Q1 2023 Western Union Co Earnings Call

Participants

Devin B. McGranahan; President, CEO & Director; The Western Union Company

Matthew Cagwin; CFO; The Western Union Company

Tom Hadley

Andrew Garth Schmidt; VP & Analyst; Citigroup Inc., Research Division

Bryan Connell Keane; Research Analyst; Deutsche Bank AG, Research Division

Darrin David Peller; MD & Senior Analyst; Wolfe Research, LLC

Jeffrey Daniel Goldstein; Equity Analyst; Morgan Stanley, Research Division

Kenneth Christopher Suchoski; US Payments and FinTech Analyst; Autonomous Research US LP

Ramsey Clark El-Assal; Research Analyst; Barclays Bank PLC, Research Division

Rayna Kumar; Analyst; UBS Investment Bank, Research Division

Tien-Tsin Huang; Senior Analyst; JPMorgan Chase & Co, Research Division

Timothy Edward Chiodo; Director; Crédit Suisse AG, Research Division

Tyler DuPont; Analyst; BofA Securities, Research Division

Vasundhara Govil; Research Analyst; Keefe, Bruyette, & Woods, Inc., Research Division

William Alfred Nance; Research Analyst; Goldman Sachs Group, Inc., Research Division

Presentation

Operator

Good day, and welcome to the Western Union First Quarter 2023 Results Conference Call. (Operator Instructions) Please note that this event is being recorded.
I would now like to turn the conference over to Tom Hadley, Head of Investor Relations. Tom, please go ahead.

Tom Hadley

Thank you. On today's call, we will discuss the company's first quarter 2023 results, and then we will take your questions. The slides that accompany this call and webcast can be found at westernunion.com under the Investor Relations tab and will remain available after the call. Additional operational statistics have been provided in supplemental tables with our press release.
Joining me on the call today is our Chief Executive Officer, Devin McGranahan; and our Chief Financial Officer, Matt Cagwin. Today's call is being recorded, and hour comments include forward-looking statements. Please refer to the cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission, including the 2022 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 some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in our earnings release attached to our Form 8-K as well as on our website, westernunion.com, under the Investor Relations section.
I will now turn the call over to our Chief Executive Officer, Devin McGranahan.

Devin B. McGranahan

Good afternoon, and welcome to Western Union's First Quarter 2023 Financial Results Conference Call. We are pleased with the progress we are making on our Evolve 2025 strategy and are generally positive about our first quarter results.
As we have discussed previously, we see our evolution as a 2- to 3-year journey to return the company to sustainable, positive revenue growth. In the near term, changing the trajectory for new customer acquisition and transaction growth has been our priority.
Our reported revenue in the first quarter was $1.37 billion, excluding contributions -- and excluding contributions from Business Solutions, this decreased 1% on a constant currency basis. This reflects several underlying dynamics including a negative impact of 3 percentage points from the suspension of operations in Russia and Belarus and a positive impact of 2 percentage points each from the business performance in the Middle East and Argentinian inflation.
Adjusted earnings per share came in strong and was $0.43 in the quarter compared to $0.51 in the prior year, which included a contribution of $0.05 from Business Solutions and $0.04 from operations in Russia and Belarus. Matt will further discuss our financial results in more detail and provide an update on our 2023 financial outlook.
As you can see from these results, we are progressing against our Evolve 2025 strategy. We are making headway on stabilizing our retail business and accelerating growth in our Digital business.
Recall, some of our Evolve 2025 goals include getting the retail business to stable and returning our digital business to low double-digit growth rates. As we reported today, we saw sequential improvements in transactions across all regions compared to where we exited last year.
More important -- more importantly, for the first time in almost 2 years, we saw positive transaction growth in North America in the first quarter. We also saw a 200 basis point sequential improvement in transaction growth in our European operations when adjusted for the suspension of services in Russia and Belarus.
Transactions in our Middle East region also improved by 200 basis points sequentially and transactions in APAC improved significantly as well. Latin America continued to be the top performing region in the company with transactions up 9% year-over-year, an acceleration of 100 basis points over the growth rate we experienced in the fourth quarter. Our results demonstrate that our focus on improving the core operational performance of our business, focusing on winning new customers and improving retention can be achieved.
Stepping back for a moment. On the macro front, the first quarter of 2023 continued to be challenging with persistent high inflation despite interest rates being elevated around the world. Even with that backdrop, 2023 Central Bank remittance data indicates the resilience of the cross-border remittance market with an average principal volume up mid-single digits in the countries which have reported.
We are also seeing resilience in our own customer base with constant currency principal per transaction, up 5% in the quarter. Our PPT is benefiting from our decision to suspend operations in Russia and Belarus, but even excluding Russia and Belarus, constant currency PPT remains positive.
Last October, we launched our Evolve '25 strategy to return Western Union to positive revenue growth by becoming the market leader in providing accessible financial services to the aspiring populations of the world. In addition to accelerating our core retail and digital remittance businesses, we have been working to launch new products and services to expand our value proposition to our existing 120 million customers.
We have successfully launched our Digital Bank in Germany, Italy, Romania and Poland. We are now in friends and family testing in Brazil and the U.S. with our digital wallet product. We have expanded our bill pay business in LACA, relaunched our U.S. Corrections Pay platform, have entered into partnerships in Argentina and Australia to help connect customers to lending products and are nearing the relaunch of our prepaid product in the U.S. as well.
While in the short term, these products and services will not be material contributors to our overall revenue growth. They are the foundation of expanding our value proposition, increasing our relevance, improving our customer retention and providing platforms for future revenue growth. As we gain more traction, I look forward to sharing more with you.
Returning to our -- returning our branded digital business to positive customer and transaction growth has been a top near-term priority over the last 3 quarters. We launched a new go-to-market approach in August of 2022 and shifted from maximizing revenue per transaction to maximizing LTV to CAC. We launched new customer segment offers and more importantly, revamped our approach to marketing funnel management. We are now far enough into this journey to be able to tell you we believe it's working and durable. We reported to you last quarter that new U.S. outbound branded digital customers were up 30% year-over-year, which contributed to 5% transaction growth in the fourth quarter.
I am happy to report that in Q1, we saw a continuation of these trends with U.S. outbound branded digital customers growing at 21% and transactions now growing at 11%, the fastest transaction growth we have seen in the U.S. since 2021. Our expectation has always been that we would see new customer growth first, followed by transaction growth and ultimately revenue growth which we expect to begin in North America in the third quarter of 2023.
In the near term, growing new customers and transactions is an important part of the equation to jump start revenue growth. But sustaining that growth at scale longer term will require us to increase the customer's lifetime value and improve our cost of customer acquisition. Our work in these areas is also starting to bear fruit. In the first quarter, while increasing our new U.S. branded digital customers by 21%, we were also able to lower our average customer acquisition cost by roughly 20% in North America. Additionally, retention rates of our U.S. outbound September cohort, the first of our new approach, continue to perform at or above the levels of our existing customer base.
In conclusion, we are acquiring more new U.S. outbound branded digital customers than in the recent past. We are acquiring them at a lower cost of acquisition and early signs would indicate we are also retaining them at similar, if not higher levels than in the past.
As we mentioned in the last quarter, we have expanded our digital go-to-market program to several of our large European markets. As a result, we have begun to see a similar trajectory across key countries in Europe. New branded digital customers in France, Spain, the U.K. and Germany were all up double digits in Q1, which is a meaningful improvement from recent trends in those countries. Additionally, we've also seen improvements in transaction growth across these same countries and look forward to sharing more with you on future calls.
Our retail growth strategy centers around having the right value proposition for customers, delivered with the right partners in the right locations and on driving location level productivity as opposed to just increasing the number of active locations. Frequently, these partners include some of our largest networks, many of which have been partners for decades. Strategic network partners, as we refer to them, are an important element of our overall retail network strategy as in most cases, they are exclusive to Western Union and provide the customer with a unique value proposition around convenience.
Over the past 6 months, we have been working to better understand how we can improve the in-store experience as well as individual location productivity of the stores in these large networks. The initiatives being developed include creating a more omnichannel offering, introducing new products and services, integrating loyalty programs, improving stage and pay options, simplifying refunds and focusing on reducing friction in the transaction flow.
Beginning in the second quarter of 2022, I began discussing the opportunities to reduce friction for both our retail customers and our agents to better improve the overall Western Union retail experience. Over the past year, we have launched many such initiatives, including streamlining our refunds processes, reducing friction in our compliance processes, increasing transparency of the flow of funds through our track a transfer services.
I am pleased to let you know that this focus on agent and customer experience has led to a 30% year-over-year drop in per transaction agent support calls to our call centers. While this is obviously beneficial from a cost perspective, ultimately, we believe it will help us increase retention. We realize we still have a lot of work to do but are pleased with the progress we are making, and we'll continue to work to improve the overall experience for our agents and our customers alike.
As part of our retail network strategy, we continue to pilot our new point-of-sale system in the U.S. We have developed this new system using a modular architecture and have built a services layer that we can access across multiple front-end technologies, including our legacy point-of-sale systems around the world. This type of modular development allows us to bring to market product enhancements that will improve the customer experience in advance of the full-scale rollout of our new point-of-sale system. Two functions we have developed in recent months are Quick Resend and an improved customer lookup tool, which we call Remember Me.
The goal of Quick Resend is to allow customers to complete repeat transactions to known receivers more quickly and can reduce transaction times by up to 75%. We have tested this product enhancement on our legacy technology in select agent locations in the United States in the first quarter and have now begun to roll it out across our entire U.S. footprint.
Finally, I would like to give you an update on the progress of our ecosystem strategy. In recent months, we have focused heavily on improving the onboarding and transacting experiences for new customers. In particular, we've been focusing on making it more seamless for existing and former Western Union customers to migrate to the Digital Bank. As we continue to evolve, we believe that these migrated customers and returning customers will continue to be the most valuable and easiest to retain. To date, our Digital Bank has enabled us to reengage with more than 20,000 lapsed Western Union customers. Our offer has not only brought them back to Western Union, it has given them access to an improved money transfer experience, our multicurrency digital wallet and a Visa debit card.
Secondly, converted Western Union customers and prior lapsed customers are doing more than twice the number of transactions they were doing prior to the conversion to the Digital Bank. These transactions include P2P, top up funds in and out and debit card payments in addition to traditional money transfer.
Finally, and potentially most surprisingly, we have seen that the cohort that converted from our retail network to our Digital Bank is among our very best performing with more money transfer transactions and more revenue than they were providing prior to the conversion. This will be a clear opportunity for us going forward. Now we realize it is still a small sample relative to our existing customer base and we will need to continue to scale our efforts more broadly, but early results leave us optimistic about the possibility to provide broader financial services and increased retention with our 120 million customers around the world.
Before I turn the call over to Matt to discuss our financial results and outlook in more detail, I would like to highlight a key partnership renewal. We are pleased to announce the extension of our exclusive long-standing relationship with Swiss Railways. They have been a valued partner of ours for nearly 30 years and we look forward to continuing to serve our Swiss customer base at 135-plus Swiss Railway locations for many years to come.
Thank you for your time, and I will now turn the call over to Matt.

Matthew Cagwin

Thank you, Devin, and good afternoon, everyone. I'm pleased to be here today to discuss our first quarter results. First quarter adjusted revenue was down 1% to $1.1 billion. Given this is better than our initial expectations, I'd like to walk you through several dynamics in the quarter that led us to this outcome. First, we continue to see a negative impact on our results from the suspension of operations in Russia and Belarus and agent loss and promotional pricing activities related to our new branded digital go-to-market strategy.
Russia and Belarus negatively impacted Q1 adjusted revenue by 3 percentage points. Second, Argentina inflation benefited first quarter adjusted revenue by 2 percentage points. And finally, we continue to see strength in LACA and a meaningful improvement in the Middle East. The improvement in the Middle East was driven by a change in monetary policy in Iraq during the first quarter. Our leading compliance capabilities and strong agent network allowed us to react quickly and meet the needs of customers in Iraq and thus drove a 2 percentage point benefit to adjusted revenue. At this time, it's unclear at what level or for how long this trend will continue.
In the first quarter, we saw improving trends from our fourth quarter exit rates on nearly all important dimensions. Our retail money transfer business, while still down improved sequentially, and we saw -- and we believe it is now moving in the right direction. Our branded digital go-to-market program is progressing, as Devin mentioned, driving 7% branded digital transaction growth across the company in the quarter, with new global branded digital customers up 14%, excluding Russia and Belarus. We also continue to see double-digit growth in other revenue, primarily driven by retail money order business due to the benefit of higher interest rates, the Q3 2022 optimization of our flow portfolio and strong transaction growth as well as strength in our consumer bill pay business in both Argentina and United States.
Adjusted operating margin was 20.5% compared to 21.8% last year. The year-over-year decrease in margin was due to increased technology investments primarily related to our Evolve 2025 strategy and a slower reduction in cost relative to our lower revenue. When looking at operating margins on a sequential basis, it improved by nearly 500 basis points, which was above what we initially expected when we shared our outlook in early February. The sequential improvement in our operating margin was due to a few factors. First, lower third-party spend and marketing expense, which was expected; two, quicker-than-expected expense reductions related to our cost redeployment program.
We have been able to take actions, which will allow us to free up more than $35 million in 2023, with almost half benefit in the first quarter. And third, better adjusted revenue than expected, thus increasing leverage of our cost base. The adjusted effective tax rate in the quarter was 13.5% compared to 13% in the prior year period. The increase in adjusted effective tax rate was primarily due to discrete expenses in the current period. Adjusted EPS was $0.43 when compared -- which compares to $0.51 in the prior year period, which included $0.05 contribution from Business Solutions and $0.04 contribution from Russia and Belarus.
Now turning to the C2C segment. Revenue decreased 5% on a constant currency basis, while transactions declined 6%. Russia and Belarus negatively impacted revenue by 3% and transactions by 6%. Softness in our retail business, and promotional pricing activity related to our branded digital go-to-market strategy were partially offset by growth in Iraq.
For our branded digital business, revenue declined 6% on a constant currency basis. As Devin highlighted earlier, we anticipated that, our go-to-market strategy would first lead to an increase in new customers, followed by an increase in transactions and then lastly, an increase in revenue. As a result, promotional pricing activities negatively impacted revenue in the quarter, while global transaction growth accelerated from 2% in the fourth quarter of last year to 7% in Q1, with new customer acquisition up 14% year-over-year in Q1, excluding Russia and Belarus. We remain excited about the progress of our new digital customers and transactions and expect to see positive revenue growth in the back half of this year.
Now moving to the regional results. In the first quarter, North America revenue decreased 8%, while transactions grew 1%. The U.S. domestic business and U.S. outbound business to Russia continued to be a drag on our results. While promotional pricing activities related to our new go-to-market strategy negatively impacted revenue growth, branded digital transactions grew 8%, leading to the first quarter of positive overall transaction growth in North America since the second quarter of 2021.
Revenue in Europe and CIS was down 13%, on a constant currency basis, while transactions declined 23%. Russia and Belarus, which will anniversary next quarter negatively impacted revenue by 6% and transactions by 19%. The region faced continued headwinds from an agent loss, a difficult macro backdrop and ongoing competitive pressures. But trends continue to improve for both revenue and transactions for the second consecutive quarter.
Revenue in the Middle East, Africa and South Asia accelerated meaningfully, growing 6% on a constant currency basis, while transactions decreased 3%. Iraq led the region with a higher principal per transaction driving revenue growth, partially offset by continued softness in our retail business. Revenue in Latin America and the Caribbean accelerated and was up 17% on a constant currency basis, while transaction growth of 9%. The solid performance in the quarter was led by strength in Argentina, Ecuador and the Dominican Republic. And finally, revenue in APAC was down 5% on a constant currency basis, while transactions declined 2% due to softness in Japan, Australia and Korea.
Now moving to other revenue, which primarily consist of retail bill payment in Argentina and the United States and the money order business in the U.S. Other represents 8% of the total company revenue and grew 23% year-over-year on a reported basis. As I discussed earlier, the strength was driven by our retail money order business and our consumer bill pay businesses in both Argentina and United States.
Now turning to our cash flow and balance sheet. In the first quarter, we generated $137 million of operating cash flow compared to $200 million in the prior year period, with the decrease due to timing of payments. Additionally, our annual transition tax payment related to 2017 U.S. Tax Act will increase to nearly $120 million in the second quarter. These payments will continue to step up over the next couple of years and will end after 2025.
Capital expenditures were $57 million in the quarter, with a large portion due to a single agent-signing bonus, which we entered into early last year. As a reminder, agent-signing bonuses can vary from quarter-to-quarter, and we anticipate that the mix will shift away from agent-signing bonuses. We continue to maintain a strong balance sheet with cash and cash equivalents of $1.2 billion and debt of $2.5 billion. Our leverage ratios were 2.4x and 1.2x on a gross and net basis, which continues to provide us flexibility for potential M&A while we target to maintain our investment credit rating.
Now moving to our outlook. Today, we reaffirmed our 2023 adjusted financial outlook. We have included improved trends in Iraq in our forecast for the outlook through April, but have assumed no incremental revenue for the remainder of the year due to the degree of uncertainty regarding the level and duration.
Our outlook assumes no material changes in macroeconomic conditions. As a reminder, we expect adjusted revenue to be down 2% to 4%. We expect adjusted operating margin to be in the range of 19% to 21%, and finally, adjusted EPS is expected to be in the range of $1.55 to $1.65.
To recap, we are off to a good start. We're optimistic about the trends we're seeing and the progress that we're making in our Evolve 2025 strategies. Thank you for joining the call. And operator, we're ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes to us from Rayna Kumar from UBS.

Rayna Kumar

I want to ask about promotional pricing. Can you give us an update on the spending behavior of your newly acquired customers through promotional pricing. How many of the customers are returning to make subsequent transactions at market-based pricing?

Devin B. McGranahan

Yes. Thanks for the question. Thanks for joining the call. As we have said previously, and we will continue to reiterate, the customers that we acquired with new customer promotional pricing, which in many cases, was first transaction free, have exhibited the same, if not better, characteristics in terms of subsequent transactions and retention rates over 3- and 6-month periods. In fact, we have seen an acceleration in the progress of subsequent transactions over our traditional customers acquired not through promotional pricing. So we feel good, as we commented that the strategy is working and durable.

Operator

Our next question comes to us from Darrin Peller from Wolfe Research.

Darrin David Peller

Can we just touch on where you think you are now in terms of the promotional pricing changes for digital transaction growth? And maybe just as a quick follow-on to that. I mean it looks obviously like it's been having an effect on adding digital users. If you can remind us on the stepping stones from here to a more positive inflection on revenue growth that's sustainable, just remind us on the key variables that get us from where we are today, whether it's anniversary pricing and anniversary in some of the headwinds for Russia, et cetera, all the way to a positive inflection would be really helpful.

Matthew Cagwin

Darrin, thank you very much for joining the call. As we've talked about in past calls, we're rolling this out in a cohort fashion. So we started the program last year in August here in the U.S. with 50 corridors. And then we've been continuing to bring on customers on a monthly basis since then. So it's now been in the market for going on 8, 9 months now. We rolled it out and in Q4 to our European business and the same effect. So if you go through and think about modeling our market-based pricing relative to our attrition rate, which I know we've never disclosed publicly for digital, but it's largely a little better than our retail disclosed. That will help you get your head around this. But as we've talked about also, we expect to have positive revenue growth in the second half of this year.

Devin B. McGranahan

Darrin, we have historically said we anticipated somewhere between 12 and 18 months to anniversary or lap the effects of the new customer and new segment-based pricing. I think we are pleased, as we commented in this call that we expect in North America where we first launched it to move into positive revenue territory. That is happening quicker than we originally modeled due to both, as I explained on the first question, an accelerated return of customers for second, third and fourth transaction as well as similar, if not elevated levels of retention.

Darrin David Peller

I mean if I have time for a quick follow-up, just the margin strength was pretty notable in the quarter. And so -- but we didn't see a change in EPS guidance. So was it -- just remind us again, was it below the line items, anything nuanced there? Or maybe you could remind us on your -- on the cadence of margins as the year progresses?

Matthew Cagwin

Darrin. So really, when you think about our outlook for the year, we are very excited about the start of the year. It's giving us a whole lot more financial flexibility, but it is early in the year for us to be making any kind of guidance changes. And we're looking for places where we can make investments and accelerate our path here to long-term sustainable growth.

Operator

Our next question comes to us from Ken Suchoski from Autonomous.

Kenneth Christopher Suchoski

I just want to ask about the trends in the physical retail business. If I do some macro math, it looks like the transactions in that retail business declined maybe in that mid-single-digit range year-over-year this quarter -- it was down kind of low double digits in the prior 3 quarters. Maybe there's some Russia impact in there. But I'm just curious, should we expect that year-over-year growth rate to continue to improve? And I guess, is this a business that could get to the positive growth later this year?

Devin B. McGranahan

So again, as we have stated -- thanks for joining the call. Our goal is to get the retail business to stable. We are trying hard to put in place a retail strategy, as we highlighted on Investor Day and have been executing on since, that would allow us to attract and retain customers and more importantly, to increase the retention of the large customer base that we have. Those efforts are beginning to take effect, and you can see that in the change around the world of the retail customer accounts and transactions that we've been reporting. I do not anticipate that, that will accelerate enough to get us to flat or stable by the end of the year, but we anticipate that being able to achieve that during the course of our Evolve 2025 time period.

Kenneth Christopher Suchoski

Okay. All right. That's helpful, Devin. And then just as my follow-up, I mean, you talked about some of the momentum in the wu.com kind of branded business, transaction growth accelerating to 7% this quarter. What's the expectation there, I guess, in terms of transaction growth for the rest of the year? And then, I guess, how should we expect that to translate into revenue growth just because the pricing just came in a little bit softer.

Matthew Cagwin

Ken, this is Matt. I mean, so obviously, we're rolling out our new digital go-to-market strategy. You can see the continued improvement in our transactions. You get a larger portion of our customer base that is on that as we grow our customer base. It's hard for us to forecast, but actually we don't provide guidance on digital growth. So I can't really answer that question. But I think you can model that if you think through just the path we've seen. It's been pretty sequential now for customer growth now being in the double digits and you're seeing the transactions working its way towards that level. And then same question for the first one on the...

Devin B. McGranahan

Ken, I think you can look at -- I think we've been pretty clear about what we're seeing in North America ex the Russia and Belarus progression since we launched it. We're now in double-digit transaction growth in North America. That trajectory, we feel pretty good about. And so as we roll that around the world, you can assess where we're going to be by the end of the year.

Operator

Our next question comes to us from Tien-Tsin Huang from JPMorgan.

Tien-Tsin Huang

Maybe I'll ask a similar question in a different way that's been asked already. Just thinking about the spread on the digital branded business, the spread between revenue growth and transaction growth. Is that more likely to be widened out before it narrows again? Or could we see that start to narrow ahead? So not looking explicit numbers just thinking about the relationship between the two as another way to look at where we are in the promotion.

Matthew Cagwin

Tien-Tsin, it's Matt Cagwin, pleasure to see you and hear from you. As you think about the rest of this year, I think you're going to see it could widen a little bit more potentially. But I think you're going to see the high watermark now going into Q2 and then start narrowing as you get into the back half of this year when we start generating positive revenue growth.

Devin B. McGranahan

Particularly given the scale of our business, Tien-Tsin, we chose North America to start because it's the 600-pound gorilla. And so as that turns to positive revenue growth in the back half of this year, almost regardless of what we did in the rest of the world you're going to start to see it narrow.

Tien-Tsin Huang

Yes. Makes sense. No, it's encouraging. Look forward to seeing that. And my follow-up then Devin, maybe for you, I know -- I think maybe it was Ken that asked that on the retail side, you did say that it's headed in the right direction. Is your statement there driven by the improvement more in the retention side or the acquisition side and just thinking about in prior -- from a priority standpoint, what's more important to you from KPI perspective. If you don't mind me sneaking in one more because people are asking me just the Iraq, can you just -- is there a way to quantify that? I understand you're not looking forward to extend beyond April, but I'm curious if that was sized for us.

Devin B. McGranahan

Yes. On the retail side, the most powerful lever, and this is why we shared it at the Evolve 2025 Investor Day. Small increases in retention on a very large base can make a meaningful improvement in the trajectory of that business. the breadth and depth of our retail network is always a great catchment for new customers, continuing to have them transact with us because we have great experiences, we're easy to do business with, and we've got a good value proposition -- should hopefully help us improve retention. And we're doing modifications as we talked about on prior calls in terms of what our network looks like and its ability to attract new customers into our branded locations from both an exclusivity standpoint, but also competing head-to-head in the independent channel through our improvements with our point of sale and our ongoing efforts with customer loyalty programs and things like that.
I'll let Matt answer the question on Iraq.

Matthew Cagwin

On the Iraq front, we talked about earlier on the call, it's about 2% of revenue in Q1.

Operator

Our next question comes to us from Tim Chiodo from Credit Suisse.

Timothy Edward Chiodo

I want to dig into your recent partnership or announcement of being a part of the initial group of apps and neobanks and fintechs that are participating in Visa Plus. And if you could just start off by maybe just giving us a little bit of the background or context on how you made the decision to join and what you thought some of the advantages might be?

Devin B. McGranahan

Tim, great question. Thanks for joining the call. As you know, that particular offer/product/partnership aligns with the launch of our digital wallet in the U.S. We have always been what we would consider to be an open loop network, right? So we take funds in for most of the digital wallets, and we pay out -- funds out around the world to many, many, many digital wallets, whether that's Paytm in India or bKash Bangladesh. So our basic philosophy of opening -- of operating a funds-in and funds-out network is central to who we are. So the Visa Plus product offer is consistent with how we've constructed and managed our business. And with the addition of a digital wallet in the U.S., it seemed to make a lot of sense.

Timothy Edward Chiodo

Great. If you don't mind a brief mechanical follow-up. So our understanding is that it was discussed on the Visa call that currently the offering is domestic only, but could or potentially could become more cross-border. Should we think about this as just another payout method, meaning there's retail in store, there is send to an account, there is send to card and now it would be send to another app potentially in another country, meaning the PayPower, Venmo of Country ABC or XYZ, meaning it doesn't necessarily have to be sent to Western Union app.

Devin B. McGranahan

So I think, yes, let me try to clarify. So yes, it's U.S. only. We have not agreed to anything beyond that at this point. We do today send to app to other apps all around the world. And so for us, this is simply an extension of what we already do. In fact, we have one of the largest payout networks in the world of any kind. An important component of that is payout to account and payout to digital wallet all around the world. So for us, we already have our own network, we do that. If we could expand the network for what else we payout to, I think, over time, that would make sense for us.

Operator

Our next question comes to us from Will Nance from Golden Sachs.

William Alfred Nance

Nice results today. I wanted to follow up, I think on Peller's question earlier on some of the (inaudible) and adjusted revenue and the assumptions are baked into the guidance for the remainder of the year. It sounded like the 2-point contribution from Iraq, a 2-point contribution from Argentina were some of the major pieces that drove revenue above your expectations this quarter. So could you just kind of clarify, when you're saying you're not assuming a material change in the macro. Are you guys assuming that, that continues or does not continue in the guidance for the remainder of the year? And I guess just a point of clarification hasn't continued so far. It sounded like maybe there might still be some activity ongoing.

Matthew Cagwin

Will. So on the Iraq front, as we talked about on the call, we've assumed that it continues through the end of April. We've assumed nothing beyond April for Iraq. As far as Argentina inflation is concerned, we've always had a fair bit. We called that out. Our actual outlook excludes Argentina inflation. So if you wanted to take our headline number of the down 1% add back to 2%, that kind of gives you the comparable number to compare to are down 2% to 4%. And we'll continue to back that out because it just bounced around too much for us to try to build it into our guidance. So it's one of the -- it's constant currency and we back out Argentina inflation.

William Alfred Nance

Yes. Okay. That makes sense. So I guess the Iraq continuing beyond April would be a source of upside.

Matthew Cagwin

Correct. And as you think about it though, I mean, I mentioned earlier in one of the earlier answers, mean for us, if it does continue on, it gives us a whole lot of financial flexibility to accelerate our investments. Our objective is a target being within our range accelerating as fast as possible to our journey to drive us to long-term sustainable growth. So it is going to give us a lot more levers.

William Alfred Nance

Got it. So maybe just to follow up on another lever you might have. The customer acquisition costs down about 20%. We've heard similar statistics from others in the industry on the digital customer acquisition front. So I'm just wondering if you can maybe drill down and you provide a little color on what's driving that? How much of that has just been kind of broad-based reduction in digital advertising costs versus some of the channel optimization or kind of specific actions that you guys are taking?

Devin B. McGranahan

Well, the majority of ours comes from our optimization of the marketing funnel program that we've talked about on prior calls. So finding the productive -- the most productive parts of the funnel that allow us to increase conversion for dollars spent. I can't comment on others.

Operator

Our next question comes to us from Ramsey El-Assal from Barclays.

Ramsey Clark El-Assal

Could you give us a bit more color on the Iraq policy change? What exactly was that helped to boost revenues there?

Devin B. McGranahan

Yes. So our understanding is the Iraq Central Bank changed their policy with regard to how banks can move money out of the country. We, as a remittance provider, we're not subjected to those same policy changes and as a result, customers that were traditionally using banks to move money out of Iraq, migrated to providers like us.

Ramsey Clark El-Assal

Okay. And then Devin, maybe you could give us a bit more color in terms of your reengagement with lapsed customers. What are the kind of techniques that you're using there to reengage? And any levers that you're kind of working to get that cohort sort of moving again?

Devin B. McGranahan

So one of the things we've been working on over the last 12 months has been improving what we refer to as contactability. So the ability to have marketing permission rights to our customers around the globe in accordance with individual country privacy requirements, that contactability allows us if a customer lapses, whether they lapse for one transaction, one month, one quarter or one year to communicate with them to provide offers and incentives to come back and to reengage with them in a manner that allows them to, in fact, come back to Western Union.
In Europe, particularly in Germany, in Italy. As we launched the Digital bank, we ramped up our efforts around our lapsed customer base, encouraging them to try our new product with a different experience and a different value proposition. As I was pleased to report today, we're having some success with that, and we're pleased didn't think it as a platform for us as we further roll out the digital wallet product with some of the added and enhanced benefits that we are now able to offer in Germany, Italy, Romania and Poland.

Operator

Our next question comes to us from Vasu Govil from KBW.

Vasundhara Govil

I guess first one for you, Matt, just on -- around the outlook. I kind of caught to your comment that it's too early in the year to change the guide but you clearly saw 1Q outperformance and you are also expecting at least U.S. turns to be better in the back half. So should we think about the unchanged guide as basically more conservatism baked into the back half? Or are there any timing related factors that might be sort of leading the guide unchanged? Or are you expecting to accelerate investment to the extent there is upside, just if you could sort of give us a thought process there?

Matthew Cagwin

Vasu. I mentioned a couple of times on the call, but it's giving us a lot more flexibility to make investments and look at how we can accelerate our path to long-term sustainable growth. We've not identified where we're going to go do that, but we're also unwilling to commit to a different guide with the macroeconomic conditions we're living through the uncertainty around Iraq, the stage we are in our Evolve 2025 strategies as well as we are looking for ways that we can accelerate those strategies. So we look forward to updating everybody 3 months from now when we come back and we've gone through that.

Devin B. McGranahan

And Vasu, as we have said since our Investor Day, we are taking what we believe to be a very pragmatic and measured approach to achieving and meeting our public financial commitments while continuing to rapidly involve Western Union towards our vision of becoming a broader-based financial services provider to the aspiring populations of the world. And so we will look forward to continuing to update you as the quarters go on, but we're pleased with the progress that we've made in the first quarter.

Vasundhara Govil

Great. And then a question for you, Devin. I sort of got all the color you gave on certain positive metrics you're seeing in the U.S. from the promotional activity. Any meaningful differences that you're seeing in terms of retention improvement across the other regions where you're expanding promotional pricing?

Matthew Cagwin

Yes, I'm actually going to take this one because it was (inaudible) a little bit more recently. But the results are a little bit earlier because we launched Europe and some of other parts of the countries around the world, we've put the promotional pricing into. What we have seen in the early days is comparable to the U.S., but we're -- just remember, it's 60 to 120 days less mature in the U.S., which is why we're continuing to focus on the U.S. on this call.

Devin B. McGranahan

Just to remember it is a multipart program. I just talked about the contactability and increasing the level of ongoing communication we have with our customers. But also in addition to the new customer offer, whether that be first transaction free, first transaction 50% off. In combination with the program, we're also putting second, third, fourth transaction into more of a market-based pricing basket, which is helping drive increased retention relative to some of our historical pricing practices.

Operator

Our next question comes to us from Bryan Keane from Deutsche Bank.

Bryan Connell Keane

Can you hear me all right?

Devin B. McGranahan

No problem. Thanks for joining Bryan.

Bryan Connell Keane

Sure. What's been the response from the competitors from promotional pricing in digital? Has there been much of a response? Have they come back to cut price on their own?

Devin B. McGranahan

No, we have not seen a particularly "aggressive response. " And the players that were historically at the lower end of the market have stayed there and the players that were historically similar or above us have stayed there as well. In any given corridor or any given market, there's a give and take. And they're always particularly corridor specific, particularly in Europe players that continue to operate what I would consider a value-destroying manner in terms of their pricing overall. But in general, the market is fairly rational and people have continued doing what they were doing before we made our change.

Bryan Connell Keane

Got it. And how much more promotional pricing do you guys expect to do throughout the business? Is there more areas either in retail or just further in digital that you expect to roll this out? Or is it kind of the majority of it is complete that you plan to do?

Devin B. McGranahan

We've tackled this question before, given that we operate in 20,000 corridors around the world from 150 countries, give or take, and territories. There are always opportunities to optimize high-volume corridors, long-tail corridors. We price at everything from street corner level to time of day. We have a constant and ongoing optimization algorithm and model that's always running. And we continue to tweak that to the best of our ability to get the right combination of customer value proposition, incentives and alignment with our distribution and our ability to grow transactions. Remember, the big shift is we're really focusing on acquiring customers, managing and increasing their lifetime value, which includes retention versus maximizing revenue per transaction at a transaction level.

Operator

Our next question comes to us from Andrew Schmidt from Citi.

Andrew Garth Schmidt

Devin, Matt, apologies if I missed this, but on operating margin and good performance in the first quarter here. But how should we think about the cadence as the year progresses? Is there anything lumpy we should be considering from an investment perspective? I understand there's some -- it sounds like there's some flex in the cost base, but just curious to see your perspective there.

Matthew Cagwin

Andrew, thanks for joining the call today. As I highlighted earlier, there's really 2 major drivers why it was different than what was expected (inaudible) when that maybe 6, 8 weeks ago. The drivers there were the benefit we've gotten from Iraq, just thinking about 2 basis -- 200 basis points of revenue with a normal fall-through rate there. And then also, we were able to execute on our cost optimization program at a faster pace than we were able to invest at both those things were unknown and positive surprises to us as we evolved through the quarter from early February to now. So our plan is to go and invest that money. We had always intended to save the OpEx that we were able to identify and save. So those investments will come in the later part of this year as the year progresses. And then as I mentioned previously, we are looking for monitoring how [Iraq Evolve]. We're looking at other investment opportunities to use in the upside we have relative to our guidance. And if we have some valuable way to use that to drive long-term sustainable growth, we will make those investments.

Andrew Garth Schmidt

Got it. And then if I could follow up just on the independent channel. Maybe you could comment on the -- just the early results from the new POS system, how productivity of those agents that might have the new POS system compared to the independent base as a whole. Any comments there would be helpful.

Devin B. McGranahan

Yes. So to clarify, because it is a pilot, and we are in pilot in actual Western Union exclusive locations in the U.S., partially because we wanted agents who are willing to work with us as we launch the technology, refine the experience. We won't be putting it into the independent agent channel until the back half of this year. So largely, the pilot results are really measured around, as you heard me talk about transaction times for customers for specific things like repeat sends around customers' ability to -- or the agent's ability not to have to reenter data and things like that. So the pilot agents are all friendly, hand selected to work with us through the launch.

Operator

Our next question comes to us from James Faucette from Morgan Stanley.

Jeffrey Daniel Goldstein

This is Jeff Goldstein on for James. Can you guys hear me okay?

Devin B. McGranahan

Yes, no problem, Jeff.

Jeffrey Daniel Goldstein

All right. Great. So I wanted to ask about Europe. Can you talk about some of the trends there what countries were primarily driving revenue to be down 13% in the quarter. And then I think in your prepared remarks, one issue you called out for the region was competitive pressures. I was just curious what you're seeing there in particular and how you're kind of going about navigating that backdrop, if anything is different there as opposed to other regions.

Devin B. McGranahan

Yes. So Jeff, a couple of things, right? Remember, those results also still include through the end of the first quarter, the exit of Russia and Belarus, which Matt highlighted was a moderately significant headwind on revenue growth in the first quarter in Europe, which was by far the most impacted region we had.
Second, Europe continues to be one of the most, if not the most, competitive on both the retail and the digital and in particular, Central and Northern Europe to North Africa continues to face corridor-specific competitors. As I highlighted, who are maximizing customers and transactions and potentially not revenue. So that is an ongoing headwind for us and anyone who competes in those corridors.

Matthew Cagwin

Jeff, just to build on Devin's point here, just a couple of things to remind you of. We did also have the one agent loss within Europe that started last year and has continued through Q1 and then as you think about the countries that are contributing to it, I mean, we've got some really good strength in Spain, Italy and a few other places. But Russia is the biggest place where we're obviously having a drag, as we've highlighted a couple of times in the call. And then we've got some softness in Germany and France.

Jeffrey Daniel Goldstein

And then second, as my follow-up. You mentioned starting to pilot your digital banking product in U.S. and Brazil in the quarter, I believe. Just curious if you're learning -- I know it's new, but just curious if you're learning anything as those rollouts began especially in the U.S.? And then can you also remind us of the ongoing rollout plans by geography going forward?

Devin B. McGranahan

Yes. So a couple of important just notes in both U.S. and Brazil, where in what we define as friends and family, which is largely employees and employees families, and it is truly just a testing. We have not brought non-Western Union affiliated consumers into the offer. Second, in both Brazil and in the U.S. we are working towards what we have affectionately called on these calls, One App. So as you know, in Europe, we are conducting business across two apps, a digital banking app, which we call Western Union One or in some markets, WU Plus, and the traditional westernunion.com app, which is a transactional Money Send. When we launched the new product in the U.S. and Brazil, we will be operating under what we call One app, which will include both the traditional transactional based service, which has a lower KYC burden and a full-on digital wallet. We will also be able to offer transactional customers a one or two click upgrade to the digital wallet. So that is all in process, and we're obviously learning a lot about how to integrate the two experiences into one. And as we learn more, I look forward to updating you.

Operator

Our final question comes to us from Tyler DuPont from Bank of America.

Tyler DuPont

This is Tyler DuPont on for Jason. I know bumping up on time, so I'll try to be quick with these. So it seems like LACA continues to be the bright spot geographically. Can you just speak a little bit more to the success and sustainability of that growth level? And then maybe just to the level to which you can apply that playbook to other geographies?

Devin B. McGranahan

Tyler, thanks for joining. LACA is unique on many dimensions, but there's a couple of things in specific that we benefit from, one, we have a very strong retail footprint in the country. And as we've highlighted, it's a great combination of owned and controlled as well as Western Union branded independent, and we have some particularly strong master agents in the region that we've been working with for many, many years that provide excellent products, service delivery and customer service to their customers. The second is as we rolled out westernunion.com, we had a strategy of maximizing our footprint around the globe. So we were early on our digital business in LACA and as a result, have strong presence in many of those markets and a strong customer base. Finally, we have an excellent management team that's been in place for many years that does a great job of driving that business.

Tyler DuPont

I appreciate that. And just briefly following up with inflation. It looks like just the majority of the regions you serve continue to see inflation cooling pretty significantly. Can you just briefly walk me through kind of how you are thinking about inflation and how that kind of trickles down through the P&L?

Matthew Cagwin

Yes. Thankfully, most of our largest portion of our expense base is commission based, which is driven off as a percentage of revenue. We also have a large portion of our base, which is fixed through depreciation or long-term contracts that don't have any kind of price increases. And then we've got a little bit of labor that we're obviously working our way through -- thankfully, we're well protected from inflation.

Devin B. McGranahan

Tyler, I think you can look at the success we've had in Argentina, which I think is facing 100% inflation this year on the durability of our business and our ability to manage not just through the transitory inflation that many countries around the world are seeing but sustained and high inflation like we have in many countries in LACA.

Operator

Thank you for joining the Western Union First Quarter 2023 Results Conference Call. We hope you have a great day.