Western Union Posts Mixed Quarter

The world’s leading money transfer company, Western Union Co. (WU), reported second quarter operating earnings of 46 cents per share, up 2.2% year over year and 3 cents ahead of the Zacks Consensus Estimate.

Including Travelex Global Business Payments (“TGBP”) integration expenses, the company reported net income of 44 cents, up from 41 cents earned in the year-ago quarter.

Operational Update

Western Union’s revenues for the quarter were $1.4 billion, up 4% year over year but down 1.5% from the Zacks Consensus Estimate. The year-over-year upside in revenue was attributable to a 26% surge in foreign exchange revenues and a 3% increase in other revenues.

Total expenses for the quarter increased 6% year over year to $1.1 billion, due to a 12% surge in selling, general and administrative expense and a 4% jump in cost of services. Consolidated operating margin stood at 24.3% compared with 25.7% in the comparable period last year.

Western Union expanded its retail agent location count to 510,000 from 495,000 in the prior quarter. The company remains focused on further adding to its agent location count, and aims to reach the 1 million mark going forward. This is expected to be beneficial for the company with respect to long-term demographic trends, which would support migrant flows and remittance growth over time.

Segment Details

The Consumer-to-Consumer (C2C) segment, which accounts for 81% of the company’s revenues, reported revenues of $1.16 billion, flat year over year. The revenue upside was based on a respective 3%, 4%, and 5% growth in Middle East and Africa, in Asia-Pacific and in Latin America and Carribean regions.

However, Europe and the CIS region saw an 8% revenue decline. North America region revenue remained flat on a year-over-year basis. Operating margin declined 10 basis points year over year to 28.5%.

The Consumer-to-Business (C2B) segment, which accounts for 11% of the company’s revenues, witnessed a 3% year-over-year revenue decline to $149.4 million. Operating margin contracted 220 basis points to 22.4% in the quarter under review.

Business Solutions (B2B) segment revenue increased nearly threefold year over year to $92.5 million in the second quarter.

Electronic channels revenue, representing 6% of company’s revenue, improved 26% year over year.

Prepaid revenue increased 6% year over year and represents 1% of the company’s revenue.

Financial Update

Western Union exited the quarter with cash and cash equivalents of 1.4 billion, up from $1.37 billion at 2011 end.

Borrowings increased to $3.67 billion at quarter end from $3.58 billion at 2011 end.

Cash from operations in the first half lowered to $445.7 million from $506.3 million in the year-ago period.

Capital expenditure increased to $27.4 million in the first half from $26.6 million in the year-ago period.

Share Repurchases and Dividends

Western Union bought back 10 million shares for $163 million and also declared a dividend of 10 cents per share, amounting to $61 million in the quarter.

Outlook for 2012

Management affirmed its full-year revenue guidance. The guidance included constant currency revenue growth in the range of 6%–8%.

Business Solutions pro forma constant currency revenue is expected to increase in mid-single digits.

The company lowered its operating margin expectation to 25.5% from 26%. GAAP operating margin is lowered to 25.4% from 25%. The lowered expectation reflects increased compliance related costs.

EBITDA margin, excluding TGBP integration costs, is expected to be 30%.

Proforma EPS is expected to be in the $1.73 to $1.77 range, up from the prior guidance of $1.70 to $1.75, while GAAP EPS is estimated to be between $1.68 and $1.72, up from the previous guidance of $1.65 to $1.70. The increased guidance reflects tax benefit recorded in the second quarter.

Cash flow from operations is guided in the range of $1.1 billion to $1.2 billion.

Our Take

We expect the company to remain well positioned given the vigor with which it is developing its business. Western Union is primarily intent on developing three main areas. These include expanding the existing network and increasing focus on retaining and adding new customers for the consumer money transfer business; developing a digital infrastructure to drive its electronic channels business and creating the B2B segment apart from ensuring successful integration of the Travelex business.

Given the company’s acquisition spree, agent network expansion and new products and services roll out, 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.

However, rapid growth of other cheaper money transfer options may lead to competitive pressures.

We retain our Neutral recommendation on Western Union over the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

The company closely competes with MoneyGram International Inc. (MGI), which is scheduled to release its second quarter earnings on July 26, before the bell.