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

Hello, everyone. My name is Vasu Govil, and I'm one of the analysts covering the payments and core processing space here at KBW. I'll be moderating our next fireside chat with Western Union's Chief Financial Officer, Raj Agrawal. Welcome, Raj, and thank you for joining us today.

Well, thank you, Vasu. Really nice to be here with you and looking forward to our discussion.

Absolutely, appreciate it. So I guess I wanted to start by talking about the digital business, which has been sort of the big thing for Western Union this past year. It was already seeing quite a strong growth trajectory even before 2020, and it took off even more this past year. So I guess at a high level, can you talk about how that may have changed the way you are thinking about the business overall and investing in the business? And then also, in this accelerated shift, did you ultimately sort of helped the company break away from the low single-digit growth profile that you delivered historically? Or is that still to be determined?

Yes. First of all, we're very pleased with the digital business. It really grew way beyond our original expectations last year. And we had almost 40% revenue growth, which is really something on a -- and it was already more than a $600 million business at the end of 2019, so we ended more than $850 million of revenue last year, and we as you know, we've talked about getting to $1 billion of revenue this year. So it's been really growing well. It's very representative of where the growth is coming from in the cross-border remittance space in the remittance market. Last year, the digital part of the market really took off because customers were looking for digital ways of sending money. And we were really well positioned, Vasu, as we came into the year, because we already had strong digital presence all over the world. We had 75 send countries, more territories where customers could initiate transfers. And then they were a lot -- they were able to send money anywhere in the world, either to an account into more than 100 countries on a real-time basis, or to a retail location. So that infrastructure and the things that we had built in the previous few years really positioned us well to catch the customers, I say. Because they were looking for ways of sending money, and that has really played well into our business. Clearly, digital is a much bigger part of our business than we had anticipated at this stage. Last year, we were about -- digital was about 20% of consumer revenues. This year, it's likely to be even higher than that, given the growth that we expect. And I do believe that it can have an impact on our longer-term growth. Now we're not through COVID yet, so we need to get COVID behind us. And we do expect that the second half of this year will be better economically speaking globally than the first half. And I do think that it positions the company to have a better growth profile, just given where we are. Because this year obviously we've said mid-single-digit constant currency revenue growth was our outlook for this year. And we said that a couple of weeks ago, that includes a rebound in the retail business. It includes the digital business getting to $1 billion. It includes the B2B business recovering, particularly in the second half of this year. So all these things give us better growth profile this year, I believe, that as the digital business continues to be a bigger part of our overall business, it also means better things for Western Union in the next few years as well.

Great. So I guess continuing on digital a little bit. I know on recent calls, you've shared some pretty impressive statistics, whether it's app downloads or monthly actives. What's giving you confidence with these sort of really strong metrics being sustained in the near term?

Yes. It really is a function of the market. I mean customers are continuing to look for digital ways of sending money, and they love the Western Union brand. We are front and center when customers are looking for the right options. We provide a great service offering. It's convenient. I use our mobile app to send money to India to my relatives all the time. And I can initiate and deliver money really into their -- my account to their account in a matter of minutes, or 30 seconds actually just takes me to initiate a transfer. So that experience is what we're trying to create all around the world, and we also want customers to have multiple channel options available to them. So if they want to send money to an account, that's available to them. If they want to send money to one of our hundreds of thousands of retail locations around the world, that's also available to them. So that infrastructure and the capability we've built and the seamless experience that customers have give us confidence that the digital business will continue to grow over the next few years. And the growth this year is going to moderate from where it was last year. That's in our $1 billion number for the digital business, but it's going to continue to be a key growth driver of the remittance market and for our business as well. And again, it's going to help to drive good growth and profitability, I should say. It's a very profitable business for us as well.

All right. And then is it fair to say though that the digital ecosystem is more competitive than the retail channels, where you're one of just a handful of scaled players? And if that's the case, what's enabling with the win share?

Well, there is a lot of competition in all areas of our business. And that's not a new thing, though, Vasu. We have had competition. We've had corridor players compete with us in the retail side. We have other smaller digital players that are competing with us in the digital space. But again, the breadth of what we offer, the omnichannel capabilities both sending and receiving, whether it's from a retail location or a digital business or mobile app or your bank, we really want you to be able to transact with Western Union in whatever way is convenient for you as a sender. And we want the recipient to also have that same experience. So if they want to get it in a retail location, that's great, we have it. If they want to get it into their account, that's great, we also have that. And we do it seamlessly for customers. So having a global business, 200 countries to 200 countries, is something that's not easily matched with any player, whether it's in the digital space or in the retail space. And that's really where we believe we have a competitive advantage. And we do this seamlessly, right? We have the regulatory capabilities. We have the compliance capabilities. This is why partners like Walmart or Saudi Telecom or La Banque Postale in France, that's why they work with us because they know that we're a trusted partner. We know what we're doing. We have the right capabilities in-house. And that's why we think we can continue to push into this space, which is really going into the -- if you think about the remittance market, it is made up of -- the banks are key provider. And we believe we can be the back-end provider to banks to provide a really good service offering for them, for their customers. And then we can also continue to drive good growth in our digital business.

I guess one of the key competitive advantages, you guys, like you've mentioned is in the whole cash-out network even from the digital business. But any color you can give us on what percent of the transaction today are actually to digital to digital on both sides? And are you seeing this sort of inflection towards digital happening on the receive side as well as the [ dynamic challenges ]pushing behavior towards cashless thing across the globe?

Yes, I mean we try not to force customers to do something they don't want to do. So we really are providing omnichannel capabilities. Because customers really want to use our business in different ways. Some customers only have an account-to-account need, and we provide that to them. It's still a very small piece of our revenues, but it's one of the fastest-growing part of our revenues for account to account. But there are customers that when you're sitting in a rural location in India or Philippines or some other key inbound markets, it may be easiest for you to get money or cash into your hands because that's maybe how the local expenses are being done. If you're paying for food or education or medicine, many transactions locally in these countries are being done in cash. And so that's why if you want to send $100 to somebody, it's not really about getting it into their bank account because they may need to use it right away, right? So it really is providing omnichannel capabilities and services and letting customers choose how they want to use our business, not just not forcing them into one channel or another. I'm also a customer, as I mentioned earlier, and I use our account-to-account services because that's most convenient for me. But that's not how my wife uses our services. She goes to a retail location typically. She's sending a little bit of money. And so the use cases are very different, and that's what she likes to do. I like to use our account-to-account services. So it's just different services for different customers is what we like to offer.

Got it. I want to take a second to let the audience know that if they wanted to ask a question, on the top right-hand corner of your screen, you'll see a button that said, ask a question. So please feel free to type in your question and I'll try to ask Raj. So moving on to the digital economics, Raj, because that's one of the questions we get a lot on how to compare the unit economics on the retail business versus the digital. So can you talk a little bit about the revenue -- the relative revenue per transaction [ differential ] between the 2 -- the digital channel and the retail channel? And how does that factor into the thought process as you think about the mix shift that's happening pretty rapidly away from retail?

Yes. The most important thing to remember, Vasu, is that most of our digital business is incremental in nature. A new business for Western Union. In our wu.com branded offering, our branded digital offering, more than 80% of customers continue to be new to the company. They have not used our services in the past 1 to 2 years or even sometimes longer. So they're an incremental customer, incremental revenues that we wouldn't have otherwise had, and that's really important to remember as we do these comparisons. And then on the digital white label side, we are just playing a different role there. That's also largely incremental business for us because we wouldn't have served that partner had it not been for that kind of offering, so incremental business. As we think about the revenue comparisons, revenue per transaction comparisons, we have shown in some of our -- one of our last quarterly calls a couple of quarters ago that the retail business probably has the highest revenue per transaction, but wu.com is not far behind. So wu.com has a lower revenue per transaction. However, it has a higher gross margin or higher contribution margin to it. And so the dollar profitability of each wu.com transaction actually is quite good. We love that transaction because it's incremental business, and it provides very strong profitability for us. And on the digital white label side, we play a very different role. These are lower revenue per transaction -- transactions because we're just getting paid a fee for each transaction because we're not paying for the customer acquisition costs. We're not paying for fraud losses. We're not engaging with the customer. We are really just processing the transaction that a customer has a need to do, and those costs are relatively low for us. So the margins are very high. If you look at the gross margin profile or the contribution margin for each of the businesses, the digital white label has the highest contribution margin today. And wu.com is probably next. And then you have retail, it gives you the next level of contribution margin. So as you've seen the digital business become a bigger and bigger part of our consumer business, last year it was 20% of our consumer revenues. The year before, it was around 14%, so 600 basis point expansion in digital revenues. And we took up margins last year, even in an overall down revenue environment. And this year, again, Vasu, as we grow our digital business to $1 billion, we're taking up margins again. So the company has the ability to keep increasing margins while also growing its digital business. That's not the headwind that's going to create lower margins. It really supports our margin profile. And I think there's more opportunity in the next few years as well.

Now, that's definitely very encouraging. I guess the next question I had was sort of about, I think you called out on our last earnings call that you have about 9 million active customers on the westernunion.com platform. I don't know if I got the number right. And you seem to be contained at sort of building a bigger ecosystem of services to potentially optimize the monetization from this user base. So can you elaborate a little bit on what the thought process is? What type of services would make sense? What kind of time horizon are you talking about to roll out some of these newer services you're taking on?

Yes. Yes, this is a really potentially a very exciting area for us. And I have to say it's very early stages, and we will be doing some preliminary testing later this year that hopefully we can give you more feedback on we -- ultimately, Vasu, we want to do more with our almost 9 million customers, active customers that you mentioned on wu.com, because they trust the Western Union brand. They know who we are. They know their money is going to get there. It's safe. That trust is something that we believe we can build on with our customers to provide additional products and services that are financially oriented, right? We have a bank that's in Austria, a full-fledged bank that we can leverage to provide financial services to our customer base. So we'll be doing a test later this year in a couple of countries in Europe leveraging that banking infrastructure that we have. Because if you -- as I think about myself as a customer, I would love to have an account relationship with Western Union where I could put some money down, store some money, maybe have a debit card or credit card issued by Western Union. Maybe I can then initiate transfers directly from my account to my recipient. And then the next phase would be let's also let the recipient also have a bank account or an account relationship with Western Union, and maybe that becomes a much easier account-to-account transfer for those 2 customers. And maybe my recipient can pull money from my account every month because I've set them up for that. So that's what we're really trying to test, and we believe that we can do a lot more with our customer base that is using us for cross-border remittance services, to take more share of their wallet and actually provide a valuable service offering back to it. They trust us. We know we can give them that trust back by providing more financial services. We're not going after any customer. We're going after the customer who already uses our services. They have a need to move money cross-border, because that's really where we have the strength of providing our full suite of services. So we'll see the results of that later this year. And I can't tell you exactly what it's going to look like yet, but we're very excited about this potential in the company.

No, absolutely. I mean it definitely seems like a lot of fintechs are kind of going in that direction, sort of getting the customer and offering a bundled solution around. And so it feels like that space is getting very competitive. It will be interesting to see how...

Well, it will be unique for us because it's really the migrant customer that we are going after, not just any typical customer. And so that's where we already have a connection with this migrant customer. We want to be able to do more with them. And we think they're going to use our services because they trust Western Union, and we have a bank already where consumers are using our services in the bank.

Right. And I think from your point of view, if you can sort of get the customer retention, that's kind of that one.

Absolutely. It builds a long-term relationship with customers, and they -- you sort of get more cycles out of the customer in the money. So the customer has money in the account with Western Union. They may use it to transfer money to their loved one. They may use it to buy something in our ecosystem, our consumer ecosystem that we're creating. So these are the kinds of things that we really are excited about.

So I guess switching gears a little bit to the white label business that you've touched on before. You embarked on the strategy to open up the network to third parties, I think, in 2019 second half. And you've had a couple of pretty successful partnerships there. I mean as you were sort of thinking about opening up the platform, how did you get the confidence that this would not end up cannibalizing your own branded business?

Well, look, it was a new business. We didn't know exactly what to expect with digital white label business. We knew what the market was. We knew that half of the remittance market is with the banks, or another -- and another 20% with digital players or digital providers. So we knew that 70% of the market, of the remittance market where we don't really have a big share was a big opportunity for Western Union. So we wanted to make -- we found a way to serve this market with our capabilities that we haven't really focused on in a big way before. And we really believe if you think about our current retail network, Vasu, we have about 2/3 of our network globally is with banks and post banks and financial institutions. So we provide retail services at their locations all around the world. So it's not a big stretch for us to think about serving those same banks in the account-to-account space in -- with our services. It's not a big leap to do that. So we have 2 really successful partners that you mentioned. One is Saudi Telecom, Saudi Telecom Pay in Saudi Arabia. And Sparebank, or Spare they call themselves now, Spare, in Russia, right? Spare is the largest bank there in Russia, and we provide money remittance services to them on a white label basis. Why is Spare using us? They're using us because we provide them a better service offering. They were using the correspondent banking system before to move money for their customers. They no longer have to use a correspondent banking system. They use our rails, and they deliver money. They allow their customers to deliver money into 200 countries around the world using our rails and into more than 100 markets on a real-time basis into accounts. So that service capability isn't available with any correspondent banking system. So that's why banks are going to be really interested in the offering that we have. We are doing it for retail. We're going to do it through digital for them. And there are many that we have in the pipeline that we have not announced yet. And you'll see more over the next 12 or 18 months that we'll keep adding to our portfolio here. And there's no reason why we can't get a big portion of the share in the bank space, because we believe that we can actually be a good partner to the banks to provide them a service for their customers. And that's really the strategy.

And just in terms of that pipeline, is there a particular [ place ] of new [ signs ] that we should expect as you talk about having the [ full ] pipeline with them?

Yes. I ask our people inside the company all the time, our salespeople. And there's obviously a long cycle time here as you go into each bank or each partner. And some partnerships are going to take a while. I know that Spare took a couple of years before it actually came to fruition. Because it just takes time to get to the bank and its organization in the process. It's not because nobody wants to do it. It just takes time in that place. But we've been working on things also over the last 18 months. So you'll start to see more that are coming to market even this year, Vasu. You'll see some good examples, some high-visibility examples, and we'll continue to add those this year or next year and the years to come.

And I guess another important partnership that you signed there was with Amazon. Slightly different partnership, but is there any update you can provide to us on where that stands to be in terms of rollout, and what kind of traction you have seen there?

Yes. I think the best learning we have with Amazon is that first of all, they're a great partner. We love working with them. And they really are pushing us to think about our business in a very different way. Because the Amazon relationship is not about a remittance service for Western Union. It is about leveraging our physical network that we have around the world to -- for them to really capture more customers that may not have access to digital ways of paying for goods and services. So we really allow customers to pay at one of our retail locations in many different countries around the world now with Amazon, to be able to make these payments for things that they're buying on Amazon, right? It's not a big revenue contributor, but I think really it just allows us to think about how we can leverage our retail network in a lot of different ways. It doesn't only have to be for a remittance offering. It really is -- can be thought about it in a much more broad way in terms of how we think about that relationship. Walmart is another one. It really supports our strategy, Vasu, whether it's Walmart or Amazon or STC Pay or Sparebank, it really is about using our services as a platform. We want partners, customers, businesses to connect with us in whatever way is convenient for them to use our services for their customers. So that's really how we've thought about how do we push our platform services more around the world and be very flexible in how we connect with partners. We can do it in a branded way. We can do it in a non-branded way. It can be exclusive in nature. Maybe it's not exclusive in nature. Really allowing flexibility for the partner to connect with us to use our rails because our rails are fantastic. We keep upgrading them. We're keeping on improving them, but it really is about getting more access to that remittance market that we may not have had before.

Right. So I guess my last question on the sort of white label business, how should we think about that mix of [indiscernible] revenue from partnerships today versus what it might be [indiscernible].

Yes, you've faded out at the end. How should we think about the mix of partnerships?