The Western Union Company (NYSE: WU), a leader in the money transfer segment of global payments, today reported financial results for the third quarter.
Financial highlights for the quarter included:
- Consolidated revenue of $1.3 billion, a decrease of 5% compared to last year's third quarter
- Constant currency adjusted consolidated revenue down 2%
- A pre-tax accrual of $71 million for an anticipated agreement to resolve the company's disputes with the State of Arizona and to fund a multi-state not-for-profit organization (the settlement accrual)
- GAAP EPS of $0.26 , or EPS of $0.33 excluding the settlement accrual
- Constant currency EPS $0.01 lower than EPS excluding the settlement accrual
- GAAP operating income margin of 21%, or 27% excluding the settlement accrual
- Year-to-date cash provided by operating activities of $958 million
Other highlights included:
- Completed the acquisition of international business-to-business payments provider Custom House
- Signed letters of agreement with Lagardère Services, Ortel Finance and PayUp, potentially adding 15,000 locations in Europe over the next few years
- Renewed agreement with Agricultural Bank of China, bringing an additional 15,000 agent locations by 2011
- Agreed to partner with Maxis Communications in Malaysia to launch a service that will allow Maxis subscribers to send cross-border remittances from their mobile phones for cash payout at any Western Union location worldwide
- Grew agent locations to more than 400,000
Western Union President and Chief Executive Officer Christina Gold said, "We were pleased to see consistency in transaction and revenue trends relative to the prior quarter. Our geographically diverse portfolio delivered 3% growth in consumer-to-consumer transactions, as strength in key international markets offset softness in other countries. We also achieved our 2009 goal of surpassing 400,000 agent locations."
Gold continued, "We made strong progress on our focused set of strategic growth initiatives. We achieved advances with our Americas banking strategy, signed letters of agreement with key retail agents in Europe, and concluded the acquisition of Custom House, which gives us a strong platform to grow in the cross-border, business-to-business payments market. We expanded our presence in mobile money transfer with new carriers and additional mobile-enabled locations. Additionally, we continued to pilot programs positioning the company for the long-term opportunities available in prepaid."
Accrual for Anticipated Regulatory Settlement
During the quarter, the company recorded a pre-tax accrual of $71 million related to an anticipated regulatory settlement. The anticipated settlement includes resolution of all outstanding legal issues and claims with the state of Arizona, as well as a multi-state agreement to fund a not-for-profit organization. A significant portion of the accrual relates to the funding of this organization, which will promote safety and security along the entire U.S. and Mexico border. In addition, as part of the agreement, the Company anticipates committing to make further investments in its compliance programs in the U.S.-Mexico border area over the next two to three years. A final agreement is expected to be completed before the end of 2009.
"Our objective is to move forward without the uncertainty surrounding this issue, as well as to contribute to improving conditions along the border," Gold said. "These legal matters date back to 2003, and the identified compliance procedures involved are not an issue today. Over the years we have made significant improvements to our compliance programs, which we believe are the best in the industry."
In the third quarter, revenue was $1.3 billion, down 5% from the comparable period last year or down 2% on a constant currency basis. Custom House added $8 million of revenue and $5 million of operating loss, primarily due to acquisition-related costs. Third quarter operating income margin was 21%, or 27% excluding the impact from the settlement accrual. Operating income margin in the third quarter of 2008 was 27%.
GAAP earnings per share was $0.26, or EPS of $0.33 excluding the settlement accrual. On a constant currency basis EPS excluding the settlement accrual was $0.01 lower. GAAP EPS in the third quarter of 2008 was $0.33.
The effective tax rate for the third quarter of 2009 was 27%, which compared to 28% for the same period in 2008.
Capital Deployment & Liquidity
Western Union's year-to-date cash flow from operations was $958 million and capital expenditures were $67 million. Through nine months, Western Union repurchased 15.6 million shares for $225 million, at an average price of $14.38 per share. The company maintains its target of $400 million in repurchases for 2009.
Cash on hand at quarter-end was $1.6 billion and total outstanding debt was $3 billion. The nearest-dated debt maturity is $1 billion due in November of 2011. The company has a commercial paper program that is fully backed by a $1.5 billion revolving credit facility that expires in 2012. At quarter-end, there was no commercial paper outstanding and the credit facility was fully available.
The consumer-to-consumer segment represented 85% of Western Union's revenue at $1.1 billion in the third quarter, a decrease of 5% or a decrease of 3% constant currency adjusted. Operating income was down 6% and operating income margin was 28%, which compared to an operating income margin of 28% in the third quarter of 2008. The settlement accrual is not included in segment results. Western Union handled 50 million C2C transactions, a 3% increase over the third quarter of 2008.
For the international portion of C2C, revenue declined 3% and was flat constant currency adjusted, on transaction growth of 6%. Revenue from the subset of the international business, those transactions that originate outside of the United States, declined 2%, or increased 1% constant currency adjusted, on transaction growth of 9% during the quarter.
The Europe, Middle East, Africa and South Asia (EMEASA) region, which represented 46% of Western Union revenue, saw revenue decline 3% and transactions grow 8% compared to last year's third quarter. The Gulf States posted strong growth, although transaction and revenue growth moderated from the second quarter. Western Europe experienced consistent transaction growth rates compared to the second quarter. India achieved revenue growth of 8% and transaction growth of 16% in the quarter.
The November 1, 2009 implementation of the European Payment Services Directive (PSD) provides the opportunity to sign retail agent locations in certain countries. A scalable sales and operations infrastructure enhanced by the acquisition of FEXCO's money transfer business earlier this year further strengthens the company's ability to address the growth opportunities provided by the PSD. In the third quarter, the company signed letters of agreement with Lagardère Services, Ortel Finance, and PayUp that provide the potential for retail expansion at over 15,000 locations throughout Europe.
The Americas region, which represented 31% of Western Union revenue, reported a revenue decline of 10% compared to last year's third quarter while transactions decreased by 4%. These trends have improved slightly compared to the second quarter of 2009. The U.S. outbound business, which is the largest component of the Americas region, had transaction trends consistent with the previous four quarters. The domestic money transfer business saw revenue decline 15% in the quarter on a transaction decline of 9%. The Mexico business, which was 6% of Western Union revenue, had a revenue decline of 18% and a transaction decline of 13% in the quarter.
The Asia Pacific (APAC) region, which represented 8% of Western Union revenue, increased revenue by 5% on transaction growth of 15% during the third quarter. China revenue and transactions each increased 7%.
Global Business Payments
The Global Business Payments segment represented 13% of Western Union's revenue. Revenue for the quarter was $171 million, a decline of 3%, or down 7% excluding Custom House. Operating income margin was 24%, compared to 26% in the third quarter of 2008. Operating income margin excluding Custom House was consistent with the prior year's third quarter.
On September 1, 2009, the company advanced an important component of its strategy to expand the product portfolio and geographic reach of the Global Business Payments segment with the completion of the Custom House acquisition. Custom House offers a simplified process for small-to-medium enterprises (SMEs) making cross-border business-to-business payments. Western Union estimates that the SME cross-border payments market generates global revenue at least as great as the consumer-to-consumer money transfer market.
The Company has narrowed its revenue and EPS outlook to the higher end of previous expectations, excluding the impact of the settlement accrual. The Custom House acquisition is included in the Company's outlook, with an expected impact of less than 1% on revenues and $0.01 dilution to EPS. The company now expects the following full-year 2009 financial results:
- Constant currency revenue to decline 1% to 2%
- GAAP revenue to decline 4% to 5%
- GAAP operating income margin of approximately 25%, or approximately 27% excluding the settlement accrual
- GAAP EPS of $1.15 to $1.20, or EPS of $1.23 to $1.28 excluding the settlement accrual
- Constant currency EPS $0.01 lower
- Cash flow from operations to exceed $1.1 billion
Christina Gold concluded: "The outlook for Western Union's business performance in 2009 has moved to the higher end of our previous expectations, excluding the impact of the settlement accrual. Despite the challenging economy, we have delivered solid results. We believe we have continued to gain market share, and recent stabilization trends are encouraging. Our world class brand, 400,000 agent locations, and financial strength, along with the progress we are achieving on key growth initiatives and strategies, give us confidence in the future."