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MoneyGram International, Inc. (NASDAQ:MGI)

Q1 2010 Earnings Call

April 30, 2010 9:00 am ET

Executives

Alex Holmes - Senior Vice President, Investor Relations and Strategy

Pamela Patsley – Chairman, Chief Executive Officer

Jean Benson – Senior Vice President, Controller

Analysts

Kartik Mehta – Northcoast Research

Joshua J. Elving - Feltl and Company

Frank Mcevoy - Craig-Hallum Capital

Robert Napoli - Piper Jaffray

Robert Dodd - Morgan Keegan & Company

Operator

Good morning and welcome to the MoneyGram International first quarter 2010 earnings conference call. Today’s conference is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Alex Holmes.

Alex Holmes

Thank you. Good morning everyone. My name is Alex Holmes, Senior Vice President of Investor Relations and Corporate strategy. I'd like to welcome you all to our first quarter 2010 conference call. With me today are Pam Patsley, Chairman and Chief Executive Officer and Jean Benson, Senior Vice President and Corporate Controller.

If you've not yet seen our earnings release, you can find it on our website at www.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 purposes of the Safe Harbor provisions 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-Q for the quarter ended March 31, 2010 which is expected to be filed with the SEC in a couple of weeks.

Additionally, I want to note that today's remarks include certain non-GAAP financial measures including a presentation of EBITDA and adjusted EBITDA. Our earnings release includes a full reconciliation of these non-GAAP financial measures to the related GAAP financial measures.

Finally, many of you have been asking to see us on the road, and so today I’m happy to announce several upcoming conferences where we will be present. First, Dan O'Malley, Executive Vice President of the Americas, will be participating at the [inaudible] panel at the Morgan Stanley Conference in New York on May 5.

Pam will then be presenting at the JP Morgan Technology Conference in Boston on May 17 and then at the Bank of America – Merrill Lynch services conference in New York on May 24. Our annual meeting will be held in Dallas, Texas on May 26 and then Pam will be presenting at the Craig Hallum Conference in Minneapolis on June 2. We’re very excited to get out and visit with all of you and look forward to seeing you at these exciting events.

Now I’d like to turn the call over to Pam Patsley.

Pamela Patsley

Thanks Alex, and good morning everyone. The first quarter of 2010 was an exciting quarter for us as we continue to gain momentum, announcing many new agent signings, some very exciting developments on the product front, key new hires on the executive team, and the nomination of four new independent directors. All of these activities better position MoneyGram for future growth.

When I became CEO in September of last year, I said that talent would be a critical success factor for us, and since our last call, I’m pleased to welcome Nigel Lee, EVP of the EMEAAP area, Luke Wimer as EVP of Operations and Technology, just announced yesterday evening, and Juan Agualimpia as Senior Vice President of Global Marketing and CMO all to our team.

Nigel is a proven leader with a strong background in the global payment space and has a great deal of experience running and growing businesses in the EMEAAP market. He’s worked for industry leaders such as First Data, EDS, and Accenture. We’re looking forward to leveraging his diverse background and expertise to strengthen MoneyGram’s global position. He will be based in Singapore which we believe will bring an important perspective to our global expansion plan.

Yesterday you may have seen the news that we named Luke Wimer as Executive Vice President of Global Operations and Technology. This is a key role and Luke brings expertise in building efficiency and increasing operational innovation. His background includes over 20 years of experience working in companies such as IBM Business Consulting Services, formerly Pricewaterhouse Coopers, and CapOne Financial and most recently THL Partners where he was a principal in the Strategic Resources Group with responsibility for implementing business transformation programs across their portfolio.

We have had the pleasure and opportunity to work with Luke over the past year on a number of key initiatives at MoneyGram, so we know his strong talents and the valuable addition he will be to our team. Juan is an established veteran in the marketing arena, and his experience in large consumercentric international organizations makes him very well suited for this important new position.

Juan brings strong business acumen and extensive background in global brand positioning, marketing strategy and customer relationship management. Prior to joining MoneyGram, Juan spent nearly 20 years in global marketing and business management in industry leaders such as Newell Rubbermaid, Abbott Laboratories and The Clorox Company.

In addition, we're very excited that J. Coley Clark, Victor Dahir, Ann Mather and W. Bruce Turner will stand to election for the MoneyGram Board of Directors at the company's May 26th annual meeting. This will bring the number of directors to 9. These 4 will be our independent directors. It's an exceptional group of leaders with global experience that will bring independent judgment and a dedication to building shareholder value to MoneyGram.

Now from a performance perspective, results for the quarter were solid but continued to be a bit tempered by the global economic conditions. In the quarter, transaction volume in our core money transfer business improved 6% from the prior year, and fee and other revenue increased 4% on a constant currency basis.

While transaction growth was modest year-over-year, we were encouraged to see steady improvements throughout the quarter, particularly in our EMEAAP business. We're pleased that we saw revenue growth alongside our continued transaction growth.

During the quarter our global agent location base increased a healthy 10% to 198,000 from 190,000 at the end of the first quarter of 2009. Looking ahead, during the second quarter we anticipate opening our 200th global agent location, a meaningful milestone that we are very much looking forward to celebrating. Total revenue in the first quarter increased 3% to $289 million from $280 million in the first quarter of 2009. Adjusted EBITDA was a solid $62 million.

From a liquidity perspective, in April we made a $30 million prepayment on our senior tranche B loan under our senior facility. In addition, we were able to settle our federal securities class action and stockholder derivative action pending in Minnesota, taking steps to put these matters behind us and moving MoneyGram forward in our turnaround with this great company.

Turning now to money transfer metrics. In the first quarter, transactions originating outside of the U.S. increased 12%. Excluding Spain, transactions originating outside of the U.S. increased a strong 16%. Transactions originating outside of the U.S. accounted for 32% of our volume in the quarter. This is up nicely from 30% in the first quarter of 2009.

Our EMEAAP business performed extremely well during the quarter. In Europe our France retail business continued to grow at an exceptional rate, with strong transaction growth to countries such as Cameroon, Senegal and the Ivory Coast. The United Kingdom and Italy both delivered solid transaction growth. The U.K. business has very strong growth in its India, Pakistan and Bulgaria markets, while growth in Italy was helped by [inaudible] to the Ukraine and India markets.

In February we expanded our network in the Benelux region with the acquisition of Blue Dolphin Financial Services, adding 18 owned MoneyGram locations in Belgium and the Netherlands. MoneyGram signed its first super agent agreement in the Nordics with MTI, a leading foreign currency exchange company in Europe. This partnership will be key in accelerating our growth across Norway, Sweden, Finland, Iceland and Denmark. MTI has solid experience and expertise in operating the super agent model, and we look forward to the rapid network expansion.

Last week we reached an agreement to expand our cooperation with the Moldova Post Office and we rolled out MoneyGram services now to the entire network, bringing our total network in the country to 1850 locations. Romania, a large received country, performed ahead of expectations during the quarter despite the economic environment, assisted by strong send volume from key markets of the U.K., Greece and the U.S.

During the quarter we opened up several new markets for MoneyGram. In the Balkans region we launched in Croatia with Volksbank, 28 locations. That was after a 3 year absence. Croatia is home to 4.5 million people who receive over 1.6 billion in remittances. We also now fully launched in Hungary with super agent Corner Cash Keszpenz , which added our service at its currency exchange shops in 11 cities across the country in a remittance market estimated to be worth $4.5 billion.

We also returned to Lithuania with the signing of one of the country's largest banks, Ukio Bank. In Africa we continue to gain momentum. During the quarter, Ghana remained a key received market in West Africa, with good performance from the U.S., Libya and Germany quarters. We renewed two key agents in Morocco, [Arison] and Quick Money, with a combined network of 1000 locations, and resigned Afriland First Bank in Cameroon.

We launched 3 new agents in Angola, [Vonk, International and Banco Commercial Angolano], and in March we added at Euro Payout at all agent locations in the country, providing consumers with added convenience and choice to receive funds in U.S. dollars, kwanza and now Euro.

Despite the economic slowdowns, the Middle East region continued to perform nicely for MoneyGram with good transaction growth from the UAE countries such as Bangladesh, Philippines, Pakistan and Morocco. Saudi Arabia continued its strong growth as well, especially in its key [inaudible] quarters in India, Philippines, Pakistan and Bangladesh. We just entered that market in June and we're really excited about our progress so far, and our prospects to do even more.

We signed Bank Asya in Turkey during March, adding new networks to this important market and bringing MoneyGram services to the bank's [inaudible] million account holders. Just this past weekend I returned from India where we hosted a conference for agents from South Asia and the Middle East. I had the opportunity to discuss the current business climate and MoneyGram's expansion plans in the regions.

Let me tell you, there are tremendous synergies between these two important regions. And our focus will continue to be on leveraging those synergies to capture growth opportunities in key quarters. Continuing on to Asia, during the quarter we saw strong send volume from Australia and New Zealand, and solid received growth in Bangladesh, China and the Philippines. The Philippines in particular continues to strengthen, consisted by strong send volume from the U.S., Saudi Arabia and several markets in Latin America.

In Asia we signed in Mutiara Bank in Indonesia, a market worth $8 billion U.S. We also significantly expanded our network in Vietnam with the addition of Sacombank and Eximbank, bringing money transfer services to 400 locations in Ho Chi Minh City, Hanoi and rural communities across the country.

We further strengthened our network in Asia with the resigning of ICBC, a key agent in China, and rolled out more than 930 Bank of China branches in the Guangdong province. Turning now to the Americas.

Money transfer transactions originating in the U.S., but not including transactions sent to Mexico, increased 6% led by double-digit transaction growth in our intra U.S. business. Our U.S. outbound business, again not including Mexico, improved with sends to key received markets such as Africa, Eastern Europe, Asia and to the Caribbean, Jamaica and Haiti.

Additionally, during the quarter we were extremely pleased to sign long time agent SUPERVALU and its more than 1000 convenient locations in the U.S. SUPERVALU's regional grocery and pharmacy brands such as Albertsons, Shoppers Food and Pharmacy, Shaw's, Jewel and Cub Foods offer recognizable regional brands that MoneyGram customers have come to know and trust.

We're excited about the possibility of extension into additional SUPERVALU regional brand outlets with this new agreement. In addition to money transfer services, SUPERVALU also offers our bill payment and money order products.

Now with regards to Haiti, in the aftermath of the catastrophic earthquake of 2010, much time and effort went into daily agent support, logistics planning and negotiations geared towards securing our business for our agents and clients. Transaction volume to Haiti has now topped pre-earthquake levels and expects to increase further. Through June 30th MoneyGram will continue to donate $2 from every transaction sent to Haiti for the rescue services. So far, through this program donations have totaled approximately $250,000 to the American Red Cross. In addition, consumers have donated more than $92,000 for relief in Haiti using MoneyGram's Express Payment service, which offers free cash donations from consumers to the American Red Cross through mid-April.

During the quarter, transactions from the U.S. to Mexico declined 11%. And while the rate of change did improve sequentially from the fourth quarter, we are disappointed by the negative growth. Though trends were improving in the quarter, and yet again improving in April, we continue to work diligently with our agents to improve performance in this important quarter.

As we grow our worldwide business Mexico continues to be a smaller portion of our global transactions, but we have an outstanding network of agents in Mexico. And we're confident as the economy improves and workers return to steady employment, we will be well positioned to return to positive growth in this area of the business.

While much smaller on a total transaction basis, we're encouraged to see it continue strong transaction growth to Mexico from EMEAAP and LAC, as well as strong intra-Mexico transaction volume growth. In Latin America, our sends business continued its strong double-digit transaction growth. Sends within the region were strong, but transaction growth was also good to countries outside of LAC like the U.S., Philippines and China.

On the network front, in Paraguay we launched Banco Familiar, Cambios Chaco and Maxicambios, more than doubling our network in this country. And finally, the highlight of network growth in the region was the much anticipated rollout of Citibank locations throughout the Central America region.

During the quarter, we initiated the rollout of Citibank [Citiramasus] in Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua. The total network of 831 locations in 5 countries represents 525 new locations. The majority of these locations are already operational, with the remainder coming on line by the end of May.

On the pricing front, MoneyGram has built a reputation as being the value leader in money transfer, and value leadership is why we have the agent network we have today. While value is defined as safe, reliable and convenience, price is certainly also a factor. Thus maintaining competitive pricing throughout our network is important.

During the quarter, we began piloting a new service from MoneyGram, overnight delivery of money transfers in the U.S. and Puerto Rico. Through this service consumers can send a transaction today, with money received from 7:00 am local time onwards the next day at a reduced spend fee. Currently the opening price span for sends up to $200 is offered at $7.

This service is currently available only at select Wal-Mart locations, but we have rollout plans for other agents and quarters later in 2010. As we look to expand this service outside of the U.S. we expect this product to actually be added to revenue in select quarters, while we have been competing without this service today.

In addition to our overnight service, in April we introduced a new $50 price span at Wal-Mart and many of our other locations in the U.S. This is a smaller portion of our overall transaction volume, but we do expect that we will be inviting new segments of consumers that otherwise may have found other alternatives to send smaller amounts of money across town or across the world, to try the convenience of sending money through MoneyGram.

Now let's turn to our bill pay business. Just this week we announced a partnership with Fiserv, very exciting announcement. And through that we are offering expedited bill payment to Fiserv's online bill pay consumers nationwide. Initially, bills from more than 100 well known national and regional companies will be available for same-day payment, with the potential to offer more than 1000 additional bills based on consumer demand. Fiserv will utilize MoneyGram's direct connections with billing companies to deliver the payments.

The same-day expedited bill payment option is expected to be available through the more than 3100 financial institutions that use the check free RXP online bill payment service in the second half of 2010. We're excited about this partnership and look forward to working closely with Fiserv.

During the quarter bill payment transaction volume decreased 3% and revenue declined 7%. Economic pressures continue to affect our bill pay business in our legacy consumer credit industry. However, as we've discussed we see the future growth of this business coming through many emerging verticals such as prepaid, telecom and collections. In these verticals we saw positive transaction growth in the first quarter.

Now I’m going to turn it back over to Alex, who will give you an update on products and marketing.

Alex Holmes

Thanks Pam. In addition to our exciting relationship with Fiserv, we continue to make great strides during the quarter launching new products and services and building important relationships with partners in both our bill payment and money transfer businesses.

Continuing on our bill payment business, in January Express Payment announced that 6.5 million T-Mobile prepaid phone subscribers can add minutes to their prepaid phones by using MoneyGram's Express Payment service. In February, First Data's Money Network prepaid card customers joined our over 5.5 million other consumers who can currently reload their prepaid debit cards using the MoneyGram reload network on the Express Payment service.

During the quarter we also launched our first virtual agent. This new service allows customers who carry NetSpend prepaid debit cards to pay bills using MoneyGram's Express Payment service through NetSpend's cardholder website. We are pleased with the progress we continue to make in the bill payment space, and anticipate more good things to come over the next several quarters.

In the money transfer space we also had a good quarter. As technology and global communications continue to advance, we see customers beginning to ask for more and more channels in which to send and receive money. Through these channels we are beginning to see a number of transactions become cashless at one end of the transaction. This is largely true in our online business which has become a top 10 send country for MoneyGram.

In addition to online money transfer we're beginning to see other partially non-cash transactions like direct to account ATMs and kiosks for depositing cash received, cash to a mobile phone and cash to a card begin to gain contraction in certain markets. Today we see these channels as additive, bringing in a new group of customers, as well as increased possibilities for revenue and profit growth.

As a company we remain focused on maximizing and growing our cash-to-cash business while increasing our presence in these new channels through alliances with key players, who in many cases are often our current agents.

In the mobile money transfer space we are continuing to gain momentum. This past December we joined forces with Smart Communications to begin the pilot phase of our mobile money transfer service to deliver funds for our MoneyGram agent location direct to any Smart Money account in the Philippines. Mozido, a leading mobile technology provider, supplies the transaction services that links MoneyGram's services to these Smart mobile phone users.

Just last week we were extremely excited to announce the expansion of this service to all of our agent locations in the United States. This expansion followed our pilot program offered from select California and Hong Kong agent locations to the 40 million Smartphone users in the Philippines.

Our entry into mobile money transfers with Smart was well received by our consumers, and we are continuing our expansion plans to link Smart Money users with MoneyGram's agent locations around the world. We are also currently in discussions with several mobile operators to introduce mobile programs in other regions around the world, with countries in Africa, the Caribbean and Middle East among the locations expected to launch this service next.

Closer to home, on March 9th we launched a comprehensive redesign of MoneyGram online. This redesign not only incorporates our top consumer requested activities, but also provides us with a platform to build up its functionality and expand this product globally. This new site allows consumers to find an agent location, estimate a send fee and send money in a single, easy to use, homepage. Our new site includes a simple process with fewer steps to send money or pay a bill.

In addition, money transfers completed online are now eligible for MoneyGram rewards. Initial consumer reaction to this website has been very positive, and new customer conversion has improved by over 30% since last month's launch. If you haven't had a chance to try our new website, please do.

We'd appreciate the transactions and I can always use the money. We've been active in pursuing new channels, expanding new products and joining with partners to expand our money transfer services. We have a great many other things in the pipeline, so stay tuned.

Turning now to loyalty and marketing. MoneyGram Rewards' enrollment in the first quarter grew at a rate of 26% on a quarter-over-quarter basis. During the quarter, almost one-third of all transactions were sent by MoneyGram Rewards members. Our loyalty program is now active in six countries, but further expansion of the program planned for 2010. The loyalty generated by our Rewards customers continues to exceed our expectations and contribute meaningfully to our transaction growth.

Through our global marketing program we continue to focus on increasing our brand awareness and elevating MoneyGram to an even higher, more globally recognized, name brand. Today I'm very excited to announce that MoneyGram is the official money transfer sponsor of the ICC World Twenty20 West Indies 2010 cricket event, which begins today.

For those of you that don't that much about cricket, it is among the world's largest sporting attractions, especially in countries that rely on remittance services including India, Bangladesh, Sri Lanka, Pakistan, as well as countries in Southern Africa and the Caribbean. The event is expected to host cricket fans from around the world and this broadcast has a potential to reach over a billion people. We are delighted to be sponsoring this global event.

And with that, I'll turn it to Jean to walk you through the financials.

Jean Benson

Net income for the quarter was $10.8 million and EBITDA was $57.3 million. Both net income and EBITDA were negatively impacted by $6.9 million of higher stock based compensation expense, which was partially offset by $2.4 million of higher net securities gains.

We reported $61.7 million of adjusted EBITDA in the quarter, which is down [inaudible] million dollars compared to $66.1 million in the first quarter of 2009, primarily driven by a $5.9 million decrease in net investment revenue. Turning now to revenue, total revenue in the first quarter increased 3% to $289 million, compared with $280 million in the same period last year.

First quarter 2009 total revenue included investment revenue, and net securities gains that was $4 million more favorable compared to this year, dampening total revenue growth by 2 percentage points. Fees and other revenue increased 5% to $281 million, largely as a result of a 6% increase in money transfer transaction volume as well as a positive currency evaluation impact. This is partially offset by a lower average money transfer principal per transaction.

Now I'm spending a few minutes on operating expenses. Total expenses for the quarter were $153.2 million, up $4.7 million, or 3%. Impacting expenses for the quarter are higher stock-based compensation expenses of $6.9 million, partially offset by lower executive severance costs of $3.9 million compared to prior year, same period.

Adjusting for these items, expenses are up around 1% driven by higher legal and licensing costs of $3.3 million which we do not anticipate occurring at this level in the future. In addition, compensation and benefits expense reflect higher incentive compensation on $2.7 million due to accruing at a higher rate than prior year.

We also spent $1.7 million more on marketing activities, support transaction growth which is of course an area we intend to invest in. We continue to focus on cost savings initiatives including reducing telecommunication costs, agent forms and supply costs, [inaudible] person call center activity and technology operations.

Turning now to the segments. Total revenue for the global funds transfer segment increased 5% to $257 million in the first quarter of 2010 from $244 million in the same period last year. The increase was driven by a 7% increase in money transfer fee and other revenue, partially offset by a 7% decline in bill payment fees and other revenue.

While the euro to dollar currency exchange rate benefited money transfer revenue in the first quarter of 2010, this benefit was partially offset by a decline in average money transfer fees as a result of lower principal sent. The segment reported operating income of $27.8 million, and an operating margin of 10.8% in the first quarter, both negatively impacted by stock based compensation.

Adjusting for these, the global funds transfer segment had operating income of $33.6 million and an operating margin of 13.1%. In addition, the operating margin was impacted by the higher cost I mentioned earlier. The higher incentive accrual, marketing stemmed, legal and licensing cost had a negative impact of 280 basis points on a segment operating margin.

As I mentioned before, we do not anticipate the higher legal and licensing costs to continue. Now turning to financial paper products segment. Total revenue for this segment, which includes official check and money orders declined to $28.4 million in the first quarter of 2010 from $30.6 million in the first quarter of 2009 due to a decline in net investment revenue of $5.4 million, partially offset by an increase in net fee and other revenue of $3.1 million.

Operating income for this segment increased to $8.9 million in the first quarter of 2010, from $7.3 million in the first quarter of 2009, and the operating margin was a solid 31.3%. Now turning to the balance sheet, we started the first quarter with assets in excess of payment service obligations of $313 million. During the quarter, we recorded adjusted EBITDA of $62 million.

We made a total of $22 million in interest payments on our debts; we funded $18 million of capital expenditures, including signing bonus payments, and we made a $20 million payment to settle some legal matters that Pam had mentioned earlier. This along with positive $9 million of other working capital items, led to our ending the quarter with assets in excess of payment service obligation of $324 million.

In April, we made a $30 million prepayment on our debts, and including this payment, we now have [inaudible] debt principal of approximately $776 million with revolver capacity of $235 million available to us for future operating needs. Now I'd like to turn it back to Pam.

Pamela Patsley

MoneyGram is off to a good start in 2010. We grew money transfer transaction volume, we increased revenue, and created important partnerships with industry leaders like Fiserv and Smart. We delivered more value and the added convenience to existing consumers and expanded our reach to new consumers with the introduction of several new products.

We also launched our enhanced website. We expanded our global rewards program, and continued to increase our global agent network. We continue to strengthen our management team with the addition of Nigel, Luke, and Juan. The senior leadership team is really coming together and I'm excited about what we will accomplish.

Our focus continues to be on making the right decisions for the long-term as we continue to deliver solid performance in the short-term. We are committed to improving margin, generating cash to pay down debt, and capturing operating efficiencies as we seek to create profitable, sustainable growth and long-term share-holder value.

Clearly, we're moving in the right direction. We're pleased that others are beginning to take note. Just last week, Moody’s announced that its revised MoneyGram outlook is stable and affirmed our B1 rating, stating that the upgrade is based on the company's solid performance in our money transfer business, despite the global recession, in addition to the stabilization of our financial paper product segment.

We're looking forward to our annual meeting in late May where we will welcome our 4 new independent directors, and with that, I will again thank you for your time today and Operator, let's open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kartik Mehta – Northcoast Research.

Kartik Mehta – Northcoast Research

I was hoping you could talk a little bit about these new regulations that are being presented in Congress that might have an impact on the remittance industry. What do you think the impact will be to MoneyGram, either positive or negative because of some of those changes?

Pamela Patsley

That's a great question. We are watching that closely, and participating and hopefully communicating well for our industry alongside others in our industry who are participating actively. That's through industry associations and through some of our own direct efforts.

It's a little hard to say how it's all going to come out. I think at the end of the day, there will be enhanced disclosure requirements, which is not a bad thing. I think that the method of how that comes out and what will be required alongside that is a little bit what we want to watch.

I can't say that I see it as significantly positive nor negative at this point.

Kartik Mehta – Northcoast Research

Western Union has obviously made a change in how they're pricing their domestic transactions. I'm wondering if you could talk about how you think that will impact MoneyGram and if you intend on changing anything, either from a marketing point or a pricing point because of Western Union's change?

Pamela Patsley

Great question, certainly very topical and on the top of our minds. We continue to try and continue to balance transaction growth with revenue growth. At the same time, MoneyGram has continued to and always had stood for a value proposition to the consumers. I think some of the things I mentioned in the call like a new overnight service, so where we are competing like for like, we're not trying to compete with our same day service against the lower priced next-day service. Those kinds of moves

Some places price is down a bit but as I mentioned in other places outside the US that actually give us some edge because we’re competing primarily with the next day service with our same day 10 minute service.

Western Union has the $5 for $50. We have launched now, it started at the end of March, $4.75 for a $50 send and we are beginning to roll that out more aggressively so, for that very low principal band of transactions.

So, I think we’re just going to continue to be aggressive in a balanced approach.

Kartik Mehta – Northcoast Research

And just my last question Pam, as you look some of the statistics for what’s happened this quarter I mean what’s happened in April. I know you’ve already talked about some but others that you might not have talked about and through your travels.

How do you feel about the industry? Do you looks for things to continue to get better in 2010 or are you a little concerned that maybe this might just be a short-term positive that’s happening in market place?

Pamela Patsley

You know I think just kind of gut feel and anecdotally and what I sense from visiting with our partners around the world which I’m out and about and travel a lot coupled with the world bank recently increasing its growth forecast for global remittances. I’m feeling fairly encouraged about the health of the industry and the economy particularly as it impacts our segment.

Operator

We’ll take our next question from Joshua J. Elving - Feltl and Company.

Joshua J. Elving – Feltl and Company

Can you talk a little bit, this is something I think I spoke with Jean at the end of last quarter about, but the transaction operation support line tends to fluctuate quite a bit or least I guess maybe looking back on last year looks as if maybe the first quarter is seasonally much lower than the following three quarters. And my sense is that maybe there is a moving item within that line which is the marketing line.

Can you maybe talk a little bit about your marketing spend and how do we think about that line going forward?

Jean Benson

Sure Josh. As I mentioned just a few minutes ago when talking about our expenses for the quarter we did see higher marketing costs in the first quarter compared to the first quarter of last year. We anticipate that continuing and as I think you’ve seen with us over the past few years we tend to spend the majority of our marketing dollars in that trending upwards so in that third and fourth quarter.

So, we anticipate continuing to increase our marketing spend over the next few quarters as we have in the past years.

Joshua J. Elving – Feltl and Company

Okay and so, would you suggest that because there is a pretty significant pick-up from the first to the second quarter last year. Would you suggest we might see something along the same magnitude over the back half of this year as well?

Jean Benson

Yes I would.

Joshua J. Elving – Feltl and Company

Okay great. And then Pam, you’ve obviously been extremely busy with that, adding talent to the team. Any updates on the CFO search?

Pamela Patsley

No, but when I’ve got an update it’s going to be public. But I think that’s… I feel very very good about the team and that’s the last place where we need to fill.

Joshua J. Elving – Feltl and Company

Okay and then just one last question has to do with the excess unrestricted asset balance. You made a $20 million payment to settle the law suit. You had the $30 million pre-payment and some other cash outlays and you had that unrestricted asset balance moved a little bit up in the quarter and I was wondering are there some items that impact the number seasonally where… I guess maybe put it another way.

Was some of that debt paid out made out of that excess asset balance and how do we think of it?

Jean Benson

That payment was made in April so you’ll see that access balance come down as it relates to that payment. However, how we think about this is we’ve got our pre-cash flow if you think about it as I mentioned our adjusted EBITDA and then we’re using that to fund any interest payment we make on the debt as well as any debt principal payments we made and then our capital expenditure.

If we did make the $20 million legal settlement payment in March and so that had a negative impact on the unrestricted assets but generally when we’re making our debt payment you’re going to see that have an impact on that balance.

Joshua J. Elving – Feltl and Company

Right, I forgot that was made in April, okay.

Operator

I’ll take our next question from Frank McEvoy – Craig-Hallum Capital

Frank McEvoy – Craig-Hallum Capital

My first question is in your press release you mentioned that the money transfer transactions originally outside the US increased 12% from the prior year. Can you give us to what the revenue increase was? I suppose it was higher than that but I’m just guessing it was higher than that. Do you have a number that you can provide for us?

Jean Benson

We haven’t been providing that but your guess is a good guess.

Frank McEvoy – Craig-Hallum Capital

So it is high is that… okay. And then can you give us a rough idea what percent of revenues are the domestic that’s originating and ending in the United States? Just trying to get a sense for how significant that is? I know that you’re largely domestic orientated, but if you could give us a ball park figure that might be helpful?

Jean Benson

Yes, again I don’t think we’ve disclosed that. US still remains our largest single quarter if you can consider that a quarter. And we also gave you that transactions originating outside the US grew from 30% a year ago to 32% this year.

Let me just add we’re happy with the direction of our trend but…

Pamela Patsley

And we think there’s still more growth even in that strong US to US quarter. The weight of growth continues to be very good other places as well.

Frank McEvoy – Craig-Hallum Capital

Yes. I’m just trying to get a sense for impact of some of the pricing from Western Union. I know earlier this week they reported that their domestic transaction of volume increased 18% but their domestic revenues declined 13% and I think Pam, you said in your remarks that the domestic transaction volume increased double-digits.

Pamela Patsley

That over double, yes and…

Frank McEvoy – Craig-Hallum Capital

And did you have positive revenue growth on that or is it…? Can you give us some…?

Pamela Patsley

Yes, a positive revenue growth.

Jean Benson

Our revenue tends to be a little bit more in line with when we think about our transaction level.

Frank McEvoy – Craig-Hallum Capital

Okay and if I were to just head a guess I’d say probably [inaudible] domestic was it fair to say that might low single digits?

Jean Benson

On revenue growth?

Frank McEvoy – Craig-Hallum Capital

Yes, for the domestic money transfers. Because I know overall you were up 4% cash and currency.

Jean Benson

Yes, overall 4% cash and currency, yes and…

Alex Holmes

Right, Jean just said that our revenues tend to trail fairly close to 2 transaction growth

Frank McEvoy – Craig-Hallum Capital

And then I missed your number on what the capital spending was in the quarter including signing bonuses?

Jean Benson

We funded $18 million cash for capital expenditure including.

Frank McEvoy – Craig-Hallum Capital

And then in light of the recent upgrade on outlook can you give some sense of how that might help your ability to attach some of that assets and excess of payments service obligations. Are there $324 million at the end of the quarter? I know you already tapped a portion of it for the April payment but can you give us an idea of how much more going forward you might in 2010 be able to access to help pay down debt?

Alex Holmes

Your question Frank is did the ratings change?

Frank McEvoy – Craig-Hallum Capital

Did that help at all and if not…? I’m assuming it may have some but given where you’re at now with that ratings change, how much of that excess cash and assets and excess of payments service obligations might be available to tap to help pay down debt during the course of 2010?

Jean Benson

Yes, I think you will continue to look at that as we have really starting in May last year and so balancing our cash requirement for obviously interest payments, running the business, capital expenditure and then making debt payments…

We will continue to be very aggressive on debt payments and we are continuing to be very aggressive in working other places where we have cash tied up. So I can’t give you a precise number other than all things possible to continue to generate cash have initiatives behind them … cash or pre-cash

Frank McEvoy – Craig-Hallum Capital

And Pam, the rating upgrades like the one you just received last week, does that help you in accessing some more of this cash?

Jean Benson

It certainly is not hurtful. It’s definitely helped, you know, I think probably in even more dramatic movement would be more helpful, but absolutely.

Frank McEvoy – Craig-Hallum Capital

And my final question is can you give us an idea what the percent of revenue is from the electronic channels? Is it low single digits or I know you’ve got a lot of initiatives there and it sounds like you’re making good progress and I’m just trying to get a sense for where it’s at as a percent of revenue.

Jean Benson

Yes and I assume you mean by that like our MoneyGram online. I would say it’s definitely small, probably …

Frank McEvoy – Craig-Hallum Capital

Online and mobile as well, those kinds of things.

Jean Benson

I’d say, you know, it’s under 5% of our [inaudible]

Alex Holmes

Yes, Mobile we’re just getting going, it’s small.

Operator

Your next question comes from Robert Napoli - Piper Jaffray.

Robert Napoli - Piper Jaffray

Question on what’s going on in Arizona, I know that Arizona has been pretty tough on the industry to begin with but is there anything incremental, any incremental pressure that you see from the immigration law and changes in Arizona?

Jean Benson

Actually no. I think for our industry prior to things that are going on politically and government wise on immigration reform, I think we have been working very closely and I believe I can count that we have a good relationship with the regulators in the state of Arizona. So nothing new to report in the way of new concern or anything from us at this point.

Robert Napoli - Piper Jaffray

Any concerns, I mean business, obviously if Arizona gets more aggressive it may reduce the, the potential business impact as opposed to legal impact?

Jean Benson

Possible, yes.

Robert Napoli - Piper Jaffray

Okay, we’ll leave it at that. It sounds like you’re not getting into a pricing war with Western Union. It sounds like you want to be below them but they brought your prices down quite a bit but the gap is going to, you’re not looking to keep that gap at a level it was previously. It sounds like you’ve brought pricing down a touch to try to be below them in certain areas but you’re not getting more aggressive in that? I mean you’re willing to cede in some market share or not to get into a major price battle, is what it sounds like.

Jean Benson

Well I guess it’s just hard to always define when it’s a price war as the term everyone likes to use. I think we’ve wanted to manage our brand very aggressively and to continue to show that our brand stands for value and I think our initiatives with expanding some of the products sets, whether that’s some of the other electronic solutions coupled with a next day product and also then maybe getting a little more refined on [bands] possibly that in fact attract a different consumer. We are working aggressively on that and across our whole agency.

Robert Napoli - Piper Jaffray

Western Union is, let me guess, they’ve been carrying prices at about 3% per year, something like that and they’re pricing investment, I guess companies tend to use price cuts as a, [common] investments. But what is the long-term strategy on MoneyGram prices? Is there a certain level and do you expect continuing moderation in prices over the long-term and if so, at what level?

Jean Benson

Again, I guess it’s hard to put a fine point on that. I’m not sure I’ll ever be able to tell you anything that will give you abundant clarity because for us it continues to evolve as well. Watching the market, watching volume and transaction trends, working in conjunction with our agent, so we try and look at opportunities, product solutions, transaction growth opportunities, market share and price all together and so far we were happy with our results for the March quarter in the way we approached in partnership with our agents.

Robert Napoli - Piper Jaffray

Okay and now if you’d talk about as it relates to your pre-paid strategy and I didn’t hear it quite so clearly what you’re doing with NetSpend. I was wondering if you’d give a little more color on that.

Alex Holmes

Well you know, we’ve I guess generally speaking across the pre-pay front, we’re doing various things. Obviously we have a very small pre-pay product ourself which we’re looking to enhance the capabilities of over time [inaudible] at some point we launched in the past. Just generally speaking, having focused on it in a major way. So certainly looking at how we can expand those pieces. On the bill payment side, we’ve obviously have a long standing business and built in it. You know where we’ve been in various verticals for a large period of time and we saw that business slow down.

You see more [inaudible], you see auto and other things slow down so we’ve been focused on getting back into pre paid on top of an [inaudible] payment front. I think through partnerships with companies like T-Mobile and [first aid] and many network etc, we’ve seen some of exciting things going on. T[hat’s been is very similar in that state.] I think the difference here is that typically traditionally what you’ve had to do through our service is go to one of our locations to top up any of your pre paid cards and whether that’s been [inaudible] anybody else’s.

You know it was basically walking into a physical location. So effective this is the first time that you’ll be able to go to someone else’s website, in this case NetSpend, to reload your card using our product. So we’re pretty excited about that and I think if you think about that in terms of what the [inaudible] relationship is going to bring to us, you’re going to be able to pay your bill through expedited service which, again, was only available at a walk-in location. Now you’re going to be able to pay it, pay those bills urgently through 3200 financial institutions that partner with CheckFree today.

So it’s an excellent, huge opportunity for us to expand our scope and our reach across the United States and the country and really hopefully generate some transactions, so we’re looking forward to seeing it. But consumers adapt to that change and drive some serious growth in our bill payment business.

Robert Napoli - Piper Jaffray

Thanks a lot. Do you have any field for how material you think that it will be to your business and when?

Jean Benson

Yes, the when is now. It continues to be a great opportunity for us particularly in certain parts of Europe. We’ve made some announcements and actually, it’s faster than we thought in terms adoption rate and activation for some agents. You’ll continue to see announcements from us across those countries in Europe that are participating or governed by [inaudible].

Robert Napoli - Piper Jaffray

Okay I’m going to sneak one more in. Just gradually if you look at the growth rate, I mean your transaction growth slowed slightly in the quarter by one percent but are you seeing any pick-up in transaction sizes? Well in generally [inaudible] so many different markets, I mean I always viewed this business, as being kind of a late cycle, tied to employment improvement and employment improves after the economy generally so and I would expect a pick-up in your business later in the economic rebound. Are you starting to see that in a broadly globally side of transaction and --

Jean Benson

Well you’re right it varies by quarter but overall for our whole portfolio our average principal spent declined slightly.

Robert Napoli - Piper Jaffray

Is that a deceleration in the level of decline –

Jean Benson

It was a small amount and it kind of bounced around in different quarters. I think different holidays impact that as well. But yes, I would say it’s a deceleration. I mean our first quarter average, when you do a comparison of first quarter this year to year over year to first quarter last year, we saw the

Pamela Patsley

[inaudible] really comment sort of that second quarter of 2009 and then sort of level off. So I would say that we are seeing it kind of slow down from a different point perspective.

Robert Napoli – Pipe Jaffray

And how does April look? Can you give any color on April [inaudible]…

Pamela Patsley

We don’t…

Jean Benson

I gave you color [inaudible] on Mexico.

Operator

Your next question comes from Robert Dodd – Morgan Keegan & Company.

Robert Dodd – Morgan Keegan & Company

Hi, guys. Good morning. First an easy one. [inaudible], and I don’t know if I missed a comment. You expect to continue running at this level or with a correction adjustment or anything like that in the first quarter?

Jean Benson

You know, I expect it to remain high maybe over the next quarter or so and then we’ll start to see a slight decline. The average amortization period that we have on our stock base comp is relatively short. You’ll see a section in there 10Q that talks about I think the average life on those is around a year and a half perhaps. So it’ll continue a little bit higher here in the second quarter, and then I anticipate it will start to trend down slightly.

Robert Dodd – Morgan Keegan & Company

Okay. Got it. A question on covenants. Obviously one going back to an earlier question, are there any covenants other than the obvious regulatory one on [inaudible] above 0 then you don’t want to run too close to that. Are there any particular restrictions in the covenants that require a specific level in that item?

Jean Benson

A level in which item?

Robert Dodd – Morgan Keegan & Company

I mean it has to be $200 million or…

Jean Benson

Yeah. We have what we call our minimum liquidity requirements within both our [inaudible] debt as well as our credit facility. Those levels in terms of how you would compare to our unrestricted assets in excess of payment through subrogation right now, the amount of that excess is lower than the current $324 million as we’ve talked about but still substantial and actually increased a lot higher this quarter than compared to the increase that we talked about the $313 million up to $324 primarily because as we continue to see some of our investments that were pre re-capitalization. As we mentioned, we had the call on one of our last auction rate securities. We can’t count that toward our debt purposes, but now that we’ve sold those and reinvested them in cash we can [inaudible]. So we’ve actually seen a pretty positive increase in terms of excess liquidity we have on our debt.

Robert Dodd – Morgan Keegan & Company

Okay, great.

Pamela Patsley

As a matter of fact we’re…I think what you’re asking…here, let me just boil it down. When you look at our assets in excess of payment service obligation and what’s required versus, you know, your words the covenants in our agreement, there is a Delta there and I think what Jean is trying to say is that Delta even increased and, you know, it’s not just tiny Delta and so we’re working through comfort and how we, you know, at what level we want to utilize our cash and maintain.

Robert Dodd – Morgan Keegan & Company

Got it. Another broader question on the covenants again. Obviously, you’re paying back debt, you’ve got positive net income, etc., where do you stand on, you know, the pick on the [inaudible] case as you expect to pick this year. I mean, are you in a position where you are choosing to pick for cash [inaudible] pay down debts, etc., or are there, and some of the [inaudible] a lot of covenants on [inaudible] are those covenants essentially requiring that you pay.

Jean Benson

Yeah. You know, a little bit of both and I think it’s just fair to assume, you know, capital structure as it is today for the rest of 2010. If you would have seen that stay in place as it is today will continue to pick the dividend on the preferred.

Robert Dodd – Morgan Keegan & Company

Okay, great. I’ve got a few more questions. Cut me off if you need because we can follow up later. But one of the trends much of last year was commission management [inaudible] commissions grew at a rate below the revenue. They continued to do that in this quarter. I mean, can you give us any more color on that? I mean does that mix price re-negotiations? Is it the growth in moneygram.com? I mean, what are the drivers?

Jean Benson

There’s quite a few different things that impact those so I won’t go into specifics on a lot of them, but I think it’s probably safe to say it’s primarily mixed and that while you might see some slight movement up or down, you know, over time here, it’s going to be dependent on, you know, finding bonuses that we sign and how that amortize off and that’s probably going to be the main driver of that as well as in the mix as we grow, you know, depending on what our growth comes from, international versus domestic.

Robert Dodd – Morgan Keegan & Company

Okay. I’ve got it. The obvious one, you build a relationship with [inaudible] obviously have a strong relationship with Walmart, they have a relation with green dot. One that’s competitive. I mean, you know, are you looking to offer the same kind of service as the green dot card base or is that a bit of a conflict that obviously Walmart express or pay in their location as well?

Pamela Patsley

You know, I don’t think we want to comment specifically on any, you know, one particular provider. At the same time, you know, I think that what green dot has to offer is obviously, you know, one of the largest if not the largest prepaid network in the country and I think, you know, if we had the opportunity to partner with them, you know, I don’t see why that would be much of an issue. So I guess that’s about all I can say on that.

Operator

That does conclude the question and answer session. At this time I’d like to turn the conference to Pam Patsley for additional or closing remarks.

Pamela Patsley

Nothing here, operator. Thank you very much. Other than to say thanks very much to all those online for your interest and participation today, and look forward to following up with many of you later. Take care.

Operator

And that does conclude today’s conference. Thank you all for your participation.

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Source: MoneyGram International, Inc. Q1 2010 Earnings Call Transcript
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