Moneygram International, Inc.

Ladies and gentlemen, you're currently on hold for today's MoneyGram International third quarter 2021 earnings release conference call. At this time, we are assembling today's audience and plan to be underway shortly. Thank you for your patience and please remain on the line.

Thank you.

Good morning and welcome to the MoneyGram International third quarter 2021 earnings release conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open to your questions following the presentation. It is now my pleasure to turn the floor over to your host, Stephen Rice, Head of Corporate Communications. Please go ahead, sir.

Great. Good morning and thank you for joining us. On the call with me, you have Alex Holmes, MoneyGram Chairman and Chief Executive Officer, and Larry Angelou, Chief Financial Officer. On the MoneyGram Investor Relations website, you can find our earnings press release and presentation, which is intended to supplement our prepared remarks during today's call and provide the reconciliations between GAAP and non-GAAP financial measures. We will refer to non-GAAP metrics on the call. The non-GAAP financial measures provided should not be considered as a substitute for or superior to those prepared in accordance with GAAP. They are included as additional clarification items to aid investors in further understanding the company's performance in addition to the impact that these items and events had on financial results. Please note that today's call is being recorded. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risk and uncertainties. Actual results can materially differ because of factors discussed in today's earnings press release and the comments made during this call and in the risk factors section of our Form 10-K, Forms 10-Q, and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. And with that, I'll turn the call over to you, Alex. Great. Thank you, Stephen.

Good morning, good afternoon, good evening, everyone. Consumers are increasingly valuing our digital-first strategies. We delivered another incredible strong quarter of digital growth and cross-border payment innovation. Our direct-to-consumer channel, MoneyGram Online, continued to excel, reporting exceptionally strong revenue growth in the quarter of 34%. Total Digital, which includes MoneyGram Online, Digital Partners, and Digital Receives, delivered record revenue in the quarter of $70 million, putting our digital business on a $300 million revenue run rate as we exit 2021. Digital transactions now represent 34% of overall money transfer transactions, and we are on pace to achieve our goal of 50% of transactions being digital in 2024. This marks an incredibly rapid transformation of our company. As we enter the next stage of our digital expansion, we are focused on meeting broader consumer demand with a more expansive set of direct-to-consumer offerings. Our recently announced partnership with Stellar Development Foundation and Circles USDC Stablecoin for blockchain chain-based payments is a bold step in this direction, which we will discuss in more detail shortly. We're excited to meet the demands of a new, fast-growing global consumer base with this transformative offering, providing further evidence of our leadership in pioneering innovative digital payment technologies. Now, turning to slide four, MoneyGram Online, the largest component of our digital business, delivered strong results in the third quarter, reporting a record high in volume with cross-border revenues and transactions growing at an accelerated pace. This phenomenal growth continues to be driven by our industry-leading MoneyGram app. Given the strong customer lifetime value of app users, we're excited that 88% of MoneyGram online transactions performed on a mobile device in September. Additionally, the average number of customers who transact with MoneyGram in a given month continues to grow. This quarter, our active customer base increased 31% compared to the third quarter of last year, and as a reminder, We define an active customer as a person that has transacted at least one time in the quarter. Given our success, we will continue to increase the investments we've made in digital marketing and social media as we move forward. With our online solutions continuing to resonate with more and more consumers, we're excited to announce that five MoneyGram Online country sites now account for over 50% of their respective countries' total money transfer transactions. Australia, in particular, is a wonderful example. Three years ago, we didn't even have an online presence in the market. Today, MoneyGram Online represents more than 50% of our transactions and revenue in Australia. In addition, if we look at individual country sites, three sites are on our top 10 list of revenue and transaction sources with U.S. MoneyGram Online as our single largest source of revenue and transactions. And as I've mentioned before, strong MoneyGram Online growth will be a key driver of realizing our goal of 50% of our transactions being digital in 2024. With MoneyGram Online revenue of $47 million in the third quarter and our expectation of sequential growth in the fourth quarter, MoneyGram Online will exit 2021 on a $200 million revenue run rate, and this is before considering any of the new initiatives that we have in store for 2022. As we continue to focus on innovation and expansion of our offerings, in October we announced our most recent MoneyGram as a Service partnership with the Stellar Development Foundation. This partnership has two main benefits. First, it increases the interoperability and liquidity of digital assets while also enabling more consumers to participate in the digital economy by building a bridge between digital assets and local currencies for consumers utilizing the USD stablecoin and the MoneyGram network. With about 5.7 million wallets already connected to the Stellar network and a strong pipeline of partners, we're excited about the revenue growth potential with this partnership. This integration will provide consumers with a seamless experience for funds in and funds out between USDC and local fiat currency. The second benefit is that this partnership revolutionizes settlement flows, enabling for the first time what is effectively real-time settlement between MoneyGram and any participating wallet through the Stellar and Circle connection leveraging the USD stablecoin. This will create an accelerated collection of settlement funds for MoneyGram, improving efficiency and reducing risk. This partnership is truly transformational for both the world of crypto, blockchain, and our industry. Given our expertise in global payments, blockchain, and compliance, and cross-border admittances, we're extremely well positioned to continue to be the leader in building bridges to connect digital currencies with local fiat currencies. With a market value of about $2 trillion, digital assets and their appeal to consumers around the world will continue to play an important role in the future economy and simply cannot be ignored. Innovation in this space will remain an important component of our ongoing strategy. In the quarter, we also signed a partnership agreement to provide business disbursements for a leading tech company, which will be launched and announced in the next few months. The total addressable market for cross-border business disbursements to consumers is estimated at $1.6 trillion, and we're focused on leveraging our API-driven infrastructure and global network to meet market demand and diversify our revenue streams to capture new growth. Now turning to slide six. As we've discussed, the digitization of our received network through our unique combination of account deposit, wallet, and Visa Direct offerings for consumers is a core component of our growth strategy, and we continue to report exceptional results. Total transactions received digitally reach a new all-time high with growth of 63% year-over-year, up an astounding 332% compared to pre-COVID in 2019. As part of the success of digital receives, we have been focused on expanding our geographic footprint with Visa Direct. I'm excited to announce that 49 countries are now enabled with Visa Direct, marking a rapid expansion in just a year. Visa Direct transactions reached a new all-time high in the quarter, growing 144% year over year. We now have over 100 digitally enabled countries with digital receive options covering over 90% of the remittance market. We're proud to have built one of the largest digital receive networks in the world, enabling consumer access to 3.8 billion bank accounts and 510 million wallets. As consumer preferences shift towards receiving transfers digitally, MoneyGram is clearly well positioned to meet this demand. As we've been saying, MoneyGram is all in on digital, and it's clear that our strategy and positioning in this fast-growing market is creating tremendous value for our consumers. Saying that, however, does not mean that we do not value our cash network. In fact, nothing could be further from the truth. We believe maintaining a global cash network is important for a variety of reasons. First, in many markets, the cash network will continue to provide benefits for those consumers that need to send cash. In addition, we will continue to maintain the most robust cash-received network available, as countless numbers of receivers around the world rely on cash to support the urgent needs of their families. The cash received network is also a critical component of our strategy to scale our digital send business, as cash received continues to be a valued service even for digital senders. Having the benefit of operating one of the best known and recognized networks in the world also means we have opportunities to leverage our network for new use cases and partner more broadly. Through MoneyGram as a service, we will partner with businesses across industries to offer cross-border disbursements. And, of course, we will continue to work with blockchain to create bridges to this new and dynamic world of crypto, positioning our seamless integration for funds in and funds out as a truly transformational and incredibly unique offering. Importantly, we will not maintain our network at any cost, and the network must return value. As I've said many times, maintaining a network for the sake of size alone is a futile and costly exercise. And you will see us continue to focus on maintaining the network with an eye toward margin and cash flow optimization. All that being said, we believe the future growth of this industry and our company will come from digital. The amazing growth and benefits provided by digital sends and receives to our customers around the world can simply not be understated. We have come extremely far in a very short period of time, and I could not be more excited about our growth and future innovation in this space. As we all know, consumer demand and expectations are rapidly changing. To address this new and evolving digital consumer, we must continue to invest in product and marketing innovation. This means that in the coming months, you will see us transform our consumer direct business even more as we go deeper and wider in our consumer direct digital offerings and continue to innovate with blockchain and crypto. Going deeper and wider means we will further expand to new regions and bring our digital solutions to more and more customers for both digital sends and digital receives. We'll expand MGO to new countries. We'll add new digital send partners, and we'll add more wallets and more account deposit offerings. We'll also expand our demographic reach, offering a compelling solution for high-dollar senders that easily meets their fast-changing needs. In addition, we are assessing opportunities to offer a broader suite of financial services to our customers, so stay tuned for more updates on that in the coming months. All of this, of course, means we'll continue to drive innovation across border payments. It means more use cases. It means more customers. It means new revenue streams. And all of that means new growth. And with that, I'll turn the call over to Larry to discuss our financial results for the quarter.

Thanks, Alex. Our performance in the third quarter reflects the trends that we've been describing throughout this year. First, the continuing growth of our online digital business was accompanied by margin expansion as well. MoneyGram saw growth at its highest margin businesses while experiencing revenue headwinds in its lower margin businesses. This accounts for our improved adjusted EBITDA margin versus last quarter, and looking forward, we see this trend continuing into the fourth quarter. Revenue was $320 million in the quarter, down about 1% from last year. This included the impact of $1.1 million in lower investment income as prevailing interest rates continue to hover near zero, and reductions in our Walmart revenue as pricing at Walmart continues to be reduced due to the Walmart marketplace. We estimate that these pricing declines at Walmart are responsible for a reduction in our growth rate of about two and a half points. Neither of these two impacts are new and are the continuation of trends that began earlier this year. In addition, walk-in revenue was below our expectations with the late summer weakness in Europe, the temporary closure of our Afghanistan business, and COVID-related closures in the Asian markets. MGO, our largest single source of revenue and transactions in the world, grew 34% year-over-year to $47 million for the quarter. Gross margin from MGO exceeded 50%, which helped improve total company gross margin to 46.7% from 46% last year. Through increasing scale and improvements to our cost structure, We're expecting further increases in MGO's gross margin going into 2022. Adjusted EBITDA was $56.5 million at the high end of our expectations for the quarter. Last year had two items included in adjusted EBITDA that were not included this year, which are ripple incentives of $8.9 million and a $6.3 million valuation gain on foreign exchange position that was driven by the economic impacts of COVID. This quarter's adjusted EBITDA was up approximately 3% sequentially and approximately 5% versus last year when factoring out those non-recurring items. Adjusted EBITDA margin in the quarter was 17.7%, a sequential increase of 110 basis points from the second quarter. Of particular importance, though, free cash flow was $33.5 million for the quarter, a conversion rate of 59%. When factoring in the timing of interest payments and in a steady state, Monogram has a run rate of approximately $100 million in annual free cash flow. As we've discussed in the past, we're continuing to de-emphasize signing bonuses as a marketing tool, and signing bonuses were only $3.5 million in the third quarter, a decrease of over $11 million from the third quarter last year. And while the amount of signing bonuses will be higher in the fourth quarter, We expect they will decline over time and have a lower impact on our annual free cash flow over the next couple of years. Another item of note is the $34 million of debt extinguishing costs associated with our transformational refinancing in July and had a disproportional impact on EBITDA. With this not recurring, there will be a significant convergence between EBITDA and adjusted EBITDA in the fourth quarter. MoneyGram's improving free cash flow conversion rate can also be seen through the increase in cash and cash equivalents at September 30th. Our cash position increased approximately $36 million since the end of the second quarter, ending at $152.6 million. We didn't see the full benefit of our new debt structure in the third quarter, so interest expense will be lower in Q4, and we don't expect material remaining adjustments from legacy issues. And finally, before I provide our outlook, I'd like to just expand upon our description of the Stellar partnership. Unlike the technology used by Facebook in their Novi wallet pilot, our integration with Stellar and Circle uses blockchain technology. As Alex mentioned, not only does this utilization of the Stellar blockchain create the ability to accelerate our settlement collection, it also provides the underpinning for transforming the way we settle our transactions around the world. we've taken extra care to de-risk the way we handle crypto and provide a highly secure flow to protect both MoneyGram and our customers. In addition, transactions will be recorded as revenue, and this will be additive to EBITDA in 2022 and beyond. When we look at the fourth quarter and assume the current economic conditions and the impact of COVID remain similar to today, We anticipate total revenue of approximately $325 million. Embedded in this projection is an assumed revenue growth rate of 30% plus for MGO. We anticipate adjusted EBITDA to be approximately $60 million, which implies an adjusted EBITDA margin of 18.5%, which will be another sequential quarterly improvement from 17.7% in Q3. This reflects the continued gross margin expansion we are delivering from our MGO and digital properties as they become a larger percentage of our business and also includes normalized expenses as we restored certain spending that was curtailed last year due to COVID, including marketing expenses. This outlook also continues to assume a competitive pricing environment. Regarding pricing, in contrast to the perception and claims made by new competitors that MoneyGram customers pay up to 8%, we're actually known for being among the best value options for consumers and are below the target benchmark set by the UN and the World Bank. Our take rate, or the average cost to send money cross-border, is less than 3% of transaction value. In addition, with customers loving our offerings, speed of service, and dynamic experience, we still have plenty of pricing power to execute our growth plans. With all of that, we anticipate fourth quarter free cash flow after interest expense of approximately $24 million, delivering growth of about 24% year over year. This includes a normal seasonal increase in committed signing bonuses, which we project to be approximately $16 million, and capital expenditures remaining on trend. For 2021, signing bonuses will be about $42 million, down significantly from $59 million in 2020. And one last item, as has become our practice for competitive reasons, we will continue to limit our reporting on MGO, digital transactions, and growth statistics to quarterly on an ongoing basis. In summary, the third quarter continued to reflect the enduring strength of our digital business. And as we look ahead, we see market opportunities as large as they've ever been. And with that, I'll turn the call over to the operator to take your questions.

Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question over the phone today, please signal by pressing star 1 in your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off. Just allow your signal to reach our equipment. So once again, that is star 1 to queue for a question on today's call. And we'll pause for a brief moment just to give everyone an opportunity to signal for questions. We'll now move to our first question over the phone, which comes from Mike Grandal from Northland Securities. Please go ahead. Your line is open.

Yeah, hey, guys. Hey, the first question, Alex, you mentioned a new business opportunity doing, I think it was business transactions for a tech company. And you said that may be coming in the next, I think you said, couple months. Could you kind of describe that? what you're doing there, and maybe how big that could be. It seems like a new use case, but a little bit on that, then I have a follow-up.

Yeah, it's actually what we're starting with is a continuation of what we've been doing, which is partnering with businesses for consumer disbursements, actually. So it's utilizing our cross-border rails to enable businesses that have customers or clients or employees in foreign markets in which it's difficult for them to operate, to actually connect to them and send the money. So it's actually a relationship for, we're calling it business disbursements, but it's primarily business disbursements to consumers. I think it's a super interesting opportunity. I think as economies continue to change, as gig economy workers continue to expand, as there's more and more contractors working from home, as it becomes much more commonplace to distribute employees and many markets around the world as more and more companies become more global, you know, operating and distributing disbursements and payments is obviously difficult and can be complicated. And so we believe we have a solution that'll simplify that. So, you know, it's really a continued expansion of our as-a-service offerings. And I think that, you know, the market opportunity there is quite substantial. So unfortunately, we can't We can't discuss in further detail right now, at least that particular relationship, but we're super excited about it and we'll talk about it, obviously, when we can.

Got it. And then maybe just in general, the MoneyGram as a service pipeline, how does that look?

It looks good, actually.

You know, we continue to see more and more use cases. And honestly, since we've more or less promoted the service and its availability, we've received a number of, you know, inbound calls. So, you know, we have a sales force that's kind of looking at it in terms of what we think of the opportunities. But we've had a lot of, you know, unsolicited calls really coming in directly to us asking about it. You know, I would say it's an exciting opportunity. I think there's a lot there. I think it's one of those where it's a little bit new for everybody. And so it's going to take a little bit of time to get them all sort of lined up and going. I think once it becomes a little bit more mainstream or commonplace for businesses to be doing this types of disbursements, I think it'll be, you know, easier and then it'll ramp from there. So it's a little slow in the beginning here as we kind of you know, get people on board and begin to, you know, do test transactions and look at it because, you know, again, it's a little bit of us doing it, but it's also the businesses getting, you know, comfortable with it as well because it is a new way of distributing payments. But I think it's got a lot of interesting prospects out there and given sort of the global nature of what we do, you know, the prospect list is clearly global from that perspective.

Got it. And then just lastly, what should our outlook be for the, for the walk-in business? Um, you kind of called out Europe, Afghanistan, COVID and in Asia. I mean, can you get this back to flat or how should we think about it?

Yeah. I mean, that, that is, um, the, that is the intention and obviously the goal. Um, you know, clearly, um, the outlook for the fourth quarter doesn't anticipate that we return to flat just yet. Um, And, again, I think there's a lot of moving parts there. You know, clearly, you know, the transition with Walmart continues to be a little bit in flux. That continues to perform, you know, quite well, to be honest with you. But given the competitive nature of what, you know, Western Union actually brought in in terms of, you know, no FX rates on several countries, which is, you know, I still don't quite know why they're doing that. But, you know, that's taken out. you know, substantial chunks of revenue, which is disappointing because actually from a consumer perspective, we're actually doing quite well on retaining our customers and continuing to push transaction growth. So, you know, we have to continue to look at that. You know, COVID has created an interesting environment out there, right? You know, there's not a lot that we can do in, you know, some of the markets that we've talked about, you know, across Asia where lockdowns And, you know, your restrictions on movement continue to impact people. You know, I think there continues to be a feeling that, you know, COVID is sort of at the back end here. But yet, you know, when you get out into the markets, you know, it's still a lot of restrictions on movement. It's a lot of requirements to have, you know, vaccination passes. It's a lot of mask wearing, right? So I think people are still you know, not quite, you know, out the way they used to be. And that's really impacting, I will say, honestly, around the world. A lot of our key partnerships, right, what we consider to be our bigger partners in terms of larger retailers or larger banks or post offices, you know, you're just not seeing the foot traffic that you would otherwise anticipate it to be. You know, the offset to that obviously has been, you know, wonderful growth and continued expansion of, you know, digital products and digital offerings. And so that's, you know, incredibly exciting. You know, I think in a normalized environment, I have absolutely, you know, no thoughts about not getting, you know, the walk-in business, you know, at the flat to low single digit. And that's something that, you know, we continue to, you know, to believe will occur at the appropriate time. It's just in the interim period here as, you know, just continues to be uncertainty. We just haven't seen that resurgence and return to growth that you would otherwise expect. I would say in certain markets and in some of the smaller retail markets, You are seeing that return. People seem more comfortable. But again, it's some of the larger chains, post offices in particular, continuing to be challenged with COVID. And then obviously, you've got, you know, continued challenges around the world with employment, you know, jobs, migration still isn't quite back where it needs to be either. So, you know, there's a lot of things that are still hanging over that are kind of residual from COVID. And I think it's still going to just take some months here before that sorts itself out.

Okay. Hey, thank you.

Thanks, Mike.

Thank you. We'll now move on to our next question over the phone, which comes from Karthik Mehta from North Coast Research. Please go ahead.

Hey, Larry and Alex. How are you guys? Good. Alex, you talked about maybe more financial products for your customers, and I'm wondering, is that a solution that is going to be an online solution or retail solution or something where you can offer in both places?

Yeah, the primary focus is going to be online on the NGO app. I think that's obviously the easiest way to provide ancillary services to consumers. Clearly, You know, the trend is on, you know, financial services needing to be, you know, more fulsome financial suites of products. You know, creation of wallets and these types of applications continue to provide a lot of affinity to different, you know, consumer demographics, and it's an area that, you know, we think will be beneficial to us, particularly as you think about interoperability, you know, between different worlds. It's an important, I think, expansion of our service and enhancement to what we're doing in the online space. And I won't give you exact specifics on exactly what suite of products will be there because we're still kind of going through that assessment and looking at the timeline to bring that to market. But I do think it's an important part of the evolution and the expansion of our service. And I do think it will increase throughput and stickiness with customers and give us an opportunity to scale in some different ways. You know, bringing that to the walk-in space, I think, continues to be a challenge because, again, most of our partners out there, whether they're a bank or a post office or a retailer or a small mom and pop, you know, oftentimes they already have their own service or their own concepts around this in terms of, you know, the services that they're trying to sell. And, you know, they continue to obviously believe in many ways that the customer is there not just for the MoneyGram service, but also because they're a customer of the local store or the retailer. Again, I think that these types of services sell well in a consumer-direct environment. They become a little bit more complicated, I think, at the point of sale. So this will be primarily focused on the online experience for our customers.

And then, Larry, you obviously talked about crypto and blockchain, and obviously there's a lot of conversation surrounding that. But from a MoneyGram perspective, What does this do? If you're able to successfully use it, what does it do in terms of cost for the company? And how do you see that playing out if it works?

It can be transformational. And that's one of the issues about using a stable coin is that we're on chain and it actually takes a lot of the cost out of the settlement engine. And that's one of the things that we're excited about is that this is still obviously in its infancy, but there's an operating cost of moving money for our settlement. There's operating costs associated with foreign exchange. And there's also something we've talked about in the past with cryptocurrencies. There's a cost of capital in terms of the size of our balance sheet. This has the opportunity to address all those. I don't think it shows up in our numbers in the near term, But that's one of the other reasons. It's not just a potential revenue opportunity, but if this lives up to its potential, it does have operating cost efficiencies, mainly in the settlement flow on a go-forward basis.

All right. Well, thank you both. I appreciate it. Thanks. Thanks, Garth. Thank you very much.

We now move on to our next question over the phone, which comes from Ten Hsien Huang from J.P. Morgan. Please go ahead.

Thanks. Good morning, everybody. I wanted to ask on the walk-in business also, did you size those three areas and what the impact was in the quarter? And I'm curious, did you see or did you market to, for example, some of those Asia locations or regions to you know, to identify sort of alternatives from a digital or mobile perspective? Or what's the general strategy around that, trying to pick off some of that business on the digital side to the extent that you have presence there online?

Yeah, I think, you know, about half of the impact, as we mentioned, was Walmart, and the other half of the impact was really a combination of those factors. I think the AsiaPak one was Not particularly surprising in terms of how that played out, although I will say that we had expectations that some of that would have softened and eased up, and we would have had better growth in those markets. I'll come back to that in a second. You know, the Europe one was a little bit surprising, to be perfectly honest with you. You know, we had a very good July, and then suddenly we saw quite a bit of a slowdown in August and September across the European markets, and it does turn out that there was a lot of holidays that were taken, which surprised us a bit. And it slowed down and pulled quite a bit of money out of the market. And, in fact, there was a program that the Moroccan government promoted to actually enable Moroccans to come back to the country for free. And so, you know, that's anecdotal of one large corridor. But, you know, out of France, Spain, several other markets, Morocco is a very important aspect of that. And, you know, that market kind of dried up. Now we're seeing recovery now. But, you know, so that one was fairly surprising and a bit unexpected. And, you know, Afghanistan is obviously, you know, a large country for us, and to have that closed for a month was challenging. And then when it did reopen, interestingly, we're not seeing the fund flows that we saw before, despite, you know, kind of the humanitarian crisis concern. We're actually only seeing about half the amount of principal being sent for a transaction that we saw prior to the Now, that may be largely because the U.S. dollars in Afghanistan dried up, and now they're only paying out local currency, which is not as valued as the dollars were. And that's not really on our end. It's on, you know, the difficulties of actually getting dollars into the market from the banks in the country to pay out. So, you know, the combination of those factors is really what kind of knocked us off of where we were on our guidance trajectory after a strong July crisis. You know, when you go back to Asia markets, yeah, absolutely, you know, the digital piece is an important part of the expansion there, and we did see, you know, good growth across those, but just given the vastness, I suppose, of kind of the markets, the number of markets, and the amount of cash-based uh, trade going on, um, within those markets, um, it was hard, it was hard to offset that. So, um, you know, Asia, um, continues to be, um, a little bit frustrating and, uh, you know, hopefully we'll see that continue to, uh, or not continue to, hopefully we'll see it to start to improve, um, you know, in the, in the front of next year, but we're not anticipating much of a change, um, in the fourth quarter. Yeah, that's good detail.

Thanks for sharing all of that. Just my quick follow-up, uh, Just on the pricing front with Walmart, I know it's – you call it competitive, obviously. Is there any knock-on effect from that? Have you seen, you know, other pressure points as a result of some of the changes coming out of Walmart, or is it still pretty isolated?

You know, I'd say the two are isolated, although I will say that, you know, in what I would call more of the retail – you know, mom and pop market, we have seen a lot of negative effects, meaning that, you know, sending with a variety of our customers, you actually get more than you send, kind of based on some negative effects that's been put in place. And so I'd say that, you know, from, and that's particularly to, you know, Mexico and the Northern Triangle. So I would argue that there's a lot of competitive effects going on, extremely competitive effects going on in that area. smaller retail channel. But then when you get into the, you know, to the key partnership side and some of the Walmart impact, we haven't really seen it shift to the other key partners. It continues to be largely isolated to Walmart, which is good from a pricing perspective. You know, that being said, you know, I think that the, you know, some of the corridors that have been selected to go with, you know, zero effects just I don't think is needed or required and actually is a little bit costly since trading FX in foreign markets is not free. So buying and selling pesos is not a free expense. And so not charging an FX for that, to me, continues to not make a lot of sense. So anyway, it is the environment that we're in. It continues to be how that product, the competitive product anyway, is being positioned. And we're doing what we need to do to maintain our customer base. And again, I think we're doing extremely well on On that front, but given sort of that impact, Walmart is now below 8% of revenue, which is a positive trend as well. But unfortunately, kind of getting there by reducing prices, which we've had to do to be competitive.

Yeah. Thanks for all that. Thank you so much. Thanks. Thank you.

We'll now move on to our next question over the phone, which comes from Ramzi El-Asal from Barclays. Please go ahead. Your line is open.

Hey, guys. This is Ben on for Ramzi. Thanks so much for taking the question. I wanted to follow up on the Walmart question that was just asked. You mentioned the impact was about two and a half points from pricing, which I think was in line with your expectations you talked about in the last call. Was there any impact on share shift as well, like any impact of volume, or was the impact of revenue purely related to pricing?

Yeah, it's a good question. I think that volume, given a full quarter versus a partial quarter back in the second, volume impact was higher than it had been. We are seeing good new customer retention, I would say. Actually, that's the wrong word. I apologize. We're seeing good acquisition of new customers still coming in the door. I'd say a lot of the transition has been on some of the repeat customers. And so what we're trying to balance or at least understand is whether those customers dropped out of the market in the sense that they didn't return or if they shifted to one of the competitors in store. That's a little bit difficult to do unless you actually do direct follow-up with the customer. So We're trying to trace that because we did see some softness, you know, as we went forward. So there has been a larger impact on transactions than obviously there was in the first – or excuse me, in the second quarter, which was the first quarter where we had the new competitor, Western Union, in there. But, you know, we've – again, we've lowered prices. We've matched what's happening. And I think that's enabled us to retain the vast majority of our customers, although, yes, in the third quarter, the impact was bigger than it was in the second quarter.

Okay, that's helpful. Thank you. And then just a question around the margins and the agent signing bonuses, which are, I suppose, somewhat related. So I guess I'll ask these two questions right here. On the agent signing bonuses, are there any particular drivers? I know one of your competitors has been talking about lower signing bonuses as a driver of cost reductions next year from renegotiating with agent partners. Is that the reason, or is there perhaps something else going on there? And then the second question is, kind of on longer-term margins. You've mentioned that you're getting a gross margin benefit from the MGO business. What are the implications for your adjusted EBITDA margins in 2024 when you hit that target of 50% transactions from digital?

I'll start with the signing bonuses first. Actually, we haven't seen evidence that our competitors have softened their view on signing bonuses. And It was really something that we've been talking about in our own modeling. As Alex mentioned in his remarks, we're basically focused on return in our walk-in business and on a net present value or internal rate of return basis, signing bonuses, we've raised our bar in terms of what we expect return on those investments. So, you know, these have been declining gradually over time and it's lumpy because the ones we're paying now tend to be stuff that we're already committed to do. And so it isn't going to just move in a straight line. But I think that, you know, there's been a risk transfer with signing bonuses and our competitors are probably seeing it too. And if you're not growing or if your growth rate slows and you're pre-paying for volume, makes the math pretty difficult. So in a general sense, we still think they're going to be around. There are certain relationships that justify it, but it's not as effective. And when we think about what we could do with that capital in terms of investing it in a more profitable business or in the digital space, it seems to make a lot of sense. I can't speak for the others, but that's definitely the way we've been looking at it for the last couple of years. In terms of margin expansion, so there's a couple dynamics here. One is the percentage of digital as a percent of our business and getting to 50-50. The other is that That is also on an upward trajectory. Part of it is just economies of scale. In terms of new customer acquisition is more expensive than customers that are transacting for multiple times. And so as the personage of customers who are repeat customers increases, there's a natural tendency for that margin to improve. The other aspect of it is that we're able to start taking advantage of scale and reducing certain direct transaction expenses which are starting to show up in our numbers. So, you know, when you start doing the math on a weighted average basis and just, you know, assuming that maybe our margins are going to be consistent in the walk-in space and a margin improvement in the digital space, both MGO and digital transactions, that's where that migration comes from. And it does suggest that even at lower price points by 2024, you're going to see wider gross margins and potentially improved EBITDA margins as well. But that's how we're getting to that number.

Okay, very helpful. Thanks so much for taking the question. Thank you.

We'll now move on to our next question over the phone, which comes from David Scharf from JMP Securities. Please go ahead.

Good morning. Thanks for taking my call. Hey, Alex, I'd like to switch gears and see if you can expand a little more on the Stellar and Circle announcement. Because I know you and I had a talk a couple weeks ago, and you kind of set me straight on maybe some misperceptions I had. And it seems like any time words like blockchain or stablecoin or crypto appear in a press release by a company like MoneyGram, the initial reaction is that this is somehow related to the traditional remittance business. And it sounds like at least initially this is an entirely different customer use case and potentially business model. Can you talk more specifically about, and I realize it's in its infancy, But at least in the first couple years, you know, who you really envision the user being. I mean, because it sounds like it's just somebody that might have some currency in either a custodial or non-custodial wallet that for some use case needs to convert, you know, fiat into USDC in the reverse. And just help us understand kind of MoneyGram's role, who the user really is, what you envision sort of the pricing model, the distribution system for signing up customers, because it seems like an incredibly kind of innovative approach, but it also seems like something that's entirely incremental to sort of your traditional money transfer business.

Yeah, thanks. It's a really, really good question.

There's a couple different ways to approach that. I think Larry definitely discussed earlier kind of the back-end settlement side of it, and we can kind of come back to that later. But yeah, from the front-end consumer, at this point in time, it really is, at least in this initial stage, as you pointed out, this is really about creating interoperability for on-chain activity, basically to get it off-chain into fiat currency. And for those of you who are you know, participate in crypto and blockchain in a big way. You understand this well. For those of you don't, it can be a little bit, you know, confusing. But, you know, conceptually, there are literally millions of people around the world that are in blockchain and crypto. Either, you know, they're getting paid in it, they're doing some mining work, they're developers, they're trading in it, they're sending it to other people, et cetera. And, you know, blockchain is an incredible, incredible tool and crypto is incredibly unique in its own right. Yet, you know, in its kind of infant state here as it continues to mature, all most of the activity occurs in what they refer to as sort of on-chain, right? So anything that stays on the blockchain, anything that moves crypto to crypto, you know, exists sort of in a parallel world to, you know, the traditional financial system. And one of the most difficult things to do is interoperate between those two systems. I think for those of you familiar with it, the easiest example would be to say, hey, I want to open an account with Coinbase and I want to load $1,000 into Coinbase. Well, you've got a couple of options there. You can link your bank account. You can load it with MasterCard, Visa, debit credit. You can use Apple Pay, et cetera. There's a variety of ways to get it in there. I myself, I loaded $1,000 to Coinbase the other day And the first thing it told me is that you've loaded $1,000. Thank you. And it says you can get back $28 today if you want, or you can get $1,000 back in seven days. So they've definitely tied up the money. And once it's in, you can buy and sell crypto, and it's pretty easy. But the first thing you notice is that you pay 1.5% to 2% to buy your crypto. And then once you own it, there's a lot you can do because now you're on chain. You can move it around. You can send it to people. You can do a variety of things. But then you decide you want to get your money back. You know, you push, you know, sell the coins are sold. You want that into some fiat currency. You know, it costs, again, one to two percent to convert it back. And it's going to take you, you know, a couple three days to get the cash. In fact, if you do a domestic transaction on Novi right now, you can easily move money through USDP. But it'll tell you it's going to take you three days to get your cash back. And for those of you who understand our industry and understand most financial transactions, waiting three days, seven days in the case of getting your $1,000 back out of your wallet is really not a timeline that's acceptable. I mean, our entire industry exists for the sole purpose of moving money instantly in real time. And so that is what we do. And it's amazing to me, as these blockchain startups and others have evolved, The misperception of the current financial system is stark and it's quite remarkable. I mean, I can't tell you how many people think that we move money on a per transaction basis. I've been asked, what do you do? Just send an ACH and a wire every time someone sends $300 to Mexico. And it just, it's hilarious to me that that's what they think is happening and that's where they think the cost is. And so, you know, there's this idea that you can move money through crypto. rapidly, fast, it's easy, it's seamless. And in a lot of ways, that's true. But you can do the same thing in the fiat world today. So the question becomes the interoperability and the question becomes the speed at which you can settle that. And so what we've done is integrated with Stellar through USDC. And so anyone who wants to convert their crypto into USDC and then ask for that cash out, they can receive that cash instantly through the MoneyGram network. And that's pretty remarkable and transformational because most crypto is in essence stuck on chain. And getting that off chain is incredibly expensive and slow and complicated. And so for us, it's a very straightforward, effectively, we can turn USDC into a money transfer for purposes of the consumer collecting those funds effectively real time and instantly the way that we send money today, right? We run a net settlement engine and we settle with many currencies all around the world across many different borders and across many different banks, working with exchanges, working with crypto, in essence, is really not any different. And so as long as you have the right product set toward it, as long as you have the right IT systems and the right capabilities, you can drive a lot of efficiency. And again, cross-border is complicated. It's expensive. Buying and selling foreign currency is complicated and expensive. Compliance is expensive. But we have all of those pieces built into our systems and into our rails today. And so interacting with blockchain and crypto is simply a transition across. And the other thing I think is important to remember, too, is that simply because you're doing things in blockchain and crypto doesn't preclude you from traditional moving and doing things in the traditional financial way. They don't have to be mutually exclusive and they can interoperate together. So You know, that's a long way to come back to. There are literally millions of customers who have crypto and wallets. Those continue to grow in size every day. But the interoperability, the ability to get money, you know, off of that and into the hands of consumers and into cash is, you know, difficult. And so this is a new consumer. This is a different use case. This is not a traditional remittance customer at this point in time. Now, you are seeing more and more companies that are promoting cross-border through crypto for the purposes of remittance. But I think it's super important to pause on that and remember as well that you've got a cost of moving, of getting the crypto in the first place. Maybe moving the crypto is free cross-border, but then you've got to pay the exchange or whomever owns the crypto or the wallet to get it off-chain once you're down in the foreign market. That involves foreign exchange costs. That involves having exchanges. That involves compliance that involves partners who are willing to do that and pay out the cash. So there's cost there as well. So this idea that suddenly things have become free, the idea that something's getting displaced couldn't be farther from the truth. I think MoneyGram is in an incredibly strong position to sit in the middle of it and actually help it happen and enable it. And we won't be displaced. We're going to be extremely relevant in this future transition and in the future model. So Very excited about that, and I do think over time, remittance will become a much more important part of the movement and the chain, and the interoperability between fiat and crypto will become even more important as that gains scale and becomes important down the road. In the interim period, adding new customers and simply enabling an as-a-service capability for customers to buy and sell crypto and get it off their wallets and into fiat and the currency in the country they need it in is an important part of the evolution of of our financial system going forward, so we're in a good place for that.

Got it. No, that's really helpful because, as I said, I think there's maybe some misinterpretation that somehow this is primarily an announcement about just a new form of digital cross-border remittance, but it's a different use case. Maybe just a follow-up to that, and I apologize for getting in the weeds here. It sounds like the value add that you're describing, obviously the interoperability to convert, basically pull crypto off the blockchain and into fiat, it's a cost savings for the consumer. And as you noted, I got the same email back when I tested a new Coinbase account as well. But it seems like in some respects... does this put you into competition with the custodians like Coinbase? I mean, Coinbase is basically charging a fee for expedited access to your funds, just like PayPal or Venmo does, you know, in exchange for sort of acting as a custodian. And does the service you envision with the all these wallets that Stellar's blockchain has, is this just catering to sort of non-custodial wallets? Is that the trade-off that, because I'm still trying to get my arms around who's getting paid in crypto, and if you are getting paid in crypto, you know, who's willing to kind of put assets in a non-custodial wallet?

Yeah, well, I mean, again, that's a great question, and I think there's a couple different ways to look at it. I mean, first and foremost, There are literally millions of people around the world that operate in non-custodial wallets. And the primary reason for that is that they're either developers in the blockchain world or they're doing some sort of mining activity or they're simply consumers that have wallets and kind of buy and sell in a non-custodial way. I mean, it's very common in the blockchain world and in the crypto community for consumers to want to keep their own keys. You know, custodial, in some respects, I find it all quite fascinating. You know, we talk about exchanges and we talk about, you know, custodians and non-custodians. But, you know, a custodial having custody at an exchange is basically like putting your money in a bank. So at the end of the day, all you've done is you've taken the concept of taking fiat and putting it in a bank and you've replaced it with putting crypto into an exchange. And, of course, they want to make money. And, of course, they're going to charge you fees for that. That's what they do. And so, you know, this whole idea that, you know, somehow, you know, all this is free and fast and inexpensive is really not true. What they're really actually trying to say is that I'm going to displace banks and traditional financial systems and I'm going to make the money over here in my new world. So I think that gives us a huge opportunity to play there. And I also think, too, that if you look at, you know, an exchange as nothing more than, you know, a nouveau type of bank, then certainly I would think that they'd want to partner with MoneyGram, even in a custodial sense, to actually help facilitate funds in and funds out in a more rapid and dynamic way, particularly considering how much money is going into crypto. I mean, you're into the world of $2 trillion. Now, some of that's been created on simply the value creation, but also if consumers are willing to put that much money into it and buy and sell. you know, then values are going to be there and there's a lot of money that needs to get, you know, eventually exchanged back. So, you know, I think we can play a huge role for both custodial and non-custodial. And, you know, I think, look, I think for mainstream, you know, consumers, I think, you know, custodial is kind of, you know, the go-to environment for people that are much more in blockchain, in crypto, you know, globally around the world. And again, it's millions and millions of people that are doing this. I mean, they are, you know, custodian their own keys and that's where these bullets and non-custodials come into play.

Got it, got it. It's, yeah, a lot of nuance and complexity, but sounds like at some point it has the ability to scale into an entirely separate business line item. Great.

Thank you. Yep, absolutely. Thanks. All right, I think we'll take a couple more.

Thank you very much, sir. We'll now move on to our next question over the phone, which comes from Bob Napoli from William Blair. Please go ahead. Your line is open.

Thank you, and good morning. Appreciate the question. So just, I guess, competitively, when you hear Wise talk about aggressively reducing pricing, and I think you've touched on this a fair amount, have you seen online with the new competition? You've had some IPOs, obviously, but those companies have been around. It's not like they're new companies, but have you what is your feeling of the competitive environment for the digital business and the pricing? And when you hear pricing conversations out of, you know, somebody like a wise that talks about aggressively reducing pricing, is there, has there been a change in that market with some of those players like, like a wise, if you would?

Yeah, it's a great question, Bob.

Good to talk to you. Listen, I think first and foremost, Since they've gone public, we haven't seen any material change in their positioning in the marketplace. I would argue that what MoneyGram has been trying to do for the past really three years, since 2018, is be disruptive in the online world and actually try to figure out how to grow and scale a digital business while expanding margin and putting through more cash flow. And I think we've done that extremely well. That being said, one of the things we have learned is the incredible amount of money that companies like Remitly and Wise are putting into marketing expense. And obviously, they're on a warpath to acquire customers. And I think the single biggest way to do that is to spend money on marketing and then also position yourself as being cheaper and better and faster. If you spend a lot of time on the Wise website, one of the things that they do is they they put a list of who their price is better than. MoneyGram's not on there anymore. It used to be, but it's dropped off and we're not on there anymore because we're extremely price competitive with what they're doing. And I would argue that most of the prices that Remitly is doing, other than their first transaction, which they give a big discount on, and by the way, they put into their marketing expense, is other than that, our pricing is super competitive. So You know, I feel very, very good about that. And actually, I think, as Larry said in his script, we feel like the way that consumers are coming to the MoneyGram app, the way that they're adopting, the way that they're sticking around, I think we have a lot of pricing power in that to do a variety of new things. And, you know, we also touched on moving more Folsom into high-dollar sending, which is really where Wise makes most of their profit and does most of their business, and that's an area of expansion for us in the coming months. And so I think that's going to continue to help with cash flow. And the other thing, too, to remember in our industry, and this is where a lot of the misperception comes in, is that oftentimes, you know, the less money you send, the more expensive it is on a relative, you know, basis. And so the more money you send, the lower it tends to be on a you know, percentage of face from a transactional view. So, um, you know, I think we're very competitive. I haven't seen prices move around too much in the online world. I think what we're doing, um, is, is extremely relevant. And, um, I think our marketing team is doing an amazing job and I think the pricing team is doing a good job as well. So feel very competitive there and feel like we can continue to not only grow that business, um, at the rates that are expected, but also expand margin.

And then I just, uh, follow up. Thank you, Alex. It is, uh, Now, at that pricing levels, the margins that you're targeting, the unit economics are sufficient to support the types of EBITDA margins and gross margins that you've discussed here today, like 20% EBITDA margins or in that range, driven in part by expanding gross margins.

Yes, sir.

Yes. We don't see a change to that.

I think you said it well. I don't want to ruin it.

Okay. Thank you. Really appreciate it. Appreciate the question.

Thank you. All right. Last question, please.

Thank you. Certainly. We'll now take our last question over the phone, which comes from Brian Keane from Deutsche Bank. Please go ahead.

Hey, thanks for taking my question. So this is Ethan on from Brian. So How come the firm purchased two Clown Hashmasks NFTs, ID number 13498237, for roughly $80,000 to represent your firm's corporate identity? I ask this because I'm wondering the rationale for jumping into the NFT space and purchasing those specific assets. Thank you.

We're not aware of that and really can't respond completely.

Yeah, quite honestly, I don't even understand what you just said.

Yeah, we don't understand the question. Can you rephrase the question? Yeah, so it's NFTs of clowns, so I'm just wondering why you guys went with those clown masks.

So you're not from Deutsche Bank or Brian Keene's office is what I'm guessing, but that was nice of you to use their name. I'll be sure and pass my regards on to them when I speak to them. I'm not really sure what you're asking us, so...

I think we can probably move on from you. Thank you. Yeah, thank you.

Thank you to our speakers. As there are no further questions, ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.