Western Union Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the Western Union Third Quarter 2023 Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Tom Hadley, Head of Investor Relations.

Operator

Tom, please go ahead.

Speaker 1

Thank you. On today's call, we will The slides that accompany this call and webcast can be found at westernuniondot Under the Investor Relations tab and will remain available after the call. Additional operational statistics Have been provided in supplemental tables with our press release. Joining me on the call today is our CEO, Devin McGranahan and our CFO, Matt Cagwin. Today's call is being recorded and our comments include forward looking statements.

Speaker 1

Please refer to the cautionary language in the earnings release and in Western Union's filings with The Securities and Exchange Commission, including the 2022 Form 10 ks for additional information concerning factors that could cause actual results During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in our earnings release attached to our Form 8 Okay, as well as on our website, westernunion.com, under the Investor Relations section. I will now turn the call over to our Chief Executive Officer, Good afternoon, and welcome to Western Union's Q3 2023 Financial Results Conference Call. It was just a little over a year ago today that we presented our Evolve 2025 strategy To the investment community in New York City, we laid out a 3 year journey that focuses the company on successfully delivering Everyday Branded Financial Services to the aspiring populations of the world. We articulated a strategy that focused on driving the business through customer level economics, including improved LTV to CAC, an emphasis On improving retention and an expansion of our TAM by launching new transaction based financial services products.

Speaker 1

We painted a financial picture that would fund the required investments for this strategy within our strong operating margin range of 19% to 21% and with the goal of returning Western Union to sustainable and profitable revenue growth by 2025. Shortly thereafter, we reported Q3 2022 C2C transaction growth of negative 12% and adjusted revenue growth of negative 6%. And just 1 year later, today, We reported Q3 2023 transaction growth of 5% and adjusted revenue growth of 7%. Even absent the benefits of the Iraq Central Bank's policy changes, we have achieved global C2C transaction growth now A 4% an 800 basis point reversal in the trajectory of the underlying business. Potentially most important and initially viewed with some skepticism, we committed to returning our retail business to stability.

Speaker 1

I am thus pleased to announce that we have now, excluding Iraq, returned our global retail transactions to flat on a year over year basis in Q3. Switching to digital. When we launched our new go to market program, I highlighted that we would first grow new customers, then we would grow transactions, and finally, we would start to grow revenue. In the quarter, we achieved positive revenue growth of 3% for our global branded digital business, a full quarter ahead of our previous target. We have also begun to narrow the delta between transaction growth, which has been sustained at 12% And revenue growth.

Speaker 1

While it is still too early in our journey to declare success, as I reflect on the last year And the progress we have made against our evolved 2025 goals, I am particularly pleased with the following: The strength of the management team that we have been able to assemble, which I believe is a great mix of the old and the new. The broad based engagement of our employees around our purpose driven strategy and the recognition of our need to drive For everyday execution in everything we do, the impact of our revised go to market strategy It is driving accelerated new customer acquisition at much more favorable CACs. A streamlined operating model that we believe is delivering both increased customer and agent satisfaction, while achieving efficiencies that power our nearly $50,000,000 in run rate savings. A fundamental shift in our product and technology road map from Delivering back office modernization to building customer and agent facing product and experience innovation. Finally, I'd like to recognize the strong support of our Board of Directors over the past 18 months as we've executed our strategy.

Speaker 1

We believe the success of these programmatic building blocks will help us to continue to power our journey to achieve our evolved 2025 goals. Shifting now to our Q3 results. Our total revenue for the Q3 reached $1,100,000,000 reflecting a 7% increase on a constant currency basis when excluding the contribution from Business Solutions compared to the same period last year. This growth was driven by several factors, including the increase in revenue from Iraq, the benefit of Argentinian inflation and the improving fundamentals in our core business. Adjusted earnings per share came in the quarter strong at $0.43 and included our continued investments in our Evolve 2025 strategy.

Speaker 1

Matt will further discuss our financial results in more detail and provide an update on our 2023 financial outlook. Shifting to the macro. Despite significant and potentially rising uncertainty and disruption in the world, we remain pleased with the resilience we continue to see in the Western Union customer base. While much has been written recently on the receding power of consumer spending in the U. S.

Speaker 1

And Europe, We continue to see a strong employment environment in our major markets, which we believe is translating into a continued willingness Our transaction growth trends are very positive, as I previously highlighted, And our average PPT, excluding the higher PPT from Iraq, has remained relatively stable year over year at down only 1%. Despite this increasingly uncertain macro backdrop, We continue to see enough opportunities within our own customer base to support our belief in the ability to drive our evolved 2025 Strategic outcomes. At our Investor Day in 2022, we highlighted the fact that we found ourselves in the unenviable position of having a digital business that was shrinking on a transaction basis. This circumstance was the result of a strategy designed to maximize in period revenue per transaction, To rectify the situation and drive long term transaction and revenue growth, we unveiled a new go to market strategy, which was designed to maximize customer LTV to CAC. Our new go to market strategy is a holistic program Focused on accelerating our new customer acquisition by targeting the right audiences, launching promotional pricing offers, Improving funnel conversion and ensuring a high quality conversion ratio from first transaction To repeat usage, as you have now seen, over the last year, our new customer acquisition is up meaningfully.

Speaker 1

We have returned our branded digital business to double digit transaction growth rates. And most importantly, we have We've accomplished all of this on a CAC that has declined by over 20% year to date, largely led by efficiencies in our marketing program. Not only is our strategy driving more customers, transactions and now revenue, but it is doing so more cost effectively with retention rates generally in line or better than our historic norms. As we have started to lap the impact of our promotional pricing launch last year, We continue to see strong growth in new customers and transactions. This ongoing performance is being driven by a relentless Focus on improving execution and experience at a country and even a corridor level.

Speaker 1

One example of this more granular focus Has been our recent efforts to ensure our offers and our messaging resonate in high payout to account corridors. And as a result, our digitally initiated payout to account transactions grew 27% in the 3rd quarter. Moving now to our retail business, which is powered by our extensive agent network of over 400,000 locations providing accessible financial services to those customers who prefer in person transactions. When we began our EVOLVE 2025 journey, due to the sheer size and scale of our retail business, we knew that improvements in this business Would be both more gradual and potentially lumpy. With the exit of Russia and Belarus, The looming loss of 2 large and important agents in Europe and the ongoing operational and executional challenges, In the Q3 of 2022, we shrank transactions in the global retail business by 8%.

Speaker 1

Beginning with the launch of our Evolv 2025 strategy, we began investing in our retail point of sale system and platform in a more meaningful way than we had in many years with a focus on improving and simplifying agent and customer experiences. We launched a program to grow our footprint of controlled distribution through concept stores and owned locations, And we realigned our sales and account teams to focus much more on agent and network productivity versus total agent count. 1 year later, I am pleased to report that we have been able to achieve flat year over year retail transaction growth in Q3, Excluding the benefits of Iraq, which continued the best sustained transaction growth improvement we've seen since 2018. Additionally, our largest region, North America, grew retail transactions 3%, excluding our U. S.

Speaker 1

Domestic money transfer business and had its Q1 of positive transaction growth in over 6 years. As we drive more customers to our platform and continue to make enhancements to the customer and agent experience, we are also beginning to see improvements and our retail retention rates in large markets like the U. S. However, given ongoing challenges in markets like Europe, Our global year to date retention rate has been relatively flat to 2022. Additionally, I would like to highlight the progress we continue to make on our controlled distribution strategy, supporting our focus on network Optimization.

Speaker 1

We began to roll this model out in Europe last year, primarily through Stores where we partner with our agents to provide an exclusive Western Union branded experience. We are pleased to share that we opened our 1 100th concept store in Europe during the Q3. As of September, the average concept store opened more than 6 months was doing 8 These types of locations to be a large portion of our overall distribution, they highlight the power of our brand a new retail go to market program earlier this year with an emphasis on reinvesting in retail marketing and aligning our value proposition to market levels in important corridors. We have been pleased with the results we have seen, including an impressive turnaround in one of our more meaningful European markets. In this market, we expanded our controlled distribution, We increased our marketing presence and we implemented a much more dynamic pricing strategy that adjust pricing based on market insights multiple times a day.

Speaker 1

Since its implementation, our transaction growth in this country Has more than doubled and after initial dip following its implementation, our revenue growth rate is now growing at an even higher level than it was before. Recent progress in our retail business validates our conviction that we can indeed stabilize this business on a global basis. Now switching to our 3rd pillar, ecosystem. The foundation of our accessible financial services strategy It's to provide products and services that can meet the unique needs of our migrant customers, which will translate into a more account based relationship and thus ultimately higher retention. Traditional financial services can often be intimidating to our customers and may require account minimums and or impose steep fees.

Speaker 1

As a result, our research indicates There is significant unmet need amongst our customers for fair, transparent and accessible transactional financial services and a need for broader access to credit. To address these needs, we have relaunched our prepaid card in the U. S, Developed and launched a digital wallet in Europe and South America and have piloted partner based lending solutions in Australia and Our wallet provides a foundational set of financial services, including a multi currency bank account, P2P transfers as well as a Visa debit card, all integrated into our Western Union digital money transfer experience. Since last year, this service has been available in 4 countries in Europe. In the last quarter, we launched friends and family in Brazil, the largest economy in Latin America and an important digital market for us.

Speaker 1

This quarter, we also launched a wallet in Argentina under our Pago Facil brand in that country. In the coming quarters, we continue to prepare for a launch in the United States. We have now onboarded nearly 200,000 customers to our ecosystem and in the process have gained several insights. Our traditional money transfer customers are more attractive than customers seeking a pure digital banking offering. Our best wallet customers are those that have migrated from either our traditional digital or retail offerings, including recently lapsed Customers.

Speaker 1

Onboarding and customer service matter more when enrolling someone in a more complicated product offering and in our traditional transactional oriented money transfer services. As our product experience has improved, We have seen monthly transactions per active customer nearly double from 4.5 in January to 8.5 In September, our customers have a clear preference for physical digital physical debit cards over digital with a ratio of 5:one. We clearly see the need to rationalize our offering into 1 app Instead of the 2 we currently have in the market in these four countries, we plan to begin this consolidation in the first half of next year. While we are in the early days of this journey, I am pleased with the progress we are making, the learnings that we are developing and our ability to serve our customers in the future with a broader set of products and services. While we do not expect our ecosystem strategy to be a material contributor to revenue nor profits in the short run, We do think it can improve customer retention rates over time and position us to provide additional products and services to meet the needs of our nearly 120,000,000 customers worldwide.

Speaker 1

I'm also excited to announce That our U. S. Prepaid debit card has now moved from friends and family to a commercial pilot and is available in a number of agent locations In the U. S, with plans to roll it out more broadly throughout 2024, the card will provide By reintroducing a prepaid card solution, we aim to expand our product offerings and provide additional value to our customers. The final pillar of our EVOLVE strategy, which we laid out a year ago, was to improve the customer We view this pillar as the force multiplier of the strategy.

Speaker 1

Over the last several quarters, we've talked about improvements in our process flow, such as Remember Me, Quick Resend, One Step Refund, all of which are aimed at removing pain points from the transaction process and creating a better customer and agent experience. Recall last quarter, we said that 30% of all transactions completed on our V Go brand in the month of June We're initiated using our quick resend transaction process. This process allows an agent to complete a transaction in a fraction of the time than was historically required. I am pleased to report that the usage of this tool in North America has continued to accelerate With now 45% of all transactions in the quarter on our V Go brand being initiated using quick resend technology and enabled Western Union Branded Agents to perform at an even higher level. This technology has been rolled out to roughly 20 5% of our North American agent base and we look forward to continuing to expand it across our network globally.

Speaker 1

We are also excited about the rollout of our One Step refund, which is now available at 80% of our agents around the globe, Solve an important customer pain point and simplify the refund process. As part of our continuous improvement mindset, We've also created over a dozen other self-service tools that allow agents to do things like password resets, Check the status of a transaction, check their transaction history. These improvements help reduce friction, calls and make for a better experience for our agents and customers alike. Finally, I'd like to highlight a new partnership and some additions to our executive team. First, we are pleased to announce our exclusive partnership with SancoSuit.

Speaker 1

SancoSuit is the largest retailer in Chile And the 3rd largest retailer across Latin America. This partnership will allow consumers to send money internationally From more than 250 of their establishments in Chile to more than 200 countries and territories where we operate. Next, I would like to announce the addition of Ben Hawksworth to our management team as our new Chief Technology Officer. Ben brings with him a wealth of experience, including more than 25 years of global technology leadership roles across multiple high transaction FinTech organizations. Ben was most recently the Chief Technology and Product Officer With Progressive Leasing and prior to that, he was the Chief Information Officer at Fiserv First Data's Merchant Acquiring Business.

Speaker 1

I would also like to announce that Rodrigo Garcia, President of our Latin American Business, Has now assumed the role of President of North America. Rodrigo has been with Western Union for nearly 20 years, having helped build our Latin American business over the past 2 decades. For the last several years, he has been successfully Managing and growing our Latin American operations to now be the fastest growing region of the company, and we look forward to that leadership here in North America. Looking ahead, We remain optimistic about our strategic direction and the positive progress we are making. We are pleased with the change in the trajectory of our business, driven by improved transaction trends across both our retail and our digital businesses.

Speaker 1

We are excited about the launch of our new prepaid card solution in North America and the opportunity that that presents as part of our expanding ecosystem offering. We remain committed to delivering value for our customers, our shareholders and other stakeholders while we adapt to this rapidly evolving market dynamic. I would now also like to thank our 8,000 plus employees For their dedication and commitment to our customers and our partners, their focus, passion and efforts every day Have enabled us to make the progress discussed here and will enable us to continue to meet our evolved 2025 goals. Thank you for joining the call today, and I will now turn over to Matt to discuss our financial results in more detail.

Speaker 2

Thank you, Devin, and good afternoon, everyone. I look forward to sharing our financial performance over the past quarter and highlighting some of the key achievements. I will also outline our updated outlook for the remainder of the year. Starting with a review of our financial results. In the Q3, Western Union delivered revenue of $1,100,000,000 representing a 7% increase year over year on a constant currency basis.

Speaker 2

This is excluding contributions from Business Solutions. Results exceeded our expectations Due to revenue increase from Iraq, a 300 basis point benefit from Argentinian inflation and improvements in our retail and branded digital businesses. As Devin highlighted earlier, We achieved positive revenue growth in our Branded Digital business globally, a full quarter ahead of expectations. During the Q3, we continue to see elevated volumes in Iraq relative to historical levels due to a change in monetary policy, which began impacting our business in the Q1 of this year. In Q3, IRAC benefited adjusted revenue by 8 percentage points, with over half of this benefit coming in July.

Speaker 2

For the remainder of the year, we expect Iraq volumes to be significantly lower going forward as we recently Saw levels come down closer to 2022 levels due to changes in the regulatory environment. I will discuss our forward looking assumptions when we get to our financial outlook in a few moments. We continue to make progress in our Evolve 2025 Strategy, growing C2C transactions 5%. This is led by continued momentum in our Brand Digital business, which grew transactions 12% in the quarter and flat retail transactions excluding Iraq, which had been in decline since 2019. Adjusted operating margins was 19.6% compared to 20.6% last year.

Speaker 2

The decrease is due to higher variable costs And technology spend associated with our evolved 2025 strategy, partially offset by lower SG and A expenses, associated with the actions related to our As you may remember, last October, We launched a 5 year $150,000,000 operating expense redeployment program. Since launching, We have taken actions that will allow us to free up more than $50,000,000 in 2023 with over $40,000,000 of total savings already benefiting this year. So far in 2023, our ability to save has continued to outpace our ability to invest, benefiting adjusted operating margin. Adjusted EPS was $0.43 versus $0.42 last year, With the current period benefiting from higher revenue, a lower share count, partially offset by higher adjusted effect taxes. Now turning to our C2C business.

Speaker 2

Revenue grew 3% on a constant currency basis led by Iraq, with transaction growth of 5%. All regions drove sequential transaction improvements except for APAC. For our Branded Digital business, revenue was up 3% on a constant currency basis on transaction growth of 12%. This was driven by our go to market strategy launched last year. This was the 1st quarter and over a year Positive revenue growth in our Branded Digital business.

Speaker 2

Now moving to the regional results. In the 3rd quarter, North American adjusted revenue decreased 3%, which is a 500 basis point improvement relative to the first half of twenty twenty three. This is driven by North American branded digital business, which grew 4% on a constant currency basis, reaching our goal of positive revenue growth in the 3rd Transactions accelerated and grew 7%, led by our branded digital business And improving transaction trends in our retail business, which had a positive transaction growth for the first time since 2017. The North American region has begun to turn a corner and is benefiting from our Evolve 2025 strategy and the continuous operational improvements to our customer and agent experience that we've made over the last several quarters and have discussed in the last few earnings calls. Revenue in Europe and CIS was down 10% On a constant currency basis, while transactions were flat, with a sequential improvement in key markets, including Spain, United Kingdom and Germany.

Speaker 2

As we've discussed previously, the region has faced tough macro backdrop. Revenue in the Middle East, Africa and South Asia grew 42% on constant currency revenue on transaction growth of 9% due to monetary policy change in Iraq previously discussed, which had a higher principal driving this revenue growth. The Latin American and Caribbean region grew constant currency revenue 8% in the quarter on transaction growth of 9%. This solid performance in the quarter was led by Argentina, Ecuador and Venezuela. And finally, revenue in APAC was down 7% on a constant currency basis with flat transactions.

Speaker 2

Now moving to our other revenue, which consists primarily of retail bill payment in Argentina in the United States And retail money order in the United States. Other represents 7% of the total company revenue and grew 22% Year over year, on a reported basis, benefiting from higher interest rates and our retail money order business as well as solid transaction growth in our bill payment business. As a reminder, Q3 was an easy comparison as we optimize our investment portfolio in the Q3 of last year. Now turning to our cash flow and balance sheet. Year to date, we have generated $519,000,000 of operating cash flow, which included a transition tax payment of $119,000,000 paid during the Q2.

Speaker 2

As a reminder, these tax payments continue to step up over the next 2 years and will end after 2025. Capital expenditures were $27,000,000 in the quarter $117,000,000 on a year to date basis. As mentioned previously, we expect lower agent signing bonuses going forward, but in the Q1 this year, we had a large signing bonus that was committed to prior to this change in strategy. We continue to maintain a strong balance sheet with cash flow and cash flow equivalents of $1,100,000,000 And debt of $2,300,000,000 Our leverage ratios were 2.2x and 1.1x on a gross and net basis, which we believe provides us great flexibility for potential M and A, while maintaining our investment grade credit rating. Year to date, we have returned $363,000,000 to our shareholders.

Speaker 2

This includes $100,000,000 of shares repurchased during the Q3. Now moving on to our outlook. Today, we improved our 2023 adjusted revenue and EPS outlook. As mentioned earlier, we expect Volumes from Iraq to be significantly lower going forward, much closer to the 2022 levels. This is And sanction related challenges in the banking system as well as other potential changes in our own internal policies or practices in that region.

Speaker 2

Our outlook also assumes no material macroeconomic condition changes. We now expect adjusted revenue, excluding Argentina inflation to be in the range of flat to positive 1%. And as a reminder, Argentine inflation has benefited year to date We continue to expect full year adjusted margin to be in the range of 19% 21%. And lastly, Adjusted EPS is now expected to be in the range of $1.68 to 1.75 To wrap up, a year after unveiling our Evolve 2025 strategy, I'm pleased with the progress we've made so far. Our branded digital business has returned to positive revenue growth 1 quarter ahead of our expectations and our retail business Has seen significant improvement in transaction trends relative to the last several years.

Speaker 2

We look forward to sharing an update over the next upcoming quarters as well as providing our 2024 outlook during the call in February.

Operator

Our first question comes to us from Tien tsin Huang from JPMorgan.

Speaker 3

All right. Thanks so much for the encouraging results. I thought, Devin, maybe I'd ask with Success here in both the retail stabilization and the digital brand and growth coming a quarter early, does it change your thinking on Investment timing or the intensity that you've maybe attacked both of those between retail and digital? And just curious if your strategy

Speaker 1

Jing Jin, great to have you on the call. Thank you for the positive comments. We have benefited over the course of, Call it the last 7 months from the increased and unexpected growth in Iraq. So we have had the opportunity to invest in our Program, and that is, as you can see, driving the results. It is that relationship between being able to invest in our program and drive our results that we're going to continue through next year in terms of getting us to that Sustainable positive revenue growth that is the bedrock of our Evolve 2025 strategy.

Speaker 1

I'd expect us to continue to use a very balanced and return oriented view on investing with the goal of driving to Positive revenue growth.

Speaker 3

Understood. Understood. So just maybe for Matt, thinking about The Q4 year and the implications, any changes? I know it's excluding Argentina. It sounds like no real Impact from Iraq.

Speaker 3

Any other considerations? It sounds like you're still calling for macro stability. I don't know if there's anything we should assume with Israel

Speaker 2

Thanks for the question. The conflicts going on in Israel It's not overly material to our business, so you should not think about that as having a major impact on our financial results. Beyond that, in Q4, we are Balancing our overall financial results and the upside we've gotten throughout the year from Iraq and making additional investments in our evolved strategy, things along the lines of Technology investments, point of sale solutions, Devin talked about the one app solution or ecosystem. We're also looking to accelerate and do some additional testing on the marketing side. So all that fits into the guidance I gave a couple of minutes ago, but helps explain why the guidance is what it is.

Speaker 2

Understood.

Speaker 3

Great. Thank you so much.

Speaker 1

Tien Tsin, I'll just add because it's obviously been discussed a lot and it was in the Prepared comments. We've been pleasantly surprised by the resiliency of our customer base Pretty much across the globe, we've seen stability across all regions in our PPT. And as you can tell from the results, we see Strong growing quarter over quarter improvements in our transaction trends. I think our customers are Largely and most susceptible to employment levels. And so as employment levels, particularly For the lower paid employees have continued strong in most regions of the world, that's creating the stability that

Speaker 3

Yes. No, I agree. The Employment there is quite strong, so showing good results. Thanks for the clarification.

Operator

Our next question comes to us from Jason Kupferberg From Bank of America, please ask your question.

Speaker 4

Thanks, guys. So just on the raise and the revenue growth guidance, The adjusted revenue growth guidance, I guess, we went up by 0.5 point at the midpoint here. Is that purely just because of the Iraq tailwinds lasting longer than expected or anything else We should be noting there.

Speaker 2

Yes, Jason, this is Matt. The way we think about our results is IRAC has obviously provided an uplift in revenue throughout the year. We flagged that impact. That has also given us a lot more flexibility and what Devin talked about earlier about our retail go to market Strategy, we feel like we're largely on track for at the midpoint of our original guidance when you net all those decision points and moving elements, if not a hair bit above. That's the way you think about it.

Speaker 4

Okay. Okay. That's helpful. And then just as a follow-up, if I'm thinking about both the adjusted branded digital revenue growth, the acceleration there as well as the retail transaction growth Improving just on both those fronts, what are you expecting in Q4? Should we see some further improvement relative to Q3 In terms of the year over year growth and then just any comments on rough trajectory as we head into 'twenty four because obviously you've got both those going in the right direction now.

Speaker 1

And so I think there's a couple of things to think about there, Jason. Remember, and you have to take into account, the way we launched The digital the new digital go to market is we started with a few corridors in North America in the August, September timeframe. We expanded that to 50 corridors, which we then gained confidence in towards the back end Of 2022, we began expanding into European markets, like the U. K, Germany, France. We then continued that rollout over the course of the first two quarters, culminating with APAC and our big markets like So the revenue growth as we begin to work through the lapping of each incremental won't necessarily be linear.

Speaker 1

And in some cases, it will be a little bit of lumpiness depending on the size of the market in which we launch the program and where it will be. I think over time, you should look towards what we're trying to get to, which is sustainable double digit transaction and revenue growth, but the path between here and there is not Likely to be linear. The work that we began in retail at the beginning of this year is really now starting to take hold on a transaction basis. But as you can see, we're not going to get the same double digit transaction growth rates that we've gotten in digital in retail. We'll be much happier with Low single digit transaction growth rate, so it just takes longer than to narrow that gap between transactions and revenues when

Operator

Our next question comes to us from Will Nance from Goldman Sachs. Please ask your question.

Speaker 5

Hey, guys. Good afternoon. Appreciate you taking the question. Yes, I guess I just wanted to ask a question on the moving piece in the guidance As well, kind of piggyback on some of the prior questions. I mean, if I put together a handful of the comments, I mean, expense performance this quarter materially better than expected.

Speaker 5

I've seen a lot of upside from sort of external factors like Iraq over the course of the year. You guys came in a little bit ahead of your objectives in the digital business. And then I think the comment was made that the ability to kind of save is outpacing the ability to spend. And so I guess all of those comments seem very constructive and yet it does seem like the guidance for the Q4 is a little bit below where Street was expecting and there wasn't

Speaker 6

as much maybe flow through of

Speaker 5

the outperformance this quarter. So just is that FX? Is that the incremental expenses? Maybe just a little color on why we're not Seeing some of that strength come through in the numbers and just any color you provide on the Q4? Thanks.

Speaker 2

Hey, Will. Thanks for the question. FX is not a material impact to us. We do think it will be a drag based on today's rates of about $0.01 but not a major driver for us. Really, what you're probably doing to calculus on is, we're looking to make some incremental investments.

Speaker 2

I'm hopeful Devin I'm the saver and Devin is the spender, And he's promised me that he'll catch up in the investments in our Vault strategy, both on the point of sale solution, the one app solution that he talked about in the ecosystem, We're doing additional marketing, things of that nature. So a little bit similar to last year as we work our way throughout the year, we started saving well in advance of the actual

Speaker 1

Well, I think it also goes to a general philosophy that we've been working towards where We have a tendency to want to start the year relatively conservative, make sure that we're going to be able to deliver on our commitments As we get towards the back half of the year and have confidence in the macro and in the performance of the business, continue to make the investments And so again, you saw that last year, you're seeing some of that this year.

Operator

Our next question comes to us from Andrew Schmidt from Citi. Please ask your question.

Speaker 7

Hey, Devin. Hey, Matt. Thanks for the question and good job with the progress here. I wanted to dig in on the Digital side for a second. Maybe you can talk about what you're seeing in just new user acquisition trends.

Speaker 7

And then, anything that's gross new user number you usually call out, maybe you could just talk about Whether the user base is growing on a net basis and if not, what's the right expectation around that? Thanks a lot.

Speaker 1

Thanks for the question. A couple of things to unpack there. As you know, when we launched our Strategy back in August, September, our goal was to drive double digit New customer growth, which would then drive double digit transaction growth, eventually bringing us back to double digit revenue growth. Since we've launched that, we have continued to see double digit new customer growth in cross border, and we continue to have that drive growth and customer growth continue in the double digits. Our ongoing program, which is to continue to drive that Through improved marketing, through improved effectiveness, is sustainable and ongoing.

Speaker 1

So we expect and continue to see users growing, New customers growing, transactions growing and that's what's powering our revenue.

Operator

Our next question comes to us from Tim Chiodo from UBS. Please ask your question.

Speaker 8

Great. Thank you for taking the question. I want to go to a conference that was made during the prepared remarks that was a standout around the North America retail business with the I believe it was revenue up 3% and the transactions positive for the first time in a big number, which was 6 years. So I was hoping you could

Speaker 3

do a little bit of

Speaker 8

a broader kind of refresh us on the North American retail market in terms of the number of agents and how that might compare to 2, 3 years ago, The mix of exclusive versus not, how that might compare to a few years ago? Any other key broader stats about that North American retail business, which

Speaker 1

The mix of those locations between our independent brands, V Go and OV, as well as our more exclusive brand, Western Union, Very little of that has changed, if any or at all. The underlying driver of the productivity really has been around our go to market, Improving our agent experiences, winning a bigger share within those non exclusive agents And making our exclusive agents more productive, investing in the right retail marketing messages to bring customers back into Western Union locations The last is we're getting very tactical at a corridor Level in terms of improving the products experiences, so doing things like home delivery in the Dominican Republic, making sure that we have the right payout partners in the right exchange rates to Mexico. So the tactical execution of aligning the product and service delivery Any geography with an agent for a corridor is what really has been driving that performance.

Speaker 8

Thank you. I appreciate that context. The minor follow-up, I apologize if this was captured early and I missed it, but The overall total company revenue growth of flat to up 1%, which was ex Argentina. Did you mention what The aggregate kind of across the 1st 3 quarters impact from Iraq was? In other words, what would that 0 to 1 be if it didn't have That benefit from Iraq in the 1st 3 quarters of the year.

Speaker 2

We didn't give that number, but we have given each quarter the impact by But what I did say to a question a few minutes ago is we've used the upside we've got from Iraq The opportunity to go and accelerate our go to market strategy in retail. So the way we've been looking at it is what is Iraq net of retail investments On the pricing side as well, we've done a bunch of stuff that Devin has talked about with accelerating the point of sale solutions, whether it be Remember Me, Quick resend, refund, so forth, that number is largely on track for the midpoint of our range we gave out at Investor Day, which was down 2% to 4%, so view that as somewhere

Operator

Our next question comes to us from Ramsey El Assal from Barclays. Please ask your question.

Speaker 9

Hi, thank you for taking my question this evening. I wanted to ask about Iraq as well. Is the contribution from Iraq, has it flowed in Through mostly through retail locations or is it also benefiting digital revenues? I'm just trying to get a better idea about how it's benefited those two sides of your business.

Speaker 2

Yes, it's 100 percent retail.

Speaker 9

100 percent retail, okay, that's what I thought. And then Devin, I had a question for you about You announced some kind of key new executive hires this quarter. Can you give us an update on the organization, sort of evolution The team, do you have what you need at this point? Are there still gaps you're looking to fill? How is that all evolving?

Speaker 1

Hey, thanks for the question. The as I indicated in my prepared remarks, I'm actually quite pleased with how the team has come together. And now with Rodrigo taking the helm in North America and Ben taking our Chief Technology Officer role, I have filled out the entire executive suite. So this would be the first time in my 18 plus months, where we have what I would consider a complete and full executive suite. As you know, it's a great mix of people who have been in the business, Like Giovanni, who's running Europe and Africa and JC, who's running the Middle East and APAC and Rodrigo now in North America, With new folks like Karen, who I announced last time as our new Chief People Officer and Ben this time as our new Chief Technology Officer.

Speaker 1

So I feel quite good about the team. It's coming together really well. And I would now say we have A full team on the field.

Speaker 9

Great. Congratulations on that. Thank you.

Operator

Our next question comes to us from Bryan Keane from Deutsche Please ask your question.

Speaker 9

Hey, guys. My question is for Matt, just a clarification. If I do the math, the implied revenue growth in the 4th quarter, at least on the high end, is something like a negative 5% growth. Is that right? Because I guess I would have thought the number would be a little bit better given the turn in digital and the positive You've seen in the retail business, but there's a lot of moving parts.

Speaker 9

So maybe you could just help us through it.

Speaker 2

Yes, Brian. There are a lot of moving parts. Between Q3 and Q4, Q3 has been had a benefit of the portfolio rebalancing I talked about in my prepared remarks that helped us by about 100 basis points In the quarter, that will not repeat itself next quarter, so the comps get harder for our other category in Q4 relative to Q3 and earlier parts of the year. We've also highlighted earlier in the year that we had the 2 lost agents. We start to lapse the first of those 2, but the other one, the impact will become more severe in Q4.

Speaker 2

And then as well as the new go to market strategy for retail will have a little bit of pricing pressure in Q4 that will continue in Is the what Devin talked about a minute ago, transactions and revenue starting to converge over time, that will take longer for retail, and that's having an impact. So By us accelerating that strategy, it has made a little more pressure on Q4.

Speaker 9

Got it. And then I guess my other question is strategically, Devin, you've had success with the digital program. Have you thought about leveraging pricing more in digital to even grow transactions faster or maybe even more aggressive in retail To get the transaction growth going more positive?

Speaker 1

It's a great question. As we stated When we were on the stage a year ago, we were going to execute this transformation while maintaining our commitment to our Shareholders supporting our dividend and maintaining our industry leading 19% to 21% operating margin. So we are working within the balance of that, and I'm quite pleased with our ability to invest in any given period with the results that we're being able to deliver now, which you're seeing both in transactions and revenue. So it's that equation that we balance every day, every week, every month, every quarter and we'll continue balancing it going forward.

Speaker 3

Got it. Thank you.

Operator

Our next question comes to us from James Faucette from Morgan Stanley. Please ask your question.

Speaker 6

Great. Thank you very much. Can you hear me okay?

Speaker 3

Yes.

Speaker 6

Awesome. That's great. I'm trying to make sure I know how to use Zoom. Sorry about that. I'm wondering in terms of your Planning assumptions as we head to 2024, a couple of things is that obviously employment has been quite strong in most regions of the world as you highlighted.

Speaker 6

Are you feeling like it's appropriate to build in any conservatism into your planning for next year right now? And Or should we expect that for the time being at least it makes sense to better streamline and I assume stability on a go forward basis. And I'm asking the question because I want to follow-up with a question around how you're thinking about Investment and expansion of the projects that are underway.

Speaker 2

Yes. So James, as we've thought about 2024, we'll come out In February and give more precise guidance. But sitting here today, we feel pretty strong about our customer base. They've been resilient, as Devin has talked about. Most important factor really is unemployment rates.

Speaker 2

There's also important about migration patterns, which we're watching, which have been very strong for us as well. So we feel good about where we are, but things can change every day and we monitor on a daily basis.

Speaker 1

And I think Matt's comments On the second part where we monitor both employment levels, but also migration and after COVID induced a relatively low level of cross border migration. Since 2021, we've seen that rebounding. And we see it whether it's in markets that have historically Been more closed like Japan, to places in Europe like Italy and Spain where you see, again, inbound migration driving The lower end of the employment spectrum as economic opportunities continue for our customers. So We remain with the viewpoint that stability, at least as far as we can see into the future, is the right planning assumption.

Speaker 6

Yes, that makes a lot of sense. And then to follow-up, Matt, you mentioned that you and Devin kind of balance each other out as you're making investment decisions. How are you thinking about what makes sense and what kind of hurdle rates or other metrics you can share About how you think about pushing through potential upside to incremental investments versus, hey, maybe it's better if we kind of Push up the bottom line or at least be a little more patient, even when we're seeing that. Just trying to get a sense of your current thought processes around investment opportunities.

Speaker 2

So it's unfortunately, it's not a simple answer because we are always monitoring and balancing our public commitments we've made, which is the point Devin was making a few moments ago. But in periods like we are right now going into Q4, we're focused on maintaining our LTV to CAC and driving marketing spend where it's very I'm going to provide a really good return. As we've talked about on the call today, we've brought down our CAC by about 20%. So we feel really good about the progress we've made there and We're always balancing the low double digit return on investment. It's hard to measure some of these things when you're driving agent experience or customer experience when it's one little Output, but we're talking to our customers, understanding what's important, talking to our agents and driving technology improvements that can make their lives and experience with us better.

Speaker 1

And while I'm the idea guy and Matt's the money guy, there is a pretty strong and robust process within the company As evidenced by the fact that we've managed the investment envelope within our public commitments in our 19% to 21% operating. So given there are more opportunities and ideas running around this place given the strength of Our footprint, our brand, what we view as the market opportunity, those that get funded are the ones that have the ability to rise to the top of that heap on a revenue and return commitment projection. So there is internal competition given the constraints we're living in And I've highlighted we aren't about to relax, for making sure the things that we are funding are the have the highest potential both for future revenue and return.

Operator

Our final question comes to us from Chris Kennedy from William Blair. Please ask your question.

Speaker 9

Great. Thanks for fitting me in here. I just wanted to follow-up on retail retention rate for your retail customers. I think you said it was flat with 2022 levels. I think your goal was like 200 basis points of improvement per year.

Speaker 9

Can you just talk about the roadmap to that 200 basis point improvement goal? Thank you.

Speaker 1

Thanks for the question. As I indicated, we are seeing a tale of 2 worlds. 3 of our 5 major regions are seeing improvements in retail retention And 2 of our major regions are headed in the wrong direction. Now some of that's an impact of Matt has talked about the loss of A couple of large important agents and then some macro factors in the other region. The things that we're working on and will continue to work on are improved transactional experiences for returning customers in both our retail and our digital environment.

Speaker 1

We will be launching a new loyalty program hopefully in the Q1 of 2024, which we also think will help. The last thing that we've done is to improve our ongoing communications and marketing efforts to Customers on an ongoing basis and monitoring traditional transaction patterns, which we call the heartbeat, And when someone falls off of their traditional transaction pattern, reaching out to them, with either a marketing message or an offer to bring them back. So we are working hard to drive retention across the entire franchise, obviously with a particular focus on retail, given our goal of achieving stability. As you can see in the performance of North America, when we are able to get improvements in retention, That significantly helps drive the overall transaction. And as we highlighted, North America retail It's now performing at a level that we would be happy with on an ongoing basis.

Speaker 2

Hey, Chris, I want to add to Devin's point. The metrics we gave at our Investor Day a year ago, those were all targets, aspirations over the 3 year horizon. It was not meant to be viewed as a commitment going into 2023 or 2024, we want to have a true north to galvanize our employees as well as our shareholders knowing we're trying to target. The first one we got to was the double digit new customers in digital. We had talked about it on our Investor Day.

Speaker 2

Most of the other ones were a little harder and took Effort to get there, so we're still working hard at Devon to talk about it to get to them.

Speaker 9

Great. Thanks for taking the question.

Operator

Thank you for joining the Western Union Third Quarter 2023 Results Conference Call. We hope you have a great day.

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Earnings Conference Call
Western Union Q3 2023
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