to continue to use us even after this environment is over because this need for recipients to get money isn't going to go away anytime soon. It's going to take some time for these other economies to gain some momentum back. So that's really what's happening, and it's great for us. We love it, and we think getting to about $1 billion this year is just case in point in that regard.

Yes. As we flip the page back for a moment, to the core cash-to-cash physical business, right, for as long as I can remember, looking at Western Union probably over a decade now, there's been kind of a slow and steady sequential march towards more agent locations, right, because that creates more nodes, that builds the network effect on the pay-in, payout side and allows you to historically touch more people before electronic became as material as it is starting to become. So how do you kind of think about the longer term on the physical agent count side? Is there kind of a peak that maybe we're cresting? And at some point, it will no longer be the biggest remittance player that has the most agent locations necessarily. It will be the one who's got the most sort of digital touch points.

Well, look, we -- there's certainly white space around the world, but we really do look at distribution as being much more broad than just retail agent locations. That's why you've really seen us think about account-oriented services, account payout, account funding, maybe ATMs or kiosks, even. So other ways of giving customers touch points in terms of how they can interact with us. There are a lot of white space around the world for retail. So I don't know if 550,000 locations is the right answer. If it means that we should have another couple of hundred thousand locations, we'll do it, right? We obviously signed a deal with Walmart. So that gives us some key locations, almost 5,000 locations that are very important locations here in the United States that we think we're going to do really well with. So it just depends on which market you're in, the kinds of channels that are available to customers and the variations of channels that we can offer. So we think about distribution as being very broadly, not just retail. And again, it's the network effect. We want -- we've been pruning locations over the last several years. So we've been closing down nonproductive locations, the retail locations because that's also good for our partners. They don't want to be providing services if nobody is really using the services at those locations. So we sort of closed those down. But we -- so we've had -- I would say, we have a higher quality 550,000 locations today than we might have had a few years ago, if that makes sense. So that's really how we think about distribution in total.

Yes. And I believe there's also some sort of maintenance cost, right? So there's probably a tipping point where certain agent locations that are not productive are ultimately costing you more from a KYC perspective.

Yes. Yes, we have some basic costs. We have tools and systems to be able to minimize that cost, but yes, partners also have some skin in the game because they have to have somebody servicing you at the counter, right? So maybe they can put that the person somewhere else instead of to these services. So it really just depends. As long as we can get -- as long as it's valuable for that partner, they like the brand because it brings traffic into their stores. So that's why it's important for them to keep providing these services in many cases.

Yes. Definitely. You mentioned Walmart. That's obviously been a new partner to you, one that's had kind of remittance partnerships prior and has expanded upon them over the years. Why was now the right time with Walmart, I guess? Kind of what was the genesis of this coming together now versus a decade ago or a decade from now?

Yes. Yes. No, it's a very good question. It really goes to reinforce our platform strategy. So we really want to be able to enter into agreements with partners and customers and businesses that will expand our network that really allow us to provide services to a wide variety of customers, whether it's STC pay, white label or the services that we'll provide at Walmart locations. Anything we do here, Matt, has to make economic sense for us, and that's really how we think about Walmart. We're going to make a fair amount of money here. It's very valuable to us. We think we're actually going to be quite successful at the point-of-sale. This year, the services began to launch in the spring, sometime in the spring, and so we'll see some impact this year. We think it's going to be meaningful. We also think it's going to continue to grow for us. So we'll see more of a full year impact next year. So this has some runway for us to gain some share here. And we also see this as largely incremental business for us at the Walmart locations. The last thing I would just say is Walmart recognizes, with a partner like Western Union, they don't need to bring in a third partner because there are already 2 providers at their points of sale. They recognize with someone like Western Union the strength of our brand and what that means to their customer base, again, bringing the customer traffic. And they also understand the strong compliance and regulatory capabilities that we have. That's very important to Walmart as it would be to any large partner like that. And so we really believe that with the package of service offerings that we have for Walmart, it's going to be a very successful business for us. And we sort of built into our outlook for this year, but more to come on the success of that rollout. And it's going to be 4 different product offerings. So it will be a domestic money transfer. It will be international money transfer. It will be bill payments and then retail money order as well. So all 4 of those are -- have unique customer segments that are looking for that kind of offering in both the branded and non-branded ways. So we'll be quite flexible in terms of how we're offering that service today.