西聯匯款 (WU) 2014 Q2 法說會逐字稿

Good afternoon, and welcome to the Western Union second-quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mike Salop, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you and good afternoon, everyone. On today's call, Hikmet Ersek, Western Union's President and Chief Executive Officer, and are Raj Agrawal, Executive Vice President and Chief Financial Officer will discuss the Company's second quarter of 2014 results, and then we will take your questions. The slides that accompany this call and webcast can be found at WesternUnion.com under the Investor Relations tab, and will remain available after the call. Additional operational statistics have been provided in supplemental tables, with our press release.

Today's call is being recorded, and our comments include forward-looking statements. Please refer to the cautionary language in the earnings release and Western Union's filings with the Securities and Exchange Commission, including the 2013 Form 10-K, for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements.

During the call, we will discuss some items that do not conform to Generally Accepted Accounting Principles. We have reconciled those items to the most comparable GAAP measures on our website, WesternUnion.com, under the Investor Relations section. All statements made by Western Union officers on the call of the property of the Western Union Company and subject to copyright protection. Other than the replay noted in our press release, Western Union has authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. I would now like to turn the call over to Hikmet Ersek.

Thank you, Mike, and good afternoon, everyone. Overall, the first-half results are generally in line with our expectations coming into the year, and we are pleased to be able to narrow the full-year operating profit margin and earnings-per-share outlooks to the higher end of the previous ranges.

The strategic actions we have implemented in consumer money transfer over the last couple of years, including pricing adjustment in key corridors and digital expansion have helped turned the business back to positive revenue growth in the first half of 2014. Our productivity initiatives are also contributing to results, as we are maintaining a 20% margin in the first half, despite cost pressure in some key areas. And we continue to generate and deploy strong cash flow for our shareholders, with over $200 million of share repurchases and dividends in the quarter.

For the first half of the year, we have now returned over $450 million to shareholders. In the quarter, revenue increased 1%, or 3% in constant currency terms. Our consumer-to-consumer revenue increased 2%, or 3% constant currency, driven by both improvement in cash initiated retail money transfer, and continued strong growth from WesternUnion.com. Trends have been aided by our previous pricing actions, but we are also seeing growth in non-price corridors. We have made adjustments to address our value proposition in the key corridors and we do not believe significant, additional pricing reductions are needed this year.

The impact of pricing in the second quarter was only 1% of revenue, although reported revenue was also negatively impacted by currency and some geographic mix differences, compared to last year. We continued to make progress with WU.com, including risk management enhancement in the US, the launch of mobile experience in the UK, the addition of bank account funding options in several European countries, and direct-to-bank connections in new markets.

We are acquiring new online customers at a faster rate, as well as increasing customer retention. However, based on our latest customer comp projections and the timing of new service rollouts, we no longer expect acceleration in trends to be as steep as we previously anticipated, as a result of our $500 million revenue target for digital is being pushed out beyond 2015.

Digital, which includes WesternUnion.com and mobile money transfer is still an area that is generating strong growth. Our strategies are working, and we're seeing dotcom online money transfer revenues increase 31% in the quarter, and are up 38% on a year-to-date basis. We expect the digital business to continue to be a long-term growth driver for Western Union.

Western Union Business Solutions revenue was flat in the quarter, which follows three straight quarters of double-digit constant currency growth. We believe customers' activity was impacted by extremely low foreign exchange volatility in the quarter, and some sales execution challenges. On the year-to-date basis through June, Business Solutions' constant currency revenue increased 5%, which is roughly in line with global trade projections. Although we continue to believe it is a strong long-term growth opportunity, considering the current low foreign exchange volatility in the market, we do not believe we will reach the full-year double-digit revenue growth target for Business Solutions in 2014.

For the total Company, however, based on our first-half performance and forecast for the remainder of the year, we have affirmed our 2014 revenue outlook. We have narrowed our operating margin outlook to approximately 19.5% to 20%, which is at the higher end of the previous range. As a result, I am pleased to report we have also narrowed our earnings-per-share outlook to $1.45 to $1.50, also at the higher end of the previous range.

As we look to the second half of the year and the future, we remain focused on strengthening consumer money transfer, with an emphasis on digital expansion, growing our [senior] Business Solutions, and generating strong cash flow for our shareholders. We believe long-term growth will be driven by digital C2C and Business Solutions, but also with lower but steady growth rates from the cash initiatives C2C.

In consumer money transfer, we expect cash payout at our global Asian locations and ATMs to still be extremely important for our receivers, and we plan to continue expanding our account payout options to bring new customers to our business. Increasing our network through both strategic retail agents and more digital connections is also an important part of our strategy. In Business Solutions, we plan to continue to increase our integrated product offerings, and expand our customers base to drive business in a strong, long-term growth market. And of course, we expect to continue to generate strong cash flow and deploy it for our shareholders, for both dividends and share repurchases.

Finally, I would like to say how pleased I am with a couple of key additions to our team that we announced earlier this month. We are very proud to add Robert Selander, former CEO of MasterCard, to the Western Union Board of Directors. Bob brings a wealth of business and financial service experience to our Board and we are looking forward to benefiting from his payment expertise.

And as you are aware, Raj Agrawal was named Executive Vice President and Chief Financial Officer, after serving in the role on an interim basis since the beginning of the year. Raj has demonstrated to me and to our Board of Directors, that he was the right choice for this position. He's a strong leader with a diverse financial and business background, and he has deep knowledge of our business. So, Raj, I would to now like to welcome you officially to this role, and I would like to ask you to give more detail on the second quarter.

Thank you, Hikmet, and I am very pleased to be named to this role, and I look forward to meeting more of the investment community in the coming months. So, let's turn to the financial results for the quarter. Total revenue was approximately $1.4 billion, an increase of 1% or 3% on a constant currency basis compared to the prior year. Electronic channels revenue increased 27% in the quarter, and represented 6% of total Company revenue.

In the consumer-to-consumer segment, revenue increased 2%, or 3% on a constant currency basis. Total transactions increased 6% in the quarter, which benefited from our previously implemented pricing and other strategic actions in key corridors, and strong growth in WesternUnion.com. Western Union's C2C cross-border principal increased 7% in the second quarter, or 6% on a constant currency basis.

Principal per transaction was flat compared to the prior-year period, on both a reported and constant currency basis. As we've mentioned in prior quarters, we expected C2C transaction growth rates to come down from the 9% levels we saw the last three quarters, as we moved further away from the pricing driven lift, but, the pricing impact of revenue has narrowed.

The spread between the C2C transaction and revenue growth in the quarter was 4 percentage points, including a negative 1% impact from currency. The impact of net price decreases was 1% in the quarter, while mix had a negative impact of approximately 2%. Mix was negatively impacted by growth in some lower revenue per transaction geographies, and a reduction in business in some high revenue per transaction corridors. We continue to anticipate 2014 pricing actions to be modest.

Turning to the regions. In the Europe and CIS region, revenue increased 3% year over year, including a positive 1% impact from currency, with Germany continuing to deliver strong growth. Transactions in the region increased 11%, and benefited from the pricing actions implemented in 2013.

North America revenue grew 1% in the quarter, while transactions increased 3%. US outbound continued to deliver good growth, while Mexico revenue grew 2% on a transaction increase of 3% in the quarter. Domestic money transfer trends were similar to the first quarter, with revenue increasing 1% and transactions growing 6%.

In the Middle East and Africa region, revenue and transactions each increased 6% compared with the year-ago quarter, with no impact from currency. Strong revenue growth from Saudi Arabia and the United Arab Emirates drove the region's increase, and we are pleased that we recently renewed a multi-year agreement with Bank Al Bilad in Saudi Arabia, one of our largest global agents.

In Asia-Pacific, revenue grew 1%, including a negative 1% impact from currency and transactions, increased 3%. Revenue benefited from early from strong growth in Japan and further increases from the Philippines.

In the Latin America and Caribbean region, revenue was down 13% from their prior-year period, including a negative 6% impact from currency and transactions were flat. The currency impact was primarily due to the weak Argentine peso, while constant currency revenue was negatively impacted by government-imposed restrictions on the market in Venezuela.

WesternUnion.com delivered strong C2C revenue growth of 31% of the quarter, while transactions increased 46%. US originated online transactions also grew 46%. WU.com continued to benefit from very strong revenue growth in several key corridors, including US outbound to India, the Philippines, and Mexico, US domestic money transfer, and UK to India.

In the consumer to business segment, revenue declined 5% in the quarter, but increased 8% on a constant currency basis. The differential between the reported and constant currency rates was primarily due to the devaluation of the Argentine peso. On a constant currency basis, the South America businesses continued to grow, while in the US, increases in electronic bill payments were offset by declines in cash walk-in business. Business Solutions revenue was flat on a reported and constant currency basis, and represented 7% of total Company revenues in the quarter.

Turning to consolidated margins, the second-quarter GAAP operating margin was 19.8% compared to 20% in the prior-year period. The margin was negatively impacted by higher average C2C retail commission rates, higher interchange cost in consumer bill payments, and the impact of currency, and benefited from cost-savings initiatives and lower integration costs. Compliance expense in the second quarter was approximately 3% of revenue. We continue to expect costs to ramp in the second half of the year, but we do appear to be in good shape to be towards the lower end of our 3.5% to 4% full-year outlook.

The benefits from cost savings initiatives relate to comparisons with costs in the second quarter of last year, when we incurred $20 million of expenses related to the combination of cost saving initiatives and Travelex global business payments integration. We also achieved just over $10 million of incremental cost savings in this year's second quarter and continue to expect approximately $45 million in incremental savings for the full year. EBITDA margin was 24.7% in the quarter, compared to 24.8% a year ago. Our tax rate was 16.5% in the second quarter, and we continue to expect a full-year rate of around 15%.

Reported earnings per share in the quarter was $0.36, which is the same as the prior year's period. the C2C segment operating margin was 22.7%, down from 23.2% in the prior-year period, primarily due to higher average retail commission rates, and the negative impact of currency, which were partially offset by benefits from cost savings initiatives. The consumer-to-consumer operating margin declined, primarily due to higher funding costs related to increased interchange expense, driven by increased credit card usage by our US electronic bill payment customers.

The second-quarter C2B margin was 16.2%, which compared to 20.5% in the prior-year period. Business Solutions reported an operating loss of $3 million for the quarter, compared with a loss of $7 million for the same period last year. Both quarters included depreciation and amortization of approximately $15 million. The reduction in operating loss was due primarily to lower integration expense, compared to the prior-year period.

Turning to our cash flow and balance sheet, year-to-date cash flow from operations was $450 million. Capital expenditures were $51 million in the second quarter, and for the full year, we expect capital spending to be approximately 4% to 5% of revenue. At the end of the quarter, the Company had debt of $3.8 billion, and cash of $1.6 billion. Approximately 25% of the cash was held by United States entities.

During the second quarter, we repurchased approximately 9 million shares for a total of $143 million and we paid $66 million in dividends. Year-to-date through June, we have returned $457 million to shareholders. At quarter end, we had 530 million shares outstanding, and $177 million remaining under our share repurchase authorization, which expires June, 2015.

As Hikmet mentioned, based on our first-half performance and current forecast for the remainder of the year, we are affirming the full-year revenue outlook, and we are narrowing the operating profit margin and EPS outlooks to the high end of the previous ranges. We now expect the operating profit margin to be in a range of approximately 19.5% to 20%, and earnings per share to be in a range of $1.45 to $1.50.

We have also adjusted our expected cash flow from operating activities to approximately $1 billion. Our previous forecast of approximately $900 million included $100 million of anticipated tax payments related to our 2011 IRS agreement, which are now expected to be made in future years. So, to summarize, our first half results were in line with our expectations, and we believe full-year profit margin and earnings-per-share will be up the high end of the previous outlook ranges. That concludes our prepared remarks on the quarter, and operator, we are now ready to take questions.

(Operator Instructions)

Bryan Keane, Deutsche Bank.

Hi, guys, just want to ask about a few corridors. It looked like Europe and the CIS region again was pretty strong, it upticked in the quarter. And then on the other -- on the flip side APAC and the Latin America region looked like it down ticked a little bit. Maybe you could just talk about what's going on there? Thanks.

Sure, Bryan, this is Raj. On Europe and CIS we anniversaried most of the pricing actions through the first quarter of this year, but we did have some additional pricing in the second quarter of last year, and so we're still seeing the benefit of some of the pricing actions. And having said that, we also continue to see good growth in Germany and some other markets, so Europe overall is doing well for us. Russia was also good for us, we had good transaction there. For APAC Philippines, was a good contributor to us, but it did slow down a little bit in the market. But overall, it was about flat quarter to quarter.

And India, delivered, Brian, good revenue, transaction growth, especially those online corridors we were pleased with our WesternUnion.com during the year.

And then LATA, there are couple of things that are going out in the LATA market. Argentina, on a reported basis, Argentina is cause of the lower reported revenue numbers because of the currency devaluation of the peso. The peso is about 35% weaker than it was about a year ago.

And then when you look at the business on a constant currency basis, Venezuela have imposed restrictions on the entire market, in terms of capital flows to Colombia which is our primary corridor there, so we were impacted there, that corridor has basically shut down, so we did lose that part of the business. We haven't that the business is going to come back the rest of this year, we expect that at some point the business will come back, but we've made an assumption that is not coming back to us at least this year.

Okay, and just last question from me. On the margin, just outside of C2C, what is the margin outlook, I guess in the C2B and the Business Solutions going forward? How should we think about the margins?

For C2B we were impacted this quarter by higher interchange costs, and we had consumers using more credit cards. Over the last 12 months, we've been expanding our payment options with our billers and with new bills that we bring on, and credit card is a key requirement there. Clearly, that's in an effort to drive revenue growth there, but we also saw higher costs. So that something that we're trying to address but --

I think it's also an industry trend, I understand.

We see just an industry shift towards more consumers using credit cards, so we're not going to be able to fix that overnight, but it is something that we do believe we have some solutions to handle and to address this year. And in terms of the B2B business, the profitability is about at the same level as last year's quarter. We had some higher compliance costs in the quarter that were above where we would have normally had the business.

I do believe that the business ill expand margins over the next few years in that business, because we need to get the revenue leverage. And we didn't get revenue growth in the quarter, but as we get revenue leverage, we will be able to expand margins in that business, as we can leverage the infrastructure that we have already put in place. So I would look for greater margins over the next few years in that business.

For the second half of this year, the margins should be pretty similar to what we saw in both segments to the second quarter, or should it be different?

I think on the payments business, our key issue that we're dealing with is the higher interchange costs, so I don't really have a view for you on that one. That's really higher than we had expected this year. So it's hard to say exactly when we'll get that solved, but we are addressing. On the B2B business I would look for improvements. I can't tell you whether it will be exactly in the second half, but I would look for improvements over the next 12 months in the margins there.

Okay, thanks so much.

Kartik Mehta, Northcoast Research.

Could you just talk a little bit about the digital business? I know you said that you're no longer looking for that $500 million lump bogey that you had last -- just talk about where you stand?

I think we are very pleased with our digital business. Last quarter we grew 31% of revenue, year-to-date about 38% even the transaction grow about 46%. So, we are very pleased with the momentum, we are also pleased with the customer acquisition. As you know that we put as a target on the customer acquisition, new customer acquisition brings revenue for the future, and the customer acquisition target is not accelerating, is not as steep as we thought in the last few months, but we are very optimistic, it's a very focused business.

The main growth in the future for Western Union will continue to come from our digital business. We are in 23 countries, dropping money to 200 countries and our expansion policy continues, our expansion strategy continues. So, only the new customer acquisition has not been at the acceleration rate that we thought, and that is why we come back from the $500 million in 2015, which was a target we set.

And Kartik, I would just add that the business continues to perform really well. We have great growth in the quarter, and pushing the target back for next year is not really about this year's performance. It's really the acceleration that we needed from here on out going into next year was our primary concern, and that's why we've pushed that number back beyond next year, but the business is performing really well and really improving on various metrics.

Does this change all your outlook for the profitability of the business? Because revenues are going out, or does it in fact maybe make the business more profitable quicker?

No, I would say, generally it does not change the outlook on the profitability of the business. For us, we've always believed and still continue to believe that as the business scales and gains leverage, we'll be able to grow the profitability of that business. We're spending a disproportionate amount in both marketing and technology in that business, but we won't need to keep spending at that level. Right now, the focus has been on spending, so that we can drive that revenue growth, and we're still getting really good revenue growth in that business.

Also, add on that, Kartik, as you recall, last time you asked the question about the funding methods from the send side with the credit card will be less, so interchange fees long-term will be less. There will be more account-based money transfer and more direct ACH. And also in Europe we have the direct support and all these things will help to bring the interchange fees down. And on the same side, we don't have the agent commissions, so long-term, I'm quite confident about the profitability of this business.

And just one must question, Raj, you've done a very good job bringing cash back and returning capital to shareholders. How long, or with the process you have in place, how long can you continue to bring cash back, and continue to return that to shareholders?

Yes, Kartik, we focus on that quite a bit, as you can imagine. We're pleased with the current program we have, which goes through the middle of next year. It's a $500 million program and we still have about $180 million left on that program. As we've said before, and this is still what I believe to be true, is that we do believe we have options to bring additional cash back over the next few years in some similar manner as we put our programs in place internally for our inter-company capital working program. So I believe we continue to bring cash back and keep returning cash, both in the form of dividends and stock buyback.

Thank you very much.

Tien-Tsin Huang, JPMorgan.

Raj, congrats on the title. I will ask on the Business Solutions side, I heard sales execution was an issue. How quick a fix can that be, and could you just elaborate on that, and just the very low FX volatility. We've heard that from a few firms now can you quantify the impact there, and how that might, what the sensitivity is in the future? (multiple speakers)

Thanks, Hikmet, let me start with the volatility question, first, and I'll give it to Hikmet on the sales part. On the volatility part of the business, the outlook -- first of all, our strategy for the business hasn't changed. We still believe this is going to be a good grower for Western Union and contribute well to our overall growth, but when you look at the volatility as low as it was, it was at a multi-year low, and continues to be at a low level, putting today upside for a moment.

Our customers begin to change their behavior, because our business is made up of hedging, foreign exchange, risk management, and then we also have other payment transactions that happen. So when you feel more comfortable with a transaction, or when you feel more comfortable with where currencies are, you're less likely to move off the sidelines and do a transaction now. Ultimately over the course of a year or over two years, you will actually do the transaction.

So it is really a short-term issue. Over the course of a year, two years we would not expect volatility to have that much of an impact of the business. It's really in a very short period of time when you have such a dramatic move in the volatility level, and we do see that impact.

Exactly, the volatility also impacts our sales execution, Tien-Tsin, because the people are not trading that easy, it's hard to sell that. Plus on that, during the integration process, we also changed some salespeople. We have a new sales organization that has also impacted.

Seeing that on the non-foreign exchange trading business on payments part, like universities and like [endure] payments, we've been executing pretty well there. some new sales, new payments, part of the cross-border will be as the transaction has been executed very well. But on the existing core business, we have given the lower foreign-exchange and other integration issues we had a little execution issue.

I see, I see. So if FX volatility stays low here, I guess we should still assume it to be muted growth for maybe for the balance of the year, but it sounds like you still are confident in double-digit longer term?

We feel confident in double-digit long-term. The volatility, it's hard to predict where that's going to be. Ultimately customers have to do transactions, but when we achieve a flat growth, it does take a little bit of time to come back from that.

Okay. Understood. One more for me, just on C2C, everything looked very much in line. Everything looks good there. Just the modest pricing outlook was comforting, just wanted to clarify. So Walmart to Walmart I guess hasn't been an issue, and also just thinking about some of the geopolitical things out there, Russia, you said was good, Israel, obviously some activity there, just curious if any of that could have been reflected in your guidance in any way? Thanks, that's all I had.

I think we are quite comfortable with our guidance on the revenue outlook, Tien-Tsin, in particular on the domestic money transfer. Revenues were up 1%, transactions were up 6%. The delta as you know, Tien-Tsin, is basically mix, because our lower-band transactions have been growing faster than the higher-band transactions.

I would say that are 46,000 locations all over the nation in the US, the customers are continuing to use the DMT business, so I am -- especially also very strong WesternUnion.com electronic DMT is growing very strong with mobile. The people do use their mobile phones to send transactions in the lower band, so I'm pleased on that part.

The other on Russia and Israel and other parts of the world, I would say generally, as we operate in 200 countries we definitely have everyday somewhere something. Over the last 14 years I've seen many things and being in 200 countries that helps a lot. We have diversified portfolio, none of our countries out of the US is bigger than 6% of our revenue and that diversification helps.

On Russia, I would say that our actions we put in place about 18 months ago, price promotions, especially to CIS countries and other countries helped a lot to turn around this business. And the delta between revenue and transactions became closer so that's also pretty well executed there.

All right, that's great. Glad to hear it, thank you.

Darrin Peller, Barclays.

Listen, I just want to touch again on pricing. It's good to hear you mentioned the pricing change should be about done for the year if I heard that currently? When we look at the revenue per transaction, it dropped sequentially, and I guess that's been the trend as we've seen, ever since you made the pricing drops. Should we now expect that to stabilize somewhat, going forward, given that, given your comments, so revenue per transaction going forward or other impacts to that we should keep in mind?

And on a higher level maybe if we think about pricing going forward now, you obviously made big change you had a successful impact of really showing elasticity to transaction growth. Going forward, can you give us some advice? I know we have talked about in the past quarters as to how we should think about pricing in 2015, or really just longer-term with where the business model looks like it's responding today?

Let me try to answer the longer term, because as you know, we don't give long-term guidance, 2015 guidance but let me understand directionally, maybe I can give you, Darren, an overview.

Sure, thanks.

First of all, you're right I think I'm not planning big pricing actions coming in 2014. I'm pretty comfortable with our projection, with our revenue projections. The impact of where you see here is there mainly mix, the bank mix and the corridor mix. We see very strong growth, for instance in DMT as I mentioned earlier to Tien-Tsin's question on the lower band on the DMT, on the mobile money transfer, and also, and some corridors are growing whichever the lower band, lower RPT faster than on a higher RPT quarter, that has been the case, and the mix has impacted part of it.

But long-term, I would say I think we're not going to change our strategy, we're going to look at corridor-by-corridor, we will always have competition there on the markets special corridor, specials, it's a very competitive market. But we believe that we are very well-positioned with our corridor-by-corridor pricing actions and we will continue to drive the revenue. We are focused on the revenue growth. We are focused on the operating profit growth, and that's going to continue.

Okay and I guess with respect to looking at the next couple of quarters in terms of modeling, from a revenue per transaction basis, maybe, Raj, is there any other moving parts we should keep in mind, maybe besides pure pricing?

Well, the things that you should just think about are three things that can impact RPT are certainly pricing. We're not planning on any major pricing, but there will be some normal level of pricing. There will be some mix impacts, and then you typically will have some currency impact as well, so those are the kinds of things that you should think about as you move forward.

All right. That's helpful. Just one follow-up, and then I'll turn it back to the queue, if you don't mind. On the gross margin side, that's been pretty stable for a while now, and we've heard some discussion in the industry around more competition for exclusivity around the agents. So I mean can you give us a little color? Are you seeing any signs of that in the sense of other of your competitors really trying to go after bringing more exclusivity up, and potentially trying to offer higher commissions to agents in the market, or is that really just -- are you able to really use your brand and hold that off from happening? Thanks.

Yes I think we see really a pressure from the competition. They are going with higher commissions, with higher signing bonuses and everything. But Darrin, you know this business. Most of our agents have been very loyal, especially since the top 40 agents have been loyal for us the last 17 years exclusively. They feel comfortable when they promote our brand with us, they feel comfortable. But, Darrin, case-by-case we do have competition there, but I feel comfortable that we will continue to have a our agent network, keeping our network exclusive, and continue to have that environment.

Right, that's great. Thanks.

Tim Willi, Wells Fargo.

Thanks, good afternoon. Two questions one on just a modeling question if I could, Raj. In terms of quarterly run rate for interest expense, which dropped down I think a couple million dollars this quarter, is that a new number we should use? I know it's probably not huge at the bottom line. I'm just trying to make sure I understand how that will look over the next several quarters and into next year?

Yes, on interest expense, specifically, we, as you know, we refinanced some debt in the first quarter of this year. We retired debt that was at 6.5% and we issued some floating-rate notes, as well of some other term debt, so it was at a much lower interest rate. So that's having a positive impact. If you look at the other income expense line in total, we have some offsets there for FX losses, related to Argentina. Look at those items in total but yes, the interest expense should be lower than it was on that specific line item.

Okay, great and other question I had is, I guess it was a handful of weeks ago, there were some stories about banks sort of throwing in the towel on money transfer, and I know from a direct perspective, that's obviously good news for you. I've been talking with other people, I've also heard people say that banks might stop supporting other money transfer companies, to just rid themselves of any exposure to the industry. I know you have talked a lot about compliance as a competitive advantage.

I mean, anything you would say around those comments, and those stories that gives you even more confidence? Are you seeing, as you look deeper into the competitive landscape, that's starting to happen or be talked about, where smaller guys are losing bank partnerships on top of banks just getting out of the business?

Tim, I want my money back, and compliance is an investment we believe that will pay back. 3.5% to 4% of our revenue, and we believe that it's a good investment. And it shows already some good signs that some banks or some other competitors are getting out of this business, and we do see some market share gain in some markets. Not overall, in one or two markets, we started to see that, and it helps our -- banks not serving us I don't know, I think it's about working together, don't forget 75% of our network globally are banks and financial institutions.

And they do see -- one of our biggest agents is La Banque Postale in France, and we've been together working more than 25 years worldwide with them, and they are very pleased with our programs, and we do share our compliance programs with them, and we think we have a good business model that they continue to work. On the competition I can't give a comment here, I don't know how their compliance programs are, but I think our existing agents are happy with us.

I guess where I was coming at, from, Hikmet, clearly you are good partners with banks. I think more along the lines that there lots of smaller players throughout this industry, as you know, that use banks or other banking services and partnerships around money flow. Do you think those second and third tier players in money transfer might find it harder to have -- to find banks that will work with them as a vendor and a money transmitter partner, not necessarily an agent, but just say, we want to rid our sales of compliance risk, reputational risk, we will not be banking money transfer companies as a partner?

The short answer is yes I do see that long term, and I saw it in some markets in the short answer is yes. They will have -- law enforcement will also ask them to implement all this program. I think, yes the answer is yes, absolutely.

Great. Thanks very much for the comments.

Sara Gubins, Bank of America Merrill Lynch.

I wanted to go back to the discussion about commissions. Commission expense has increased for the past few quarters, given agent renewals. And I'm wondering how we should think about that expense as a percent of revenue going forward, and whether or not there are any large agent renewals coming up in the next couple quarters?

Sara, this is Raj. In terms of renewals, generally we'll have -- the contracts are typically five years in maturity, so in any given year, you might have 20% renewals, but you're not always going to have the lumpy renewals every single year. So, from a retail commission standpoint, yes, we've had some pressure. Our opportunity, more broadly, is about reducing overall distribution costs as we grow and change the mix of our business. So, as we have more bank account type options, funding and sending to bank account, and as we grow our digital business, that overall distribution cost should go lower.

We also have the opportunity as we bring in view agents to bring them in at a lower overall commission rate. Now, that doesn't have an impact right away, but it does have an impact longer-term, so that's really the way we think about it. We have had success in managing commission, retail commission rates in the past, and we're obviously very focused on that, but at the same time we want to balance the larger renewals, that's something that we're not prepared to lose, so that's the way we think about, in terms of overall distribution costs.

Great and then separately just on the compliance initiative, can you give us an update on where you are in implementation? Thanks.

Yes we're making progress. We have -- we expect the spending in the compliance area will be a little bit higher in the second half of the year, versus the first half. As you know, we indicated last time that we plan to have about 2,000 people in the compliance organization by early next year, and we're deep into that hiring process, and so those costs will ramp up as we move into the second half. We're making progress on the overall implementation of the various programs, KYC programs, KYA programs and overall processes that we need to put in place. So we feel good about the progress we're making. We have a multi-year implementation plan, and we're well along that plan.

Thank you.

Ashwin Shirvaikar, Citigroup.

Raj, congratulations.

Thank you.

My first question on the digital side, when you say new customer acquisition rate is down, is that the question of you needing to maybe spend more, are certain corridors tapped out? Is it more competition from other sources? What's going on there?

No it's not down, Ashwin, I just want to correct that once again, I want to be very clear. It's not down, it's even growing very fast pace, but acceleration, which we were planning for future, it's not as steep as we wanted to have it. Once again, I just want to be very clear, we are very pleased with our acquisition, we are pleased with our revenues, we are pleased with our transaction numbers, and the new customers are coming, 80% of the customers are new to the network, so all our strategies are working. But we had good target and the targets was higher acceleration coming over the months, and this is not at that number as we would like to --

We're acquiring customers at an extremely fast pace. We're also -- we have a fast rate of activation of customers. We're converting more customers, improving retention, but as Hikmet mentioned, the acceleration that's required the rest of this year, we don't see that coming. At this stage, we're still working through that and are driving for the best result there, but that's why we have pushed that target back.

What I meant was, I mean, your growth rate has dropped from, what was it, 65% in 4Q to 55% to 46%, and that's what I meant. Is that law large numbers, what's going on? That's what I tried to drill down, but we can talk about that off-line. I guess back to the compliance, Raj, you did mention 3.5% to 4%, you will be at the lower end of that range this year? Or near?

Yes.

Okay. And, is that because you're being successful in implementing certain things, or is that a push out into next year, which is that also at a similar level? 3.5% to 4%?

Ashwin, it's really the result -- we're making progress as I mentioned on the key activities there, of putting actions and processes in place. The ramp-up of the hiring is really coming in the second half of the year so we see the spending ramping up in the second half of the year. There could be some spillage between years, between this year and next year, but overall we feel good about the range for next year, which is the 3.5% to 4%. Based on what we know today, that's still a good range for next year. Depending on the specific items that we complete this year, that will help us get more specific in terms of where that's going to be next year.

Ashwin if you allow me, one thing I will say, compliance was also mentioned in this call is we do see the impact of revenue impact on the higher band. All of the programs we implemented in our programs, as you know, we went out there, we said we're going to do that, compliance. We created a culture of compliance and we do see the impact, especially on the higher band, and it impacts our revenue growth. But long-term, I believe, back to Tim's question, that will be a competitive advantage because I believe that we are going to be ahead of the competition.

Yes, from a cost standpoint, obviously we're trying to do things as efficiently as we can. So initially the focus has been on hiring people, getting things completed, but then longer-term, we want to put technology in place. We want to get efficiencies out of the spending that we are doing.

Okay. And on SG&A I guess, pretty good controls this quarter and that was in spite of the World Cup spending? I don't know how material that was, or is that going to have an impact in either 2Q or 3Q, is there something that we should take into account, or is that not material?

No, we did not spend on World Cup. We have a small promotion for some loyal customers, agents, but we did not spend anything on World Cup. It was maybe on Euro Cup you are mentioning, and that's a multi-year program that's included in our marketing expenses and our normal expenses as forecasted, so it's nothing. So, I think the team did a good job. As you know we announced some cost saving initiatives, and we are executing against that and that has been reflected in Q2.

Okay. Can I sneak in a last question on the $100 million tax payment got pushed out? Any explanation on that?

Yes it's really a question of timing, Ashwin. We had planned on that period being in the fourth quarter, late in the fourth quarter this year. And there are just some outstanding items that are unrelated to that, that impact the timing of it, but we plan to make those payments starting next year, so it's really just a question of timing.

Thank you, guys.

James Schneider, Goldman Sachs.

Thanks for taking my question, this is SK Prasad Borra on behalf of James Schneider. Can you elaborate a bit more on your compliance costs especially as you head into 2015, how would that pan out?

Our plan right now, SK, is that we believe that the range for next year is still in the 3.5% to 4%. Again we don't have more detail behind that at this early stage, but based on the spending that we're doing this year the programs we're putting in place, we believe that the range at this stage is 3.5% to 4%.

Okay. And you mentioned that there is going to be a sequential increase in the compliance costs heading into second half is it just more headcount related, or is investments heavily geared to technology as well?

It's all of the above so it's headcount related, it's other programs, it's technology, the spending is split roughly half for people and the other half is between technology and outside services, so it's a mix all those.

Okay, thank you.

Operator, we're going to take one more question.

David Togut, Evercore.

David this is Rayna Kumar for David Togut. Could you please discuss your plans for an instant ACH cross-border money transfer product? Maybe tell us a little more about the timing and pricing?

Yes, absolutely. Rayna, you're talking about really, primarily the US. When we look at our business, instant ACH is one of the many things that we're introducing or going to introduce. We're doing a lot of great things in the business, and I don't want to lose sight of that.

We're global in scope, we have many products and services and features that we're enhancing on, to improve the overall customer experience. We're adding many more customers to the franchise, even in our current business, and we're also expanding our distribution some more bank account funding and payout options. Instant ACH is going to help, it's not the only thing that's going to drive our business, so our plan is to introduce that later this year. We're testing that, as we speak, with a couple thousand people. But we will introduce it more formally and more broadly to other US customers later this year.

It's only for the US corridor, and it's a part of our business. It's also how much risk you want to take. We are quite confident and quite happy in our growth rates, 31% revenue, less risk. That's a good growth and good helps for the margin. But, we do also, huge growth comes from Europe outbound on dotcom, and we do have direct data capabilities, support capabilities, which helps us to drop money immediately.

How should we think about pricing for this product, and what specific corridors from the US will it be initially introduced to?

Yes, we do already have ACH.

Yes we have ACH right now, which is a four day. Instant ACH will be just an expansion of that. Our ultimate goal is to have it available for many of the corridors in which we operate.

You can drop money today's ACH, you can drop money to 200 countries, no problem. A question is how do you fund that? So we serve despite the competition to 200 countries already with ACH. The question is when we do the instant ACH how much risk you take. Currently we are quite satisfied with our customer response, so I think we are satisfied with our growth rates.

Thank you.

Thanks, everyone for joining us today. I want to wish you a good afternoon and we'll talk to you next time.

Thank you.

Thank you.

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