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The Western Union Company (WU), Moneygram International Inc (MGI): This Company’s Affordable Services Bring a Smile to Investors

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The Western Union Company (NYSE:WU)

If you were an immigrant worker in the U.S., pricing would be a key consideration for selecting a money-transfer service. Xoom Corp (NASDAQ:XOOM) is a digital money-transfer provider, which enables its customers to send to families and friends through the Internet and offers lower transfer charges than its competitors.

Pricing matters for its customers

Xoom Corp (NASDAQ:XOOM)’s customer base is largely comprised of of immigrant workers in the U.S., with a bank account or credit card and access to Internet. The Philippines, Mexico and India accounted for close to three-quarters of Xoom Corp (NASDAQ:XOOM)’s fiscal 2012 revenue.

I believe that the cost effectiveness of transfer services is a key factor for foreign workers in their selection of money-transfer providers. A comparison of the difference in transfer charges between Xoom Corp (NASDAQ:XOOM)’s digital transfer and The Western Union Company (NYSE:WU)’s physical-agent based transfer will be useful in understanding Xoom’s price competitiveness vis-à-vis its peers.

For example, if one were to transfer $1,000 to the Philippines, it will cost a Xoom Corp (NASDAQ:XOOM) customer $4.99 to transfer money with his bank account, compared with a transfer charge of $12.00 for him to send money from a physical The Western Union Company (NYSE:WU) agent location. Alternatively, a transfer of $1,000 to the Philippines using a U.S.-based credit card or debit card will carry transfer charges of $9.99 and $24.99 for a Xoom customer and a The Western Union Company (NYSE:WU) customer, respectively.

It needs to be noted that The Western Union Company (NYSE:WU)’s digital money-transfer services are cheaper than Xoom Corp (NASDAQ:XOOM) in certain countries. This if one were to use a bank account for payment and have the ability to wait anytime between one and three days for cash pickup. However, Xoom’s advantage lies in the fact that it offers relatively faster disbursement, and more cash-pickup options, such as home delivery or direct bank deposit.

Superior margins indicative of cost advantage

Xoom delivered a gross margin of 66.5% for fiscal 2012, which is much higher than that of competitors Western Union and Moneygram International Inc (NASDAQ:MGI) , which delivered 2012 gross margins of 43.6% and 55.3%, respectively. In my opinion, Xoom enjoys an edge over its listed peers for a few reasons.

Firstly, Xoom originates all of its money transfers online, and does not have to pay commissions to physical originating agents accepting cash.

Secondly, it is estimated that bank accounts funded through the Automated Clearing House (ACH) system account for more than 90% of Xoom’s gross sending volume, with the remaining transfers funded by credit or debit cards. ACH transfers cost less on a per-transaction basis vis-à-vis other funding methods, and offer volume-based cost savings.

Last, but not least, Xoom is solely an online-services provider without the costs associated with physical locations.

Future outlook

Xoom achieved a good set of results for the first quarter of fiscal 2013, growing quarterly revenue and gross profit by 43% and 46% year-on-year to $24.3 million and $16.8 million, respectively. Management guided for full-year fiscal 2013 revenue to increase by 30% to between $104 and $106 million.

I am confident of Xoom meeting its targets as it expands its marketing partnerships and disbursement networks. In July, Easypagos, an international shipping company based in Ecuador, joined Xoom’s disbursement network, increasing Xoom’s cash pickup locations in Ecuador to over 1,000. In the Philippines, Xoom worked with its partners to provide free U.S. immigration law consultation for first time customers and cash bonuses for recipients.

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