MoneyGram's Q1 Earnings Outperform, Chops Guidance - Analyst Blog

MoneyGram International Inc. MGI reported first-quarter 2014 operating earnings per share of 37 cents, outpacing the Zacks Consensus Estimate of 28 cents and the year-ago quarter number of 24 cents.

Including adjustments, reported net income surged to $39.0 million or 54 cents per share from a loss of $12.6 million or 18 cents per share in the year-ago quarter.

Higher money transfer transaction volumes and investment income as well as higher fee and other revenue drove the top line, while lower interest expenses aided the bottom line. However, higher operating and commission expenses were partial dampeners.

Total operating expenses rose 14.1% year over year to $337.9 million, whereas total commission expense increased 10.8% to $171.0 million. Subsequently, operating income shrunk to $37.0 million from $44.3 million in the year-ago quarter. Interest expense also plunged 44.3% from the prior year to $9.7 million.

MoneyGram's total revenue for the quarter was $374.9 million, up 10.1% from the year-ago period. While fee and other revenues increased 8.9% year over year to $367.7 million, investment revenues stood at $7.2 million, way up from $2.8 million in the year-ago period.

Quarterly Segment Results

In the Global Funds Transfer segment, MoneyGram's revenues grew 10% year over year to $351.7 million. Money transfer transaction volume increased 12%, while money transfer fee and other revenue grew 11% year over year to $326.1 million, showcasing double-digit growth for the 10^th consecutive quarter.

Self-service money transfer revenues surged 35%, representing 7% of money transfer revenues. Moreover, MoneyGram online money transfer and bill payment transaction volume grew 36%, while revenues jumped 26% over the prior-year quarter.

Further, global agent locations increased 6% over the prior-year quarter to 339,000. Bill payment transaction volume remained flat year over year, whereas, fee and other revenues declined 2% to $25.6 million. As a result of higher commission expense, operating margin deteriorated to 9.0% from 12.9% in the prior-year quarter, whereas adjusted operating margin edged down to 12.6% from 14.5% a year ago.

Total money transfer transactions originating outside the U.S. escalated 11% from the prior-year quarter. Additionally, MoneyGram's transactions originating in the U.S. increased 7% year over year, while U.S. outbound transaction increased 18% over the prior-year period driven by 31% growth in transactions to Mexico from the U.S.

In the Financial Paper Products segment, MoneyGram's total revenue spiked 17% year over year to $23.2 million, reflecting higher investment revenues related to one-time returns on legacy investments along with lower fee and other revenue. Subsequently, operating margin improved to 42.2% from 34.7% in the year-ago quarter, as commission expenses decreased 40%. Additionally, adjusted operating margin rose to 46.6% from 37.7% in the year-ago quarter.

Liquidity

As of Mar 31, 2014, MoneyGram had cash and cash equivalents of $2.15 billion (down from $2.23 billion at 2013-end), net receivables of $890.0 million (up from $767.7 million) and available-for-sale investments of $41.6 million (down from $48.1 million).

The company exited the quarter with $840.8 million of outstanding debt (up from $842.9 million at 2013-end), and assets in excess of payment service obligations of $329.6 million (up from $318.8 million).

Adjusted free cash flow increased 42% year over year to $46.7 million in the reported quarter, primarily due to lower signing bonuses and interest payments.

Guidance for 2014

Management revised the full-year 2014 guidance taking into consideration the recently launched Walmart-to-Walmart white-label product of Wal-Mart Stores Inc. WMT, which is likely to take a toll on MoneyGram's top line, primarily the U.S-to-U.S., Walmart-to-Walmart transactions, that accounted for 12% of the total revenue in first-quarter 2014. The new Walmart product has the potential to directly cannibalize the U.S. market and amplify competitive pricing pressure.

Subsequently, total revenue is now expected to grow 1–3% on a constant currency basis, slashing estimates from the prior 8–10%. Further, adjusted EBITDA growth is projected in the band of 0–2%, down from prior projection of 7–9%.

Global Transformation Program

In Feb 2014, MoneyGram provided a long-term outlook that it aims to achieve in order 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.

Furthering its reorganization and restructuring initiatives, MoneyGram aims 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 $3.1 million was incurred in the reported quarter. In all, MoneyGram incurred $7.1 million in operating expenses and $3.4 million as capital expenditure in the quarter.

Additionally, MoneyGram expects to incur cash outlays for fraud losses of about $80–90 million until 2017.

Other Stocks to Consider

Some top-ranked stocks in the financial sector are Euronet Worldwide Inc. EEFT and General Finance Corp. GFN, both of which sport a Zacks Rank #1 (Strong Buy). Meanwhile, MoneyGram and Walmart presently carry a Zacks Rank #4 (Sell).