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Western Union Delivers Ahead

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Western Union Co.’s(WU) fourth quarter earnings came in at 38 cents per share, 4 cents ahead of the Zacks Consensus Estimate, benefiting from a strong margin improvement led by its Consumer-to-Consumer (C2C) segment. The earnings also compared favorably with 32 cents in the prior-year quarter. 

Western Union’s revenues for the quarter were $1.4 billion, ahead of the Zacks Consensus Estimate of $1.3 billion and up 3% year over year. On a constant currency basis, revenues were up 5%.

For the full year, revenue came in at $5.2 billion, in line with the Zacks Consensus Estimate, but up 2% year over year. EPS of $1.43 per share for the full year, however, fell below the Zacks Consensus Estimate of $1.51. 

The C2C segment, which generates most of the company’s revenues (85%), reported earnings of $1.2 billion, up 3% year over year, led by a 7% increase in both International as well as Americas regions and a 14% increase in the Asia-Pacific region, partially offset by a 1% decline in Europe, Middle East, Africa, S.Asia (EMASA) region. The quarter reported a fourth consecutive increase in constant currency revenues.

The number of transactions increased 9% year over year to 55 million, led by 6%, 11% and14% transaction growth from EMASA, Americas and Asia-Pacific region, respectively.

The Global Business Payments segment’s revenues were $181 million, unchanged relative to the prior-year quarter. An increase in revenues from Custom House acquisition completely offset the 5% decline in US bill payments revenues. In the prior-year quarter, Custom House reported revenues of $23 million. Operating income margin of the segment was 13%, down 700 basis points year over year due to the revenue decline in mix shifts in U.S. Bill Payments as well as higher investment in Custom House.

Fourth quarter consolidated GAAP operating margin was 24%. Excluding restructuring charges, the consolidated operating margin was 25%. The fourth quarter operating margin, excluding restructuring charges, improved approximately 30 basis points from the same period last year.

During the quarter, Western Union hiked its quarterly dividend by 16.7% to 7 cents per share, which was paid on December 31 to the shareholders. 

Along with earnings release, Western Union declared a new share repurchase authorization of $1 billion.  During the year, the company spent $584 million to repurchase nearly 36 million shares or 5% of the total shares outstanding at an average price of $16.44. In the fourth quarter, 4 million shares were repurchased at an average price of $18.15 per share for a total of $70 million.

Western Union grew retail agent locations to 445,000 during the year. It plans to add another 30,000 to 40,000 agent locations in 2011, to harvest growth from long-term demographic trends, which would support migrant flows and remittance growth over time.

Outlook 2011

Management expects stronger Consumer-to-Consumer revenue growth, moderating Bill Payment declines and mid-teen revenue growth from Western Union Business Solutions. On the back of these assumptions, management expects revenue growth of 3% to 4% (constant currency). The outlook reflects continued share gains in cross-border expenses from further retail expansion, marketing initiatives and growth in electronic channels.

Management also guided that the Prepaid business would double the cards-in-force, and revenues from this business will increase to constitute 1% of total revenues.

The company will generate $1.2 billion to $1.3 billion of cash flow from operations.

Electronic channels are projected to grow to 3% of total company revenue.

Prepaid, including third-party top-up, is expected to reach approximately 1% of revenue

Operating income margins would expand to approximately 27%, excluding restructuring charges, compared with 26% in 2010.

The company is likely to incur $50 million in pre-tax restructuring charges.

Western Union has reported solid results for the year 2010, recovering from the recession that hit the previous year. Its strategic initiatives – growing electronic channels, developing product portfolio, expanding retail chain, and improving process and productivity -- are gaining traction. These initiatives are expected to drive revenue growth in 2011.  Stabilizing economic trends are also likely to fuel remittance growth.

We believe Western Union’s strong branding, network expertise, financial strength and restructuring initiatives will deliver long-term profitability. Moreover, transaction volume, revenues and pricing are recovering gradually.

Peer Moneygram International Inc. (MGI) is expected to release fourth quarter and full year earnings on February 4, 2011, before the opening bell. Moneygram has been reporting loss for full year 2008 and 2009 due to negative top-line growth based on lower revenue per transaction and investment revenue. The Zacks Consensus Estimates loss of 35 cents per share for the fourth quarter and a loss of $1.22 for the full year 2010.

Western Union carries a Zacks #3 Rank, which translates into a “Hold” recommendation over the short term. Also, over the medium to long term, we suggest the investors to maintain a “Neutral” position.

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