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

Okay, great. So welcome, everyone, to here on the second day in the -- I guess, technically the third day in the afternoon session of our 26th Annual Technology Conference here in Arizona. I'm Tim Chiodo. I'm the lead payments processors and fintech analyst. And we're very fortunate to have with us this afternoon 2 leaders of Western Union. We have Devin McGranahan, who is the CEO, and we also have Matthew Cagwin, who is the interim CFO of the company. I want to thank you both for making the trip here to Arizona and for joining our conference.

Great to be here. Thanks so much for having us.

All right. I think we should start at the 3-year targets that you've put out titled Evolve 2025. I think this is a great interest to investors, specifically the target to return to, let's call it, low single-digit 2% revenue growth or so by, let's call it, 2025. Let's talk about the main changes that you're making to get that top-line growing again.

So let me talk about a couple of things and then I'll ask Matt just to talk about kind of how the financial model work to get us to that point. The 2 main changes -- and we talked about this at Investor Day. One is to reorient basically our model around growing customers and growing transactions instead of maximizing revenue per transaction, right? So it's a shift in mindset to say, we want to have a compelling proposition in the marketplace for our customers and be able to compete for new customers. And we talked about that a little bit on the third quarter, what we're doing with introducing new customer pricing and promotional first-time customer introductory offers. And so we're going back to the business of competing for new customers and growing our franchise across our channels. The second thing is really integrating our customer experience, making our customer and agent experience best-in-class and then integrating them across channels. And so at Investor Day, we also talked about how do we improve our experience at the point of sale? How do we improve the service delivery that we have in supporting those agents at the point of sale? And when customers come either digitally or in the retail environment, how do we recognize and treat them as customers, not as transactions? So the combination of those 2, we believe, will increase retention, will drive more volume into our retail and then the enhanced value proposition and competitive pricing will help us drive our digital business. And Matt can talk a little bit about we've been doing this now since June, what we're seeing and how the model gets us from where we are to 2%.

Awesome. Tim, thanks for the question. I'm going to go 2 parts to this. One, as you may have noticed in our Investor Day, we laid out 4 true north for us that would help us give investors, analysts and our own employees, some sense of progress towards what Devin has talked about and I'll come back to what he was saying a minute ago. But those 4 things we had laid out were improving our retail retention by 2% per year, driving new digital customer acquisition by double-digit, improving our omnichannel clients by 20% per year. And then the final one is get to 100,000 new banking clients, ecosystem clients per month. Those 4 things are all tied to our pillars and our objectives that we talked about at Investor Day. We're already starting to see some very early proof points on those. On the second one being the drive double-digit new customer acquisition for our digital space. As you may know, we launched back in Q2, a couple of small corridors, testing on how you can optimize promotional pricing, what can you do to drive better marketing. And then that evolved into Q3, we launched across 50 different corridors out of the U.S. and then that's continued now into further expansion here in Q4. That I'm happy and excited to say has been driving mid-20-digit -- 20% digit growth in new customer acquisitions on average in the territories where it's been launched. So that's just a proof point about where we're going and how we're going to get there on the economic standpoint.

Excellent. Thank you, Matt. So I wanted to go a little bit deeper on the retail component. A lot of what you just mentioned applies to the retail business, of course. But if we drill down on that part of the business, you mentioned a lot of these items already, right? The dynamic pricing across quarters and you talked about retention, in-store experience. One that we didn't hit on too much or maybe we could just expand upon just to bring it to life and make it real is the new POS systems, right? So is that something that the retail agents have to ask for? Are they just given? How does that mechanic work?

So we came to the conclusion probably in the end of the first quarter that in particular parts of our distribution and that being those that are independent and non-exclusive, our competitors had gained a market advantage by reducing transaction time, making the process easier for agents and by allowing agents to do a lot more self-servicing. So if a name needs to be changed, the agent can do it on the point-of-sale system versus calling into a call center to have help making it happen. So based on that, we decided to launch a revised -- or actually, it's a completely new and updated point-of-sale technology. Its thin client, can run on an iPad, can run on a PC, can actually run on our former Clover point-of-sale device. That does exactly those things, reduces wait times, reduces friction in the process and enables agents to have more self-service. Our desire is to roll that out first and foremost, in those places where we're competing head-to-head in nonexclusive independent agents. And so those agents in the United States, that would be Vigo, we'll be getting those capabilities sometime in 2023. We're going to continue to roll that out into Europe, which is also we are more independent, nonexclusive in certain countries in Europe. And then over time, we will trickle that capability into the rest of our network because it does provide a better experience for the agent, less calls, less cost and better experience for the customers because we have customer recognition technology. We've got OCR, ID scanning. So it just makes the whole process more seamless. But first and foremost, we're going to roll it out head-to-head where we are in nonexclusive situations.

Okay, great. Well, I think that's great for the retail segment. Maybe we'll move to digital in a second here. But let's -- there's a transition question here, which relates to the marketing spend. So -- your marketing spend in the past, you've said a large portion of it goes more to the online or digital business. Can you just talk about what marketing support is given to the retail business and partially why that's less necessary, right? Their locations in and of themselves and where they're located, helps to drive customers in. And in summary, maybe just talk about the evolving mix of where your marketing spend goes across retail and digital.

Yes. So we should spend a little bit of time first disaggregating that because I think the perspective might be reflecting the prior Western Union strategy, which in that strategy we had a very singular view that digital was digital and retail was retail. As we talked about at Investor Day, it turns out 40% of our digital customers did their first transaction in a retail environment for Western Union. And so when we think about marketing now, customers are customers, right? And if we're acquiring customers that start in retail and go to digital, we're acquiring customers that come to digital. So the strength of Western Union is actually its brand. So creating a message and marketing across channels about Western Union, not necessarily about purely digital or purely retail, but about Western Union actually creates scalability and a multiplicative effect in the value of the marketing dollars, right? So one of the things we're doing and some of this digital acquisition work is we're integrating the message. So the hundreds of millions of dollars that we spend in marketing are not channel-specific and allow us to drive new customer acquisition across our franchise cost effectively, not just do Google Search ads to drive digital customers. Does that make sense?

Totally does, which leads to the next question, so completely follow here, which is around the digital growth coming out of the retail customer base. So maybe bring to life how do you take a retail customer and make them aware/incent them? And then the follow-up is, and we talked about this a little bit. But how do you incentivize the agents to support that process to essentially move customers to the online channel?

So let's take another hypothesis or premise that I think we're challenging. And we talked about this in Investor Day, which caused some interest and, in some cases, agitation, the 45% retention rate that we have in retail. So in any given year, over half of our customers leave our retail business. Some of them, as we said, 60% of the lost customers are -- they were only onetime user, their emergency use case, onetime money send customers. We captured them because we have this great brand and this great franchise. They didn't go anywhere else. We didn't lose them to competitors. But the other 40% went someplace else. And some real part of them went digital and they went digital without us. And so there is a natural migration of our customer base. Someone who travels across an ocean or across a border in search of an economic opportunity, much of the time when they land, they don't have a financial institution. They don't have a bank account. They are dealing in a cash economy. And so they naturally end up in our retail, sending money home. As they become more established and they become more institutionalized in their new home, they open bank accounts and they migrate to digital. This is a -- the agent can't control this. We can't control this. It just happens. That's why we have low retail retention in some cases. And so what we're really talking about is capturing that natural flow of the graduation effect of someone who starts in the cash economy, ends up in a more sophisticated financial situation and then migrates to digital, right? And so we're trying to capture that instead of letting it all go to our customers. Now we also are going to, proactively in some cases, help customers recognize that that's an option. And there are 2 -- and I'll come to your point about the agent incentive in a second. There are 2 ways to think about that. One is loyalty programs. So right now, our loyalty program is largely a digital phenomenon, right? And so we have a pretty robust, our Western Union points program, for our digital customers. Enabling that at the retail point of sale, which enables a customer to participate in the benefits, some discounts, some rewards, starts to establish a relationship outside of the retail environment then it also allows us to push a digital offer, right? First transaction free, if you try download westernunion.com, yes. So that allows us to start using the loyalty program as a way of migrating. In some cases, we are partnering also with our agent partners. And again, coming back to this idea of 55% attrition, it's actually quite easy to incent an agent, provide economics that make sense, also far less expensive than advertising on Google to say, help us. And by the way, in some cases, these customers remain omni-channel. Our most valuable customer is the one that uses both retail and digital. That's also valuable for them. And so creating the incentives that allow them to participate in that migration is also something we're working on.

Excellent. Thank you, Devin. You alluded to how the company's approach to marketing over time has shifted. And it's very true. And there's one other aspect that you've also called out that's maybe a little bit different than the past, which is focusing a little bit more on putting some of the spend towards the receiver side. So maybe you could just talk about what that means for the business and also what it means for the unit economics when you're able to go digital to digital on both sides? In other words, you've engaged the receiver to receive digitally.

Yes. So there's 2 interesting ideas there. One is the strength of Western Union. So in our 120 million customers, over half of them are received in receive markets, right? So they trust an important financial transaction to Western Union. And in many cases, it's a cash transaction. So they're taking money out via a retail network. Many of those customers or the children of those customers or the brothers and sisters of those customers are, in fact, the ones that immigrate to a different country in search of economic opportunity. So, leveraging the strength of our receive market relationships to promote future centers, so this is really an investment not in a transaction today. So it's a much longer-term philosophy on how you might spend your marketing dollars. So instead of trying to incent the transaction today, it's creating the messaging and the goodwill to create a new customer and a transaction tomorrow, right? And so, it is kind of one step ahead of just driving in-period but driving multi-period new customer acquisition. The second thing you said, which is super interesting, is one of the reasons we launched our digital wallet and banking product in Germany and Romania, and then in Italy and Poland, is the idea of getting the 2-sided part of our network fully digital, right? And so we've seen a significant, almost 20,000 customers in Romania who have downloaded that wallet, who will receive customers in our retail network, right? So now they can receive digitally. In the United Kingdom, we put promotions in place. If you're sending to Romania, encourage your recipient to download the Western Union wallet app. And there is an economic incentive for that sender that makes it attractive for them to get their receiver to participate digitally on the other end.

Excellent. Thank you for bringing that to life, that's exactly what we want to do. So that is a nice segue into the next topic, which is the digital banking platform. So maybe for the audience, you could recap the offering and one of the milestones you've put out is targeting 150,000 by year-end. Maybe talk about some of the other milestones and how much of a contributor this could be over the coming 2 to 3 years?

Yes. Thank you, Tim. I'll work my way to the offering. So it's a digital wallet. People can do wallet to wallet transfers. They can do money transfers. They had the ability to use our existing services. We're also in 30, 40 countries where we have debit cards available for folks. So they can use a debit card or a prepaid card. And we're continuing to add additional technology and products around the country or world. As far as your question around the economics, we've not disclosed what the economics is going to make sense at this point or what it's going to be. Really about trying to acquire those customers get to the right scale. We're still testing what the right CAC levels are, LTVs. And we're starting to see some really good penetration in those 2 countries that we're live, 3 countries we're live in right now.

Excellent. But in terms of the economics, it's fair to say, without putting specific numbers on it, that, of course, there's the potential for those digital to digital, call it, network transactions that Devin alluded to, but the secondary economic or revenue stream would be the interchange from the card. So there's a sort of a double whammy way to monetize there and it probably has a triple whammy, which is probably the improved retention.

So you can imagine retention, remittances, interchange, monthly fees. And there's different services with FX levels and stuff like that, depending on whether someone is a premium customer or a base customer. So -- and then you can, other services that we're looking at beyond that, which could add further to the overall TAM.

So Tim, coming back to our conversation about the receive markets and capitalizing on the economic opportunity, and we talked about this at Investor Day. We are seeing, on an annualized basis, those customers in Romania averaging about $25 of revenue per user per year. Pre-the digital wallet, the average revenue per user per year in Romania was 0, right, because it was a 95% receive market. It was mostly payout to cash. So it was actually an expense to us because we're paying agent commissions to hand cash to Romanians. And so we've opened up an entire new economic model in a country where we have brand awareness. We have existing customers that we now have the ability to monetize in a way that just wasn't possible before.

Well said. I think, wrapping up on this topic and...

No. Obviously, we would -- nobody should put $25 in their model. There's a -- that is an early and we aspire obviously to a lot more. But I'm just using it as an example of something we shared for folks.

Okay, great. I think noted on that. But it sounds like a lot of benefits to wrap up this topic and we'll move on. But there's the transaction, there's the interchange. There's the improved retention. And then, Devin, to your point, there's also the cost avoidance, if you will, of the previous retail fee that would have been paid for the cash out. So that's a long list.

I'll also add, the last one, it's a service you're going to have. It's great if that happens, you save the money there, but our partners are important to us. And if a customer wants cash out, we have that. And that's one of the strengths we have is we have a big network and we have it on both ends to put money into the network.

So just in our models and how we think about the opportunity, all the things that you said are correct. But they are all incremental to the base belief that the real value on both the send and the receive side is increased engagement and therefore, increased retention. So our principal objective is to bring the wallet and the multiproduct ecosystem to our existing 120 million clients and small increments in the retentive value has large benefits in our overall economics. If we get interchange, if we get debit card issuance and usage or prepaid card issuance and uses, if we get extra 4x from people holding and managing currencies in the wallet, all those things are goodness that stacks on top. But the base model is really about increasing engagement, moving from a single transaction to an account and a relationship and therefore, driving retention.

Well said, Devin. Excellent. I think we covered the digital banking topic quite well. I think we hit digital well and I think we hit retail pretty well, too. So why don't we move to macro. So very topical, given the environment, so somewhat of a fluid macro environment. Investors would surely appreciate any either intra-quarter updates or general updates in terms of what you are seeing in the business?

Yes. Thanks, Tim. It's -- so obviously, a very dynamic market, as you just said. Thus far through the quarter, we're not seeing any major changes in our macro conditions we saw last quarter. We put out 3-year outlook at our Investor Day a couple of months ago, a month ago. That outlook was -- that outlook was built off of having consistent macros to where we were today. We think there is room with the improvements we plan to make in the business that you have ability to land the plane on that outlook. Now obviously, we have a deep recession. That would be a different conversation. But at this point, we're still seeing no impact on inflation. Our principal balances are holding up. We're still seeing similar transaction levels, so not seeing anything today, but obviously, very dynamic market.

All right. Excellent. And just to be clear, that comment applies through today, basically, no meaningful change since you reported earnings system, great. Okay, excellent. I want to go to the audience, if you don't see -- if anyone would like to grab the microphone, we could open up for questions. We certainly have more. But we wanted to make sure that we give the opportunity to the audience. If you'd like to raise your hand, we'll bring you a microphone.

Bueller.

That's all right. No problem. We have plenty more to go. Why don't we -- might have to be our last question given time. But why don't we go to capital allocation and M&A. And maybe just talk about, of course, your priorities, but also just what are sort of the guardrails that you have in place in terms of how you would think about what you would or would not consider?

So let me start from a strategy standpoint and Matt can talk about from a financial standpoint. So we've articulated a pretty clear strategy about refocusing the business on the consumer value proposition around leveraging the Western Union branded delivery channels and around focusing while we are still doing digital white label deals, while we'll still do partnerships with FIs, the real emphasis is on growing our consumer -- direct-to-consumer business. Therefore, from a strategy standpoint, straying from that, I don't think you'll see us going in trying to replace Western Union Business Solutions by buying a new B2B payment company. I don't think you'll see us wandering off to go into the merchant processing business as dear as that is to Matt and my hearts from where we came from. So we're really focusing our activity on those things that can enhance the consumer value proposition that can strengthen our distribution capabilities and reach and can bring new products and services into our ecosystem that meet the uniqueness of our particular customer segment, which is the marginally banked and the un-banked. From a financials perspective, you can talk about.

Yes. And from a financial standpoint, similar to our past position. We're very committed to our dividend. That's our first pillar for using up our free cash flow. To Devin's point, we are looking for things that help our consumer position. On an M&A standpoint, if they're the right deals that have good payback, obviously, we want to invest there. And if not, we're going to continue to be shareholder-friendly and buy back shares.

Okay, excellent. Thank you, Matt. All right. On behalf of all of my colleagues at Credit Suisse, I want to again, thank the full team from Western Union. I want to thank Devin, Matt, Brendan for joining us here in Arizona. Thank you for joining the 26th Annual Conference.

Thanks so much.

Thank you.