MoneyGram International Inc. (MGI - Analyst Report) reported second-quarter 2014 operating earnings per share of 28 cents, lagging the Zacks Consensus Estimate and the year-ago quarter figure, both of which were 32 cents, by 12.5%. Results deteriorated primarily due to significant decline in U.S. money transfer transaction volumes given the launch of Wal-Mart Stores Inc.’s (WMT - Analyst Report) competitive product that led to a lower top line.
With this result, the company’s average four-quarter beat stands at 2.9%. However, shares of MoneyGram dipped 0.5% following the earnings miss.
Operating net income plunged 20.8% year over year to $17.9 million. Including adjustments, reported net income surged to $25.6 million or 40 cents per share from $19.1 million or 27 cents per share in the year-ago quarter.
Total operating expenses rose 8.9% year over year to $351.3 million primarily due to higher compensation and operating expenses. Total commission expense edged up 1.2% to $171.7 million. Subsequently, operating income sank 50.4% to $21.1 million from $42.5 million in the year-ago quarter.
Interest expense also increased 15.2% from the prior year to $11.1 million. Total earnings before interest, taxes, depreciation and amortization (EBITDA) improved 7.9% year over year to $69.8 million, while adjusted EBITDA fell 3.1% to $68.1 million.
MoneyGram’s total revenue for the quarter was $372.4 million, up 2% from the year-ago period and breezing past the Zacks Consensus Estimate of $372 million. While fee and other revenues increased 2% year over year to $368.8 million, investment revenues stood at $3.6 million, slightly down from $3.7 million in the year-ago period.
Quarterly Segment Results
In the Global Funds Transfer segment, MoneyGram’s revenues grew 2.4% year over year to $352.8 million. Money transfer transaction volume increased 4%, while money transfer fee and other revenue grew 2.7% year over year to $328.2 million, reflecting single-digit growth for the first time after 10 consecutive quarters of double-digit growth.
Further, global agent locations increased 6% from the prior-year quarter to 345,000. Total money transfer transactions originating outside the U.S. escalated 10% from the prior-year quarter. Additionally, the U.S. outbound transaction increased 15% from the prior-year period driven by 21% growth in transactions to Mexico from the U.S.
However, MoneyGram’s transactions originating in the U.S. decreased 11% year over year due to 31% decline in transactions originated at U.S-to-U.S., Walmart-to-Walmart, along with 33% fall in revenues, which accounted for 23% of total revenues.
Self-service money transfer revenues surged 42% from the prior-year quarter, representing 8% of money transfer revenues. Money transfer transaction volumes spiked 60% and contributed 10% to total transaction volumes. Moreover, MoneyGram online money transfer and bill payment transaction volume grew 41%, while revenues jumped 31% from the prior-year quarter. Bill payment fee and other revenues decreased 1.2% to $24.5 million.
As a result of higher commission expense, operating margin deteriorated to 5.5% from 11.8% in the prior-year quarter, whereas adjusted operating margin declined to 10.4% from 12.5% a year ago.
In the Financial Paper Products segment, MoneyGram’s total revenue fell 3.4% year over year to $19.6 million, reflecting lower fee and other revenue within both money order and official check sub-segments. Subsequently, operating margin declined to 31.1% from 37.4% in the year-ago quarter, although commission expenses remained flat. Additionally, adjusted operating margin dipped to 38.8% from 38.9% in the year-ago quarter.
As of Jun 30, 2014, MoneyGram had cash and cash equivalents of $2.05 billion (down from $2.23 billion at 2013-end), net receivables of $941.8 million (up from $767.7 million) and available-for-sale investments of $40.2 million (down from $48.1 million).
The company exited the quarter with $968.3 million of outstanding debt (up from $842.9 million at 2013-end), and assets in excess of payment service obligations of $349.1 million (up from $318.8 million).
Adjusted free cash flow decreased 37% year over year to $30.2 million in the reported quarter, primarily due to higher investments in the global transformation program and increased signing bonuses.
Guidance for 2014
Management reiterated its guidance, which was lowered in Apr 2014 due to the cannibalization from Wal-Mart product. Total revenue is expected to grow 1–3% on a constant currency basis, which was slashed from the prior estimate of 8–10% in Apr 2014. Further, adjusted EBITDA growth is projected in the band of 0–2% that fell from the prior projection of 7–9%.
Global Transformation Program
In Feb 2014, MoneyGram provided a long-term outlook that it aims to achieve to fuel multi-channel growth and improve cost structure.
By 2017, the company targets annual revenues of $2 billion and expects self-service products to contribute 15–20% to money transfer revenues. In order to attain this goal, MoneyGram plans to augment investment in its online and mobile, account deposit as well as kiosk-based money transfer services, thereby aggressively expanding its market presence by improving back-end processes and product efficiencies for these products.
As part of its global transformation program, the company also announced the opening of a new location in Poland – MoneyGram Global Business Center – in late 2014. The new outlet is aimed at enhancing global talent base and cost efficiency.
Taking forward its reorganization and restructuring initiatives, MoneyGram targets to enhance operating efficiencies, realign certain businesses and reduce costs, all of which should result in annual pre-tax cost savings at a run-rate of $15–20 million by 2015-end.
In this regard, the company also projects to incur cash outlay of $30–40 million over the next two years, of which $14.9 million was incurred in the first half of 2014. In all, MoneyGram incurred $14.5 million in operating expenses and $7.8 million as capital expenditure in the first half of 2014. The company also incurred expenses worth $6.7 million related to severance accruals.
Additionally, MoneyGram expects to incur cash outlays for fraud losses of about $80–90 million till 2017.
Stocks to Consider
Currently, MoneyGram carries a Zacks Rank #3 (Hold). However, one could consider better-ranked in the financial sector like Euronet Worldwide Inc. (EEFT - Snapshot Report) and Moody’s Corp. (MCO - Analyst Report) , of which have a Zacks Rank #2 (Buy).