Western Union Beats EPS, Guides Up
October 26, 2011

Western Union Co.’s (NYSE: WU - News) third quarter earnings of 42 cents per share, came in three cents ahead of the Zacks Consensus Estimate of 39 cents per share, on the back of a strong margin improvement led by its Consumer-to-Consumer (C2C) segment and a lower share count. Earnings per share also surpassed 37 cents per share recorded in the prior-year period.

Western Union’s revenues for the quarter were $1.4 billion, up 6% year over year and in line with the Zacks Consensus Estimate. A 12% hike in foreign exchange revenues, coupled with a 5% increase in transaction fees and a 10% growth in other revenues, accounted for the revenue upside.

Total expenses increased 7% year over year to $1.1 billion, led by 10% hike in selling general and administrative expense and 6% increase in cost of services.

The C2C segment, which generates most of the company’s revenues (84%), reported revenues of $1.2 billion, up 4% year over year, led by a 6% increase in the Americas region, an 11% increase in the Asia-Pacific region, along with an 5% growth in Europe, Middle East, Africa, S.Asia (EMASA) region.

The number of transactions grew 5% year over year to 57.64 million owing to 3%, 6%, and 7% transaction growth from EMASA, Americas and Asia-Pacific markets, respectively.

The Global Business Payments segment’s revenues upped 7% year over year to $191.5 million, led by a 30% increase in Business Solutions revenue and a 2% increase in the Bill Payments revenue. Transactions grew 4% year over year, and operating margin was 17.7% compared with 15.5% in the prior year quarter.

Electronic channels, which contributes nearly 3% of the company's total revenue, saw a revenue growth of 40% year over year. Given the company's aggressive focus on developing this channel offering during the quarter, the company announced the formation of a new business unit called Western Union Ventures, which will house all the electronic offerings such as Westernunion.com, prepaid, and mobile money transfer.

Consolidated operating margin stood at 26.7%, down from 27.5% in the last year quarter.

Western Union grew its retail agent location count to 485,000 from 470,000 in the year-ago quarter.

The company is aiming an agent location count of approximately 500,000 for FY11, to harvest growth from the long-term demographic trends, which would support migrant flows and remittance growth over time.
Raised Outlook for 2011

Led by the solid earnings this year so far, management has made an upward revision to the FY11 guidance. It now expects constant currency revenue to grow in the range of +4–+5%. Management has also raised its 2011 adjusted earnings per share guidance to $1.55–$1.58 range from previously forecasted $1.53–$1.58 range.

Besides, management guided that the company would generate cash flow at the lower end of $1.2–$1.3 billion. Operating income margins are projected to lie in 25–25.5% range (or 26–26.5% excluding restructuring charges).

This year so far, Western Union has shown a solid earnings performance. In our view, the company is poised for long-term growth, which is validated by the combination of demographic trends, new market opportunities, and its advantages of scale. The company is aggressively expanding in the global remittance market. This is supported with a continued strong cash flow, allowing shareholders to be rewarded with acquisitions, share buybacks and increased dividends. We thus maintain our Outperform recommendation over the stock, which competes closely with Moneygram International Inc. (NYSE: MGI - News).

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