My friend Vish pointed me to a company called XOOM, which is in the money transfer business. He got the idea from a LinkedIn post by Jason Mosers (TMFJMo). Anyways, I though the company was interesting and I really liked their new Bill Payment initiative, so I some digging around using my usual method, i.e. summarising the most recent 10K I could find along with some of the recent earnings releases. See notes below.
FYI, Jason’s LinkedIn post is here:
Anyone looked at Xoom? Thoughts?
Xoom (NASDAQ: XOOM) offers fast and cost-effective consumer-to-consumer money transfer services. Currently, Xoom supports money transfer from the US to 31 countries, and it targets the immigrant population in the US, i.e., people who left their home country for the US in search of better opportunities and lifestyle as well as income that would support their families back home.
Xoom IPO’ed in Feb 2013 where about 7.3 million shares were sold to the public @ $16/share; this included about 1.1 million shares of selling stockholders. There was a follow-on offering in September 2013 where approximately an additional 5 million shares were sold to the public @ $30.5/share; this included about 1.4 million shares of selling stockholders.
How does Xoom approach fund transfers?
Origination & funding - Xoom does not operate any physical locations (unlike Western Union) and all transfers originate online either at the xoom.com website or via their mobile app. The customer initiating the money transfer can choose to fund the transfer from a US bank account, credit card, or a debit card. Over 90% of their GSV is funded by bank accounts through the Automated Clearing House (ACH) system. Xoom instantly processes 95% of ACH transactions for disbursement by recipient-side partners, which allows fast transfer of funds to receipts, while funds become available to Xoom within 1-2 business days since ACH transfer was initiated. This quick transfer of funds is one of Xoom’s USPs, but it does expose them to additional risks. Managing this risk is one of the key aspects of the Xoom business.
Disbursement - This can be via bank deposit, cash pickup at disbursement locations, and even home delivery of cash at certain countries. Xoom can either pre-fund or post-fund a disbursement. In the pre-fund mode, Xoom funds the disbursement partner’s bank account prior to the funds being delivered to the recipient.
Given there are risks in both the funding and disbursement processes, especially because Xoom initiates the transfer before receiving the funds in a majority of the cases and also does the same with disbursement, a competent system of risk management is required. Xoom’s transaction loss rates have been 35 basis points or lower as a percentage of GSV since 2010. Xoom claims that it’s proprietary risk management system is one of its key business strengths.
Xoom makes money by charging a transaction fee for the money transfers and from foreign exchange spreads when transfer is not in US dollars. Foreign exchange spreads typically range between 1 to 3% of the transfer amount.
What is the Xoom Opportunity?
The US is top remittence sending country. Estimated outbound flow of monies in 2012 was about $120B, out of which about $80B was destined to countries served by Xoom. The traditional money transfer model (e.g., Western Union, Money Gram) is slow, inconvenient, and comes with high overheads of physical locations and transaction processing agents. Xoom’s digital transfer model offers a fast, convenient, and low overhead solution.
The traditional money transfer model with extensive physical network of agents such as those of Western Union are expensive to maintain and have limitations such as requiring the sender to go to a branch/agent during business hours to initiate the transfer. Xoom’s business model is light on infrastructure, fast, and efficient. Xoom’s proprietary risk management system is one of the key tools for it to enable fast money transfer. They claim that their risk management system enable Xoom to manage payment & fraud risk, anti-money laundering and regulatory compliance.
Xoom has recently expanded its services to include Bill Payment and cell phone top-up services. This service is now available in some Latin American countries, but this seems like a great addition to the basic money transfer facility offered by Xoom. In fact, I would argue that this is an even bigger value proposition as many immigrants wish there was a simple and easy method to make payments for their loved ones back in their country of origin but are instead left to grapple with crummy payment services, which often don’t accept foreign currency payments. Further, the ability to consolidate several bills into one interface for the sake of management and payment is a great service. I believe this sort of service will increase customer loyalty at Xoom.
Xoom launched money transfer services to China in early 2015.
Has Xoom Xoom’ed?
Let’s start by looking at some of the company’s key operating metrics:
- Gross sending volume (GSV) is the total amount of funds transferred, excluding fees. These grew at a rapid clip until 2013, but have seen a slowdown in 2014.
----------------------------- Year GSV ($M) YoY% ----------------------------- 2009 $500M - 2010 $859M 71.8% 2011 $1707M 98.7% 2012 $3248M 90.3% 2013 $5544M 70.7% 2014 $6859M 23.7% -----------------------------
Is there a legitimate reason to be worried? The GSV growth rate was hovering in the 70+% range, but it has suddenly come down to 24% year-over-year increase. Why?
- The number of active customers measures the customers who have at least made one transfer in a given 12-month period; similarly, new customers added reflect new customers added who have at least made one transaction in the 12-month period considered. Xoom now has over 1 Million active customers and it seems to find about 400 thousand new customers each year.
#’s below in thousands.
----------------------------------- Year #active #new ----------------------------------- 2009 301.8 205.3 2010 392.7 225.9 2011 516.6 291.5 2012 776.4 405.3 2013 1059.7 481.1 2014 1278.6 465.3 -----------------------------------
The above numbers seem to suggest that the company is looking at adding about 450,000 odd new customers each year. That’s not bad, given they have about 1.3M active customers.
- The company also reports Adjusted EBITDA and Non-GAAP Net Income; the company became profitable on a non-GAAP basis in 2013. The company went from negative EBITDA to positive in 2013. EBITDA grew about 43% b/w 2013 and 2014.
Let’s look at Adjusted EBITDA for last 3 years. This measure removes the impact of stock-based compensation, taxes, amortisation & depreciation, interest income & expenses, and any one time loss event (this one can be a problem if the loss events are recurring).
EBITDA for 2014, 2013, and 2012 were $20.1M, $14.4M, and $(0.5)M, respectively. Note that 2014 adds back $30.8M for a one-time loss related to “business email compromise”. This needs to be investigated further.
Non-GAAP Net Income adds back stock-based compensation, amortisation of acquired intangible assets, and one-time loss events. Non-GAAP income was $14.7M, $10.4M, and $(3.5)M, in 2014, 2013, and 2012, respectively. Note that for 2012 no compensation is made for acquired intangible assets as I didn’t look hard enough to find the value.
- Xoom sports strong revenue growth and high gross margins.
Xoom generates revenue from transaction fees charged to customers, and foreign exchange spreads on transactions where the payout currency is other than U.S. dollars. Xoom recognises revenue when they accept the transaction for processing, net of cancellations and refunds.
Xoom reports cost of revenue, which includes fees to disbursement partners for paying funds to the recipient, fees to payment processors for funding transactions, a provision for transaction losses. Note that promotional expenses to acquire new customers are not reported under Cost of Revenue and are instead reported separately under "Marketing Expenses”.
------------------------------------------------------- Year Revenue CoR Marketing ------------------------------------------------------- 2012 $80M $26.8M $21.5M 2013 $122M $38.1M $25.9M 2014 $159M $38.1M $32.7M -------------------------------------------------------
Gross margins have been going up from around 50% in 2009 to 76% in 2014. That’s showing that the business is scaling nicely. Marketing spend as a percentage of revenue is trending down from 25% in 2012 to around 20% in 2014.
Financials & Valuation
o Cash, cash equivalents, disbursement pre-funding, and short-term investments as of Dec 31, 2014: $250M. Company has no long-term debt.
o Weighted average diluted shares for year ending 2014: 38,195,000
o FY 14 Revenue: $159.1M
o FY 14 Non-GAAP EPS: $0.35
o Share price as of 22 Feb 2015: $16.43 (close to the IPO offer price)
o PE (non-GAAP): 46.9
o PS: 3.9
Xoom’s FY 2015 guidance is for revenues around $190M and non-GAAP EPS around $0.35 at the mid-point. I.e., the company is guiding for revenue growth of around 19.5% and zero earnings growth. Given the outlook, it’s no surprise that Xoom’s share price has come down sharply. It’s 52-week high has been around $30, so it’s down 50% with respect to the 52-week high.
The story looks exciting but I ‘m concerned by the slowdown in growth. Management is guiding for a flat 2015. I have a hypothesis - the initial years of Xoom and during its pre-public life the company was doing well because the big giants like Western Union and company hadn’t really taken to digital money transfers. I ‘m guessing the giants are now more and more focusing on digital transfers and are starting to eat Xoom’s lunch. This is my hunch but given the slowdown in growth and the high earnings multiple even after a 50% drop in share price, I don’t think this is a good investment. I ‘m happy to discuss this further with anyone who’s some idea as to what’s the reason for the slowdown in revenue growth in 2014 and 2015. But, for now, I ‘m not going to really put more effort into uncovering the reasons …