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

Good afternoon, everyone. I'm Rayna Kumar. I'm part of the payment processes and IT services team at Evercore ISI. And today, I'm joined by Hikmet Ersek, Chief Executive Officer, Western Union; and Raj Agrawal, CFO of Western Union. So thanks to both of you for joining us today. We really appreciate your time.

Thank you for having us here, Rayna.

Thanks, Rayna. Nice to be here.

Great. So starting out at a high level, the market for cross-border, money transfer and payment performed better than most people expected in 2020. Can you give us an overview of what you think drove that type of market performance? And especially the share gains that you've got in digital business and how do you expect these trends to really play out this year?

Yes. I think there were some uncertainty beginning of -- starting March, obviously, as the global pandemic really spread all over the world. But it showed also that our customers, our business and our customers are extremely resilient. They really love their loved ones back home, and they're going to continue to send money and they have chosen their trusted brand Western Union. And we did gain market share. You are right, Rayna. And there were several factors on that. First of all, our digital business has been growing very good, very fast. And we were ready to respond to the market needs. We are in some of the outbound countries with westernunion.com, sending money to 200 countries in retail or on an account or a wallet, right? Nobody has that, our reach on a network like we have it globally. So customers, obviously, they preferred saying that, okay, during difficult times, I'm going to support my loved ones. Is it in Uganda, is it in India, is it in Bangladesh or is it in Guatemala? And they did that. And the digital business was really growing. We did some slowdown, as you know, in the beginning of the -- a decline actually, beginning of March and first quarter -- second quarter and end of first quarter, second quarter. And then that even came back, our retail business as the market, some markets really, really opened again. I think there were some -- from the investor's point of -- from analysts' point of view, there was some question mark, as -- in the beginning, as the World Bank came with the projection of the decline of the principal amount, and we immediately say that we believe that the World Bank projection was too conservative. And we believe that the customer is going to support their loved ones and they did. That's extremely resilient business. Look, the needs you have in the same country, the same needs are on those received countries, and they want us to provide the help to their customers. And so we believe also that World Bank then corrected their forecast 7%, obviously, but they're going to really -- I think that they're going to adjust that again, therefore, there in our projection for 2020 principles. And we are also -- had a good Q4. And we ended the year, I believe, without turning back. And we believe also we gave some guidance in for 2021 in February, and we feel comfortable with our business. We feel comfortable with our digital growth, and we believe that the retail will also recover. And that will definitely put us -- continue to gain market share. And I'm currently very satisfied with the performance of the business. Raj, do you want to add something?

I think you covered it. So that's good.

Great. So you're probably 2 of the best people to answer this question. But in a post COVID-19 world, how does the global recovery look? You have 550,000 agent locations worldwide, unmatched by anyone. Which regions do you think really lead that recovery?

First of all, we are still in '21. It's uncertain this year. It's hard to make a prediction, but the vaccination will definitely help. I don't think that the travel industry or the travel as you -- as was in the past, will change. But the recovery of the economical empowerment, the stimulus packages definitely will help to -- in our business that the people will have cash to support their loved ones back home. And that's going to continue to happen. We can see in the countries where the retail locations, again, opening, where the people are more free to go on streets and really do their day-to-day business, the retail recovery is coming. But I know -- you know what? Digital will grow. We're going to be a $1 billion business this year, and I'm very excited about that. And that's definitely the growth area. And when we go to the market, we go with 2 areas of the market on our digital business. One is we go with the westernunion.com. And one, we go with our white label, right? So we are covering really the needs of the market. Our dot-com is basically, if you lean back and look at our largest agents, our largest send agents in 75 countries, sending money to 200 countries to 500,000 locations plus. But not only on that, one of the growth areas is at dropping money where we gain market share from the competition is really sending money to an account, directly to an account in real time. And this is huge for us because also these additional customers, first of all, it's incremental customers, also the principal amount is higher. It's a different customer. And we always say that our digital business is additional customer is not cannibalizing our retail money transfer business and really adding new customers. But within the digital business, we see also different customer segments, especially during COVID-19 and post COVID-19 with higher principal amounts using us because we are paying out [ in minutes ] in accounts also. So -- and the second part where we go to market besides westernunion.com is our white label business, which we are extremely excited. We have a platform, which is unique, probably one of the best networks worldwide, one of the best probably compliance programs worldwide -- settlement programs worldwide. We are paying out in 137 currencies in real time almost, right? And this is something that -- many banks or financial institutions want to really join us, as example is the Sberbank relationship, which we mentioned that earlier, it's growing very well. And basically saying that, okay, if you look at the C2C market, 50% of the market is bank to bank, correspondent banking, 30% is retail, 20% is digital players. What we are doing with our white label -- besides, we are growing our westernunion.com business. With white label, we are really going after the correspondent banking, and we are not replacing the correspondent bank. We are saying to the bank, "Hey, there's a better way to use -- serve your customers." Sberbank was always sending money to its [ 10 ] countries. But now they're using Western Union platform in a white labeling, sending money there, and that's the growth region also, how we do expand our digital programs. And I'm -- probably this year, we'll be up another $1 billion revenue. And I'm talking about not our principals, I'm talking about revenue here and growing from $850 million. It's a good growth.

Yes. I mean, look, what -- yes, go ahead, Raj.

Sorry. I was just going to add that from an economic standpoint, we've assumed that the second half of this year will be better economically as more people get vaccinated and people try to get back to normal, and that should be better for the overall business. There's obviously going to be variability from quarter-to-quarter, and different regions of our consumer business will recover different -- at different paces, if you will, because like Latin America, for example, has been slower to recover. It's going in the right direction, but it's likely to follow the others from a money transfer standpoint. So I mean, overall, we think end of the year will be -- the second half of the year will be better from an economic activity standpoint, and that should be good for our business as well.

Great. And then Hikmet, you just mentioned $1 billion of digital revenue in 2021. That's a large number. What else do you think -- investments do you think you need to make to realize the full opportunity that there may be in digital for Western Union?

Great question. I think that's really a good question. As you know, with our westernunion.com, as I said earlier, basically our largest customer acquisition and larger agents, we are extremely excited because the customers who are joining westernunion.com ecosystem, I call that as a digital ecosystem, are unique. Nobody has that. We have customers in 75 countries on westernunion.com from 200 different countries. Basically, we are the financial service provider for migrants and [ send countries ] with our westernunion.com. Now today, they are using westernunion.com to send money. In the future, they will also use other products for that. They could be a prepaid card. It could be small ticket loans. It could be insurance programs. And I'm very excited. In fact, we are starting a test in Europe. We have a full bank license in Europe, and we are starting a test in -- I believe it's in Germany and Poland, I believe, Raj. And starting -- asking the customers and really offering them additional products, accounts saying that, do you want to have that kind of financial service to add additional revenue to us? Don't forget that because the advantage of Western Union is that these are [ ethnic ] customers. We are talking to German in Germany to Albanian in Albanian and Polish in Polish. We are not going after German customers, we are really going after migrant customers and saying that, okay, we would like to have their loyalty besides sending money and supporting their loved ones at home. Do you want to have a prepaid card? Do you want to have accounts with us? And we do have the fundamentals. We have a full bank license there. That's a very exciting opportunity for the future. Now it's too early to give a projection, but all customers tell us that they would like to see additional products with Western Union.

So that's great. And just expanding more on that idea of a financial services ecosystem. Is it also possible for you to create similar business model to that of a PayPal, Venmo or a Square Cash App just on the domestic side of your money transfer business and then build banking and financial services products on top of that?

Well, our focus, our competency is the cross-border, cross-currency. It's hard, stem hard. It's not easy to do it. Thank God, it's not easy to do it. Thank God, it's hard. It's our competency. So that's our biggest advantage, right? It gets complex, but the complexity is our competitive advantage, and we -- it's hard for competition to go at that direction. It's easier to build a local payment within a currency and within a restriction, local payments relationship than cross-border. And we will definitely focus mostly on our cross-border international payments. Our -- in fact, our domestic focus is not that big, but people are moving money, they will move more money cross-border and the potential is here.

Understood. Okay. Well, because your business is becoming more digital-centric, do you think over time that your top line growth is not really low single digits but more like mid-single digits? Is that really the goal that as more of your business shift over to digital that you're also able to accelerate top line growth?

Well, I'm not going to give you guidance. Of course, everybody -- every CEO's goal is growing faster, right? Obviously, looking back, if you look at the last 10 years for Western Union, obviously, until 2016, we had to restructure many things. We have to reinvest in our technology and our compliance programs. And by '17, we started -- 2017, we started with our program, how we can be more lean, better and really focusing on our artificial intelligence technology, running this company more agile actually. And we are -- we've been very successful. And at the Investors Day in September 2019, with our -- we said that we would like to go -- assume that we're going to grow low single digit and expand our margins, and we've been delivering on that. The only thing has -- COVID hit suddenly in March. But obviously, we are on the way back and we are definitely targeting faster growth. Now it's all about -- we are expanding the margins. We're extremely profitable. We are turning a lot of cash to the shareholders back, but now it's all about growth. And I believe we have the right platform to grow faster long term. And I think that digital is one proof point. It's not like it happened to us because of COVID. We were ready. And the customer has chosen us and there are other opportunities, as I mentioned earlier.

I do think, Rayna, the mix of our business is very different today than what we were expecting in -- at the end of 2019 when we had our Investor Day because we were sitting at a $600 million revenue business for digital. Today, this year, we expect it to be about $1 billion. That gives us a better starting point to think about for the future growth. Just on the digital side, last year was a little bit north of $850 million. This year, we said about $1 billion. That's about $150 million of incremental revenue. Just on the digital side, that's 3 points on the company's top line, right? And that's why we're able to get to a mid-single-digit type of outlook for this year. So it certainly gives us a good starting point to think about future additional growth opportunities.

Great. And before I leave the topic of digital, this question is for you, Raj. The #1 question I really get on digital is just the difference in profitability between digital and your agent locations. Could you just walk us through how digital operating -- gross profit margin and operating margin looks and how they could progress as that business gets larger?

Yes. Yes. I think the best data point, and I'll go into some of the specifics that the best data point I can give you is that last year, we expanded our digital business by almost 40% on the top line. And in overall revenue down environment, we were still able to expand margins. And this year, we're going to do the same. We're growing digital to about $1 billion in size. We're going to expand margins again this year. Retail will go again. So it is very margin supportive in terms of our digital growth. That's a headline that you should really take away. We really look at our digital business as being incremental revenues to the company. So incremental revenues, incremental profits, customers that we wouldn't have otherwise had because they are largely new customers to Western Union. On the westernunion.com side, we continue to see more than 80% of customers -- new customers that are visiting wu.com are new to the company. They haven't used us in the past 1 to 2 years. So that's really what we're going after. And then I know people try to compare what's the margin profile [indiscernible] in the different areas of the consumer business. And we also look at that, but that's not really the most important thing. They're very profitable businesses. We show, if you recall in the third quarter of last year, how the margins for wu.com -- the contribution margin for wu.com is actually slightly higher than we see in our retail business. And then the contribution margin for the digital partnerships or the white label partnerships are even higher than wu.com because we play a very different role there. It's much more of a processing role. So -- and then the dollar contribution for wu.com is actually quite attractive. It's not the same as retail, but it's very attractive. That's why each incremental transaction we get on wu.com is very profitable for the company, and that's what's allowed us to really increase our margins. The same thing with the processing model or the white label partnerships we have, we don't pay for customer acquisition costs. We don't have the fraud losses. We're not really engaging with the end consumer. We're engaging with the partner. So the partner is paying us a fee for our services. We're transferring the money. We get good customers with good funds. And that's why it ends up being a higher margin. It's a lower starting point, but it's a very high margin. And that's why we really think that as we grow the digital business, as we grow more white label partnerships, they're going to be very margin accretive for us as a company. And so hopefully, that helps. Rayna. I know you get the question all the time and we also do. But I think the best data point we can give you is that we've expanded margins last year, and now this will be the second year in a row with significant digital growth and expanding margins.

That's extremely helpful. And then getting into the topic of white label, you've done very well with white label partnerships in '19 and 2020 with -- particularly with Sberbank in Russia and Saudi Telecom. Do you expect to win more white label in 2021? And how -- like how far is the TAM for that part of your business, white label partnerships?

So the answer is yes. We expect to bring more partners. And is there another Sberbank -- like the Sberbank or another STC? Look, we recently signed 2 banks, one in South Korea and I believe also one in Japan. And then one example is, it could be also co-branded, right? I mean one example is in Canada, we had recently just signed one. And then this kind of expansion will continue to happen. Rayna, look, it is -- it's not a new business. It's a new business for us, not for the bank. The bank does already do a correspondent banking. It struggled though for a bank to do that with the current environment. And we are saying that, okay, why don't you take our platform, you still use your brands and you still use your customer relationship and you really use one of the best platforms worldwide, which is a Western Union platform, and you can use it co-branded or in a white label. And the team is working on that to get more of that. I -- it will be definitely one of the future growth areas. Now signing a bank, it takes longer and implementing the -- within the bank, the APIs and the -- upgrading their platform takes longer. Going direct to the consumer, it's easier with our westernunion.com, but going both makes big sense to expand our digital growth opportunities.

Got it. That makes a lot of sense. So on your fourth quarter earnings call, Raj, you had mentioned that there's going to be a continued gap between revenue growth and transaction growth. And we know most of that is coming from the white label partnerships. But would you attribute any of that to pricing? Obviously, we have -- you have competitors that are being very aggressive on pricing. So help us understand how that gap will look in 2021 and how you expect that to look beyond this year.

Yes. The -- I would just say, first of all, the pricing environment continues to be relatively stable. And our strategy during the course of last year with westernunion.com was really to drive a significant customer acquisition. And you saw that throughout the year, the fourth quarter, we had 49% growth in active average monthly customers in wu.com. So it really is paying off. And that strategy is really what's allowing us to get to $1 billion of digital revenues this year. In the end, Rayna, we don't look at the spread between revenues and transactions as much as you may or others may in terms of how we run the business. It really is about the ultimate revenue growth profile that we have. So we think that having a mid-single-digit type of revenue growth profile this year with the ability to expand margins and getting the digital business to $1 billion are really the key data points that investors should be thinking about. There may continue to be a spread between transactions revenue, but that's not the long-term indicator of how healthy this business is going to be. That's a short-term indicator of what we're doing with our pricing strategy and customer acquisition strategy. And we -- if that formula continues to work, we're going to keep doing it. It is not about pricing pressure. It really is about making sure that -- especially last year, as customers we knew we're looking for digital ways of sending money, we were really well positioned with 75-plus countries with wu.com. We wanted to make sure that we attracted the customers, we have them create accounts with us, we price the product correctly, we have them to continue to engage with us, they're continuing to transact. These are the kinds of things that really are going to make our business successful. And then the next wave of growth really is the stuff that Hikmet talked about, which is additional consumer services -- financial services for the customers that we have that are using us for cross-border transactions. We want it to be much more than just a transactional relationship. We wanted to be a long-term relationship with customers where we can provide other kinds of things. So revenue growth, margin expansion and the $1 billion digital business are the key data points that I would just give you.

Do you expect to add a number of these financial services and banking solutions this year that could be incremental to your revenue and earnings?

Well, there are going to be tests this year, later this year. And we hope that we can give you much more visibility to those at the end of this year. It's not a significant contributor to this year's outlook. Our outlook just assumes that those are mostly tests and we won't get much contribution from them this year. But that is certainly the next potential wave of growth that we could get on our digital business.

Understood. That makes a lot of sense. So during your 2019 Investor Day, you spoke about dynamic pricing. And I'd love to just understand how that's progressed versus your expectations. And if you can also give us a real-life example of how you're using dynamic pricing, that would be helpful.

As you know, one of the biggest advantages we have is that we are in 40,000 corridors or something like that. We connect 200 countries, send and receive, right? And we have the capability from fee transaction pricing and from FX, foreign exchange rates. So the capability is huge. Within that corridors -- from corridors, we do have different pricing with different banks, different customer relationship, different holidays, promotions, birthday pricing, everything. So it's really -- what we are doing is that going from a transactional pricing environment to a customer relationship pricing environment, which makes us more flexible. The beauty of Western Union is basically really with the dynamic pricing within our portfolio. On our corridor portfolio, we can really manage the customer relationship with dynamic pricing. We started doing weekend prices we are doing all the time. Online, we do different prices, if you pay with different methods or pick up with different methods, the money -- you send money to an account, it's different prices. You can send money to -- from your account. It's different prices given the funding costs, and we can really play on that. And it's really about customer satisfaction, customer loyalty. It's really having the customers with you and it's understanding the customer needs to drive the shareholder value and our team has been very active here. And really, it's something that we are doing it all the time. And depending on the corridors, depending on the competition, depending on environment, and I'm very encouraged by that, that -- to have that capability to adapt your prices to the customer needs.

Great. In January, you announced a big win with Walmart. And as we all know, you have 2 other competitors who also serve Walmart. How do you expect to differentiate yourself there? And how big of an opportunity revenue and earnings wise is Walmart for you?

Obviously, we are extremely excited about Walmart. There was, Hikmet -- there are even questions. I remember at one of the earnings call, he said, are you desperate to sign Walmart? No, we signed Walmart because it was a win-win situation for Walmart and for us. And we've sat down and we have an extremely good relationship. By the way, Walmart relationship is not new to us. We have a relation already in Canada and in Mexico, and we just added obviously U.S.A. Extremely excited about that. Obviously, we're going to start with the transactions second -- early second half of the year, end of first half of the year, second half of the year. And it will definitely give us an incremental -- transaction, incremental revenue. And also for Walmart because Walmart's idea was that choosing one of the largest, one of the best payment providers -- cross-border payment providers worldwide. It's adding -- also bringing new traffic to their customers, to their financial services, to their stores and to their online sites with Western Union because we have probably one of the best worldwide and we can settle in 137 currencies and pay out in 137 currencies. And we could do that in minutes. So that was definitely an exciting announcement.

Great. On your fourth quarter earnings call, you announced a 4% increase in your dividend. You reinitiated share buyback. Discuss your capital allocation priorities, including your thoughts on potential acquisitions this year.

Raj, I'll take the M&A.

Let me start, and then I'll let you do the M&A part of it. The -- our capital priorities really have not changed, Rayna. They continue to be to invest in the business organically to drive organic growth and expansion and that really is digital. Digital is a clear example of that. Secondly, we did raise the dividend by 4%, as you said, and that's going to be a significant use of cash flow this year, almost $400 million. Third, we look at the right kind of M&A opportunity, and then we'll come back to that one. And then lastly, to the extent that we have not exhausted our free cash flow with the other priorities, we do buy back stock, and we're happy to be back in the market buying back stock. We did pause at the beginning of last year given everything else that was going on with the COVID issue. And -- but given the stability that we saw in the second half of last year and coming into this year, we felt more confident about reengaging on the stock buyback side. So Hikmet, I'll give it to you on the M&A component.

No worries. I think, as Raj mentioned earlier, we have a very strong cash position. Cash is not our issue. I think we are very good also returning cash, obviously, to the shareholders and we are very disciplined on that. That's not our issue. Return is an issue, right? What is out there. We are very satisfied with our own return. But we -- if you look at our strategy and out there, our opportunities, we'll let -- fit in with our strategy. We are very much execution-oriented, and we are very much focused on that. So on the M&A side, I would say that it could be too transformative M&A or consolidation of M&A, right, where the synergies are here. Could be revenue synergies or cost synergies. I think that there are interested companies out there. We are looking at them. And once we have the right environment, we will definitely do one -- we're like our investment at stc pay. It's not only securing our long-term relationship with STC but also giving us a new opportunity on their ecosystem really. I'm not only learning from them but really driving their ecosystem with -- as a shareholder, it's an opportunity. And then we are definitely looking at -- is it the digital area with the right return, right customers, opportunity? Or is it on the traditional money transfer area, which you could find cost synergies and add additional revenues? We also look at the regulatory environment. Does it fit in within the regulatory environment? So we are open, and one of the examples was definitely stc pay.

Great. There's much talk about cryptocurrency and Bitcoin over the last several days. And I'm curious what your thoughts are on crypto. And separately, how is Western Union utilizing cryptocurrency or blockchain in the business right now?

Look, I got this question for many years now and our strategy has not changed. We are really taking regulated currency in one side of the world and paying out a regulated currency in the other side of the world, in a regulated environment. And we're going to do that as long as the customer wants that. And so if Central Bank issues a cryptocurrency, we'll take it as a currency issued and we'll translate it maybe to another country to -- [ at a cash currency ], there's a [ fee of currency ]. So that's our approach. By the way, obviously, we are not carrying by -- with [ luggage fund ], cash from one location to another location, everything, what we do for many, many years, it's digitally. And I -- we take one currency in, let's say, in dollars and we pay out in rupees. And we fixed on the send side the currency, and we pay out immediately in rupees and we settle overnight with our partners here. And this is already a true occurrence of design by Western Union by nature. And we are very proud of that, right? And we do that in 137 currencies in minutes and we move billions of dollars every year. And that's something that -- because customer wants that and it's regulated. And so that continue to be -- we're going to look at around what the cryptocurrency environment is doing. But we are a regulated business. We are in 200 countries. And we are not only responding to the regulatory needs but also to the customer needs.

Great. Well, it looks like we're running out of time. So I want to thank you, Hikmet and Raj, for joining us today. Very insightful meeting. Appreciate your participation. Hope you have -- hope you guys have a great day.

Thank you.

Thank you so much, Rayna. Thank you for having us.