Western Union CO Q4 FY2020 Earnings Call

Good day, and welcome to the Western Union Company Fourth Quarter and Full Year 2020 Earnings Release Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Brendan Metrano, Vice President of Investor Relations. Please go ahead.

Today’s call, we will discuss the company’s fourth quarter and full year 2020 results, our financial outlook for 2021, and then we will take your questions. The slides that accompany this call and webcast can be found at westernunion.com 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. On our call today is our CEO, Hikmet Ersek; our CFO, Rajesh Agrawal; and Head of Treasury and Investor Relations, Brad Windbigler. Today’s call is being recorded and our comments include forward-looking statements. Please refer to the cautionary language in the earnings release and in Western Union’s filings with the Securities and Exchange Commission, including the 2019 Form 10-K for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. 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 on our website westernunion.com under the Investor Relations section. We will also discuss certain adjusted metrics. The expenses that have been excluded from adjusted metrics are specific to certain initiatives, but may be similar to the types of expenses the company has previously incurred and can reasonably expect to incur in the future. All statements made by Western Union officers on this call are the property of the Western Union Company and subject to copyright protection. Other than the replay noted in our press release, Western Union has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. I will now turn the call over to our CEO, Hikmet Ersek.

Thank you, Brendan, and thank you all for joining us this afternoon to discuss our fourth quarter results and our outlook for 2021. 2020 was an unprecedented year that brought significant changes in the world, as well as within Western Union. We became a more agile, efficient and digital-focused organization. Thanks to the successful execution of the global strategy we announced in September of 2019. I am proud of how well Western Union faced the crisis, quickly adapted and created solutions to help our customers provide critical economic support to families and communities around the world. I would like to thank our customers, especially the millions of migrants, many of them frontline heroes, for their dedication and generosity that has helped ease economic hardship and support resiliency of people in need. Moving on to an update for our business. We began 2020 with strong momentum from our September 2019 Investor Day, where we unveiled our new strategy designed to advance our position as a leading cross-border omni-channel payments platform. While we continued to stay focused on our long-term strategy towards the end of the first quarter, the global pandemic hit and caused a historic drop in global economic activity in the second quarter. This coupled with widespread lockdowns, reduced consumer foot traffic negatively impacted our retail business. At the same time, there was tremendous demand for digital services broadly that drove significant growth for our digital business. In the third quarter, the uncertainty lessened and economic activity improved, and we saw a strong rebound in our C2C business led by better retail trends and continued digital strength. The global economy continued to recover in the fourth quarter, and we finished the year with our business and strategic initiatives getting back on track. Our digital business once again achieved new quarterly highs for customers, transactions, principal, and revenue of $240 million. Westernunion.com continued to lead its peer group for app downloads with more than double that of any other peer, and we had a 49% growth in average active monthly users. Retail money transfer maintained the improved trends we saw in the third quarter, despite additional waves of COVID-19, and business solutions and other segment trends improved sequentially. Putting the pieces together, total company revenue, margin, and EPS were all in line or better than expectations in our revised full year 2020 outlook. From a strategic standpoint, we accomplished a lot in 2020. Our agenda was centered on two sets of priorities. The first, continue getting the organization to grow, and the second, implementing growth initiatives. Starting with getting fit, we made significant strides with the organization in 2020, essentially completing the WU Way changes that are expected to drive $100 million in annual cost savings in 2021. We also renegotiated more than 250 contracts with agents globally, putting us well on track to achieve the additional three-year $50 million savings target from commissions and third-parties. So by the end of 2020, we had completed a large portion of the actions that drive the $150 million of annual savings by 2022. Getting fit isn’t just about getting leaner; it is also about adding strength in areas that will improve our competitive position and growth. We continue to improve the coverage and quality of our network, adding almost 100 new agents globally with nearly 20,000 potential new locations. We reduced inefficient locations and renewed relationships with certain key agents for five or more years. We also increased our account payout capabilities to approximately 120 countries, including achieving our goal of 100 new real-time payouts. So our industry-leading cross-border network got even better in 2020. Another important way we strengthened our position was by upgrading our technology capabilities. We brought on a number of tech professionals and made good progress migrating applications to the cloud, making us more agile and able to scale efficiently. These moves have enhanced our progress for key initiatives, including fraud prevention and applications like wu.com and dynamic pricing, as well as backend applications like currency settlement and data management. In summary, we finished 2020 as a leaner and stronger organization, well positioned to support our strategy in 2021. Shifting to implementing growth initiatives, 2020 exceeded our expectations for some key growth initiatives and accelerated the pace of our evolution as a global digital-centric payments company. Our overall digital money transfer revenues, which includes wu.com and our digital partnership business, increased 38% to more than $850 million, up from over $600 million in 2019, and we expect to grow to around $1 billion in 2021. The profile of our business changed a lot last year, with digital channels accounting for 29% of transactions and 20% of revenue for our C2C business, up from 16% and 14% respectively in 2019. Wu.com had an amazing year and grew annual active customers almost 30% to 8.6 million, benefiting from significant investment in customer acquisition. Customer growth remained highly incremental, with more than 80% net new to Western Union, and we saw engagement improved with a 12% increase in transactions per customer and a 25% increase in principal per customer. Importantly, wu.com is enabling us to develop a more direct and sticky relationship with customers closer to an account-based relationship. In the fourth quarter, over 80% of wu.com customers accessed our services through a mobile device. Wu.com customers transact more frequently and have less attrition than retail customers, and those trends are even better for heavy wu.com users. It’s a strong growth and improving engagement trends that we think wu.com has the potential to serve as the centerpiece of a cross-border consumer ecosystem in the future. In addition to our strong wu.com results, our digital partnership business was another big success for us in 2020. Opening our cross-border platform to third parties was a major shift in our operating philosophy that will enable us to become a more diversified payments company, adding incremental customers and expanding our addressable market. We highlighted this initiative at our Investors Day; it started to ramp up in the second half of 2019, but it really took off in 2020 driving significant revenue and profit growth. It is still early days, and we are encouraged by our progress adding new partners in 2020 and in early 2021, and we are working on a large set of prospects. An exciting opportunity that arose from our digital partnership business is our recently announced minority investment in stc pay, a key digital partner. This first tranche of the transaction is scheduled to close this quarter and would make us a minority owner of what could someday be a high-growth fintech company within the Gulf States. Winding up the discussion on 2020, I am pleased with how well we managed the business and executed key objectives under challenging circumstances. Looking forward to 2021, we remain focused on how we can create long-term value for our shareholders, balancing opportunities, risks, and options for allocating our capital and cash flow generation. Digging into our plan for the year, I’ll start with the big picture. According to the prevailing economic forecast, the global economy appears to be on a path of recovery, especially in the second half of the year, although, uncertainty remains higher than normal due to the pandemic. The World Bank currently forecast a 7% decline in remittances for 2021, which is the same as their latest 2020 remittance forecast from October. You may recall that we grew cross-border principal by 12% in 2020 and gained share. A great example of this was seen in Banco de México's fourth quarter remittance. Similarly, we believe we will continue to grow principal and gain share this year. Importantly, we want not only to grow principal and gain share, but to continue to do this profitably. This gives us confidence that we will achieve the 2021 outlook, including mid-single-digit constant currency revenue growth. Raj will provide additional details on our outlook in a few minutes. Our 2021 business agenda builds on the progress of 2020, but with emphasis shifting more towards growth initiatives. Our multi-channel network remains the cornerstone of our competitive advantage today. We will continue to focus on improving the coverage, quality, and cost. Digital is clearly a top priority, and we have had some significant recent additions in the last weeks, including the digital wallet of Alipay in China, and then another social media company in China, and a new partner in the UAE. We will continue to seek additional partners with comprehensive relationships that can broaden our network, such as auto-pay, financial institutions, digital wallets, or telecom companies. It is an increasingly important factor for cross-border payment networks that we can leverage potential digital partners and underpenetrated customer segments. Therefore, we will continue to expand our lead in the real-time payout network beyond the 100-country goal we reached in 2020. Lastly, we will continue to optimize our retail agent network. In an increasingly digital world, we want to connect with a broader set of customers, and we may consider different relationships and classes of trade to achieve this. Fortunately, the scale and quality of Western Union’s cross-border network and capabilities are a significant draw for retailers, illustrated by our recently announced partnership in the U.S. with the world’s largest retailer, Walmart. This is an addition to our existing partnership with Walmart in Canada and Mexico. We will continue to develop our market-leading consumer money transfer business, especially digital. We will continue investing in marketing and customer acquisition to expand our customer base and add additional digital partners. Last but not least, to expand growth opportunities in 2021, we need to start developing new services and enhancing capabilities, which makes our product and platform functions important areas of focus. We will continue to upgrade and modernize our technology infrastructure, enhance our product portfolio, and build the right team to execute our objectives for our C2C, B2C, C2B, and B2B business, ultimately creating a unique and agile cross-border platform for multiple customer segments. In closing, despite the unprecedented times, I am proud of all we accomplished in 2020. In 2021, we are celebrating our 170th anniversary. Western Union has always been a landmark of innovation, hope, and connection for millions of people and businesses globally. As I think about where our business stands today and our agenda for 2021, I’m convinced we are again in the early stages of some compelling developments and success. As usual, I extend a big thank you to our business partners, agents, and consumers all over the world for your trust and loyalty. Stay healthy. With that, I’ll turn the call over to Raj.

Thank you, Hikmet, and good afternoon, everyone. My comments today will focus on fourth quarter results along with our financial outlook for 2021, including color on quarterly trends. Information for full year results can be found in our press release and the attached financial schedules. Moving to fourth quarter results, revenue of $1.3 billion declined 3% compared to the prior year period, while constant currency revenue declined 1%. Currency translation, net of the impact from hedges, reduced fourth quarter revenue by approximately $22 million compared to the prior year, primarily due to the depreciation of the Argentine peso. In the C2C segment, revenue was flat on both a reported and constant currency basis, with transaction growth partially offset by the impact of mix. C2C transactions grew 6% for the quarter, led by 83% transaction growth in digital money transfer, partially offset by transaction declines in retail money transfer. Retail trends held steady in the fourth quarter, despite a recent acceleration of COVID-19 infection and newly introduced U.S. regulation limiting our ability to operate in Cuba for the time being. We believe retail will continue to improve, but the path to recovery may not be linear given the ongoing economic and public policy effects of the pandemic. Total C2C cross-border principal increased 24% on a reported basis or 23% constant currency, driven by growth in digital money transfer. Principal per transaction or PPT was up 14% or 13% constant currency, led by retail and wu.com. Multiple factors contributed to higher PPT that can be characterized broadly as changes in consumer behavior and business mix. The spread between C2C transaction and revenue growth in the quarter was 6% on both a reported and constant currency basis. Similar to last quarter, excluding the mix impact from the significant ramp-up of our digital white label partnerships, transaction growth would have been modestly above revenue growth. As a reminder, digital white label partnerships carry a lower revenue per transaction for RPT than Western Union branded transactions due to our role as a processor. It is important to keep in mind that these partnerships are highly profitable and incremental to the company. We anticipate the gap between transaction and revenue growth will continue in 2021 as channel mix and customer acquisition strategies evolve. Digital money transfer revenues, which include wu.com and digital partnerships, increased 36% or 35% constant currency and accounted for 21% of total C2C revenue and 32% of total C2C transactions in the quarter. The spread between transaction and revenue growth was due to our pricing strategy, targeting customer acquisition for wu.com and the mix driven by the digital white label partnerships, which have a lower RPT. As noted previously, we expected the year-over-year impact of pricing investments made in wu.com during the fourth quarter would be pronounced due to comping against targeted price increases we took in Q4 2019. Wu.com revenue grew 27% or 26% constant currency, with cross-border revenue up approximately 38%. Transactions increased 56%, improving sequentially from Q3 and demonstrating the effectiveness of our customer acquisition strategy. We continue to see the pricing environment broadly stable. As noted earlier, we continued to see strong transaction and revenue growth from our digital partnership businesses. Turning to the regional results, North America revenue declined 3% on both a reported and constant currency basis with transactions down 1%. Declines in constant currency revenue and transactions were primarily due to the steady decrease in U.S. domestic money transfer, which was less than 5% of total company revenue in the quarter, and newly introduced U.S. regulations limiting our ability to operate in Cuba for the time being. U.S. outbound continued to have solid growth in the quarter. Revenue in the Europe and CIS region increased 3% on a reported basis or was flat constant currency on transaction growth of 23%. Constant currency revenues were positively impacted by growth in Germany, Russia, and France. The primary factor driving the spread between transaction growth and constant currency revenue growth was the digital white label business in Russia. Revenue in the Middle East, Africa, and South Asia region increased 1% on a reported basis or was flat constant currency, while transactions grew 12%. Qatar led the region with solid constant currency revenue growth in the quarter, while the UAE continued to experience softening trends due to the ongoing impacts of COVID-19. The spread between transaction growth and constant currency revenue growth was driven by the impact of the incremental digital white label business in Saudi Arabia. It’s lessened somewhat sequentially, because the prior-year comp ramped up from the third quarter to the fourth quarter of 2019. The Latin America and Caribbean region continued to steadily recover from the lows in the second quarter with continued sequential quarterly improvement. Revenue decreased 9% on a reported basis or increased 2% constant currency, and transaction declined 13%. The region continued to face challenges relating to the ongoing impact of COVID-19. Revenue in the APAC region increased 8% on a reported basis or 6% constant currency. Constant currency revenue growth was led by strength in Australia. Transactions declined 3%, primarily driven by the Philippines domestic business, which has a limited impact from revenue. Business Solutions revenue improved from Q3 and decreased 8% on a reported basis or 11% constant currency, representing 7% of company revenues in the quarter. Revenue declines were the result of the ongoing impact of COVID-19 on certain verticals like travel and tourism, small and medium-sized enterprises, and education, while the overall decline in cross-border trade impacted payment volumes. Other revenues represented 5% of total company revenues and declined 29% in the quarter. Other revenues primarily consist of retail bill payments in the U.S. and Argentina, as well as money orders. The revenue decline was due to the ongoing impact of COVID-19 and the depreciation of the Argentine peso. Turning to margins and profitability, I will focus on consolidated margins as segment margins are not comparable with the prior year period, due to expense allocation changes implemented in the first quarter of 2020. Consolidated GAAP operating margin was 17.9% in the quarter, compared to 17.3% in the prior year period. The increase was primarily attributable to productivity savings, additional cost savings, and the timing of marketing investments compared to the last year, partially offset by declines in revenue. We completed the restructuring program in the fourth quarter, incurring approximately $150 million in restructuring expenses over the course of the multi-year program and $12 million of restructuring expenses in the fourth quarter. The productivity program generated over $50 million in annual restructuring savings in 2020, and we expect to achieve the full $100 million in annual restructuring savings this year. In total, we continue to expect to generate approximately $150 million in annual cost savings by 2022, which comprises $100 million of restructuring savings and an additional $50 million from commissions in third-party spending. Adjusted operating margin in the fourth quarter was 18.8%, compared to 18.7% in the prior year period, with expansion driven by the same factors stated previously and adjusted for restructuring and M&A costs. Note that in our Business Solutions segment, we incurred a one-time facility closure cost that remained in our adjusted results since it was not part of our initial restructuring program, this one-time cost impacted segment margin by around 1,000 basis points in the fourth quarter. Foreign exchange hedges had a negative impact of $4 million in the current quarter and a benefit of $7 million in the prior-year period. The GAAP effective tax rate in the quarter was 11%, compared to 31.4% in the prior year period, and the adjusted tax rate was 11.6% in the quarter, compared to 24.5% in the prior year period. The decreases in the company’s GAAP and adjusted effective tax rates were primarily due to higher prior period domestic pretax income associated with the sales of the Speedpay and Paymap businesses, prior-period one-time settlements in certain geographies, and discrete tax benefits in the current period. GAAP earnings per share in the quarter was $0.43, compared to $0.32 in the prior year period. The increase in EPS was driven by a lower effective tax rate, productivity and cost savings, and lower share count, partially offset by revenue declines. Adjusted earnings per share in the quarter was $0.45, compared to $0.38 in the prior year period, with the increase due to the factors stated previously, adjusted for restructuring and M&A costs. Turning to our cash flow and balance sheet, year-to-date cash flow from operating activities was $878 million. Capital expenditures in the quarter were approximately $51 million. At the end of the quarter, we had cash of $1.4 billion and debt of $3.1 billion. In addition, we have an undrawn $1.5 billion revolving credit facility and no significant debt maturities until 2022. Our financial position continues to be among the strongest within our payments peer group. We returned $93 million in dividends to shareholders in the fourth quarter and had no share repurchases. Furthermore, we announced today that we increased the quarterly dividend by 4% and that we have resumed share repurchases this quarter. The outstanding share count at quarter end was 411 million shares, and we have $783 million remaining under our share repurchase authorization, which expires in December 2021. Turning to our financial outlook for 2021, first, please note that our outlook assumes that there will be no material worsening in the COVID-19 pandemic. Also consistent with the prevailing economic forecast, we believe the macro-economic environment may begin to improve in the latter part of this year as vaccines are more widely distributed. We expect GAAP revenues for the full year to be up mid-to-high single digits. On a constant currency basis, which excludes the impact of Argentine inflation, we expect revenues to be up mid-single-digit. Operating margin is expected to be approximately 21.5%, benefiting from revenue growth and the remainder of the $100 million of annual restructuring savings we will realize this year. We expect an effective tax rate in the mid-teens range for 2021, and we expect to return a significant portion of our cash flow to shareholders through dividends and share repurchases. EPS for the year is expected to be in a range of $2 to $2.10. While we expect solid full-year results, we anticipate quarterly variability in growth rates as we cycle through the impact that COVID-19 had on the business last year. So, I will provide some thoughts regarding the potential quarterly cadence for 2021. The first quarter of 2021 will be the softest from a year-over-year growth perspective, where total company constant currency revenue growth may be in a similar range to the fourth quarter of 2020. Note that retail is not fully rebounded to pre-COVID levels. The second quarter of 2020 experienced the most significant declines of the year. Accordingly, the second quarter of 2021 should see the strongest year-over-year growth. The third and fourth quarter of 2020 had similar year-over-year growth trends; so looking at the back half of 2021, we expect trends to be generally stable. We expect Business Solutions trends will continue to be soft in the first quarter, but they should improve progressively over the remainder of the year with an expected recovery in broader cross-border trade. To recap, last year we delivered our adjusted full-year financial outlook and continued to make good progress on key strategic initiatives while maintaining our strong financial position during a period of profound disruption. As you’ve heard from Hikmet, we have a full agenda this year that should position us well for the future. The strong 2021 financial outlook we issued today demonstrates confidence in our ability to execute against the initiatives we’ve outlined for the year, along with our expectation that the business should continue to rebound from the disruptions caused by COVID-19 in 2020.

We will now begin the question-and-answer session. The first question comes from Tien-tsin Huang of JP Morgan. Please go ahead.

Hello, everyone. Happy to speak to you all.

Thank you, Tien-tsin.

Hey, guys. My daughter has her piano lesson going on, so forgive the music. Just the guidance was, I thought encouraging. I know you’ve given the long-term outlook of 2% to 3% revenue growth at your Investor Day. But maybe would you mind unpacking your general assumptions on the relative performance between digital and traditional retail? Could we see some of those growth trends maybe converge? I’m just directionally curious what you’re anticipating there? And I don’t know if maybe some of these Asian additions, like Walmart, are also going to contribute in a meaningful way as well? Thanks.

Let me start here, Tien-tsin. Nice to hear your good questions. Obviously, we are very pleased with our performance and the recovery helped the business, especially our digital business growth has been exceptional. So we are very pleased about that. And that’s going to continue to happen, right? We do see no reason that’s not going to happen. With the economic recovery at the latter part of the year, I think we are convinced about our guidance, and we are really happy with how the customers are really sticky to us. It looks like we are gaining market share; people choosing Western Union trust us. We are gaining market share, and digital customer acquisition continues to happen. We know that most 80% of the customers are new; for the new customers, new to the westernunion.com, so this is also huge. Once customers stay with us, they stay longer; they do more transactions. They use us more often. Generally, I would say that it’s great. I’m also very excited about the Walmart addition. Walmart will definitely give us additional customers in our retail business. By the way, retail business is also recovering very well. As lockdowns diminish worldwide and vaccines are distributed, I see really good prospects. Saying that, though, you never know; we don’t think that wave three or wave four or wave five won’t happen. We hope all get the vaccine, which will help us grow this business, and generally also for the industry. Raj, do you want to add something?

I can just give you a little bit of color, Tien-tsin, on the trends. Retail, we do expect the retail part of the business to grow this year, but it is going to be a volatile Q1. It’s going to follow the company cap that I laid out, and Q1 is going to be the softest. Q2, because we had the lowest Q2 last year, will be probably the highest, and then much more stable in the third and fourth quarter, but it should get growth for the full year. Digital, the Q2, Q3, and Q4 last year were very high growth for digital. So we’re going to see the grow-over impact of that, so Q1 is likely to be the highest quarter there, and then we’ll get some normalization after that. And then, the B2B business is probably going to have a softer first quarter like the rest of the company and then improve as economic conditions improve for the rest of the year. So I don’t see those pieces converging as you had asked, but they are certainly normalizing versus what they did last year.

Terrific. Thank you, both.

The next question comes from Jason Kupferberg of Bank of America. Please go ahead.

Thanks, guys. Good afternoon. I wanted to ask about the spread between C2C revenue growth and transaction growth. I know you were at 6% in Q4. I think that was steady versus Q3, but I thought you would actually expect it to widen a little bit in Q4. So if that was the case, I’m just curious where there may have been a little bit of upside surprise, if you will? And then how should we be thinking directionally about that spread in 2021? Should it narrow versus that 6 point gap we’re currently observing, or do you expect it to stay at similar levels? Thanks.

Sure. Jason, it’s Raj. Yes, the fourth quarter was about the same as in Q3. I would say generally, overall trends are similar. Retail was relatively stable between the two quarters. And then digital, we did start to see some of the grow-over impact of digital both in wu.com from the higher pricing from a year earlier and digital white label as we had expected. We also got the benefit of some positive mix in other parts of the business, and that’s why the spread ended up being similar. As we look at this year, we think there is going to continue to be a spread, but our focus really has shifted Jason to the top-line growth, and that’s why we’re really happy that we can give a mid-single-digit constant currency top-line outlook along with margin expansion. There are so many moving pieces, and it’s a very complex exercise to try to boil it down to just a revenue and transaction spread because we have a white label business, we have wu.com that’s branded, we have retail, and the geography plays a part. So we’re really focused on the top-line growth outlook that we’ve given; that’s our ultimate objective, and then obviously the margin expansion is also a big part of that.

Yes. I just want to add, just in general, Jason. Great question. In our business model, nothing has changed, right? I mean, we are going to continue to invest to get more customers, and that’s going to continue. We are very much focused on revenue growth and profit growth. I call that profitable growth, and you could see that we are also planning margin expansion to 21.5%. It’s important. So it’s really good results. I like how we acquire customers as well as how we got the revenue and the profit.

Yes. One last thing just to add to that, we said on the call that digital revenues were 20% of consumer revenues last year, and that’s up 600 basis points from the year earlier. We obviously expanded margins last year, and we’re going to do that again this year. So two years in a row of expanding margins while the digital business continues to track towards $1 billion this year.

All right. Good start. Thank you, guys.

The next question comes from Darrin Peller of Wolfe Research. Please go ahead.

Listen, I want to just tone in on the westernunion.com monthly active customer growth, which I think was 49% again, which compared to around 45% the last couple of quarters. So clearly it’s doing well. And I’d be curious to hear, and if you guys can give a little more color on what you think is the driving force in terms of that improvement in active users? What do you actually define as an active user, first of all, would be helpful? And then when we think about what that could mean for your business model when you have these active digital users that are more engaged, in terms of strategic opportunities, well, even above and beyond what you’re doing now multi-year, more thoughts on that too.

Let me start strategically where we are going Darrin on that. Maybe Raj, you can add more color on that later. I think of Western Union’s consumer ecosystem. Westernunion.com is an ideal platform to acquire customers and make them stickier. We know that the customers who are using Western Union stay longer, and they are stickier, and they’ll use us more often. That’s a great acquisition opportunity to have a long-term opportunity here. Within the ecosystem, today we are using – the customers are using us for sending money, paying bills, but also as we create this ecosystem, we have about 8.6 million customers at Western Union, and these customers are coming from 75 different countries globally. It’s a unique platform for a multicultural and global customer base to really add additional services long-term, and could include banking services or other services to build that ecosystem. I am very excited about that long-term strategy. Your question regarding the numbers, maybe Raj, you can help out here?

Yes. Darrin, how we define it is that these are the uniquely active customers in a month. It’s sort of the average for the quarter that we’re giving. So 49% growth there, and the great thing, as Hikmet said, is this is really a sticky business because these customers are creating an account relationship with us, and that’s really where they become repeat customers, and they do more transactions. This is good to have. That’s really been the strategy this year, to continue to drive more customer growth, because that will be the lifeblood of wu.com over the next few years.

Okay. And so that active user growth, it’s kind of new metrics that should be sustainable in your minds? I know I’m trying just to keep it in the same question. Thanks, guys.

Yes. Just like the digital business is going to grow over time, we expect that similar behavior for the customer metric just because of the impact from last year, but the absolute numbers are going to continue to increase this year quite well.

And one other thing, Darrin, is we do see that westernunion.com also captures a little bit different customer segment, especially during the pandemic. For example, people currently within the European Union or within the U.S. can’t travel. They used to use their MasterCard or Visa to apply for and use their cards, picking up the money at ATMs in the receiving countries and distributing within families. Now they have chosen us because it’s easier to send money. We are targeting that kind of customer segment. Our marketing programs and product programs are really packaged around that, which is exciting news.

Okay, that makes sense. Thanks, guys.

The next question comes from Rayna Kumar of Evercore. Please go ahead.

Good evening. Thanks for taking my question. So you are making very strong headway with white label partnerships in 2020. Can you talk a little bit about how your 2021 pipeline would work with new partnerships? And then I’ll ask my second question upfront. Really nice to see the dividend increase plus return to share buyback, how aggressive could you potentially be with the buyback at current prices?

Well, let me start on the white label. Rayna, I’ll start with it. Hi, Rayna. How are you? Let me start with the white label. I think we have had great success in 2020. We announced in late 2019 about our white label and started this really being the beginning of a new era of how we offer our platform to third parties. The banks are currently sending money through bank-to-bank transactions, using swift and other correspondent banking forms. It’s a model, but it’s painful. The payments industry has struggled there. Some banks are choosing us, especially when it comes to exotic currency, to replace their existing platform. This white label opportunity is huge for us; it’s a big opportunity for the future. We signed some banks, and we’re going to announce some bigger ones when we have them. It takes some time as you know to implement our system in their system, and I’m very optimistic that we’re going to grow this white label partnership also in the future.

And just on the capital return, we are also very happy that we could raise the dividend today by 4% or so. I think it’s a significant use of our cash flow. In terms of our priorities, we continue to invest in the business to drive organic growth and expansion. Dividend is a significant use of our cash flow. It will be almost $400 million this year. We’re also looking for the right kind of acquisition opportunity that fits within the cross-border payment space. Lastly, we’ll buy back stock. I would just say, Rayna, that to the extent there is not a material acquisition, we would expect to buy more stock than we did last year. As you know, we paused the stock buyback for three quarters of the year, but I expect that we will be more active this year.

Perfect. Thank you.

The next question comes from Jeff Cantwell of Guggenheim Securities. Please go ahead.

Good afternoon, and thanks for taking my question. Nice results, and I hope you all are doing well? I wanted to ask you to focus on your digital business. Can you talk some more about the pieces that we need to consider this year? I guess, on the one hand, you’re looking at some tough comps, because of how many transactions migrated to digital during the pandemic last year? But then on the other hand, we see your app downloads look really strong, right? So you are still getting a lion's share of those downloads, and that’s been persisting since the pandemic. And wu.com monthly actives have now increased by 49% year-over-year. I think those are some data points that speak to the strength of your digital side. Could you help us understand how we should think about transaction growth and revenue growth in digital through this year, 2021? Thanks very much.

Thanks, Jeff. First of all, thank you for the compliments for the presentations. I’ll give that to my team. They used a nice PowerPoint presentation, but it’s all about the results. I have to give compliments to my team for executing especially in digital. Great question. Look, we are very satisfied with our digital. We expect approximately $1 billion this year, which is a significant number. We are very pleased about that. If you look at our digital business, you have to see it from two parts. One is the Western Union Business, westernunion.com, where we have direct access to customers. The other part is the white label, where banks or financial institutions or businesses use our platform to move money cross-border for their digital customers. Both segments have significant growth opportunities. On the wu.com business, we are going to continue to invest in marketing and customer acquisition and stickiness; that’s our business model for the future, making that an integral part of our ecosystem, which creates a big opportunity. For the white label or digital third-party business, it’s really expanding, offering our platform to the banks, and our sales teams are actively engaged. We signed also some banks late 2020 and early 2021, and I’m very excited about that. So the $1 billion revenue target is something we are looking forward to achieving, and it motivates us all.

I’d say, Jeff, we expect digital business to approach approximately $1 billion in revenue this year. We ended at just over $850 million last year. That gives you a sense of the revenue growth. I do expect transactions to grow above that level just given the mix of business we have. Digital white label partners, just to ground you again, last year, it was largely a new business, so you can’t look at it as a new business anymore. WU.com will be more stable year-over-year in terms of transaction volume, also growing a little bit, but not as much as the digital white label. So think of it that way; the data points we gave you will help frame what we’re thinking for overall revenue.

Okay, great. Thanks for all the color and congrats on the results.

The next question comes from James Faucette of Morgan Stanley. Please go ahead.

Thank you very much. And thanks for all the color and detail on both the results and how you’re looking at 2021. Just a quick clarifying question and then I guess my real question. And the first is on the clarification; you talked about picking up the pace of buybacks in 2021. How much is assumed in your EPS outlook? As far as a little more color on what you’re seeing from a behavioral standpoint, any nuance or details you can give us in terms of attracting a lot of new customers and a lot of customers outside of your traditional demographics, especially during the pandemic? Anything you can share in terms of how their repeat business or retention has looked over the course of the rest of 2020? And then what are you seeing in terms of the impact from things like stimulus, etc., coming on and fading off? Just trying to understand a little bit the behavior of a lot of these new customers you added during the course of 2020?

Yes. Let me start and then Hikmet, feel free to jump in wherever makes sense. On the share buyback, last year, I’ll just point you to what we bought in the first quarter, which was about $217 million for the full year, and that was all in the first quarter. The previous year in 2019, we were above the $500 million mark. I would just say that it’s not going to be as high as $500 million, or as low as $200 million; it’s probably going to be somewhere in the middle of that range. Again, it depends on the other capital priorities, James. But that’s roughly what we’re thinking about. More than the amount and the timing of repurchase will also be important. So, that’s what we’re thinking there. I think we gave some metrics regarding what we’re seeing from a retention standpoint or at least, I think we’re getting 12% more transactions per customer in the dot-com business. We also increased the number of customers by about 30%, and then the principal per customer increased by about 25% in the dot-com business. And then James, I’m sorry, I forgot your last question.

Yes. Your point on stimulus programs benefiting our business is valid, but it’s hard to quantify. We don’t think they have been significant so far to our business. Maybe the U.S. stimulus package was at the end of Q4, so it may have an impact in Q1 2021. But in general, the business recovery really has to do with the economic turnaround in different countries. Just a reminder, most of our business is out of the U.S. and distributed within different countries; as countries open or close, it has a positive impact on our business. We believe that as the global economy performs and lockdowns lessen, and since vaccines are rolled out, Australia and New Zealand are good examples; Japan and Singapore are doing great too. We are seeing the first recoveries, and as millions of people in the U.S. get vaccinated, that will also help our business. In difficult times, people are choosing us; they trust us, and we believe they will continue to do so.

That’s great. Thanks a lot.

Thanks, James.

The next question comes from Ashwin Shirvaikar of Citi. Please go ahead.

Ashwin, we can’t hear you?

No, Ashwin, we’re not able to hear you. You are saying something. So maybe we go to the next question, and maybe Ashwin, you can come back again.

Just one moment. The next question comes from Bryan Keane of Deutsche Bank. Please go ahead.

Hey guys, how are you doing?

Good. How are you, Bryan?

Good, good hanging in there. I wanted to talk a little bit about the pricing initiatives in wu.com? It looks like successfully, I’ve seen transaction growth continue to increase. I think it was up at 56%. Can you talk about what kind of pricing initiatives you’ll do in wu.com in 2021? Is there other places where it makes sense to maybe make some changes in price to maybe drive a faster transaction rate even in the retail business? Thanks.

Yes. I think in our pricing philosophy, Bryan, we have not changed. What has changed, though, is that we are more efficient on pricing with our dynamic pricing strategy, which helps us identify customer behaviors better. So, generally, I would say that our pricing has not changed; we are focused on customer acquisition, especially in the dot-com business. One essential point is that we are focused on profitable growth. It may vary from quarter to quarter, depending on the promotions and dynamic pricing; as you know, we operate in many corridors within many countries with many currencies. Previously, we adjusted dynamic pricing on a quarterly basis. Now we have shifted to doing it based on customer relationships, making the customers stickier. Our upgrades on our systems and platforms have helped tremendously, and we also have our own department of data management to support this. Khalid and Jay, who run this dot-com business, are doing a great job. So, Raj, do you want to add something?

Yes, I’d say, Bryan, that we were quite active last year in driving customer acquisition, and maybe we have a little bit more to do this year. A lot of what you’ll see in the numbers will be the carryover impact of the pricing strategy from last year. If you actually look at the yield, just comparing the yield between Q3 and Q4 for dot-com, they were quite similar. In fact, our entire businesses are quite similar. So not a big change from quarter to quarter. I think you’ll see more of that stability probably this year in terms of yields. A little bit more to do yet, but a lot of it was achieved last year.

Yes. You can really see the solid growth in digital. So congrats on that. Thanks.

The next question comes from Andrew Jeffrey of Truist Securities. Please go ahead.

Hi. I appreciate you taking the question. Lots of good information back and forth here. My question is really high level, and I’m just trying to wrap my head around this dynamic. Looking at Slide 11 with C2C transactions up 6% the last couple of quarters and cross-border principal up north of 20%. I’m also thinking about a competitor’s results this morning where revenue grew significantly faster than transactions. Just trying to think about what needs to happen at the margin, given the solid volume growth for revenue growth to accelerate. I know you said retail is going to be up Raj this year, and maybe that’s part of the answer, but is it mix, is it price, or is there something else? I’m just trying to distill it down to its most basic components.

I do think you’re going to start to see the benefits of some of our groundwork we’ve been laying over the last year. Last year, Andrew, we had so many customers looking for ways of sending money, and we wanted to really back up the truck and take those customers in and engage them in our digital business. That will show up here. We’re going to get a lot of revenue growth from digital. Our retail business is going to rebound, so that’s an additional piece of it. We can confidently say that we’re able to give the outlook; our goal is mid-single-digit constant currency top-line growth and margin expansion, so we’re really happy.

Yes. I will just add in that Andrew. You mentioned a competitor, but if you look at our base of about $860 million in digital business last year and target to hit about $1 billion this year, is a solid achievement by any measure. The downloads of our apps have been huge on the Western Union apps, with figures double that of our next competitor, as you know. We are pleased with the growth rates, and we’re targeting a $1 billion milestone.

Thank you. I appreciate it.

The next question comes from Timothy Chiodo of Credit Suisse. Please go ahead.

Great. Thanks a lot for taking my question. I just want to dig into the margin guidance a little bit. Operating margins this year came in at about 20.8%, guided to 21.5% next year; so about 70 basis points of margin expansion. Maybe you could break down some of the components. I know there’s more cost saves on the come, but perhaps there’s some more investment behind CAC and digital. Maybe some of the temporary cost savings from this year might come in the model. Just break down the components to bridge us to the 70 basis points of expansion.

Yes, sure. Nice to speak with you, Tim. Revenue growth is a key driver of the margin expansion. You are right; we are targeting about $100 million of total savings this year, including more than $50 million from last year. So, there’s an incremental amount that will help us on the margin side. We’re also investing in the business. Some is catch-up spending from last year, but we are investing in our technology platforms, setting up a new settlement system this year and migrating applications to the cloud. We are upgrading our dynamic pricing capabilities and spending a bit more on the marketing side. So all of these components combined give us an additional 70 basis points of expansion, and we’re pleased with two years of margin expansion in a row. Last year was even in the face of a down revenue environment, and this year not only will revenue go up, but we are driving margin expansion. We expect an additional $50 million of savings next year, making our target of $150 million run rate savings realistic.

And we are also returning significant cash back to shareholders while performing well in our business and providing guidance. We are increasing the dividend and conducting share purchases.

Excellent. Thank you for that context. That’s all very, very helpful. Minor, minor follow-up is, and I apologize if you mentioned this and I missed it, but did you quantify any of the Cuba impacts at all, either for the quarter or for the guide? I’m sure it’s small, but it’s like you mentioned?

Yes, Cuba. We obviously are working to see what we can do to relaunch it. Right now, it’s closed. It’s about 1% of our revenues typically, so that’s – so it is not the biggest impact, but it is about 1% of our revenues.

Okay. I think you were about to anticipate my question; go ahead.

Yes. We’ve taken that into account in our outlook. We knew it was shut down in mid-November or late-November.

Perfect. Thank you so much for taking the questions.

And the last question will be from Bob Napoli of William Blair. Please go ahead.

Thank you for getting me in there. Appreciate it. Good afternoon, everybody. How are you?

Hey, Bob. How are you?

Great. Question on – maybe just digging in again to the digital business and kind of the long-term outlook. I understand it’s getting close to $1 billion in revenue. Looking out over the next three to five years, is this accretive to margins over the long-term? What’s the right growth for this business over the next three to five years? Where are the biggest opportunities geographically? What’s going to sustain the growth of that business?

2020 was definitely an exceptional year. We had a very strong year. But we believe this is only the beginning of the digital growth curve. I really believe the future lies in digital transactions. It’s going to continue to grow via westernunion.com or via digital third parties. I’m excited about that, especially in acquiring customers for the westernunion.com as we already have 8.6 million customers, which opens up huge opportunities to expand our customer base globally. We can engage these customers long-term beyond mere money transfers. A good example is Sberbank; Sberbank is a great partner who is already using our services to send money to specific countries. They’re choosing us for settlement, payouts, and compliance activities, and this kind of leverage will enhance our growth potential.

Regarding margins, we are ensuring our digital business remains accretive moving forward. All of our digital segments have high margin profiles, and as you've seen, we've continued to expand margins throughout this period. This year, our digital business is set to grow significantly, with $1 billion in sight.

Thank you. I appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to Brendan Metrano for any closing remarks.

Yes. Thank you, Andrew. Thank you all for joining the call today. We appreciate your interest in the Western Union Company.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.