(WU) Western Union Reports In Line Earnings – Affirms Outlook

The world’s leading money transfer company, Western Union Co. (WU), reported first quarter operating earnings of 40 cents per share, in line with the Zacks Consensus Estimate. Earnings increased 14% on a year–over-year basis, mainly on the back of strong margin improvement in the Global Business Payments unit and lower share count.

Western Union’s revenues for the quarter were $1.4 billion, up 9% year over year but down 2.8% from the Zacks Consensus Estimate. The year-over-year upside in revenue was attributable to a 26% hike in foreign exchange revenues, 4% increase in transaction fee and a 3% rise in other revenues.

Total expenses for the quarter increased 9% year over year to $1.1 billion, due to a 24% surge in selling, general and administrative expense and a 5% jump in cost of services.

Segment Details

The Consumer-to-Consumer (C2C) segment, which accounts for 81% of the company’s revenues, reported revenues of $1.13 billion, up 4% year over year. The year-over-year revenue upside was based on a respective 5%, 6%, 7% and 2% growth in North Americas, Middle East and Africa, Asia Pacific, Latin America and Carribean regions. Revenue from the European and CIS region, however, remained flat year over year, mainly due to the struggling Eurozone economy.

The number of transactions increased 7% year over year to 56.37 million, with transaction volume increasing the most in Middle East and Africa region up 9%, followed by 8% growth in Latin America and 6% growth each in  North America and APAC regions. In the European region transaction volume remained flat on a year-over-year basis.

The Global Business Payments segment revenues upped 24% year over year to $242 million, led primarily by a threefold increase in Business Solutions revenue and a 1% increase in the Consumer-to-Business revenue. Business Solutions revenue witnessed higher foreign exchange revenue during the quarter, stemming primarily from the Travelex Global Business Payments (TGBP) acquisition that was completed on November 7, 2011.

Electronic channels, which accounts for nearly 3% of the company’s revenues, performed strongly and reported year-over-year growth of 38%. The company is highly focused on developing this channel. The announcement of the formation of a new business unit, the Western Union Ventures last year was a step toward this direction. The new unit houses all the electronic offerings such as Westernunion.com, prepaid and mobile money transfer.

Consolidated operating margin stood at 23.9% compared with 26.3% in the comparable period last year.

Western Union expanded its retail agent location count to 495,000 from 455,000 in the year-ago quarter. The company is intent on further adding to its agent location count and aims to reach the 1 million mark going forward. This is expected to benefit the company from long-term demographic trends, which would support migrant flows and remittance growth over time.

Western Union follows a strong cash deployment strategy.  During the quarter, the company bought back shares worth $147 million.

Key Events in 1Q

  • Launched WU Pay, an electronic payment platform for facilitating online transactions.
  • Partnered MTN Group to launch mobile money in Uganda.
  • Expanded online payments services in Austria, Belgium, Netherlands and Sweden.
  • Collaborated with Roshan to introduce mobile money transfer in Afghanistan.

Outlook Affirmed for 2012

Management maintained its original guidance provided while reporting its fiscal earnings in February. The guidance included constant currency revenue growth in the range of 6%–8%, operating margin of 26%, earnings per share in the range of $1.70–$1.75, and operating cash flow in the range of $1.2–$1.3 billion.

Our Take

We are impressed with Western Union’s continuing solid performance over the past several quarters.

We expect the company to maintain the same trend for the rest of fiscal 2012, given the vigour 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.

Western Union currently retains a Zacks # 2 Rank, which translates into a short-term ‘Buy’ rating. However, we are maintaining our long-term “Neutral” recommendation on the shares.

The company closely competes with MoneyGram International Inc. (MGI) which is scheduled to release its first quarter earnings day on April 26, 2012.

MONEYGRAM INTL (MGI): Free Stock Analysis Report

WESTERN UNION (WU): Free Stock Analysis Report

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