Western Union 2008 Annual Report Download - page 28

WESTERN UNION
2008 Annual Report
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benefit to transaction fee and foreign exchange revenue of
$96 million, over the previous year, net of foreign currency
hedges, that would not have occurred had there been con-
stant currency rates. The positive impact to operating profit
derived from foreign currency exchange rates increasing
against the United States dollar during the year was offset
by the impact of foreign currency derivative losses for those
foreign currency derivatives not designated as hedges and
the portion of fair value that is excluded from the measure
of effectiveness for these contracts designated as hedges
thereby resulting in a minimal impact to overall earnings
per share. Transactions in the euro, which represent the
majority of the Company’s foreign currency denominated
business, benefited revenue by $82 million and operating
income by $19 million during the year. If exchange rates
between the United States dollar and other currencies
remain constant with those experienced at the end of
2008, or if the euro and certain other currencies continue
to weaken against the United States dollar, we expect a
negative impact on our revenue in 2009. However, the
impact to earnings per share is expected to be less due to
the impact of translation on our expenses and our hedg-
ing program.
Americas revenue declined 1% for the year ended
December 31, 2008 compared to the corresponding
period in 2007 but transactions grew 2% for the same
period. The United States domestic and the United States
outbound revenue continued to decline, due to the overall
weakening in the United States economy and rising unem-
ployment, for the year ended December 31, 2008. Within
the Americas region, revenue declines in our domestic
(transactions between and within the United States and
Canada) business, which represents approximately 10%
of consolidated revenue for the year ended December 31,
2008, continued to occur due to the factors described
above. Although the domestic and United States outbound
revenue declines experienced in 2008 have moderated
compared to those experienced in 2007, we did experi-
ence increased revenue declines in the fourth quarter of
2008 compared to the third quarter of 2008, due to the
further weakening in the United States economy.
Domestic revenue declined 6% on transaction declines
of 3% for the year ended December 31, 2008 compared
to the corresponding period in 2007. In addition, United
States telephone money transfer revenues continued to
decline, and website money transfer revenues were flat
for the year ended December 31, 2008.
Revenue in our Mexico business was down 2% on trans-
action declines of 1% for the year ended December 31,
2008 compared to the same period in 2007. The Mexico
business continues to be impacted by the weakening
in the United States economy, noted earlier, with such
declines increasing in the fourth quarter of 2008. During
a few weeks in the fourth quarter 2008, the value of the
Mexican peso decreased dramatically against the United
States dollar and, as a result, we experienced a spike in
transactions as United States senders took advantage of
the more favorable exchange rates. As the devaluation of
the peso was sudden and unusual, we needed to acquire
pesos at less favorable rates in order to meet the demand
for immediate payout in Mexico, which impacted the overall
decline in revenue by less than $5 million.
In early July 2008, the Arizona Court of Appeals over-
turned a trial court’s ruling in Western Union’s favor regard-
ing the authority of the Arizona Attorney General to seize
money transfers originated in states other than Arizona
and intended for payment in Mexico. In December, the
Arizona Supreme Court agreed to hear the case, which was
argued on January 13, 2009. However, a decision has not
yet been rendered. The Arizona Attorney General has not
attempted to resume the type of seizures that are at issue
in this litigation. However, we remain subject to scrutiny
in Arizona by law enforcement and regulatory agencies.
The Arizona Attorney General has and continues to make
extensive data requests of us regarding our operations,
our agents and our consumers. On January 8, 2009, the
Arizona Superior Court ruled in Western Union’s favor and
held that certain subpoenas for Western Union transaction
data issued by the Arizona Attorney General were over-
broad and unenforceable. However, the legal and regu-
latory environment in Arizona remains challenging, and
we could become subject to additional civil and possibly
criminal actions. To date, we have not experienced any
measurable impact to our Americas business as a result
of the recent Arizona Court of Appeals decision or the
data requests by the Arizona Attorney General. However,
additional civil or criminal actions or an unfavorable reso-
lution of the case described above could adversely affect
our business, financial position and results of operations.
Revenue and transaction growth in the APAC region
for the year ended December 31, 2008 compared to the
same period in 2007 was driven by strong inbound growth
to the region, especially to the Philippines. China revenue
and transactions grew at 13% and 11% for the year ended
December 31, 2008 compared to the corresponding
period in 2007, respectively. Revenue growth rates slowed
to China during the third quarter of 2008, with revenue
declining in the fourth quarter of 2008 compared to the
same period in 2007, in part due to the weakening eco-
nomic situation described previously and the decline in
high revenue transactions from small entrepreneurs that
typically make purchases in China.
Foreign exchange revenue increased for the year ended
December 31, 2008 compared to the same period in the
prior year due to an increase in cross-currency transactions
primarily as a result of growth in international consumer-
to-consumer transactions. As described above, foreign
exchange revenue also benefited during the year ended
December 31, 2008 compared to 2007 from the exchange
rate between other currencies against the United States
dollar, despite the negative impact of currency rate fluc-
tuations in the fourth quarter of 2008.
We have historically implemented and will likely imple-
ment future strategic fee reductions and actions to reduce
foreign exchange spreads, where appropriate, taking into
account growth opportunities and competitive factors. Fee
decreases and foreign exchange actions generally reduce
margins, but are done in anticipation that they will result
in increased transaction volumes and increased revenues
over time. During the year ended December 31, 2008, fee
decreases and foreign exchange actions have occurred at
a significantly lower rate than in previous years. Such fee
decreases and foreign exchange actions have impacted
our annual consolidated revenue on average approximately
3% during 2006 and 2007 and approximately 1% in 2008.
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