WU Western Union Company

World’s leading money transfer company, Western Union Co. (WU) reported fourth quarter operating earnings of 40 cents per share, in line with the Zacks Consensus Estimate. Earnings per share, however, were up 5.3% year over year on the back of a strong margin improvement in its Global Business Payments unit and a lower share count.

Western Union’s revenues for the quarter were $1.4 billion, up 5% year over year, and in line with the Zacks Consensus Estimate. The year-over-year increase came on the back of 20% hike in foreign exchange revenues and 2% increase in transaction fee, and was partly offset by 10% decline in other revenues.

Full year 2011 total revenues came in at $5.5 billion, up 6% year over year, and led by higher transaction, foreign exchange and other revenues. Earnings per share also increased 11% year over year to $1.57.

Total expenses for the quarter increased 4% year over year to $1.1 billion due to a 12% hike in selling, general and administrative expense and 1% increase in cost of services.

Segment Details

The Consumer-to-Consumer (C2C) segment, which accounts for majority of the company’s revenues, reported revenues of $1.2 billion, up 3% year over year. This followed 3%, 6% and 2% growth in the Americas, Asia Pacific and Europe, Middle East, Africa, South Asia (“EMASA”) region, respectively.

The number of transactions increased 5% year over year to 59.00 million owing to 3%, 6%, and 8% growth in transactions in the EMASA, America and Asia-Pacific markets, respectively.

The Global Business Payments segment revenues upped 24% year over year to $224.4 million, led primarily by 130% increase in Business Solutions revenue and a 2% increase in the Bill Payments revenue.

The significant change in Global Business Payments’s foreign exchange revenues in the quarter was primarily the result of the acquisition of Travelex Global Business Payments (TGBP) that was completed on November 7, 2011. Transactions grew 4% year over year to 105.5 million, and operating margin was 17.5% compared with 13.3% in the prior-year quarter.

Electronic channels, which contribute nearly 3% of the total company’s revenues, performed strongly thus reporting revenue growth of 36% year over year. The company is highly focused on developing this channel.

The announcement of the formation of a new business unit, the Western Union Ventures, in the last quarter was a step in this direction. The new unit houses all the electronic offerings such as Westernunion.com, prepaid and mobile money transfer.

Consolidated operating margin stood at 25.0%, up from 23.7% in the comparable year-ago period.

Western Union grew its retail agent location count to 485,000 from 445,000 in the year-ago quarter. The company is intent on adding to its agent location count going forward and aims to reach the 1 million mark. This would enable it to benefit from long-term demographic trends, which would support migrant flows and remittance growth over time.

Western Union also maintained a strong cash deployment in 2011. In addition to a number of acquisitions, it repurchased $800 million of shares and paid approximately $200 million in dividends.

Key Events in 4Q

• Completion of acquisition of TGBP, a leading specialist provider of international business payments, which would enhance Western Union’s position in small and medium enterprise (“SME”) business-to-business cross border payments. The company views this area as one offering key strategic growth.
• Completion of acquisition of Finint S.r.l., one of Western Union’s leading money transfer network agents in Europe.
• Western Union also signed a global prepaid and money transfer agreement with MasterCard, which will help it to globalize prepaid services and allow it to leverage MasterCard's world-class global electronic network.
• Launched prepaid cards in Europe.

Dividend Hike

With a robust performance all through the year 2011, the company decided to reward its shareholders with a greater dividend payout. Consequently, the company declared a 25% increase in quarterly dividend to 10 cents per share. The dividend will be paid on March 30, 2012 to shareholders of record as of March 16, 2012.

Conservative Outlook for 2012

Citing macro economic challenges, like trouble in the European markets and high global unemployment, Western Union provided a conservative earning forecast for the full year 2012. It expects constant currency revenue to grow in the range of 6%–8%. This forecast is almost in line with its close rival MoneyGram International’s (MGI) revenue growth expectation of 7%–9%.

Western Union expects an operating margin of 26%. Earnings per share are likely to be in the range of $1.70–$1.75, and operating cash flow is expected to be in the range of $1.2–$1.3 billion.

Our Take

We are very impressed with Western Union’s solid performance throughout 2011. The company surpassed its earnings outlook from the beginning of the year and delivered highest full-year revenue growth rate since 2008.

For the year 2012, Western Union is intent on developing three main areas. These include expanding the existing network and increasing focus on retaining and adding new customers to the consumer money transfer business; creating a digital infrastructure to drive its electronic channels business and developing the B2B segment apart from ensuring successful integration of the Travelex business.

Given the pace at which the company is aggressively making acquisitions, expanding its agent network and rolling out new products and services, we expect the company to evolve from a transaction-based to a truly customer-centric organization within a short span thus offering added convenience and more choice to its consumers.

Western Union currently retains a Zacks # 1 Rank, which translates into a short-term ‘Buy’ rating. However, based on its strong fundamentals, we are maintaining our long-term “Outperform” recommendation on the shares.

 
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