MoneyGram International Inc. ( MGI ) reported third-quarter 2014 operating earnings per share (EPS) of 17 cents, which significantly lagged the Zacks Consensus Estimate of 30 cents by 43.3%, making the trailing four-quarter average miss 11.1%.
EPS also witnessed a radical fall from the year-ago quarter figure of 31 cents. The market's negative response was reflected in the 32% fall in the stock price following the earnings release.
Results deteriorated primarily due to significant decline in U.S.-based money transfer transaction volumes given the launch of Wal-Mart Stores Inc.'s ( WMT ) competitive product that led to weak financials.
Operating net income plunged about 52.8% year over year to about $10 million. Including adjustments, reported net loss rose to $3 million or 5 cents per share against an income of $22.5 million or 31 cents per share in the year-ago quarter.
Total operating expenses rose 2% year over year to $341.7 million. Total commission expense declined 8.1% to $164.2 million. Subsequently, operating income shrank 66.1% to $16.3 million from $48.1 million in the year-ago quarter.
Interest expense also increased 16% from the prior year to $11.6 million. Total earnings before interest, taxes, depreciation and amortization (EBITDA) declined 38.7% year over year to $44.5 million, while adjusted EBITDA fell 5.9% to $72 million.
MoneyGram's total revenue for the quarter was $358 million, down 6.5% from the year-ago period. While fee and other revenues increased 5.5% to $355.2 million, investment revenues stood at $2.8 million, significantly down from $7.2 million in the year-ago period.
Quarterly Segment Results
In the Global Funds Transfer segment, MoneyGram's revenues fell 5.6% year over year to $339.5 million. Money transfer transaction volume decreased 3%, while money transfer fee and other revenue declined 5.8% year over year to $314.3 million.
Further, global agent locations edged up 3.9% from the prior-year quarter to 347,000. Total money transfer transactions originating outside the U.S. climbed 8% from the prior-year quarter. Additionally, the U.S. outbound transaction increased 15%, reflecting double-digit growth for the 12 th consecutive quarter, and driven by 17% growth in transactions to Mexico from the U.S. The company now enjoys 17% market share in Mexico.
Notably, MoneyGram's transactions originating in the U.S. decreased 37% year over year due to a 57% decline in transactions originated at U.S-to-U.S. transactions at Walmart, along with a 60% fall in revenues. Excluding Walmart business, however, money transfer revenues grew 6% from the year-ago quarter, while money transactions rose 11%.
Self-service money transfer revenues surged 47% from the prior-year quarter, representing 10% of money transfer revenues. Moreover, MoneyGram's online money transfer transactions grew 34%, while revenues jumped 30% from the prior-year quarter. Bill payment fee and other revenues decreased 2.7% to $25.1 million.
As a result of lower revenue and higher commission expense, operating margin deteriorated to 4.5% from 11.3% in the prior-year quarter.
In the Financial Paper Products segment, MoneyGram's total revenue fell 20.6% year over year to $18.5 million, reflecting lower fee and other revenue within both money order and official check sub-segments. Subsequently, operating margin declined to 31.4% from 45.1% in the year-ago quarter, although commission expenses remained flat.
As of Sep 30, 2014, MoneyGram had cash and cash equivalents of $1.94 billion (down from $2.23 billion at 2013-end), net receivables of $753.9 million (down from $767.7 million) and available-for-sale investments of $29.9 million (down from $48.1 million).
The company exited the quarter with $966.6 million of outstanding debt (up from $842.9 million at 2013-end) and assets in excess of payment service obligations of $320.7 million (up from $318.8 million).
Adjusted free cash flow plunged about 83% year over year to $8.2 million in the reported quarter, primarily due to higher investments in the global transformation program and increased signing bonuses.
MoneyGram has been facing a challenging economic, geopolitical and regulatory scenario in many global markets, while cannibalization from Walmart's while-label product has been eating into the company's revenues in the U.S. Hence in order to stay competitive, MoneyGram has announced a slash in its U.S.-to-U.S. money transfer transaction fees to $11.50 or less for most transactions available at all U.S. locations. However, the lowered price band may further drag revenues.
Furthermore, given the introduction of a new low price chart, management withdrew its earnings guidance for 2014. Adjusted EBITDA for the fourth-quarter 2014 is now expected to be within $60-65 million.
In Apr 2014, MoneyGram had lowered top-line growth guidance to 1-3% on a constant currency basis, slashed from the prior estimate of 8-10%. Additionally, adjusted EBITDA growth was projected in the band of 0-2%, which fell from the prior projection of 7-9%.
Global Transformation Program
Taking forward its reorganization and restructuring initiatives, MoneyGram targets to enhance operating efficiencies, realign certain businesses and reduce costs, all of which should result in annual pre-tax cost savings at a run-rate of $15-20 million by 2015-end. In this regard, the company also projects to incur cash outlay of $30-40 million through 2015, of which $7.8 million was recorded in the reported quarter.
Meanwhile, MoneyGram incurred costs from its compliance enhancement program worth $29.5 million in the first nine months of 2014. Overall, the company incurred $21.6 million in operating expenses and $15.3 million as capital expenditure in the first nine months of 2014. The company also incurred expenses worth $6.7 million related to severance accruals in first-half 2014. MoneyGram expects to incur cash outlays for fraud losses (compliance enhancement program) of about $80-90 million till 2017.
Previously, in Feb 2014, MoneyGram provided a long-term outlook that it aims to achieve to drive multi-channel growth and improve cost structure.
By 2017, the company targets annual revenues of $2 billion and expects self-service products to contribute 15-20% to money transfer revenues. In order to attain this goal, MoneyGram plans to augment investment in its online and mobile, account deposit as well as kiosk-based money transfer services, thereby aggressively expanding its market presence by improving back-end processes and product efficiencies for these products. As part of its global transformation program, the company also announced the opening of a new location in Poland - MoneyGram Global Business Center - in late 2014. The new outlet is aimed at enhancing global talent base and cost efficiency.
Currently, MoneyGram carries a Zacks Rank #4 (Sell).
Stocks to Consider
Better-ranked stocks in the financial sector like SS&C Technologies Holdings Inc. ( SSNC ) and Portfolio Recovery Associates Inc. ( PRAA ), both of which have a Zacks Rank #2 (Buy), are worth reckoning.
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