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

All right. Great. Welcome, everyone. It is the afternoon session here at our 27th Annual Global Technology Conference, and it's a pleasure to be hosting Western Union. We have with us today Matt Cagwin, who's the CFO. Also joining us here, we have both Tom and Shannon from the IR team. So I just want to thank all 3 of you, Matt, Tom and Shannon, for making the trip to Arizona.

Okay. With that, we're going to get into some questions here with Matt. And as we were just talking previously, I think a good place to start is just a little bit of clearing the air on how investors should be thinking about 2024 for the business? So as a little bit of context, this year, it looks like things are shaping up or at least guided to be in the kind of 0% to 1% revenue growth, and that's including a little bit of the benefits from Iraq. But how should we be thinking about the 2024 business?

[ Tim ], thank you very much for having us here. It's been a great day so far. To your question, having Iraq this year does add a little bit of uncertainty or confusion around where our trajectory is. So just to help on that, we've tried to advise people to go back and look at our 2022 guidance and our 2022 results. And just as a reminder, we had our Investor Day in October of last year. We talked about the fact that we thought this year would be a down 2% to 4% growth year, and we talked about the fact that we thought next year will be down 0% to 2%. When we exited that year, we were a little bit below $4.5 billion. Included in those results were $200 million related to our Business Solutions disposition, which closed earlier this year in July. So you get down to about $4.3 billion number. When you back off that midpoint of those 2 ranges, you get to down to kind of a target for next year, somewhere around $4.1 billion. We're not here to give guidance for next year, but that's the way to model it. And as you probably remember from our last earnings call, we had talked about -- we were pretty excited about our progress we've made on digital, which I'll talk about in a few minutes, and our retail side. So we're slightly ahead of that, but we'll come back out in February and give real guidance.

Okay. I'm sure investors appreciate that mechanic there and kind of the initial framework. So that's a good way to start thinking about at least the framework for 2024. Let's talk a little bit about what you've been seeing in the business since you last reported and kind of what you're seeing so far in Q4, either -- whether it be related to specific regions or broader macro or really any way that you would like to tackle it? And if you don't mind, Matt, if you could talk a little bit about how Iraq specifically has been tracking relative to your expectations within the quarter?

So I'll start out with Iraq. As we had talked about couple of weeks back on our earnings call, our largest agent was suspended in the middle of October. When that occurred, our results from Iraq have now largely reverted back to pre this uplift period that we had. Just a reminder, we had about a 200 basis point benefit in Q1, a little over 1,000 basis point improvement in Q2, 800 basis point in Q3. And then we expect this quarter to be a little bit, but the latter part of the quarter is largely reverting back to pre-Iraq elevated levels. To your question around the overall macros and broader, our business really -- there's a couple of things. One is we're very focused on what goes on related to unemployment levels, in particular, blue-collar unemployment. That has held pretty firm for most of the major geographies around the world for us. So we feel really good about our customer base. You can see it in internal metrics. When you look at our principal per transaction, ex Iraq has been largely flat. It was down 1% last quarter, where prior to that, the last 8 quarters before that, it had been generally plus 1%. So it's kind of hovering in that flattish positive range. So we feel very good about the stability in our customer base and the transactions they're doing. And then the last one that does have an impact on us is FX rates. At times, you can have FX rate move, and you might see a little bit of a shift. But ultimately, we're a business where people are supporting their family needs. So that's eventually going to -- need to be sent, and you'll see that happen. But when FX rates move wildly, you'll see some behavioral changes in a couple of month period as they're adapting to the new changes. To your question about what's doing well, very excited about what's going on in North America. We reverted after 6 years of negative transaction growth to having the first quarter of transaction growth here in Q3. So very, very excited about that. From our Latin America business, we've continued the strong growth they've had, starting to see some great improvement within our European business. Really, 5 out of our 6 regions had sequential improvement from Q2 to Q3 from a transaction standpoint. Year-over-year, all of them are positive. So we feel really good about the work that we've been doing on our business.

Okay. I think we should move a little bit into -- so we touched a little bit on kind of near term on the employment picture. We talked a little bit about 2024. We'll circle back later on margins. But why don't we talk a little bit about some of the pillars, right, the retention, the omnichannel, digital and the ecosystem more broadly, really as part of your Evolve 2025 strategy?

That's perfect, [ Tim ]. I mean, let me just step back, and we'll go to our -- what is our strategy? Our strategy is made up of 4 pillars. The first one is we really wanted to stabilize our retail business. We're seeing the strong progress there. We've actually gone from having transactions down about 6% 4, 5 quarters ago. Two, we got to flat on transaction basis this past quarter. So we're really excited about the progress we're making there. Our second pillar is to accelerate digital, get back to market-level growth rates, which are low double digit. And we've now had, for 2 quarters in a row, 12% transaction growth. We were able to get back to positive revenue growth after a period of a year of reductions in revenue. Still feel very good about our new customer acquisition, which is really the first part of that successful turnaround story for our digital business. Our third pillar is expanding the accessible financial services, our ecosystem. We've been live now for about 15 to 18 months in Europe across 4 different countries. We've learned a lot about that. We're still very bullish about the strategy, about putting the wallet in the market. It comes with the ability to store and save money, ability to do remittances, ability to do crypto, issuing debit cards, things of that nature. We're seeing a 2x to 4x more frequency of transactions for those customers in those countries, but we've also learned some things we could do better. When we launched it, we kind of felt like there might be a need to have a single app because then you can get people to graduate from being a remittance client to being an ecosystem client, but that was going to be a longer build. So we end up going into the market with 2 different apps. That hypothesis and, let's call it, fear turned out to be true. So now we're in the process right now of those countries to roll out a one app solution, which we'll be doing here in the coming months. And then from there, we'll go into North America and into Brazil.

Excellent. I wanted to drill down a little bit on the new digital customers. You mentioned that 12% growth in transactions 2 quarters in a row now of Q2 and Q3. Can you break down a little bit of either today and how that's evolved over time? I think the historical context would be helpful in terms of the mix of new customers or how much of that is being driven by new customers?

Yes. So from a transaction basis, this has been a business that was a really strong grower going into COVID. We saw an acceleration in COVID of new customer acquisition in the low double-digit range, call it, 15%-ish. And that didn't translate into transactions and also revenue going through the early part of COVID. Coming out of COVID, we saw a massive slowdown in our customer. We actually saw shrinking of our customer acquisition, which then translated into a shrinking transaction, shrinking revenue base. We started a program last year in August of 2022 where we've launched a new go-to-market strategy. That strategy is anchored on to a few different pillars. One is we have introduced new promotional pricing, we've introduced a new -- how we engage our customers through marketing campaigns as well as reengagement, and we've also enhanced our apps and our website to help the funnel and to try to take out the friction that a customer would see if they tried to interact with us. All of that has translated into 4 quarters now in a row of double-digit new customer growth. That's translated into double-digit transaction growth. And then last quarter, we had 3% revenue growth. Those 2 things will converge over time as we continue to deliver on new customer and transactions.

I want to also circle back to another point that you made there, which was around the retail segment stabilization. So you were expecting that to get to something more sort of roughly flat over the next 2 to 3 years. Maybe just talk about some of the tools that you're using there in terms of the pricing, the in-store, the point-of-sale systems and elaborate upon those?

Yes. So I'll start at the highest level. For us, it's all about reducing friction, and it's about customer service and agent service. And we've spent a lot of time this over the last year on improving our call centers, working with our agents on having single point of contacts, having as many self-service tools so that our agents and customers can help themselves, which has actually helped us reduce and pull costs out of our business, but also satisfy the customer because able to get things resolved much quicker. And then we've introduced new product improvements to our point-of-sale solution. We've introduced things like one-step refund, which actually helps both on calls to our call center, frustrations for our agents, frustrations for our customers because before that, the vast majority of them had to call into our call center and get the refund done versus today they can be done through a single step by an agent location. And a large portion of the refunds are being done that way. We've also implemented Quick Resend and Remember Me. Both those allow us to speed up the lines at our agent locations. They've been launched here in the U.S. principally through our Vigo locations at first, and then now they're moving into our Western Union outlets. We've got activated here in the U.S. by about 25%. And then at our Vigo locations, about 45% of the transactions are using the Quick Resend functionality now.

All right. Let's go a little bit more into branded digital. One of the things you've talked about is using the in-store retail footprint to help drive the digital business and to bring -- make the customer more of an omnichannel customer. Maybe if you could just bring to life and maybe give us some examples of how you go about taking a traditional retail customer and enticing them or incentivizing them to become more of an omnichannel customer for you?

Yes. So this is one that we've done a number of different tests on, whether it be commission programs for agents to help them upgrade the retail digital escalator. We're also right now -- we'll launch early next year a new loyalty program that will help them send customers to do transactions on both sides, which we think will help drive an omni experience. The reason why -- you may be wondering, why do we care? Why is this important? And there's really a few reasons. One is we've noticed through our studies that a customer that's doing transactions on both sides is a much more profitable client to us. It's about 2x the valuation for Western Union, someone who's doing both sides. We believe it makes them more sticky because they're able to use the full functionality of our system. So we have a lot more work to do on this one. It's still early days, but we think the next major milestone is early next year on the loyalty program.

All right. Let's talk about the marketing spend that goes towards digital. So in the past, it used to be more of -- the vast majority, I believe, of the marketing spend for Western Union would have been more for online customer acquisition. Maybe just give us an update on kind of where that stands? And then more specifically, we can dig into the 20% decline in CAC that you've talked about and some of that efficiency that you're seeing in digital marketing.

Yes. That's a great question. Still, the vast majority of our marketing spend is still on the digital side. We believe that our 400,000 agent -- active agent locations is the way to recruit clients to our retail network. We're paying commission rates that brings customers into this foot traffic. So that's the best way to acquire those. It doesn't mean there's nothing spent on ads or different things of that nature, but the vast majority is still digital. What have we done to lower that CAC? We've done a couple of different things. I talked earlier about how we've improved the usability within our app and our website, try and take out the friction. So the number of visitors we're getting is up year-over-year, but the actual number that are converting has gone up significantly. And that's just really due to the friction we've taken out of the system that's allowed more customers to actually engage and transact with us versus those that had visited in the past. We also believe that our promotional pricing is driving a fair bit of that because now they're coming, they're getting enticed to try us out, work their way through the entire funnel process, getting a great experience and then returning. I think one of the things we've talked about in the past is that our digital retention for customers after 90 days is very consistent, higher in a lot of geographies, but largely consistent overall with what it was before we did the promotional pricing. So you're attracting more customers, and you're still retaining them, which was one of our worries when we first launched and have been pleasantly surprised with where that stands.

Before we go to margins and then wrap up with capital allocation, why don't we talk a little bit about the digital banking platform. So maybe this is a smaller revenue contribution maybe today and in the medium term, but something that -- it seems like the management team is more excited about for maybe 2025 and beyond. Maybe just talk a little bit about that offering and some of the reasons why you believe that Western Union has a good chance to win in that segment?

Yes. So we've got a customer base that generally is underbanked. And most of our -- most of the traditional banks are not interested in our customer base. We already have a door open to these customers. Reason for doing it? It's not 100% about expanding the TAM. We do think there is an opportunity to expand the TAM, but it's rather to drive that ability for them to grow up and mature with us and retain them over time. Historically, some of them migrate countries, move into a new geography, not get banking services. So going to a Western Union agent location to pick up money first when they arrive because they need money to be able to get settled, then they start earning a living and sending money back home to their family to maybe bring them along with them over time, and at some point, they bring up enough credit, enough financial worthiness to be able to get a bank account, and they graduate from us. By having a wild solution where you're able to store funds, able to get a debit card, a prepaid card, hold multiple currencies, it gives them more touch points with Western Union, a place they already trust and use versus before they trust and use us, but eventually migrate away to the other services to help them throughout their entire financial journey.

Okay. I think it's a good time to turn a little bit to margins. Maybe we could talk a little bit about just to level set for this year's margins and what some of the benefits have been and maybe some of the reinvestment you've made as a result of those benefits? And maybe more similar to like we did with revenue for next year, just some of the mechanical building blocks that we should think about as we think about the margins for next year in the context of your medium-term outlook?

Yes. So I'll answer part of that, and I'll come to the first -- latter part in a different way. So I'm actually going to build off the EPS. So you can do the similar build we did for revenue, but we didn't give a percentage improvement for EPS for 2023, we gave a range. Our initial range we gave for this year was $1.55 to $1.65. We've been consistent in our calls publicly that most of the improvement, if not all, from our midpoint has been due to Iraq. So we've taken our range up from the $1.55 to $1.65 to now we're $1.68 to $1.75. That improvement is Iraq. If you take the midpoint of that range, $1.60, and we told folks back at our Investor Day last year that we expected to grow mid-single digits, so call it midpoint 5% to 4%, 5%, 6%, that should give you an idea where the leaping-off point is for next year with the revenue we just talked about a few moments ago. Back to your first part of the question on where do we make the investments because we had about $250 million of revenue from Iraq, it's got a little bit lower fall-through rate than the traditional retail business for us because of commissions and incentives in that market and extra compliance costs associated with being in Iraq. But you just take the midpoint, call it, 50% fall-through rate. We've returned to the Street about $0.10 or so of that through higher guidance. That's $40 million. The remaining 2/3 of that profit fall-through, we put into incremental marketing spend. We've done a fair bit of pricing in the marketplace that we talked about before around testing in the retail market. We've accelerated a little bit on the digital side as well as we've done some other product innovations that will ultimately end up in other, which we look forward to talk about in detail in future quarters.

Right. So let's move a little bit to capital allocation. So I think most investors understand the dividend is an important part of your capital allocation. So maybe we can talk a little bit about the dividend, but also buybacks and your view there and whether or not the team wants to further prioritize buybacks?

Yes. So very consistent with where we've been in the last couple of years, very committed to our dividend. It's a very good yield for everybody in the room who wants to go buy and get an 8% yield. I do look for the day that the yield is only like 3% or 2% because our stock price is higher. But then our second priority is M&A. So we're regularly looking at M&A. You may be saying, you're looking at a lot, but you haven't bought anything. We're very diligent about how we do that. We want to have something that's going to help accelerate our ecosystem strategy or it's got to be a logical thing that brings in a good return, if it's on the remittance side because we're already in retail, we already have every country in the world covered, we already have one of the largest agent network. So what is it adding to us if there's something on the retail side? Same kind of concept on the digital, what is it adding? And we're very diligent about that, but we're very interested in things that might help accelerate our ecosystem. Unfortunately, most people still want too high multiples for what makes sense, and we end up building things. We've recently launched our prepaid card here in the U.S. That's one of the things we looked at a number of different options to buy, but ultimately concluded that the multiples for those relative to building was not the right use of our capital and ultimately started returning cash to our shareholders last quarter.

I think we should pause now and see if we could go to the audience to see if there's anyone that would like to ask a question. We have a microphone right here. Okay. I'll jump in. We have one last one here, and then we'll wrap. But the last one is really around partnership opportunities. So whether it be partnerships with other retailers or other digital platforms, whether it be on a branded basis or on a white label basis, could you just expand upon that topic of that potential distribution angle, if you will?

Yes. So partnerships are a unique word. So I thought about this question. To us, we have lots of partners that are agents. And you can partner with them where if you're partnering with a retailer, we're helping to drive foot traffic to that retailer. People want to come and pick up money. We do pay them a commission rate. Now they have a customer in their location, whether that be a Walmart or Kroger or Walgreens, whatever. They have cash that they can go in and buy other goods. So it's actually helping to drive business to those folks. Beyond that, we also look at partners for -- as you're familiar, we've got a partnership where we've got a JV in the Middle East with Saudi Arabia Telecom where we've partnered for remittances, and they were launching a wallet and lending products and so forth where we've got an ownership stake and has a partnership there. But then beyond that, we're looking for how do we expand the ecosystem of partnerships? We have partnership with -- through 2 different parties on lending, one in Australia and one in Argentina, because one of our top needs our customers have is money. How do they get access to money? How do they get short-term loans? And we're not -- no one in this room should be worried. I'm not looking to put on-balance sheet loans for Western Union, but there's lots of people who want to have access to our customers and are willing to pay us and willing to give good customer service. So we've been testing that now for about 4, 5 months and have seen fantastic results in both places. Where -- in Argentina, though we're not live in every country, we have lots of company-owned stores in Argentina, it's not live in all of them yet. But the one that we've been testing it in, we're actually generating enough loans and then collections that is actually offsetting our cost of rent. So not a ton of money, but you defray some of your costs, you provide some additional value to a location you've been paying for. nothing to be upset about, and we're now starting to expand that further. In Australia, we've partnered with something that's all digitally done. And there, we're seeing a meaningful renewal rate of the loans. We partnered with someone who does do the right thing by our customers, where they don't let you do serial loans. You have to have a breakpoint, but we're seeing people borrow once and then come back and do it multiple times. And you're seeing that help drive -- hopefully, over time, we're expecting to see it drive stickiness for us as we're tying the 2 together. So things like that.

And your revenue structure on that is more of revenue gen type of fee?

Rev shares, more like rev shares per loan.

Perfect. Okay. Great. Well, I want to again thank Matt and Tom and Shannon for joining us here in Arizona. It's been a pleasure hosting you, and thank you for sharing the thoughts on 2024. I'm sure everyone appreciated that.

Awesome. Thank you, [ Tim ].

Thank you, Matt.

Thank you, everybody.