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

Hello, everybody, and welcome back. Our next fireside chat is with Western Union. We have Raj Agrawal, CFO of Western Union; and Shelly Swanback, President of Product and Platform. Raj and Shelly, thank you so much for being here today. I really appreciate it.

Thank you Ramsey. Thanks for having us.

We'll just jump right into questions here. I wanted to start off by asking about COVID in general. It's obviously a theme throughout the conference. How has -- what is your view on how the pandemic has sort of changed the remittance industry and maybe your business in particular? And to what extent are the trends that we've seen, sort of permanent versus fleeting?

Yes, I would say there's been a tremendous amount of shift in the overall remittance market over the last 12 months, Ramsey. The -- and it's reflecting in our business as well. We've seen the digital part of the remittance market take off and grow by leaps and bounds. And the retail part, last year, unfortunately, had more of a downstep, although that's recovering nicely now, as well, as you've seen in our numbers. But the digital part of our business now is about 23%, almost 1/4 of our consumer revenues in the first quarter, and just 1 year ago we were in the mid-teens. So it really has changed the overall complexion of our business. And it has really, I think positive implications on the growth profile of Western Union as we look forward. Because if you can get a digital business that is almost 1/4 of your consumer revenues, growing at a relatively good clip, and you have a relatively stable retail business, that really translates into solid growth as we look forward. So the market itself has shifted but we were ready, I would say, Ramsey, for the market to shift like this. We had been laying the foundation with our really successful wu.com business and with the digital partnerships. And so last year, when the pandemic hit, we were -- as I say, we were ready to catch the customers. Customers were looking for digital ways of sending money, and we had prepared a really good business. We had presence in 75 of the most important send markets, where customers could digitally initiate transactions and we have multiple channels available for consumers. So it really set up well for us. The retail business, I'd say, took a dip in the second quarter of last year. But as you've seen, we're starting to recover. We have a positive outlook on the business for this year, and we expect the business to continue to fire on all cylinders [ I'd say ]. Shelly, anything you want to add there?

Well, I think as you said, we were ready, and then we acted quickly, right? We took advantage of some opportunities in certain markets where we weren't able to do electronic customer verification pre-COVID. But we were able to organize, making that happen, right, not just from a technology perspective, but also from a regulatory perspective. And so I think that was part of what we learned last year, too, part of the success of being able to grow the digital business.

Yes. Pivoting to kind of the product strategy. There is a lot of excitement from you guys on the topic that we're hearing, on the topic of providing sort of a broader array of financial services to your customers. I think there was commentary around neobank-type services like multicurrency accounts, debit, credit cards and potentially something around the marketplace. Would love for you to go in as much detail as you can around what we may see from you in the future here.

Yes, sure. Well, I think first thing is, I think we feel like this is a logical next step for us, right? I mean -- and particularly good timing for a couple of reasons. One, because of the digital growth that Raj talked about in terms of last year, right, we ended the year with almost 9 million active annual customers. So that's a nice customer base to start with, in terms of a real captive audience and customer base. And then two, we've made some good progress in terms of just our technology capabilities and our base platform, if you will, to build from. And so we're going to be doing -- as you said, we're going to be doing a market launch, a pilot, if you will, in Europe later this fall. We'll start in 2 countries. We'll offer a new banking product to those customers. I think of it as kind of a multicurrency account, a debit card. It'll be connected into our money transfer services, be connected into our loyalty program, which we're actually going to be evolving or relaunching globally later this summer in terms of just trying to make our loyalty program more relevant for our customers in terms of how they earn it, can earn and redeem points. And so we'll do that in Europe, and then we'll have a little bit of a test and learn cycle there in the market, and then we'll expand from there. We've got several iterations of countries that will come after those first 2 pilot countries based on what we learn. And I think -- we're excited about it. I mean our customers have -- we've learned a lot about our customers in the last 12 months, particularly as the digital business has been growing. And one of the things we hear from them is that they still feel underserved with some core banking services. And so we'd like an opportunity to provide those to them. And we're optimistic. We'll see how it goes. It's a market test and we'll build from there. And I think, as we -- as you talked about a marketplace as sort of a broader set of services, maybe even just more in the medium, long term. I think every company that builds toward a marketplace and a set of services and ecosystem, if you will, typically, you start with something close to your core, right? Something -- start from a position of strength which is why you see us provide it starting with this pilot around financial services. But of course, there's many things that we could provide to our [ micro ] customer base. You can think of things in terms of maybe social, shopping sorts of services. You could think about immigration services. You could think about just us connecting our customers to merchants and others who want to serve our customers. And so this will be part of the vision that we'll be building on with this market test that we have coming up this fall.

Interesting. And maybe, Raj, in the context of these potential new products, but also just in the context of what we've seen at this conference is just this rapidly evolving kind of fintech industry and remittance industry. How do we think about business investment levels today versus the past? Do you need to step up business investment in order to support the innovation? How should we think about that?

Absolutely, we're investing in the innovation aspect of our business. We have a lot of things that are going on, and Shelly certainly can speak to a lot of specifics there. We have launched a new settlement system, for example. We're moving a lot of our operations to the cloud. We've been investing heavily in our digital capabilities. That's why we're so successful there. Our investments historically, Ramsey, from a CapEx standpoint has been in the 3% to 5% of revenues range. So it gives us a lot of flexibility. This is not a capital-intensive business, but we have enough -- obviously, we have very strong cash flows. We have full ability to keep investing for the future. And there's no -- the good thing is that there's no lack of opportunities for us to invest in. There's a continual pipeline of opportunities that we look at, whether they're organic or inorganic. And so there's a lot of things like that, that we're looking at. Just one example that we shifted over the years, to your question, is the marketing spend in the company. It is very heavily skewed towards our wu.com business, in terms of our marketing spend because that's really the lifeblood, the customer acquisition vehicle for us on a long-term basis. The retail brand itself speaks for itself, but that's not where the incremental dollars are going, necessarily. Anything you want to add on that?

Yes, maybe I can just give a little bit of color around the investments we have made and kind of some of the progress we're making, because I'm pretty excited about some of the transformation that we've been doing from a digital perspective and really upgrading our technology landscape. So as Raj says, we're in the middle of a big cloud transformation, as many companies are. And by the end of the year, we'll have moved 50 of our core customer-facing applications to the cloud. And so that will give us a new opportunity in terms of being able to have some flexibility with those applications, being able to scale, continuing to modernize them. We're also actually moving our core transaction processing engine from the mainframe to the cloud, which is a huge step, right? Many, many organizations are just getting started on that, and we've been at it for a little while. So this is a big year for us in terms of that cloud transformation. And probably one of the most important investments and returns this year is really around our data estate. So we've now got 20 petabytes of data in a Snowflake environment on AWS platform. And so this is really exciting for us because now it's opening up new opportunities for us to gain valuable insights about our customers, about agent productivity, about taking our -- what we know about our customers in terms of our internal data sets and matching that with external data sets and getting new insights about how we see different markets developing in different ways. It's going to be a core asset for us as we build toward this ecosystem or this marketplace of services for us because, of course, that's a very data-intensive kind of business model. So pretty excited about some of the progress there. And then, of course, making a lot of investments around digital marketing, as Raj said, not just in terms of the marketing and the media itself, but in terms of our capabilities, in how we can communicate with our customers, our messaging platforms, our advertising technology. So we're spending a lot of time and effort and investment there to continue to improve those capabilities, as part of what will be required, as part of what's helping us grow our digital business, but it will also be very important for us in terms of the future products and services we're planning to offer to our customers.

And on the digital side of the business, one thing that investors are always trying to turn over is that the digital performance of your business, and, candidly, in the business of some of your competitors, has been so explosive due to the pandemic. The question is sort of like, where are these customers coming from? And I know you guys have said in the past that the lion's share of the customers that you're bringing into the digital business are net new to the business. There's not a tremendous amount of cannibalization involved. So I know you get this question frequently, but help us understand if you can give any additional insight into who are these new digital customers? Where are they coming from? Where are you taking them from? Is it banks? Is it informal channels? That would be great.

Yes. No, there -- the -- we have said and we continue to say -- and it continues to be true that more than 80% of the new customers visiting wu.com are new to the company. And they have not used Western Union services in the past 1 to 2 years. And that's the way we define a new customer. These are customers that are largely coming from other parts of the remittance market. And as you said, Ramsey, it's the banks that are providing these customers. It could be other digital players. It could be other retail players where the customers are coming from. And over the last 12 months, we've also seen customers with new needs that have arisen, because now if the market is in a difficult situation because of the pandemic, maybe there's a new need that somebody had that they didn't think about before, right? So we've had new customers coming to the space, if you will, that haven't been remittance customers in the past. And so that really has been part of -- we get a little bit of migration from our own retail business, but it really is the minority of the new customers that are coming from there. And even those customers that are coming over -- go ahead, you want to...

Well, I was going to say one of the things, Raj, was I get excited about is those customers that are transitioning from retail to digital. They're liking the experience and we can see that, because they're actually transacting more. We have higher retention. They're sending more principal than they did when they were retail customers. And so I think that's a positive thing that we're seeing emerge as well.

Yes. We like it when -- we don't mind that customers are coming over from retail because they're going to create a formal account relationship with us, likely, on the digital side, which then gives us the opportunity to engage with them on a longer-term basis, right? They're not a one-and-done type of customer that you might see in a retail type of setting. But here, they're creating an account, they're giving us some information and then we can start to engage with them, which gives us the longer-term opportunity with them.

That's very interesting. So it's sort of -- in terms of the customers that are new to you, it's a mix. It's some share gains from others. It's some net new users who didn't need the service before, but now do. That's actually quite interesting. And maybe a couple of tactical, kind of more tactical questions on the business more lately. Give us an update on what you're seeing very recently in the business, exit rates in April, that type of thing.

Yes. I mean with the -- you saw the first quarter data, and it was a nice turnaround from the fourth quarter. Overall, from a revenue standpoint, we had about a 300-basis-point turnaround from the trends that we had in the fourth quarter. We expect that the trends will continue to improve. As we've said before, Ramsey, the second quarter of this year should be the highest revenue quarter for us, just given the grow-over impacts that we're seeing from last year. But the revenue itself will continue to build as we go through the course of the year, as new initiatives ramp up, as the digital part of the business continues to grow. We have Walmart, that is now fully live at 4,700 locations. So these kinds of things will keep adding to the revenue build as we go through the course of the year, which also translates into margin increases as we go through the course of the year. As we said, the first half of the year, the margins will be lower than the full year. But the second half will be higher, just given the trajectory of revenue and the trajectory of the investments that we're making. So April, as we had said on the call, April was consistent with our expectations. April last year was where we saw the brunt of the impact of the COVID issue last year when it first hit and the world was coming to an end, unfortunately, last year. And so we did see a nice rebound in April as we expected. And it's supportive of what we expect for the second quarter and for the rest of this year.

And Raj, maybe to also talk about recent walk-in cash volume trends on that other part, or the non-digital part of your business. How are things trending there?

They're good. I mean we expect the retail business this year to have positive growth. And you'll see that beginning in the second quarter. The second quarter, that's where you'll see the biggest turnaround in the overall business is the retail. So retail will be very strong. As we go through the course of the second quarter and then the rest of the year, it should be positive. And then digital had very strong growth in the second, third and fourth quarter of last year. So that will moderate a little bit more now in the second, third and fourth quarter, but still on its way to exceed $1 billion of revenue overall. So I mean, this year, Ramsey, is setting up to be a very solid year for Western Union, and both from a revenue growth and a margin standpoint. And we think that over the last 12 months, we've really gained from a competitive standpoint. We had very strong growth in our principal. We saw it again in the first quarter, our cross-border principal was up 28%. I haven't seen anything like that in the business since I have been here. And then digital is certainly driving a large part of it, but retail has also rebounded and -- so we think we're gaining some share in a market that's also shifting in terms of its own composition and it sets us up well for the next few years.

I think the other thing -- the other thing we see playing out is the -- is the power of the combination of having a strong global scale in retail and digital on the combination. So we can offer a choice to our customers. So Western Union branded customers, if you will, and also to our white label partners. And I think that's part of what we see playing out is that -- the power of having that choice.

It's really hard -- it's hard for most of the companies to match the omnichannel on a global scale that we have, right? You can do omnichannel in a couple of markets here and there, but on a global scale is a very different playing field, which is what we offer.

Yes.

[indiscernible] synergies -- please, go ahead.

It's -- well, it's important for our digital business, too, because we have a lot of our digital customers who want to send money to somebody who wants to pick it up in cash, right, pick it up at a retail location. So these aren't 2 disconnected businesses, right? It's about having the choice and having the omnichannel options for our customers.

That is also very interesting. I keep saying that, but it is interesting. On your last earnings call, it sounded like the spread between transaction growth and revenue growth was expected to narrow in the near term, kind of as you anniversary the ramp-up of the white label business. I guess, 2 related questions: One is, could this reverse if you sign another white label customer? Could you see another widening of that spread? And second, how does the pipeline look in white label?

Yes. Let me answer the first part; and maybe, Shelly, you can come in on the pipeline a little bit as well. The spread itself should continue to narrow as we go through the rest of this year, Ramsey. It would take a very sizable partner for it to have an impact on the spread between revenues and transactions, because we have a lot of things that are going to tighten that spread. The incremental digital white label with the business that we have today will be less this year than it was last year. We have a retail business that's rebounding in a dramatic way and that's at a higher revenue per transaction. And then the overall pricing environment in dot-com is quite stable, and we made most of the changes we were going to make last year. And so all of those factors are going to tighten that spread. So it would take a big partner for it to have a material impact in the opposite direction. And we've always felt that the uniqueness of the new digital white label business was creating this revenue transaction spread, but it was going to be short-lived in nature. It took a year for it to sort of cycle through and we should start to see it narrow. I would love for there to be a big digital partner, but I'm not sure that -- the kind of partner we have in Saudi Arabia is very unique. We have millions of migrants. It's a perfect market for us to be a partner with Saudi Telecom pay. And that -- those conditions don't exist in most other markets around the world.

Yes. Yes, I think, I mean we continue to add partners to our platform in, with various different -- some co-branded offerings, some in a white label nature. You might have seen the press release about a week or 2 ago about Google Pay. So now starting in the U.S. So for customer -- Google Pay customers who want to send money to India or Singapore, they can choose Western Union to do that. And their receiver can pick up money at a retail location, deposit it to their bank account. Really, again, it's about offering that choice of bank account, wallet or cash. And so that's just the beginning of that relationship with Google, that will, as I said, it starts in the U.S. and will expand globally from there. And that's just one of the partners that we're currently working with, talking with and integrating with our platform. So I think that will continue to progress as well.

I wanted to also ask about brand as it is perceived by your customers on the -- in the digital versus the walk-in sort of realm. In the past, you've spoken about having a pretty material pricing premium because of the power of your brand. Does that translate to the digital side of things as well? Is this a new customer base that needs to be educated about your brand? Or is it your brand equity is such that you still get that sort of premium on that side as well?

Yes. Let me just start here a little bit and then feel free -- the pricing premium, I would say, Ramsey, that sort of used to be a global average, right? And that doesn't really tell you what's happening in each individual market because we're going to be very competitively priced in very competitive corridors, if that makes sense. So U.S. to Mexico, for example, is a very competitive corridor. We charge typically $8, up to $1,000. And we have promotional pricings, et cetera, et cetera, but that's where most of the competition is. So in the most competitive corridors, we're going to be priced wherever we need to, to make sure we capture the share of the business. And our share to Mexico has been in really good shape. We've been able to do a really good job over the last few years in gaining share there. We also -- there are also corridors that are not as competitive, where there is a little bit more flexibility. So that's certainly, on a global macro basis, there's probably a premium, but it really doesn't translate corridor by corridor, if you will. And when we think about the digital business, it's largely incremental business to us. So when we go into a new market, it gives us the opportunity to really price that business competitively for the right kind of customers and for the business that we're trying to generate. So again, to the extent that there's a lot of competition in a particular corridor, we're going to be very competitive. We have to be, to be able to drive the business that we are. If it's a less competitive corridor, and then we have more flexibility there. And that's really the way we approach it.

Yes. I think also one thing that plays into that too, right, is this idea of choice in this omnichannel capability because some of our -- in some markets, some of our competitors can't offer the choices that we can, right? And so that plays into this whole pricing environment as well. I think back to your question on brand, though, I mean, I think we have seen that the strength of the Western Union brand has helped us in digital. Certainly, last year, as Raj said earlier, we were ready -- our digital platform -- and we were ready to capture those customers. But some of them were looking for us. And obviously, we did digital marketing right to go reach some of them as well. So I think we see that brand strength translating into our digital business as well. And of course, that's something that we're going to continue to invest in and will be important for our future. We also, as we talked about earlier, this pilot market test in Europe, I think the strength of our brand over multiple generations, right, is part of what earns us the right and what we think can help us be successful in terms of expanding the product sets that we offer to our customers.

Yes. There are few companies that have such a lengthy corporate history, at least in the U.S., than Western Union.

We are celebrating our 170th anniversary this year, so.

That's right.

Yes. Right. From stagecoaches to digital money transfers, or whatever. So I wanted to ask also about the agent network. And what I'm trying to think through here is, if digital is ascendant in the world, does this put pressure on your agent network? Do you envisage that over time, your agent network actually can -- would kind of shrink with the times? Does it impact their health, and, therefore, indirectly potentially your health, just with the mix shift we're seeing in the industry?

Yes. There is a broad discussion we can have on this, Ramsey. Our network partners are -- 2/3 of our network are banks and post banks and financial institutions. So they have other things they do in their day jobs. It's not just Western Union money transfer. So from a partnership standpoint, Western Union money transfer is just one aspect of what they do. We have other retail relationships like Walmart, Kroger, other relationships as well. And they have other day jobs as well in their business. So it's not really about the partner health. Typically, the partners have a lot of things that they offer to consumers, and this is a customer acquisition vehicle for them, to have money transfer in their stores. As we think about the digital business, and we've said a lot about it already, the retail aspect of our business is so important to connect to the digital aspect of our business. And we don't really think of them as separable, because our wu.com business, the vast majority of the revenues we still earn today in wu.com digitally initiated transactions is from a retail payout transaction. So that retail network is key and critical to our business today, and it actually sets us apart from all the other digital-only players, right? We have -- we obviously -- we can do the digital-only stuff, and that's something that we've been working on for the last few years. We're creating an account payout network. That's real time in nature, all of those things. And we can do that as well as anybody. But the retail payout part of it, having the branded payout or the nonbranded payout across the entire world is something that most other players in the industry will not be able to match. It's really critical to our strategy today and into the future, it's partners like Sber in Russia or Saudi Telecom pay in Saudi Arabia, they partner with us, and I think Shelly talked about it earlier. They partner with us because we have an omnichannel payout capability, right? That's very important to partners, to get a turnkey solution that's global in nature and that has a lot of different channels available for their own consumers.

Okay. Raj, maybe we can also talk about -- or Shelly, for that matter, we can talk about capital deployment priorities. It seems as you're building out and focusing more on these digital capabilities, I'm wondering whether that doesn't open up the aperture a bit in terms of the types of assets that might be interesting and additive. So how should we think about the sort of build versus buy balance for you, and whether it's changed now with the sort of pivot harder, or leaning harder into digital?

Let me just talk about broad capital priorities. And then maybe a little bit on the M&A, Shelly, you can add in. On the capital priorities, they have not really changed, Ramsey. It is to invest in the business to drive organic growth and expansion. And you've seen that in our wu.com business, the digital business. That's really where we're putting a lot of investment and then the technology upgrades. We then pay -- quite a healthy dividend, which is almost $400 million this year. It will be when we're done. And then third, we'd like to find the right kind of acquisition opportunity in the cross-border payment space, and I'll hand that to Shelly in just a second. And then the last is really using excess cash for stock buyback, right? And that's really the order we think about when we have $1 of cash, how do we want to spend it. That's really the prioritization that we look at. From an M&A standpoint, we're looking at a lot of things. But Shelly, go ahead, please.

Yes. Maybe I'll hit the organic investment piece part first. I mean as I mentioned earlier, we've made a lot of investments and starting to make a lot of progress on our cloud migration and really modernizing our cross-border platform. And I think that will continue to be a priority. One of the things I'm excited about is, now that we've got some of these foundational components modernized and in place, we have an opportunity to do more with artificial intelligence and machine learning, whether it's about pricing, customer behaviors, next best offers or operational efficiency right in the back office of the business, if you will. And so those organic investments are going to continue to be important. They're going to -- it's going to be -- continue to be important for us to move forward our digital marketing capabilities, and, actually, our digital marketing media spend as we go acquire new customers to our digital business. I think, though, as we begin to build toward this idea of an ecosystem and a marketplace of offers that we can provide to our customers, which, by the way, we don't intend to do all of those ourselves. Many of this we'll bring through partners, right? And so we'll be building out our cross-border platform for us to be able to do that. And as I said before, really looking at our data capabilities. And so this is where I think M&A could play a potential role. And we have a number of things that we continue to look at. It will be important for us in terms of which markets we think we can really win in, and we can scale in and really matching the needs of our customers and what they're asking us for and what they're telling us that they need with those acquisition opportunities. So we -- of course, something global that solves the world would be great. I don't think that's probably realistic. So we're looking kind of a, from a -- with a geographical lens as well.

It doesn't have to be a giant acquisition. It could be a small technology play, it could be something that has -- a company that has customers. It doesn't have to be a direct revenue play, if you will.

I see. I see. Unfortunately, with that, I think we're out of time. So I'd like to thank you both for your time this afternoon, and you are the last panel of the second day of the conference. So I'd also like to thank the audience for tuning in and taking part as well. So Raj, Shelly, thanks so much for being here, and have a great rest of the day there.

Thanks for having us.

Thanks again. Thank you.