WU Western Union Company

MoneyGram International Inc. (MGI) reported third-quarter 2012 earnings per share of 28 cents, a penny higher than the Zacks Consensus Estimate. However, the reported earnings soared from year-ago quarter’s earnings of 3 cents a share.

Operating net income in the reported quarter excluded negative impacts of certain accruals and legal expenses of $72.2 million or $1.00 per share, restructuring and reorganization costs of $3.9 million or 3 cents per share and stock-based compensation of $2.4 million or 2 cents a share.

Including these expenses, reported net loss available to common shareholders surged to $54.8 million or 77 cents per share against a net income of $15.8 million or 22 cents per share in the year-ago quarter.

Higher money transfer transaction volumes and higher fee and other revenue drove the top line, while lower interest expenses helped the bottom line. However, lower investment income along with higher operating, commissions and tax expenses deteriorated the margins and cash flow.

Total operating expenses escalated 29.9% year over year to $365.9 million, whereas total commission expense climbed 8.1% year over year to $152.5 million. Subsequently, operating loss widened to $27.4 million from an income of $40.3 million in the year-ago quarter. However, interest expense decreased by 20.3% from the prior year to $17.7 million as a result of continued delevering activities and the refinancing initiated in May 2011.

MoneyGram’s total revenue for the quarter was $338.6 million, up 5.2% from the year-ago period but lagged the Zacks Consensus Estimate of $343 million. While fee and other revenue increased 5.5% year over year to $335.6 million, investment revenue plunged 25.6% to $2.9 million. MoneyGram has been gaining traction with the raised momentum in self-service and new channel revenue that jumped 40% during the reported quarter and represented 5% of money transfer revenue.

Segment Results

In the Global Funds Transfer segment, MoneyGram’s revenue climbed 6.4% year over year to $317.9 million. Money transfer transaction volume increased 13%, while money transfer fee and other revenue grew 8%year over year to $291.3 million and 11% on a constant currency basis, showcasing double-digit growth for the sixth consecutive quarter.

Further, global agent locations increased 15% over the prior-year quarter to 293,000, primarily driven by growth in India, Africa and Mexico. Bill payment transaction volume dipped 4% year over year, whereas, fee and other revenue declined 7% to $26.4 million from the prior-year quarter.

However, excluding the effect of divestiture in the fourth quarter of 2011, bill payment transaction volumes improved by 5% year over year, while fee and other revenue decreased marginally.

As a result, operating margin deteriorated to 12.4% from 13.1% in the year-ago quarter, while adjusted operating margin also dipped to 14.2% from 16.4% in the year-ago quarter.

Total money transfer transactions originating outside the U.S. escalated 18% from the prior-year quarter. Transaction volume to Mexico increased 19% year over year, significantly improving for the eleventh-consecutive quarter. Additionally, MoneyGram’s transactions originating in the U.S. increased 9% year over year, while U.S. outbound transaction growth increased 13% over the prior-year period.

In the Financial Paper Products segment, MoneyGram’s total revenue declined 9.8% year over year to $20.3 million, reflecting reduced investment, money order and official check revenues. Conversely, operating margin improved to 37.3% from 24.6% in the year-ago quarter, although commission expenses remained high. As well, adjusted operating margin escalated to 39.7% from 30.5% in the year-ago quarter.

Liquidity

As of September 30, 2012, MoneyGram had cash and cash equivalents of $2.54 billion (down from $2.57 billion at 2011-end), net receivables of $1.33 billion (up from $1.22 billion) and available-for-sale investments of $79.9 million (down from $102.8 million).

The company ended the reported quarter with $810.1 million of outstanding debt (marginally down from $814.6 million at 2011-end), and assets in excess of payment service obligations of $266.1 million (up from $211.7 million). Free cash flow slipped to $24.6 million from $36.4 million in the year-ago quarter, primarily driven by higher signing bonuses and capital expenditures that were partly offset by lower interest payments.

Guidance

Management reiterated its 2012 guidance and expects total revenue to grow 7–9%, while adjusted EBITDA growth is forecasted in the band of 9–11%. Including the impact of declining euro against the U.S. dollar, reported EBITDA is projected within 7–9%. This is consistent with the company’s long-term goals. Total marketing spend is anticipated to be about 4.5% of total revenue.

Peer Take

Last week, MoneyGram’s peer Western Union Co. (WU) reported third quarter operating earnings of 45 cents per share, in line with the Zacks Consensus Estimate. Earnings compared favorably with 40 cents reported in the year-ago quarter. While consumer-to-consumer revenue segment declined due to weak economic conditions in Southern Europe and the US, all other business segment witnessed noticeable growth year-over-year.

MoneyGram carries a Zacks #3 Rank, which translates into a Hold rating over the short term. Additionally, we maintain a Neutral recommendation over the long term.

 
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