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MoneyGram International Inc. (MGI - Analyst Report) reported second-quarter 2012 earnings per share of 23 cents, in line with the Zacks Consensus Estimate. However, the reported earnings soared from year-ago quarter’s loss of $1.37 a share.

Operating net income in the reported quarter excluded negative impacts of certain accruals and legal expenses of $39.7 million or 54 cents per share, restructuring and reorganization costs of $4.4 million or 4 cents per share and stock-based compensation of $1.6 million.

Including these expenses, reported net loss available to common shareholders improved to $25.1 million or 35 cents per share against a net loss of $438.3 million or $10.97 per share in the year-ago quarter.

Higher money transfer transaction volumes and higher fee and other revenue drove the top line, while absence of preferred dividend payouts, lower interest expenses helped the bottom line and margins’ expansion. However, these were mostly offset by lower investment income along with higher operating, commissions and tax expenses.

Total operating expenses escalated 18.6% year over year to $327.0 million, whereas total commission expense rose 8.2% year over year to $146.8 million. Subsequently, operating income plummeted to $3.1 million from $34.3 million in the year-ago quarter.

However, interest expense decreased by 23.1% from the prior year to $17.6 million as a result of continued delevering activities and the refinancing initiated in May 2011.

MoneyGram’s total revenue for the quarter was $330.1 million, up 6.5% from the year-ago period and was at par with the Zacks Consensus Estimate. While fee and other revenue increased 7.4% year over year to $326.7 million, investment revenue plunged 42.4% to $3.4 million.

MoneyGram has also been gaining traction with the raised momentum in self-service and new channel revenue that jumped 57% during the reported quarter and represented 5% of money transfer revenue. Additionally, MoneyGram Online delivered strong revenue and transaction growth, both in excess of 37%, primarily helped by the recent launch of MoneyGram Online in the U.K.

Segment Results

In the Global Funds Transfer segment, MoneyGram’s revenue rose 8.6% year over year to $308.3 million. Money transfer transaction volume increased 13%, while money transfer fee and other revenue grew 10% year over year to $282.0 million and 13% on a constant currency basis.

Further, global agent locations increased 16% over the prior-year quarter to 284,000, primarily driven by growth in India, Africa and Spain. Bill payment transaction volume dipped 3% year over year, whereas, fee and other revenue declined 6% to $26.0 million from the prior-year quarter.

However, excluding the effect of divestiture in the fourth quarter of 2011, bill payment transaction volumes improved by 7% year over year and fee and other revenue increased slightly. The increase was led by new vertical expansion, new billers and growing strategic partnerships.

As a result, operating margin improved to 12.5% from 9.1% in the year-ago quarter, while adjusted operating margin also escalated to 14.3% from 11.9% in the year-ago quarter.

Total money transfer transactions originating outside the U.S. escalated 18% from the prior-year quarter. Transaction volume to Mexico increased 19% year over year, significantly improving for the eleventh-consecutive quarter. Additionally, MoneyGram’s transactions originating in the U.S. increased 10% year over year, while U.S. outbound transaction growth increased 11% over the prior-year period.

In the Financial Paper Products segment, MoneyGram’s total revenue declined 16.0% year over year to $21.5 million, reflecting reduced investment, money order and official check revenues. Conversely, operating margin improved to 37.5% from 36.4% in the year-ago quarter, based on low commission expenses. However, adjusted operating margin dipped to 39.8% from 40.8% in the year-ago quarter.

Liquidity

As of June 30, 2012, MoneyGram had cash and cash equivalents of $2.55 billion (down from $2.57 billion at 2011-end), net receivables of $1.27 billion (up from $1.22 billion) and available-for-sale investments of $85.3 million (down from $102.8 million).

The company ended the reported quarter with $810.4 million of outstanding debt (marginally down from $814.6 million at 2011-end), and assets in excess of payment service obligations of $268.6 million (up from $211.7 million). Free cash flow rose to $38.7 million from $22.9 million in the year-ago quarter, primarily driven by strong revenue growth and lower interest expense and signing bonuses.

Guidance

Management reiterated its 2012 guidance and expects total revenue to grow 7–9%, while adjusted EBITDA growth is forecasted in the band of 9–11%. Including the impact of declining euro against the U.S. dollar, reported EBITDA is projected within 7–9%. This is consistent with the company’s long-term goals.

Business Update

During the reported quarter, MoneyGram launched bill payment top-up capabilities from the U.S. for mobile phone plans in several countries including Brazil, Panama and Paraguay. The company also strengthened its ties with Buffalo Community Bank and fortified its footprint in South Sudan.

Moreover, the company also broadened its network by adding about 1,000 locations in the Spain and strengthened its position as it began the roll-out of the largest retailer of Portugal – Continente. Further, the company added 650 locations through four banks in Pakistan and an additional 3,000 locations in India through State Bank of India and India Post.

MoneyGram also partnered with First California Bank to improve its prepaid card services, while consistently building out its network in Africa including ARB Apex in Ghana and Ecobank in Nigeria.

Peer Take

Earlier this week, MoneyGram’s peer Western Union Co. (WU - Analyst Report) reported second quarter operating earnings of 46 cents per share, up 2.2% year over year and 3 cents ahead of the Zacks Consensus Estimate. While consumer-to-consumer revenue segment remained flat, all other business segment witnessed modest growth year-over-year.

MoneyGram carries a Zacks #3 Rank, which translates into a Hold rating over the short term. Additionally, we maintain a Neutral recommendation over the long term.

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