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Western Union Q1 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Tom Hadley
    Head of Investor Relations
  • Devin McGranahan
    President and Chief Executive Officer
  • Matt Cagwin
    Chief Financial Officer

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
Head of Investor Relations at Western Union

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 our 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 McGranahan
President and Chief Executive Officer at Western Union

Good afternoon and welcome to Western Union's first quarter 2023 financial results conference call. We are pleased with the progress we're 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 two to three-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 $1,037 million 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 Argentinean 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 importantly, for the first time in almost two 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 principle 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 2025 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 Lakha, 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 launch 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 three 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 jumpstart 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 costs by roughly 20% in North America. Additionally, retention rates of our U.S. outbound September cohort, the first of our new approach continued 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've 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 six 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. Initiatives being developed include creating a more omnichannel offering, introducing new products and services, integrating loyalty programs, improving staging 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 and 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 roll-out of our new point of sale system.

Two functions we have developed in recent months are quick resend and an improved customer look up tool, which we call remember me. The goal of quick resend is to allow customers to complete repeat transactions to know one receivers more quickly and can reduce transaction times by up to 75%. We've tested this product enhancement on our legacy technology 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 have 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 the easiest to retain. Today, 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 multi-currency 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 increase 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 value 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.

Matt Cagwin
Chief Financial Officer at Western Union

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 this outcome. First, we continue to see a negative impact on our results from the suspension of operations in Russia and Belarus in 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 Lahka 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 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 then 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, 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 continue 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 continued 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 consists 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 the 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 signings 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 2.4 times and 1.2 times 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 and our forecast for the outlook through April, but have assumed no incremental revenue for the remainder of the year due 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.

Questions and Answers

Operator

[Operator Instructions] Our first question comes to us from Rayna Kumar from UBS. Please ask your question.

Rayna Kumar
Analyst at UBS Group

Hi. Good afternoon. Thanks for taking my question. I wanted 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 McGranahan
President and Chief Executive Officer at Western Union

Yeah, 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 three and six 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. Please ask your question.

Darrin Peller
Analyst at Wolfe Research

Hey. Thanks guys. 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 some of the stepping stones from 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 anniversarying some of the headwinds for Russia, etc, all the way to a positive inflection would be really helpful.

Matt Cagwin
Chief Financial Officer at Western Union

Hey, Darren. 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 eight, nine months now. We rolled it out in Q4 to our European business with same effect. So if you go through anything 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 McGranahan
President and Chief Executive Officer at Western Union

Yeah. And 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 launch 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 and accelerated return of customers for second, third and fourth transaction as well as similar if not elevated levels of retention.

Darrin Peller
Analyst at Wolfe Research

Thanks. And 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 item, anything nuance there or maybe you can remind us on your -- on the cadence of margins as the year progresses?

Matt Cagwin
Chief Financial Officer at Western Union

Hey, Darren. So really if 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 in 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.

Darrin Peller
Analyst at Wolfe Research

Thanks guys.

Operator

Our next question comes to us from Ken suchoski from Autonomous. Please ask your question.

Ken suchoski
Analyst at Autonomous Res

Hi, good afternoon, everyone. Thanks for taking the question here. I just wanted 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. You noted down kind of low-double-digits in the prior three quarters, maybe there is some Russia impacting 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 positive growth later this year?

Devin McGranahan
President and Chief Executive Officer at Western Union

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. We anticipate that being able to achieve that during the course of our Evolve 2025 time period.

Ken suchoski
Analyst at Autonomous Res

Okay. All right. That's helpful, Devin. And then just as my follow-up, I mean, you chuck 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?

Matt Cagwin
Chief Financial Officer at Western Union

Hey, Ken, this is Matt. 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 we actually 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 a path we've seen. It has 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.

Devin McGranahan
President and Chief Executive Officer at Western Union

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.

Ken suchoski
Analyst at Autonomous Res

Okay. Thank you so much.

Operator

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

Tien-Tsin Huang
Analyst at J.P. Morgan

Hey, thanks so much, good quarter here. Maybe I'll ask a similar question in 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 widen out before it narrows again or could we see that start to narrow ahead? So not looking for explicit numbers, just thinking about the relationship between the two as another way to look at where we are in the promotion.

Matt Cagwin
Chief Financial Officer at Western Union

Hey, Tien-Tsin, this is Matt Cagwin. Pleasure to see you. As you think about the rest of this year, I think you're going to see it could -- could it widen a little bit more, potentially, but I think you're going to see the high watermark mow going into Q2 and start narrowing as you get into the back half of this year and we are generating positive revenue growth.

Devin McGranahan
President and Chief Executive Officer at Western Union

Particularly given the scale of our business, Tien-Tsin, right, we chose North America to start because it's a 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
Analyst at J.P. Morgan

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

Devin McGranahan
President and Chief Executive Officer at Western Union

Yeah. 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 a 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.

Matt Cagwin
Chief Financial Officer at Western Union

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

Tien-Tsin Huang
Analyst at J.P. Morgan

Thanks for the time guys. Thank you.

Devin McGranahan
President and Chief Executive Officer at Western Union

Thank you.

Operator

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

Tim Chiodo
Analyst at Credit Suisse Group

Great. Thank you for taking the question. I wanted to dig into your recent partnership or announcement of being a part of the initial group of apps and neo banks and fintechs that are participating in Visa+. 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 McGranahan
President and Chief Executive Officer at Western Union

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 wallet and we pay out -- funds out around the world to many, many, many digital wallets, whether that's Paytm in India or bKash in 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+ 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.

Tim Chiodo
Analyst at Credit Suisse Group

Great. Thank you. And 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's send to an account, there's send card and now it would be sent to another app potentially in another country meaning the PayPower Venmo of country ABC or XYZ meaning doesn't necessarily have to be sent to Western Union app?

Devin McGranahan
President and Chief Executive Officer at Western Union

So I think yes, let me try to clarify. So yes, it's U.S. only. We have not agreed anything beyond that at this point. We do today send to app -- to others 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 where we do that. If we could expand the network for what else we pay out to, I think over time that would make sense for us.

Tim Chiodo
Analyst at Credit Suisse Group

Excellent. Thank you for taking both of those. I appreciate it.

Operator

Our next question comes to us from Will Nance from Goldman Sachs. Please ask your question.

Will Nance
Analyst at The Goldman Sachs Group

Hey, guys. I appreciate you taking the question and nice results today. I wanted to follow-up I think on previous question earlier on some of the moving pieces 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, have it continued so far. It sounded like maybe there might still be some activity ongoing.

Devin McGranahan
President and Chief Executive Officer at Western Union

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

Will Nance
Analyst at The Goldman Sachs Group

Yeah, okay. That makes sense. I guess, the Iraq continuing beyond April will be a source of upside?

Devin McGranahan
President and Chief Executive Officer at Western Union

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

Will Nance
Analyst at The Goldman Sachs Group

Got it. So maybe just 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 could maybe drill down and provide a little color on what's driving that? How much of that has just been kind of broad based reduction to digital advertising cost versus some of the channel optimization? Is there kind of specific actions that you guys are taking?

Devin McGranahan
President and Chief Executive Officer at Western Union

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. Please ask your question.

Ramsey El-Assal
Analyst at Barclays

Hello. Thanks so much. Could you give us a bit more color on Iraq policy change? What exactly was that, that helped to boost revenues there?

Devin McGranahan
President and Chief Executive Officer at Western Union

Yeah. 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 were not suggested to those same policy changes and a result customers that were traditionally using banks to move money out of Iraq migrated to providers like us.

Ramsey El-Assal
Analyst at Barclays

Okay. And then 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 McGranahan
President and Chief Executive Officer at Western Union

So one of the things we've been working on over the last 12 months has been improving what we refer to as contact ability. So the ability to have marketing permission rights to our customers around the globe in accordance with individual country privacy requirements. That contact ability 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 and 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 in a different value proposition. As I was pleased to report today, we're having some success with that and we're pleased and think it is a platform for us as we further rollout 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.

Ramsey El-Assal
Analyst at Barclays

Fantastic. Thank you very much.

Operator

Our next question comes to us from Vasu Govil from KBW. Please ask your question.

Vasu Govil
Analyst at KBW

Hi. Thank you for taking my questions. I guess, first one for you, Matt, just around the outlook. I kind of caught your comment that is too early in the year to change the guide, but you clearly saw 1Q outperformance and you're also expecting at least what's going 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 signing 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.

Matt Cagwin
Chief Financial Officer at Western Union

Good afternoon, Vasu. As I've mentioned a couple of times on the call, 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 willing 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 are looking for ways that we can accelerate those strategies. And so we look forward to updating everybody three months from now when we come back and we've gone through that.

Devin McGranahan
President and Chief Executive Officer at Western Union

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 evolve 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.

Vasu Govil
Analyst at KBW

Great. And then question for you, Devin. I sort of got al the color you gave, all sorts of 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?

Devin McGranahan
President and Chief Executive Officer at Western Union

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

Vasu Govil
Analyst at KBW

You have to remember it's a multi-part program. I just talked about the contact ability 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. Thank you for the color.

Devin McGranahan
President and Chief Executive Officer at Western Union

Thank you.

Operator

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

Bryan Keane
Analyst at Deutsche Bank Aktiengesellschaft

Yeah, hi. Can you hear me all right?

Devin McGranahan
President and Chief Executive Officer at Western Union

No problem. Thanks for joining, Bryan.

Bryan Keane
Analyst at Deutsche Bank Aktiengesellschaft

Sure, thanks. 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 McGranahan
President and Chief Executive Officer at Western Union

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 is 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 Keane
Analyst at Deutsche Bank Aktiengesellschaft

Got it. And how much more promotional pricing do you guys expect to do throughout the business since there are more areas either at 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 McGranahan
President and Chief Executive Officer at Western Union

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 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 in 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.

Bryan Keane
Analyst at Deutsche Bank Aktiengesellschaft

Helpful. Thanks for taking the questions.

Operator

Our next question comes to us from Andrew Schmidt from Citi. Please ask your question.

Andrew Schmidt
Analyst at Smith Barney Citigroup

Hey, Devin. Hey, Matt. Thanks for taking the questions, Pardon, just if I missed this, but on operating margin, 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 some -- it sounds like there's some flex in the cost base, but just curious your perspective there. Thanks a lot.

Matt Cagwin
Chief Financial Officer at Western Union

Hey, Andrew, thanks for joining the call today. As I highlighted earlier, there's really two major drivers why it was different than what I expected when me met maybe six, eight weeks ago. The drivers there were the benefit we've gotten from Iraq, just think about 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 and both those things were unknown and positive surprises to us as we evolve through the quarter from early February to now. So our plan is to go and invest that money. We always intended to save the opex that we were able to identify and save. So those investments will come in later part of this year as the year progresses. And as I mentioned previously, we are looking for -- so we're monitoring how Iraq evolves. We're looking at other investment opportunities to use any 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 Schmidt
Analyst at Smith Barney Citigroup

Got it. Thank you very much for that. And then a 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. Thank you very much.

Devin McGranahan
President and Chief Executive Officer at Western Union

Yeah. 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 were willing to work with us as we launched the technology, refined 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 repeats ends around customers' ability to or the agents' ability not to have to re-enter data and things like that. So the pilot agents are all friendly hand selected to work with us through the launch.

Andrew Schmidt
Analyst at Smith Barney Citigroup

Got it. I appreciate the clarification. Thanks, Devin.

Operator

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

Jeff Goldstein
Analyst at Morgan Stanley

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

Devin McGranahan
President and Chief Executive Officer at Western Union

Yeah, no problem, Jeff.

Jeff Goldstein
Analyst at Morgan Stanley

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. So I'm 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 McGranahan
President and Chief Executive Officer at Western Union

Yeah. 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 any one who compete in those corridors.

Matt Cagwin
Chief Financial Officer at Western Union

Hey, Jeff, just to build on Devin's point, just a couple of things to remind you up. We did also have the one agent loss was in Europe that started last year and has continued through Q1. And then as you think about the countries 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.

Jeff Goldstein
Analyst at Morgan Stanley

Helpful. Thank you. 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 near, but just curious if you're learning anything as those roll-outs began, especially in the U.S. And then can you also remind us of the ongoing roll-out plans by geography going forward.

Devin McGranahan
President and Chief Executive Officer at Western Union

Yeah. So a couple of important just notes. In both U.S. and Brazil, we're in as 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 1 or in some markets WU plus and the traditional westernunion.com app, which is a transactional money send.

When we launch 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.

Jeff Goldstein
Analyst at Morgan Stanley

Appreciate it. Thank you.

Operator

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

Tyler DuPont
Analyst at Bank of America

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

Devin McGranahan
President and Chief Executive Officer at Western Union

Tyler, thanks for joining. Lakha is unique on many dimensions, but there's a couple of things in specific that we benefit from. One, we have 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 product 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 Lakha 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
Analyst at Bank of America

Great. Thank you. I appreciate that. And just briefly following-up with inflation, it looks like just the majority of the regions you serve continuing to see inflation cooling pretty significantly. Can you just briefly walk me through kind of how you're thinking about inflation, how that tickles down through the P&?

Matt Cagwin
Chief Financial Officer at Western Union

Yeah. Thankfully, most of our -- large 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 McGranahan
President and Chief Executive Officer at Western Union

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 Lakha.

Tyler DuPont
Analyst at Bank of America

Great. Thank you very much.

Operator

[Operator Closing Remarks]

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