西聯匯款 (WU) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to the Western Union Fourth Quarter 2018 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, Laura. On today's call, we will discuss the company's 2018 fourth quarter results and the 2019 financial outlook, 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 in Western Union's filings with the Securities and Exchange Commission including the 2017 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've 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 this call are the property of the Western Union Company and subject to copyright protection.

Other than the replay noted in our press release, Western Union has not 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, our business continues to produce stable results as our customers remain resilient despite slowing global economic growth in parts of the world. Digital remains strong with westernunion.com transactions accelerating to 25% growth in the quarter, which translated into 22% constant currency revenue increase. In addition to ongoing strength in our U.S. outbound digital business, we are also making great progress in increasing westernunion.com penetration and growth in key European markets including France, U.K. and Germany. For our entire money transfer business, revenues increased 1% in constant currency. Transactions, however, increased 4% in the fourth quarter and cross-border principal volume grew 8% in constant currency terms. So underlying metrics are sound. Business Solutions showed improvement with revenues increasing 5% constant currency, led by strong growth in Europe. We again delivered good performance in the payments area of B2B including the education vertical. This quarter, however, we also had good growth in foreign exchange services aided by customer hedging related to increased foreign exchange volatility.

The bill payments businesses posted mixed results, with the Argentina results in U.S. dollar terms continuing to be heavily impacted by negative currency translation. From a profit perspective, margins were solid at 19.3% for the quarter and 20.1% for the year as effective cost management and our WU Way lean programs contributed to stability. Operating cash flow for the year came in as projected as we generated over $800 million, and we returned over $740 million to shareholders in 2018 through dividends and share repurchases.

We are also very pleased to announce today a 5% increase in our quarterly dividend, raising it to $0.20 per share or $0.80 on an annualized basis.

As we begin 2019, we remain focused on driving digital expansion and growth, offering our cross-border platform to new payments areas and generating additional operating efficiencies. We made good progress on this initiative in 2018.

I mentioned the strong results we experienced with westernunion.com, which exceeded $0.5 billion in revenue last year. Our digital expansion efforts to drive future growth also continued to ramp up as we launched approximately 20 new westernunion.com or mobile app markets over the last year, particularly in Asia, Latin America and the Middle East. Consumers can now access our online or mobile services to initiate transactions in more than 60 countries plus many territories and our digital penetration covers markets that represent approximately 75% of global remittance market principal. We believe this will give us additional future revenue growth opportunities for our digital business.

In addition, we embedded digital money transfer services into more third-party platforms, such as Safaricom in Kenya and added large principal transfer products for our westernunion.com services in the U.K.

We also continued to expand our bank account payout services as we now have the capability to send to nearly 100 countries and territories reaching billions of accounts, and we have seen strong growth in account payout transactions. The combination of our extensive retail footprint and our growing digital presence and account payout network creates a very strong proposition for consumers, providing them the ability to send and receive in whichever method and currency they prefer around the world.

Looking at our progress with new cross-border payment opportunities. In October, we announced our collaboration with Amazon, in which we utilize our global platform to process international e-commerce payments. Under this agreement, Amazon customers in various markets will have a new way to pay in person at our retail agent locations. Over the last few months, we have launched pilots for this service in 10 markets, mainly in Asia and South America. Coverage in this market is now being increased, and we are working with Amazon on the expansion road map for additional countries in the future.

Turning to our operational efficiency accomplishments, WU Way continued to help us run the company better. We implemented more than 40 lean deployments last year, trained more than 6,000 employees on lean processes and achieved approximately $70 million in run rate savings from WU Way-driven efficiency programs. These savings helped fund investment in growth initiative technologies and core proficiencies, such as GDPR.

In 2019, we will continue to push forward these strategies. On the macro level, there's uncertainty on economic growth in many parts of the world as well as foreign exchange headwinds and geopolitical concerns, but we expect stable financial performance in 2019.

Our business is very diverse with 20,000 corridors and no one country outside the U.S. representing more than 7% of our revenues. Historically, our customers have been resilient even in challenging economic times. Our transaction and principal transfer helped exiting 2018, and we expect that to continue. We believe the pricing environment will remain stable and do not expect major pricing changes in 2019.

Overall, our 2019 outlook calls for a low single-digit constant currency revenue growth and operating margin of approximately 20% and continued strong cash flow generation and return of funds to shareholders.

Raj will give you more information on the 2019 outlook in a few minutes. And right now I would like to turn the call over to him to provide more details on the fourth quarter results.

Thank you, Hikmet. As I review 2018 financial results, I will focus primarily on the fourth quarter. Similar information for the full year can be found in our press release and the attached financial schedules.

Fourth quarter revenues of $1.4 billion, declined 3% or increased 2% on a constant currency basis compared to the prior year period. Currency translation net of the impact from hedges reduced fourth quarter revenues by approximately $69 million compared to the prior year, primarily due to continued declines in the Argentine peso. The decline in the peso negatively impacted total revenue by 4 percentage points while the effects of inflation on our Argentina businesses is estimated to have positively impacted both reported and constant currency revenue by approximately 2 percentage points.

In the Consumer-to-Consumer segment, which represented 80% of company revenues in the quarter, revenues declined 1% or increased 1% constant currency while transactions grew 4%. Total C2C cross-border principal increased 5% or 8% on a constant currency basis, while principal per transaction was flat or increased 3% constant currency. The spread between C2C transaction and revenue growth in the quarter was 5% with a negative 2% impact from currency. Mix had a negative impact of approximately 2 percentage points in the quarter while pricing had a negative impact of 1% compared to the prior year period. The 1% pricing impact primarily reflects actions taken in the Middle East earlier in the year. Excluding the Middle East, the net pricing change for the rest of the world was positive both for the quarter and the full year.

Turning to the regional results. North America revenue was flat on both reported and constant currency basis while transactions grew 2%. The U.S. to Mexico corridor delivered strong revenue growth in the quarter, but this was offset by continued declines in the U.S. domestic money transfer business. In the Europe and CIS region, revenue increased 1% or 2% on a constant currency basis, led by France and Spain, while transactions in the region increased 8%. Revenue in the Middle East, Africa and South Asia region declined 7% on a reported basis or 6% constant currency, while transaction growth improved to 3% as the previously implemented price reductions are delivering good results in driving volume. The Latin America and Caribbean regions continued to deliver strong constant currency revenue growth driven by Argentina, Ecuador, Peru and Brazil. Revenue in region was flat in the quarter or increased 16% constant currency, while transactions grew 11%. In the APAC region, revenue declined 9% or 8% constant currency and transactions were down 4% with Australia, China and New Zealand contributing to the decline.

Westernunion.com continued to deliver strong growth as revenue grew 21% or 22% constant currency on transaction growth of 25%. Westernunion.com represented 12% of total C2C revenue in the quarter and for the full year.

Business Solutions revenues increased 3% or 5% on a constant currency basis and represented 7% of company revenues in the quarter. Other revenues, which consist primarily of our bill payments businesses, decreased 11% in the quarter or increased 10% on a constant currency basis and represented 13% of total company revenues.

The Pago Facil walk-in business in Argentina continued to grow transactions and local currency revenue aided by inflation, but declined in U.S. dollar terms while our Speedpay U.S. electronic bill payments revenue also declined in the quarter.

The depreciation of the Argentine peso negatively impacted other reported revenue by 21 percentage points in the quarter, while Argentina inflation is estimated to have positively impacted other reported and constant currency revenues by approximately 11 percentage points.

Turning to the margins and profitability. Our consolidated GAAP results reflect some significant special items, primarily in the prior year, so I am providing the adjusted metric comparisons to better reflect the fundamentals of the business. The adjusted metrics in the current quarter exclude the impact of tax expense related to changes for the accounting of the U.S. Tax Act. I refer you to our press release tables for a detailed listing of the adjusted item amounts for the prior year quarter and full year.

The consolidated operating margin in the fourth quarter was 19.3%, up from 18% in the prior year on an adjusted basis. The adjusted operating margin expansion was driven by lower bad debt, marketing and incentive compensation expenses, which are partially offset by higher other corporate expenses and technology spending. Foreign exchange hedges provided a benefit of $4 million in the current quarter compared to a negative impact of $7 million in the prior year period. We achieved approximately $10 million of incremental savings from WU Way initiatives in the fourth quarter, which gave us approximately $45 million of incremental savings for the full year. On an absolute basis, we achieved approximately $70 million of savings from WU Way for the year.

EBITDA margin was 24.2% in the quarter, which compared to 22.5% in the prior year period on an adjusted basis.

The GAAP effective tax rate was 9.8% in the fourth quarter. On an adjusted basis, the tax rate was 6.3% compared to 14.3% in the prior year period. The decrease in the adjusted tax rate was primarily due to discrete items in the current year period.

As we previously stated, certain of the impacts related to the Tax Act enacted in December of 2017 were provisionally estimated and additional effects were reported during each quarter in 2018. In the fourth quarter, changes in our estimates related to the Tax Act resulted in an $8 million due to tax expense. The accounting for the Tax Act was completed during the fourth quarter so there will not be any additional adjustments going forward.

Adjusted earnings per share in the quarter was $0.49, which compared to $0.41 in the prior year period. The increase in adjusted earnings per share was primarily due to the increased operating profit margin, a lower effective tax rate and fewer shares outstanding, partially offset by lower reported revenues. The C2C margin was 23.3%, which compared to 21.5% in the prior year period. The margin increase was driven by lower bad debt, marketing and incentive compensation expenses, which were partially offset by higher technology spending.

Business Solutions operating margin was 5.4% in the quarter compared to negative 3.2% in the prior year period. The increase in operating margin was primarily due to high technology and other operating expenses in the fourth quarter of last year. Business Solutions EBITDA margin was 16.2%, which compared to 8.1% in the prior year period. Operating margin for the businesses included in other was 1.8% in the quarter, which compared to 7.9% in the prior year period. The year-over-year margin decline was primarily due to lower revenue and higher corporate expenses as certain corporate expenses including spending for M&A and other strategic actions -- activities are recorded within other.

Turning to our cash flow and balance sheet. Cash flow from operating activities was $821 million for the full year, which includes the negative impact of approximately $200 million related to payments from special items. Capital expenditures in the quarter were approximately $91 million. At the end of the quarter, we had cash of $973 million and debt of $3.4 billion. We returned $133 million to shareholders in the quarter including $84 million in dividends and $49 million of share repurchases, which represented approximately 3 million shares. The outstanding share count at quarter-end was 441 million shares, and we have $544 million remaining under our share repurchase authorization which expires in December of this year.

Turning to our outlook. We expect stable financial performance in 2019 despite a slowing global economic environment. Similar to 2018, we expect a low single-digit constant currency revenue increase excluding any benefit related to Argentina inflation. Due to the strength of the dollar against the Argentine peso and major European currencies, we expect reported revenue growth to be in a range of a low single-digit decrease to a low single-digit increase.

Operating profit margin is expected to be approximately 20% as we continue to focus on cost efficiencies and lean management implementations to offset investments and some negative impact from foreign exchange. We expect an effective tax rate of approximately 17% to 18% in 2019 including negative incremental impact from the U.S. Tax Act's BEAT provision. We have identified and are in the process of implementing structural actions to mitigate the adverse impact of BEAT for the future. The 2019 rate outlook includes partial benefits from our mitigation efforts as they are rolled out during the year. We currently expect the effective tax rate in 2020 to be lower, in the mid-teens level, reflecting the full effect of mitigation.

Due to the increase in tax rate this year, our 2019 outlook anticipates full year earnings per share to be in a range of $1.83 to $1.95, while cash flow from operating activities is expected to be approximately $1 billion.

As we have mentioned previously, we are currently considering various strategic alternatives for certain of our business units but do not have anything to announce at this time, and there is no assurance any transaction will occur. If we were to complete a divestiture during the year, our outlook would need to be adjusted to reflect the related revenues and profits that would be removed as well as the impact of any user proceeds.

So to summarize, we delivered our full year adjusted financial outlook in 2018 and made good progress on key strategic initiatives. We continue to generate solid cash flow and return significant capital to shareholders through dividends and repurchases. In 2019, we expect stable business, solid margins and continued strong allocation to shareholders.

Operator, we are now ready to take questions.

(Operator Instructions) And our first question will come from Tien-Tsin Huang of JPMorgan.

Just on -- I'll start on the dot-com business, you mentioned acceleration. You mentioned new countries. I'm curious if you have an outlook for 2019. And what is it driven by? Is it again more country expansion? Or are you just getting more penetration within your existing countries?

Tien-Tsin, I think both will continue to do that because our U.S. outbound digital business is very strong. And these are done by our exist -- not by existing customers, but these are -- they've been here for a longer time. And as you know, we are also in the European Union countries longer time with our westernunion.com transactions. So that's going to continue, but we are also very excited finding new customer segments in our new countries. And once you launch a country, it takes up time with the marketing activities, and you'll win customers, but the growth rates are very promising. We came in Q4 also with a 25% transaction growth, which is also very encouraging. And we are just starting in Middle East and Asia with our expansion. I think that's really encouraging numbers. So that gives us additional channels, and still, these customers are new to us. Additional customers doesn't cannibalize our existing business.

Okay. And just for my follow-up quickly. Just I want to ask on WU Way. I heard the $70 million in savings, but how -- where are you now in terms of potentially seeing better revenue production from WU Way? Where are the investments going? Maybe just a quick update there.

Yes. I think we are still very excited about the WU Way initiative. So I think there's still room from efficiency side, also from growth opportunities, how we implement that. Our focus is definitely on digital growth, and we do -- when we are launching a new country, we do launch it with WU Way initiatives. The Amazon pay -- how we are -- also our platform to Amazon, the collaboration with Amazon was done all via WU Way. That has been launched in 10 countries now, and we are just starting to promote that in the 10 countries. And from the efficiency side, I still believe there is some room, and we gave our guidance about 20% margin for 2019. And while we do this efficiency program, we do invest also in the growth. That's still going to continue to happen, and we are -- WU Way is definitely the way we operate.

And Tien-Tsin, on the $70 million, that is our full run rate. We don't plan to call out any further savings there, but we will keep driving for lean and operating efficiencies and keep reinvesting in the business.

The next question will come from Bryan Keane of Deutsche Bank.

I wanted to ask about the regions. In the North America region, I see transactions accelerated in the quarter at least year-over-year from 1% to 2%. But constant currency revenues went down a couple of points. Then EU and CIS, similar. Transactions remain the same at about 8%, but the constant currency revenues dropped a couple of points. Just curious what's causing that. And is that the mix that you called out there?

Yes. Bryan, this is Raj. In North America, what you're seeing on the revenue side is a grow-over from higher foreign exchange spreads we had in the previous year fourth quarter and some of those spreads were reversed during the course of the year. But transaction growth, as you mentioned, continued to accelerate. So that's good. Our U.S. outbound business actually did quite well. We had 7% transaction growth there, which has been accelerating during the course of the year. But some of the pricing and mix impacts had the impact that you're referring to. And then in Europe and CIS, the dot-com business overall grew very well during the course of last year and in the fourth quarter. And also our DMT business in France. So those had some mixed impacts. The slowdown in the fourth quarter is again related to higher FX spreads that we had earlier in the year in those markets that we reversed part of those. So transaction trends have been quite healthy and just some of the mix and pricing impacts are having the revenue impact that you're seeing there.

Okay. Got it. Got it. And then Hikmet, just thinking about the new opportunities that you're talking about for cross-border. Is there a way to quantify that in terms of a revenue opportunity those could produce?

We don't give that revenue guidance there, but I've believe there's a new opportunity for additional customers, like we did with westernunion.com. These customers like offering our platforms to third-party, like Safaricom or Amazon Pay are really new customers that we didn't offer that. And that's the only way they can do transactions because if you are in Brazil, a local currency owner, if it is in the form of card or cash, you can't do international transactions because you can't use your credit card -- international credit card. There's no international credit card. But if people want to buy online, want to buy global and pay local, and that's the -- really our platform, which we developed over years, enables that, technology-wise, compliance-wise and settlement-wise, do that. So we are very excited about that. And Amazon is definitely a partner, but there are other also opportunities to expand our platform to new payment capabilities. Paying local, buying global, it's definitely something we are excited about.

And the next question comes from Darrin Peller of Wolfe Research.

Just when you go into the mix impact, on the C2C segment, that drove the 2 points of difference between transaction growth and revenue growth, and I think you mentioned 1 point pricing. Can you just explain a little more around the mix you're talking about? And then when we think of '19 outlook, just if that's going to persist, that kind of a mix impact is going to persist?

Yes. Darrin, the mix is something that we don't really try to forecast. It's difficult to forecast. It really is related to where the growth is coming from. It's mostly geographic mix, around the world. So what it means ultimately is that we're getting faster growth and lower revenue per transaction corridors and that's what you're seeing coming through. It varies a little bit. This time, it was minus 2. And it also has to do with product mix, but mostly, it's a geographic mix issue that's showing up there. So it's not something that we try to forecast overall, but our revenue outlook envisions whatever might happen there.

Okay. I guess just a higher-level question then. We're seeing very strong growth of the dot-com business continue and to your point, accelerate. And I guess it just feels like at some point there should be an inflection, where it's big enough to more than offset some of the headwinds that you've seen, whether it's on mix or it's pricing and potentially something that starts to align more with the volume growth on cross-border or even the transaction growth on cross-border you're seeing, which is higher than revenue. When did -- can you give us a little idea as to when you think that could really start to show and materialize so that the digital side is big enough for you that it offsets other areas?

Well, digital -- our wu.com business is, obviously, much larger than it was a few years ago. It was over $500 million last year, but it's still only 12% of consumer revenue. So it's going to -- I don't know when that inflection point is. Clearly, digital, we still see very strong growth opportunities. Retail, we think, will be a flattish-type grower, maybe low-single digit. But we have had negative growth in some of our other areas, which is really what's dragging it down. We'll accelerate it, which is good. But our bill payments businesses were negative, particularly Speedpay, and so we need to get better overall performance there. If we could get to mid-single-digit type of growth, and that gives us good flexibility in what we can do overall. So not just digital. Digital certainly has to be there, but other components of our business also have to perform a little bit better than they have been.

All right. Is there anything -- I'm just going to leave it at this, but anything more you think that's possible to do from a restructuring standpoint beyond this -- potentially the B2B business we've talked about? Maybe it's the PE that sort of domestic money transfer? Anything else that can be done around restructuring that could help the overall growth profile in a more near-term manner?

Yes. I think, yes. I mean, we are looking constantly about the structural opportunities, growth areas and on the efficiency margin part. Obviously, in the retail money transfer business, as Raj discussed earlier, I think it's going to -- we have a good market there and it's going to be flattish, but the growth will come from digital environment. And it's already 12% of our revenue, it's the largest by far in the digital money transfer environment. And the countries we rolled out, they will come also and adding additional customers. So I think if you really keep the customers on the retail side and add customers from the digital side, our C2C business is quite solid and will drive the growth. I think we have to really look at our payments part, payments business. And on the payments part, the volatility in the last 3 months helped us on the B2B business but like as student pays, the payment in the B2B business is growing very well, and we are building on that. We have to keep some -- the DMT and the domestic business, and the Speedpay domestic business has been challenged, right? And then that has an overall impact to our company's performance, and the domestic business has been something we are focused now to turn around.

And the next question comes from Jim Schneider of Goldman Sachs.

The Latin American region is one that continues to put up very good revenue growth for you. I think you talked about the U.S. outbound and Mexico in particular. Can you may be kind of call out, a, any other countries or geographies that really contributed to that? What initiatives you have going into other countries? And then, b, to what extent that was helped by the addition of wu.com in those corridors?

This is Raj. The Latin America revenue growth is really the outbound growth from Latin America, if that's what you're referring to. And that was driven, as we mentioned, by Argentina, Ecuador, Peru, Brazil. So we've had quite healthy growth in some of those other markets, even though Argentina was impacted on a reported basis by the currency devaluation. The other markets have been doing quite well in that region. So the conditions are quite good. It's a relatively small piece of our overall revenues. LACA is about 9% of total C2C revenues. So we've seen continued good performance there at least on a constant currency basis. But -- and then in terms of dot-com, it's certainly a focus that we have in terms of expanding dot-com presence in Latin America. So that's really what we're focused on.

I think, Jim, generally, C2C business has been stable. Especially, at the cross-border, C2C business is really stable. Latin America, as Raj said, is a smaller part of our business, but we had also strong growth in -- despite -- besides U.S. outbound, also Europe. U.K., Germany and France have been growing very well but we also see now good transaction growth in the Middle East. As you recall, Jim, last year, we implemented some promotions there. Now they are showing good returns. I think that's also a good sign and show how stable our business is. So digital growth is definitely driving the top line, but there are also very stable numbers in the retail money transfer business.

That's helpful. And then maybe as a follow-up. Some of your payments peers have kind of noted a notable slowdown in cross-border travel. And I understand most of your trends are driven by migration, which are longer-term things. Are you seeing anything in the business as you start Q1 that gives you a little bit of pause in terms of a potential macro slowdown? And to what extent is that baked into your guidance?

Well, macro environment has definitely been challenging. But as you look at our business, we are in 200 countries. We have 20,000 corridors. So we clearly are a portfolio, particularly a play in our case, right? So we do actually don't see big changes on economical environment in the retail money transfer business. On the online -- on our dot-com business, even strong growth continued to happen in strong growth. And Q4 exit was very good, especially, as I mentioned earlier, in transactions and in principal amount, which was really constant currency principal that was about 8% growth in Q4. And so I think the environment is stable. However, there is some concerns and global concerns on the economical environment.

And next we have a question from James Faucette of Morgan Stanley.

I wanted to call up on wu.com. And as you're expanding into new markets and corridors, what are you having to do from a pricing perspective to encourage and attract volumes? And then how should we think about the pricing opportunity set over time? And that's my first question.

Jim, this is Raj Agrawal. When we expand to new markets, we really look at the digital business as being new incremental revenues to us. So we go into any new market making sure that we price competitively with whatever else might be available in terms of that similar service. Now we have a very unique service offering because the majority of our revenues pay out at retail locations even though they may be digitally initiated. So we do try to price competitively, and it doesn't really carry the legacy of the retail business. So it's a new incremental business to us. We price it very competitively. We try to get the business and it's really about marketing and acquiring new customers more than anything else in terms -- it's not really driven by the pricing. We're going to make that a competitive offering, and then we just need to tell consumers about the offering.

Got it. And I guess on the 2019 outlook, you guided to roughly 20% margins. In 2018, during different parts of the year, you were a bit above this level. So can you talk to what would be the puts and takes that would allow you maybe to get back above 20% potentially in 2019?

Yes. We're comfortable with our 20% margins. It could be a little bit above, a little bit below. It just depends on how things play out. If you look at the pieces, we are investing in the growth opportunities like digital, like the relationship we have with Amazon. We're also investing back in regulatory items like privacy and other areas. And then when we are in a low growth environment, like we are, and we have negative FX impacts, it's more challenging to get leverage on our cost structure. So we do need to get better revenue growth overall to be able to drive better margins, which is our objective. But for this year, we're comfortable with the 20% level.

The next question comes from Jason Kupferberg of Bank of America Merrill Lynch.

Just wanted to start on the C2C. I know the constant currency revenue growth there, I think, came in at 1%, a little bit below recent trend. And the comp is kind of tough in Q1, and so I just wanted to get a sense of how we should think about the near-term trajectory on C2C in constant currency terms.

Yes. I mean we don't give an outlook on specific business units, Jason. But if you just think about the pieces, retail business is likely to be a flattish type grower. And digital, we continue to see good growth opportunities there and it's going to become a bigger and bigger piece. I think the consumer business overall will be solid and stable. And it really is about getting good growth in the other areas, but the consumer business should be relatively stable. The underlying transaction trends have been good. So we've had some variation due to pricing and mix factors last year and in the fourth quarter, but overall, the underlying metrics have been solid.

And then just in terms of sensitivity in 2019 guidance, I mean if we just think about some of the macro uncertainties out there, hypothetically, if there was to be, let's say, a hard Brexit, is that -- would that be a material issue for Western Union? Has there been any risk adjustment in the 2019 forecast for that scenario? I mean, it just seems like it's a decent size remittance market overall. So I wanted to get your perspective.

Yes. From an operational standpoint, we're very well positioned. We're ready to operate under a number of different scenarios. And you can't predict exactly what the outcome will be. Economically, I don't know exactly what to expect. But I would say, overall, for Europe, we've assumed slightly softer environment. But from an operational standpoint, we're ready to go regardless of what scenario plays out.

Again, we believe that we are prepared. We've been working on that. I think operational and customer-wise, we don't see any issues in here. And just from the risk side, I mean as I mentioned earlier, none of our countries are bigger than 7% of our revenue outside the U.S. So we operate in 20,000 corridors, and I believe that we are very well positioned to -- despite the economical challenges globally, we are well positioned to respond, and we believe we're going to have a stable 2019.

The next question comes from Ashwin Shirvaikar of Citi.

I guess my question is on operating margin. I thought you mentioned lower bad debt. Is this some action you've taken, maybe big data analytics type of stuff? What's leading to this? Can you comment?

No. I would say, Ashwin, that that's really a one-off item. We have had some special items, I would say, that helped us on the bad debt side. But overall, from a bad debt standpoint, we do a pretty good job of managing. Some of it is certainly using data analytics. But generally, we manage the risk in our business quite well. And most of our business is on a [digi-trans] model. So there's not really too much that we have to deal with there. So I think we're in good shape.

I'd just say the bad debt was primarily high debt that was expensed in the prior year quarter, so the comparisons were just favorable.

Got it. Got it. And then the other question with regards to the cross-border principal growth, I just kind of wanted to delve a little deeper into that. What's driving that? Is it sustainable? Is it specific deals, channels? Is it any -- is it reflective of any immigration-related concerns, people send back money to their home countries? Anything detail on that?

I think from general overall business, we had a good U.S. to Mexico business doing well. I would say that our principal and now the Middle East turning around, that's why I mentioned earlier, the transactions growth has been good. So it impacts the principal amount also. And European business has been stable also. As you know, we had some issues in the U.S. domestic money transfer business but that's not the cross-border principal. And generally, the cross-border principal has been in a good environment, and the market growth has been healthy. I think the people are using cross-border transfer, and thank God, they're using Western Union and are going to continue to use Western Union.

It sounds like deal mix then?

And our next question is from Jennifer Dugan of SunTrust.

I'm on for Andrew Jeffrey. Looking at the B2B and other revenue growth, both appeared very healthy but the margins in both were a bit weaker. Can you just go into some of the dynamics there?

Yes. In the B2B business -- you're looking at the third quarter comparison and margins first part of the fourth quarter?

Yes.

Yes. In the B2B business, we just benefited in the third quarter from the timing of expenses, so that was really just related to timing. I would say the overall margins for the full year were around 6% for the B2B business or EBITDA margins close to 17%, which is more representative of the overall margins there. And then in the other revenues or other area of our business, we did have lower overall revenues in that business but we also had other corporate expenses because certain corporate expenses that are for strategy or M&A costs fall into the other part of our business, we just -- that's where we record them. So that impacted the margins as well.

Okay. Great. And then one other thing I wanted to talk a little bit more. I think you've mentioned some of the tech investments around digital and some of these opportunities with Amazon and in addition to some of the regulatory expenses. But looking more at the tech investments, what is the time line for some of these investments, time line to getting them done and the return time line?

Well, the digital investments will be ongoing. Our strategy there is really to drive growth and expansion all over the world. So we're going to -- it's a continual effort to improve the features and functionality in our platforms. We're launching new sites all the time. And so that investment will continue for the digital expansion. We're also leveraging our platform for new opportunities like the Amazon relationship. So there's some spending that goes with that. So we continue to invest in the technology area, and that's really to drive long-term growth and expansion. And so that's really our strategy.

I think from -- sorry, I think from -- also, if you're already in a country like U.S. or Europe with the digital, which we invested already, it's really winning new customers, expanding in the marketing wise, really making promotions on the digital. And if you launch in a new country, then we'll do investments. And as Raj mentioned earlier, we want to be in 200 countries like we are in our retail money transfer business. We want to be also with our digital business in 200 countries. And we are expanding. That's one of our biggest competitive advantages, connecting 200 countries with 200 countries and using our payout network and retailers with 560,000 locations, but also build them as it comes. We can drop money really momentarily -- very fast in accounts directly in more than 100 countries. So that investment is going, and you could see in the numbers, the growth numbers are coming from digital investments.

The next question comes from Ramsey El-Assal of Barclays.

This is Ben Budish on for Ramsey. I just had a question on the U.S. outbound. You mentioned that it had grown quite nicely and then accelerated over the course of the year. And I guess I'm just sort of wondering what's going right? Is it more digital revenues kind of taking more -- becoming a bigger piece of the whole or taking share? Or can you kind of parse that out a little bit for us?

Yes. It's a number of things that are going well there. There's some pricing and mix impacting the revenues overall, but the transaction growth has been accelerating. Dot-com, U.S. outbound and our digital business have been growing very strong. And U.S. to Mexico was also very strong and that was being offset by some other things, but those 2 areas have been very strong. And our price positioning for U.S. outbound is very competitive to other offerings. And so I'd say it's a combination of those 2 things. And cross-border wise, U.S. outbound to other countries has been doing quite well for us, and there's some impacts on revenue from mix and pricing. But otherwise, it's -- the transaction trends and the principal trends have been healthy.

Okay. Great. And then just on the tax rate, you had mentioned that you expect it to come down a little bit in 2020. Can you give us any sense of like the timing over the course of 2019? Will there be some -- like a step-down quarter by quarter? Or it will be a little more unpredictable? Any color you can give there would be great.

Yes. We're very pleased with the solution that we're putting in place for the BEAT issue that came about as part of U.S. tax reform. It was really causing unwarranted double or triple taxation on a portion of our U.S. outbound business. So we are implementing a solution that's going to be implemented during the course of this year. I don't have a quarterly tax rate to give you, but certainly it's going to be implemented during the course of this year. And next year, we see our tax rate falling back down to the mid-teens level for really the foreseeable future given the current tax environment that we're in. So we're very pleased with that outcome.

And the next question comes from Vasundhara Govil of KBW.

I guess my first question was on the free cash flow guidance. I guess you guys are guiding to slightly better free cash flow even though revenue there is expected to be flattish and margins stable. So what's driving that better conversion?

Well, our operating cash flow outlook is for about $1 billion in 2019. And last year, in 2018, we had $200 million of special type items that we paid for, and that's why the operating cash flow last year was just over $800 million. So that's the primary difference overall in the operating cash flow.

Got it. And then in terms of the EPS outlook, what are you guys including in terms of contribution from share buybacks? And more broadly, could you talk a little bit about your appetite for M&A and how it fits into your capital allocation priorities? Are you looking at deals actively? And if so, what type of targets are -- would you be interested in?

Yes. We don't give a specific amount for share buyback or the impact to EPS. But if you look at the last few years, we've been buying between $400 million and $500 million of stock each year. We've basically been returning 100% of our free cash flow back to shareholders through both buybacks and dividends. And so I expect that we're going to be active again in 2019. And then in terms of M&A strategy, we're always looking for the right kind of acquisition that fits within our cross-border payment strategy. We would love to do right kind of digital type of acquisition, but it has to be at the right price. And it has to really -- whatever we do, it has to advance the ball for us. We have a great platform. We have great capabilities. So whatever we do has to really give us some additional capabilities that fit strategically within our strategy.

And next we have a question from Tim Willi of Wells Fargo.

I had a couple of questions on digital and one on Amazon. But in terms of thinking about digital and the impact around the margin discussion, if I do the math correctly, right now, it appears that the digital channel is effectively driving all of the revenue growth in C2C. Would that be correct? If we just think about its contribution and its revenue growth rate, the digital is sort of the sole growing channel for C2C while sort of the traditional business, you could sort of call it flattish to slightly down. Is that correct, first of all?

Yes. Digital is going to be the key growth driver, not only for us, but we believe in the market long term.

Okay. So if we think about it like at a 12%, I know that there's always lots of moving pieces around margins and scale and investing and expanding that franchise. But is there a way to think of it like just conceptually that by the time digital is at a 20% or 25% of revenue for that C2C, is that -- is there a way to think about the inflection point about letting the scale and the growth of digital and that, what should be inherently pretty attractive margin, start to show through? I know you've always said it's profitable. It's just not at the same sort of levels as the rest of the business. But I think you've always sort of said at some point it should be a higher-margin business. Is there any update on that thought process over the next several years?

Yes. I mean, Tim, the -- it's a great question. We're in heavy-investment mode in that business. If you separate the marketing and technology, which is a much heavier concentration than the rest of our business, we're spending in marketing and technology for the long-term growth of this business. And so today, the margins are lower than the rest of the company and that continues to be the goal until we get broad expansion all around the world with digital. But when you look at the contribution margin on a percentage basis, and I think we've mentioned this before, the incremental margins are actually similar in both the retail and the digital business, right? It depends on how much money you're spending, the corridor that's involved, but profitability of a transaction and from a percentage basis is actually quite similar to our retail business. So it can be a very profitable business. We could drive the profitability up overnight, if we wanted to, but that's not really the strategy we have. It really continues to be to grow our business in 200 countries and territories. And then at some point, it will be a better contributor to our overall profitability. And especially as we have more account channels, account-to-account capabilities that we're building there, that will also help the overall margin profile.

Yes. That makes sense. And I totally understand. I was just sort of curious if there's a way we could sort of think about a mile marker that, okay, it's $1 billion of revenue. We should really start thinking about digital having a positive upward impact on margin spend. I can understand there's a lot of to go on between point a to point b when you get there. My follow-up was just on Amazon. I think over the years, again, you guys have struck partnerships and tried to leverage this vast network and your brand and your competencies around cross-border and risk management, some with mixed results, some have announced, and I don't think necessarily, there's been a ton of follow-through I guess we'd point to over to years, but obviously, Amazon's Amazon. So I guess, I'm just sort of curious when you think about this partnership relative to other agreements that have been struck over the many years, how you feel or how this evolution may be different than this potentially could be something where, "this actually has really worked and had an impact and really leveraged the brand and the network of Western Union better than other times."

Yes. I think we are very excited about this opportunity with the largest global online marketplace, right? I mean -- and I think Amazon wants to get to new customer segments and really offer their products to the new customer segments, and they have the product and using our platform. Our platform is unique. We invested over the years, and we are very proud of our platform. Not many companies have licenses to operate in 200 countries, and we do have it. Not many companies can settle in 137 currencies, act in 137 currencies. We have it, and that's technology. That's the regulatory environment that puts us in a unique position to offer our platform to Amazon. Now it's a new product, as you know. It's nobody did that earlier. We are the first doing this in partnership with them. We are testing it. It's very promising. It's a $600 billion market for online shopping. And I think that millions of customers don't have an access on that, and we hope that our platform will help Amazon to offer their products to new customer segments.

The final question will come from Bob Napoli of William Blair.

First question just on the domestic money transfer business, and I know that's been a challenge. How big is that business now? And how much is it declining? And do you expect that to continue to decline over the next few years?

Yes. I think as you know, Bob -- how are you, Bob? As you know, that's a quite challenging business because it's a domestic money transfer business. There is some pricing pressure and -- but there are some -- a lot of customers still using that because they want immediate cash at our Western Union locations payout. And these customers are loyal and staying. It is about 8% of our C2C business, and it's a declining business and -- but there are some loyal customers who use that sending money online, for instance, paying immediately in cash. It's quite attractive for many customers.

Yes. Bob, we don't disclose the growth rates on that, but it was about 9% of C2C revenues in 2017. So it's gone from 9% to 8%.

Okay. That's helpful. Then Western Union invested in the education vertical, I think, in payments. And you talked about payments, Hikmet, being a healthy business for you. Can you give an update on the education vertical and what the opportunities are in that business? And I think there's some good competitors out there as well.

Yes. We have some competitors out there definitely, but it's a great business for us. We acquired globally universities, and universities are attracting more and more foreign students. For instance, I just was going through that in Spain, for instance, there are about 200,000 Chinese students studying in Spain. Along that number, to put things into perspective, there are millions and millions of students going abroad and studying and they want to pay their tuition in local currency and study abroad in their universities, and we enable that. Now we are in a few countries with our student pay, with -- mostly in Anglo-Saxon countries. But also we are expanding our university acquisition constantly to offer the product to the new segments. I'm particularly excited about the future of The Western Union. Once we build this C2B abilities, we could do that also besides universities, also to other verticals. I think that gives us a unique position to do the cross-border payments for many needs of many customers because we can handle 137 currencies.

Can you give us any feel for the size and growth rate of that business?

We don't particularly break that business, but the main growth on the B2B -- this quarter, we had a good also trading business, but main growth of the B2B comes from the payments part of the business, and it's something that we're very excited.

Yes, just within B2B, about half of the business comes from what we refer to as payments and half of it comes from the basic FX services. Education vertical is one of the businesses within payments, but we don't disclose specific size.

Thanks, everyone, for joining us today. We wish you a good day.

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