International Money Express, Inc. Q3 FY2021 Earnings Call

Greetings and welcome to the International Money Express Inc. Third Quarter 2021 Earnings Conference Call. All participants are currently in listen-only mode, and a question-and-answer session will take place after the formal presentation. Please note this conference is being recorded. I will now hand the call over to your host, Mike Gallentine. You may begin.

Good morning, everyone and welcome to our quarterly earnings call. I would like to remind everyone that today's call includes forward-looking statements, including our updated 2021 guidance, and actual results may differ materially from expectations. For additional information on International Money Express, which we refer to as Intermex or the company, please refer to the company's SEC filings, including the risk factors described therein. All forward-looking statements on this call are based on assumptions and beliefs as of today, and you should not rely on our forward-looking statements as predictions of future events. Please refer to Slide 2 of our presentation for a description of certain forward-looking statements. The company undertakes no obligation to update such information, except as required by applicable law. On this conference call, we discuss certain non-GAAP financial measures. Information required under Regulation G under the Securities and Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides, in our earnings press release, our quarterly Form 10-Q, and our Annual Report Form 10-K, including reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. These can be obtained in the Investors section of our website at intermexonline.com. Presenting on today's call will be our Chairman, Chief Executive Officer, and President, Bob Lisy; Chief Financial Officer, Andras Bende. Also on the call today is Joseph Aguilar, Chief Operating Officer; and Randy Nilsen, Chief Revenue Officer. Let me now turn the call over to Bob.

Good morning and thank you for joining us today. We are proud to announce another quarter of very strong growth across all of our operating and financial metrics. Let me highlight some of these accomplishments on Slide 3. Compared to the third quarter of 2020, revenues grew 26.3% to $120.7 million, total dollar volume grew 36%. Net income was $11.5 million, an increase of 21.2%. Adjusted net income of $15.7 million, an increase of 28.3% and adjusted EBITDA increased 19.8% to $22.9 million. As has been the theme since we have been a publicly traded company, we again generated a record number of remittances during the third quarter with more than 10.5 million while transferring $4.7 billion for our customers. Underlying this performance, I want to commend the entire Intermex team, both in the U.S. and abroad. The Intermex brand continues to gain more traction each quarter. Our market share increased to a record high in our core markets of Mexico, Guatemala, El Salvador, and Honduras capturing a share of 21.8% as we grew 40% more than what was already a very robust market. The company's omnichannel strategy continues to meet our customers' needs while delivering strong financial results for our shareholders. We have spoken about it before, but particularly for those who may be new to our call, it is always worth highlighting. Intermex employs a growth strategy that focuses on the consumer, meeting their needs efficiently and effectively with a constant focus on security and timeliness. We provide choices for our consumers for what we believe to be the best retail and online product and service in the marketplace, enabling consumers to choose whatever is the best method for them to send and for their beneficiaries to receive money. On the send side, we partnered with an engaged, carefully vetted top-quality group of retail agents located where our customers live and work. Both our agents and Intermex strive to provide the best quality of service in the industry. At the same time, for those consumers who prefer to initiate remittances through their laptop or smartphone, we continuously work to improve and expand our online digital business offering. Additionally, Intermex consumers can choose to send money retail by using cash or debit card or online by using debit card, credit card, or ACH. On the payout side, or receive side, we have thoughtfully assembled a network that delivers wires more efficiently and effectively than ever before while providing consumers with more options than any other competitor. Our customers and beneficiaries can receive money digitally into their bank accounts, loaded on a mobile wallet, paid out at an ATM, or they may pick up cash over the counter at one of our convenient payment locations. Importantly, all of these funds are available in minutes. We believe our strategy is a major differentiator for Intermex, particularly when considering the widely differing demographics of those who send and receive money throughout the world. We believe that the cash option remains critically important in Latin American corridors where the vast majority of wires are sent and received in cash. One of the biggest opportunities that remains for the company is our retail digital business. There are hundreds of ZIP codes throughout the country that are either underserved or unserved by Intermex. This means we do not have a retailer in the ZIP code or we have fewer retailers in the ZIP code than would be optimal. We feel confident that we are in the best position to exploit these opportunities through our best-in-class retail sales force. A disproportionate share of these ZIP codes are found in California and in the Western states and are expected to produce significant numbers of wires. We have a tremendous opportunity for organic growth in the Western states, along with plenty of organic opportunity remaining even in our most established states. For the quarter, our agent base increased 13% over the prior year period, with most agents added in California West. Our agent growth helped deliver a 19% increase in unique customers this quarter compared with the prior year period. We finished the quarter with 2.7 million unique customers who transferred with us. Our relationship with the 4 million customers who trust and value our service is a tremendous asset for the company. We will be able to market additional products like our card products that I will talk about later, and of course, our digital service to these consumers. In the third quarter, our customers sent money more frequently and also sent larger amounts. As I mentioned earlier, we delivered more than 10.5 million transactions, an increase of 23% over the third quarter of 2020. This is also the largest number of remittances ever sold by the company in one quarter and as a result, our principal sent increased 36% to $4.7 billion in the quarter, again, the most the company has ever sent in a quarter. With our expanding agent network, Intermex continues to capture market share, fueled by exceptional growth in transactions across our core markets of Mexico, Guatemala, Honduras, El Salvador as well as emerging markets. You can see illustrated on the next slide. We now have achieved a 21.8% market share in our combined core markets. We did this with a growth rate 40% faster than the total market for this period. Shown on Slide 6, emerging markets, such as the Dominican Republic, Ecuador, and Nicaragua, among others, also continued to experience robust growth during the quarter. The one-year growth in these markets was similar to that in our core markets. The emerging markets had much more difficult comp versus last year. In total, our emerging markets grew transactions by 23% compared to the third quarter of 2020. However, looking past the impact of the pandemic in 2020, our two-year growth rate for the third quarter is 66% for emerging markets and 39% for our four core markets. Both are very strong performances considering the overall market. While growing a very highly profitable base of retail agents and growing remittances at retail much faster than market, Intermex is also continuing to invest in our digital app and furthering our presence online. On the next slide, you will see the continued penetration of our digital online initiative with transactions increasing 71% compared to the prior year period. Based on the definition of some of our industry competitors, who define a digital transaction as a transaction where either side of remittance is cashless, Intermex processes more than 23% of its transactions digitally. These remittances were either initiated cashless transactions on the send side or settled cashless on the receive side. During the quarter, transactions that were deposited directly into a bank account increased 37% compared with the prior year period. Transactions processed through the use of a debit card at retail, although a small percentage of our overall wires, grew at 78% year-over-year. These transactions will continue to increase as the number of retailers who accept debit cards has expanded. Lastly, another key pillar of our growth strategy is our card product category: Card Direct, Prepaid MasterCard, and Payroll MasterCard. We have been enhancing our systems infrastructure to efficiently and effectively support these products while adding field sales and support personnel to expand our presence in the market to drive meaningful contribution to future revenue and profitability growth. Before I turn the call over to Andras, I'll conclude by saying Intermex continues to execute at a very high level. That execution has led to significant gains in market share, strong growth in revenue, adjusted EBITDA, and net income. This has all been accomplished while we have simultaneously invested in the future of our company through the development of our new products. The third quarter represents another period in which Intermex has met or exceeded market expectations for revenue, adjusted EBITDA, and net income. Having now been a public company for 13 quarters, we have now met or exceeded our EBITDA and net income expectations for 13 consecutive quarters. We are confident in our ability to continue to execute our multichannel plan, which provides and fuels consumer choice, ultimately resulting in the company's continued growth and strong performance in what we believe is a tremendous growth opportunity that lies ahead. With that, I will turn the call over to our CFO, Andras Bende.

Thanks, Bob and good morning to everyone. Moving to Slide 8, let's walk through the third quarter results in a bit more detail. As Bob highlighted, it's been another quarter of strong execution in all areas of the business with plenty of new milestones achieved across our key measures. In the quarter, revenues were up significantly at 26% versus the prior year quarter, finishing at just under $121 million. Behind that strong growth were a few key factors; we had a 19% increase in customer count and a 13% increase in active agents. So our payments ecosystem and network of clients continues to grow and grow. This has helped us drive remittance transactions up 23%. Our customers sent more often in larger amounts, pushing total remittance principal up 36% versus last year. Those larger amounts also produced a revenue tailwind for us from the FX component we earned on those transactions. GAAP net income for the quarter was $11.5 million, up over 21% versus the prior year period. Our strong top line was the key driver, with lower depreciation, amortization, and interest expense also contributing to solid bottom line results. These improvements were partially offset by higher salaries and general spending related to new product initiatives like card, investment in digital, and enhancements and modernization of our technology. It's worth mentioning that within net income, we did have to work through two unusual headwinds this quarter; one, in line with our technology and software upgrades, we recorded an impairment of about $1 million in the quarter for capitalized software related to code we will no longer utilize; and two, a small banking institution that we use was put into liquidation by the Mexico Bank regulator resulting in a $2 million reserve for company deposits held there. Excluding the software write-off in the bank reserve, along with other certain non-cash expenses, adjusted net income increased 28% to just under $16 million, which you can see on the next page. Our strong growth in revenues, partially offset by growth in operating expenses, drove adjusted EBITDA up 20% to $23 million. Adjusted EBITDA margin for the quarter was 19%, our second quarter in a row of 19% plus margins. A year ago, margins were higher, although at that time, we were benefiting from an extraordinarily lean stretch of cost management as we were managing through what was still a great deal of uncertainty from COVID. Those savings last year accentuate this year's investment in digital, card, and the retail front end, all of which position us well for 2022. Moving on to Slide 10, given the strength of our third-quarter results and our execution trajectory in an incredibly valuable and growing payments ecosystem, we're again increasing our full-year 2021 guidance for revenues and adjusted EBITDA and narrowing our net income and adjusted net income ranges. We now expect revenue to be between $450 million and $455 million, GAAP net income between $44 million and $45 million, adjusted net income between $52 million and $53 million, and adjusted EBITDA between $84 million and $85 million. We continue to balance revenue growth and profitability while simultaneously investing for the future of our company, especially in technology, talent, and marketing. Our expectation for a strong finish to the second half is allowing us to accelerate many of these investments and position us for what we feel will be another standout year in 2022. With that, let me turn the call back to the operator for questions.

Thank you. Our first question is from David Scharf with JMP Securities. Please proceed with your question.

Great, good morning everybody. Thanks for taking my questions. Terrific results again. And Bob, I guess, first question, just it's really more macro commentary or speculation on your part; some of the larger providers or Western Union and MoneyGram, both remarked that demand didn't come in quite as strong or the outlook is expected largely due to the Delta surge and supply chain issues. But they did call out Latin America as sort of one of the few bright spots. So definitely in the right place at the right time. Is there anything in particular we ought to be focusing on either in the headlines or just paying attention to on your biggest core markets? Just kind of curious whether or not this kind of growth can be sustained if there are any sort of macro headwinds on the horizon we should be paying attention to in your biggest corridors?

Good morning, and thank you for the question. First, I want to clarify something regarding Western Union and the Latin American corridor. When they refer to inter-Latin America, they are not talking about the U.S. Their discussion of U.S. to Latin America generally focuses on U.S. outbound. Additionally, while I'm not an expert in our competitors' businesses, some experienced a downturn in internal Latin America last year due to COVID, which means they are now comparing against easier numbers. It would be beneficial to look at the two-year trends in those cases. However, our focus remains on our business, and we’re not facing any significant challenges that we haven't encountered before. Success depends on our execution, superior retail technology, and carefully selecting our retail agents. We understand where our customers are and are committed to providing them with the best service possible, such as answering our customer service line quickly. Consumers continue to prefer our brand, while larger competitors are not necessarily competitive because they operate primarily through big box stores and haven’t adapted their models over time. So, all these factors have been positively influencing us. We don't foresee any major reversals ahead. Naturally, forecasting 25% revenue growth indefinitely is challenging. As noted in our discussion, we emphasize our growth in transactions. Looking at the two-year trend shows even better results, as we had a strong third quarter last year. Over the past two years, our core market has seen nearly a 40% growth, and our emerging markets have increased by 66%. We are seeing consumers choosing us both in retail and online. Our online business is growing, reflecting the conditions I've mentioned. We don't see indications that this is just a temporary situation, but we also aren't prepared to claim that 25% revenue growth is sustainable forever, as it’s difficult to maintain that level indefinitely.

Got it. I appreciate the clarification. One follow-up. You had some brief comments on kind of Card Direct. We've been hearing for a number of years about plans to roll out prepaid products, either in retail or with employers. Can you give a little more granular update on kind of where you are on that front and maybe...?

Yes, we have been implementing this with employers. While we don't go into extensive detail about it, especially since it's a newer area for us, we are making progress. We're establishing a sales team under Randy Nilsen, our Chief Revenue Officer, and we currently have representatives in the field promoting the payroll card to employers. Since we handle the processing of checks through our reconciliation product, we have insights into the employers that issue a significant number of checks at our retail partners. This initiative is underway and is showing positive growth. There is also a retail card product in development, which is a more versatile card that can later be converted into a MasterCard or MasterCard Debit Card for individual use, allowing for reloading. We expect to roll that out in the fourth quarter or early first quarter, although we haven't finalized the exact timing yet due to the holiday season. Both products are performing well and are significant for us as they serve as a bridge for many of our consumers, who have traditionally lacked the ability to conduct cashless transactions. We believe this will enable many of our consumers to access our online services or conduct transactions at retail using a card-based system.

Our next question is from Mark Palmer with BTIG. Please proceed with your question.

Yes, thank you. Good morning and thanks for taking my question. Excellent quarter again. If you could talk a bit about capital allocation priorities, you've now got over $125 million of cash on your balance sheet. You've got full access to your credit line. What are you seeing in the environment in terms of opportunities for potential acquisitions and baring that, what are you thinking with regard to the deployment of some of that cash?

Yes. I'll first address your question regarding the opportunities we see. We've been quite active in mergers and acquisitions, maintaining our financial discipline to avoid overpaying or taking on excessive debt, which is common in the market. Therefore, we are being very selective. We have been engaging with various prospects that could benefit the company, and we will provide more information soon. On the M&A front, we are eager to expand our core strengths into markets where we currently have lower penetration, especially in areas west of the Mississippi where we may be able to establish a stronger presence. Additionally, there are many adjacencies in our space that present opportunities through potential synergies, whether in technology, customer outreach, or product offerings, even if these aren't directly aligned with our current activities. That's our focus for M&A. You may have noticed the share buyback we announced this quarter. It's essential to consider this in light of our earlier refinancing efforts, which aimed to increase our flexibility. We secured a larger credit line on better terms earlier this year. In the recent quarter, we explored ways to give back to our shareholders when appropriate, leading to the establishment of the buyback program. It's a significant initiative, and we plan to be opportunistic about when we implement it. We've discussed buybacks with the Board for some time, and after our strong results last quarter, we felt there was considerable value to be captured, so proceeding with a buyback made sense.

Thank you and I have one more question, which just pertains to the pricing environment. And Bob, you had said that you're not really seeing some of the challenges in your business that we've heard about from others in the space. What are you seeing on the pricing front?

I think we're seeing relatively the same as we've always seen. There's always going to be a pressure point, and I'm going to talk about retail primarily right now. I assume that's where the question is directed. We're always going to see the small players that are desperate in certain regional areas be aggressive related to both agent commissions and discounting in the form mostly of increased exchange, increased pesos, increased quetzals per dollar. But I don't think it's heightened at all. I think it kind of comes in ebbs and flows. And it's hard for some of them to sustain because some of them have gotten to a place where based on scale, that's really difficult to discount. So we're seeing our margins; now some of that is buoyed by the fact that we've had higher principal amounts, but we're seeing really good solid margins, particularly in our core, particularly in our markets where there is an exchange component, which would be primarily Mexico and Guatemala. So price compression for us is something we deal with, but not in a way that is hindering us from driving profitability or continuing to drive the EBITDA margins that we'd like. Randy is here as well and I don't know, Randy, if there's anything you want to add to that?

Yes, I would just add to that. To Bob's point, we see it, we feel it every day from the little smaller companies. But our sales team, I think, is very, very good at selling through that and talking to our agents and consumers about all the other solutions and benefits we're bringing so that we don't have to compete on price or take part in the price compression.

Thank you very much.

Our next question is from Timothy Chiodo with Credit Suisse. Please go ahead with your question.

Thanks a lot for taking the question. Slide 7 and the comments there, I thought were really helpful, and I think you very accurately called out that the definition of digital send can be different across platforms and sometimes it includes in-store on one end of that or investing cash. The mix that you shared of the 23% in Q3 for total digital as a send or receive; are you able to provide any context on the portion of those that are digital on both sides? And then as a brief follow-up, just any comments around the marketing approach for the online customers, how that might differ, how you plan to expand those efforts? Thanks a lot.

Yes, we won't go into great detail, but I can share that a significant portion involves transactions being deposited into bank accounts across the border, which qualifies as digital since they are cashless on one end. That's the main aspect of it. We haven't disclosed the specific components, but that represents the larger share. What was the other part of the question?

What is your marketing approach for online transactions and how does it differ in attracting customers?

The online strategy is distinct in several ways. We connect with consumers through the right retailers in neighborhoods where we know they are present, as well as where competitors operate, ensuring we have the necessary channels in place. Our focus is on providing a superior product that stands out in those locations. This is quite straightforward, and our customer acquisition costs are significantly lower, something we’ve discussed previously without delving into specific figures. In terms of our online efforts, we primarily utilize social media for marketing. Currently, we do not target our existing customer base, which numbers over 4 million annually. Because our retail business is thriving, with revenue growth of 25% year-over-year, we’re not prioritizing converting our retail consumers. Instead, we are attracting new customers online separately. While we have marketing strategies we will not disclose for engaging consumers who have interacted with our retail operations, we are not attempting to convert retail customers into online users, as we do not see that as an effective strategy. Our omnichannel approach emphasizes providing options without pressuring individuals into making choices that may not align with their preferences. Therefore, we offer mobile wallets, over-the-counter services, bank deposits, credit and debit card acceptance at retail outlets. Our online marketing will rely heavily on social media, taking advantage of the extensive capabilities and agencies available to assist us. We have partnered with a competent company for this marketing initiative. If we observe any downturn in retail—which we are not experiencing at the moment, given our 25% revenue growth, 39% transaction growth over two years, and 66% growth in emerging markets—we could adjust our strategy to engage retail consumers more aggressively. However, right now, retail customers are considerably more profitable than online customers. That's one reason some recently public companies exhibit lower profitability compared to those in retail. Therefore, we aren't forcing retail customers into the online space or incurring additional costs to do so, as this would result in lower margins for transactions. Our focus will remain on effectively competing in the online space for those consumers interested in online shopping, employing traditional online marketing strategies to compete with other online providers.

Excellent, thank you for all that context. We appreciate it.

Thanks.

Our next question is from Alex Markgraff with KeyBanc. Please proceed with your question.

Hey team, thanks for taking my question. Can you talk about some of the progress with the upgrades and enhancements around your IT infrastructure? Just maybe provide some detail as to what exactly has been done to date and some of the benefits that you're seeing from this, some of the early benefits? Thank you.

We have several projects underway, and I'm not exactly sure what you're referring to. Could you clarify your question a bit? Currently, we are updating our core retail product, encompassing both software and hardware. We're in the final stages of our new online application, which is now in testing and will soon be released as a significant upgrade for our consumers. This will be a native app available likely late in the fourth quarter or early in the first quarter. We have many initiatives ongoing and have significantly increased our technology spending over the past few years, both internally and with external vendors. This remains a major priority for us. Historically, we've been known for our cutting-edge, fast, and reliable technology that is user-friendly. We strive to maintain this advantage with our core retail upgrades, which also includes new hardware for our top agents. Regarding our online business, we are in the final testing phases of our new native app, expected to launch either late this quarter or early next quarter, and we believe it will be industry-leading. We have carefully analyzed what works best in the online space and incorporated those insights into this app. Additionally, our customer service enables quick response times, connecting customers in just a few seconds, which is rare, especially among online providers.

And Alex, this is Andras. So I'd just add, it's less exciting. But obviously, we're investing in cybersecurity as well. That's something that's top of mind with us and investors, so we're putting appropriate money to work there, too.

Great. Thank you, that answers the question. I appreciate the detail.

Our last question is from Mike Grondahl with Northland Securities. Please proceed with your question.

Hey, everyone. Congratulations on another strong quarter. Bob, do you have any updates or insights about the sales force that you'd like to share?

Yes. I'm going to ask Randy to answer that, and I'll add some color if needed. But Randy, do you want to go ahead?

Good morning, Mike. We are excited about the recent upgrades in our sales leadership positions over the past few months. As Bob mentioned earlier, we have identified hundreds of unserved ZIP codes across the country. We have organized those ZIP codes into districts and hired 13 additional sales personnel to focus on these unserved areas. We recognize there are numerous opportunities for agents in those ZIP codes, and many consumers currently lack access to our services because we haven't had the agents in place. With the new sales team we added in September, and a few more in October, they are already quickly contributing to our agent network.

That's great to hear. Bob, any thoughts or insights just on 36% principal growth, how do you think about that going forward?

Part of that is buoyed by our transactional growth, right. Part of it is that some of the countries that grew faster are those countries with higher principal amounts. So there is some movement, right, some shifts change there. But another piece of it is that the economics of remittances have changed a bit. The average remittance has gone up, particularly in our case, we've always been a company that is at the higher end of the average principal amounts. We think that's partly due to that when someone is sending a larger amount of money, I'm not talking about ones that raise flags, but $500, $600, $700, that those are the ones that we get because of the surety that it gets there on time, and we've got great customer service and all the rest of it. But there's clearly a component that's there based on the economic conditions and based on the stimulus that have been out there, it's hard to pinpoint what percentage of our consumers are benefited directly, but I believe they've all benefited directly or indirectly. What I mean by that, they may be recipients of a government stimulus, but if they weren't, they worked for someone that was a beneficiary of a government stimulus. Somebody got an X number of dollars and decided to finally put the deck on the back of their house or do the landscaping or whatever. So the economic activity has been greatly increased. We also have a bit of a thought process that says that, as our economy has heated up, at least in terms of activity and in terms of cash in the system, some of the recipient countries are still lagging and suffering a bit from COVID or the second wave or Delta or what have you. And as a result, there's a greater need that exists south of the border and more cash north of the border. So that's buoying that average send amount. But behind that, let's not lose sight on the fact that there's tremendous transaction growth that's also there that's driven that 36% amount of principal growth. We don't necessarily rely on that. As you see a lot of the projections that we've had over time are kind of modified. But now we've started to see that now for a succession of quarters, and typically in the past, we haven't seen that come back to its origins; what we've seen is a plateauing, and that's what we probably expect, although we're not depending on that as we project our future numbers.

Got it, great. Well, hey congratulations again.

Thank you.

Thank you. We have reached the end of the question-and-answer session, and I will now turn the call over to Bob Lisy for closing remarks.

Thank you all again for joining us for the third quarter. We look forward to talking to you, well not too soon because it will be fourth quarter, so it'll be next year. But thanks again for your time and attention. We'll talk to you soon. Have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.