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

All right. See the countdown starting. Yes. Thanks, everyone, for joining. My name is Tien-Tsin Huang. I cover the payments and IT services sector at JPMorgan. Really excited to have Devin McGranahan back, CEO of Western Union. Enjoyed having you here last year. And bridging from Pfizer into Western Union, he's put in a lot of good change, and excited to get through that with him today. We are going to take questions from the portal as well as from the audience. So to ask a question, portal, I'll have that ready. So feel free to submit questions there. But Devin, thank you for being here.

Yes. It's great to be here. Thanks for having us.

No, that's great. So -- yes, I figured we'd start with a progress report. I'll ask you about Evolve 2025. I know we are eagerly tracking that as we go, but I'm sure you're doing the same internally. So catch us up on what's going on with that.

So we launched Evolve 2025 in the fall. And as you know, there were a couple of important pillars to that strategy. We've talked extensively about the first, which is reinvigorating our digital business and bringing it back to double-digit growth. So we launched the program in August, first in North America, and then have subsequently been rolling it out across the world. In the second quarter of 2022, our digital business shrank 3% on a transaction basis. By the end of 2022, we were positive 1% to 2%. And we announced at the end of the first quarter, we were positive 7%. We continue to execute that program around the globe and believe we are, in fact, on the right path to returning the digital business to double-digit growth rates. The second, which was really stabilizing our retail business. The retail business is obviously a lot larger and more diverse, with over 400,000 locations around the world. And obviously, some of the macro effects that are existing in the world economy affect the retail business more than the digital business. But as we announced on the end of the first quarter, we've seen 200, 300 basis point sequential improvements in our retail transaction growth in almost every geography around the world. So we feel good about both of those. We also announced the launch of our -- what we call our Ecosystem, which was expanding the product set beyond just what we do in cross-border remittance. So we have the privilege of serving 120 million people around the world. And so bringing new products and services, both physically and digitally to that customer base. So we are in the process of relaunching our prepaid product, which will go live here this quarter in the U.S. We launched a digital bank in 4 countries in Europe, Poland, Romania, Germany and Italy. We now have over 150,000 enrolled customers and continue to see upside in the migration of existing Western Union digital and retail customers into the digital bank, which we highlighted some of, at the end of the first quarter. We will go live in Brazil this month. So we're finishing our friends and family, and we are working on bringing the digital wallet to North America before the end of this year. So we feel good about the progress we're making on the Ecosystem as well. As I said on the first quarter call, we don't anticipate that the Ecosystem will make a material difference to revenue generation this year and maybe even next year, but it is the foundation for long-term increases in customer engagement, customer retention and, obviously, TAM expansion. So we're continuing to invest in that portfolio of products and services. You also saw on the end of the first quarter, the work that we've been doing around our bill pay business, our retail money order business, our transactional services businesses that are part of that ecosystem have all been doing very well, both in North America and South America. So we're pleased with the progress we're making there as well.

Yes. And that's a real progress. You talked about sequential growth, I mean -- Devin, we get this question a bit just upfront here. How cyclical is the business in terms of consumer health, user health? Maybe you want to walk us around the globe a little bit, any interesting trends to call out?

Yes. So we highlighted on the call the -- what we believe is the durability of our customer base. We've continued to see principal per transaction stable and, in some cases, slightly expanding. Our customer has enjoyed despite the macroeconomic effects, mostly high employment in most regions around the world, and so that makes a difference for our customers. Our business is probably more sensitive to changes in exchange rates and monetary policy than it is to general macroeconomic effects. And so right now, you're seeing real strength in the Mexican peso. So that affects one of the largest corridors in the world, U.S. to Mexico. As we highlighted in the call, there was a change in economic policy in Iraq. So we saw some benefit from that in the first quarter as well. So in general, we pay attention to the macro effects. We've come to believe that global GDP is a pretty good tracker for cross-border remittances. And so we have seen some slowing as global GDP has slowed, but nothing falling off a cliff anywhere.

Got it. So thinking about policy and regulation in general, I always think about it like a pendulum. It swings in your favor or out of your favor. Where do you see it swinging today? And maybe can you expand upon the Iraq piece and how much that helped, and why?

Yes. So Iraq was a change in monetary policy as the Central Bank in Iraq is shifting to basically strengthen their banking system and have a better outward-facing mechanism for dealing with its currency. That benefited MTOs like us because the delays in which -- were put in place for banks to move money out of the country. I think it is temporal. As Iraq stabilizes, as the Central Bank continues to adopt and modify its policy, this is a temporal change that will abate over time, without a doubt. The rest of the world, right, is right now from a policy standpoint, relatively stable, obviously, with the rescinding of Title 42. People had expected a significant change in the migration situation on the southern border. The Biden administration put in a different set of rules, which have largely maintained the status quo. A number of our customers are in Mexico awaiting entry into the United States. And so when you're on both sides of a border or you're on all sides of the border, people from Colombia, Guatemala, Nicaragua, wherever, who are in Mexico, are receiving money in Mexico. So we're seeing strength in our Mexico business.

Good. Yes. I know we've been tracking that. The performance there has been good. So pricing, and that was always a fun topic. And you've educated us quite a bit here, Devin, on pricing. So, you mentioned the promotional activity. And it sounds like you're moving more towards this market-based pricing, which is different than what I remembered with Western Union being the premium-priced product. So catch us up on the promotion activity where it stands and how much further you could go on that. But more importantly, market-based pricing, what does that mean?

So we launched promotional pricing in August, which, in many cases, is first transaction free, first transaction 50% off, in our digital business. We have subsequently evolved our ongoing pricing to, as you know, what I refer to as market-based pricing. So we have a pretty sophisticated view of the prices by corridor around the world. And our goal is to be within the market basket. So we're not aspiring to be the lowest price, but we're also not aspiring Tien-Tsin, to be the highest price, right? And I think for some period of time, Western Union had a strategy and potentially even a belief that the strength of the brand, which is about all that exists in the digital business, at this point was sufficient to command a market premium. And at some level, it will, but it won't command the market premium and drive double-digit growth. And so we are in the pursuit of growing our business double digits. And as a result, a more competitive price in the marketplace, combined with the strength of our brand, our strong compliance capabilities and obviously, our great payout network, is enabling that to happen.

And to be clear, you can see pricing very, very closely, right? In any quarter, at any moment in time, so it is dynamic?

It is a real-time proposition where we look at prices across 20,000 corridors. We are continuously updating that. Obviously, U.S. to Mexico, probably one of the most heavily competed corridors in the world, that has a lot of price transparency and a lot of price -- ongoing price management that goes on. But if you're Gabon to Angola, that's a different game.

Got it. So the pathway to double-digit growth on the digital side, Devin, talk to us about the optimal formula in your mind to get there across retention, price, transaction activity, et cetera.

Yes. So the beauty of a digital business is it's relatively straightforward. And so we've been working on 3 things, one of which you've talked about, which is competitive offers in the marketplace. The second is we've really been working a lot on the end-to-end funnel, right? So improving the efficacy of our marketing dollars, both in terms of bringing eyeballs to westernunion.com, into our digital apps, but also then the conversion of those, price check to transaction. We said on the first quarter call, we've seen a significant increase in the efficacy of our marketing and a double-digit lowering of our CAC on a period-over-period basis. So that effort and -- you've heard me talk a couple of times about shifting the mindset of the organization to really be focusing on LTV to CAC or CAC to LTV versus transaction economics. So much of the work that had been done was around maximizing the value of a transaction, we're really trying to maximize the value of a customer. And so part of that equation is how much you pay to acquire that customer and then what's the value of that customer over time. So the third thing really is around retention. We've publicly said we're seeing the same, if not better, retention around the world from these new cohorts of customers that we brought in than we have historically seen. And that was obviously one of the concerns some folks had, which is would you acquire the same quality of customer with promotional marketing activity. And I think now, 9, 10 months into this, we can definitively say the customers that we've acquired within this program are as good, if not better, in terms of retentive ability over time.

Good. Good. So I know you've been very clear upfront around the LTV to CAC, which I think, from a relationship standpoint, it makes a ton of sense. Translating that to margins, can the margins of the digital business sustain at a premium to the retail business as you see it longer term?

Yes. So in general, the digital business is margin accretive on a percentage basis to the company. As you can imagine, the cash in, cash out business is high commission pretty much on both sides of that transaction. And obviously, there's a lot of operating costs with the cash -- funds in, generally bank account or a card, that's pretty predictable. And our funds out, particularly funds out to account business, which has superior economics, is growing quite rapidly. On a unit economic basis, the digital business is less dollars per transaction. And so managing that mix over time is one of the things that we're working hard on. But we see the digital business and the strength and growth of the digital business to be accretive to the overall business from both a revenue growth and a margin perspective.

Right. So what could increase the digital business on the revenue per side would be some of the ecosystem initiatives, right? So let's talk about that before we do the retail business. So we've liked this idea on the Ecosystem side, right, that you've built this trust, you're taking all these inflows from your users, why not bank them, right? And so with this digital bank initiative, you're talking about prepaid as well, bill pay, the wallet, being a bank, how do you prioritize all these things, Devin, and which ones are you the most excited about?

Yes. So we talked a little bit about this recently. There are 2 primary benefits of the digital ecosystem. The first is around engagement. And so the work that we've been doing in Europe, we're seeing 2 to 3x as many transactions. And transactions can be funds-in, it can be top-ups, it can be debit card transactions, it can be IMT, can be sending money across borders. It can be DMT. So it can be sending to other people in the ecosystem. So that increase in transactions drives an increase in engagement. So cross-border remittance even in the digital realm is largely an event based. So I need to send money, I do that once a month or I do that once a quarter or I do that at holidays. By increasing engagement, having that stickiness, the benefit comes in retention, right? So that when Mother's Day does come along or Ramadan does come along, you're already part and engaged with Western Union. You've not been searching for how you're going to send money, it's a natural part of the platform that you're already engaging on. The second is obviously each of those types of transactions, whether they be debit card transactions, whether it be currency exchange, whether it be bill pay, those are all incremental revenue per customer per transaction, right? And so being able to provide our customers with incremental products and services increases the LTV of the customer. So that kind of dual effect of increasing retention by driving engagement and then increasing LTV by driving product penetration.

So the markets that you're choosing to go after these opportunities, would you say there's already fin-tech competitors in place today? Or are you choosing ones that are maybe a little bit less competitive? How are you going about prioritizing the countries that you're going after?

Yes. So we are doing two things. One, obviously, we started in Europe, where we already owned a bank. So that was a natural. I wanted to get this out in the marketplace. As you recall, I've only been doing this for 15 months. We've been doing it for a long time. We wanted to get into marketplace pretty quickly, and it was easiest to do that in Europe with our European banking charter. So we then said, let's pick, send and receive pairs. So one of the beauties of our business is we're a 2-sided payment network. And so we picked Germany and Romania and then Italy and Poland. And so the 4 of those are 2 big outbound markets, 2 big inbound markets. And so then that gives us the ability to start playing with send and receive. So like one of the things we just did in the U.K. and in the U.S. in our retail business, we have mandated in for customers sending to Romania, a cell phone number. And so Romania is largely still a payout to cash market. we now will SMS the customer, the receive customer, and offer them an incremental RON 100 if they want to receive that money in their Western Union digital wallet, then they can pay it out in cash or they can do something else, right, to try that notion of send and receive pairs and building a 2-sided payment network. After those 4, we then said, let's start looking at places in the world that we have a natural customer base. And people have talked a lot about this. Look, I'm not trying to compete head-to-head with Revolut or N26 or Chime, or pick your favorite money losing digital bank. I'm actually trying to engage the 120 million customers I already have, trying to drive increased retention and incremental product, right? So I have a natural customer base. We have several million customers in our digital business already. And so our evolution then is where do we have natural places that we have existing customers who are likely to interact with us in this manner, which leads you to Brazil. Brazil, our digital business is bigger than our retail business. At this point, we've been very successful there. But more importantly, in Brazil, and you've heard me talk about this, is we have 60-ish owned physical locations that are entirely Western Union, where we do currency exchange, bill pay and IMT. That's a natural on-ramp to feeding an already very strong digital business. Coincidently, we also own a bank in Brazil. So that allows us to pay interest and do a few other things. So that's why we're in Brazil. And then we're coming to the U.S., obviously, as the natural largest digital business that we have and many of our customers in the U.S. are more digital than they are in other parts of the world already. So we're going to see how those progress and we'll continue evolving. This is a long-term strategy. As I said, we should be thinking about this in the '25, '26 time frame, but it's evolving nicely, and we like the progress we're making.

Yes. No, I think it makes a lot of sense in terms of planting the seeds for growth here in the midterm. So before I open it up, let me ask you, since you mentioned Brazil and sort of the retail business, I know overall returning the retail business stability is the goal. And part of that is to embrace Omni, as you sort of called out there. So I'm curious how is that tech being embraced? How are the agents responding to some of the changes? And I'm curious if you're seeing any real impact already, other examples.

Look, the agents -- and again, this is -- people have expressed concern that the agents are not monolithic, right? So -- yes, there are some agents. If you go to the Middle East and visit with some of my agents, they think this is the worst idea known to mankind. But that is a relative minority. Many of our smallest agents are looking for ways to compete and partners to help them succeed. I was with a large check-cashing client and they see Cash App as an existential threat to their business, right? And they don't see Block-Square, as a partner for them, they see us as a partner for them. So they want to know what can we do together if we bring a digital wall to the U.S., how can they participate, how can they benefit from some of the economics of enrolling their customers in a Western Union based product versus a Cash App product. The strategic partners are some of the most interesting, the big retailers, many of them have strong what I'll call, Omnichannel strategies. So whether this be the big grocers, whether this be the drug store chains, et cetera. And they're all looking for partners in their move to Omnichannel and a more digital. They can't staff service desks. They can't get the labor. One of my large grocery store retailers has actually closed all of the service desks in California because of the labor shortage and labor costs. And so when we showed up and said, "Hey, we'd really be interested in a more Omnichannel experience, kiosk driven, in lane-driven, digital and retail together", they will launch that pilot in California and -- end of the second quarter, they were so eager to try something. So I think, again, not all agents are the same. Yes, there are some that -- they view this as competitive. The -- there are enough that don't, plus with our own on-ramps, we still believe that our own retail base is a great opportunity and feeder for our digital platforms.