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

Hello. Good afternoon. Welcome, everybody, to this session of the Morgan Stanley's Payments and Financials Conference. Very excited to be talking to Western Union in this session. Before we get started with the team from Western Union, I do have an important disclosure to read. For important disclosures, please see our website at morganstanley.com/researchdisclosures. So with that, as I said, we're going to be able to have a -- or we're going to have a chance to talk to Shelly Swanback, the President of Product and Platform at Western Union. We get a lot of questions around digital and the digital part of Western Union in this fast growth and so she's in charge there. And then we also have Brad Windbigler, Head of Treasury and Investor Relations for Western Union, and he'll help us tie out the financial impacts of everything that Shelly and her team are doing. So just for those of you that are following along on the webcast, you should know that you can post questions via the webcast, and we'll pick those up and incorporate them into our conversation this afternoon.

So with that introduction, maybe Shelly, we'll start with you. And I think it'd be really useful if you gave us some background on where you came from, what your past history has been in development and what attracted you to the Western Union opportunity?

Okay. Very good. Well, first of all, thanks for having us. A pleasure to be here. So I spent 28 years at Accenture, actually, a career doing technology and sales and running P&Ls and building businesses and capabilities. I spent a lot of time helping our clients in the -- communications, media and technology sector. So very high tech-oriented sort of environments, ran our technology business for North America at one point. And right before I left Accenture, I built a business called Accenture Digital. And it was a business that started with some resources and assets, a couple of billion, billion dollars' worth of things that we put together and grew to be about 5x that over 7 years. And so it was really focused on a couple of big areas. One was what we called creating an experience agency. So this started as a marketing technology, marketing tech group, if you will, and we built that through this a whole series of acquisitions over time to really be focused on customer experience, helping businesses across sectors figure out how to design, how to build and how to run customer experiences. The second piece was really all around advanced analytics, of course, getting into the world of artificial intelligence and all of the various platforms and technologies that could be leveraged on the market. And not just about technology, of course, but really building new insight, enterprises driven on insight. And then the third piece was all around mobile technology that really evolved into the whole area of Internet of Things. And so that's what I was doing. I was spending a lot of time with different organizations across the industries on this whole world of digital transformation, how do you do this from a technology perspective, from a culture perspective, from a talent perspective, from a business model perspective and was having a lot of fun doing that, and I'm from Denver. Western Union is the hometown brand here in Denver and had an opportunity to come -- lead the way in terms of a pivot and digital transformation here at Western Union. And I thought it was a great opportunity, nice to be part of a purpose-driven organization, see the world from a different lens, if you will, be part of this purpose around financial inclusion and be part of, obviously, a company that's in a fast, fast-growing fast-paced industry, with lots to do.

No, there definitely is. And so if we go back to your experience at Accenture and whether we're working with customers or building Accenture's own capabilities in digital, what are the -- can you talk about what you've seen as the key ingredients for successful digital ventures? And how are you applying that to Western Union? What are you looking at as what Western Union has versus the ingredients that need to be added or developed?

Yes. Yes. Sure. Well -- so I guess, let's see -- well, let me answer the first part of your question. What does it take to have a successful digital business or a digital venture, right? I guess, first thing I'd say is having the business anchored and really trying to address a particular need or set of needs for a customer, whether that's a business or an end consumer, and doing that with a focus on a great customer experience because, of course, all of the technology and the digital means we have provide us an opportunity to create a great experience. And for most people, when they want to experience -- do something digitally, they expect a great customer experience. And so I think that's the first piece. And of course, that's not a onetime sort of event, right? Digital businesses have a constant focus on evolving the customer experience and finding new ways to engage their customers, whether that's with their existing products or perhaps from expanding their products. And so digital, my experience is digital businesses are always -- they build affinity with their brands largely through a great customer experience. That would be the first point. I think the second thing I would say is that typically, the business models are very oriented toward leveraging technology. And not technology just to create a great customer experience because, of course, technology lets us do that in new ways today than we could even do a year ago, certainly than a decade ago. But also leveraging technology for front office, for back-office operations and doing that in a way that allows you to provide really good scale and operating leverage out of the business model and create some flexibility to do things globally and to do things different locally. I guess, next, I would also just say business models and an innovation engine, if you will, that are anchored in data. There's so many great tools, and we've come so far in terms of what technology allows us to do in terms of data science and really understanding our customers in new ways, understanding our business in new ways and being able to take actions and always constantly be rooted in the data and insights that you can collect, not just about your own operations, your own customers, but also leveraging that with external data sources. And then, I guess, maybe last and certainly not least, maybe what I should have started with at the beginning, is just all around talent and culture, rooted in innovation, rooted in testing and learning. But at the same time, being able to innovate and scale at the same time because many small digital businesses get started, and they're really good in innovation, but they're not good at scale, and so they never really take hold. And so for me, it's a magic of being able to do those 2 things at the same time.

No, I think that last point is really important. And we'll come back to kind of the implications. But let's start with the broader market, Shelly, is that what were the things that you would call out or enumerate as important developments in the digital market over the past 12 to 18 months or so? And how has this impacted Western Union's position in digital growth?

Well, I mean, I think no doubt, COVID changed a lot of things for our business and lots of businesses across industries, right? I mean, I think it certainly accelerated the move online, the move towards digital, which has created different options for people to handle things online versus in a physical store, retail location and that sort of thing. So I think it certainly accelerated the move toward digital. I think it also has created in our industry, but really across the industries, the need to be able to evolve more quickly. We certainly saw that in our business. The early days of COVID, we created what we called rally teams. And it was all around rallying around a customer need, right? Old customers might not be able to get out and about in certain areas of the world So what can we do to help them move online? Everything from, let's create a video to a digital location, something where somebody can call in on a video call and we can help them through the process of doing a digital money transfer. To those who are maybe more familiar with digital technology, how can they provide, how can they validate their identity online versus having to be at a retail location. And so I think it's created just a piece of change difference. I think the other thing is, certainly, I think one of the things I'm excited about for Western Union is we have the ability to offer really an omnichannel solution for our customers. And not a lot of organizations have the scale we have from a physical perspective, our retail business and also our digital business. And so I think this opens up some really interesting possibilities for us in terms of the customer experience that we can provide across those channels but also the choice that we get to provide our customers, right? Do they want to initiate the transaction at a retail location on digital? How does the receiver want to receive the money? And so that's a choice that we can offer our customers. And I think part of this is also going to be then about how do you digitize the experience in a physical retail location? How do you make that experience seamless across those channels? And I think that is something certainly we're focused on, and I see many other organizations across the industries focused on as well. How do you get the best of both worlds?

Absolutely. Brad, maybe we can pull you in here quickly is that, clearly, Western Union digital business has been growing very rapidly. Can you just recap for us and for those on the webcast, like what has been that rate of growth on the digital business? And how have you -- and I think you've seen that accelerate even beyond what you had originally anticipated at beginning of the year. Can you just recap for us kind of what you're seeing in terms of your expectations for this year?

Yes. Digital business in Q1 was high 40s, call it, 48% saw an acceleration actually from Q4 in the digital business. So continued strong growth. It's now 23% of the business. So if you recall back to Investor Day in the fall of 2019, we're talking about a $600 million business at the time. It's now on track. And we said specifically, we expect it to exceed $1 billion in 2021. So continued strong growth. What we also said is we've had a very strong surge throughout 2020. So as we look forward, the rate of growth will likely moderate, but it's still a very strong business for us. So Q1 is likely the highest growth that you'll see in the digital, and you'll see some moderation. But you'll see other parts of the business also pull up. So we've seen the retail business. We expect growth from that as we look forward in 2021. So you have a mix of factors. The other part of the business, a component of that digital, is our third-party partnerships oftentimes, the digital white label business. And so similarly, we saw very, very strong growth in those businesses. Pipeline continues to build, but it will likely moderate. So those are sort of the forces as we look forward into '21.

So I want to talk about the white label and the like here in a moment, but Shelly, Brad, when you look at like that incremental user that is on Western Union, and using the digital solutions to send money and you compare that to your historical retail customer. What behavior differences can you identify? And what does that tell you about the likely behavior down the road? I know at the onset of the pandemic, there was lots of anecdotal comments about seeing new customers sending to parts of the world or to customers or receivers that were completely new to Western Union, sending larger amounts, maybe more sporadically, but continuing. So what can you tell us about kind of this new digital customer that's maybe new to Western Union versus not? And how do you think about your ability to retain them and their staying power as customers over the long run?

Yes. Yes. Well, I think -- I mean, I think first thing is, as you said, certainly, last year, we saw a lot of new customers come to Western Union, right? They didn't -- they actually -- they weren't coming from our retail business, right? They were migrating from -- either they had a new need, they were new to money transfer overall or coming from perhaps our competitors, banks, et cetera, right? So a lot of new customers joined wu.com, our digital business, last year. We're seeing strong retention this year, which is great. And I would say also just sort of a strong cohort of customers as that we were able to pick up last year just in terms of retention, in terms of transaction frequency and the like. And Brad, I don't know if you want to add anything?

Yes. I mean, these are the -- we started offering some incremental commentary around that. One thing we're really closely tracking is the quality of the new cohort. And so you've heard some commentary from us around the transaction frequency. So the leading indicators we look at are transaction frequency, retention. Obviously, the new customer acquisition number as a whole has swelled, right? We are 7 million digital customers, and on wu.com up to 9 million and monthly average user growth also very, very strong growth there. So those are the metrics we look at. And that -- what it tells us is the quality of the new cohort is there. And when we talk to them through our panel research, they tell us they expect to stay. So we're encouraged by that and encouraged to see the retention.

That makes sense. Shelly, obviously, a lot of your discussion or any discussion that we have around Western Union is focused on the consumer-to-consumer money transfer business. But can you tell us more about the company's opportunity to develop as a platform business? Like what are the -- I've got to imagine that for you, when you look at everything that Western Union has in terms of reach and brand and technical capability, expanding that further has to jump out at you. So how should we think about that opportunity? And where are you focused right now?

Yes, yes. Well, I think, one of the nice things we have is we have an opportunity to, let's say, expand or monetize our direct customers, right, and our C2C business, as you said. And so we can talk more about that, but that's interesting as well. And then this opportunity to expand our platform, right, extend what we're able to do with our platform. The nice thing for me is that these things are actually linked together as well. So investments that we make in terms of serving our direct customers that interact with us either of a retail location or via wu.com. The investments and advances and modernization we're doing in our technology and experience there serve us well from our platform perspective as well because the whole idea is to leverage this cross-border platform that we've developed over the years, so with partners and reach those partners' customers, right? Because we're not going to be able to go out and reach every customer across the globe. And so I think right now, certainly, very focused on modernizing our platform, making it easy for us and easy for our partners to connect to our platform. Really, really, of course, we're strong -- very strong in the C2C space, and there's opportunities for us to extend beyond that as the business continues to grow.

And so you mentioned kind of in passing there. So I think expanding with partners and other brands, like that obviously makes sense, especially if you're going to reach into new demographics or geographies maybe where the Western Union brand isn't as strong. But you also mentioned there in passing like expanding the services to consumers. And I know that you've got some banking pilots that you're working on, but -- and investors generally are looking at the expansion of financial services or for a lot of different digital players in the market. So what is Western Union doing? And how are you thinking about that evolution and [ where that go ]?

Yes. Okay. Well, first thing I would say is one great asset we have is our strong multigenerational brand in this great cohort of customers. Digital customers, as Brad said, nearly 10 million now, think of those as the digital senders, those who initiate the transaction, but then highly connected to the same number or more receivers, right, in terms of who they're supporting with their financial means. And then, of course, a really big customer set from a retail perspective. And so the way I think about this is a couple of things. First thing is job one is to continue to improve the customer experience for our money transfer products, right? Continue to evolve things like our loyalty program, which we've got a lot of efforts underway right now, continue to evolve our understanding of our customer and their behaviors and their needs. And we've spent a lot of time talking to them about some of those unmet financial needs. And would they be interested, would they trust Western Union to meet some of those financial needs? And as through all of that research and some of the data that we've collected and been working through led us to this idea of let's do a pilot in Europe where we have a banking license, right? So you can think about as a market test with our existing customers to offer them a banking product with a debit card, ability to hold multiple currencies. And of course, an experience that's integrated in with money transfer because that's what they rely on us for today. And so that's just the first step, I would say, a market test in a couple of countries in Europe. We'll see how that goes. We'll iterate from there. And we're building this with this mindset of we could scale this globally. So sort of think of it as we're building a platform that can work globally. But also with very, let's say, local personalization or local relevance. We're not going to offer the same thing necessarily in the U.S. and Brazil and Africa and the Middle East and Asia as in Europe, right? But we're doing this in a way that gives us some optionality. Perhaps in some places, it won't make sense for us to offer a bank account, maybe a wallet as an example.

Right. So when you look at that banking -- those banking pilots and tests that you're running in Europe, what are the kind of KPIs that you're tracking and saying, okay, this is what we should be paying attention to or not. Just wondering how to evaluate that from an outside perspective.

Yes. Well, I think in many ways, similar to what you would see others, some of the fintechs in terms of when they get started and in terms of customer acquisition, customer engagement. The nice thing for us is we're doing this targeted at our existing customers. So for us, it's going to be -- maybe you can think about it less about customers' acquisition and more around customer conversion, right, particularly of this new offering. And certainly, I'll also be watching for how many -- can we get a little bit of a network effect inside our customer base, right? Did your senders attract receivers, right? And also, we'll -- of course, we'll be looking for customers that are new to the Western Union franchise that are joining us because of this new product, not -- they weren't a customer of our money transfer service previously. And so I think those are the things that we'll be looking at as we will be continuing to iterate as we go -- as we get this into the market.

Got it. Brad, I want to bring you back in here and talking about the digital product particularly and digital-to-digital consumer transfers. We certainly have seen a lot of increased disclosure from company and management around the economics over the past year. I'm sure all investors and the investment community, including myself, thank you for that. But there still seems to be a lot of misperceptions on the margin and dollar profits of the digital business. Can you provide just a summary or recap of how investors should be thinking about the dollar profit of a digital transfer versus a retail transfer and how those are comparable? Just so like we can start to put some of these growth metrics that we're talking about in perspective.

Sure. Yes. And Q3, we offered some additional detail just around sort of the channel contribution relativity. What I would say is, I mean, the most important starting point is just to understand the incrementality of the digital consumer. So as you think about -- while it may show up in the mix in terms of relative growth, the digital is growing faster. Generally, that digital consumer is -- 80% of them are actually new to the franchise. Actually, that incrementality figure went up during COVID, so maybe [ surprisingly ]. And so that's an important thing to think about. And then as it all comes together, you think about a retail transaction that may have slightly higher RPTs, or revenue per transaction, and is profitable. And at that level, when you get to the wu.com, it might be a slightly lower RPT, but the dollars of contribution might be slightly lower, but the percentage margin might be slightly higher. And what's going on there is it's effectively substituting one side of the commission. And that works out to a pretty close substitute. You've got, most commonly in our business, it's a debit-funded transaction that's paying out at retail, and that's also very important to understand, and that's a bit different than maybe some of the digital competitors that might be true digital, account-to-account. We also have that. But still, the business is still dominated by a retail payout. And so you end up with a profit and your contribution margin that's actually slightly higher in the wu.com channel. Then as you move to the third-party partnerships, the digital white label business, it's very different economics in that model. We're partnering with these financial institutions or fintechs because they have the consumer. It's good funds. So there's no risk of fraud, no funding cost, the customer acquisition. I mean, the reason we're partnering is because they bring in the consumer. And so when you look at that, it's going to start with a different revenue that's different, certainly, lower than the other channels. But the actual -- the percentage of profitability is quite high. The dollar contribution is lower than either of the two. But I think perhaps the biggest proof point is you've seen tremendous growth in the digital channel across both wu.com as well as the partnerships. And as that was occurring, margin actually went up. And we're calling for margin again this year to also increase. And so I think as a high-level proof point, that's some evidence for how that -- all of those contribution economics come together.

Well, it seems like a couple of things there. If I can parse and clarify and make sure that we're on the right track here. So if I look at a retail-to-retail versus a wu.com transaction, it sounds like while the revenue per transaction is lower, on a like-for-like transaction, the dollar of gross profit is maybe in the same range, maybe slightly lower for wu.com, but it's kind of in the same range. And so even if there is some cannibalism there, like that actually doesn't really impact you. And it doesn't sound like you're actually seeing much cannibalism and like you said, 80% of wu.com transactions are coming from new users. Is that right?

Yes, exactly. Yes. I mean, there's that small amount of cannibalization, I suppose, where there's some multichannel users that are showing up in both. But yes, I mean, that's the important point is -- and yes, I think the comparisons are often drawn to businesses where the yields might be sub-100 basis points. That's not what we're talking about. We're talking about relatively small degrees of difference in yield in the big scheme.

Yes. So -- and then versus the white label where, look, if you thought like your partners were going to take all of your retail or even your wu.com business, that would be a concern. But it sounds like you're also viewing those as largely incremental right now. And granted their dollar per transaction on a like-for-like basis may be lower to -- from a gross profit or gross dollar perspective. But they're incremental and you're basically running within your existing systems. Is that a fair way to characterize it?

Yes. And in some ways, we evaluate where we partner. We carefully consider the strategic implications of who we're partnering with. But yes, that's all part of the consideration. I mean, the other thing to point out, I think when you think about the -- particularly in the wu.com and digital consumers overall, I mean we're talking in a contribution margin math here. The real story is about lifetime value and profitable growth. And that's really where we're focused. That ties in with some of what we talked about, about the strategies around pricing and data analytics. But really, we're focused on that lifetime value. And the digital consumer has very, very attractive lifetime value.

Right. So Shelly, I want to talk about the landscape a little bit and tie this into topics like acquisitions and capital allocation, et cetera. Coming from Accenture, I would imagine that many times you're tasked with looking at the overall ecosystems and all the different players and finding the right path through. And one of the things that's been striking to me over time is that there were a lot of companies that were funded 5, 7 years ago, maybe a little bit longer, and their whole thing was like we're going to be digital-to-digital, and we're going to bring down costs a lot, and we're going to basically take a ton of share from Western Union. And then they all kind of ran into their own respective walls, like it got harder to grow, right? And so when you take a look at that landscape and the resilience that Western Union has had through all of that, what are the lessons learned from that? And what does that do in terms of -- and you mentioned kind of in passing earlier that a lot of times, you have businesses that may be in this area or other digital areas, that they have good concepts but the team or whatever has a hard time scaling. And so that maybe those can be good acquisitions. Just like how do you look at the landscape and where it might make sense to add from external versus develop internal and just love to get your kind of consultant hat on when you look at the space?

Yes. Yes. Well, I think, first of all, I think you mentioned some that have run into different roadblocks, right? And I think first of all, right, it's one thing to launch a business and look at one market or a couple of corridors, right? And these days, the technology piece is easier and maybe it's kind of a nice -- it's a luxury to be able to start with brand-new fresh technology and just build it from scratch, right? But that's only one piece of being able to have a successful digital business, right? Then of course, you have to build a brand for this customer acquisition, how do you find those customers? How do you build affinity to the brand? And then you start to try and scale, right? And it's -- and a lot of it is around talent, as you said in the team. But of course, in the industry we're in, the business we're in, all of the regulatory matters, all of the compliance matters, being able to have -- operate globally, but also then understand the nuances and specifics locally to different regions, having those relationships with the regulators, et cetera, like, that's not a small thing to do. And so I think maybe perhaps part of the challenge that some of them have run into is just being able to do that at a big enough scale that they can scale to be an ongoing concern, if you will. I think for us, in terms of -- and I guess the other thing I would say is it's one thing to be a digital-only player. It's another thing to have the combination of physical and digital, right? For in our case, that's our retail business and our digital business. So this true omnichannel solution, which is about offering choice to our customers as we talked about. I think in terms of how we're looking at the landscape and what could make sense to do internally versus potentially look at sort of partnership or some sort of acquisition, it's -- we have established ourselves globally, right? We have the local presence. So that's not as necessarily the focus for us as much as, 'Hey, we have this 10 million-ish digital customers now." We're looking at what more we can do in terms of increasing our relevance and therefore, the products and services that we can offer them. Are there some acquisitions that could help us with that part of our strategy? Are there some acquisitions where perhaps we could extend our platform and the reach of our platform, maybe geographically, but maybe more so from a use case perspective in terms of, again, sort of new opportunities that we could use to extend our platform. And so those are things that are on my mind and things that we're looking at on a regular basis.

So Brad, in the last minute or 2 that we have, what is the Western Union? How should we think about capital, capital allocation, balance sheet? And what that looks like? And how are you thinking about allocating among dividends and buybacks and acquisitions, et cetera. Because one of the things that we seen from Shelly's -- from Accenture, I'd like to highlight them as an example in a lot of cases, but their response to massive levels of private capital infusion into the IT markets or software, et cetera, has been -- they just always are doing acquisitions, dozens and dozens a year, right? And they spend a good part of their free cash flow on that. But like what's the right structure and thought in your mind for Western Union in terms of its uses of capital?

Yes. I mean, the good news is it's -- the operating cash flow of the business has been about $1 billion for the last couple of years, very strong cash flow generator. And as you think about where we can apply that, we're obviously going to invest in the business to grow relative to the priorities we've identified. The dividend is there. We're going to spend about $400 million on that this year. And M&A is always ranked ahead of buyback. What we've, I think, shown is that we're disciplined in terms of how we think about M&A. So the returns need to be there as well. And sometimes, we find valuations get stretched in certain areas. But for the right opportunity, M&A would rank ahead of buyback. And we've shown that the buyback becomes sort of the adjustment lever in the whole equation, and we've, at times, gone up and down, but we've been fairly consistent in recent years in returning capital. So I think the priorities really haven't changed. And we've been active despite in conversations, even if we haven't been extremely acquisitive, but we're always out looking at these opportunities.

Got it. Keep the tires to find the right one. Especially -- I mean, especially for a company like Western Union that has so many capabilities and reach and brand, et cetera. So that's understandable. Shelly, end with you, what are prioritized to-do list over the next 3 quarters to 1.5 years?

3 quarters to 1.5 years. There's a lot on it to-do list. Let me start with -- let me, of course, continuing to strengthen our customer experiences is at the top of the list, as I said before. And by the way, that's not just the digital experience, right? I think certainly, we have some ideas around how we can digitize our retail experience. That will be important as well. Part of that then is to continue to modernize our technology stack because that will provide us more flexibility to continue to adjust in the future. And I think we have quite a large cloud transformation program going on right now. In fact, we may well -- we may be one of the first, right, to have our core transaction engine in the cloud here soon. And so that's a huge thing on the list. And then we've made tremendous amount of investment and progress in establishing what we're kind of calling our strategic data foundation. And so we got, I think, 20 petabytes of data in a snowflake environment now in the cloud. And that's providing us all kinds of different insights about our business. And so being able to leverage those in new ways, as I said, about customers, but also about front desk, office operations, back office and how do we create a better customer experience, but how do we operate our business differently as well. Looking at the productivity of our agent network, as an example, so many things we can do with this new set of insights and really driving this organization to be a data-driven, insight-driven organization. So those are just a few. We have things underway in terms of our loyalty program, for our digital customers and we'll just continue to iterate that. And then, of course, a successful market launch of the pilot that we talked about in Europe is high on the list as well.

Exciting stuff. Shelly, Brad, thank you both for joining us today. And Brad, thanks as well to your entire IR team for making this happen. Anything to follow up on, please reach out to us here at Morgan Stanley, and look forward to chatting with you again soon. Thank you very much.

Thanks, James.

Great to be here.