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

Good afternoon, everyone. Thanks for joining us today. I'm Ken Suchoski. I'm an analyst on the U.S. payments and fintech team at Autonomous Research. We're really excited to have Western Union here with us today at our 40th Annual Strategic Decisions Conference. And we're thrilled to welcome Devin McGranahan for the third year in a row. Devin joined Western Union as the company's CEO at the end of 2021 after spending 5 years at Fiserv where he oversaw the company's acquiring and processing businesses. Prior to that, Devin spent over 20 years at McKinsey, including over 10 years as senior partner. So Devin, welcome, it's good to see you again.

It's great to be here. To set the record straight, it's 885 days since I took this role, but who's counting?

Great. And thanks for everyone for joining in person and on the podcast. We're going to do a fireside chat, so I'll start it off with a few questions. If anyone else has questions for Devin, feel free to submit those using the Pigeonhole application by scanning the QR code, and we'll try to weave those in as we go.

So with that, Devin, why don't we get started. So you and the team have been very busy working really hard to implement your strategy, turning the business around. So maybe we could start there sort of high level. We heard at your last Investor Day in -- that was end of 2022 about your Evolve 2025 strategy. We're about halfway through that 3-year plan. So how are you and the team feeling about the targets that you provided? And maybe you can give us an update on how you're progressing towards those?

Certainly, for those who might not be following the movie quite as closely, in the fall of 2022, we had a business that was shrinking in the mid-single digits. And we laid out a plan over 3 years of taking that from shrinking revenue in the low single digits to growing revenue in the low single digits. Shrinking mid-single digits to growing low single digits. And so we've been tracking incremental revenue gains year-over-year 200, 250 basis points improvement each year. And now 18 months in, we talked about on the last call, it was the third consecutive quarter of 5-plus percent transaction growth, which was the first time the company has done that in a decade. And we had our fourth quarter of double-digit transaction growth in our digital business. So by objective measures, whether it's transactions or revenue, we are ahead of what we laid out in the fall of 2022. And I would expect we're going to get to that positive organic revenue growth sooner than we predicted when we laid that plan out. It's going well.

Great. And part of your strategy was to shift from a transactional-based model to a relationship-driven one. And obviously, digital is a key part of that. But can you talk about the progress you're making towards this relationship-focused model? And how are things like retention rates trending across your different cohorts and different lines of business?

So the history of the business is as a retail cross-border transaction processor. So as the business was developed, the agents manage the customer, and we processed the transactions and you had agents on both the send and receive. In a digital world, at least in the first iteration of the digital world, we managed the customer and then we had agents paying out in this next iteration of the digital world, we're actually managing it on both sides of the equation. But much of the infrastructure of the company, much of the mindset of how we went to market was still very transaction-oriented. So the basic philosophy was about maximizing revenue per transaction. And I mean, you know because you've studied -- you followed the company for a long time. We used to talk about things like oh, we're doing weekend pricing. Oh, we're doing street corner pricing. Well, think about that. So you're a loyal customer and you normally send money on Fridays because that's when you get paid, but something interrupts that this Friday, kid's sick, you need to get home. And so you pay -- you go on Saturday to send money, and it's 30% more. What do you think the customer thinks about that? From a transaction standpoint, sure, we just maximize the revenue of the transaction. But from a customer standpoint, it had consequences in terms of retention. It had consequences in terms of customer loyalty and certainly had brand implications of how people perceive how Western Union treated its customers. So moving to a customer orientation, and that's both in the infrastructure. So how we make risk decisions. Historically, we made a risk decision. You could be the world's best retail customer and the first time you did a digital transaction with us, we treated you like we've never seen you before. New customer risk assessment and yet you've been our retail customer for 10 years, right? So bringing the systems together has really been something we've been working on. And then that's all translating into increased retention, which is part of how you get to 5% plus transaction growth is you grow new customers, but also you start to get more transactions per customer and longer duration of customer relationships.

And is there any risk, maybe just a follow-up on that. Is there any risk on the agent side, right? So if you're taking on more responsibility. Does that -- is there any risk of disintermediating the agents at all? Or like has that shown up over the last few years or any signs of that?

So there's 2 important concepts. One, even with our retention improvements, and we're -- still lose almost 50% of our customers every year. So if you're a retail agent, small increases in retention are great for you because half your customers are going away every year, but more importantly, our agents in my view, have never been happier at least in the last couple of years because not only do they hear from me, but they see in our actions that we're committed to our retail business. For 2017 to 2022, we talked about we're going to be a digital company. So we stopped investing in our retail point of sale we stopped investing in retail marketing, we stopped being competitive in many retail markets from a pricing standpoint. And so our retail agents were watching their business decline and thinking we have basically abandoned them in lieu of going digital. For the last 2.5 years, we've been investing in our agent footprint. We've been investing in our retail marketing and branding. But most importantly, we've been investing in our agent support, whether that's our point of sale, whether that's our call centers, where that's their ability to serve their customer efficiently and effectively so they can make money. So they're happy.

Okay. So it's quite the opposite then?

Correct.

Yes. Okay. That's helpful. And then I mean you're making progress on the digital side, right? We've seen transaction growth accelerate. I think it was roughly flat or so in 2022. I think you're up to sort of the low teens today. I mean what's driving that? How much of that is due to customer growth versus transactions per customer, better retention rates? What's really driving that acceleration?

So when we launched the program in the fall of '22, I was very clear that it's a pretty simple formula, grow new customers, that will grow transactions, which will grow revenue. I think it's almost linear, particularly in a business that has kind of low-ish retention, right? So if you don't grow new customers, even at 60% or 70% retention, you can't grow the business. And so we focused a lot on growing new customers. So we put new customer offers in the marketplace. We improved our marketing efficiency and our effectiveness. We worked a lot on increasing conversion rates for people who came to Western Union to look for a price to actually making a transaction. So top of the funnel to the bottom of the funnel metrics, all significantly improved. There was a lot of conversation when we did it. If you recall, oh my gosh, you're going to get a lot of price shoppers, you're going to decimate retention, anybody can offer a free transaction. This will never work. Well, it turns out the customers we acquired and are acquiring are both sticking. And to your point, they're better customers. So we're getting incremental improvements in TPC and in PPT because the customers are sending more, a little more frequently and sticking around longer. So it's actually working out pretty well, which is how we drive 13% transaction growth for now 4 quarters.

And the retention rates, I guess, on the digital side, those have improved versus, I guess, where we were a few years ago? Yes, okay. And you said 60% to 70%...

So that depends on the corridor. The highest retention rates are in the fastest-growing part of the business, which is account to account. So we're growing the account-to-account business 30-plus percent, and that is where the highest retentions are. The lowest retentions are somebody who does funds in on a prepaid card to pay out to cash, right? So it's a -- and that's a wide range between the top and the bottom.

Yes. And where are these customers coming from? I mean, is it competitors? Or is it -- I mean there's a big part of the market that is not addressed by the traditional remittance players. So I guess, where are these customers coming from that you're acquiring?

So part of the reasons for our lowest retention relative to other businesses is there's a fair amount of churn in our remittance customer base. So when you leave the Philippines and you go to the Middle East, you get a 2-year work permit. Sometimes it gets renewed, sometimes it doesn't get renewed. When you go home, you don't need to send money back to the Philippines, right? People move, people settle after 3 or 4 years, they stop sending money home. There's other obligations, commitments, things that they do. And so there's a fairly high natural turnover in our customer base. And so a lot of the customers are recent migrants. And so one of the things we pay a lot of attention to is where are migrant populations growing, where are people crossing borders, seeking economic opportunity, and that's where we can grow customers. And the great thing about us is our brand is synonymous with send money home. And for years, we've been in many of these what would be traditionally payout markets, the Philippines, India, Bangladesh, Mexico and everybody knows Western Union. So when they leave, the first thing that comes to mind is send money home with Western Union. That's where the customers come from.

Yes, okay. That's helpful. And you guys have done a nice job closing the gap between transaction growth and revenue growth on the digital side. I think the most recent commentary was that for that to bounce around a little bit over the near term. So what could make that spread, I guess, between the transaction and revenue growth come in a little bit higher or lower versus what we saw in the most recent quarter?

Yes. So I think in the fourth quarter of 2023, we had transaction growth about 12 and we had revenue of about 5. So we had 700 basis points of GAAP. And we laid out a plan that said over the course of 2024 we'll close that to be closer to 300 to 400 basis points. For a multitude of reasons, some of which were driven by the calendar leap year, Ramadan and Easter in the same quarter, we had outsized performance in the first quarter. So we went up a little bit in transactions to 13%, and we pulled revenue of 9, right? And so that's way ahead of what we had expected. And so it could bounce around. We're on track with the plan we laid out. We're very happy with the progression that we're making between revenue and transaction. I've been quite clear that for the foreseeable future, particularly because of what I said about the growth in payout to account, investors can and should expect a couple of hundred basis points different between transactions and revenue. I'm a little bit of -- I've become a little bit of a historian of at least the recent past. And if you look at our digital business from, call it, the 2012 to the 2019 time frame, so pre the run-up in COVID, right? We traditionally ran transactions, 23% to 25% and traditionally ran revenue 20% to 21%. And so the delta in the mix has been going on for years and years. And even then, we were talking about the growth in payout to account, and it was a much smaller portion than it is today. So I think we're on track. We will continue to watch that march up. I'd love to have the gap be even bigger in this quarter because that means we've accelerated transactions and revenue will take time to catch up. But if it's not, it's not, it will bounce around a little bit. But I wouldn't look at that as any big deal other than the dynamics in the business that as long as the trend line over multiple quarters is headed in the right direction, yes.

So that gap could actually widen, and that could be, I guess, in your mind....

It could be good, good for the business. It could be good.

You're acquiring more customers. They're doing more transactions. Then the revenue follows at a later date.

But also think about the dynamics. So we've gone to a model like most of the industry, where new customer -- first-time new customer transaction is free. So growing new customers suppresses in-period revenue while accelerating transactions. The key is then converting that first time transact free into later revenue-producing transactions in the next couple of quarters. So again, if we have a good quarter of new customer growth, it will suppress in-period revenue, which is, by the way, a very good thing.

No, absolutely.

So bounce around. People are very indexed on the bounce around, but that's normal in any...

Yes. And then I guess longer term, just remind us the spread that you're expecting is that sort of 200 to 300 basis points. And I guess, to get to the -- in terms of the pieces around that, I mean, what do you guys expect in terms of transaction growth versus revenue growth in that digital business?

So we are committed long term to double-digit revenue growth, right? And as long as transactions are trending 13%, it's easy to see, particularly if you're going to keep that at 200 to 300, how you get double-digit revenue growth.

Yes. And remind us, Devin, the margins on the account payout, so it's a little bit lower rev per transaction. But in terms of margin is it better because you don't have the agent payout?

So margin percentage is better margin dollars is smaller for what you said because RPT, we charge less for funds in from account to account than we charge for cash, obviously, because it's harder and more expensive to do cash. But the margin percentage is higher because we keep more of it. When we pay out in cash, I don't make it up, but our average payout commission 20%, 25% of revenue goes to the agent who's doing the payout. That goes away in that model.

And what's the cost, I guess, on the account payout side that would just be funded -- it's a bank account business.

Funded bank account, right? So there's generally a fee to deposit in somebody's account, but it's a fraction of 20% of the revenue.

Yes. No, that's a good point. And the company brought down its digital pricing to more market-based pricing. So are you seeing any response from competitors in terms of them looking to adjust pricing based off of that promotional activity that you did. And I guess, maybe higher level building on this, is the industry backdrop more constructive now that the cost of capital is higher, right? I mean rates were low presuming it's easier for these newer players to scale. Cost of capital is lower. Obviously, we're in a different environment today.

But you'd probably be a better judge of macro dynamics of my competitors than I am. But we're pleased with where we are. And as I said, we now have a methodology where we want to be in the market. We don't want to be the highest. We don't want to be the lowest. And so in any given market, we try to -- and by the way, in some markets, that band is very narrow, some markets at band is high, which means there's not perfect pricing information. We have more data than anybody else because we're in more markets and we see more things, plus we have the retail business. So we actually have a pretty good sense that our pricing is working. But you had a very interesting thing, which we're seeing more and more of. In a world in which there was free -- my business is -- people don't realize. My business is actually pretty capital-intensive because in order to facilitate particularly real-time money movement, you're going to keep a lot of customer cash in the system to do the payouts. And so for me, higher interest rates are good because I'm now actually earning returns on all the capital as I have floating around in the system. If you don't have capital and don't have easy access to capital, this is catastrophic. And so we're seeing a lot of these little digital players or small retail players really struggling because they can't fund their business.

Yes, totally. So it helps you on a relative basis. As part of the Evolve strategy, I think part of that was using the retail channel as a gateway for the digital business and to drive better acquisition costs. I mean, how are you thinking about leveraging that physical retail network to your advantage when it comes to digital acquisition?

So we go back to -- there's a high degree of natural churn in the market because people move back to forth. And every year, many new people cross borders. We acquire 20 million new retail customers every year. Almost -- not the guy who's going to Stanford to get his Ph.D. but a normal migrant who's going to work in construction, who's going to work in hospitality, who's going to work in agriculture, almost always their first remittance transaction is a retail transaction. They don't have a bank account. They don't have an international card, they get paid either in cash or they get a check that they take to a check casher and then they live in cash. And so when they send money home, they walk into Walmart, they walk into one of my check cashing partners and they send money home. So that's the natural stop for most first time migrants. So our job, and this as I talked on the last call about our new omnichannel loyalty program, is to increase our ability to interact directly with that customer whether that's through the loyalty program. The #1 reason people call me, where is my money, right? Digital track or transfer, helping people understand where in the process they are 4 out of 5 people on the planet have a smart phone, very simple to have a digital traffic transfer. Now I'm having a direct interaction with that customer that has the ability for me if and when they want to go retail -- or go digital, to be there for them, right? So we're building these omnichannel platforms and capabilities whether it's track or transfer, whether it's loyalty, whether it's the refund process so that our customers can interact with us even if they want to send money in cash in the retail environment. And then as they progress on their journey, they can become digital with us.

Yes. Okay. That's helpful. And then maybe just digging into the physical retail business and maybe we could look at this ex Iraq for a second because I know -- and that's becoming -- it sounds like it's become a real -- a sustainable business for you, which maybe we'll touch on in a bit. But we think maybe the revenue growth for physical retail ex Iraq was down sort of mid-single digits year-over-year. I think you said recently that was 200 basis point improvement sequentially. You're making progress improving the growth rate on this part of the business. But how do you ultimately get this back to flat year-over-year? And what sort of visibility do you have to improve the growth rate of that business?

So it's like digital, but in slow motion because it's a much bigger flywheel, and it's a much less responsive network right? And so I'm very pleased with -- we were shrinking retail transactions mid-single digits, high single digits when I got here, right? Now there are a bunch going on with that, but we're losing 6%, 7% of the transactions. We've now got that to flat, right? So that's a big -- now I took some revenue hits in doing that. So sustaining that flat, in the absence of any future further price reductions, revenue will just slowly get back to revenue and transactions being relatively stable, which is also the history of our retail business. And so I think the real opportunity as we roll out -- and remember, we did a lot of this in North America, which is the giant flywheel. It's where I launched Quick Resend, that's why I launched Remember Me, the one-step refund, the point-of-sale experience improvements for the agents, that's the giant flywheel. And that's what really helped move the wheel up. Rolling that stuff out now happens on a country, you got to do France, and then you got to do Italy, and then you got do Germany and you got to do Brazil, and you got do Saudi Arabia, like the continuing now comes one drop at a time as you roll it out across the network. So we'll see further gains from the rolling that stuff out, it will just be slow. And slowly, the grow over, which will happen mostly in this quarter and next quarter, which is when we took the big pricing last year under the umbrella of Iraq, you'll see those start to close as well.

So it could narrow just based off of comps basically as you...

And keeping transactions flat, right? So as transactions continue at a consistent level, the comps will go behind us.

And the transaction growth in physical retail, you mentioned it got back to flat. It was down mid-single digits before. Obviously, you made some pricing adjustments. I think taking some of that Iraq benefit sort of reinvesting it back into the business. But I guess when you think about that improvement in transaction growth, how much of that was due to the pricing adjustments versus the other adjustments that you talked about, whether it's the POS refresh and other things around that?

It's a great question.

Maybe it's hard to quantify the...

It's hard to disaggregate it exactly, but what I can tell you is when we get competitive pricing and a good agent experience. We actually can grow the retail business mid-single digits. And so in parts of Europe, we're really working well, parts of our distribution here in the U.S., whether that's V-Go or some of our independents. The market and the opportunity is there, but you got to get them right. You got to actually have a competitive price and you got to have a good experience for the agent to efficiently process the transactions. And when you get that right, this is a great business. When you don't get it right, it's very competitive, and customers and agents quickly move the business someplace else.