MoneyGram International Inc. (MGI) CEO W. Alexander Holmes on Q3 2018 Results - Earnings Call Transcript

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About: MoneyGram International, Inc. (MGI)
by: SA Transcripts

MoneyGram International, Inc. (NYSE:MGI) Q3 2018 Results Earnings Conference Call November 9, 2018 9:00 AM ET

Executives

Michelle Buckalew - Head of Communication.

W. Alexander Holmes - Chairman and Chief Executive Officer.

Lawrence Angelilli - Chief Financial Officer

Analysts

Rayna Kumar - Evercore ISI

Tien-Tsin Huang - JPMorgan

David Scharf - JMP Securities

Kartik Mehta - Northcoast Research

Mike Grondahl - Northland

Matt O'Neill - Autonomous Research

Chris Kennedy - William Blair

Operator

Good morning and welcome to the MoneyGram International, Inc. Third Quarter 2018 Earnings Release Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Michelle Buckalew, Head of Communication. Please go ahead, Ma’am.

Michelle Buckalew

Hi. Good morning and thank you. Welcome to our third quarter 2018 earnings call. With me today are Alex Holmes, our Chairman and Chief Executive Officer; and Larry Angelilli, our Chief Financial Officer. Our earnings release is available on our website at moneygram.com.

Please note that today's call is being recorded, and some of the information you will hear contains forward looking statements. Actual results or trends could differ materially from our forecast or expectations. For more information, please refer to the risk factors discussed in our Form 10-K for 2017 and in our Form 10-Q for Q3.

MoneyGram assumes no obligation to update any forward-looking statements. Our presentation also includes certain non-GAAP financial measures to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation tables within our earnings release issued last night in the Form 8-K furnished to the SEC.

And now, I will turn the call over the Alex.

W. Alexander Holmes

Great. Thank you, Michelle. Good morning everyone and thank you very for joining us. As we announced yesterday, we’ve entered into agreements with both the Department of Justice and the Federal Trade Commission regarding our outstanding matters.

In connection with these agreements, we have agreed to amend and extend our differed prosecution agreement with the Department of Justice for 30 months and we will modify our consent order with the FTC.

We have also agreed the forfeiture of $125 million which the Federal government will make available to the victims of consumer fraud. We will continue to retain an independent compliance monitor and have agreed to implement additional agent over side in compliance program enhancements.

While the duration of these discussions continued far beyond our original expectations, we worked hard throughout the year to resolve these matters. It is good to finally have a resolution and the clarity uncertainty needed to move the business forward.

I want to be clear that we share the government’s goal of protecting consumers and the integrity of our global business. We despise fraudsters and scams – perpetuate and nothing is more frustrating when they attempt to utilize our system for illegal purposes.

[Indiscernible] the DPA in 2012, we have enhanced all aspects of our compliance program and remediated many of the issues noted in these agreements. Importantly, in that same time period we have prevented approximately $1.5 billion in fraudulent transactions.

Today, we have one of the most comprehensive fraud programs in the industry and we are working hard to ensure that it is the best. In the last couple of years, we have engaged a leading global consulting firm to support our efforts to enhance our compliance program. We have invested over $100 million in building a state of the art compliance system, implemented, enhanced processed these systems and rules and we have increased our data collection standards including ID collection at $1 for all transactions globally which allowed us to better know our customers.

We are now seeing the direct tangible results of these efforts. Our consumer fraud reports are at a seven year low and represent less than 0.5% or five basis points of all transactions conducted through our system. I believe, this is the lowest rate in the industry.

While we have clearly made significant progress, the extension of these agreements will continue to result in additional cost to our business as our efforts to ensure that criminals are prohibited from using our services remain ongoing.

I am confident in our plans and I know that we will get it done. Given the requirements of these agreements and the revenue headwinds that we face from implementing enhanced compliance controls, I am often asked before operating and the level playing field relative to the competition.

Frankly the answer is no, then I would argue the situation is not currently equal among money transfer companies. I believe we are doing more than most and I look forward to the day when others have implemented the same necessary standard. In the meantime, we will continue to do what’s right for our consumers and for our business.

As we transitioned out of the business update despite the heavy focus on compliance, I certainly hope that you neither missed nor overlooked the main headline of our story this year, which has been a busy year of building and transformation of our business.

During the quarter, we continued to execute against our plans to expand our digital capabilities made further progress to optimize our physical network and leverage the benefits of major operational improvements deployed earlier this year.

On the digital front, we continue to build and deploy our digital services. These services are collectively enhancing our ability to facilitate digital transactions through international expansion, new partnerships and personalized interactions.

A key aspect of our efforts to build a digital presence is to expand our send capabilities internationally. Over the past couple of months we have launched moneygram.com in six new countries, bringing our total now to 17.

These include important markets such as Canada and Italy, both of which have enormous potential. moneygram.com is also in testing phase in eight additional countries and we anticipate a full rollout in the coming weeks. This will bring our total number of countries with access to our award winning platform to 25.

Expanding our online platform is important, but with more than 70% of our online transactions initialized on a mobile device, the need for a customer centric native mobile app is even more critical. I'm excited to tell you that in September, we successfully introduced our new native app in four countries. We believe that the app is best-in-class and the best in the industry. It offers our customers a very personalized experience with features like biometric identification, location finder, transfer tracking, plus exchange rates and fee estimate.

By the end of the year, it will be available in 16 countries including the U.S. our largest online send market. We're also excited about how the app will tie into our new refreshed loyalty program, which is designed to improve the customer experience by rewarding loyalty and personalizing communications.

The new loyalty program will be launched later this month, but customers are already finding value in it, but the initial pilot test demonstrating an increase in both average transactions and average revenue per customer.

In addition to digital sends we're also focused on digital receives. In the quarter, we launched two new mobile wallets in two key markets; the first in Ghana with Zeepay and the second in the Philippines with GCash.

Zeepay partnership gives us access to every mobile wallet in Ghana. With this addition, MoneyGram becomes the only leading money transfer provider in Ghana to offer consumers three different options to pick up funds from over 200 countries around the world.

We also continue to build on our already successful partnership with GCash in the Philippines. Earlier in the year, we launched what we call a directed received service with GCash. This capability allowed GCash customers to redirect money transfer into their wallet.

In the third quarter, we launched a send-side money transfer service, which allows senders to send directly into more than 10 million GCash mobile wallets in the Philippines. Given that the Philippines is the third largest remittance market in the world, we are very excited about the potential.

I'm very pleased with the work we've completed thus far to expand digital solutions to our customers around the world. We're now seeing the direct result of these investments through a number of key metrics.

Online mobile transactions have increased 12% year-over-year account deposit transactions have increased 24% year-over-year, and despite the limited rollout at the beginning of the year and lower introductory pricing to capture new customers, total digital revenue still accounts for 16% of our total and 50% of all of our transactions originating now in Apex, Middle East, and South Asia are made up from a digital channel.

We position our company to provide solutions to enable consumer choice and convenience and enable us to better compete in this ever evolving omni channel world. Whereas digital remains the industry's growth engine, it is important not to forget that for other parts of the world, cash continues to remain king.

For example, in Latin America and the Caribbean cash-to-cash transfers still account for about 85% to 90% of all transactions. Therefore, we continue to seek and to continue to invest and capitalize on the strength of our physical network in many markets which I will now discuss.

I'm excited to report that we've recently [ph] expanded our relationship with two key partners, Worri Bank in Korea and 7-Eleven in Australia. For nearly two decades, we've worked with Worri bank to drive financial inclusion in South Korea and expand our digital channels.

We're excited to continue our work with this leading bank in South Korea to offer customers our services as a physical location or on the banks mobile app. In Australia, we have expanded our relationship with 7-Eleven, one of our largest retail agents in the world, and one of our top international providers of a kiosk based service.

Both MoneyGram and 7-Eleven are pleased to continue to offer customers in Australia, our easy-to-use kiosk service 24 hours a day. In addition to these key renewals, I'm excited to announce a couple of new strategic partnerships.

In Serbia, we’ve signed a six year contract with the Serbia Post. Until now, the Serbia Post had an exclusive contract with one of our competitors. This new relationship allow us to provide service to customers in some of the most rural areas in the country for the first time.

Back here in the U.S. we've launched our bill payment capabilities at Kroger, the largest grocery chain in the U.S. and I couldn't be more pleased to be working with Kroger. I'd also like to give you a quick update on an announcement we made last quarter concerning our relationship with OXXO in Mexico.

I'm happy to say the rollout has been a great success. Consumers are selecting this service at a fast rate and clearly have a strong affinity in Mexico for what is the country's largest convenience store retailer, with more than 17,000 locations across the country.

And finally on the topic of physical locations. In September, we opened the doors to our new MoneyGram Experience Center here in Dallas. You may have heard me talk before about reimagining the money transfer experience, and this store delivers on that concept. It showcases cutting edge technologies and innovations that are changing the industry and providing customers with a fully digital and highly personalized customer experience.

It is also a testing ground for new products created inside our MoneyGram innovation lab. It's great to receive immediate customer feedback on these new products before they go to market. It helps us determine what works and what does not.

Overall, the MoneyGram experience reinforces our commitment to leading the financial technology industry in innovation into providing consumers with more convenient choices when they transact with us.

I want to shift now to providing update on our fourth strategic initiative for the year, and that's the implementation of our digital transformation restructuring program that places an emphasis on operating efficiency and maintaining margin and profitability.

I'm proud of the progress we've made, which includes, implementing customer experience initiatives such as product changes, push notifications and self-service capabilities, which have led to a decrease in call center volume of 22% compared to the third quarter of last year, on a per transaction basis.

Transitioning to the cloud has reduced I.T. hardware spend by over 80% compared to 2017. Consolidating software has reduced software maintenance spend by approximately 15%. Launching digital capabilities has reduced our reliance on paper forms, thus reducing our environmental impact and enabling over 30% savings.

In preventing a robotic process automation capability for our compliance filings, has produced 25% human time savings and transitioning to agile and migrating all work to scrum teams has increased IT delivery output while also reducing costs by approximately 10%.

We believe these efforts will enable us to maintain margin against the backdrop of declining revenue, while simultaneously improving our customer experience and enabling quicker delivery times.

Our strategic vision for the future remains well intact and our execution is underway. We are making significant progress towards being a leader in financial technologies. These efforts will transform MoneyGram and make us a customer centric company that will; one, increasingly facilitate digital transactions and deploy digital capabilities to enhance and personalize interactions with our customers.

Two, a company that can capitalize on the unique strength of its physical network, three, a company whose operations are better structured to compete in a dynamic environment, and four, a companies that is the flat out leader in compliance. Larry?

Lawrence Angelilli

Thanks Alex. During the quarter, we continued to implement tighter compliance controls and took additional steps to target high risk consumers, countries and corridors. The third quarter bore the full impact of this process, as we saw the highest level of denied and held transactions to high risk corridors.

In addition, the roll out of our additional digital products in our geographic digital expansion was still in its early phases. Without the implementation of our new products, the magnitude of the revenue decline from new rules in both the second and third quarter was difficult to offset.

Total revenue for the quarter was $347 million. Money transfer revenue was $304 million, a decrease of 14% on a constant currency basis. These declines in revenue were in large part from reductions as high as 79% in parts of Asia, 51% from certain West African received corridors and 38% in certain Middle Eastern markets.

These reductions were the direct result of velocity in dollar limits imposed by MoneyGram or its agents to reduce compliance risk. Economic and political upheaval in parts of North Africa added to the impact.

We continue to see revenue reductions in the U.S. to U.S. market, for both cash and online, as well as the U.S. up on quarters to Latin America, as our higher compliance standards have offered an opportunity to many of our competitors to welcome transactions that are denied by MoneyGram.

However, when we look at our revenue on a sequential basis, over the last four months, we see early signs of stabilization. Comparisons on a year-over-year basis would continue to be negative, but we appear to be stabilizing at our current revenue run rate.

Recently, we've seen transaction growth in parts of Europe, Latin America and send markets in Africa. Totally operating expenses included the impact of an additional 30 million accrual for the settlement of the DPA. Without the special charge transactions and operating support expenses would have declined $14 million dollars or 19%. This is due to the successful implementation of our restructuring and the improved operating systems of the company as Alex described that reduced transaction expenses.

The company incurred $1.2 million in restructuring and organizational costs in the third quarter, and has incurred $14 million for the year. We expect this process to be complete in 2019 at a total cost of up to $19.5 million.

Total compensation and benefits decreased $10.7 million for the quarter from last year, excluding $600,000 of severance costs related to reorganization restructuring, total comp and benefits would have decreased $11.3 million.

We're on track to exceed $30 million in cost savings this year and a run rate of operating expenses savings in excess of $45 million. As we anticipated, our restructuring has been accretive to 2018.

And as we have described in the past, these savings are permanent, and positions us to achieve economies of scale as the new technologies reshape the customer and the agent experience. Our improved efficiency means that this is an opportunity to improve operating margins at a lower revenue threshold, and improves our competitive position and new products that may have lower prices than our traditional cash-to-cash business.

Regarding our taxes, the accrual of the $30 million in the quarter for the Department of Justice settlement is not tax deductible, which has a significant impact on our effective tax rate. In addition, the company recognized the net benefit of $5.3 million for the third quarter, due to onetime discrete items.

Comparison to last year are not meaningful, due to the impact of tax reform on MoneyGram and the impact of discrete items as well as the DOJ settlement.

Third quarter EBITDA was $20.4 million versus $54.9 million last year, primarily due to the $30 million charge, adjusted EBITDA was $59.5 million compared to $67.9 million last year.

We held our adjusted EBITDA margin constant at 17.1% in spite of declining revenues. Adjusted free cash flow was $28.9 million for the third quarter, versus $25.2 million for last year. This includes the impact of lower capital expenditures and lower agent signing bonuses offset, in part, by our higher interest rates.

We finished the quarter with $209 million in cash. Under the terms of the DPA, we'll be paying the government $70 million in the fourth quarter and $55 million by May of 2020. We’ve been building our cash balance in anticipation of this settlement and expect to retain sufficient liquidity to maintain our normal level of working capital of approximately $120 million.

Also, now that this is complete, we'll begin the process of refinancing both our revolving credit and our long term debt. The addition of significant new compliance rules and our expanded impact on the last quarter that I described earlier should cause our fourth quarter revenue to fall short of our original expectations.

This, in addition to the company's performance in Q3, will result in lower full year revenue and adjusted EBITDA than our original guidance. We now anticipate the full year revenue will decline approximately 10% from 2017 and adjusted EBITDA will decline approximately 15% from last year.

And now I'll turn the call back to the operator and we can begin taking questions.

Question-and-Answer Session

Operator

Thank you very much sir. [Operator Instructions] We’ll now take our first question from Rayna Kumar from Evercore ISI. Please go ahead, your line is open.

W. Alexander Holmes

You’re there, Rayna?

Rayna Kumar

Hello.

W. Alexander Holmes

Hi, there you go.

Rayna Kumar

Hi, thanks for taking my question. By agreeing to forfeit $125 million to the federal government, why isn't this settlement? Could you help us better understand what the 30-month deferred prosecution agreement means?

W. Alexander Holmes

I’m trying to make sure I completely heard your whole question. So the first part was why is it not a settlement? And then the second question was, what does it mean?

Rayna Kumar

Exactly.

W. Alexander Holmes

Exactly…

Lawrence Angelilli

It is forfeiture; I guess we're using the term forfeiture, because technically we’re forfeiting the proceeds in order to have the government have a fund to provide funds to victims of fraud. So I think that’s the legal term. Technically it is a settlement and forfeiture, if that answers your question.

W. Alexander Holmes

Yes, and I think, just add a little color to that. I mean going into or for the past several years we've had both a DPA and a consent order with the FTC. Obviously, the discussions that took place over the past year were really to discuss compliance with those two agreements. And you know if you go through the agreements, you can clearly see the conclusions that were reached by both departments and so what we agreed to do to with Larry's point is, reimburse consumers for fraud that those departments felt went through our system. And we’ve also agreed to continue both the DPA and the consent order for extended period of time.

I think the obligations under both are relatively clear and straightforward. And I think that we have an opportunity to execute against both of those quite successfully. I think that the position that we’re in as a company today versus where we were five, six, seven years ago is materially different.

I think the systems, the processes, the control, the organization is much better prepared I think to undertake the responsibilities of those, and I think we’ll do very well against that backdrop. It’s obviously an unfortunate position to have been in and there's a lot of responsibilities on a go-forward basis. But I think we're prepared.

Rayna Kumar

Understood. So in the near-term with revenue declining double digits. What are your plans to reduce your cost basis? And secondarily, what is your plan to return to revenue growth.

W. Alexander Holmes

Yes, I can start on that and then let Larry add some color. I mean, I think from a cost perspective, we’ve done a phenomenal job this year. And what's exciting about it is, there has been some general restructuring initiatives that we've undertaken. But the vast majority has been really efficiency gains, and thinking very differently about the business, those are a couple of areas that I think we've tried to highlight over the past year and quite actively to really try to emphasize just the opportunity that's in front of us from thinking very differently about how we approach various items, and I highlighted quite a few of the successes that we've had thus far.

When you look at the revenue, we've taken basically some deliberate decisions to stop doing business with certain types of consumers in certain corridors. And we've made some obviously some decisions to implement enhance compliance controls. Obviously, things like introduction of ID dollar one for sends and receives globally, now particularly here in the U.S. has had a large impact, as no one else is doing that.

That being said, I think what we're beginning to see in the business is that we we've eliminated a chunk of a business and a chunk of consumers, and what we're seeing now is that a number of corridors and markets were seeing new customers come in, and we're able to build on that and we'll continue to I think make progress on that in the coming months as we continue to improve that customer experience through digital enablement, but also through the new loyalty program and the continued rollout of a lot of notifications, profile creations, and other things that are going to make the experience at the point of sale a lot a lot easier for our customers.

So, I look at it as kind of a reset, shrinking the business, taking out business that we don't want to have and then basically rebuilding off -- off that base. Larry, you want to add to that.

Lawrence Angelilli

Yes, the only thing I would add is that, we've been learning about this as we go. I think we didn't really know the impact of what these rules would be and the other part that isn't really obvious is that we've been adding additional rules through the course of the year.

So, as we’ve guided, and we even set our own cost structure, we’ve added rules that have impacted revenue on a subsequent basis, and we’ve been following that. I think, what we’re looking for now, is that if we reach some level of stabilization, we can size the expense base of the company and restore the volumes. And I think we’re just starting to get a sense of that now.

So the comps have been tough on a year-over-year basis, but our run rate of expenses has continually declined over the year. So we’re positioned pretty well to function at a lower revenue base on an ongoing basis, and 2018 was the year where we had kind of all the bad news and really not much of the good, and we have a lower run rate on our expenses that we’re – we’ll be looking at that going forward, but we continue to right size the expense base.

Rayna Kumar

That's very helpful. Just final question from me. You have about $900 million of debt coming due in 2020. Are you now in a position to refinance that debt? Just help us better understand your strategy with your capital structure?

Lawrence Angelilli

Yes, we've been holding off, because we really couldn't engage in any kind of credit discussion with anybody with all the unknowns associated with the extension of the DPA. So now that that is complete, we'll be immediately beginning conversations with our lenders and begin the process of refinancing that. That, the term loan expires in March of 2020. So we’re still in a good position to have plenty of time to refinance that but we’ll be starting it now. Now that all the variables have been covered from a credit perspective.

Rayna Kumar

Thank you.

Lawrence Angelilli

Thanks, Rayna.

W. Alexander Holmes

Next question, Simon.

Operator

We’ll now take our next question from Tien-Tsin Huang from JPMorgan. Please go ahead, your line is open.

Unidentified Analyst

Hi, this is [Indiscernible] for Tien-Tsin. Just on the amendment of those compliance enhancements. The DOJ said, you've agreed to, how much of that is incremental versus the improvements you have already talked about and that the main driver of the revenue revised revenue outlook?

W. Alexander Holmes

It’s a good question. The undertakings provided for in both the [Indiscernible] let me take them separately. So if you look at the DPA, most of the requirements are still sort of the base requirements that we had in the original DPA and that's really to complete the efforts that we've started across a variety of work streams. Those I think are pretty well defined. We've been working on those, I think as we’ve mentioned, we've made great progress. I think, particularly the last couple of years. And I think those efforts will just continue forward. And I feel, I feel pretty good about that.

The DPA has asked us to take on some additional responsibilities with respect to reporting back, reporting back to the government over progress, which I think, we can handle, and then they've asked us to take out some additional responsibilities associated with consumer fraud. I think the details are in both documents, and you can you can look at those and really that's the responsibility in terms of when we determine transactions are fraudulent, the actions and steps that we need to take.

If you look at the FTC consent order, this document is remarkably similar to the consent order that Western Union has. And I think, what this tries to do, is really define the actions and steps that money transfer company should take with respect to our responsibilities associated with our agents, and their roles and responsibilities associated with ensuring that our agents are performing compliance processes in lockstep with the requirements expected of us as a company. I think that a lot of ad centers around consumer fraud prevention, a lot of centers around refunds, and responsibilities when consumer fraud takes place but also the actions that you need to take associated with addressing concerns with agents.

And so, that's an area where you know we'll work proactively with our agents, a lot of that is what we're doing today. Sometimes we're even doing more than what's required there. So, we need to make sure that we have the right processes and procedures in place to ensure that we're fully complying with those orders and make sure that is working.

We also have some increased reporting responsibilities there as well. So – no, I don't think any of the actions listed in there specifically reflect the decreased outlook on revenue. I think that for the most part, the decreased outlook on revenue is associated with general changes in our compliance policies and general changes in our outlook on specific markets and corridors and business that we want to undertake as an organization.

And those are changes that we began late last year, implemented this year, and I think as Larry said, in probably mid third quarter, made the decision to take some additional steps and target some higher fraud areas and reduce our exposure from a risk perspective to those particular markets, and that's really having more of the impact on the revenue guidance down than anything else at this point.

I mean in the end, in fairness, it's all kind of interrelated, right. I mean, obviously, we have to have the best compliance; we have to ensure that our fraud is reduced, and that we have the best program in the country and that is kind of what we're attempting to do.

But you got to look at on a global basis, and make the right decisions holistically.

Unidentified Analyst

Okay. Thanks. And then maybe just switching gears to something we spent last time on the last few quarters. Just the core C2C business. Any regions or corridors doing particularly well the last few quarters. I'm sorry, in the last quarter.

W. Alexander Holmes

You know I think that we continue -- given the amount of change from compliance controls and rule changes that we've implemented, it's a little bit, what I want to say, messy, but it's sort of all over the board. I do think in certain markets, where we're focused on growth, sends out of Latin America have been have been fairly positive, which is -- which is nice to see. I think, there are certain markets across Europe, Asia, Middle East where we continue to have growth, which is some of these larger corridors where we're taking some corrective actions and clearly our business has been hurt in the U.S., on the U.S. outbound side by a number of the real changes that we've put in place and the introduction of the I.D. collection requirement.

I think we're seeing really good progress across almost all of our online markets, everywhere that we've deployed, moneygram.com anywhere we've rolled out the new app, we're seeing great growth although we are doing that through a lot of introductory pricing and some consumer acquisition strategies, online in the U.S. has been a bit of a slower grower at some of the compliance rules have hit, and then also the U.S. business continues to be in decline.

But, yes, there's some good pockets of growth in a number of different places.

Lawrence Angelilli

Yes, and I think part of the point we were making is that there are some concentrations of declines that are very significant and high, and you need a lot of growth and smaller ones to offset it. And we have been able to do that, but it has been a, not a not a constant trend. I think but some of the very large quarters have been impacted disproportionately by our rules and that's what's really driving the lion's share of the declines.

Unidentified Analyst

Makes sense. Thanks guys.

Lawrence Angelilli

Thank you.

Operator

We’ll now take our next question from David Scharf from JMP Securities. Please go ahead. Your line is open.

David Scharf

Yes, good morning. Thanks for taking the questions. A few things, first off, different topic. I know in the last couple of quarters that there was talk of agent rationalization. And you may have actually exited some in Q2. Is that process continuing, and is there any roadmap or geographic focus that we should keep in mind.

W. Alexander Holmes

Yes, good question. Yeah, absolutely. I think we've reduced somewhere at this point in the neighborhood of 4000 say 4000 some odd relationships, and that's different sized networks. We continue to execute on that process in a number of different markets. Some of them take a little more time obviously for contractual reasons and then some of them are easier to execute against. Interesting statistics there is that you know about, we’ve eliminated sort of the dormancy in our network. It was about 18% now down to 9%, which is a huge improvement in terms of the pieces of the business that were underperforming for us. So I think that's tightening that up and we’re going to continue to do that.

There’s a number of markets where I think I said this before, I just feel like we have probably overextended, there's several countries were agents are nonexclusive and kind of the ideas that everybody signs up the exact same agent. And so you’ve got whatever it might be 15 to 16 partners in a market and most of your business is going to four, five of them and I just -- I think the rest of it is nice to have. I think in my opinion I’ve share this. I think shouting out have big your network is kind of meaningless at this point in time. So I think cutting those out and focusing on efficiencies and cost savings is more important and reducing compliance exposure and risk. So that’s where we…

David Scharf

Right, Alex. How do you define – Alex, how do you define dormancy? I mean, 9% seems like that’s a big number still if -- I mean there’s literally agents that just do no volume or less than three transfers a month. I mean, how much room is left?

W. Alexander Holmes

We know that one of our competitors makes the public disclosure that it’s more like 30%. So 9% in that context is pretty low. Part of this is -- is that over time market change, and this is actually been one of the positives that we really hasn't had an impact on revenue and has a positive impact on cost. I think that there’s probably this industry as a whole doesn't probably prune the network. You find people up and then over time. Some are successful and some aren’t. And this was an opportunity for us to take some cost out without really having any meaningful impact on revenue at all.

Lawrence Angelilli

Okay. And that’s a net number dormancy location, not necessarily just specific agent.

W. Alexander Holmes

Yes.

David Scharf

Okay. Got it, got it. Following up on I guess previous question on how to think about ultimately if revenue inflects back to growth. When you think about those high concentration areas that these new controls impacted the most, trying to understand are those also typically or historically high velocity users, because it seems like this is more than just we’re requesting more IT, its resulting in fewer transactions. So, I'm wondering were the fraudulent, the people that were most apt to be fraudulent senders also the ones who sent the most frequently i.e. 10, 20, or 100 transactions a year or do you have that kind of read yet on the customer base?

Lawrence Angelilli

Yes. That’s an interesting question to answer for a variety of reasons. I would say, the answer is no, not necessarily because there's a lot of high-frequency send corridors, your U.S. Latin America corridors since the Philippines no matter where you are those tend to be more frequent. We’ve talked a lot about some of the other markets. It’s more typical to send once a month than there is more common to send sort of once a week. And then there is market where people send a couple of times a week and there is all sorts of reasons for that.

I will say those separately when you look at fraud, when you have victims of fraud particularly in the U.S. or in Europe where maybe even down in Australia where sender -- where the senders are being duped and they are being victims of fraud. Oftentimes they have a belief and a passion for what they think they're doing, whether that's trying to send money to a person in need or whether that’s to some sort of investment scam or whether that's a romance scam. You do see these senders try to get money there and they want to make sure that they can get it and they balance between networks and they try to go multiple locations if we stop them.

And then on the receive side you do see concentrations of fraudsters from time-to-time receiving from multiple people. So, a lot of what we’ve spend our time and efforts doing in is really trying to control velocities into high-fraud corridors reducing the ability for people to become victims of fraud scams by preventing them from re-transacting with us for a period of time if we find them to be victim of a scam ensuring that we block receivers and put them on our permanent block list if we believe that they’re involved in fraud scams and these types of thing.

So it becomes a big complicated. But I will say, the more information you collect about your consumers the more you have about them, ID collection, these type of things makes a massive difference in terms of making determinations on who these people are and ensuring that you do your best to prevent victims and to stop the criminal.

So, I think we’ve made some incredible strives on that front and obviously in doing that we’re putting some controls in place that also makes it a little more difficult for your average everyday consumer to send money as well. But it's for their protection and its for the benefit of the business. And I think this will normal out over time.

David Scharf

Right. And I know, Larry had made reference to there appears to be some signs that kind of the current run rate is stabilizing. Just want to make sure the latest, I guess latest round of additional compliance controls that were rolled out during the quarter. Were they implemented network-wide, so these signs of stabilization I guess, are you seeing those in those very high concentrated areas that fell off so much in Asia, Middle East and are you basically through with whatever is supposed to be the latest round of additional controls? I just want to get a sense to what the confidence level of that the run rate or revenue you're operating at now may represent close to the floor?

W. Alexander Holmes

Yes. Good question and that’s exactly what we’re trying to ensure ourselves internally. I guess the way to look at it is that we put in a lot of global controls that impact every single quarter, every single country, things like ID collection and the standard data collection requirements that we put in place. We also put in some velocity controls generally speaking in some high dollar sender controls as well to limit our exposure kind of around the world. So those all went in earlier in the year and those take time to blend into the business. I’ll come back to that in a second.

Secondly, we then put in a number of much stricter controls on a number of high-risk high-fraud areas which we then doubles down on in the third quarter in a number of areas. And so the incremental impact that we’re seeing is really doubling down on those high-fraud areas and then where the stabilization is coming in is really in a lot of those quarters that were initially impacted by the initial set of rules we put in place, we’re actually seeing some of those stabilized and new customers coming in. And so areas like the U.S. and Mexico for example that were hurt by the ID implementation, suddenly over the last couple months are stabilizing and we’re getting to see new customers coming in.

Now, it hasn’t nearly been enough to offset the decline, but its enough to give us some confidence that people are getting use to the new controls and its not as broadly impactful potentially on the go forward basis and that’s we’re just going to have to monitor and continue to look at.

David Scharf

Got it. That’s helpful color. Last question, it is actually just repeating I think the first one that was asked earlier, it just understanding the technicalities around the settlement. And really, Alex, what we’re trying to get at is the whole concept of regulatory overhang. Can you – the terms settlement in combination with a payment of funding, 125, however you want to term it, has a connotation of, hey, we’ve kind of wiped their hands clean of additional shoes that could drop, can you explain how we’re suppose to think about the use of the terms settlement, the agreement of an amount to be funded to reimburse victims of fraud in the context of a 30-month extension and no guarantee that they don’t come back to you with even more additional compliance control requirements?

W. Alexander Holmes

Sure. I guess what I will simply say is that, well, first, I’ll just make a giant caveat which is I’m not a lawyer. I just surround myself with them. So I don’t want to get into the sort of discussion on the difference between a settlement versus the agreements that we’ve entered into. I mean, what I can simply say, I guess in my own way is that we have a consent order from the SEC which require the company to do certain things and the SEC found us to be deficient in our execution against those responsibilities and saw fit to revive that, put into more responsibilities and hold us to that on a go forward basis. And we signed up for that and agree to comply with the consent order.

Similarly, that the deferred prosecution agreement outlined a number of responsibilities that the company was asked to undertake in the course of the past year determined that we were deficient in executing against this deferred prosecution agreement and saw fit to extend that agreement to continue to monitor the company and ensure that we perform against the deferred prosecution agreement and collectively both organizations or entities or government bodies determined that during the time of the DPA and the time of the consent order that we didn't do what we suppose to do and allowed too much fraud through the system and that the allegations that they've made. And we've agreed to pay forfeiture to those consumers that they alleged were victims of fraud during that period of time.

I guess my secondary answer to your, I guess, third question is how do I give assurances that it wont happen again. I think the assurance only comes from the idea that, if you don't execute against your orders the government comes back and follows up and you receive additional punishment. And so clearly my focus and goal is to avoid that happening again and we’re going to do everything possible to ensure that when the DPA comes up in 30 month that we’ll walk away from it. And that the consent order which will live for quite a bit longer, that we continue to comply with the consent order and do all the things that the order requires us to do on a go forward basis. And so we’re going to the process of implementing any additional steps and controls that we need to do and those are going in now and so we’re going to go after and ensure that it doesn't happen again.

David Scharf

Great. Sound like there’s been a tremendous amount of progress. Thanks so much.

Operator

We’ll now take our next question from James Faucette from Morgan Stanley. Please go ahead. Your line is open.

Unidentified Analyst

This is Priscilla on for James. Just a quick update on some of the metrics that you’ve – some of the guidance that you’ve given previously, last quarter you said, you expected EBITDA to return to growth next year. Can you just update that after this quarter’s results? And then you’ve also said that you expect digital to get to the high 20s, 30s as a potential revenue by 1Q, 2019, seeing it’s a 16% again this quarter. Can we just have an update on that metric?

Lawrence Angelilli

Yes. We’re not providing any guidance on 2019 at this time. I think we’ll be formulating our plans, also I think we need to really see where we are today at the fourth quarter. So, I really don’t think like any of those questions forward looking, I think right now we’re just confining our guidance for this year.

W. Alexander Holmes

Yes. And I don’t – I mean just say that, I think what I’ve said is that, I think that we can get much higher percentage of our revenue from digital over the next several years.

Lawrence Angelilli

Yes. I don’t recall putting timeframe on that – yes.

Unidentified Analyst

Okay. Thank you. And then in terms of the new business that you were expecting to ramp up in the second half, can you break out just how that did this quarter. What contribution that had? And whether or not that was an offset to some of the headwinds that you saw?

W. Alexander Holmes

We have seen new business come on line and actually we’re seeing new business come on line this quarter. But I think as we described its not sufficient to overwhelm the rules that we put in place. So there’s really two dynamics. We’re bringing in new business and we are ramping up some new relationships, but on the same, we’re adding new rules that were contemplated. And really as our compliance system gets better and better we actually can see patterns that didn’t see before. So I think overall the new business has been offset by the new rules and its been a net negative.

Unidentified Analyst

Okay. That’s helpful. Thank you very much.

W. Alexander Holmes

Thank you.

Operator

And we’ll take our next question from Kartik Mehta from Northcoast Research. Please go ahead. Your line is open.

Kartik Mehta

Good morning. Alex, just a question on the C2C business, and just a fundamental question as to what you’re seeing in terms pricing competition, and if anything that’s happen because of the regulatory issues is part of your competitors to be more aggressive than try to take even more market share?

W. Alexander Holmes

Yes. I think the views of pricing are consistent, I think interviews from last quarter, we are definitely seeing some of the larger players taking down prices pretty substantially across Asia and Africa. I think in the smaller competitive retail mom-and-pop space we’re definitely seeing those competitors paying high commissions and going in with some real, I think what I would call favorable actions to those agents to try to shift business over and take advantage of the compliance changes that we’ve made. And I would guess based on the results that I’ve them report, they’re doing a good job with that.

So, we have a number of initiatives that we’re undertaking internally. We have some good plans I think in terms of how to go. Think about that and we want to reposition the business on a go forward basis. But yes, I would say that competitively speaking prices online continue to be very aggressive I think just generally around the world definitely seeing prices as a competitive vein, I think continues. Do you want to add anything to that?

Lawrence Angelilli

No. I think in some areas outside the United States it’s gotten more aggressive. We’re seeing substantial pricing pressure, but we’re responding to it. And I don’t think at this point we’re calling that out as a reason for revenue decline, but it is putting margin pressure, I would have say, probably across the industry.

Kartik Mehta

And then, Alex, just as a clarification, DPA, the deferred 30-month deferred agreement. Does that being the monitor stays for another 30 months or is the monitor a different timeframe then the 30 months?

W. Alexander Holmes

No. The monitor is the same time frame.

Kartik Mehta

Okay. And then, just finally, Larry, you’ve talked about refinancing – now you can start refinancing. As you look at kind of the current marketplace, what you think happens to the funding cost for you? Is it – do you think it will be the same or do you think you have a chance to make a lower or based on the current market conditions where they are?

Lawrence Angelilli

Yes. I think it’s a little early for us to make that call. There’s really a good tone to the market that we’re going to be entering. So, right now we don’t think there’s a material change to spreads, but I think that’s something we’ll get a lot closer to as we get closer to having the approvals in place. I feel too early to call that, I think.

Kartik Mehta

Thank you, gentlemen, I appreciate it.

Lawrence Angelilli

Thanks.

Operator

Now we’ll take our next question from Jim Schneider from Goldman Sachs. Please go ahead. Your line is open.

Jim Schneider

Good morning. Thanks for taking my question. I just want to ask a little bit on the financial for a second. I believe the Q4 guidance implicit is that EBITDA will be down about 25% or 3% year-over-year. So I just want to confirm that is indeed the correct assumption. When do you expect to be free cash flow positive on adjusted basis next quarter?

And then, Larry, relative to the comment you made earlier about minimum working capital amount. Did you say $120 million in the balance sheet is what you feel you need to run the business? Or is it something lower than that?

Lawrence Angelilli

No. 120 is actually what we target as normal. So answer to that question first. On the fourth quarter I think your perceptions are accurate. We have some fairly heavy expenses in the quarter that relate to the launch of all these new apps and websites that will have an influence on the quarter. So we’re including that and we think we need to aggressively launch those products to set us up for next year. So that will put some pressure on the EBITDA margin for next quarter. On the cash flow basis I think we expect to be cash flow positive in the quarter as well..

Jim Schneider

That’s helpful context. And then maybe just a follow-up, you know, as revenues have kind of come down with the tightened compliance regime, one thing that I don’t think has come down as much been the agent commissions as a kind of a percentage basis. So can you maybe talk about what if anything can be done there whether how much of those are fixed versus variable at this stage at least on a run rate basis? And how those might trend over the next couple of quarters?

W. Alexander Holmes

Yes. There’s a little math there that you need to understand when revenues are declining we do have the amortization signing bonuses that are embedded in that number which is almost like a fix charge. So, the relative impact of that makes the illusion that our commissions are rising when actually they're not. We’ve actually made some progress on that score, but its hard to keep that margin flat to up in a declining environment just because of the amortization signing bonuses. As signing bonuses continue to decline the impact of that will also decline, but that really is the primary driver for that illusion at this point.

Jim Schneider

Fair enough. And then I guess as a point of clarification on the compliance piece of it. First of all, can you say something about whether you feel there’s any corridors that are fully normalized already from a compliance perspective? You talk about the pressure on the U.S. outbound, that that’s very clear. Any quarters you think are kind of in the stable territory from a incremental perspective? And then maybe just talk about whether there is any kind of incremental mantra cost on a go forward basis above and beyond what you've already been recording?

Lawrence Angelilli

Yes. I think part of the difficulty in predicting this is that we look at this book from a send and receive perspective. What I would say is some of the markets that called out, if you're down 70 something percent in the market, you can’t repeat that. I think you can't lose it twice. So I think that’s part of the impact here is that we’ve really taken out some markets and so they're gone and we don’t expect to lose those again, so I think that’s part of stabilization.

In terms of the send market, I think where it’s a little bit still open. I think that as we find patterns and as we put rules in place we can impact send market because they go into multiple receive market. So that’s where the – as the receive markets mature and we start to lap that, it will have a significant impact in stabilization, but we’re still has a little bit of uncertainty around how the send markets impacted. Regarding the monitor expense, right now, I would say, that we’re expecting to continue at the same rate of expense for both Compliance enhancement program and monitor that we’ve seen in the past. We don’t have evidence at this point. But if any more or any less than it has been.

Jim Schneider

Thank you.

Operator

We’ll now take our next question from Mike Grondahl from Northland. Please go ahead. Your line is open.

Mike Grondahl\

Hey, guys. You talked about doubling down on some of the high risk, high-fraud corridors in the third quarter. Was that during the beginning of the quarter, the end of quarter? And is there any other actions kind of tweaking this or even making it harder for customer to find you? Are you done?

W. Alexander Holmes

So to answer your first question, it was later in the quarter. The rest of the question I think is generically, I think in a much position vis-à-vis risk than we’ve been before. We continue to look at corridors and ensure that we’re making the right decisions around fraud. So you know its hard to say that you're kind ever done, but I do think some of the broader impact issues that were not corridor specific. Those of the areas where I think we’re going to get more benefit on a go forward basis against that backdrop. So, we are – in terms of significant changes I think we’re well through that.

Mike Grondahl

Okay. And then, one you guys commented about improving the point of sale experience. Was that online or at the agent location?

W. Alexander Holmes

Both really, I mean, when I mentioned the point-of-sale experience that was actually at physical walk in location. I think that the online experiences going to improve substantially with the rollout of new app and the rollout of new online platform in number of countries, plus an improvement to both coming over the next six months time period or so. So that will all continue to get better and then we’re also deploying a number of improvements to the agent applications themselves so directly at point-of-sale and then obviously he’s trying to work diligently to make sure that you know things like the online experience and the native app experience seamlessly integrate at the point-of-sales while so that you’re giving access and control to a lot of the transaction back to the customer making the agent responsibilities for data entry on the actual technology side less burdensome on them in and speed up that experience to point-of-sale. So, a lot of improvements have been going and they continue to roll and I think that teams doing a great job not only working with the business to build that and deploy it, but also ensure it kind of leading edge there. So we’re pretty excited about what that can be enforce on a go forward basis.

Mike Grondahl

And I guess, Alex, specifically at the agent location how is that experience going to be improved?

W. Alexander Holmes

Right now, I think it’s a mix experience depending on where you go. I think the agent's ability to interact with the customer, how transaction are entered into the system, how seamless that process is, the ease of which a customer can perform a transaction. In Canada for example we just launched barcode scanning which you basically is like enables you to do your own transaction and then have the agent to scan a barcode, that type of staging opportunity, changing the speeds, the lookups and how customers actually get their information and how it gets recalled that experience, the screens, the flows, all that is being improved.

And that we’re really trying to do is find better solutions for some of the smaller format stores as well aware speed and time is of the essence and so we’re working with a number of different partners to help think through how that can be – how that can be change. We’ve touched on some of the distribution of our services. We continue to look at blockchain opportunities there. We continue to look at migrating cloud-based services and continue to move that forward to speed that experience and sort of our ability to push new product into the market and these type things, so, generally speaking it just kind of transforming that entire experience from top to bottom.

Mike Grondahl

Got it. That will be interesting to see. Thank you.

W. Alexander Holmes

Thanks Mike.

Operator

We’ll not take our next question from Matt O'Neill from Autonomous Research. Please go ahead. Your line is open.

Matt O'Neill

Yes. Hi, guys. Thanks for taking my question. You had some interest of late on the M&A front and that is obviously sort of died down. I was wondering if the conclusion of the DPA in your mind will reinvigorate that process if you're proactively seeking out that option or if you're just in the strategy mode of working on the business and obviously remaining receptive to offers that may come in?

W. Alexander Holmes

Yes. Listen, its great question and I think, I’ve said before that we always entertain discussions and our job here is to create shareholder value in the best way possible. And when you look at the stock price today it’s almost ridiculous to even sort of contemplate. So, I think we have an amazing strategy for the next five years. I think that this year is about resetting the business and derisking it. That's never a fun thing to do in and clearly not one that is typically well received.

But I think that the changes that we’re making to the backend systems and technologies, the new products they we’re deploying, the costs and expenses that we’re taking out and then obviously derisking the business and the reduction of the revenue to ensure we don't have those challenges to deal with on a go forward basis I think we’re going put us in an amazing position, and whether that means executing that growth initiative as a public company or whether that means that the phones is going to start ringing and we’ll have someone come in who want to take the business and materially shift it, we’re going to be open to the two ideas and what's right for shareholders and the business over the long-term. So we’ll see how that plays out.

Matt O'Neill

Thanks. And then, I know this has been harped down a lot already through the Q&A, but just to try to parse with the agreement that you guys announced last night. Is it safe to say that there is incrementally more stringent kind of compliance practices that are being put in place effectively starting today. So not necessarily everything kind of was in the business quarter and there’s probably going to be some more contraction or, I guess, implicit in the guidance for fourth quarter is probably the case?

W. Alexander Holmes

I don’t know that there’s anything specific in the requirements of either documents that’s going to require us to take any specific actions pursuing to those agreements that will have an impact on revenue. The underlying implication is that if you read through the lines is that you need to reduce fraud in your business and ensure you don’t have fraud in your business. And so that’s not specifically laid out in those documents in terms of how you do that. But the application is that you need to do that and that’s what we've been doing and we’re ensuring that our rates are low and when you at a seven-year low and less than .05% I think you can say, that you’re doing a very, very good job with that.

So the steps and actions that we’re taking are to ensure that we know who our customers are. They were working with customers that we want and that we’re ensuring that we’re getting rid of the fraud as much as possible. What’s amazing is, that fraud, those frauds are going to just use MoneyGram and they’re not going away. So we’re taking them out of our business, so they’re going somewhere and someone else have to deal with them, and that’s fine with us, because we’re going to make sure they don’t come into our business.

When you take that to the next level, you then say, what do you need to ensure your frauds rates are low? We’re doing those and that’s that impact on the business. The requirements in the documents around ensuring sustainability of your compliance program, ensuring that you have the right policy procedure and steps in place, ensuring that you have the right processes around agent oversight; ensuring that you have right steps that you’re taking when you do have victims of frauds that you have the right refund policy and right practices around, how do we ensure that we’re protecting those consumers in the right way.

But don’t necessarily have a direct impact on the business or the transactions themselves that's done through two other steps which is the first step which is to ensure that that business doesn't come through our pipes. And so I think the fourth quarter is really -- the impact of all the above coming through on a year-over-year growth basis which isn’t going to look great on a reported basis, but when you look at the underlying volumes and you look at the Larry’s point how that looked over the last couple of months. It’s been relatively stable. So I think the business is stabilizing itself. We’re taking out the bad business. That will come out of the year-over-year numbers, but you know sequential basis I think we’re hopefully flattening out and we’re moving the right direction.

Matt O'Neill

Got it. Thanks very much. I guess the simplistic way of reasking that would just be to say, everything that's been put in place as of today was that basically in place at the beginning of the third quarter? Or were some of the things kind of being rolled in over the last three months. And so incrementally there could be a little bit more impact still going forward? I'm just trying to think about it from when all these changes, we can think about them been kind of fully jumped in?

W. Alexander Holmes

No. Some of them were throughout the quarter and then there was a few that were at the end of September.

Lawrence Angelilli

Yes. So the third quarter isn’t fully representative of all the rules that are in place today.

Matt O'Neill

Got it. Thank you very much for your time.

W. Alexander Holmes

It also wouldn’t be fully representative of any quarters that are starting to potentially shift back a little bit little either. It’s a little bit of mix.

Matt O'Neill

Right. Understood. Thank you.

W. Alexander Holmes

Thanks, Matt. All right. We have time to one more here.

Operator

We’ll take our final question from Mr. Chris Kennedy from William Blair. Please go ahead. Your line is open.

Chris Kennedy

Great. Thanks for taking my question. Just any update on the new Visa Direct relationship for cross-border payments? And then any update on initiatives with Ant Financial? Thanks a lot.

W. Alexander Holmes

Yes. I don’t really have much of an update on either that I can share. I can say that both continue to be exciting opportunities for us. I think we continue to look at those both as having high expectations over the course of the next couple of years, the rollout and the timing of which continues to be a little bit up in the air for variety of reasons. But those opportunities are there and it something that we’re looking at in terms how do we continue to transform the business and reshape the landscape. So we’ll update on those as soon as we have something that we can publicly update.

Chris Kennedy

Okay. Thanks a lot guys.

W. Alexander Holmes

Thanks.

W. Alexander Holmes

All right, Simon. Thank you very much. Thanks, everybody. Appreciate your time and I look forward to speaking with everybody over the quarter.

Operator

Ladies and gentlemen that concludes today's call. Thank you for your participation. You may now disconnect.