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

Today's session now is with Western Union. It's going to be a fireside chat with Raj Agrawal, the CFO, and Jay Jaffin who's the Chief Marketing and Digital Officer. I'm Bryan Keane. I cover the payments processors and IT services here. And we will go through a list of questions for these gentlemen. [Operator Instructions] So with that, gentlemen, thanks for joining us.

Bryan, thanks for having us.

A pleasure. So Jay, we know Raj pretty well here, but I was hoping you might be new to some investors. Can you tell us why you joined Western Union in January of 2020, right before the pandemic started, which your timing was impeccable there, and what your outlook is for the opportunity for WU in digital?

Yes. Timing is everything, right? Yes, I've spent 16 years at Verizon leading up to this in different roles across marketing and sales and operations. And I got the call about Western Union, and I explored it a little bit. And it's interesting. What really resonated with me were probably 3 things. One is the people were great. We all want to work for a company where we enjoy our colleagues, and we generally see eye to eye with them. Second was the mission. Not only does the company do some really great things through the Western Union Foundation. But think about our core service, remittances; and our core customer who tends to be a migrant and move from 1 country to the next to make a better life for themselves and their families. In many cases, our service is putting food on the table in countries like Bangladesh and the Philippines. So that was great. And then, of course, the opportunity we have to transform this company from a digital standpoint to really lead the industry. And so my outlook for Western Union Digital, not surprisingly, is very optimistic, very positive. Structurally, the digital business is even better positioned than it was before COVID. In 2020, our annual customers grew by nearly 30%. We had 9 million customers at the end of the year. Over the last couple of years, since 2019, we've grown from $600 million to now a $1 billion business. COVID really just reaffirmed our strategy around digital, being focused on digital growth broadly but also continuing to expand our platform in new use cases, bringing on new partners and ultimately starting to build towards an ecosystem, which I'm sure we'll have an opportunity to talk about here.

Yes. I mean the digital business has been impressive through the pandemic. I know growth was approaching 50% for the year. And then it slowed only moderately to 20%, which is still strong growth in the second quarter despite tougher comps. So with digital on track to hit $1 billion in revenue for fiscal year '21 and mobile downloads leading money transfer peers, what do you think has been resonated so well and differentiates WU's digital strategy and really resulting in share gains?

Yes. I mean, look, arguably, WU was the first fintech. I mean we built a solid foundation 10 years ago. We've been improving it along the way. But the pace of change in technology is only increasing, and it's so critical to stay ahead of it and source those new capabilities that can drive the business forward. So I would say there are 3 main elements to this. One is, as we know, in a digital e-commerce business, it's really all about customer experience. It's the one thing that keeps me up at night. And it's not because our customers have bad experience, but expectations are constantly getting higher. And there's always something new to do. There's always a piece of friction to take out of the system or a new piece of technology to bring in. So we have a ton of customers [ looking and putting something ] from MPS, the app stores and everything in between. And so we are constantly looking to make the experience better in the app. So I would say it's just a trusted brand that we have. This is something I've really grown to appreciate and understand now, being with WU for the last 1.5 years that something I didn't realize coming in. But we have, in many cases, generational attachment to this brand. We have customers that, when they were little, when they were kids, like their families might have been receiving remittance through Western Union. And so they have that attachment to the brand. So then when they go off and they go to make a better life for themselves, we're the first thought that they have, and that's powerful. And then the third, I think, just relates to just the basics. The depth and breadth of all of our assets, speed of our network and the scale of our network is really unmatched. wu.com is in 75 countries. We've got 0.5 million locations, which still with most of our transactions still ending in cash. That's a key competitive advantage. We've got billions of accounts we deposit into and so on and so forth. And just as a reminder, last Investor Day, we said we expected the digital business to grow around 20%. As you mentioned, it's nearly double that in 2020. Obviously, COVID was a forcing mechanism, and it forced people to consider digital that maybe hadn't in the past. But as a result, we expected some moderation this year, and that's what we're seeing. We're getting back to a little bit of a normalization, and we're up against tougher comps. But we're still growing the business, and we feel very good about it.

The stat that always blows me away is that over 80% of the customer base is new to Western Union. And I would always think there'd be more crossover and people moving from kind of regular Western Union customers to digital customers. Can you help us understand that dynamic and where these new users are coming from.

Yes. What's interesting about our category is there's a lot of onetime senders. So we see about 50%, 60% of folks that come in -- and by the way, we define a new customer as someone we haven't seen in the last 12 to 24 months. So they may have sent with us a few years ago, but that's just the way we define it. And we do -- we see a lot of them are just here for emergency send. They may be here to send a gift, and then they disappear and they may come back a year or 2 later. So I think that's why you see that high number. But that said, our retention rates -- among the customers that have a remittance need ongoing, our retention rate has sequentially, year after year, improved. And we put -- that's why that experience is so critical. We look at metrics like onetime and two-time senders because so many customers are onetimers, how many can be routine for that second remittance. And what we find, when we do that, in many cases, they're our customers for life.

What investments as WU made in the technology, the automation and cloud? And how do you plan to improve the digital app capabilities and expand in stuff like customer loyalty?

Yes. This is big on our list. We have spent the last year or so making quite a few upgrades. And as I mentioned, pace of technology is just as increasing. Like, this is something you have to stay on top of. And so some of our areas of focus have been, first and foremost, is migrating to our strategic data foundation. We're moving our data into the cloud, into Snowflake. That's giving us new capabilities. We're seeing new use cases. We get deeper insights in our customers. And that's really the backbone of all of our information infrastructure. There are also a host of initiatives that build off of that foundation. One of those is building a master data management platform, MDM, which is sort of in the category of foundational and boring, but so important. Having that one iterative 360-degree view of your customer regardless of channel is important, and that's a new capability we've developed recently. We recently migrated Salesforce Marketing Cloud, which is giving us true omnichannel messaging capabilities. We're able to consolidate a lot of our back-end messaging platforms and make it just a cleaner process now. There were some data fields that we would get for 1 or 2 days, now we're getting them in near real time. And so we can message our customers in real time. We're overhauling our ad tech stack and bringing in more first-party data, obviously critically important if anyone is familiar with the evolution of the digital advertising industry. That is something that all of us digital marketers are having to deal with. So a lot of work there. And then, finally, upgrading our experience in the app is a key priority. So that's both the back end, so we're migrating to a new tech platform that's going to allow us to serve our customers in better ways, faster page loads, better responsiveness, more personalization. It's also going to accelerate the velocity of development, which is really important. And then we're also modernizing the look and feel. So the app itself will get a bit of a facelift, and we think it's due for that. So those are some of the things that we're going to start rolling out early next year. The one other thing I'd say here and just one example, and it's a powerful example of how some of these technologies are allowing us to do different things and drive the business forward, is when it comes to our dynamic pricing engine. So today, just as kind of normal course and speed, we're using machine learning models that incorporate both market and customer data. They incorporate competitive data. And we're able to create unique pricing almost down to the individual customer level. And we're still in the early innings of this. We have dozens of test-and-learn experiments in any given week or month. But ultimately, the goal here is to be able to maximize the lifetime value. And again, none of that would be possible without some of these foundational improvements that we've made.

Can you talk a little bit about what you guys have done with the third-party white-labeling solutions and how that compares to the digital brand, the WU brand products?

Yes. Let me say a few words. The digital white label is a key driver of the digital growth that we've had, but wu.com still continues to be the lion's share of the digital business. Obviously, Bryan, you know that we've talked a lot about the STC Pay partnership we have as well as Spare in Russia. And we have a number of other partners that are in the pipeline that have not gone live yet, but they are coming to market soon and something we'll talk about in the coming months. So we're excited about the opportunity. If you think about the opportunity we're going after, it's 50% the remittance market is generally controlled by the bank. So you may typically go to your bank to move money around the world. And so we'd like to be the back-end provider or the white-label provider to the banks, effectively going outside of the correspondent banking system, right? So just giving the banks a turnkey solution to move money all around the world. And it's not a big stretch to think that we can do that as Western Union because we do it today for the banks from a retail organization standpoint because 70% of our network are banks and post banks and financial institutions all around the world. And that's where customers are coming in to a retail location. They're moving money at that location. And so we think we can just take that to the account-to-account space and be the back-end provider to these banks. And that's effectively what we're doing with STC Pay or Spare. We have given them a turnkey solution overnight to move this money around the world. And so we're excited about the opportunity. We think it's going to continue to be a key growth driver for us. And it's largely incremental business that we're seeing, not all of it but largely incremental.

And you've had some slides on the margins, Raj, before in some of the earnings in the investor deck. Can you just talk a little bit about the margins of the business going forward?

Yes. The digital business in total, I would say, Bryan, has been very margin supportive. So if you think about our digital business in 2019, it was about $600 million in revenue size. This year, we're saying that it's going to be in the $1 billion range. And so it's had that significant growth while also supporting margin expansion. So we have expanded margins over that period of time because both the wu.com business as well as digital white label are very margin supportive. They have higher gross margins than we do in the retail side of our business just because of the way the business operates. And so on the digital white label side, we're much more of a processor. So we're not paying for the customer acquisition. We don't have the fraud losses that we're paying for and things like that. And so we get paid a fee to process the transaction, but we also have less costs in that processing. And so the margins are actually quite high in the digital white label side. They're also very good in the wu.com side, if you exclude the marketing cost of things, and then the retail side is also very profitable. So we wouldn't have been able to expand margins over the last couple of years as we did with the significant growth and expansion in the digital business had this not been the case.

It's no secret that digital is where the volume is, and there's been a lot of competitors, and Wise has recently gone public. Can you just talk a little bit about differentiation of WU and the brand and your offering versus the competitors in digital?

Yes. Look, we think we have one of the best offerings in the market. We are not necessarily going after the same customer set that Wise might be going after. Most of our customers have been moving money in the $300 range. Let's say that's the average ticket size. With Wise, it's probably much higher. And when we look at our like-for-like business, the digital-to-digital or account-to-account-, if you will, in our total digital business, it's at about a $200 million run rate. And I'm not sure that people really fully appreciate that. So we already have a digital-to-digital business that's about $200 million in annual revenue size, And so it's quite a good competitor to the other account-to-account offerings. And look, people trust the brand, the Western Union brand. We cater to a certain type of customer set. And I think, Jay, you can probably speak even more than I can about this. And then on the digital white label side, it's not about the brand. It really is a white label offering. It is about the partner that we're serving and being sort of behind the scenes, if you will, facilitating the transaction and the delivery of the money all around the world. And on the branded side, it's obviously wu.com. And obviously, the ecosystem opportunity is something new and emerging for us, and we think that could be a very interesting opportunity longer term for Western Union.

I don't know, Jay, if you were going to comment on any of the competition side and how you saw it.

Raj said it perfectly. The only thing I would say is like we're watching every single day. I agree, there are different segments of the market that we serve. There's a little bit of overlap. With someone like Wise, maybe it's a little bit less. With someone like Remitly, maybe it's a little bit more. But our goal is to ensure that there is -- once customers come in the door with Western Union, there's no reason to leave. They have a great experience. We're serving the needs that they expect us to serve. And we're constantly surprising them with new stuff and keeping it fresh.

I was hoping you guys could talk a little bit about the opportunity with the consumer base to monetize it with more of a bank account option, debit card money transfer solution throughout Europe -- or I think you're starting in Europe. Can you just talk about the expansion plans for that product rollout?

Yes. This is an extremely important rollout for us. This really signifies the first step in our journey towards building this larger consumer ecosystem. Again, if you think about the assets we have, first and foremost, it's this large and very unique customer base. We serve the global migrant community. And it's a segment that's generally underserved across financial products. So our customer base, as we've talked about, they place a high degree of trust in us. And we've done a lot of research on this over the last year. Our customers tell us they give us permission to get into some of these adjacent spaces. And we would better serve them if we expanded our set of solutions. Now that said, it's critical that we don't take our eye off the core business. The first hurdle is do no harm to the existing business. So as we launch some of these products, as you mentioned, we're going to have a pilot later this year in Europe, one of the key metrics we're looking at is just what happens with money transfer activity. And then beyond that, I think we look at some of the more interesting revenue metrics as we expand that revenue profile. We do think that this is going to fortify the base when it comes to retention, share of wallet. There will be more reason to remit with Western Union because we're making it easier for them as we have these multicurrency accounts that customers can now store money in, for example. So right now, we're focused on Europe. We have a European banking license that will allow us to offer these types of services for our customers across Europe. As you think about a broader rollout, it's probably fair to assume we'll be more focused in Europe initially. But end goal would be a product like this at global scale to have that local relevancy. So any time we launch a new market, we want to have products and services that serve customers for that specific market. And the expansion could look different market by market. So you envision a scenario where Europe, for example, we have a full banking solution. But maybe in the U.S., we have a wallet. And then in other countries, we may focus on partner offers in our marketplace. And that's what's really exciting is this opens up a whole new segment for us. And one of those segments is the receiver. Today, our deepest relationship is with the sender. The receiver, for the most part, accesses their money in their bank account or they go to an agent location to pick up cash. We believe this type of product has a flywheel effect whereby senders will bring their receivers onboard and encourage the receivers to open an account because there will be inherent benefits of both the sender and receiver both having an account. And then, in addition, we think like some of these other products that we're looking at, these marketplace products, whether that be buying goods and services and sending it to a country with a product or gift cards or insurance or lending, that's also going to open up new customer segments for us. But initially, the focus is on the existing customer base.

And is it a driver of engagement and ARPU? Do you think about a target ARPU where you can drive that user up to?

Yes. I think it's a driver of engagement initially, and it's certainly a driver of ARPU. I think initially that ARPU is going to come through money transfer, whether that's higher TPC, higher retention. But over time, as the suite of solutions grows, I think you'll see that revenue expansion into other products. And it's going to diversify our revenue profile, so to speak.

So I know you guys have announced the Business Solutions divestiture. Just thinking about, as you go forward, will there be more focus on the digital business to expand that business and maybe just the priorities of spend now, allocation going forward for you guys.

Yes, I would say, Bryan, I think it's a good sale that we've had. And obviously, the transaction has not closed yet. The first closing is in the early part of next year. But I would expect us to continue to focus on our core, which is cross-border, cross-currency money movement. And that includes, obviously, a heavy focus on the consumer side, as we've talked about already; obviously, our digital business; but also driving more partnership opportunities within Western Union and leveraging our cross-border payments platform. Many more examples like Spare and Saudi Telecom Pay. Many are in the pipeline. We think we can do a lot more with that platform and different kinds of use cases. And then lastly, just going outside of the remittance space into additional opportunities using the consumer ecosystem, that's really going to be the focus. But yes, it allows us to refocus our efforts back on the core of our business in these emerging areas. And there's a lot of opportunity in what we have left after Business Solutions, and we think it's an exciting opportunity for us for the next several years.

And just to finish on those lines, is there other divestiture still that you guys could take a look at making? And on the M&A front, now as you divest these businesses, are you more likely to buy into digital? Or is that not necessary, you can grow organically?

Yes. On the divestiture front, we got rid of our Speedpay business a couple of years ago and then now our B2B business, sometime next year. Those are probably the 2 biggest chunks that we had in our business that would be candidates for divestiture. From an acquisition side, look, Bryan, I think our primary focus would be on acquiring capabilities and maybe a technology capability or maybe it's an account payout or mobile capabilities. We may not necessarily do a direct revenue type of acquisition in the digital space because of where the multiples are, and that's not necessarily what we need. Maybe it's a service offering of some kind that can fit into our consumer ecosystem technology of some sort. So that's the kind of thing that we may be focused on. We may look at other things that could provide efficiencies in our cost structure, but we'll certainly want to see what can supplement the digital growth strategy that we have, and that would be the primary focus from an M&A standpoint.

Raj, I wanted to ask you about the core cross-border C2C business. Cross-border principal continues to accelerate. I think it was up 29% last quarter. Can you just talk about the drivers of cross-border principal strength and those expectations going forward?

Yes. What we've seen over the last 18 months, Bryan, is that the people who have remained in our business are the people who have the higher ability to send. So some people have obviously left the business, maybe they don't have a job or they're struggling in some way, but the people who have remained have continued to have the ability to send money at higher principal amount. And the need to receive money has been higher than ever before given the pandemic and the impacts to various received markets all around the world. So that's driven a higher principal per transaction within the business and the industry, frankly. Additionally, we've seen a mix shift taking place as well. As more digital transactions have been coming into the space, more digital we initiated and paying out to an account, that typically is going to be a much higher principal amount than we would typically see in a traditional kind of transaction that might have a retail connection to it. And so that mix impact is also having an impact. And then lastly, I would just say new needs have arisen in the market. So people who didn't have a need to send money before have come into the space because now, all of a sudden, one of their loved ones has a need to receive money. And these people are typically able to send higher principal amounts. So I don't know, Jay, if you want to add anything else, but those are the reasons why we've seen the higher principal levels in the business. And I guess from a market standpoint, the last thing I'll say is that the World Bank's estimate is for less than 2% growth in cross-border principal this year and next year. We do think that's conservative based on everything we're seeing in our own business and what we believe about the market.

Yes, I think that's right. I mean that account-to-account piece is a natural, I guess, tailwind from a principal standpoint. They are sending higher amounts. And yes, it's a good thing. The yields, as we know, are lower on that business. With higher principal, they're sort of counterbalancing. And what's really exciting is that, fundamentally, it's a different customer. There's some transition, for sure, from cash. You've got a customer that maybe establishes a bank account or maybe just doesn't have the need to send in cash anymore. But we also see largely that the business we're getting now in the account-to-account side is unique. It's a different cohort.

Can you talk a little bit about the corridors, the key corridors, what you're seeing? A lot of worry about the Delta variant and that impact. Can you talk about, Raj, what you're seeing around the world.

Yes. I'll have Jay also say a few words about that. But look, we expected that, generally, the economic conditions around the world might be a little bit better in the second half of the year than the first half. I would say the Delta variant has probably mitigated that improvement to some degree. And it's hard to say that there's any particular trend that we're seeing from Delta. People still seem to be going out and doing their normal business. People are still going to restaurants. As far as I can tell, they're still actively out in the community. So I don't really see anything specific related to Delta. But it certainly is having a little bit of a mitigating impact here and there throughout the industry, I would say. Jay, anything else from your side?

Yes. Last year was very unique for all of us, as we know. And [ when you see a ] country going on lockdown, and you knew the next day digital numbers would go up, and it was sort of like clockwork. And we were at that elevated level for the better part of the year. And then we're starting to see some normalization now. It's still at higher levels, which is great. But the lumpiness, I guess, of the business is starting to smooth out and starts to look more like what you would normally expect to see, again, at a higher level, though. So the only exception for that, from a corridor standpoint, like Australia and New Zealand went on some pretty strict lockdowns over the last few weeks. We did see the digital business benefit from that. But for the most part, the lockdowns we've seen this year haven't had that type of impact, partially because and they just look different fundamentally than the lockdowns we saw last year, to Raj's point.

And looking at those World Bank numbers, you mentioned that you guys have tracked ahead of them, is there a reason for that? Do you think is that just share gains? Or is that just them underestimating the growth in the marketplace?

Yes. Look, we think we have a direct beat on the market. And we look at our business, and that gives us the best view of the market. World Bank has its own methodology of how they assess the market opportunity. And the World Bank has a couple of revisions during the course of the year, and we may see some revisions to their data set later this year as well. But I think what I described, Bryan, we've also heard from others in the space. So I think the market has probably expanded a bit as well just from the informal channel over the course of the last 18 months where people have had to use formal services to the extent that travel was restricted and other sorts of things like that. So there are a number of factors why, but we have the best view based on what our business is doing, we believe.

Got it. Can you talk a little bit about spreads, Raj? I know spreads have narrowed here to roughly about 1%. Can you talk about what we should expect for spreads going forward and some of the factors driving it?

Yes. Look, the wider spread -- and you're talking about revenue and transaction spread. The wider spreads that we had seen over the course of last year was largely due to the significant growth that we had in our digital white label business, and that's at a lower revenue per transaction. It's largely incremental business, as I mentioned earlier, but it is at a lower revenue per transaction with high transaction growth. So that had a dramatic impact on the overall spread. But as we hit the second quarter, we started to grow over that, right? That was a relatively new business last year in 2020. It started late 2019. And so we started to grow over that. And that's why the spreads have narrowed quite dramatically. Then look, we always want more new business, and we'll be happy to take that. But to the extent that we don't see a significant new partner added on, we'll probably see more stability in that spread during the course of this year, but we're going to keep adding to that business, and that will work itself out over time. But Bryan, we don't really look at the spread as an indicator of is it pricing pressure or something else happening because I know that's the primary concern that's always asked of us. From our perspective, to the extent we can add revenue and transactions and more customers to the business, that's a good outcome for us.

I wanted to ask about the $150 million of annualized cost savings that you guys targeted by fiscal year '22. How much of that is left to still achieve? And what impact will that have on the margins, especially as we go through the back half of this year into fiscal year '22?

Yes. For this year, as we had mentioned before, we would expect to see higher margins in the second half because we are still targeting the roughly 21.5% margins for this year. And we are about 2/3 of the way through our $150 million target. So for this year, we'll get to the $100 million of savings. Next year, we'll achieve an incremental $50 million. And margins for next year, I would say it's too early to speak about, Bryan. It's going to be heavily dependent on where overall revenue growth is going to be, obviously. So the part that we can control is really around the cost savings, and we're very much on track to achieve those by the end of next year.

And I was going to ask -- from the Analyst Day back in September of 2019, we talked about 2% to 3% constant currency revenue growth, 23% adjusted operating margins and low double-digit EPS growth. Obviously, we've had a pandemic to go through here. So just wondering if those goals have moved or those goalposts have moved now due to the pandemic or a different philosophy.

Yes, I would say that the world has changed, and you've said it yourself. What we can control is the cost savings side of the equation, and we are very much on track, as I mentioned. The 2% to 3% revenue growth was a key assumption in that overall equation. And last year, obviously, was a COVID year. So COVID hasn't gone yet, and so we need to let the world get back to whatever we might think of as normal. But look, we still have long-term objectives of growing the top line well, doing really well on the margin side. But a lot of these things are going to be dependent on getting back to a more normal environment. I would say the business model hasn't changed, Bryan. I mean we continue to have about 40% to 45% of our costs that are fixed. And so to the extent that we can get good revenue growth, we continue to have the ability to drive good leverage in the business. And we also want to take into account investment that we want to make back into the business because, as an example, if the consumer ecosystem test or the financial services test is very good later this year, we'll want to relook at that, and we'll want to go aggressively at that. So a lot of different factors are going to come into play as we go into next year. But we feel good about the positioning of the business as it is today.

Yes, I was going to ask that and maybe to close, just is there -- if there is the opportunity to drive faster revenue growth through some of these other opportunities, especially on the digital side and the banking side, does it make sense to spend incremental dollars and maybe actually have to push margins down for a time period as you invest to get that revenue growth up.

Well, I'll put the margin question to the side for a moment, but it absolutely would make sense. If we did a successful outcome from the pilot offering later this year, we will definitely want to invest dollars to drive that opportunity. We have a bank in Austria, which gives us pan-European capabilities to take this pilot service throughout the European Union. And we have the best ability to expand that as quickly as we can. So it's really going to depend on the consumer adoption and the level of success we have. But if we can drive a $1 billion business in digital today to double that in a few years, we'll absolutely want to go invest to go achieve that.

Yes. That makes sense. All right, gentlemen. Raj, Jay, thanks so much. Thanks for taking the time.

Thank you. Thanks, Bryan.

Thanks, Bryan.

Thank you. Bye-bye.