Apr 21, 2009
Executives
Gary Kohn - Vice President Investor Relations Christina Gold – President, Chief Executive Officer Scott Scheirman – Chief Financial Officer
Analysts
Bryan Keane – Credit Suisse Kartik Mehta - Ftn Capital Markets Glenn Greene – Oppenheimer Julio Quinteros – Goldman Sachs [James Castain – Bank of America, Merrill Lynch] Franco Turrinelli – William Blair Christopher Mammone – Deutsche Bank Tien-Tsin Huang – J.P. Morgan Daniel Perlin – RBC Capital Markets Robert Napoli – Piper Jaffray
Operator
Welcome to the first quarter 2009 Western Union company earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr.
Gary Kohn, Vice President of Investor Relations.
Gary Kohn
Good morning everyone. Welcome to Western Union first quarter 2009 earnings conference call.
Thank you for joining us today. As we indicated in our press release, we have prepared slides to accompany this call and webcast.
These slides are available at westernunion.com under the investor relations tab and will remain available after the call. Before I turn the call over to Christina, I want to remind you that today's call is being recorded and that our comments include forward-looking statements.
I ask that you refer to the cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission including the 2008 Form 10-K for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call we will discuss items that do not conform to generally accepted accounting principals.
We have reconciled those measures to GAAP measures on our web site, westernunion.com under the investor relations section. All statements made by Western Union officers on this call are the property of the Western Union Company and subject to copyright protection.
Other than the replay, Western Union has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. With that, it's my great pleasure to introduce our President and CEO, Christina Gold.
Christina Gold
Welcome to our first quarter call. We entered 2009 with a strong focus on gaining market share, driving profitability and generating cash flow, and we were pleased with our performance in the first quarter.
Our revenue was in line with our expectations at $1.2 billion for the quarter, down 5% or flat constant currency adjusted compared to a year ago. We earned $0.32 per share, up 10% from last year excluding the 2008 restructuring expense, and underlying these numbers was the fact that we handled $15 billion in cross border remittances during the quarter an increase of 4% over the last years first quarter when adjusted for currency.
During 2008 and 2009, we made great progress of cost saving initiatives including reductions in head count, the relocation of numerous positions to lower cost geographies, selectively lowering agent commissions and the consolidation of our C to C regions. These efforts, as well as the timing of marketing expenditures and other investment let to a first quarter operation margin that rivaled our largest peers in the payment industry at 28%.
This was a 210 basis point improvement from a year ago excluding the 2008 restructuring expense. We generated $357 million of cash flow from operations for the quarter with CapEx of just $16 million.
Cash flow and liquidity continue to be a focus in 2009. We are in a strong financial position and believe this will be a key contributor to creating long term value for shareholders.
Within the C to C business, we experienced transaction growth of 7% year over year. In fact, we handled 46 million transactions this quarter compared to 43 million in the prior year.
As expected, transaction growth moderated from the fourth quarter and the average amount of money sent per transaction declined. These factors impacted C to C revenue growth for the period.
We maintain our stance that 2009 is a year of opportunity for the company and that mind set is exemplified by our acquisition of FEXCO Money Transfer business in Europe, along with our new agreements with U.S. Bank and Fidelity National Information Service.
In our view, these key actions provide tangible evidence that we are able to leverage our strength and either acquire or partner to drive incremental market share opportunities through new channels around the world. Now let me take you through our three C to C regions.
Europe, Middle East, Africa and South Asia represented 43% of our total revenue for the quarter and experienced a revenue decrease of 4% on 15% transaction growth. However, on constant currency basis, revenue was up.
As expected in Europe, we experienced a modest slow down in transaction growth from the fourth quarter into the first quarter. We were pleased to see certain countries hold relatively stable to fourth quarter growth rates, but clearly there are others that remained under pressure including Spain and Russia.
Offsetting mixed results in Europe were the Gulf States and India, two areas that remain among our fastest growers. The Gulf States performance was strong, slowing only slightly from the fourth quarter of 2008.
India's performance contributed to the regions results with revenue growth of 19% and transaction growth of 42% in the quarter. Across the Middle East we are directing investments at market share opportunities.
In Europe, we are particularly focused on opportunities presented by the November 2009 implementation of the payment services directive. This regulatory change will allow us in many countries, to expand the classes of trade that can offer money transfer services.
This is an exciting development and for that reason, we have established a dedicated sales force to sign new agents. Additionally, we took an important strategic step by acquiring our agent FEXCO Transfer business which allows us to operate across Europe more profitably with broader growth opportunities.
In the first quarter, the Americas regions represented one third of consolidated revenue and experienced a revenue decline of 7% year over year on a transaction decline of 3%. In the region, our domestic business saw 10% revenue and 7% transaction declines for the quarter.
Mexico say revenue decline 10% and transactions declined 9%. We believe that these businesses will continue to be challenged throughout 2009.
Transaction growth in our U.S. outbound business was stable compared to the fourth quarter.
In the America's we implemented a new go to market strategy that has enhances efficiency and effectiveness. Specifically we have combined our U.S.
and Latin American organizations including the Western Union V-Go and Luanda sales forces. We are looking to open new distribution points and are making progress in the U.S.
banking channels as the U.S. Bank and Fidelity National agreements would suggest.
Asia Pacific grew revenue 3% on a 25% increase in transactions. Revenue growth slowed in part due to headwinds in China where revenue decreased 13% on a 1% transaction decline.
For our China business, sequential revenue and transaction trends continued from the fourth quarter into the first as transactions conducted by small business users usually exceeding $1,000 had been adversely affected by economic conditions. Our team has increased their focus on China and is taking steps aimed at maximizing growth and profitability in this important market.
Specifically, we have brought together a cross functional team to create a new strategy which includes a deeper sub regional structure and marketing strategy, development of closer affiliations with key inbound corridors and an updated marketing approach with more localized grass root activities. The Philippines inbound remittance growth outpaced the growth reported by the Central Bank of the Philippines.
We continue to see significant potential in this market as migrant flows remain robust. According to the Philippines Department of Labor and Employment, in January 165,000 Philippinos migrated overseas, a 25% increase year over year.
This increase comes on the heel of the record 1.4 million Philippino workers who immigrated during 2007. As the Asia Pacific region accounts for just 8% of our revenue, but represents nearly one-fifth of the global remittance market, the region is one of our largest core opportunities.
Moving to our consumer to business or payment segment, we generate nearly 90% of the segments revenue in the United States and much of this stems from home mortgage, credit card and auto loan payments. Much like the fourth quarter, we are continuing to feel the impact of the recession.
The American consumer is obviously under pressure and those likely to use our services are conducting fewer payment transactions. In an effort to diversify, we continue to evaluate acquisitions and are pushing hard on international expansion.
We have introduced bill payment in Peru and Panama and are also working on obtaining a license in Brazil. These expansion efforts build on the continued success of our business model.
On the product front, we recently announced that through our relationship with Yodlee, Fidelity National will offer its customers integrated online expedited bill payments. We look to attract more partners and sign more deals that leverage our ability to offer same day bill payment in the United States.
This is an important step to expanding the segments' reach into new customers and channels. So to sum up the first quarter, Western Union is performing well in a tough environment and we credit our strong brand and our diversity and scale with operations in 200 countries and 15,000 corridors.
We delivered transaction growth, strong margins and generated significant cash flow, the hallmark of our model. Now, I'd like to turn the call over to Scott.
Scott Scheirman
First quarter revenue was $1.2 billion, down 5% on a reported basis and flat constant currency adjusted. In the first quarter we delivered $0.32 earnings per share.
Transaction fee revenue for the first quarter which makes up 80% of company revenue declined 6% due to the impact of currency translation and slowing transaction growth with C to C. Year over year, C to C principal per transaction declined 10% in the first quarter or down 3% on a constant currency basis.
Foreign exchange revenue is generated from the difference between the exchange rate we make available to our customers and the rate at which we or our agents are able to acquire foreign currencies, and in the first quarter, foreign exchange revenue was down 2% year over year. Taking first quarter revenue down further, reported revenue in C to C segment which was 84% of total revenue, declined 5%.
On a constant currency basis, revenue was up 1%. Revenue in this segment was driven by transaction growth of 7%.
An increasing number of corridors have experienced the impact of global economic slowdowns which we expected. Our international C to C business saw revenues decline 3% or on a constant currency basis, up 3%.
Transactions grew 11%. A portion of the international business, those transactions that originate outside the U.S., saw a revenue decline of 3% or growth of 5% constant currency adjusted while transactions grew 16%.
The spread between C to C revenue and transaction growth rates widen in the first quarter compared with fourth quarter 2008. The largest factor in the reported revenue number accounting for half of the 12% point difference was currency.
Also impacting the spread was first, geographic mix. Transactions carry different revenue per transaction based on originating geography and destination.
Second was product mix. Intra transfers have a lower revenue per transaction than cross border transactions.
And third was price decreases. The combined impact from geographic mix, product mix and price decreases was consistent with fourth quarter 2008.
As we stated on the fourth quarter call, the spread may continue to widen in 2009 from currency translation and our global initiatives to drive our intra country money transfer business. First quarter C to C operating margin was 29% compared to 26% in last years first quarter.
Contributing to the overall C to C margin improvement were the relocation of call centers, work force reductions, combining of C to C regions and management of expenses. The C to C segment which is 14% of our revenue saw revenue decline 8% in the first quarter.
Operating income for the segment was down 10% and first quarter operating margin of 29% with 60 basis points compared to the first quarter of 2008. We have taken costs out of the business and will continue to evaluate additional cost savings initiatives.
That said, we do not foresee improvement in the U.S. C to C business in 2009.
This makes our international expansion and product diversification including acquisitions all the more important. Moving down the P&L, let's go to cost of services and SG&A.
To get a meaningful comparison to 2008 we excluded the $24 million of restructuring expenses incurred in 2008's first quarter. On an apples to apples basis in the first quarter, cost of services declined 250 basis points to 55.7% of revenue versus 58.2% in the first quarter of 2008.
We drove this improvement from the cost center relocations we undertook and selective agent commission reductions we achieved in 2008. In terms of SG&A in the quarter, it was 15.9% of revenue, generally consistent with the first quarter of 2008.
Going forward, we expect SG&A to increase as a percent of revenue due to costs related to the FEXCO acquisition and timing of certain investments. First quarter consolidated operating margin was 28.4%.
This is a 210 basis point improvement from 26.3% excluding restructuring in the first quarter of 2008. During the quarter, we benefited from $40 million in annual cost savings we achieved from the steps we took last year.
Also helping the margin in the first quarter was the timing of certain investment and lower, more effective marketing expenditures at 4% of revenue. We expect the marketing spend to increase throughout the year to about 5% of 2009 revenue.
As a reminder, about 65% of our costs are variable so they move with revenue and we are confident that our business model allows us to drive margin expansion as the market improves and the revenue grows. The tax rate for the quarter was 26.6% compared to 29.2% in the first quarter a year ago.
The decrease is primarily a result of a higher proportion of foreign direct profits which are taxed at lower rates compared to U.S. derived profits and the effective tax efficient strategies implemented in 2008.
We expect these items to drive sustainable cash benefits on a go forward basis. For the quarter, our already strong liquidity improved.
Cash flow from operations was $357 million. Capital expenditures were $16 million.
We finished the quarter with $1.5 billion of cash on hand with about $900 million in U.S. cash and $600 million internationally.
In February, we refinanced a $500 million, 364 day bank loan by issuing five year bonds at a 6.5% interest rate. We have debt of approximately $3 billion with maturities of $1 billion in 2011, $500 million in 2014, $1 billion in 2016 and the last $500 million in 2036.
Additionally, we have a commercial paper program that is fully backed by a $1.5 billion undrawn revolving credit facility that expires in 2012. At quarter end we had no commercial paper outstanding.
On March 31, we had about $100 million remaining due to us from the reserve international liquidity fund. We expect to receive the full amount from the fund.
Our cash position, cash flow generation and our A-A3 credit ratings allow us to invest in the future to expand our market share. To put this into context, our business model will continue to generate significant cash flows.
Liquidity is a distinct advantage for Western Union. For 2009 we are reaffirming our outlook as provided during the fourth quarter 2008 earnings release.
We expect constant currency revenue to be down 2% to 5%, GAAP revenue to be down 5% to 8%. Going into the year we had planned for pricing decreased to total 1% of full year revenue.
As our leaders review their new areas of responsibility, they are identifying market place opportunities and shifting investments. As a result, we may see pricing decreases total around 2% of revenue for the full year.
For EPS, our constant currency range remains $1.16 to $1.26 and GAAP remains $1.18 to $1.28. We are expecting the full year margin to be around 27%.
In addition to our revenue and EPS outlook, we reiterate the following; we expect to generate cash flow from operations in excess of $1.1 billion and to make capital expenditures of less than $150 million. Finally, we repurchased $100 million of Western Union stock during the first quarter and that puts us on track with the $400 million stock buy back target.
Christina Gold
We continue to see 2009 as an opportunity, a time when the strongest brands have a true competitive advantage. In Western Union's case, the economic slow down though certainly an issue for us, hasn't slowed our momentum as it relates to organizing our business and investing for tomorrow.
We made our regional structure more efficient and effective by expanding Hikmet Ersek's responsibility to include Asia Pacific and placing Stewart Stockdale in charge of the consolidated Americas region. Additionally, Vanna Clark joined Western Union to lead the C to B or payment segment as well as oversee our global strategy.
She brings to Western Union a wealth of strategic and payment knowledge. In her more than 20 years with Wachovia, she gained deep expertise, especially in marketing, innovation, brand development, customer loyalty and strategic planning.
This sets the stage of strategic progress aimed at moving our core money transfer business forward while pursuing other initiatives that will target the broader payment space. We are as focused as ever on growing our core agent based cash to cash money transfer business.
Over 90% of our C to C transactions fall in this category. We are building on our success here by investing more heavily in channels that not only move the ball forward in money transfers but allow us to make progress with new incremental consumers.
In addition to other initiatives there are three offerings we are focused on; westernunion.com, intra country money transfers and account to cash. Each of these channels is less than 2% of total revenue today, and is growing transactions at double digit rates.
We believe they provide significant opportunity. We have been working hard on international expansion of our online network, westernunion.com and making the overall user experience easier and faster.
Based on the site improvements we are experiencing positive transaction and revenue growth in the United States. We are also seeing 20% plus transaction growth on international westernunion.com sites.
And we have improved margins in this important channel. We are leveraging our network and high brand awareness to develop even more intra country corridors.
Outside the United States, we have $100 million plus intra business with transaction growth exceeding 20%. We are making progress on growing this into a more meaningful business.
We made great strides in our banking strategy in the United States with the signing of U.S. Bank and Fidelity National.
Our strategy is designed to expand our distribution and more importantly, expand our brand to new customers through banks physical as well as online distribution. We have made solid progress in attracting new customers with our online relationships with many banks including Sims in Malaysia, Duetsche Post Bank in Germany, Scotia in Canada and other similar bank relationships that allow for account to cash money transfers in addition to the retail walk in service at these banks.
In fact, just months into the relationship, Scotia accounts for around 2% of all our business in Canada, serves mostly new customers who send higher principal and is on a pace to double their transactions this year. We are excited to capture more opportunity with our banking strategy and our new relationships.
In Europe, we are prepared for the upcoming Payment Services Directive implementation. We have a dedicated sales force which is already prospecting potential agents.
The FEXCO acquisition also positions us well to offer money transfers through new types of agents and taking on FEXCO's money transfer operations gives us a center from which to operate and grow throughout Europe while becoming more profitable. I was recently in Europe to meet with the sales and the integration teams and I am pleased with their progress and confident in our ability to capture the opportunity.
On the mobile front, we continue to sign key operators globally and expect to make more announcements in the near future. Our mobile team is working hard in implementing new tests and understanding our current pilots which are focused on key intra and cross border opportunities.
Our Americas team is broadening its test of the Western Union Money Wise prepaid reloadable Visa card including a new innovative feature overnight home delivery. Preliminary results on our test locations have been good and we are planning to begin tests in Kansas City and St.
Louis. We are also investing in technology and process improvement initiatives that better position Western Union in the market place.
The revised report issued by the World Bank in March forecasts remittances to developing countries to return to modest growth in 2010 as the mobile work force continues to seek employment throughout the globe. The report states that remittance flows remain resilient as many migrants are likely to stay in their country.
In addition to the migrants who will stay, there still exists a migrant flow to destination countries, albeit at a slower pace than historical levels. Importantly, this population needs to transfer cash home.
Based on these long term trends and associated investments, we are making Western Union much more of a consumer centric organization with the emphasis on developing new products based on demand and marketing capabilities to sell them to our global base. In an effort to strengthen our understanding of our consumers, we have moved our consumer data base which now spans 200 countries, in house.
We have a dedicated team who is leveraging this consumer data to provide stronger analytics supporting many key areas including more effective price modeling, better market demand forecasting so we can add agents to the most impactful locations and increase cost efficiencies through better targeting of marketing investments for customer acquisition and retention including maximizing the benefit of our more than 11 million gold cards. Utilizing this data more effectively will certainly allow us to grow more profitably.
To ensure that our brand matches up globally with this strategy, we've launched a Western Union YES campaign. This campaign is our first truly global marketing effort and we are leveraging many techniques across 200 countries and territories.
We have made great traction using social media including a micro site called the Western Union YES effect, U-tube, and Face book. The YES campaign was launched in New York, London, Paris and Toronto to great reviews by customers and employees.
We showcased the new commercials to more than 400 agents during a recent meeting in Capetown. The excitement was overwhelming.
We will be running our commercials in 21 languages in the coming months to compliment the other grass roots efforts. Western Union's physical presence truly makes it the world's payment network and for that reason, we believe we have a significant market opportunity, and a strategy to get there, and at the core of the plan we are allocating capital and other resources to an increasing set of opportunities that leverage our network, brand and customer relationships.
We are now ready for our first question.
Operator
(Operator Instructions) Your first question comes from Bryan Keane – Credit Suisse.
Bryan Keane – Credit Suisse
The operating margins were significantly better than I expected at 28.4%, but you are kind of maintaining a guidance of 27% operating margin. I'm just trying to see if there are additional expenses in there that would cause the margin to fall sequentially because usually first quarter is seasonally the weakest.
Christina Gold
I think that we're just delighted to see the margins that we achieved in the first quarter. I think one of the things when we look at our guidance and where we see revenue is going to be for the year, we have to temper that into it as well.
So there is investment in marketing, but it will still be around the 5% level, so it's really a timing of some of the investments going after Mother's Day, Christmas, Ramadan, some of the key holidays. So they come at different times in the year.
Obviously we've very focused on margins, but there is a little bit more on the technology side, but not a large amount so it's really a question of some timing and also just where the revenues land as we go through the year.
Bryan Keane – Credit Suisse
I think you said pricing is going to be down 2% versus previously. I didn't quite get the reason why that was.
Christina Gold
We are really planned right now at about 1.4%. That's about where we are, but as Hikmet and Stewart have gone into their roles, we see some of the corridors, some opportunities to gain some share.
So as we did in the Middle East, we priced not so much from a competitive position but really to gain share, so we see that there's an opportunity there, so that may bump up to about 2% for the year as we go through the year.
Bryan Keane – Credit Suisse
The guidance for the year last quarter had single digit principal remittance growth and it looks like remittance growth was down 3% so we got a little less than you expected.
Scott Scheirman
It was actually about what we expected. One thing to keep in mind is that on a reported basis, it is minus 3%.
On a constant currency basis it is plus 4% and our objective is to continue to gain market share and use our $1.1 billion plus of cash flow to do that. Also, I think as you move throughout the year, it's things like now the Euro may move more in parity from where it was a year ago to where it is today.
For example, a year ago the Euro was $1.50. It's about $1.30 today in rough numbers.
And in the fourth quarter it was about $1.30. So as we move throughout the year, I think as you look at the cross border principal, that will begin to normalize.
But our objective is to gain market share as we move forward.
Bryan Keane – Credit Suisse
Then the other one would be principal per transaction. It looked like it was down 10%.
I think it was down 4% last quarter. I know that the guidance was for it to be down.
I don't know if that was in line with expectations to minus 10%.
Scott Scheirman
It was actually where we expected. On a reported basis, it was down minus 10%.
On a constant currency it would be down about minus 3%. So what we're continuing to see is our customers are coming to the store front.
They're sending transactions. C to C transactions grew 7%.
Cross border principal on a constant currency basis was up in the low single digits at 4%. So the strength of our brand, the 379,000 locations are continuing to see customers remit money back to their loved ones, and it's one of those things where it's not a discretionary spend for them.
They want to get money back to their loved ones. So we'll continue to work to gain market share as we move through the year.
Operator
Your next question comes from Kartik Mehta - Ftn Capital Markets.
Kartik Mehta - Ftn Capital Markets
I wanted to ask a little bit about you intra country opportunities. You've talked about that a lot.
Is there any way you could talk about what some of the near term opportunities are and maybe some more of the longer term opportunities and what the potential is for Western Union.
Christina Gold
I think if we look right now where we see a strong growth in the intra, we have it in the Philippines. We have it in Chile.
We have it obviously in Russia. So those are some very strong markets.
So I think we're looking at various parts of Eastern Europe. We're looking at some countries there which are not as big as some of the big long term opportunities like the China's, India's of the world where we see tremendous opportunity.
I think that's where we feel that mobile could be the entree into us for intra in either China or India. So that's one of the reasons why we're pushing very hard on that because there's about 300 million inter country migrants that we could take advantage of.
But we're looking to grow that and not only intra but let's say a pan European strategy because with their Payment Services Directive, we can now create a more cohesive pan European one as well as we opened up South Africa a few months, we'll have a pan African strategy as well. So again, these are some of them are more cross border, but they're really almost like intra taking continents and working them through.
Kartik Mehta - Ftn Capital Markets
On of the things you mentioned, one use of cash was acquisitions and I'm wondering, is this acquisitions of existing agents or is this acquisitions of other products or companies that might help you grow? If you had, what would be one over the other?
Scott Scheirman
It really could be a combination of both of those. As we look at acquisitions we believe there's a number of opportunities out there.
A key for us is to make sure we've got the right strategic fit as we look at the acquisition. And then second is the right cash on cash economic return.
But clearly we acquired the Money Transfer business of FEXCO. We made some agent equity investments so we're always evaluating opportunities there.
And we're also looking at opportunities that may allow us to expand our geographic footprint or extend some of our product expansion in some of our key product areas.
Kartik Mehta - Ftn Capital Markets
I wanted to figure out if there's been a change in consumer behavior other than just people sending less money. Have you seen any other changes as in the distribution method they're using?
Anything else that you've been surprised by from consumers that are using your service?
Christina Gold
I think what we're seeing is our core consumers behavior is very consistent except that they're very stressed so they don't have as much money, but what we are seeing though is we're getting incremental consumers by doing the cash to cash business. Just take Scotia bank, it's 2% of Canada's business in less than a year and it's going to double, so we're seeing that we're able to bring customers into the system.
Also, as we've improved our capabilities on dot com, again bringing in new customers into the system. So we're actually broadening the franchise to other consumers who use our services.
Operator
Your next question comes from Glenn Greene – Oppenheimer.
Glenn Greene – Oppenheimer
Just a quick question as it relates to EMEA region and the differential between the revenue growth and the transaction growth, the 19% delta. I was wondering if you could just give us a little more color and sort of breaking down the piece and sort of drill that differential between currency, product mix, pricing, just a little bit more color on the differential.
Scott Scheirman
What primarily the difference in EMEA region compared to prior quarters or the fourth quarter is really currency, and if you think about on a consolidated basis, currency impacted us by about 5%. GAAP number was down by constant currency was flat revenue growth.
So if you really apply that to EMEA which is a large part of our international business, it even had a much more magnified impact on EMEA. If you exclude the currency impact revenues were clearly up in the EMEA region.
Glenn Greene – Oppenheimer
Any way you would be able to be a little bit more specific? How much the currency impact was in EMEA?
Scott Scheirman
I would probably do is refer you to slide 17 in the deck which will really give you an overview of the C to C and EMEA is a part of that. And clearly, what we've seen if you compare Q1 to Q4, the difference from product mix, geographic mix, pricing is consistent with Q4.
Really what's driving the difference on an overall basis which would be true in EMEA is currency too.
Glenn Greene – Oppenheimer
Similar to Bryan Keene's question on the operating margins, but if I look at it just from a gross margin perspective which clearly was upside relative to what we were expecting, but is there any reason to think that these gross margin levels aren't sustainable going forward? How much of the benefit was currency on the gross margin side?
Christina Gold
Let me just give you a little bit of color on that as well. I think the other thing, obviously we planned our investments for 2009.
We did though as we came into Q1, we were very careful in our management of expenses waiting to see what was going to happen in the market place, because we're trying to balance 200 countries, a lot of corridors, and making sure that we could deliver in terms of our guidance and also deliver in term of what we were expecting for the business in terms of growth of transactions. I think you see that on the agent commission side and that line, we really have made tremendous progress with the reallocation of some of those contracts that we've done with agents and the new signings, but also when you look at moving the call centers out of the country, that really has improved that line.
So some of that will stay. It's more on the expense line we're going to see, Mother's Day is coming and that's a key event for us, so there will be more spent, because there is still the question as you look at our guidance, we recognize that there's still challenges in the market place as it relates to revenue.
Scott Scheirman
Clearly the cost of services line, we're pleased with that. As Christina mentioned many of the expense actions we took in 2008 and some of them in 2009 have helped out with call center relocations, head count reductions and selectively reducing agent commissions and signing new agents at lower commission rates.
As we move forward, we are targeting a 27% margin to make sure that we have the right balance of profitability, but investing to drive the growth. And on an overall basis, our investments are relatively the same.
I'll give you an example. Marketing, we're targeting about 5% of revenues on a full year basis.
We're a little bit less than that in the first quarter. We'll probably be a little bit higher as we move through the quarter, but that 5% is consistent with where we were in 2008.
Glenn Greene – Oppenheimer
The trends towards the end of the quarter, did you see any change, any stabilization or is it a consistent pattern month to month to month?
Christina Gold
I think when we look at, we saw a slight step down from Q1 from fourth quarter and it was really consistent throughout the quarter so there wasn't sort of a ramp down. It just kind of pretty well spread across the quarter.
Operator
Your next question comes from Julio Quinteros – Goldman Sachs.
Julio Quinteros – Goldman Sachs
Can you go into a little bit of detail on some of the new initiatives that you announced over the last couple of days, specifically some of the bank relationships in terms of the pace of adoption and how quickly to expect to see some of those banks begin to contribute to the growth?
Christina Gold
Obviously we're very delighted about U.S. Bank and they will actually be going live in the month of May, and we'll be hooking them up so they will become a retail location for Western Union offering our services starting in May.
As we move through and develop our relationship with them, we look to see account to cash and other opportunities for us that will develop with them, but that will be a little bit longer term. Obviously you saw with Scotia Bank it's been very, very strong and also we have it with the Deutsche Post Bank.
We have a number of things that are doing extremely well as it relates to that banking strategy. Again, with Fidelity National we have two different relationships there; one is that they will be offering money transfer services to their 8,500 members so the smaller banks, for us to reach out to 8,500 banks is more complicated, but we now have some dedicated banking people who are really going out to sell our services to these banks for money transfer.
But on the other side as well with Yodlee, we're offering a bill payment which is real time bill payment online so again, another opportunity for us to expand our payment segment. So both of these initiatives are doing well and we're very focused on our banking strategy in terms of making banks particularly in the United States a part of our network.
In Europe and other parts of international, we have banks. It's about 75% of our locations are banks and post offices, but now this really broadens the portfolio for us.
Julio Quinteros – Goldman Sachs
Any general view in terms of what the pricing relationships or the commission structures look like with the banks?
Christina Gold
Very much the same. We basically have no favorites.
We love them all.
Operator
Your next question comes from [James Castain – Bank of America, Merrill Lynch]
[James Castain – Bank of America, Merrill Lynch]
Can you provide a little more color on China and how you can rejuvenate your business there? It's not growing much and I know the economy is weak, but it's such a huge opportunity.
Christina Gold
I think with China, we have a great team over there in China, but what we've done now is we've basically carved China into regions as opposed to looking at it as one big country. When you think of the size of China, just from an operating point of view, Hikmet's team has really carved it out into different regions who have different types of consumers and different types of needs.
And then they've connected with the right send and receive. Part of China's send and receive, some of it is coming from the Middle East.
Some of it is coming from the west. Really looking at the corridors and identifying what the needs that they have, and doing a lot of grass roots work.
I think also, we had seen tremendous growth in India and the knowledge of the team from India is really going to be transported to assist the team in China and really rethink some of our strategy because in India we have over 50,000 locations. In China, we have 25,000.
Although that's good, when you think of the population, we need a much greater reach, so the team is focused on doing that as well. So I think yes, we have to deal with the small business and find the right solution there, and some of that is going to be driven by the recession.
But as we look at really the remittance business, we are looking at a new sort of go to market strategy for that business.
[James Castain – Bank of America, Merrill Lynch]
In your release you mentioned that the U.S. outbound business was stabilizing.
Do you think it's bottomed out at this point?
Christina Gold
It seems to be doing okay. I think we're pretty pleased with it.
I think one of the things we saw in the U.S. is the Hispanic consumer is a consumer that we're seeing has had the most pressure and as you look at unemployment and a lot of factors, that consumer for us has been really challenged.
So the U.S. outbound is much more broad based and I think we feel that one is holding pretty well.
[James Castain – Bank of America, Merrill Lynch]
The opportunity associated with commissions and you talked about pricing being down minus 2% instead of minus 1%. Can you give us kind of quantifying commissions, what the margin opportunity is longer term?
Christina Gold
I think on the commission you saw I think we came in at 55.7% for the quarter so we felt very good about that when you see where we were last year,. In terms of the pricing, we haven't finalized everything on the pricing because we're at about 1.5%, so it could be 2%, it could be 1.7%.
It really depends on as we look at some of these corridors that we have countries like Indonesia and Malaysia where we really don't have large share, but where we have a huge opportunity. So if we put the pricing right, we can really go in there and really lift a lot of business out.
Gary Kohn
Just for a clarification, I think you got that the 55% isn't the commission level. It's part of the cost of services.
[James Castain – Bank of America, Merrill Lynch]
I'm just curious longer term, is it a one point opportunity here, a two point opportunity or is there a push back from the agents?
Christina Gold
It's a balancing act. I think what we've tried to do on all of the new ones, especially on the receive side, set up a better rate of commission because they obviously know the size of the business they're going to get and the volume and the value of the brand.
So we've been working on it consistently. You'll see it coming through in our numbers.
But these contracts are a five year duration so sometimes it takes awhile before it flows through into the system, so it's a point of focus. We have a target every year and the team is actively going after it.
Operator
Your next question comes from Franco Turrinelli – William Blair.
Franco Turrinelli – William Blair
Thanks very much for the disclosure on the impact on Slide 17. I'm curious about, you talked about lower principal.
Is that captured in the mix component of the difference between transactional revenue growth?
Scott Scheirman
That would be part of it. The overall mix as we think about the change from transaction growth to revenue growth.
Franco Turrinelli – William Blair
So in mix we've got geography, we've got intra versus inter and we've got lower principal all kind of embedded with that?
Scott Scheirman
All embedded within that, yes. And that's been running relatively consistent, that mix difference compared to the fourth quarter of 2008.
Franco Turrinelli – William Blair
Are those three factors broadly equal? No precisely, but broadly?
Scott Scheirman
We haven't provided that level of detail, but just to say that suffice, the three of those are making up the mix difference. I believe on the principal transaction, a number of individuals may think that has a huge, huge impact on revenues for transactions.
It has some impact on the revenue for transaction but you've got to remember that we price in bands so a lot of our bands run in bands of $100 or $200 so it may take awhile for a transaction to cross a fee band.
Franco Turrinelli – William Blair
It's really interesting to see how many different initiatives you have in terms of new channels in particular. Is your experience thus far that those channels are really going to be additive to your existing business?
To what extent are you seeing cannibalization or kind of shift from traditional channels to some of these new channels?
Christina Gold
I think that we saw right from the very beginning on dot come about 50% to 60% of the business was incremental, so we know that. I think when we look at the account to cash in the banking system, that's pretty much all incremental because some of those transactions, banks were doing them to some degree with difficulty, and now it's actually a much faster transaction.
So a lot of it is incremental. It's not cannibalizing the business and so even on the mobile front, it's a much smaller transaction.
It's a different consumer. So I think what we're doing is broadening our base and giving ourselves a bigger customer footprint to work with.
Franco Turrinelli – William Blair
I think that's really both interesting and important because obviously these technology based alternatives or challenge based alternatives have for a long time been seen as a real risk for the company and I think what you're really telling us is that these are primarily in fact additive. Is that fair?
Christina Gold
That's fair. And I think it just broadens our opportunities and really puts us toe to toe with any of the competitive offerings out there.
Franco Turrinelli – William Blair
Going back to Jim's question on agent commissions and you talked about new contracts with agents. Is there something where in future you can structure these contracts such as when volume ramps up with a new agent, the commission rate would automatically come down as opposed to having to renegotiate as volume goes up?
Christina Gold
We have different types of arrangements and some of them actually it goes in reverse. As they drive a certain level of productivity they get a higher level of commissions.
So we do have performance based commission contracts as well. So it varies across the globe based on the volumes, based on the type of location.
So we can manage that.
Franco Turrinelli – William Blair
Obviously tremendous operating cash flow performance. Even being aggressive with your CapEx, buy backs and acquisition assumptions, you're still left with a lot of excess cash.
Any thoughts on where your preference would be there? Would it be debt pay down?
Would it be more buy backs? Anything you can say there?
Scott Scheirman
We're pleased with our cash flow. The $357 million in the first quarter and we're on tract to at least $1.1 billion in 2009.
As we think about our capital structure, we're going to continue to target a capital structure that's consistent with A-A3, so that would leave us right around that $3 billion of debt. And then just the operating, the global operating environment we're in right now, we feel like it's very prudent from a liquidity standpoint to be very solid there.
We have been solid, but we continue to want to be solid, so we'll continue to look at opportunities in the market place. We periodically review our capital structure internally and with our Board, and will continue to make sure we've got strong liquidity.
We'll invest in the business. We've got an eye to some acquisitions, and then we're targeting $400 million of stock buy back and we're right on target.
We're $100 million into that through the first quarter.
Franco Turrinelli – William Blair
Any discussions at the Board level on dividend levels?
Scott Scheirman
We periodically have those discussions with our Board and will continue to have those discussions and clearly investing in the business is very important to us, but also providing a very solid return to our shareholders is important. So we'll continue to have those discussions and weigh the priorities and our capital structure and our use of cash.
Operator
Your next question comes from Christopher Mammone – Deutsche Bank.
Christopher Mammone – Deutsche Bank
The FEXCO acquisition closed in February, is that right?
Scott Scheirman
That's correct. The FEXCO acquisition closed in February.
Christopher Mammone – Deutsche Bank
Can you just remind us about the accounting? Was there any impact to revenues from the timing of that deal closing?
Scott Scheirman
No there wasn't. Today and even before the acquisition those revenues were really already recorded on our books and with the FEXCO acquisition we acquired the money transfer business so we did not acquire any non money transfer assets as part of that acquisition.
And the impact overall first quarter was pretty nominal since we owned it about five or six weeks in the first quarter.
Christopher Mammone – Deutsche Bank
On the margins, how should we think about the distribution going forward? I know that the prior expectation was for the back half to be higher than the first half.
Have you got pretty good numbers in the first quarter? Should we expect second quarter to be lower due to Mother's Day and then maybe a lift in the third quarter and then fourth quarter would be down because of holiday marketing spending?
How does the timing of the other technology fall in the marketing distribution as well?
Scott Scheirman
The margins will vary by quarter. In the first quarter we're at 28% and we're targeting a full year margin right around 27% so quarter by quarter the margins will be different and by default, some of the quarters will probably be a little bit below that 28% mark as we manage to a 27% margin on a full year basis.
Also what will vary to some extent is the revenue performance through the year, but we continue to make investments around Mother's Day. There's a number of key holidays in December and then Ramadan so we'll continue to invest behind that.
So a full year basis, I encourage you to think about we're targeting a margin right around 27%. But again, it will be balanced with investments and the revenue performance as we move through the quarters.
Operator
Your next question comes from Tien-Tsin Huang – J.P. Morgan.
Tien-Tsin Huang – J.P. Morgan
I want to ask about South Asia because it held up so well despite all that negative press around the destruction going on in the Gulf states. How big is the Middle East or the Gulf coast now exactly?
Can you give us some rough sketch of that and what kind of trends are you seeing there in recent weeks?
Christina Gold
We don't disclose the size of the Middle East but the Middle East itself is 43% of our business. We continue to see strong growth coming out of the Middle East.
It has moderated somewhat from Q4 but I think to put it in perspective, Saudi Arabia is the second largest end market in the world. The U.S.
is number one and then it's Saudi Arabia, so you can see just how large and important it is. It tends to be a lower principal and a lower revenue per transaction, but a very high volume business.
Tien-Tsin Huang – J.P. Morgan
It sounds like maybe a little bit for them but not much material change there.
Christina Gold
No. But I think as we look through the year, we're balancing all of the needs that we're looking at.
We're looking at all of our big growth engines and just monitoring those because we want to make sure that we really have a good feel for what's happening in the market place.
Tien-Tsin Huang – J.P. Morgan
I guess U.S. Bank, what ultimately drove the deal in your direction?
I believe this partnership was previously your largest competitor so what created the opportunity? Was this a competitive situation?
Was there a bidding process? I'm just trying to better understand how that came about and secondly if you can also just talk about the pipeline for other direct partnerships with banks especially in the U.S.
Christina Gold
I think one of the things that Stewart and his team has been very focused on a banking strategy for the U.S. It's something that we've looked at for some period of time.
But he really mobilized the team and himself to go and make that happen. I think we really offered a tremendous brand.
379,000 locations, great compliance which is very important. So I think all the attributes of our business were important to them in making that decision.
And, the ability to also drive traffic, to really give them customers and business and then also the technological capabilities that we can offer as we move along in this relationship with account to cash and other alternatives.
Tien-Tsin Huang – J.P. Morgan
And the pipeline for banks?
Christina Gold
Obviously it's everything is in our line of sight. Obviously Fidelity, that relationship is going after a certain group of smaller banks, but we have a number of others in the line of sight so look to more announcements over the next period of time.
Tien-Tsin Huang – J.P. Morgan
The revenue guidance, 2% to 5% decline starting out at a good pace here in the first quarter, any change in your confidence level to hit the 2% to 5% decline for revenues in '09?
Christina Gold
I feel good about the guidance. I feel confident in where we are.
I think that we had a great first quarter looking at where we came out in Q1. But I do recognize that there's a lot of unknowns out there in the market place and we're trying to balance all of that with some orders like countries like Spain and Russia are more difficult.
But then we have the strength of the Middle East and also some European countries are also strengthening. So we're balancing all of our different businesses.
Operator
Your next question comes from Daniel Perlin – RBC Capital Markets.
Daniel Perlin – RBC Capital Markets
I have a question about the foreign exchange revenue. Is there anything that's either making it more difficult for you to earn a spread or creating an opportunity for you to earn maybe an outside spread given some of the volatility in the currency?
Scott Scheirman
No, not at all. As we talked about pricing and so forth whether it's FX spread, that's all considered in our overall pricing equation.
But we manage that very carefully and very closely every day with our agents and continue to earn spreads that we believe are competitive and allow us to drive, for example in the first quarter C to C transaction growth of 7% and internationally outside of the U.S. grew transactions 16%.
So really no impediment in driving the business with FX.
Daniel Perlin – RBC Capital Markets
I don't mean so much from the volume standpoint, but your ability to actually control that spread.
Scott Scheirman
It's part of the pricing equation if you will and we have the ability to set those spreads every day and don't have any challenges in doing that. It's a very competitive market place and we're competitive out there, but we have the ability to set the spreads where we like to.
Daniel Perlin – RBC Capital Markets
When you look at the correlation with global unemployment and in your business, have you seen a massive lag effect to that or is it a quarter or two? I'm just wondering, you're starting to see the global unemployment really start to head higher and I'm wondering if you've actually see a real slowdown potentially in volumes yet.
Christina Gold
I think our business is very mixed in terms of what drives what. Recognizing that our customers need to send money, so what we do see is lower principal.
We see fewer transactions, but there's not one criteria that says this correlates directly to our Western Union transactions or revenue growth. There are certain countries, let's say Spain where we know unemployment right now is running at 15.5% and it was a highly construction focused economy.
That we saw hit about a year ago. But in other countries it's really very mixed so it's not unemployment.
It's just our customers what they end up doing is going to other jobs or fewer hours, but they really need to send money. This is food and lodging and helping their families survive.
So I think you cannot just say it impacts our customers, but it is not one factor that drives our business results.
Daniel Perlin – RBC Capital Markets
If I adjust for the potential marketing spending that you could have done at 5% this quarter, it looks like there was only about a penny in earnings anyway. Does that sound about right to you?
Scott Scheirman
Yes. 1% of revenue is probably in the neighborhood of $12 million, so yes.
Daniel Perlin – RBC Capital Markets
So even if you had spent at that level, you still would have posted a pretty strong number.
Scott Scheirman
Yes. There are some other investment timing in their but we're trying to keep our investments relatively consistent to drive a 27% margin.
But there is some marketing and some other investments within the year.
Christina Gold
I would also add that with our YES campaign, the team has done a terrific job in using common materials, doing shots like 20 commercials in one shot, really maximizing how we do it and how we go to market. So that's going to give us tremendous savings going forward.
So we're getting more bang for the buck. So that's also very important in terms of what the marketing team has been able to do.
Daniel Perlin – RBC Capital Markets
You previously said FEXCO would be $0.2 diluted. Is it now expected to be kind of flat to accretive to you this year or slightly diluted?
Scott Scheirman
It will still be slightly diluted so within our outlook there's that $0.02 dilution, so that's still our view on FEXCO.
Operator
Your final question comes from Robert Napoli – Piper Jaffray.
Robert Napoli – Piper Jaffray
The FEXCO acquisition, the payment services directive, what kind of competitive moves are you seeing? It does open up and certainly you are aggressively moving after that market but what are you seeing on the competitive side?
It should open up some opportunities for others.
Christina Gold
I think right now we're not seeing too much activity because recognizing that that goes into effect in November of 2009. For us we're really geared up and ready to roll because we already have the network.
We have the compliance capability and we have the brand. So it's not something that you can walk in and just turn on a switch.
Europe is highly regulated and there's an awful lot to do so I think there's a lot to be done before a lot of the competitors will come in. I think also what we have now is a dedicated sales force who have experiences and knows what to do, who are out there right now targeting opportunities for us so when this comes through we're ready to roll.
Robert Napoli – Piper Jaffray
Do you have a feel for how many locations that you will be able to add?
Christina Gold
I would tell you it's quite substantial. Over the next couple of years it's quite substantial and I think the pay back on this extra acquisition and what we can accomplish with this is going to be very good.
Robert Napoli – Piper Jaffray
On the U.S. bank market, banks have always been viewed as potential competitors and you're making more of them partners.
You said 75% of your locations outside the U.S. are at banking locations.
What percentage of that is within the U.S. and can you quantify?
Christina Gold
In the U.S. it's very, very small.
It's not even material so it's not anywhere near that. I think that it has always been a challenge for us and the banks basically want to white label our brand and we won't do it.
So they want us to offer them service but call it whatever they want to call it. I think an interesting case is Scotia bank.
They did a lot of research when they were looking to go into the money transfer business because they wanted to attract the ethnic consumer into the bank and as they looked at how to do this, they finally recognized you need a network. You need the knowhow on both sides of the transaction in terms of ethnic marketing and also all of the compliance.
And they called up and said, "This is the only way we're going to get it done." So I think a lot of banks are rethinking their strategy and really coming to us as the experts in the field to really help them get this done.
Robert Napoli – Piper Jaffray
And FIS was not working with anybody else prior to your relationship?
Christina Gold
No, not that I'm aware of.
Robert Napoli – Piper Jaffray
Now that you're more into mobile, do you have any updated thoughts on the economics of mobile and the opportunity around mobile?
Christina Gold
I think mobile is a long term opportunity. Mobil, it tends to be a principal that's below $50 so you've got a very small amount of principal that's moving.
Right now we have it in selective markets like the Philippines we're doing it. We're working in the Middle East, so we have it and we're working with [Votophone] in Africa.
So we're learning. this is a learning mode as opposed to really knowing exactly the element of each thing but it is possible because you're basically looking a lower principal but you still have profit on that transaction and business here requires volume.
You've got to drive a lot of transactions. But I think longer term as well as we talked earlier, this is an opportunity for us to get into inter in China and India, and that will be very important to us in the future.
I just wanted to thank everybody for being on the call today. We're delighted with the quarter and as always I want to thank all of the employees of Western Union for all that they do every day, and our agents, and just appreciate your time on the call and look forward to talking with you next quarter.
Thank you very much.