Are Expectations Too Low for Xoom Corp?

Xoom (NASDAQ: XOOM  ) is an electronic payments company that provides a way for people to send funds across borders with a few taps on a smartphone. It's easy to use, cheaper than the competition, and the company has been meeting or beating estimates. The company guided below consensus for 2014 though, causing a sell off to its post-IPO low. Investors had been looking for a profit of $0.06 for the first quarter and were shocked when the company guided to a loss of $0.05-$0.08 for the quarter.

For the year, expectations were for a profit of $0.35, and guidance came in at $0.03-$0.10.  Competition is increasing, as companies like Facebook (NASDAQ: FB  ) and Google (NASDAQ: GOOG  ) appear positioned to enter the industry. Meeting expectations and setting a low bar for future quarters is a management tactic to keep pressure off. Was Xoom sandbagging, or is competition creating margin pressure?

Convenience is why Xoom stands out
Xoom's focus is on convenience, but it was also the low-cost supplier for international money transfers. The cost difference gave consumers a financial reason to try the service. After seeing how easy it is to use, customers also become hooked on the quality of service. The key is in having customers' information. Once a person fills out a profile, it is a matter of logging in and clicking a single button to initiate a transfer.

Xoom takes convenience one step further by making funds available almost immediately. International ACH transfers require a four-day hold on funds to prevent fraud and money laundering. However, Xoom makes the transfer available near real-time by lending the funds to the recipient, then recovering that investment when the transfer is complete. Xoom processes 95% of its transactions in this manner, and the loss rate is only 25 basis points. The company attributes that to its fraud-prevention procedures.

On the receiving end, Xoom partners with local merchants so funds can be withdrawn from a bank account, picked up at a supermarket, or in some cases delivered to residences.

No competition from Facebook and Google
The combination of simplicity and shorter transfer time seems to be a tough hurdle for competitors to overcome, but a few seem willing to try. Facebook, with its 1.2 billion monthly active users, is entering the market with the intent "to become a utility in the developing world." This would put it head-to-head with Xoom if it can execute, but there are two caveats -- Facebook has purchased other businesses, but it hasn't successfully built a business from scratch outside of its core competency, and Facebook's first focus will be Europe, but it is unclear if or when it will expand to Latin America or Asia. .

Google is already in the game with Wallet, which allows money to be transferred through the integration of Wallet into Gmail, but it doesn't offer the last mile. Google would need to build out a network of local partners to facilitate payment transfers in order for the two companies to compete head-on. At least today, this doesn't appear to be in the cards.

At this stage, while signs of increasing competition exist, it doesn't seem to be imminent. Google has historically focused on centralizing large, complex projects, not putting in the legwork to build out an army of partners. Facebook's competition is more direct, but the current focus is on Europe.

Management may have sandbagged guidance
Diving into the details of the company's model reveals two issues that are most likely the discrepancy between expected net income and guidance.

  1. Currencies -- In addition to the cost of the transfer, Xoom profits from currency spreads; as currencies become more volatile, spreads widen. The Rupee has been the primary focus for this source of revenue. The company did not include currency profits when offering guidance for 2014.
  2. BlueKite -- Xoom acquired BlueKite, an early stage company focused on cross-border bill payment, in February 2014. Together, BlueKite and Xoom allow a person to transfer money across borders, then complete a bill-pay-like transaction. Xoom did not include revenue in guidance, but it did include $3 million in operating expense related to BlueKite.

It seems as if guidance is lower than it needs to be, and with only 7% of its addressable market as customers, Xoom should be able to continue to gain share throughout 2014. The earnings call, scheduled for Tuesday after market close, should be interesting.

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