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Moneygram International Inc (NASDAQ:MGI)

Q2 2013 Earnings Call

July 25, 2013 9:00 am ET

Executives

Eric Dutcher

Pamela H. Patsley - Executive Chairman, Chief Executive Officer, Chairman of Special Committee and Member of Special Sub-Committee

W. Alexander Holmes - Chief Financial Officer and Executive Vice President

Analysts

Sara Gubins - BofA Merrill Lynch, Research Division

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Georgios Mihalos - Crédit Suisse AG, Research Division

Kevin D. McVeigh - Macquarie Research

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

David M. Scharf - JMP Securities LLC, Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Glenn T. Fodor - Autonomous Research LLP

Operator

Good morning, and welcome to the MoneyGram International Second Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded [Operator Instructions] It is now my pleasure to turn the floor over to your host, Eric Dutcher, Vice President, Investor Relations. Please go ahead.

Eric Dutcher

Thank you. Good morning, everyone, and welcome to our second quarter fiscal year 2013 earnings call. With me today are Pam Patsley, Chairman and Chief Executive Officer; and Alex Holmes, Executive Vice President and Chief Financial Officer. Our earnings release and accompanying slides are on our website at moneygram.com.

I must remind you that today's call is being recorded and that the various remarks we make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from expectations, plans and prospects contemplated in any forward-looking statements as a result of various factors, including those discussed in our filings with the SEC. I encourage everyone on this call to read our SEC filings, including our 10-K for the year ended December 31, 2012 and our latest 10-Q. Please note that today's remarks include certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow and constant currency. Our earnings release includes a full reconciliation of these non-GAAP financial measures to the related GAAP financial measures.

Now I'll turn the call over to Pam.

Pamela H. Patsley

Thanks, Eric. Good morning, everyone. We had another great quarter at MoneyGram. We posted an increase in our revenue growth and solid earnings on the strength of our core money transfer business. During the quarter, money transfer transaction volume increased a robust 14%. Our U.S. outbound category had its highest growth in more than 5 years. Money transfer constant currency revenue growth accelerated from the first quarter to 13%, significantly outpacing the industry and marking our ninth consecutive quarter of double-digit growth. Our global agent network also grew at a double-digit rate, increasing 15% to 327,000 global locations.

Consolidated revenue improved to $365 million, an increase of 11% and our adjusted EBITDA improved to $70.3 million. Our free cash flow strengthened to $48 million, a 24% increase over the prior year. We continue to make investments in IT, compliance and products that enhance our operations in providing increased convenience and service to our customers. We are executing well and our results reflect that. We are excited about the addition of Alex Hoffman to our executive committee. He is dedicated to our product innovation and emerging markets channel. Alex joins us from PayPal where he was previously Head of Consumer Growth for Europe, Middle East and Africa. He has 20 years of experience in payments and cards, online services and technology with a strong track record of building new products from concept to launch. Speaking of PayPal and innovation, I'm proud to announce that cash out from PayPal accounts through MoneyGram is now live at paypal.moneygram.com. Now the millions of U.S. PayPal account holders can easily initiate a cash out transaction to be picked up at one of our locations around the country. This quarter, we will also be launching a service that gives PayPal users the ability to load cash into their account at select MoneyGram locations in the U.S.

Before we go into the detailed regional performance, I would like to reiterate that this is over a $500 billion industry with long-term growth rates of high single digits as estimated by the World Bank. It's obvious with our 14% transaction growth that we are gaining share. We accomplished this by being very targeted and local in our efforts. We focused on winning consumers through innovative services at the best value. Price is only one component. Late last year, as you know, a major competitor implemented a significant price cut. We utilized our targeted strategy to leverage our brand loyalty, diversification and innovation, rather than simply changing our price as a broad response. This consumer approach, along with a close relationship with our agents, is a consistent theme driving success in all regions and channels. So let's take a look at the regional performance.

U.S. to U.S. spends represented 29% of money transfer transactions and 26% of revenue in the quarter. Transaction growth improved slightly to 8% from 7% in the first quarter. U.S. to U.S. revenue growth accelerated to 11% in the quarter due to targeted positive price adjustments in very specific bands and at select agents.

MoneyGram Online continues to generate strong growth in this quarter. We are implementing new strategies in certain DMAs which we believe will accelerate our growth. In that vein, we increased the number of our corporate-owned stores with the acquisition of Atlanta-based Latino Services. We now have corporate-owned stores in important locations that strengthen our brand and accessibility in this key DMA. These corporate stores and stores within a store also enable us to more easily test new products and services. We're encouraged by the stability of growth in this significant U.S. to U.S. corridor. U.S. outbound transfers in the quarter represented 37% of total money transfer transactions and 29% of money transfer revenue. Both transaction and revenue growth were strong at 19% and 14% respectively. The difference between transaction growth and revenue growth is primarily related to a few items specific to Mexico and higher transaction growth in lower-priced quarters. U.S. to Mexico accelerated to 31% year-over-year transaction growth. Revenue growth was also in double digits, but lower than transaction growth due to price reductions at Walmart and Mother's Day promotions. Mother's Day is a very important holiday, especially for U.S. outbound to Latin America, and our Mother's Day promotion activities were extremely successful. The Friday before Mother's Day was one of our highest transaction days in company history. Important to this quarter, we extended our agreement with Nix Financial, a long-term agent in based in Southern California. U.S., to the rest of Latin America, generated great results as well this quarter. Sends to Central America were strong, driven by our new agent signings last year. During the quarter, we signed Banco Topázio and Banco Confidence, increasing our presence in Brazil by an additional 200 locations. U.S. outbound to Africa continued to build on its great performance with strong to many countries like Nigeria, Ghana and South Africa.

While the 31% U.S. to Mexico transaction growth is a great headline, it should not overshadow the fact that we had broad based growth in U.S. outbound sends. Excluding Mexico, we've been gaining share against competitors with 15% transaction growth in U.S. outbound. Before discussing sends outside the U.S., I would like to mention our Gold sponsorship of the country cap [ph] World Cup 2014 Qualifiers. Through this initiative, we have reached more than 45 million viewers across both the U.S. and the LAC region. Our sponsorship allows us to accelerate our brand awareness momentum and most importantly, get closer to our U.S. and Hispanic consumers.

Transactions originating outside of the U.S. accelerated to 16%, while the associated revenue growth accelerated to 15%. This category represented 45% of total revenue and 34% of transactions during the quarter. Sends from Latin America have continued robust growth, particularly fueled by agent signings last year. This growth has been predominantly inter-Latin America with Mexico skewing as a big receiver. The power of our network in Mexico, with over 15,000 locations, positions us well for continued growth in LAC sends.

Across Europe, we continued the rollout of several key agents like PostNL, the Dutch post office. We also began a rollout with Tesco in the U.K. In Italy, we had one of our strongest quarters in several years as our regional network made significant gains against regional competitors. In Turkey, we signed Denizbank, a large bank with over 600 branches in 81 provinces. This was a significant competitive takeaway for MoneyGram, which greatly increases our network in Turkey. We continued to sign new retailers in Spain, like Eroski, a large supermarket with over 1,000 locations. In Croatia, we signed a 10-year agreement with Tisak, the largest retailer in the country, with over 800 locations. And finally, we launched with Payzone in Romania, offering convenient money transfer services across the region with more locations to roll out in the future. Growth in the Middle East was strong, driven by sends to the Indian subcontinent and the Philippines. With the [ph] devaluation in the quarter accelerated transactions. We renewed, Alkuraimi Microfinance Bank in Yemen, a top institution in that country. We also signed Deniba Exchange in the UAE. We continue to be pleased with our performance in this important region. We had strong growth in Asia as our young network matures. New agents and continued market focus drove strong transaction growth, both inbound and outbound. In the quarter, we grew our banking presence in China, expanding with Guangfa Bank with 500 locations across 40 cities and added Shanghai Rural Bank, a bank-focused providing more convenient hours to their consumers.

Across Africa, we signed the National Post for Zimbabwe, Uganda and Tanzania. With these post offices signings, MoneyGram is the money transfer provider for over 30 national posts around the world. We are very pleased with our performance across the African continent because both sends and receives generated double-digit growth. As we've previously discussed, Africa is certainly a dynamic environment whether through geopolitical issues, country unrest or regulatory changes, but it's an important part of our growth strategy.

As for instance, last year, Angola posted very strong money transfer send growth but we're currently seeing Angola slow as the central bank has placed regulation on the currency. We are optimistic for the long term because the country relies heavily on desk workers.

As we move to self-service category, in the second quarter, self-service in new channel money transfer revenue increased 24% driven by transaction growth of 50%. self-service and new channel revenue represents 6% of our total money transfer revenue. During the quarter, we signed a strategic agreement with DeviceFidelity to service the exclusive money transfer provider for moneto wallet users on iPhone or Android platforms. We also initiated an online service with OzForex, one of the world's leading foreign exchange service providers, providing MoneyGram customers with the ability to send money from a bank account in Australia or New Zealand to bank accounts overseas via PC, tablet or mobile phones.

Our self-service revenue is comprised of our MoneyGram online business, which offers money transfers in the U.S., U.K. and Germany, and bill payment services in the U.S. In the second quarter, our global MoneyGram online revenue increased 15% with 51% transaction growth. MoneyGram online continues to be a powerful channel for us with over 80% of our transactions coming from repeat customers. Our future growth looks promising as we again had 220,000 new customer profiles created in the quarter. Our self-service solutions are designed to offer convenience for the consumer to send and receive money any way and anywhere they want. Through partnerships, MoneyGram services are available through kiosks, prepaid cards, virtual agents, mobile wallets and online partners. Our multidimensional, self-service strategy has points of presence in more than 20 countries around the world. Now let's take a quick look at bill pay. The bill payment product represented 7% of total revenue. For the second quarter, transactions declined 2% with a 5% revenue decline. We continue to expand further into new verticals, and during the quarter, we added almost 700 billers to the network, bringing our total network to almost 13,000 payment options. We continue to focus and enhance our self-service bill payment solutions which represent 4% of our total bill pay revenue.

With that, I'll turn it over to Alex who will walk you through the financials.

W. Alexander Holmes

Great, thanks, Pam. Revenue in the quarter was strong. Total revenue increased a healthy 11% to $365.1 million on the strength of our core money transfer business. Money transfer revenue was $319.7 million, an increase of 13% on both the reported and constant currency basis. Investment revenue was $3.5 million, up from $3.4 million in the prior-year period due to high return on investments. Reported EBITDA for the quarter was $64.7 million. Reported EBITDA was impacted by $3.3 million of stock-based and continued performance compensation, $1.5 million of severance costs, and $800,000 of legal expenses related to certain ongoing matters.

Adjusted EBITDA was $70.3 million in the quarter, up 3% on a year-over-year basis, and adjusted EBITDA margin was 19.3%, down from 20.7% in the prior-year period. Adjusted EBITDA margin was primarily impacted by an increase in commission expense and compliance costs.

On our last earnings call, we mentioned that commission expense would increase slightly as we implemented a step-up in commission rates for a large agent. In addition, a shift in corridor mix led to higher commission expense as we saw accelerated growth in corridors with slightly higher average commissions. In the quarter, we also began to incur cost associated with the compliance monitor. These increased costs also impacted margin in the quarter. I will provide more detail on that in just a minute. Looking at expenses during the quarter, total reported operating expense decreased 1% over the prior year. Total commission expense in the quarter was $169.7 million or 46.5% of revenue compared to 44.5% in the prior year.

In the quarter, money transfer, as a percentage of total revenue, increased to 88% from 85% in last year's second quarter. Money transfer commission expense, as a percent of revenue, was up year-over-year due to changes in corridor and agent mix, as well as the aforementioned step-up in commission rates for a large agent. For the remainder of the year, we anticipate money transfer commission expense on a rate basis to be in line with the second quarter. Compensation and benefits expense increased $7.4 million on a year-over-year basis as a result of increased headcount costs and compliance initiatives along with increased incentive compensation and severance cost as compared to last year. On a sequential quarter basis, compensation and benefits remained roughly flat. Transaction operation support decreased $35.6 million on a reported basis compared to the prior year, largely due to decreases in expenses for legal matters and reorganization and restructuring costs. On a sequential quarter basis, transaction and operation support increased $11 million, largely related to a $5 million increase in marketing spend, a $2 million incremental increase in cost for the monitor and compliance activities, with the remaining increase primarily driven by volume and other growth initiatives. Marketing, as a percentage of total revenue, was 4.3% compared to 4.7% in the prior-year period. The second quarter had higher marketing spend on a sequential quarter basis as we rolled out our Mother's Day campaign, ICC Cricket promotions and other local and global initiatives.

For the full year, we continue to anticipate marketing expense as a percentage of total revenue to be between 4% and 4.5%. As a result of our debt refinancing in the first quarter, we were able to recognize interest expense savings in the second quarter of $7.8 million. This is slightly above our anticipated annualized run rate of $20 million announced when we refinanced our debt in the first quarter.

Income tax expense for the quarter was $13.5 million and cash tax is worth at $100,000. During the quarter, we were able to resolve one element of our dispute with the IRS. As a result, we have reduced our potential cash exposure from this previously disclosed $107 million by $35 million to the now $72 million which we will see when we file our Q. We're pleased by the progress we've made in this matter. Diluted earnings per share on the quarter was $0.27 on diluted shares of $71.8 million -- excuse me, 71.8 million shares. This included a negative $0.03 impact on stock-based and continued performance compensation; a negative $0.01 per share impact from severance and related costs; and a negative $0.01 per share impact from legal expenses related to certain ongoing matters. In the quarter, free cash flow was $48 million or 13.1% of revenue. This is the highest free cash flow as a percentage of revenue that we have had since we began reporting this measure. Free cash flow was up from the prior year due to lower interest payments and stronger revenue growth.

Capital expenditures in the quarter were $11.2 million, down slightly from the prior year while signing bonus payments were $1.6 million, up slightly from the prior year.

We ended the second quarter with assets and excess of payments service obligations at $257.3 million, up from $219.7 million in the first quarter. I'm extremely pleased with this number. Supported by strong earnings and improved cash flow, we're optimistic about our cash position. Looking ahead, we anticipate utilizing our excess cash to reinvest in the business, reduce our outstanding debt and make targeted acquisitions.

Turning now to the segments. Total revenue for the Global Funds Transfer segment increased 12%, led by strong money transferred constant currency revenue growth of 13%. From a trend perspective, growth across the quarter was quite consistent on a month-by-month basis. The Global Funds Transfers segment reported operating income of $40.5 million and an operating margin of 11.8%, down from 12.5% in the second quarter of last year. On an adjusted basis, operating margin was 12.5% in the quarter, down from 14.3% in the prior year as a result of higher commission expense and compliance costs. Total revenue in the Financial Paper Product segment during the quarter declined 6% to $20.3 million with operating income of $7.6 million. Reported operating margin was 37.4% or 38.9% on an adjusted basis. Segment margins were primarily impacted by lower revenue due to fewer items processed. Financial Paper Products revenue represented 6% of total revenue in the quarter compared to 7% last year. Now before turning it back to Pam, I'd like to make a few comments on our outlook for the remainder of 2013. Our money transfer business has performed well and our outlook for revenue continues to improve. Therefore, for the full year 2013, we are raising our revenue guidance and now estimate constant currency revenue growth to be in the range of 7% to 10%. For the second half of the year, we anticipate incurring an additional $5 million in expenses for increased costs associated with the monitor and compliance activities. These expenses will somewhat offset the revenue fall through and we therefore continue to anticipate constant currency adjusted EBITDA growth to be in the range of 3% to 6%. Now let me turn it back to Pam.

Pamela H. Patsley

Thanks, Alex. As I reflect on the quarter's performance, where we yet again outperformed the industry, I do believe we are taking the right steps, both for MoneyGram today and our future position in the payments industry. Quite frankly, we're posting some of the best results in the company's history against the backdrop of what many view as a challenging environment. While we are in a competitive environment, we're also proving that we are a clear leader in our industry through our performance. Key contributors to our success are our strong brands with local market relevance, our collective and flexible solutions and really, a partnership approach with our agents and the versatility of our growth whether it's through products, channel or geography. As I've said before, we keep the consumer at the center of all we do. We're building our business for consumers to send it, pay it, load it any way, anywhere. With that, I want to just thank you again, for joining us today and operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Sara Gubins with Bank of America Merrill Lynch.

Sara Gubins - BofA Merrill Lynch, Research Division

Could you talk about what you've seen so far in July in transaction trends?

Pamela H. Patsley

We are having a nice July.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. In terms of pricing, there's only been 100 basis point impact on pricing to revenue in the past 2 quarters when I look at money transfer transaction versus revenue. Do you think that's an appropriate run rate for the rest of the year? And is what you're seeing so far giving you any indication that you'll want or need to get more aggressive on pricing?

Pamela H. Patsley

I think it's probably, generally a good indication. We remain pleased, very pleased with our results. And so there are no dramatic turns. Otherwise, we wouldn't have made some of the changes in our estimates as we shared with you this morning.

Sara Gubins - BofA Merrill Lynch, Research Division

Okay. And then just last question on attracting new agents. Are you seeing any more competitive dynamics for adding new agents? Any change in the discussion around commissions or otherwise that would suggest that it's a more competitive environment?

Pamela H. Patsley

Really, I don't want to be dismissive of a competitive environment but we've always been in a very competitive environment for signing agents. And as far as like looking for a delta, I don't see it. And our results certainly would say that we continue to have great results.

Operator

And we'll go next to Bob Napoli with William Blair.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

A first question, I guess, just on the margins. Alex, you sound like you said the commission rate would be relatively stable, the regulatory cost, I mean, $2 million per quarter, it sounds like a run rate. Is there -- do you expect margins from here then to kind of stay stable or with the revenue growth you're getting, is there any opportunity to bring those margins up a little bit? Or do you feel like 2Q is more of a run rate?

W. Alexander Holmes

Yeah, that's a great question. I think if you look at the layout of the quarters, we're still anticipating margin upswing a little bit. We have a few things. The pricing changes we put in last November, we put in some rising changes in the online business, last August as well and we'll be going through those. I think you look at Q3, we tend to load up marketing expense in the third quarter, probably very similar to the second, maybe even a little bit more. So that will mitigate that just a little bit. I think it'll be the timing of the fall through on the revenue growth. We have some good expectations for that. So I would anticipate our third quarter to be in line with the second and accelerating into the fourth quarter.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

And I guess maybe just talk about the regulatory side and you're working with the monitor, when you're having very good growth but is -- I mean, the monitor I guess, is a studying thing -- when do you kind of get some feedback or as to whether or not you have to adjust your business at all or add additional regulatory cost in order to satisfy the monitor? How is -- what's the process there?

Pamela H. Patsley

Sure. It's laid out fairly specifically in the DPA in terms of the timing and what happens next. So we will get the report from the monitor with the recommendation of their finding. Actually, the same day that CFPB implementation goes into effect, October 28. And there is a period for comment of the Justice Department. But quite honestly -- so that's a very prescriptive part, Bob. Quite honestly, we are not waiting to hear certain things. I mean, we just have a path of continued improvement, continued investment and certainly, I think they will come with some great ideas for us and I anticipate that, that will be a collaborative and dynamic conversation and just things that we will take on board and move forward as best we can.

Georgios Mihalos - Crédit Suisse AG, Research Division

And then last question, Wal-mart, I would imagine the big retailer that drove up the commission expense would be under the new contract with Wal-Mart. I think you become a preferred "provider" I think starting July 1 or sometime soon and I just -- is there a risk of Walmart inviting or having other brands, other money transfer brands come in to play a bigger role in Walmart?

Pamela H. Patsley

Yes. And the new contract took effect April 1 and Walmart has some flexibilities at certain different timeframes and based on different conditions. We, right now, are very happy with our relationship with Walmart. I think the activities we did together around Mother's Day, the continued joint approach to looking at new investment, developing channels and other things continues and that's more at the forefront. This notion of kind of bringing in other providers, there were elements of that ability even in the previous contract with Wal-mart. So parts of it aren't totally new.

Operator

We'll go next to Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

I wonder if the boost of the revenue guidance, was that a function of just a better environment overall or just less pricing action year-to-date based on what you initially factored into the guidance when you provided it?

W. Alexander Holmes

Yes, it's a little of both. I think certainly, as we built the plan for the year, the anticipated amount of cuts that we will have to make in pricing in a variety of different markets really hasn't taken effect in the way that we thought it might, which I think is great for our brand and for the business. At the same time, we've had a few markets that have overperformed for us and then a couple, as always, I think Pam alluded to in Angola where see you some slowdowns and sometimes, it's driven by regulatory, sometimes it's competitive. And so that balances that out a little bit as it always does in any given year. It's really a little bit of both. And we're very pleased with the performance we've had and the direction we're going.

Kevin D. McVeigh - Macquarie Research

Super. And then obviously, there's been some rumors in the market about some potential change in ownership. I don't want you to comment on that but if there were a change, would that trigger any type of risk for the Walmart contract or is that contract independent of any change or control?

Pamela H. Patsley

There are things that with our Walmart contract, that we would -- that we're very mindful of as we consider anything in the future with MoneyGram. I mean, they are 27% of our revenue this quarter and we have a very close working relationship, which I think, remains at the center.

Operator

We'll next go to Julio Quinteros with Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Just in terms of agent growth expectations from here with the agents currently around 327,000, what's the expectation now for the current ramp up as you think about the next, I guess, the rest of this year and then maybe some thoughts around the longer-term plans?

Pamela H. Patsley

We are still focused on growing that agent network. The pipeline looks really good. We've always said, kind of on a quarterly basis, you get more -- would like to find a more elegant word, but lumpiness in agent growth on a year-over-year. But I think on an annual basis, we've got good runway for double-digit growth in agent networks. And we're targeted to getting the right agents and that's important.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Pam, any prioritization around which geographies I guess, would be sort of top 1, 2 or 3 from here?

Pamela H. Patsley

No. I know you've probably all heard me say that -- and when I think about all of our regional managers, it's very hard for me to say 1 region is more important than the others. Because, as you know, it takes developing both the send and the receive side together. Otherwise, it's not very effective. So we can look to just the industry's largest countries and certainly, by metrics, those largest send, those largest received. And then the quarters that are generated from that, I would say you should assume get a lot of focus on a -- however, there are some places that may not be in the top 10 but were so small or just beginning to enter that we can drive great growth and it enhances then, perhaps existing agent productivity where we're really maybe not adding that many agents on the send side but we've just gone into. So there's still several countries that we are approaching. I know we talked that we've rallied our employees around kind of getting to 300,000 agent locations. We celebrated, we keep putting milestones, we've got 200 countries as our next milestone that as a company, we'll celebrate when we cross that together. So we're very, very encouraged when we really think kind of around the world.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Got it. And then thinking about some of the disclosures that came out of the European Commission yesterday pin you guys about any reaction to some of the comments there that the money transfer businesses would have to comply with increased disclosures. It seems a lot like what we see out of the CFPB here in the U.S. but any additional sort of thoughts around what that could mean in terms of cost structure, additional expenses, anything along those lines?

Pamela H. Patsley

It's a little early to tell. We've been always -- even since PSD came about, as we chose to be regulated in the U.K. by the FSA which is now called the FCA. So we've had this dialogue. It looks like most of what came out yesterday is really centered more on the credit card, the payments industry, credit card, debit card acquiring, merchant processing, issuing. And I think you're right, Julio, to assume. It looks like everything's really around disclosure. And as we've said, much of what's come out from the CFPB that will be implemented at the end of the October is disclosure. We've already been -- it had or has existed. To our customers, it's just kind of changing the form, tweaks here and there, a little bit here and there. So we will stay very engaged but there's nothing early days on, I guess call it PSD 2, that's causing us any angst.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay, so most of those disclosure requirements would more or less be built into the system anyway?

Pamela H. Patsley

Yes.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

And then just to go back to the pricing commentary and the guys that you guys compete with mostly. So it sounds like they've obviously initiated their own sort of pricing efforts. But the way that you guys have responded and what you're seeing in your own momentum in your business, hasn't actually been driven by pricing. So just to sort of clarify, I mean, I think, at the beginning of the year, you guys have laid out some ideas that you would use that lever if needed. But to date, that hasn't been necessary and yet, you guys are still succeeding in driving the kind of growth that you want to see, I guess. What would be the pivot point that could drive you guys to use pricing, theoretically, to compete more against I guess, any other price regression from the outside?

Pamela H. Patsley

Well, without kind of revealing any secrets or anything and I think, Julio, you summed it up really well. I'm like, yes, there's no question in that. That was great, how you summarized our position. We have used it very, very judiciously, more a scalpel approach to pricing as opposed to a sledgehammer and I think that's how we will continue to think about it. And it's a balance of transaction growth and revenue growth because you got to generate revenue to have profit.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

I guess the only place where it shows up or it seems like it's a little more amplified is in the online channel where volume growth is 51% but only revenue growth is 15%. Would you say that, that's obviously a little bit more competitive relative to pricing?

Pamela H. Patsley

Yes. We definitely took and we talked about this last year and probably, I should have mentioned that when I was kind of going through some of those statistics. We will begin to anniversary, if you kind of graph, it's the big price declines in MoneyGram online this third quarter. And so they were phased in and ramped in for MoneyGram online, different parts of Q3 last year. So I guess that we'll start to anniversary that and you'll see that transaction growth, revenue growth on MoneyGram online narrow. In other words, that's delta.

Operator

We'll go next to Tien-Tsin Huang with JPMorgan.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Obviously, growth was great this quarter. I was just curios, I mean, it feels like the consumer globally, generally, pretty strong. Any big callouts in terms of where you saw particular strength or weakness in terms of consumer or market growth? I get the share gains, just curios what the underlying growth feels like.

Pamela H. Patsley

I think it's easier to call out where we still see weakness from the consumer, if you will, as you phrased it Tien-Tsin, and that remains in Europe. And particularly, Southern Europe: Spain, Portugal, Greece, follow the mad, Ireland.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

So Southern Europe, not surprisingly is really it but otherwise, it feels like it's relatively strong. You did mention, Pam, I think, volatility in the currency, the rupee pulling forward maybe, some volume. Any way to size that on a broader basis? I know the dollar has been quite strong, so how big of an impact did that have?

W. Alexander Holmes

I think in any given quarter, currency fluctuations across a variety of markets are going to influence transaction returns. I mean certainly, when you see the peso strengthen and weaken, you do see a subset of that group, I think, when you're looking at sends to Mexico as an example in contrast and you see probably, a little bit less volatility on that. Certainly, people get excited when you can send more money home and maximize it a little bit better. And when you get into South Asia, it's a very important part of how they manage their sends back home. But I would say the stable, steady users are always there, they're always sending. And I think when you scale up into some different tiers of individuals, you get into more higher education, higher work level. They're sending money home and they are sort of looking at that currency fluctuation. So it does move around, it's a bit hard to quantify. I don't Pam, if you want to add anything to that based on conversations...

Pamela H. Patsley

I would say it's just more from an anecdote or a perception in the knowing our customer. As Alex said, I think our consumers primarily sends money transfers more for life essentials and are probably -- I have to think Tien-Tsin, you're asking the question because of some of the commentary from Xoom yesterday, which they had a great quarter. And as we've always said, we think they're a great competitor and have actually been good and additive to the category. And it's clear though, I think that as we've always said, that there's just a different consumer that's drawn to that solution and ours, and I think that's just fine. So we're very excited. It does -- the Indian consumer, as Alex said, is a little more sensitive. But when you're sending for life essentials, which is most of our transactions, you get less dramatic swings based on the rupee valuation.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

I see. That makes sense. And then Alex, you talked about the monitor cost. What are you spending the $4 million, $5 million on exactly? Is it really just people cost or the tech cost? Just trying to better understand the spend.

W. Alexander Holmes

Yes, no, absolutely. I think it's important. When you think about everything we're doing in the compliance environment, to think about it quite holistically, I think the monitor is obviously 1 aspect of what we're doing. And certainly, there's a direct cost of the monitor. We have to certainly pay the fees associated with him and his team and all the activity that they do. And obviously, we're responsible for that in carrying that forward. At the same time, there are a lot of underlying requirements that are changing in the regulatory environment. We've talked a lot about them when we talk obviously, about CFPB. There's different rules that are going into play. And so a lot of the spend is really on deploying compliance people globally in the field, making sure we have the right balance of people looking at the vast number of locations we have, the number of countries that we are active in. It upgrades to a back office system, trying to automate things today, which maybe in the past, had been manual or you can take a step function further forward to try to get us more on that leading edge of some compliance technologies and innovation, reporting requirements for governments and step up in there. So it's really hard to probably single it out and put it into one bucket. But certainly, I think for the remainder of the year, the direct cost of the monitor team is certainly one category and then the continued increase in investments for people on technology is the other.

Operator

We'll go next to David Scharf with JMP.

David M. Scharf - JMP Securities LLC, Research Division

I had a few follow-ups. Actually, staying on the topic of monitors, that roughly kind of $2 million, $2.5 million a quarter does that substantially reduce or go away after the late October report comes or is this going to be recurring?

Pamela H. Patsley

I think the work should kind of fourth quarter, next year's first quarter, I would think there direct around being here on site in time and numbers of teams generally should kind of go away. But not having gone through 1 year because it's kind of an annual cycle with a review, a report, findings, remediation tests, we really just don't know. So we're trying to be conservative.

David M. Scharf - JMP Securities LLC, Research Division

Got it. Make sense. Switching gears, Pam, I'm wondering if we can dig into Mexico just a little further. I mean, notwithstanding some of the color you provided, particularly the exceptionally strong Mother's Day. That was a huge transaction growth number and it wasn't exactly coming off of an easy comp either. And you've already more than lapsed the Grupo Elektra, agent relationships being opened up. I mean, what other factors were driving 30-plus percent transaction growth? I mean, did you see any material changes and maybe competitors, agent relationships and volumes with this strictly kind of macro or outbound from the U.S. just improving so much or were there competitive dynamics in play?

Pamela H. Patsley

I would say as we started a couple of years ago, really working on our network. And our network means not just in Mexico but also in developing the right network, the right agents and driving for productivity here in the U.S., those efforts are paying off. And I think we'll always take a little help from a better U.S. economy. And whether it's Ag work or construction work or things like that. So we're staying focused, staying at it and we didn't kind of say okay, now we got some growth so we're moving onto something else. I mean it is continual, consistent focus.

David M. Scharf - JMP Securities LLC, Research Division

Okay. So there's nothing specific in the quarter that really stood out, that tick it up from kind of the low 20% growth rate we've been seeing recently?

Pamela H. Patsley

I already talked about this in the first quarter results because that was at the end of April. Because it was toward the beginning of April and I believe it was even in our press release for Q1, that there -- again, to this notion that I said of being very targeted to signing the right agents and working with our agents to grab transaction share growth for MoneyGram. There was an agent that we were able to displace on each brand with our brand this quarter. No one's asked about it. It was in our press is. It's pretty self-evident and self-explanatory but we're excited with what we did in this case in Atlanta, with our acquisition on Latino Services. And again, bringing that more directly in the fold, having a more direct impact in that community and to the consumer in controlling the experience.

David M. Scharf - JMP Securities LLC, Research Division

Got it. It's certainly paying off. I wanted to switch to self-service. It's 6% of revenue now. It's certainly no longer a rounding year. I realize there are a lot of different channel within that broad umbrella of self-service but can you just remind me how the commission structure, the various kind of channel relationships work, whether it's with some mobile providers or online? I'm just trying to get a sense of the relative profitability of the self-service transaction versus an in-store send, for example.

W. Alexander Holmes

It's great question, David. I can't think of any one single self-service that would be out of the usual, from expense perspective, higher than any normal agent relationship would be. I think they tend to trend either in line with current agent commission structures or trend down from there. And it really is a mix across the board, I think. And it's really market-specific as well and it's partially agent-specific. I think it depends on what the service is and how it's structured. But certainly, I think as we look whether that's kiosk relationships or whether that's mobile opportunities or online partnership, we definitely see the opportunity over the long-term for lower commission expense in general. I think the question that we're looking at and working through is, is there offset on the TNO [ph] line on some other cost for servicing or rental space or something else, perhaps more amortization if you're buying equipment or deploying equipment. And so those of the things. So we're looking at all of that and blending it out. But right now, I think net total, we would say that all of those self-service relationships are in line from a profitability perspective, if not, better. I think the one area that's a little unique within all that, of course, is our own MoneyGram online service, which has some of its own dynamics to it. It certainly has higher gross margin. But then of course, you have the cost of interchanging, the cost of servicing which are all areas of focus for us and I think we continue to make good progress in reducing those costs. And we have a lot of opportunity in front of us to continue to strengthen that business.

Operator

We'll go next to Mike Grondahl with Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

The better transaction growth you saw in 2Q, if you could attribute that to 3 buckets, the agent growth, the economy and taking market share, how would you kind of break it into those 3 buckets?

Pamela H. Patsley

That's a hard one, Mike, because I think I'd argue that so many of those buckets overlap. I mean, like taking market share and things like that. I think, for us, the drivers are continuing to grow networks, but as important as that or more important than that is continuing to work on agent productivity and get more out of everything we have. I would say, it might be something that you didn't name and that is the continued strength of the relevance of our brand to our consumer around the world and creative initiative, whether it's things we've done around here in Texas, where we've -- kind of innovation goes beyond technology, if you will. And we've seen a lot of great innovation out of our sales folks, out of our market approach, out of our marketing team where we sponsor a nation's cup soccer tournament, the second annual one here and it's just continuing to have a strong brand that stands and is recognized for safety, security, reliability and grows with our consumers. So I think those are the things that come together. I would say -- I'd have to say kind of least is the economy.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

And then just one more quick question. The interest-bearing investments were up to about $900 million from $500 million at the end of March. Is that you guys stepping a little bit out of cash into these higher rates or how would you describe that move?

W. Alexander Holmes

That's a great question. I would not describe it as us materially changing our focus at all on keeping a relatively or extremely -- probably a better term, a conservative investment portfolio. We've been able to find some higher bearing CDs in a few markets. Most of those are still 12 months or shorter. We have maybe 1 or 2 that have extended out beyond 12 months but still extremely short term. We had a lot of money sitting in MMDAs and some other restricted accounts that really weren't providing a lot of return. And so we've been very active trying to find some larger opportunities, some limited flow. So we're talking 60 basis points kind of activity versus sort of 7 or 8 basis points that we've been kind of looking at. So it's just a little bit of shift in that portfolio. I think we've had some good development with some bank partners out there, spending a lot of time. Certainly, hats off to the treasury department and all their work that they've been doing, trying to re-engage with banks around the world, re-engage and establish broader relationships and I think that's reflective of that. But certainly, I would not say that we've had any change at all in our investment philosophy or strategy as it relates to security and safety of our cash.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Sure and I wasn't implying that but hopefully...

W. Alexander Holmes

No, I didn't think you were. I figured I'd say it anyway.

Eric Dutcher

Operator, I think we've got time for one more question.

Operator

And we'll go next to Glenn Fodor with Autonomous Research

Glenn T. Fodor - Autonomous Research LLP

I just want to get a sense of the concentration of your strong online growth trajectory. Can you parse out for us, how much of your online volume comes from walmart.com versus any non-Walmart channels all, lumped together? And then what are the relative growth rates of each? Is Walmart growing 2x what non-Walmart is or vice versa?

Pamela H. Patsley

I don’t think we have nor -- or today, we're going to start providing kind of that level of detail but order of magnitude, most of our online business is outside the walmart.com pass-through. That business is great, it's growing, it has a lot more potential and it's important but it's very small relative to our total MoneyGram online.

W. Alexander Holmes

Just to add to that, Walmart as a percent of revenue was just around 27% in the quarter. So it did step down just a little bit as compared to prior quarters, which would include any .com activity.

Glenn T. Fodor - Autonomous Research LLP

Understood, that's helpful. And then just sticking to the online theme. You said 80% of the business is from repeat customers but can you update us with some color on what portion of new customers are coming from your physical channel and just migrating over the online or versus just entirely new customers to MoneyGram?

W. Alexander Holmes

That's the ongoing debate, a great question. That's something we've been spending a lot of time in our database looking at and trying to trend out. I think today, we're comfortable. Continuing to say that around 70% of that online business is new and there's probably a blend for the rest of it. And what's interesting about that, I think it's really too early to be making any concrete conclusions that a person who does walk-in transactions has switched to online and is never coming back. I think that there's too much of a consumer dynamic and consumer makeup when you're looking at walk-in customers and online customers. I do fundamentally believe that the average user for an online service is going to be, over time, a slightly different consumer than what we've seen in the walk-in business. I think there'll always be a blend and it's really hard to say that one is sort of pulling away from the other in any sort of definitive way. I think what's also important to recognize is that our agent partners we have today, not only in the MoneyGram online, and then the Walmart relationship, we also have 19 other relationships where our agents are putting our moneygram.com link on their website to transfer the service over. And so there's actually a lot of good partnership pieces there and we really have never had any pushback or negative reaction from any of our agents as it relates to online. A lot of them want to push forward and do more in the partnership side. And so I think it really blends out in a very positive way.

Pamela H. Patsley

Great. Thanks, everyone, again, for your continued interest with MoneyGram. Again, it was a great quarter. We're very excited for our future. I think we're positioned extremely well and as always, we're here to answer further questions. You know how to reach us. So thanks very much. Have a great day.

Operator

And that does conclude today's presentation. We thank you for your participation.

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Source: Moneygram International Inc (MGI) Management Discusses Q2 2013 Results - Earnings Call Transcript

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