Higher Overhead Costs Drag Down Western Union Q2 Profit By 7 pct

Western Union Co. (WU), a provider of money transfer and bill payment services, announced a 7 pct fall in net income for the second quarter despite an 8pct upside in top line as overhead expenses increased 12 pct year-over-year. The company stated that increased overhead costs were due to its separation from First Data.

Second Quarter Results

The Greenwood Village, Colorado-based Western Union reported net income of USD 204.5 million, down 7 pct from USD 218.9 million and earnings dipped 10pct to USD 0.26 per share from USD 0.29 per share in the same quarter last year. The company added that its results included USD 0.04 per share towards costs associated with being a public company. Twenty-one analysts, on average, surveyed by First Call/Thomson Financial expected the company to report earnings of USD 0.26 per share.

Total revenues advanced 8 pct to USD 1.2 billion from USD 1.11 billion in the previous year quarter. Sixteen Wall Street analysts' consensus revenue estimate was USD 1.22 billion. Western Union attributed revenue upside to 14 pct international consumer-to-consumer business on 20 pct transaction growth.

While revenue from transaction fees rose 6 pct to USD 981.4 million from USD 921.7 million, revenue from foreign exchange advanced 13 pct to USD 185.8 million from USD 165.1 million and commission and other revenues contributed USD 35.7 million, 33 pct higher than USD 26.8 million recorded in the year-ago quarter.

Western Union said that its domestic consumer-to-consumer business witnessed a 10 pct downside in revenue on 5pct fall in transactions due to the immigration debate and broader market. The company also indicated that there was a sequential modest improvement. The company said that in a trend paralleling the Mexico business, domestic transaction volume showed improvements in every successive month of the second quarter with June witnessing the smallest downside of 3 pct .

The company disclosed that it was on a four-part strategy to improve its Mexico unit. Western Union believes that the revenue decline of 7 pct in the second quarter from the Mexico unit will moderate as the year progresses.

Cost of services grew 15 pct to USD 687.9 million from USD 595.6 million, whereas selling, general and administrative costs remained at USD 192.3 million compared to USD 191.6 million in the prior year quarter.

Total expenses increased 12pct to USD 880.2 million from USD 787.2 million in the year earlier quarter resulting in operating income of USD 322.7 million, down 1pct from USD 326.4 million in the comparable 2006-period. Operating margin slipped to 27 pct from 29pct in the year earlier quarter as a fall out of incremental independent public company expenses compared to USD 2 million in the preceding year quarter.

The 2007-second quarter results were also negatively impacted by USD 47 million towards incremental pre-tax interest expenses over the 2006-second quarter. The company bought back 7.8 million shares for USD 168 million during the second quarter at an average price of USD 21.61 per share. Western Union still has about USD 700 million available for the share buy back program.

Meanwhile, the company stated that it is increasing its cash from operating activities forecast to USD 1 billion from USD 900 million and capital expenditures are projected to be below USD 200 million. Western Union added that it intends to speed up share buy back activities to buy back an additional USD 300-USD 400 million during the second half of 2007.

Competitors

Among others in the industry, Checkfree Corp. (CKFR) is slated to announce its second quarter numbers on August 9. Wall Street analysts have consensus earnings target of USD 0.47 per share on revenues of USD 272.12 million.

Another peer, MoneyGram International, Inc. (MGI) recently announced second quarter net income of USD 32.4 million, or USD 0.38 per share, lower than USD 36.7 million, or USD 0.42 per share in the same quarter last year. Total revenue for the quarter was USD 333.26 million, up from USD 292.91 million in last year quarter. Net revenue for the second quarter increased to USD 167.66 million from USD 154.26 million in the corresponding year ago quarter.

Stock Movement

Shares of Western Union reached a year high of USD 24.14 and a low of USD 18.36. During the day, the stock ranged between USD 20.62 and USD 21.68. Currently, shares of the company are trading USD 0.81 or 3.86 pct up to trade at USD 21.50 on a volume of 6.1 million shares.