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

Hi, everyone. I'm Jason Kupferberg, the Payments Processors and IT Services Analyst here at Bank of America. We're coming to the home stretch here in our Global Tech Conference. I'm very excited to have Western Union with us here. Specifically, we have Raj Agrawal, Chief Financial Officer. And we also have Shelly Swanback, who's President of Product and Platform. So I want to thank you both, first of all, for being here with us today. Appreciate it.

Thanks for having us.

Yes. Thanks for having us. Thank you.

Yes, absolutely. Why don't we kick it off, Shelly, with you. It's your first time at this conference, and we're thrilled to have you. We'd just love to hear a little bit about the decision-making process you went through to join Western Union from Accenture, I guess, about 18 months ago now. And then if you can just tell us at a high level a bit about your strategic priorities for, let's say, the next 12 to 18 months?

Absolutely. Well, before I joined Western Union, I was at Accenture, as you said, and I was building a business called Accenture Digital. So I was right in the thick of helping many organizations through digital transformation. We had built a business around customer experience, around advanced analytics and one around mobility and IoT. And so spending my time with lots of CEOs and teams around what was next and how they were going to do this digital transformation. I just developed a real passion for that and the passion for change. And so that was a great opportunity to come to Western Union organization with 170 years of history connecting people through technology and innovation, and obviously, in an industry that's changing super-fast. So joined for the opportunity to open the next chapter for Western Union and help back to the digital transformation. So that's why I joined. And we're right in the middle of that. So in terms of strategic priorities, maybe I'll spend just a minute on a couple of those. I think lots of people talk about innovation and they associate that just with technology. I think for me, innovation is really a lot more centered around business models. But of course, technology plays a huge role in that. So one strategic priority is certainly around continuing to modernize and upgrade our technology stack and our platform with a big program ongoing to migrate a number of our core applications and our transaction engine, if you will, to the cloud. That's exciting for us, just as many other organizations because it will provide us a lot more flexibility down the road. So that's certainly one priority. As we continue to modernize our platform and other priority, obviously, is continuing to improve our customer experiences and just continuing to develop the products that we offer to our customers. And so a lot of focus, of course, on our core money transfer product, our products that we offer in our Business Solutions business unit as well. And obviously [ we're developing ] data. We're developing a very strategic data foundation also in the cloud, and it's -- I think it's going to -- it's already powerful for us, and it's going to continue to be powerful for us because we can have -- we can see new insights about our business, about our customers and the more you understand about your customers, the more you understand about what you can do to serve them better, to innovate and new business opportunities. So plenty of some things going on.

Right. Right, for sure. Okay. Thanks for that overview. And I mean, just to pick up on the digital theme, obviously, the pandemic gave you just a little bit, a real nice boost, while it did negatively impact the traditional retail channel. So once we see year-over-year comps for both sides of the business kind of normalized, how does this shake out in terms of Western Union overall top line organic growth potential? I guess what I'm wondering is, does the company come out with a structurally higher growth rate? Or is that topic essentially the structural acceleration in digital that gets offset by structural headwinds in retail and then essentially, you're kind of back where you were pre-pandemic? What would be your perspective on that topic?

Yes. Let me just start there, Jason. Certainly, those 2 things should not offset each other. Given the mix change that we've had in the market and in our own business, it really sets us up well, I would say, going forward because in -- pre-pandemic, you define it as in 2019, we were still talking about a $600 million Digital business. This year, we're talking about something that's over $1 billion. And that's growing at a much faster pace than the rest of our consumer business. So it's actually going to have a positive impact to the overall growth profile. Obviously, the key question becomes what will the retail business do? Last year was obviously the pandemic. This year, we're going to continue to see some volatility just because of the grow over impact from what happened last year, but we expect growth in the retail business this year, as we have said previously. And we think the retail business can still be a stable business for us as we go forward, and we need to get through the pandemic. I think one thing to still remember, Jason, is that the pandemic has not left the world. It isn't gone yet. And it's certainly much better here in the United States as we've vaccinated a large portion of our population, but many other countries around the world continue to suffer in this regard. And until that situation is fully managed, which could be some time, we're still going to have some volatility in the business. But we feel good about our retail business. We think it is going to be a stable business for us. And we'll give some better views of that as we exit this year on where that's going to be. But I would say that the growth profile of the company certainly has been helped as we look longer term with the mix shifts that we've seen in the overall market on the consumer side.

Okay. That's certainly encouraging. And if we think about the C2C business in aggregate, I know for the first quarter, you had expected it to be pretty stable, but you actually did better than that. It grew 2% in constant currency. And so I'm just wondering if some of the year-to-date trends you've seen in C2C make you feel any differently about kind of your base case for the shape of the C2C recovery in the second half of the year?

I would say that what we laid out in our last quarterly call is still the case in terms of the quarterly trends. And we still see the second quarter being the highest revenue quarter because of the significant impact that we saw last year, and that's really in the retail side. And then second half of the year should be more stable for the consumer business. Digital is going to be more moderate as we look at the second, third and fourth quarters just because of the extreme growth rates that we had last year. And so when you combine all of that together, we're going to see a bigger pop in the second quarter from a revenue standpoint and then more stability, I would say, in the second half of the year. The other components of the business are not going to be big enough to have such an impact on the overall company, but we'll see some gradual improvement, I believe, in the WUBS business and then the other revenues are relatively small, Jason.

Right. Right. I know at the start of the year, you said that you expected Digital revenues to be approximately $1 billion. And then on the most recent earnings call, you said you were on track to exceed $1 billion. So it did seem like a deliberate wording and kind of an upgrade of your expectations. So I wanted to understand what is kind of driving that incrementally higher outlook? And maybe you can tease out a little bit for us to what extent that upside is coming from wu.com versus the piece of the Digital segment?

Yes. Let me start, and I'll also ask Shelly to give a little bit of color. We are very excited about our Digital business, and it was a purposeful change on our part to say over $1 billion. That's not the way we began the year, but because of the performance that we saw in the first quarter with the customer acquisition numbers and multi-active average users that we talked about as well as the overall revenue growth in digital, we felt it was the right thing to say what we expected for the full year because of the positive trends in the first quarter. It's being heavily driven by the wu.com business, the branded wu.com offering and then also Digital white label. And so that's why we feel comfortable saying that over $1 billion for the full year. And it's great. It's great to have that. I mean it's running in the first quarter. As you saw, it was almost 1/4 of our consumer revenues, and we haven't been able to say that for a long time. So we're very pleased with that. And Shelly, I don't know if you want to add any more color to that?

Well, I mean one of the things I would say is, I mean, I think, as Raj said, we're super excited about the Digital business and the growth and also just the strength of the business. I mean, one of the things that we're seeing is good customer retention, and I think that, for me, is important. And this is going to play a role for what we can do here in the future, right, as we look to maybe some expansion in terms of products that we can offer to not just our Digital customers, but in particular, our Digital customers. And as you said, Raj, Digital white label business, we can't forget that. That's an important part of what we're building for as well.

Absolutely.

So have -- those favorable trends you saw in the first quarter, have those persisted into the second quarter?

Yes. Look, we don't want to give any color really specifically on the second quarter, but we were confident when we gave the outlook, Jason, as we've mentioned, I believe, on the call -- quarterly call, April trends were quite supportive of the full year outlook. And so we're comfortable with what we said then. And -- but it's good. I mean, things are tracking well, and it's playing out largely as we had expected when we gave the original outlook and then the updated outlook in the first quarter.

Yes. Yes. Shelly, you mentioned retention in the Digital business. Can you maybe just tell us a bit about some of the other kind of APIs that you're especially focused on within Digital?

Yes. I mean, first, we're always looking at different measures on customer experience, right, because that's certainly the leading indicator typically for customer acquisition but also for customer retention. So of course, we keep an eye on things like our rating on the app store, which continues to be strong and other measures like that. And then of course, we're always looking at just different customer mix and -- so I think retention for me right now is something that's really important because if we begin to think about new products that we can offer these customers, obviously, we want to keep them engaged with the products that we have right now.

Yes. Yes. I mean, speaking of engagement of wu.com, I think, monthly active users were up 46% in the first quarter. Love to hear a little bit about what kind of geographies drove that? How many of those users are new to the Western Union platform? And how sticky is their usage proving to be? Just trying to kind of get a sense of some cohort economics, if you will, for wu.com. I know you guys track that pretty closely.

Yes. I mean, a couple of things I'd say. I think in terms of monthly active users, maybe no surprise driven by our big markets, right, Europe, North America. Yes. Yes, yes. So probably no surprise there. In terms of new customer growth, we continue to see that a large majority of the new customers are new to Western Union. So they're not migrating from our retail channel, they're migrating from the market, if you will, into our Digital business. So continue to be pleased to see that. And then as I said, I mean, we have some customers, of course, that come just for onetime because that's all -- they only had a onetime use, right? That's why we want this retention metric a lot as to how many of our new customers are coming back because they have an ongoing need to leverage our services. And so that's important. And then one of the things that we're working on right now is just extending the relevance of our loyalty program as well. So more to come on that. But these are things that are going to constantly be evolving because it's important that we continue to retain our customers and find new ways to engage them as we build toward -- I think we -- maybe later, we'll talk a little bit about the market tests that we're doing in Europe in terms of offering new products to those customers.

For sure. For sure. So just to switch over to the other part of the white labeling strategy. It seems to doing pretty well. You've got a couple of anchor partners there, if you will. You've got Sberbank, Saudi Telecom. Would love to just hear an update on other notable partnerships that are progressing, for example, with Google Pay? How does the pipeline look in terms of some more white label partners to be added during the balance of this year?

Yes. Maybe first, just a quick reminder about why we're going after this business, right? Because we see it as incremental to the customers that we can gain directly with our Western Union branded products, right? So looking for those new customer segments and different ways we can reach them. So certainly, Sparebank, Sber and STC were examples of that. Google Pay is one of the most recent ones, as you mentioned. And we're just getting started with Google Pay. So it's available in the U.S.-India, U.S.-Singapore, and then we'll expand from there. And so the idea there is just that Google Pay has a set of customers that have cross-border money transfer needs, and we can serve those needs and provide them optionality that they don't have today. And so that's one example that we've announced externally. We have a number of, of course, partner discussions underway and a number of partners we're in the midst of connecting to our platform right now. I'm not yet ready to announce those, but more to cover that. And that's a continual thing, right, in terms of connecting partners to our platform.

Great. Great. My next question is probably more for Raj. Just looking at the spread C2C transaction and revenue growth, which comes up every quarter, obviously, [indiscernible] past few quarters just due to the mix effects of white label, in particular. So tell us about your expectations for that gap to perhaps moderate over the next quarters? And anything you can share in terms of kind of magnitude of moderation that we might see in that gap?

Yes. We -- there were a number of factors, Jason, that led to the gap. We had significant growth and expansion in the Digital white label business last year, which is a key driver of that, and that was a relatively new business. So that's one of the key drivers. We also have done some strategic pricing within our wu.com business and then just some other mix factors as well. Now as we go into this year, after the first quarter, we should see a fair amount of moderation in that spread differential for the same factors going the other way. We're not going to have as much incremental lift in the number of transactions for Digital white label compared to last year as we did the previous year because now we're sort of anniversarying it. We also have had more stability on the pricing side within our wu.com business, not as many shifts, if you will, there. And one of the biggest factors is that retail is rebounding this year from a growth standpoint. And that has a higher revenue per transaction overall compared to the other components of our business. So those things will naturally make that gap between revenues and transactions moderate a fair amount, I would say, and we'll certainly have results for the second quarter in a couple of months. But -- so that's not really going to be the big factor anymore. Having said all of that, Jason, we would love to sign up more partners on the Digital white label side. We would love to have more volume there. We would love to have incremental activity, and that's really where our focus is. But given the current construct of the business, it should moderate as we go through the next 3 quarters.

Okay. Okay. Shelly, I wanted to circle back. You mentioned in one of your prior answers just in terms of the consumer loyalty program. Can you tell us about some of the initiatives there? And what kind of timing is on [ when ] that might be rolled out? And any details you're in a position to discuss would be interesting because it seems like that's a logical ancillary offering for the C2C business.

Yes. So we have a customer loyalty program today. So part of this is about just making the experience better in terms of customers being able to use their loyalty points, whether they're a retail customer or a Digital customer. And we're putting some new technology in place to allow us some optionality for the future as well, just in terms of maybe how customers can -- how they can gather points, how they can use their points. I don't want to say a whole lot more than that just yet. But let's just say this is Phase 1 of kind of evolving our loyalty program, really focused on money transfer. But as we look into the future and think about adding new products like what we're doing with the banking products in Europe, of course, we want a strong loyalty program that can be relevant for other products as well.

Right, right, right. Okay. So the kind of the inherent nature of the loyalty program, in other words, the way in which consumers earn points and what those consumers [indiscernible] the experience of actually being able to redeem loyalty and kind of make it a more accessible tool, if you will, for the [ consumers ]?

Yes. And -- well, we're putting out foundation and some building blocks in place for some things in the future as well.

Right, right, right. Okay. Okay. Understood. I wanted to maybe touch on margins a little bit, Raj. I know for the second quarter, you said that the margins will be higher than Q1, which was 19.2%. But there'll be less than the full year number, which the guide is 21.5%. So obviously, there's a bit of a range there. I mean, are you encouraging people to think more like around 20% versus 21%? Obviously, either one of those numbers would, in theory, be within the range that you described. But certainly, this is the kind of year where there's going to be a little bit of [indiscernible] compared to first half versus second half. So -- and maybe also talk about what's driving really the second half -- the implied second half ramp in the margin.

Yes. I would say -- I mean, we're not trying to be so specific on a particular number. We tried to give as much color as possible, Jason, last time, but also retained some flexibility because we are very focused on investing in the business. And that's why we do believe that, yes, we'll get margins. That's what we said, we would get margins that were -- would be higher than the first quarter but lower than the full year average. The second quarter will -- the second half will naturally be higher margins because of the way the revenue builds. That's one of the driving factors here. The expenses have been relatively stable, I would say. We are spending a little bit more in the first half than the second half, but the revenue build is what really drives the margins higher in the second half of the year, and that's really the way to think about it. For the full year, we'll get to the 20.5% or so that we've said, but there's just some timing. We don't typically have this timing, and we're also growing over a lot of volatile stuff from last year. And so I think some of that is having an impact on the way the margins are building, and the revenue really is coming in, in the second half of the year in terms of the absolute levels of revenue, and that's what gives us the higher margins for the year. And with digital, it's going to be more in absolute dollar terms in the second half of the year than it will be in the first half of the year. That's one of the key differences, if you will, as well.

Okay. And I believe you're still on track for your 3-year cost takeout program, $150 million by 2022. So how much work is left to be done there? And then is there potential for that program to continue after 2022?

Yes. Yes. Again, we were absolutely very much on track to save $150 million on our annualized run rate basis next year. We're getting to about $100 million this year. And about $100 million of the $150 million is related to the restructuring program that we had in place. And that's largely related to reduction of workforce, if you will, within the company and consolidating some of our operations. The other remaining $50 million is related more to our variable costs. So a lot of it is driven by emission rate reductions, some mix shifts in that part of the business, and then also professional services that we acquired -- that we -- like every company, we acquired third-party services in our company, and so we're trying to optimize some of those activities as well. So we're on track. To answer your longer-term question, what we've tried to build into the company is ongoing improvement in the business. So lean improvement, lean management, continuous improvement processes within the company. That's what we've referred to internally as our WU Way programs. And so we're sort of in the next-generation of WU Way programs. We're always looking for continuous improvement in the business. It doesn't necessarily mean, Jason, that we're going to take those savings to the bottom line, right? The $150 million is a part that's going to the bottom line. We're actually saving more than $150 million through our programs. So we want to reinvest back in the business, and that's really what's showing up there. And even on an ongoing basis, it's going to certainly help us to keep investing in the business while driving good margin performance as well.

So even as you continue to make new investments beyond this year, is it still reasonable to assume that operating margins should generally trend up? I mean, you can debate sort of the rate of improvement beyond what you've specifically guided to this year. But just directionally, is that a reasonable way to think about it, especially like we -- earlier, there's actual structural acceleration in your top line?

Yes. Yes. I don't want to give outlook for next year. But what I would say is that the financial model of the company has not changed. So we still have about 40% to 45% of our costs that are fixed in nature and about 55% to 60% of our costs that are variable in nature. And to the extent that we can get good top line revenue growth, we will continue to have the ability to drive good margins in the company. And I would say, Jason, that we need to get -- on a consistent basis, we need to get mid-single digit type of growth to be able to continue to have good leverage on our bottom line. In any given year, we can certainly manage the cost structure of the company. We can reduce [ hiring ], we can do other things to get to the right outcome. But on a longer-term basis, we really do need to get to mid-single-digit type of growth to have flexibility to not only invest in the business, but also to have good margin performance as well. And that's really what we try to think about internally is how do we get to the mid-single digit type of growth and what is it that we need to do to execute to get to that level of top line growth because that will help us to achieve all the other objectives that we have, right, on margins.

Right. Okay. I know you guys have done a nice job in the recent quarters, increasing your disclosures around the profitability of the Digital business. Can you tell us how you expect this to unfold going forward, both on the wu.com and the white label side, just in terms of contribution margin as well as operating margin?

Yes. The -- we've really tried to put a lot more data out on the digital part of the business, and I think that's being well received. From a contribution margin standpoint, we would expect -- well, let me say this way, the Digital business has been very margin supportive of our trajectory the last couple of years. We went from a $600 million business to over $1 billion this year is what we expect. And while doing that, last year, we had significant revenue declines, but we had a significant growth in the Digital business, and we expanded margins. This year, again, we've committed to expanding margins by another 70 basis points or so. And that's in the face of significant Digital growth. So the high-level answer is that it's going to continue to be margin supportive. The dollar contribution for wu.com is slightly lower than in retail. And then the dollar contribution for the Digital white label business is even lower than that. However, the contribution margins are higher. They're higher in wu.com than they are in retail, and they're even higher in the Digital white label business. So that's why they're very margin supportive. And we think about the Digital business as being largely incremental to the company with incremental revenues, incremental profits, incremental EPS, if you will. And so it's not necessarily -- as Shelly said earlier, the wu.com is not really cannibalizing -- other than a small amount, it's not really cannibalizing our retail business. Traffic is coming from other parts of the market or new needs that are arising in the market, especially during the course of last year. So we're very pleased with the margin profile of the Digital business.

Shelly, I wanted to come back to -- as you had alluded to earlier the plan to start piloting a little later this year, the broader consumer financial services platform, leveraging the bank license you have over in Europe. So can you just give us some broad strokes on what are your expectations for this initiative? What should we be looking out for where we're in the process? Just anything you can share would be great. It does sound pretty interesting.

Yes. Well, we've done some customer research, of course, to understand what needs our customers have and where -- which ones they might look to us to provide for them. And so that was sort of the basis of putting this market test together. We'll do 2 countries in Europe and test and learn from there and then a couple more later in the year. It's -- you can think about this as a bank account -- interest-bearing bank account with ability to hold multiple currencies, a debit card, so you can access the funds and the experience that is integrated for money transfer should you -- we're hopeful that we'll be able to have a lot of our Digital customers, our Digital senders, if you will, excited about this product and that they'll bring along their receivers, right? So kind of a network effect inside of our own customer base. But we're also expecting we'll have plenty of customers who will hold a Western Union account and they'll want to do money transfer to a loved one family member that doesn't have a Western Union account. So of course, that will be just an integrated experience and part of what we're offering as well. So the idea is to get to the market, learn a little bit, test it, and then we'll scale from there. I think there's -- we think there's going to be a great benefit for our customers. And then for us, of course, there's benefits in terms of customer retention for our core money transfer business, but then also new revenue opportunities through these new products that we're offering. And [ one of the ] things that's exciting is, it's going to give us significant insights into our customers and behavior, right? Obviously, we're going to have a much richer data trove to work with. And so you can imagine what -- some things that we might be able to do with that in the future as well.

And then would it be feasible over time to bring this to the U.S.?

Yes. So I mean, we're going to look at -- we're going to -- I think it is -- we're building it so that we could take it globally, understanding that it won't be the same thing in every market, right? What's relevant in Europe and what we can do in Europe is different than Africa, is different than the U.S., is different than Latin America. So we're building this in a way that we can scale it globally but right now building a product that's relevant for our customers in Europe. So we'll have an ability to -- I sort of say it's like a global power strip we're building, and then we can plug local products into that power strip. So this is just step 1. And sometime next year, we should have some good results, and so it should be exciting.

Yes, it sounds like it could help not only new customer acquisition but ARPU over time, one would think.

An engagement, right? I mean it's -- and it will be -- it's a product that will increase the engagement with our customers.

Right. Right. Exactly. Exactly. So I know we don't have too much time left, but I did want to ask about the Walmart partnership. I know you are now fully live across 4,700 or so locations. Anything you can share with us just in terms of expectations there? Or -- I know, it's obviously very early days, but anything around uptake so far? Does this move the needle on the C2C business in 2022?

Yes. Shelly, do you want to start?

Sorry. I just -- so we have all the stores live, right? So that's good, but we're still in our early days, right, just in terms of making sure all of the frontline associates understand what we offer and just the things that you do when you roll out a partnership like this. And so I'd say it's still early days. Raj, I'll let you comment on what this might mean for us. But I mean, it's definitely a partnership we're excited about, an important one. So lots of effort going into it for sure.

Yes. We -- they're the largest retailer in the world. We're happy to be working with them in the U.S. We already have relationship with them in Canada and Mexico. And so this is an extension of that. We think that it's going to be meaningful for us to some degree this year but certainly to some further degree next year. It is going to take time for it to ramp up, though, Jason. Customers need to be made aware of it. And so we're comfortable with it, and we like the partnership. We believe that Walmart also likes the fact that we are there with the capabilities that we bring to the table around regulatory and compliance capabilities. So I think -- just stay tuned, we'll have more color, I would say, when we give our second quarter announcement on how it's done because we're certainly seeing that even ourselves right now. And -- but each day, we get a little bit more data, and we'll have more color on that as we give our second quarter results.

Just final question. I know a couple of months ago, you have done a pilot with [ Ripple ], seemed to have kind of ended with [indiscernible] there. So curious with Western Union, how would you just characterize your current views on blockchain technology and potential applicability to cross-border remittances?

Yes. I mean, I think blockchain is an exciting topic, an exciting technology that seems like it's going to have some great uses in the future. I think we haven't quite landed on how it can be relevant, meaningful in our business now. Of course, there are plenty of things that you could think about in terms of settlement, right, as an example. And so we'll continue to look at that and continue to experiment a little bit. We just have a lot of other initiatives that I think are going to be more meaningful for us here in the near and medium term. So we're more focused on the things that I spoke about earlier.

All right. Great. Well, we are out of time, unfortunately. This was great. Wonderful having both of you with us. Appreciate the thoughts and the insights, and thanks to everyone who tuned in. Have a great day.

Thanks, Jason.

Thanks, Jason. Thank you.

Bye-bye.