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MoneyGram Earnings Plunge Yet Again, Shares Crash 32% - Analyst Blog

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.

Liquidity

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.

Outlook

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.

Zacks Rank

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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